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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, 1998
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 incorporation or organization) (I.R.S. employer identification number)
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
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The aggregate market value of Provena Foods Inc. Common Stock held by
non-affiliates as of February 20, 1999 was $8,402,993.
The number of shares of Provena Foods Inc. Common Stock outstanding on
February 20, 1999 was 2,922,780.
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. [X]
PROVENA FOODS INC.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Item Page
- ---- PART 1 ----
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1. Business ............................................................................................ 1
2. Properties .......................................................................................... 4
3. Legal Proceedings ................................................................................... 5
4. Submissions of Matters to a Vote of Security Holders ................................................ 5
PART 11
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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 111
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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 Statements Schedules, and Reports on Form 8-K ................................... 15
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Signatures .......................................................................................... 16
PART 1
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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" or "Swiss"), and its pasta
business is conducted through the Royal-Angelus Macaroni Company Division
("Royal-Angelus" or "Royal"). The Company acquired its present businesses
between 1972 and 1975. The predecessor of Swiss was founded in 1922 and the two
predecessors to Royal, 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 approximately $212,000.
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 Sausage Co. Meat Division
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During the years ended December 31, 1998 and 1997, sales by Swiss accounted
for 62.7% and 69.3%, respectively, of the Company's net sales. The Company's
processed meat products are sold primarily to pizza restaurant chains, pizza
processors and food service distributors. Pizza processors produce prepared
pizza which is sold primarily as frozen pizza in food markets. Food service
distributors supply food to delicatessens, restaurants and other retail
businesses offering prepared food. The Company's meat products are sold
nationally, but most of its sales are made to customers located in the Western
United States. The Company also sells processed meat products to the U.S.
Government. The Company does not have supply agreements with its major
customers, many of whom purchase some of their meat products from other
suppliers.
Swiss competes with numerous producers of processed meats, many of which
are larger and have greater financial resources than the Company. Swiss'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's products.
The Company competes in the meat processing business by emphasizing predictable
quality and consistency.
The meat processing activities of the Company were conducted at its
facilities in San Francisco, California, until the main plant was destroyed by
a fire on August 1, 1998. A new Company meat plant is under construction in
Lathrop, California, scheduled for completion in the 1st half of 1999. The
Company estimates the theoretical production capacity of its San Francisco plant
was 27,000,000 pounds per year. The Company did not have space within its San
Francisco plant to increase its capacity, but the plant's capacity was adequate
for the contemplated needs of Swiss. The new plant is intended to be a higher
production capacity plant with the capability of expansion. See ITEM 2.
PROPERTIES.
The meat processing activities of Swiss 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.
-1-
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 crumbles line extrudes the ground and blended ingredients into nuggets which
are cooked and quick-frozen in one continuous operation.
Royal-Angelus Macaroni Company Pasta Division
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During the years ended December 31, 1998 and 1997, sales by Royal-Angelus
accounted for 37.3% and 30.7%, respectively, of the Company's net sales. The
Company sells its pasta products primarily to food processors and canners,
private label customers, food service distributors, and specialty food
distributors.
Royal's 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's 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's 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 2001. The pasta plant has a theoretical production
capacity estimated at 30,000,000 pounds per year, adequate for the foreseeable
production needs of Royal.
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
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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.
Since August 1, 1998, when fire destroyed the main meat plant, the meat
division has attempted to maintain volume until the new meat plant is
operational by purchasing products from other suppliers for its customers, but
the meat division's sales have been almost $1,000,000 per month lower since the
fire. Business interruption insurance, to a large extent, covers the increased
cost of purchasing from suppliers.
Patents, Trademarks and Licenses
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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.
-2-
Commodity Price Fluctuations and Availability
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The Company contracts to sell its products at a fixed price for production
and delivery in the future (generally four to six months or less). The Company
is, therefore, subject to the risk of price fluctuations with respect to its
product ingredients from the time the Company contracts with its customers until
the time the Company purchases the commodities used to fill the orders. Prices
for meat and flour, the Company's major product ingredients, fluctuate widely
based upon supply, market speculation, governmental trade and agricultural
policies, and other unpredictable factors.
The Company is able to contract to 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 in 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 four
full-time salaried sales people. 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 Customer
- ------------------------------------------------
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,
1998:
Number of Division Company
Division Customers Sales% Sales%
-------- --------- ------ ------
Swiss American 3 54% 34%
Royal-Angelus 1 13% 5%
--- ---
Totals 4 39%
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 risks 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, 1998, the Company employed 115 full-time employees, 50
in production at Swiss in San Francisco, California, 50 in production at Royal-
Angelus in Chino, California, 6 in clerical and office functions, 4 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 April 1, 1998 to expire March 31, 2002. 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
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The Company provides health insurance benefits to its non-union employees
and their dependents 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 January
25, 1999, the Company has qualified for the U.S. Department of Agriculture's
Hazardous and Analysis Critical Control Points 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
plant to inspect meat products processed by the Company and to review the
Company's compliance with the program. 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 was an approximately 48,000
square foot facility located in San Francisco, which was destroyed by fire on
August 1, 1998. In 1990 the Company occupied, under a lease expiring in 2001,
an approximately 45,000 square foot facility near its main plant which it
improved by building a dryer and relocating its slicing operations. The
theoretical production capacity of the meat plant, before the fire, was
estimated at 27,000,000 pounds per year, adequate for the currently contemplated
needs of the division, but the plant did not have space to increase the
production capacity or the variety of meat products which could be produced. The
Company has under construction an approximately 85,000 square foot building,
planned before the fire and scheduled to be completed in the 1st half of 1999,
to provide a more efficient and higher production capacity meat 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 2001.
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.
-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 21,
1998, at 11:00 a.m. at the Company's principal office. Shareholders representing
2,733,103 or 95.1% of the 2,876,587 shares entitled to vote were present in
person or by proxy, with 11,445 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 2,723,403 7,200 2,500
Theodore L. Arena 2,730,603 -0- 2,500
Ronald A. Provera 2,729,003 1,600 2,500
Santo Zito 2,730,603 -0- 2,500
Thomas J. Mulroney 2,730,603 -0- 2,500
Louis A. Arena 2,730,403 200 2,500
Joseph W. Wolbers 2,730,603 -0- 2,500
John M. Boukather 2,722,003 8,600 2,500
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
----- ------ ----- ------
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
1998 High 5-7/16 5-1/16 4 3-1/2
Low 2-5/8 3-3/4 2-5/16 2-7/16
The closing price on December 31, 1998 was $2-15/16.
