ITEM 1. BUSINESS
General - -------
Provena Foods Inc. (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 $12,000.
The Company's competitive strategy is to emphasize providing products of predictable quality and consistency at competitive prices as well as prompt and reliable service. The Company attempts to establish, refine and maintain procedures to assure that the Company's products comply with its customers' specifications and are delivered in a manner that will satisfy their delivery and production requirements.
For financial information about each of the Company's two divisions, see the segment data contained in Note 12 of Notes to Financial Statements.
Swiss American Sausage Co. Meat Division - ----------------------------------------
During the years ended December 31, 1999 and 1998, sales by Swiss accounted for 64.3% and 62.7%, 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. The San Francisco plant had an estimated theoretical production capacity of 27,000,000 pounds per year. In 1999, the Company completed construction of a new meat plant in Lathrop, California. Installation of equipment at the new meat plant is substantially completed, operations have commenced, and the inefficiencies of starting up a new plant are diminishing. The new meat plant will have a preliminary estimated theoretical production capacity of 46,000,000 pounds per year when fully equipped. The Company purchased an additional 2 acres of land adjacent to the new plant in 1999 to ensure a capability of expansion which the old meat plant did not have. See ITEM 2.
ITEM 2. PROPERTIES
The Company's original 48,000 square foot meat processing plant located in San Francisco was destroyed by fire on August 1, 1998. The lease of a nearby 45,000 square foot facility used for drying and slicing operations was terminated in 1999 with no payment for early termination. In 1999, the Company completed construction of a new approximately 85,000 square foot meat plant in Lathrop, California, installed most of the equipment and commenced operations. The preliminary estimated theoretical production capacity of the new meat plant, when current installation of equipment is completed, is 46,000,000 pounds per year, compared to 27,000,000 pounds per year for the old plant. The Company purchased an additional 2 acres of land adjacent to the new plant in 1999 to ensure a capability of expansion which the old meat plant did not have. 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, with adequate short-goods capacity to fulfill foreseeable needs of the pasta division, but with limited long-goods capacity from its single line. The Company has ordered a second 17,000,000 pounds per year capacity long-goods line, subject to obtaining financing. After installation of a second long-goods line, the pasta plant will still have capability of further expansion.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company, from time to time, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Tuesday, April 27, 1999, at 11:00 a.m. at the Company's principal office. Shareholders representing 2,392,465 or 81.7% of the 2,927,353 shares entitled to vote were present in person or by proxy, with 419,131 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:
PART II -------
ITEM 5.
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:
The closing price on December 31, 1999 was $2-3/4.
Common Stock - ------------
The Company's Articles of Incorporation as amended authorize the Company to issue up to 10,000,000 shares of common stock, without par value. The Company is not authorized to issue any class or series of shares except shares of common stock. At December 31, 1999 the Company had issued and outstanding 2,972,029 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:
The declaration and timing of future dividends, if any, will depend on the Company's financial condition and results of operations and other factors deemed relevant by the Board.
All outstanding shares of common stock are fully paid and nonassessable and are not subject to redemption. Holders of common stock are entitled to one vote for each share held of record and have cumulative voting rights in the election of directors. Holders of common stock do not have preemptive rights and have no right to convert their shares into any other security. Upon liquidation of the Company, the holders of common stock would share ratably in all assets of the Company after the payment of all liabilities.
Shareholder communications regarding transfers, changes of address, missing dividends, lost certificates or similar matters should be directed to the Company's transfer agent and registrar, ChaseMellon Shareholder Services, Stock Transfer Department, Washington Bridge Station, P.O. Box 469, New York, NY 10033, (800)522-6645, www. chasemellon.com.
Common Stock Repurchase and Sales - ---------------------------------
The Company has had an announced intention to repurchase shares of its common stock since January 11, 1988. Currently, purchases are authorized up to the number of shares issued under the Company's 1988 Employee Stock Purchase Plan. Purchases are made from time to time on the open market or in privately negotiated transactions. In addition, the Company must accept outstanding shares at fair market value in payment of the exercise price of options under the Company's 1987 Incentive Stock Option Plan.
