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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





For the Quarter ended June 30, 2002





Commission File Number 1-10741





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PROVENA FOODS INC.


(Exact name of registrant as specified in its charter)





California (State or
other jurisdiction of incorporation or organization)

95-2782215 (I.R.S.
employer identification number)5010 Eucalyptus Avenue, Chino, California (Address of principal executive offices)

91710 (Zip
Code)





(909) 627-1082


(Registrants telephone number, including area code)





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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈





The number of shares of Provena Foods Inc. Common Stock outstanding as of the close of business of the period covered by this report was:





Common Stock            3,117,688




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PROVENA FOODS INC.





Form 10-Q Report for the Second Quarter Ended June 30, 2002





TABLE OF CONTENTS





Item



PagePART I.    FINANCIAL INFORMATION1.    
Financial Statements

1Condensed Statements of Operations

1Condensed Balance Sheets

2Condensed Statements of Cash Flows

3Notes to Condensed Financial Statements

42.    
Managements Discussion and Analysis of Financial Condition and Results of Operations

5Results of Operations

5Swiss American Sausage Co. Meat Division

5Royal-Angelus Macaroni Company Pasta Division

5The Company

6Liquidity and Capital Resources

6Commitments and Contingencies

7Critical Accounting Policies

8New Accounting Standards

83.    
Quantitative and Qualitative Disclosures About Market Risk

8PART II.    OTHER INFORMATION1.    
Legal Proceedings

92.    
Changes in Securities

93.    
Defaults Upon Senior Securities

94.    
Submission of Matters to a Vote of Security Holders

95.    
Other Information

9Common Stock Repurchase and Sale

9American Stock Exchange Listing

9Cash Dividends

10Management Stock Transactions

106.    
Exhibits and Reports on Form 8-K

10Signature

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PART I.    FINANCIAL INFORMATION





Item I.Financial Statements





PROVENA FOODS INC.





CONDENSED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Net sales

$
8,903,207


7,905,495


18,675,267


15,644,176Cost of sales


7,931,036


7,237,991


16,741,882


14,062,144Gross profit


972,171


667,504


1,933,385


1,582,032Operating expenses:Distribution


302,719


290,359


607,735


614,362General and administrative


440,959


392,598


937,994


830,235Operating income (loss)


228,493


(15,453
)

387,656


137,435Interest expense, net


(137,949
)

(174,401
)

(261,715
)

(368,765
)Other income, net


59,080


44,420


116,389


103,362Earnings (loss) before income taxes


149,624


(145,434
)

242,330


(127,968
)Income tax expense (benefit)


56,857


(46,800
)

93,857


(39,200
)Net earnings (loss)

$
92,767


(98,634
)

148,473


(88,768
)Earnings (loss) per share:Basic

$
.03


(.03
)

.05


(.03
)Diluted

$
.03


(.03
)

.05


(.03
)Shares used in computing earnings (loss) per share:Basic


3,113,228


3,056,878


3,106,333


3,050,416Diluted


3,113,228


3,056,878


3,106,333


3,050,416








See accompanying Notes to Condensed
Financial Statements.




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PROVENA FOODS INC.





CONDENSED BALANCE SHEETS


(Unaudited)





June 30, 2002

December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
81,392

206,777Accounts receivable, less allowance for doubtful accounts of $37,225 at 2002 and $0 at 2001


3,120,480

3,238,935Inventories


3,497,768

3,190,660Prepaid expenses


114,294

12,443Deferred tax assets


106,203

106,203Total current assets


6,920,137

6,755,018Property and equipment, net


15,783,095

16,128,662Other assets


185,031

181,268Deferred tax assets, net of current


142,057

328,884$
23,030,320

23,393,832LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Line of credit

$
3,600,555

4,000,000Current portion of long-term debt


495,285

495,285Current portion of capital lease obligation


113,200

113,200Accounts payable


1,327,428

1,362,058Accrued liabilities


1,350,759

1,229,273Deferred tax liability


46,394

46,394Income taxes payable


97,000

Total current liabilities


7,030,621

7,246,210Long-term debt, net of current portion


6,109,589

6,395,906Capital lease obligation, net of current portion


403,028

453,628Deferred tax liability, net of current


416,802

416,802Shareholders equity:Capital stock, no par value; authorized 10,000,000 shares; issued and outstanding 3,117,688 at 2002 and 3,089,516 at
2001


5,023,860

4,983,339Retained earnings


4,046,420

3,897,947Total shareholders equity


9,070,280

8,881,286$
23,030,320

23,393,832





See accompanying Notes to Condensed Financial Statements.




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PROVENA FOODS INC.