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, 1998 the Company had issued and outstanding 2,913,098
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.
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:
-5-
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Dividends $0.12 $0.12 $0.10 $0.18 $0.1725 $0.1625 $0.16 $0.14 $0.125 $0.11 $0.10
The declaration and time 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 1998, the Company purchased no shares under its stock repurchase
program, but received 5,842 shares in payment of the exercise price of options
at an average fair market value of $3.85 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 1998 employees purchased 42,959
newly issued shares at an average price of $3.49 per share. Employees have
purchased a total of 437,282 shares under the plan through December 31, 1998, at
an average price of $3.04 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 $150,000 per year.
Employees exercised Incentive Stock Options in 1998 to purchase 10,000
shares at an exercise price of $2.25 per share.
-6-
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the headings Statement of
operations data and Balance sheet data for, and as of the end of, each of the
years in the five-year period ended December 31, 1998 is derived from the
financial statements of the Company, which financial statements have been
audited by KPMG 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, 1998, 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,
------------------------
1998 1997 1996 1995 1994
-------- ------- -------- -------- --------
Statement of operations data: (Amounts in thousands except per share data)
Net Sales $ 24,503 30,966 28,895 23,424 26,265
Cost of sales 21,794 27,103 26,037 21,348 23,812
-------- ------- -------- -------- --------
Gross profit 2,709 3,863 2,858 2,076 2,453
Distribution, general and administrative expenses 2,253 2,066 2,002 2,021 2,082
-------- ------- -------- -------- --------
Operating income 456 1,797 856 55 371
Interest income (expense), net 18 (58) (75) (66) (7)
Other income, net 3,326 279 113 184 156
-------- ------- -------- -------- --------
Earnings before income taxes 3,800 2,018 894 173 520
Income taxes 1,558 764 332 84 200
-------- ------- -------- -------- --------
Net earnings $ 2,242 1,254 562 89 320
======== ======= ======== ======== ========
Earnings per share: Basic $ .78 .44 .20 .03 .12
======== ======= ======== ======== ========
Diluted $ .77 .44 .20 .03 .12
======== ======= ======== ======== ========
Cash Dividends paid per share $ .12 .12 .10 .18 .1725
Weighted average number
of shares outstanding (1): Basic 2,891 2,836 2,767 2,705 2,669
Diluted 2,924 2,855 2,775 2,750 2,687
Balance sheet data (end of period):
Working capital $ 7,221 4,574 3,564 2,832 3,180
Property and equipment (net) 7,602 4,468 4,705 5,083 4,070
Total assets 17,280 11,539 10,414 10,050 9,036
Long-term debt 4,000 752 960 969 ---
Shareholders' equity 10,479 8,435 7,357 6,915 7,245
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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:
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Purchase Plan Shares Sold 42,959 55,355 51,990 57,223 54,461
Incentive Option Shares Sold 10,000 20,400 16,000 53,555 52,000
Received in Exercise of Options 5,842 7,795 8,600 18,500 31,457
Outstanding Shares Repurchased --- --- --- 52,289 28,757
-7-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Result of Operations
- --------------------
The following table sets forth operating data for the years ended December
31, 1998, 1997 and 1996:
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Net sales $24,503 100.0% $30,966 100.0% $28,895 100.0%
Cost of sales 21,794 88.9 27,103 87.5 26,037 90.1
------ ----- ------ ----- ------ -----
Gross profit 2,709 11.1 3,863 12.5 2,858 9.9
Distribution, general and administrative expenses 2,253 9.2 2,066 6.7 2,002 6.9
------ ----- ------ ----- ------ -----
Operating income 456 1.9 1,797 5.8 856 3.0
Interest income (expense), net 18 .1 (58) (.2) (75) (.3)
Other income, net 3,326 13.6 279 .9 113 .4
------ ----- ------ ----- ------ -----
Earnings before income taxes 3,800 15.5 2,018 6.5 894 3.1
Income taxes 1,558 6.4 764 2.5 332 1.1
------ ----- ------ ----- ------ -----
Net earnings $ 2,242 9.2% $ 1,254 4.0% $ 562 1.9%
====== ===== ====== ===== ====== =====
Sales on thousands of pounds by division
Swiss American 10,473 13,903 13,475
Royal-Angelus 18,762 21,284 18,213
Comparison of Years Ended December 31, 1998 and 1997
- ----------------------------------------------------
In 1998, sales of $24,503,000 were down 21% from 1997 sales of $30,966,000,
primarily because of decreased sales at the meat division following the August
1, 1998 fire which destroyed its main meat plant.
The meat division's sales were down about 28% in dollars and 25% in pounds
and its operating income was down 152% in 1998 from 1997. Swiss's sales for the
4th quarter of 1998 were down 57% in dollars and 54% in pounds from the 4th
quarter of 1997. Sales in dollars decreased proportionately more than in pounds
because of lower selling prices reflecting lower meat costs. Swiss was
experiencing modest growth and increased profits until the August 1, 1998 fire
destroyed its main meat plant. Swiss has attempted to maintain volume until its
new plant is operational by purchasing products from other suppliers for its
customers, but since the fire, Swiss's sales have been almost $1,000,000 per
month lower and Swiss has operated at a loss, realizing a pre-tax profit only
after taking into account the benefits of business interruption insurance.
The pasta division's sales decreased about 4% in dollars and 12% in pounds
but its operating income increased 40% in 1998 from 1997. The pasta division's
sales for the 4th quarter of 1998 were down 35% in dollars and 45% in pounds
from the same quarter of 1997. The sales decreases in pounds did not result in
proportionate decreases in dollars because of higher average selling prices from
a lower proportion of high volume-lower priced sales. The decreases in sales in
pounds reflect competition resulting from increasing industry capacity. The
large decrease in the 4th quarter of 1988 partly reflects a surge in sales a
year ago, when sales for the 4th quarter of 1997 were up 44% in dollars and 62%
in pounds over the 4th quarter of 1996.