In 1999, the Company purchased no shares under its stock repurchase program, and received no shares in payment of the exercise price of options. 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 1999 employees purchased 56,293 newly issued shares at an average price of $2.98 per share. Employees have purchased a total of 493,575 shares under the plan through December 31, 1999, at an average price of $3.03 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 $160,000 per year.
An employee exercised Incentive Stock Options in 1999 to purchase 2,638 shares at an exercise price of $2-9/16 per share.
ITEM 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, 1999 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - --------------------- The following table sets forth operating data for the years ended December 31, 1999, 1998 and 1997:
Comparison of Years Ended December 31, 1999 and 1998 - ----------------------------------------------------
In 1999, sales of $20,628,000 were down 16% from 1998 sales of $24,503,000. Both divisions contributed to the decline in sales.
The meat division's sales were down about 14% in dollars and 9% in pounds and it operated at a $2,837,000 loss for 1999 compared to a $556,000 loss for 1998. Swiss's sales for the 4th quarter of 1999 were up 46% in dollars and 44% in pounds from the 4th quarter of 1998. Sales in dollars changed proportionately more than in pounds because selling prices were lower during most of 1999, but increased in the 4th quarter, reflecting meat costs. Swiss was experiencing modest growth and increased profits when the August 1, 1998 fire destroyed its main meat plant. Swiss attempted to maintain volume by purchasing processed products from other suppliers for its customers, but after the fire until the new plant commenced operations, Swiss's sales were down almost $1,000,000 per month. Most of Swiss's $2,837,000 operating loss in 1999 was offset by $2,613,000 of business interruption insurance proceeds included in other income. Installation of equipment at the new plant is almost complete, and during the 4th quarter of 1999, sales of product produced at the new plant increased and Swiss operated at a modest profit.
The pasta division's sales decreased about 19% in dollars and 21% in pounds and its operating income decreased 52% in 1999 from 1998. The pasta division's sales for the 4th quarter of 1999 were down 16% in dollars and 11% in pounds from the same quarter of 1998. The sales decreases in dollars compared to pounds were proportionately less for the year but more for the 4th quarter because average selling prices were higher for most of 1999 but decreased in the 4th quarter, corresponding to changes in the proportion of lower volume-higher priced sales. The decreases in sales reflect competition resulting from increased industry capacity.
The Company's gross profit for 1999 was $257,000 or 1.2% of net sales compared to $2,709,000 or 11.1% of net sales for 1998. Gross profit decreased absolutely and as a percent of sales because of the higher costs incurred at Swiss as a result of purchasing processed products from other suppliers. Distribution, general and administrative expenses for 1999 were up about 18% from 1998. Distribution expenses were up about $182,000 because of increased freight and sales-person payroll and expense at Swiss and increased truck-rental expense at Royal. Administrative expenses were up about $216,000 primarily due to increased outside services, bank charges, clerical payroll, depreciation, printing and travel. Increased outside services resulted in part from the union election at Royal. Printing reflects new stationery and advertising for the new meat plant and additional travel costs were incurred between the old and the new meat plant sites.
Net interest changed from income in 1998 to an expense in 1999 because of additional interest on the industrial development bonds and equipment loans and borrowings under the bank line. Other income for both 1999 and 1998 included insurance proceeds relating to the meat plant fire and decreased in 1999 from 1998 because more insurance proceeds were recognized as income in 1998.
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 attempted to maintain volume until its new meat plant was operational by purchasing products from other suppliers for its customers, but after the fire, Swiss's sales were 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 reflected competition resulting from increasing industry capacity. The large decrease in the 4th quarter of 1998 partly reflected 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 high 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 costs incurred at Swiss as a result of purchasing processed products from other suppliers after the fire. Distribution, general and administrative expenses for 1998 were up about 9% from 1997. Distribution expenses were 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 expenses were up about $119,000 primarily due to increased officer payroll, health care costs and outside services, partially offset by lower bad debt expense.
Net interest changed from an expense in 1997 to income in 1998 because of the absence of borrowings under the bank line, a lower balance on the term loan, prepayment 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.
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 and the insurance company have settled claims arising from the fire for $8,011,000, including $1,189,000 for inventory, $2,022,000 for equipment and leasehold improvements and $4,800,000 for business interruption. The Company recognized $5,204,738 of the insurance claim proceeds in 1998 and the balance in 1999, including $2,613,000 for business interruption in 1999.