CONDENSED STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2002


2001Cash flows from operating activities:Net earnings (loss)

$
148,473


$
(88,768
)Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


400,018



367,787Change in allowance for doubtful accounts


37,225



(26,000
)Decrease (increase) in accounts receivable


81,230



(36,408
)Increase in inventories


(307,108
)


(809,016
)Increase in prepaid expenses


(101,851
)


(31,984
)Decrease in income taxes receivable






336,597Decrease (increase) in other assets


(3,763
)


186Increase (decrease) in accounts payable


(34,630
)


39,418Increase (decrease) in accrued liabilities


121,486



(42,134
)Increase in income taxes payable


97,000



800Decrease in deferred tax assets


186,827



Net cash provided by (used in) operating activities


624,907



(289,522
)Cash flows from investing activities:Additions to property and equipment


(54,451
)


(119,397
)Net cash used in investing activities


(54,451
)


(119,397
)Cash flows from financing activities:Payments on long term debt


(286,317
)


(289,011
)Payments on capital lease obligation


(50,600
)


Proceeds from (repayments of) line of credit


(399,445
)


791,079Proceeds from sale of capital stock


40,521



48,288Cash dividends paid






(183,304
)Net cash provided by (used in) financing activities


(695,841
)


367,052Net decrease in cash and cash equivalents


(125,385
)


(41,867
)Cash and cash equivalents at beginning of period


206,777



88,585Cash and cash equivalents at end of period

$
81,392


$
46,718Supplemental disclosures of cash flow information:Cash paid (received) during the period for:Interest

$
261,715


$
370,423Income taxes

$
(101,970
)

$
(335,797
)





See accompanying Notes to Condensed Financial Statements.




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PROVENA FOODS INC.





NOTES TO CONDENSED FINANCIAL STATEMENTS


June 30, 2002 and 2001





(1)    Basis of Presentation





The
accompanying unaudited condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and footnotes which would be presented if such financial statements were
prepared in accordance with accounting principles generally accepted in the United States for annual financial statement purposes. These statements should be read in conjunction with the audited financial statements presented in the Companys
Form 10-K for the year ended December 31, 2001. In the opinion of management, the accompanying financial statements reflect all adjustments which are necessary for a fair presentation of the results for the interim periods presented. Such
adjustments consisted only of normal recurring items. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the full year.





(2)    Inventories





Inventories at June 30, 2002 and December 31, 2001 consist of:





2002

2001Raw materials

$1,214,274

1,393,975Work-in-process

817,138

842,577Finished goods

1,466,356

954,108$3,497,768

3,190,660





(3)    Segment Data





Business segment sales and operating income (loss) for the three months and six months ended June 30, 2002 and 2001 and assets at June 30,
2002 and December 31, 2001 are as follows:





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Net sales to unaffiliated customers:Swiss American Sausage division

$
7,580,949


6,731,246


15,758,546


13,144,890Royal-Angelus Macaroni division


1,322,258


1,174,249


2,916,721


2,499,286Total sales

$
8,903,207


7,905,495


18,675,267


15,644,176Operating income (loss):Swiss American Sausage division

$
332,871


160,766


540,969


485,699Royal-Angelus Macaroni division


(161,659
)

(175,965
)

(253,485
)

(349,618
)Corporate


57,281


(254
)

100,172


1,354Operating income (loss)

$
228,493


(15,453
)

387,656


137,435June 30, 2002


December 31, 2001Identifiable assets:Swiss American Sausage division

$
18,495,275


18,428,801Royal-Angelus Macaroni division


4,087,674


4,328,435Corporate


447,371


636,596Total assets

$
23,030,320


23,393,832





(4)    Earnings (Loss) per Share





Basic earnings (loss) per share are net earnings (loss) divided by the weighted average number of common shares outstanding during the
period, and diluted earnings (loss) per share are net earnings (loss) divided by the sum of the weighted average plus an incremental number of shares attributable to outstanding options. Options for 107,111 shares were not used for all periods
presented in the following calculations because their exercise price is substantially above market and their effect would be anti-dilutive.





Three Months Ended June
30,


Six Months Ended June
30,2002

2001


2002

2001Net earnings (loss)

$
92,767

(98,634
)

48,473

(88,768
)Weighted average number of shares


3,113,228

3,056,878


3,106,333

3,050,416Incremental shares for options









Weighted average plus incremental shares


3,113,228

3,056,878


3,106,333

3,050,416Basic earnings (loss) per share

$
.03

(.03
)

.05

(.03
)Diluted earnings (loss) per share

$
.03

(.03
)

.05

(.03
)




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





Results of Operations





Three Months Ended June 30,

Six Months Ended June 30,2002

2001

2002

2001(Unaudited)(amounts in thousands)Net sales by division:Swiss American

$
7,581

$
6,731

$
15,758

$
13,145Royal-Angelus


1,322


1,174


2,917


2,499Total

$
8,903

$
7,905

$
18,675

$
15,644Sales in thousands of pounds by division:Swiss American


5,094


4,409


10,521


8,941Royal-Angelus


2,519


2,428


5,333


5,087





Forward-Looking Statements





The following discussion may contain forward-looking statements that express or imply expectations of future performance,
developments or occurrences. Actual events may differ materially from these expectations due to uncertainties relating to the economy, competition, demand, commodities, credit markets, energy supplies and other factors.