Royal's increased operating income resulted from higher production labor
efficiency, a lower proportion of high-volume sales and lower flour costs. The
cost of semolina flour was near pre-1993 levels after an increase of about 50%
in 1993.
The Company's gross profit for 1998 was $2,709,000 or 11.1% of net sales
compared to $3,863,000 or 12.5% of net sales for 1997. Gross profit decreased
absolutely and as a percent of sales because of the higher cost at Swiss of
purchasing processed products from other suppliers since the fire. Distribution,
general and administrative expenses for 1998 were up about 9% from 1997.
Distribution expense was up about $67,000 because of increased sales person
payroll and expense, increased officer payroll and commissions at Royal, and
increased promotional expense at Swiss, partially offset by lower freight on
lower sales at Swiss. Administrative expense was up about $119,000 primarily due
to increased officer payroll, health care costs and outside services, partially
offset by lower bad debt expense.
-8-
Net interest changed from an expense to income because of the absence of
borrowing under the bank line, a lower balance on the term loan, repayment of
the term loan and interest income on higher cash balances. Other income
increased because of recognition of $1,747,000 of business interruption
insurance proceeds.
Comparison of Years Ended December 31, 1997 and 1996
- ----------------------------------------------------
In 1997, sales of $30,966,000 were up 7% from 1966 sales of $28,895,000, as
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 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 had remained
well above pre-1993 levels through 1997. Royal had been expecting 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 office
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' salesmen payroll
increased and Royal bore the freight on a higher proportion of its sales.
Administrative expense was down about $29,0000 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.
Other income increased about $166,000 because of a $164,502 state
reimbursement of the cost of 1991 removal of a gasoline storage tank at the
former distribution division warehouse. Net interest expense decreased
principally because of the lower borrowing under the bank line of credit.
Liquidity and Capital Resources
- -------------------------------
The August 1, 1998 fire at the Company's main meat plant destroyed
$1,112,435 net book value of inventory and $474,835 net book value of equipment
and leasehold improvements. The Company recognized $5,204,739 of insurance claim
proceeds at December 31, 1998. The insurance company paid $3,000,000 toward the
claims by December 31, 1998 and a total of $5,132,462 by February 20, 1999.
Included in other income is $1,747,156 of the proceeds for business interruption
since the fire. The business interruption claims are ongoing and there has been
no final settlement for any of the claims.
The Company has generally satisfied its normal working capital requirements
with funds derived from operations and borrowings under a bank line of credit.
The Company had $2,000,000 unsecured line of credit with Wells Fargo Bank, NA
which was replaced by a $2,000,000 line of credit with Comerica Bank-California
on September 1, 1998. At December 31, 1998, the Company had had no borrowings
under either line for over 18 months. The Company also had a term loan with Well
Fargo Bank, NA secured by the 2nd Royal building with a balance of $747,505
at June 30, 1998, which the Company prepaid on July 31, 1998, using funds on
hand. The Comerica line of credit is part of a credit facility proposed by
Comerica for the Company's financial needs, including the need to finance the
acquisition and construction of a new meat plant. The line is payable on demand,
is subject to annual review, and bears interest at a variable annual rate, at
the Company's option, of either 1.75% over Comerica's cost of funds or 0.25%
under its "Base Rate."
Also as part of the credit facility, Comerica has issued a $4,060,000
letter of credit which expires October 15, 2003 and secures payment of principal
and interest on $4,000,000 of industrial development bonds which were issued
October 7, 1998, mature October 1, 2023 and produced $3,909,485 of net proceeds
for acquisition and construction of the Company's new meat plant. The Company is
obligated to pay principal and interest on the bonds. Comerica is not obligated
to renew the letter
-9-
of credit, but the Company is obligated to maintain a like letter of credit
until the bonds mature. The bonds are initially demand obligations remarketed
upon repayment and bear a variable rate of interest payable monthly and set
weekly at a market rate, initially 3.15% per annum and 2.55% at January 31,
1999. The Company pays a 1.5% per annum fee on the amount of the letter of
credit and fees of the bond trustee estimated at 0.5% of the bond principal per
year.
Beginning May 1, 2000 and continuing until the bonds mature, the Company is
obligated to make monthly principal payments into an interest bearing fund, with
the principal used annually to redeem the bonds and the interest accruing to the
benefit of the Company. The monthly payments aggregate $76,700 the first year
and increase about 5.6% each year until May 1, 2022, when $813,500 of remaining
principal is payable in 18 equal monthly payments. The Company has the option
to convert the bonds to bonds with principal payable at the end of a fixed term
and interest payable semi-annually at a fixed rate set at the minimum rate of
interest at which the converted bonds are remarketed.
The proposed credit facility also contemplates an up to $1,200,000 term
loan for a new pasta line, an additional $4,000,000 term loan for completion of
the new meat plant and an up to $1,000,000 term loan for equipment at the new
meat plant. All parts of the credit facility prohibits mergers, acquisitions,
disposal of assets, borrowing, granting security interests, and changes of
management and requires a tangible net worth greater than $7,500,000, a debt to
tangible net worth ratio less than 2, a quick ratio greater than 0.90, and
cash flow coverage greater than 1.30.
On September, 30, 1998, the Company purchased a 5.3 acre parcel of land in
the city of Lathrop, county of San Joaquin, California, for a purchase price of
$484,821 plus fees and commissions, as the site for the new meat plant.
Construction of the 85,000 square foot building to house the new meat plant is
in progress with the completion scheduled for the 1st half of 1999. The
estimated cost of acquisition and construction of the new meat plant is
currently over $8,500,000, including over $3,800,000 for general construction by
A.P. Thomas Construction, Inc., the general contractor, over $3,300,000 for
electrical, refrigeration, and specialty installations by other contractors
under direct contract with the Company and the balance primarily for site cost,
developer fees, commissions, utility fees, and architectural and engineering
fees.