The Company has generally satisfied its normal working capital requirements with funds derived from operations and borrowings under its $2,000,000 bank line of credit with Comerica Bank-California. At December 31, 1999, the Company had $2,000,000 of borrowings under the bank line of credit. 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 the bank's cost of funds or 0.25% under its "Base Rate."
The bank line of credit is part of a credit facility under which the bank has issued a $4,060,000 letter of credit to support $4,000,000 of industrial development bonds issued in 1998 for costs of the Company's new meat plant. The bonds mature October 1, 2023 and the letter of credit expires October 15, 2003. The bank is not obligated to renew the letter of credit, but the Company is obligated to maintain a like letter of credit until the bonds mature. The bonds bear a variable rate of interest payable monthly and set weekly at a market rate, initially 3.15% per annum, 5.3% at December 31, 1999 and 2.9% at January 31, 2000. The Company pays a 1.5% per annum commitment fee on the amount of the letter of credit and fees of the bond trustee estimated at 0.5% of the bond principal per year. Monthly payments of bond principal begin May 1, 2000, total $76,700 the first year and increase about 5.6% each year until May 1, 2022, when $813,500 of remaining principal is payable in 18 equal monthly payments.
Also as part of the credit facility, the bank has made four loans to the Company to finance the new meat plant, a $1,280,000 real estate loan in December 1999 with a 25 year term bearing interest at the rate of 9.1% per annum and three equipment loans, a $1,000,000 loan in July 1999 with a 7 year term bearing interest at the bank's "Base Rate," a $1,200,000 loan in September 1999 with a seven year term bearing interest at the bank's "Base Rate" plus 0.25% and a $414,788 loan in December 1999 with a five year term bearing interest at the bank's "Base Rate" plus 0.75%. The real estate loan bears a fixed rate of interest and is payable in equal monthly payments of principal and interest over its term.
All parts of the credit facility are secured by substantially all of the Company's assets, including acccounts receivable, inventory, equipment and fixtures, the Company's two Chino buildings and the new meat plant, none of which is otherwise encumbered. The credit facility prohibits mergers, acquisitions, disposal of assets, borrowing, granting security interests, and changes of management and 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. The Company was in default under the quick-asset-ratio covenant at December 31, 1999 and the bank has waived the default.
In 1999, the Company completed the construction of a 85,000 square foot meat plant on a 5.3 acre parcel of land in Lathrop, California, for a total cost for land, building, improvements and equipment through December 31, 1999 of $12,511,000. The cost includes the cost replacing equipment lost in the fire for which insurance proceeds of $1,856,000 were received. In December 1999, the Company purchased an additional 2 acres of land adjacent to the meat plant for $205,000, to be used for possible future expansion of the meat plant. The installation of equipment at the meat plant is substantially complete and is expected to be completed in the 1st quarter of 2000 at an estimated additional cost of $204,000.
The pasta division has three short-good lines but only one long-goods line. The division's short-goods production capacity is more than adequate to meet foreseeable demand, but the division has recently had opportunities for the sale of long-goods which exceeded the division's production capabilities. Consequently, the Company has ordered a second long-goods line with a 17,000,000 pound per year capacity, subject to obtaining financing. The cost of purchase and installation of the line is estimated at $2,300,000. General Electric Capital Corporation has agreed to make a fixed-rate 7 year equipment loan for the line at a rate to be determined and Comerica has consented to the loan. The purchase also requires a letter of credit which has not yet been obtained.
Additions to property and equipment of about $100,000 are anticipated for 2000, plus the cost of the long-goods line and completing the new meat plant.
In 1999 cash increased about $718,000. Operating activities produced about $319,000, primarily from depreciation and a decrease in the insurance recovery receivable, offset by increased inventories. The decrease in the insurance recovery receivable reflects payment of insurance proceeds from the fire. Inventories increased because of commencement of operations at the new meat plant. Investing activities used about $9,173,000, primarily for the new plant. Financing activities produced about $9,573,000 from meat plant loan proceeds, borrowings under the bank line and a decrease in restricted cash, reduced by the excess of cash dividends paid over net stock proceeds. The restricted cash was industrial development bond loan proceeds disbursed for meat plant construction costs.