The move to the new plant will require charging to expense the net
capitalized leasehold improvements and the future rent on the remaining San
Francisco 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. The annual cost to Swiss of the new meat plan
will exceed the annual cost of its old meat plant, and reduced volume because of
the fire will increase the difficulty of building the volume at the new plant to
profitable levels.
Additions to property and equipment of about $100,000 are anticipated for
1999, plus the cost of the new meat plant.
In 1998 cash, including restricted cash, increased about $2,987,000. The
restricted cash is industrial development bond proceeds disbursable for
construction costs. Operating activities produced $3,523,000, primarily from
earnings, depreciation, large decreases in accounts receivable and inventories,
and an increase in deferred taxes, partially offset by an increase in other
receivables. Investing activities used about $3,587,000, primarily for land
purchase, progress payments and other capitalized costs of a new plant at Swiss.
Financing activities produced about $3,051,000 from the proceeds of the
industrial development bonds, reduced by prepayment of the term loan and by the
excess of cash dividends paid over net stock proceeds. Accounts receivable and
inventories decreased because of the fire and subsequent reduced sales at Swiss.
The deferred taxes arose from a gain of insurance proceeds exceeding the net
book value of leasehold improvements and equipment lost in the fire. The gain is
not currently taxable but reduces future tax deductions for depreciation on the
replacement improvements and equipment. The other receivables are unpaid
insurance proceeds relating to the fire.
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
activites 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 account receivable and about a $631,000 increase in inventories,
following about a $502,000 reduction in inventories in 1995 on reduced sales.
-10-
In 1999 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 $149,835 in 1998 and may be as much as $150,000 or more in 1999.
The Company believes that is operations and bank line of credit will
provide adequate working capital to satisfy the normal ends of its operations
for the foreseeable future, including the financing of a new meat plant,
assuming the proposed credit facility is fully implemented.
New Accounting Standards
- ------------------------
The Finance Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in June 1997 and SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS No. 131 is
effective for interim financial statements beginning 1999 and for other
financial statements beginning 1998. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Application of these
Standards, 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 Y2K defect and programs with it may treat dates after
1999 as earlier than dates before 2000. The Company uses computers for
accounting, payroll, display and analysis of information, word processing and
other clerical activities, as well as some production process control. The
Company has examined its computer usage and found only that is accounting
programs exhibit the Y2K defect, which could adversely affect routines such as
calculating depreciation or aging accounts receivable. The Company has engaged a
computer programmer to correct the defect, which is expected to be corrected
before the year 2000 for under $20,000. The Company will be able to manually
perform the tasks affected without a material adverse effect on the Company's
operations, if the defect is not corrected. Programs being acquired for
production at the pasta plant and the new meat plant are specified to be free of
the defect. The Company's customers, suppliers and service providers may use
computer programs with the Y2K defect which, to the extend not corrected, could
adversely affect the Company's operations, such as the receipt of supplies,
services, purchase orders and payments of accounts receivable. The Company is
not aware of any customers, suppliers or service providers with Y2K problems
likely to have a material adverse effect, individually or in the aggregate, on
the Company's operations, but the Company has limited information about other
companies' Y2K problems and no means to audit or direct correction of them.
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 66, 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.
-11-
Theodore L. Arena, age 56 has been the General Manager of Swiss 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 61, 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 62, 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 53, 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 76, 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 form 1975 until his retirement in 1989.
Joseph W. Wolbers, age 69, has been director of the Company and Chairman of
the audit committee since 1990. He retired in 1989 as vice president of the
First Interstate Bank where he had been employed since 1950.
John M. Boukather, age 62, is a management consultant. He was 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 director of the Company and
member of the audit committee since 1987.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1998, 1997
and 1996, all compensation of all executive officers of the Company serving at
December 31, 1998.
Annual Restricted SEP/IRA
Name and Position Year Salary Option Award Contributions
----------------- ---- ------ ------------ -------------
Shares
John D. Determan, 1998 $ 80,771 $ 12,116
Chairman of the Board 1997 65,658 9,849
1996 62,791 9,419
Theodore L. Arena, 1998 133,749 29,062
President and 1997 110,790 91,458 16,618
Chief Executive Officer 1996 107,135 16,070
Ronald A. Provera, 1998 129,641 19,466
Secretary 1997 105,414 15,812
1996 103,568 15,535
Santo Zito, 1998 132,806 19,921
Vice President 1997 108,195 16,229
1996 106,246 15,937
Thomas J. Mulroney, 1998 129,793 19,469
Chief Financial Officer 1997 105,552 18,291 15,833
1996 102,161 15,324
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.
-12-
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 1998, the Company contributed $424,327 to IRA's under the plan.
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 ten 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 161,704
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 the 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 1992, options were granted to purchase 260,000 shares at a price of
$2-1/4 per share, 150,000 to Theodore L. Arena, 30,000 to Thomas J. 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.
In 1996, 1997, and 1998, options were exercised to purchase 16,000, 20,400,
and 10,000 shares, respectively, none by executive officers. The following table
shows, for the two executive officers, the number of unexercised options held on
January 1, 1999, the number exercisable and unexercisable and their aggregate
value based on the year end closing price of $2-15/16.
Option Values at January 1, 1999
--------------------------------
Number of Unexercised Value of Unexercised In-the-
Options at 11/1/99 Money Options at 1/199
Names Exercisable/Unexercisable Exercisable/Unexercisable
----- ------------------------- -------------------------
Theodore L. Arena 78,000/13,458 $29,250/5,047
Thomas J. Mulroney 18,291/ -0- $6,859/ -0-
-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, 1998.
Shares Beneficially Owned
----------------------------------------------------------
Without Options(4) Options Exercised(5)
------------------------ ------------------------
Name or Category(1) Number Percent Number Percent
- ------------------ -------- ------- ------- --------
John D. Determan 335,327 11.5% 335,327 11.1%
Penny S. Bolton 378,463 13.0% 378,463 12.5%
Theodore L. Arena 140,994 4.8% 232,452 7.7%
Ronald A. Provera 322,330 11.1% 322,330 10.7%
Santo Zito 352,330 12.1% 352,330 11.7%
Thomas J. Mulroney (3) 13,900 .5% 32,191 1.1%
Louis A. Arena 288,030 9.9% 288,030 9.5%
John M. Boukather 1,778 .1% 1,778 .1%
Joseph W. Wolbers 12,250 .4% 12,250 .4%
Officers and Directors 1,466,939 50.4% 1,576,688 52.2%
Shares Outstanding 2.913,098 100% 3,022,847 100%
- --------------------------------------------------------------------------------
(1) The address for each person is c/o Porvena 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) Includes 2,000 shares owned by Marsha Mulroney, wife of Thomas J. Mulroney.
(4) 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.
(5) 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 1998, officers and directors purchased the
following numbers of shares of the Company's common stock: 1st quarter, John M.
Boukather - 17 shares; 2nd quarter, Mr. Boukather - 12; 3rd quarter, Mr.
Boukather - 13, Joseph W. Wolbers - 4,500; 4th quarter, Mr. Boukather - 17,
Marsha Mulroney, wife of Thomas J. Mulroney - 2,000. During the 1st quarter of
1998, Thomas J. Mulroney sold 9,000 shares. No other purchases or sales of the
Company's common stock by officers or directors were reported ruing 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 1998 and (except as previously disclosed) prior
years by Section 16(a) of the Securities Exchange Act.
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 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 Office to
Chino, California (8)
3.13 Amendment to Bylaws of the Company re President as Chief Executive Officer
4.3 Form of Certificate evidencing common stock (8)
10.2 1987 Incentive Stock Option Plan, as amended to date (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 San Francisco Plant (7)
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)
10.37 First Amendment to lease dated December 18, 1995 between Company and
Therma-Lok, Inc.
10.38 Construction/Development Agreement Between Owner, Contractor and Developer
dated June 19, 1998 among Swiss as owner, A.P. Thomas Construction Inc. as
contractor and Catlin Properties, Inc., as developer
10.39 Master Revolving Note and Security Agreement, both dated July 14, 1998
between the Company and Comerica Bank-California, relating to the
Company's $2,000,000 line of credit
10.40 Collective Bargaining Agreement dated April 1, 1998 between Swiss and
United Food and COmmercial Workers Union Local 101, AFL-CIO
10.41 Loan Agreement dated October 1, 1998 between the California Economic
Development Financing Authority and the Company
10.42 Remarketing Agreement dated October 1, 1998 between the Company and Dain
Rauscher Incorporated
10.43 Purchase Contract among the California Economic Development Financing
Authority, the Treasurer of State of California and Dain Rauscher
Incorporated
10.44 Tax Regulatory Agreement dated October 1, 1998 among the California
Economic Development Financing Authority, U.S. Bank Trust National
Association, as trustee, and the Company
10.45 Building Loan Agreement dated October 1, 1998 between the Company and
Comerica Bank-California
10.46 Reimbursement Agreement dated October 1, 1998 between the Company and
Comerica Bank California
23.1 Consent of KPMG 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
-15-
Reports on Form 8-K
During the year ended December 31, 1998 the Company filed reports on Form
8-K dated August 1, 1998 regarding the meat plant fire and October 7, 1998
regarding the issuance of industrial revenue bonds for a new meat plant.
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 20, 1999 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 20, 1999
- ----------------------
John D. Determan
/s/ Theodore L. Arena President (Principal Executive February 20, 1999
- ---------------------- Officer) and Director
Theodore L. Arena
/s/ Ronald A. Provena Vice President, Sales, Security and February 20, 1999
- ---------------------- Director
/s/ Santo Zito Vice President and Director February 20, 1999
- ----------------------
Santo Zito
/s/ Thomas J. Mulroney Chief Financial Officer (Principal February 20, 1999
- ---------------------- Financial and Accounting Officer)
Thomas J. Mulroney
/s/ Louis A. Arena Director February 20, 1999
- ----------------------
Louis A. Arena
/s/ Joseph W. Wolbers Director February 20, 1999
- ----------------------
Joseph W. Wolbers
/s/ John M. Boukather Director February 20, 1999
- ----------------------
John M. Boukather
-16-
PROVENA FOODS, INC.
Financial Statements and Schedule
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
PROVENA FOODS INC.
Index to Financial Statements and Schedule
Page
Independent Auditors' Report F-2
Balance Sheets December 31, 1998 and 1997 F-3
Statements of Earnings - Years ended December 31, 1998, 1997 and 1996 F-4
Statements of Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
Schedule
II - Valuation and Qualifying Accounts and Reserves F-19
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, 1998 and 1997 and the related statements of earnings, shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1998, 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, 1998 and 1997 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Orange County, California
February 1, 1999
F-2
PROVENA FOODS INC.
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
-------------- --------------
Current assets:
Cash and cash equivalents $ 116,306 1,089,957
Accounts receivable, net of allowance for doubtful accounts of
$0 and $10,934 at December 31, 1998 and 1997,
respectively (notes 4, 5 and 12) 1,638,022 3,112,520
Insurance recovery receivable (note 15) 2,204,738 --
Inventories (notes 2, 4 and 5) 1,458,369 2,679,118
Prepaid expenses 59,118 45,460
-------------- --------------
Total current assets 5,476,553 6,927,055
Restricted cash (note 5) 3,960,224 --
Deferred tax asset (note 8) 73,504 101,279
Property and equipment, net (notes 3, 4 and 5) 7,602,040 4,467,521
Other assets 167,342 43,203
-------------- --------------
$ 17,279,663 11,539,058
============== ==============
Liabilities and Shareholders Equity
Current liabilities:
Current portion of long-term debt (note 5) $ -- 8,460
Accounts payable 1,118,294 1,123,820
Accrued liabilities (note 6) 989,443 1,122,068
Income tax payable (note 8) 107,960 98,545
-------------- --------------
Total current liabilities 2,215,697 2,352,893
-------------- --------------
Deferred income -- 7,752
Long-term debt, net of current portion (note 5) 4,000,000 743,275
Deferred tax liability (note 8) 584,519 --
Shareholders equity (notes 7, 9 and 10):
Common stock, no par value; authorized 10,000,000 shares;
2,913,098 and 2,865,981 shares issued and outstanding at
December 31, 1998 and 1997, respectively 4,572,482 4,422,647
Retained earnings 5,906,965 4,012,491
-------------- --------------
Total shareholders equity 10,479,447 8,435,138
Commitments and contingencies (notes 4, 5, 9, 13 and 14)
-------------- --------------
$ 17,279,663 11,539,058
============== ==============
See accompanying notes to financial statements.