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 about $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 activities used about $385,000 for dividends and the term loan pre-payment, offset by net stock proceeds. Inventories were down and accounts receivabe up because the surge of sales in the 4th quarter depleted inventories and generated accounts receivable.
In 2000 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 $167,474 in 1999.
The Company believes that its operations and bank line of credit will provide adequate working capital to satisfy the normal needs of its operations for the foreseeable future, including cash flow to service the debt incurred to finance the new meat plant and to service an equipment lease of the new long- goods line.
New Accounting Standards - ------------------------
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Application of this Standard, in the opinion of management, will not have a material effect on the information presented.
Y2K - ---
Many computer programs used only the last two digits of a year to store or process dates or did not provide for incrementing the first two digits of a year. This is the Y2K defect and was expected to cause computers to malfunction, if not corrected. The company has experienced no material Y2K-related problems in 2000.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The $4,000,000 industrial development bonds, the $2,000,000 bank line of credit, and the $2,614,788 of equipment loans bear variable rates of interest (see Liquidity and Capital Resources under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and see Note 5 of Notes to Financial Statements) which tend to follow market interest rates and increase the interest expense to the Company if interest rates increase. A 1% per annum increase in the rate born by the industrial development bonds would increase annual interest expense by almost $40,000. Assuming an average bank line of credit balance of $1,OOO,OOO plus the $2,614,000 of equipment loans, a 1% per annum increase in the rate born by those borrowings would increase annual interest expense by almost $36,000.
ITEM 8.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III --------
ITEM 10.
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 67, has been a vice president and director of the Company since its formation in 1972, General Counsel from 1986 to 1992, Chief Executive Officer from 1992 to February 21, 1998 and Chairman of the Board since 1992. He is a member of the audit and option committees.
Theodore L. Arena, age 57, has been the General Manager of Swiss since 1976, and the President and a director of the Company since 1985. He has been the Chief Executive Officer since 1998. He is the nephew of Louis A. Arena, a director of the Company.
Ronald A. Provera, age 62, 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 63, 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 54, 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 77, has been a director of the Company since 1972, a vice president from 1972 to 1989, and General Manager of the Royal-Angelus Macaroni Co. division from 1975 until his retirement in 1989.
Joseph W. Wolbers, age 70, has been a director of the Company and Chairman of the audit committee since 1990. He retired in 1989 as a vice president of First Interstate Bank where he had been employed since 1950.
John M. Boukather, age 63, is a management consultant. He was the Director of Operations of PW Supermarkets from 1993 to 1994, Vice President, Retail Sales, of Certified Grocers of California, Ltd. from 1992 to 1993 and president of Pantry Food Markets from 1983 to 1987. He has been a director of the Company and member of the audit committee since 1987.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1999, 1998 and 1997, all compensation of all executive officers of the Company serving at December 31, 1999.
The Company does not currently pay bonuses or deferred compensation to any executive officer and does nor 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-l/2 may be subject to tax penalties.
For 1999, the Company contributed $419,340 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 10 years from the date of adoption, an Option Committee appointed by the Board of Directors is authorized in its discretion to grant to key management employees options to purchase up to an aggregate of 261,704 shares of common stock of the Company. The options may become exercisable in such installments as may be established by the Option Committee. The purchase price of shares covered by an option may not be less than the market value of the shares on the date of grant. The term of an option may not exceed 10 years and an option may not become exercisable in any year with respect to the purchase of more than $100,000 worth of shares based on the market value on the date of grant.
In 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 1997 and 1998, options were exercised to purchase 20,400 and 10,000 shares, respectively, none by executive officers. In 1999, Mr. Mulroney exercised options to purchase 2,638 shares. The following table shows, for the two executive officers, the number of shares acquired on exercise of options in 1999, the value realized on exercise of options based on the year end closing price of $2-3/4, the number of unexercised options held on January 1, 2000, and their aggregate value based on the year end closing price. All unexercised options are exercisable.
Aggregate Option Exercises in 1999 and Option Values at January 1, 2000 -----------------------------------------------------------------------
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.
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, 1999.
(1) The address for each person is c/o Provena Foods Inc., 5010 Eucalyptus Avenue, Chino, Ca. 91710. (2) Penny S. Bolton is the widow of James H. Bolton, former chairman of the Company. Her shares are not included in the group's shares. (3) Includes 320,930 shares held by the family trust of Ronald A. Provera and his wife, Madelyn M. Provera. (4) Includes 3,800 shares owned by Marsha Mulroney, wife of Thomas J. Mulroney. (5) 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 15,653 shares and to all officers and directors as a group to purchase 107,111 shares. (6) 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 1999, officers and directors purchased the following numbers of shares of the Company's common stock: 1st quarter, John M. Boukather - 18 shares; 2nd quarter, Mr. Boukather - 1,019, Thomas J. Mulroney - 2,638; 3rd quarter, Mr. Boukather - 25; 4th quarter, Mr. Boukather - 28, Marsha Mulroney, wife of Mr. Mulroney- 1,800. No sales and no other purchases of the Company's common stock by officers or directors were reported during the year.
Based on copies of filed forms and written representations, the Company believes that all officers, directors and l0'% shareholders have timely filed all Forms 3, 4 and 5 required for 1999 and (except as previously disclosed) prior years by Section 16(a) of the Securities Exchange Act.
ITEM 13.
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.
PART IV -------
ITEM 14.
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.
- -------------------------------------------------------------------------------- (1) Exhibit to Form S-l Registration Statement filed May 11, 1987 (2) Exhibit to Amendment No. 2 to Form S-l Registration Statement filed June 17, 1987 (3) Exhibit to Amendment No. 3 to Form S-l Registration Statement filed July 29, 1987 (4) Exhibit to 1987 Form 10-K Annual Report (5) Exhibit to 1988 Form 10-K Annual Report (6) Exhibit to 1989 Form 10-K Annual Report (7) Exhibit to 1990 Form 10-K Annual Report (8) Exhibit to 1991 Form 10-K Annual Report (9) Exhibit to 1995 Form 10-K Annual Report (10) Exhibit to 1998 Form 10-K Annual Report
Reports on Form 8-K - -------------------
During the year ended December 31, 1999 the Company filed no reports on Form 8-K.
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 26, 2000 PROVENA FOODS INC.
By: ----------------------------- 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.
[LOGO OF KPMG]
PROVENA FOODS INC.
Financial Statements and Schedule
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
Provena Foods Inc.
Index to Financial Statements and Schedule
[LETTERHEAD OF KPMG]
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, 1999 and 1998 and the related statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP Orange County, California January 29, 2000
PROVENA FOODS INC.
Balance Sheets
December 31, 1999 and 1998
See accompanying notes to financial statements.
PROVENA FOODS INC.
Statements of Earnings
Years ended December 31, 1999, 1998 and 1997
See accompanying notes to financial statements.
PROVENA FOODS INC.
Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
See accompanying notes to financial statements.
PROVENA FOODS INC.
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
See accompanying notes to financial statements.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(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 (SFAS) 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
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
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 borrowings under the line of credit and 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 undiscounted 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 exceeds 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
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," establishing accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company follows the disclosure requirements of SFAS No. 123.
(k) Segment Information
In June 1997, the Financial Accounting Standards Board 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.
(l) Reclassifications
Certain amounts in the prior year's financial statements have been reclassified to conform with the 1999 presentation.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(m) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes rules for the reporting and display of comprehensive income and its components. The Company does not have any components of other comprehensive income, and accordingly, the Company's comprehensive income is the same as its net income.
(n) Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
(2) Inventories
(3) Property and Equipment
Property and equipment, at cost, consists of the following:
The Company leases certain real property to outside parties under noncancelable operating leases. Rental income, included in other income, totaled approximately $101,000, $99,000 and $106,000 in 1999, 1998 and 1997, respectively.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(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 (8.5% at December 31, 1999) minus .25%. The line of credit is secured by accounts receivable, inventory and equipment. At December 31, 1999 the Company had borrowings under this line of credit of $2,000,000. There were no borrowings outstanding under this line of credit at December 31, 1998. The bank line of credit agreement is subject to certain covenants for which the Company was in default under the quick ratio covenant at December 31, 1999. The bank has waived the default through March 31, 2000. The Company will be subject to the same covenant at March 31, 2000 and the Company believes they will be in compliance at that time.