F-3
PROVENA FOODS INC.
Statements of Earnings
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------------- ----------------- -----------------
Net sales (note 11) $ 24,502,571 30,966,339 28,895,372
Cost of sales 21,794,109 27,103,198 26,037,541
------------- ---------- ----------
Gross profit 2,708,462 3,863,141 2,857,831
------------- ---------- ----------
Operating expenses:
Distribution 1,055,130 987,948 893,834
General and administrative (notes 3 and 15) 1,197,643 1,078,225 1,107,581
------------- ---------- ----------
2,252,773 2,066,173 2,001,415
------------- ---------- ----------
Operating income 455,689 1,796,968 856,416
Interest income (expense), net 18,442 (57,830) (75,437)
Other income, net (notes 3 and 15) 3,325,831 279,257 113,339
------------- ---------- ----------
Earnings before income taxes 3,799,962 2,018,395 894,318
Income taxes (note 8) 1,558,183 763,776 332,416
------------- ---------- ----------
Net earnings $ 2,241,779 1,254,619 561,902
============= ========== ==========
Earnings per common share (note 11):
Basic $ 0.78 0.44 0.20
================ ========== ==========
Diluted $ 0.77 0.44 0.20
================ ========== ==========
Shares used in computing per common share
amounts (note 11):
Basic 2,890,516 2,836,434 2,767,156
============= ========== ==========
Diluted 2,923,868 2,854,939 2,775,133
============= ========== ==========
See accompanying notes to financial statements.
F-4
PROVENA FOODS INC.
Statements of Shareholders Equity
Years ended December 31, 1998, 1997 and 1996
Note
Common stock receivable Total
------------------------------- Retained from shareholders'
Shares issued Amount earnings shareholder equity
--------------- ---------- ---------- ------------- -------------
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
Repurchase of common stock (5,842) (22,500) -- -- (22,500)
Sale of common stock 42,959 149,835 -- -- 149,835
Exercise of shares under
stock option plan (note 10) 10,000 22,500 -- -- 22,500
Cash dividends paid, $.12 per
share -- -- (347,305) -- (347,305)
Net earnings -- -- 2,241,779 -- 2,241,779
--------------- --------------- --------------- ------------- -----------------
Balance at December 31, 1998 2,913,098 $ 4,572,482 5,906,965 -- 10,479,447
============== ============== ============== ============ ================
See accompanying notes to financial statements.
F-5
PROVENA FOODS INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------------- -------------- --------------
Cash flows from operating activities:
Net earnings $ 2,241,779 1,254,619 561,902
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 452,848 535,119 572,459
Loss on disposal of fixed assets -- 803 --
Provision for bad debts -- 36,241 (43,637)
Deferred income taxes 612,294 (94,430) (6,849)
Changes in assets and liabilities:
Accounts receivable 1,474,498 (740,464) (164,989)
Insurance recovery receivable (2,204,738) -- --
Inventories 1,220,749 249,560 (631,356)
Prepaid expenses (13,658) 4,850 16,743
Income taxes receivable -- 2,342
Other assets (124,139) 6,378 (197)
Accounts payable (5,526) 453,226 (123,161)
Accrued liabilities (132,625) (262,857) 101,899
Income tax payable 9,415 74,085 24,460
Deferred income (7,752) (9,305) (71,947)
----------- --------- --------
Net cash provided by operating
activities 3,523,145 1,507,825 237,669
----------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment -- 3,655 1,200
Additions to property and equipment (3,587,367) (302,496) (195,362)
----------- --------- --------
Net cash used in investing activities (3,587,367) (298,841) (194,162)
----------- --------- --------
Cash flows from financing activities:
Payments on note payable to bank (751,735) (208,460) (8,460)
Issuance of long-term debt 4,000,000 -- --
Increase in restricted cash (3,960,224) -- --
Repurchase of common stock (22,500) (22,498) (21,500)
Proceeds from sale of common stock 149,835 141,485 139,087
Exercise of stock options 22,500 45,900 36,000
Payments received on note from shareholder -- -- 3,268
Cash dividends paid (347,305) (340,983) (277,216)
----------- --------- --------
Net cash used in financing activities (909,429) (384,556) (128,821)
----------- --------- --------
Net increase (decrease) in cash and
cash equivalents (973,651) 824,428 (85,314)
Cash and cash equivalents at beginning of period 1,089,957 265,529 350,843
----------- --------- --------
Cash and cash equivalents at end of pe$ $ 116,306 1,089,957 265,529
=========== ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 78,484 73,511 81,081
Income taxes 939,589 787,855 287,600
========== ========= ========
See accompanying notes to financial statements.
F-6
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) 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).
(b) Inventories
Inventories consist principally of food products and are stated at the
lower of cost (first-in, first-out) or market.
(c) 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
(d) 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.
(e) 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 (see note 11).
(f) 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 tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable
F-7
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
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.
(g) 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.
(h) Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are measured at cost which
approximates their fair value because of the short maturity of these
instruments. The carrying amount of the Company's long-term debt
approximates its fair value because the interest rate on the instrument
fluctuates with market interest rates.
(i) 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.
(j) 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.
F-8
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
(k) Segment Information
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which the Company adopted in 1998. The Company
has two reportable segments; the meat processing division (Swiss
American) and the pasta division (Royal-Angelus) (see note 12).
(l) Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform with the current presentation.
(m) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gain and losses) in a full set of
general purpose financial statements. SFAS No. 130 is effective for
financial statements issued for periods beginning after December 15,
1997. The Company does not have any components of comprehensive income,
and accordingly, the Company's comprehensive income is the same as its
net income.