(5) Long-Term Debt
Long-term debt at December 31, 1999 and 1998 consists of the following:
The $4,060,000 irrevocable letter of credit securing the IDRB, 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 quarter.
The proceeds from the IDRB issued in 1998 were held in trust and released as qualified capital expenditures were made. At December 31, 1998, $3,960,224, was held in trust and classified as "restricted cash" in the Company's 1998 balance sheet.
The installments of long-term debt maturing in each of the next five years and thereafter are: 2000 - $462,418, 2001 - $492,185, 2002 - $498,078, 2003- $504,443, 2004 - $511,226 and thereafter - 5,324,059.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(6) Accrued Liabilities
(7) Shareholders' Equity
In 1998 and 1997, the Company repurchased shares of its common stock in negotiated transactions and retired the shares purchased. The Company sold shares to employees under its stock purchase plan (note 9) in 1999, 1998 and 1997.
(8) Income Taxes
Income taxes (benefit) for the years ended December 31, 1999, 1998 and 1997 consist of the following:
The sources and tax effects of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities are as follows:
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
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, 1999. 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 "expected" income taxes, computed by applying the U.S. Federal corporate tax rate of 34% to earnings from operations before income taxes, as follows:
(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 1999, 1998 and 1997 were approximately $419,000, $424,000 and $392,000, respectively.
In 1988, the Company adopted a stock purchase plan, enabling substantially all nonunion employees except officers and directors to purchase shares of the Company's common 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 common 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 matching contributions to the stock purchase plan for 1999, 1998 and 1997 were $83,737, $74,918 and $70,743, respectively.
The Company provides partial coverage for medical costs to its employees under a self-insured plan. Additionally, the Company carries a catastrophic policy that covers claims in excess of $40,000 for any covered individual. The Company has accrued the estimated liability for its self-funded costs (see note 14).
(10) Incentive Stock Option Plan
Under a stock option plan (the Plan) adopted in 1987, the Company has awarded options to certain of its key employees to purchase common stock at prices which approximate 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.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
There were no options granted in 1999 or 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 of 1%, risk-free interest rate of 6.7%, volatility of 35% and an expected life of 8 years.
The Company applies the intrinsic-value based method of 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:
Pro forma net earnings reflect 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.
Stock option activity during the periods indicated is as follows:
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
At December 31, 1999, the exercise price and remaining contractual life of outstanding options was $2.56 and 7 years, respectively.
At December 31, 1999 and 1998, the number of options exercisable was 107,103 and 96,291, respectively, and the weighted-average exercise price of those options was $2.56.
(11) Earnings Per Share
The following table illustrates the computation of basic and diluted earnings per share under the provisions of SFAS No. 128:
Substantially all options were included in the computation of diluted earnings per share for 1999, 1998 and 1997.
(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.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
The following table represents financial information about the Company's business segments as of and for the three years ended December 31, 1999:
The Company had major customers during 1999, 1998 and 1997 that accounted for more than 10% of consolidated sales and purchased products, as follows:
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(13) Commitments and Contingencies
Rent expense for all leases was approximately $197,000, $405,000 and $396,000 in the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999, approximately 54% of the Company's employees are covered by a collective bargaining agreement which expires March 31, 2002.
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur, the Company believes the final disposition of such matters will not have a material adverse effect on its financial position, results of operations or liquidity.
(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 that expired 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 improvement were insured at replacement cost. The Company was also reimbursed for incremental operating costs under its "Business Interruption & Extra Expense" coverage. Total insurance proceeds recognized in 1999 and 1998 were $2,806,262 and $5,204,738 respectively, which resulted in gains of $2,806,262 and $3,204,342 which are included in other income in the accompanying 1999 and 1998 statements of earnings, respectively. The claim has been completely settled and all amounts have been fully collected as of December 31, 1999.
PROVENA FOODS INC. Notes to Financial Statements December 31, 1999 and 1998
(16) Selected Quarterly Financial Data (Unaudited)
The following summarizes certain unaudited quarterly financial information for 1999, 1998 and 1997:
PROVENA FOODS INC.
Schedule II: Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1999, 1998 and 1997
See accompanying independent auditors' report.