(2) Inventories
A summary of inventories follows:
1998 1997
----------- -----------
Raw materials $ 335,725 $ 1,220,151
Work in process 115,034 674,400
Finished goods 1,007,610 784,567
----------- -----------
$ 1,458,369 2,679,118
=========== ===========
(3) Property and Equipment
Property and equipment, at cost, consists of the following:
1998 1997
----------- -----------
Land $ 1,091,706 551,985
Buildings and improvements 2,728,087 3,283,200
Machinery and equipment 4,151,622 5,550,646
Delivery equipment 28,599 28,599
Office equipment 118,338 114,912
Construction in progress 3,225,797 40,861
----------- -----------
11,344,149 9,570,203
Less accumulated depreciation (3,742,109) (5,102,682)
----------- -----------
$ 7,602,040 4,467,521
=========== ===========
F-9
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
The Company leases certain real property to outside parties under
noncancelable operating leases. Rental income, included in other income,
totaled approximately $99,000, $106,000 and $104,000 in 1998, 1997 and 1996,
respectively.
The Company has under construction a new meat processing plant scheduled for
completion in fiscal 1999.
(4) Line of Credit
The Company has a $2,000,000 secured bank line of credit, due on demand with
no stated expiration date, at an interest rate of bank prime minus .25%
(7.50% at December 31, 1998). The line of credit is secured by accounts
receivable, inventory and equipment. No borrowings were made under this line
of credit during 1998. The bank line of credit agreement is subject to
certain covenants for which the Company was in compliance with at December
31, 1998.
(5) Long-Term Debt
Long-term debt at December 31, 1998 and 1997 consist of the following:
1998 1997
----------- ---------
Mortgage note payable, secured by land and
building, bearing interest LIBOR plus 2%,
payable in installments though the year 2000.
The note was paid in full in 1998 $ -- 751,735
Industrial Development Revenue Bonds at variable
interest rate (3.85% at December 31, 1998),
secured by an irrevocable letter of credit, and
requiring monthly principal and interest
payments ranging from $6,400 to $45,200 from the
year 2000 through the year 2023 4,000,000 --
----------- -----------
4,000,000 751,735
Less current portion -- (8,460)
----------- -----------
$ 4,000,000 743,275
=========== ===========
The $4,060,000 irrevocable letter of credit securing the Industrial Development
Revenue Bonds, is collateralized by accounts receivable, inventories, equipment
and certain real property. The commitment fee is 1.5% per annum, due at the
beginning of each year.
The proceeds from the Industrial Development Revenue Bonds issued in fiscal
1998 are held in trust and released as qualified capital expenditures are made.
At December 31, 1998, $3,960,224 was held in trust and is classified as
"restricted cash" in the Company's balance sheet.
The installments of long-term debt maturing in each of the next five years are:
1999 - $0.2000 - $51,133, 2001 - $79,566, 2002 - $84,000, 2003 - $88,767.
F-10
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
(6) Accrued Liabilities
A summary of accrued liabilities at December 31 follows:
1998 1997
--------- -----------
Accrued profit sharing (note 9) $ 424,327 391,762
Accrued retirement 147,444 161,179
Accrued compensation 137,224 253,148
Other 280,448 315,979
--------- -----------
$ 989,443 $ 1,122,068
========= ===========
(7) Shareholders' Equity
In 1998, 1997 and 1996, 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 1998, 1997 and 1996.
(8) Income Taxes
Income taxes (benefit) consist of the following:
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ 611,799 680,035 233,135
State 334,090 178,171 76,945
Deferred:
Federal 577,374 (56,366) 18,366
State 34,920 (38,064) 3,970
----------- ----------- -----------
$ 1,558,183 763,776 332,416
=========== =========== ===========
F-11
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
The sources and tax effects of temporary differences between the financial
statement carrying amounts and tax basis of assets and liabilities are as
follows:
December 31, December 31,
1998 1997
------------ ------------
Deferred tax assets:
Deferred income $ -- 3,111
Depreciation 3,146 37,590
State taxes 70,358 60,578
--------- ---------
Total deferred tax asset $ 73,504 101,279
========= =========
Deferred tax liability - gain on destroyed
equipment $ 584,519 --
========= =========
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, 1998. 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.
Actual income taxes differ from the "expected" tax amount, computed by
applying the US Federal corporate tax rate of 34% to earnings from
operations before income taxes, as follows:
1998 1997 1996
---------------------- --------------------- ---------------------
Amount % Amount % Amount %
------------ ------- ------------ ------ ------------ ------
Computed "expected" income taxes $ 1,291,987 34.0% $ 686,254 34.0% $ 304,068 34.0%
State income taxes, net of Federal 221,705 5.8 117,593 5.8 50,784 5.7
income tax benefit
Change in valuation allowance 0 0 (28,545) (1.4) 19,068 2.1
Other 44,491 1.2% (11,526) (.6) (41,504) (4.6)
----------- --------- --------- --------- --------- ---------
$ 1,558,183 41.0% $ 763,776 37.8% $ 332,416 37.2%
=========== ========= ========= ========= ========= =========
(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
1998, 1997 and 1996 were $424,327, $391,762 and $393,880, respectively.
F-12
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
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.
There were no options granted in 1998. 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:
1998 1997 1996
----------- --------- ----------
Net earnings As reported $ 2,241,779 1,254,619 561,902
=========== ========== ==========
Pro forma $ 2,217,369 1,218,761 561,902
=========== ========== ==========
Net earnings per share As reported:
Basic $ .78 .44 .20
=========== ========== ==========
Diluted $ .77 .44 .20
=========== ========== ==========
Pro forma:
Basic $ .77 .43 .20
=========== ========== ==========
Diluted $ .76 .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-13
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
Stock option activity during the periods indicated is as follows:
Weighted-
Number of average
shares exercise price
--------- ----------------
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 2.56
Exercised (20,400) 2.25
Terminated (72,045) 2.25
----------- -----------
Balance at December 31, 1997 119,749 2.54
Exercised (10,000) 2.25
----------- -----------
Balance at December 31, 1998 109,749 $ 2.56
=========== ===========
At December 31, 1998, exercise price and the remaining contractual life of
outstanding options was $2.56 and eight years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was 96,291
and 67,291, respectively, and the weighted-average exercise price of those
options was $2.56 and $2.54, respectively.
F-14
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
(11) Earnings Per Share
As discussed in note 1, the Company adopted SFAS No. 128 effective December
31, 1997. The following table illustrates the computation of basic and
diluted earnings per share under the provisions of SFAS No. 128:
1998 1997 1996
----------- ---------- -----------
Numerator:
Numerator for basic and diluted earnings per
share - net earnings $ 2,241,779 1,254,619 561,902
============= ========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average number of common shares
outstanding during the period 2,890,516 2,836,434 2,767,156
Incremental common shares attributable to
exercise of outstanding options 33,352 18,505 7,977
------------- ------------ -----------
Denominator for diluted earnings per share 2,923,868 2,854,939 2,775,133
============= ============ ===========
Basic earnings per share $ 0.78 0.44 0.20
============= ============ ===========
Diluted earnings per share $ 0.77 0.44 0.20
============= ============ ===========
Substantially all options were included in the computation of diluted
earnings per share for 1998, 1997 and 1996.
(12) Segment Data and Major Customers
The Company's reportable business segments are strategic business units
that offer distinctive products that are marketed through different
channels. The Company has two reportable segments; the meat processing
division (Swiss American) and the pasta division (Royal-Angelus). The Swiss
American division produces meat products that are sold primarily to pizza
restaurant chains, pizza processors and food service distributors. The
Royal-Angelus division produces pasta that is sold primarily to food
processors, private label customers, food service distributors and
specialty food distributors.
F-15
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
The following table represents financial information about the Company's
business segments as of and for the three years ended December 31, 1998:
1998 1997 1996
------------- ------------ -----------
Net sales to unaffiliated customers:
Swiss American Division $ 15,358,867 21,460,415 19,677,706
Royal-Angelus Division 9,143,704 9,505,924 9,217,666
------------- ------------ -----------
Total sales $ 24,502,571 30,966,339 28,895,372
============= ============ ===========
Operating income (loss):
Swiss American Division $ (555,721) 1,072,749 425,280
Royal-Angelus Division 1,111,545 794,617 507,914
Corporate (100,135) (70,398) (76,778)
------------- ------------ -----------
Operating income $ 455,689 1,796,968 856,416
============= ============ ===========
Identifiable assets:
Swiss American Division $ 12,651,307 5,214,515 4,920,249
Royal-Angelus Division 4,405,736 5,098,629 5,185,553
Corporate 222,620 1,225,914 308,044
------------- ------------ -----------
Total assets $ 17,279,663 11,539,058 10,413,846
============= ============ ===========
Capital expenditures:
Swiss American Division $ 3,288,356 241,686 --
Royal-Angelus Division 293,413 60,810 194,775
Corporate 5,598 -- 587
------------- ------------ -----------
Total capital expenditures $ 3,587,367 302,496 195,362
============= ============ ===========
Depreciation and amortization:
Swiss American Division $ 155,742 201,537 213,892
Royal-Angelus Division 291,508 327,995 352,669
Corporate 5,598 5,587 5,898
------------- ------------ -----------
Total depreciation and
amortization $ 452,848 535,119 572,459
============= ============ ===========
F-16
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
The Company had major customers during 1998, 1997 and 1996 that accounted for
more than 10% of consolidated sales and purchased products, as follows:
Accounts receivable
1998 1997 1996 balance at December 31
------------------- -------------------- ------------------- -------------------------
Customer Sales % Sales % Sales % 1998 1997
- -------------- ----------- ----- ----------- ----- ----------- ---- ---------- ---------
A $ 2,626,616 11 $ 7,356,414 24 $ 7,043,135 24 $ 206,465 $ 807,982
B 2,987,405 12 3,275,088 11 3,158,942 11 -- --
C $ 2,727,134 11 $ -- - -- - $ 283,106 $ --
=========== ===== ============ ===== =========== ==== ========= =========
(13) Commitments and Contingencies
The following table summarizes future minimum lease commitments required
under various noncancelable operating leases:
Amount
----------
Year ending December 31:
1999 $ 260,114
2000 270,519
2001 114,552
---------
$ 645,185
=========
Rent expense for all leases was approximately $405,000, $396,000 and
$387,000 in the years ended December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, 37% of the Company's employees are covered by a
collective bargaining agreement which expires March 31, 2002.
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.
(14) 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.
(15) Casualty Loss
On August 1, 1998, a fire destroyed one of the Company's two meat
processing facilities located in San Francisco, CA. The destroyed facility
was being leased under an operating lease expiring on November 1, 1998. The
fire destroyed inventory with a net book value of $1,112,435 and certain
equipment and leasehold improvements with a net book value of $474,835. The
inventory was insured at market value and the equipment and leasehold
improvements were insured at replacement cost. The total recovery for
F-17
PROVENA FOODS INC.
Notes to Financial Statements
December 31, 1998 and 1997
inventory, equipment and leasehold improvements totaled $3,117,607. The
Company is also being reimbursed for incremental costs under its "Business
Interruption & Extra Expense" coverage, which reimbursement totaled
$1,954,670 as of December 31, 1998. The business interruption claims are
ongoing until the Company's new meat processing facility is completed,
which is scheduled to be completed in fiscal 1999. As of December 31, 1998,
the Company's total insurance claims were $5,204,738, resulting in a gain
of $3,204,542, which is included in "Other income". The Company has
received a partial payment of $3,000,000 as of December 31, 1998 and the
remaining amount of $2,204,738 is included in the balance sheet as
"Insurance recovery receivable," as it was received after December 31,
1998. There has been no final settlement on any of the aforementioned
claims.
F-18
PROVENA FOODS INC.
Schedule II: Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
Balance at Deductions -
beginning of Provision, net uncollectible Balance at end
Description period of recoveries accounts of period
----------- ---------------- -------------- ---------------- ---------------
Allowance for doubtful
receivables:
1998 $10,934 --- 10,934 ---
====== ====== ======= ======
1997 $ --- 36,241 (25,307) 10,934
======= ======= ======= ======
1996 $54,700 (43,637) (11,063) ---
======= ======= ======= =====
See accompanying independent auditors' report.
F-19