Swiss American Sausage Co. Meat Division





Sales by the processed meat division
increased about 20% in dollars and 18% in pounds in the 1st six months of 2002 and increased 13% in dollars and 16% in pounds in the 2nd quarter of 2002, compared to the same periods of 2001. Differences in the percent increases in dollars versus
pounds resulted from changes in selling prices in response to meat prices which increased during the 1st six months of 2001 but decreased during the 1st six months of 2002. Swiss operated at a $540,969 profit for the 1st six months of 2002 compared
to a $485,699 profit for the 1st six months of 2001, and at a $332,871 profit for the 2nd quarter of 2002 compared to a $160,766 profit for the 2nd quarter of 2001. The profit improvement resulted from increased sales, with margins slightly lower
during the 1st six months because of higher insurance and maintenance costs but higher during the 2nd quarter because of declining meat prices, comparing the same periods of 2002 to 2001.





Royal-Angelus Macaroni Company Pasta Division





The pasta divisions sales
increased about 17% in dollars and 5% in pounds in the 1st half of 2002 and increased 13% in dollars and 4% in pounds in the 2nd quarter of 2002, compared to the same periods of 2001. The percent increases were higher in dollars than in pounds
because of higher selling prices reflecting higher flour costs. Royal operated at a $253,485 loss for the 1st half of 2002 compared to a $349,618 loss for 1st half of 2001 and a $161,659 loss for the 2nd quarter of 2002 compared to a $175,965 loss
for the 2nd quarter of 2001. Sales and operating results continue to be adversely affected by competition resulting from increased industry capacity, but increased sales and higher margins resulted in reduced losses. Margins were higher because of
improved pricing and plant utilization. Royal is continuing to seek personnel experienced in pasta sales and production, to aggressively pursue sales opportunities and to further improve margins.




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The Company





Company sales were up 19% in the 1st half of 2002 compared to the 1st
half of 2001 and were up 13% in the 2nd quarter of 2002 compared to the 2nd quarter of 2001. The Company realized net earnings of $148,473 for the 1st half of 2002 compared to a net loss of $88,768 a year ago and net earnings of $92,767 for the 2nd
quarter of 2002 compared to a net loss of $98,634 a year ago. Both divisions contributed to the increased sales and improved results. The Companys gross margins for the 1st half and 2nd quarter of 2002 were 10.4% and 10.9%, respectively,
compared to 10.1% and 8.4% a year ago. The Companys margins increased slightly in the 1st half because Royals margins increased, with Swisss margins down slightly because of increased insurance and maintenance costs incurred in the
1st quarter of 2002. Higher margins at both divisions resulted in higher Company margins in the 2nd quarter of 2002.





General and administrative expense was up about $108,000 for the 1st half of 2002 and up about $48,000 in the 2nd quarter of 2002, compared to the same periods in 2001. The increases were primarily from increased health benefit costs
and bad debt expense. Distribution expense was down about $7,000 for the 1st half and up about $12,000 for the 2nd quarter as reductions in advertising and salesman expenses either exceeded or fell short of increases in freight and insurance. Net
interest expense decreased about $107,000 for the 1st half of 2002 and decreased about $36,000 for the 2nd quarter of 2002 because of lower borrowings under the bank line of credit, lower long-term debt outstanding and lower interest rates on the
Companys debt. Other income increased in part because of increased rental income at Royal.





Meat plant
employees are represented by United Food and Commercial Workers Union, Local 588, AFL-CIO, CLC under a collective bargaining agreement which expires April 2, 2006. Pasta plant employees are represented by United Food and Commercial Workers Union,
Local 1428, AFL-CIO, CLC under a collective bargaining agreement which expires September 29, 2002. There has been no significant labor unrest at the Companys plants and the Company believes it has a satisfactory relationship with its
employees.





Liquidity and Capital Resources





The Company has generally satisfied its normal
working capital requirements with funds derived from operations and borrowings under its bank line of credit, which is part of a credit facility with Comerica Bank-California. The line of credit is payable on demand, is subject to annual review, and
bears interest at a variable annual rate of 1.75% over the banks Base Rate. The variable rate reduces to 0.75% over the Base Rate if working capital exceeds $50,000 and tangible net worth exceeds $8,750,000. The maximum amount of
the line of credit is the lesser of $4,000,000, or 30% of inventories plus 80% of receivables, with a limit of $1,000,000 for inventories, determined monthly. At June 30, 2002 the Base Rate was 4.75% per annum, 30% of inventories was
$1,049,330 limited to $1,000,000 and 80% of receivables was $2,496,384 for a total maximum of $3,496,384 and the Company had $3,600,555 of borrowings under the bank line of credit, representing a $104,171 over-advance.





As part of the credit facility, Comerica Bank-California issued a $4,060,000 letter of credit to support $4,000,000 of industrial
development bonds issued in 1998 for costs relating to the construction of the Companys meat plant. The bonds bear a variable rate of interest payable monthly and set weekly at a market rate1.25% per annum at June 30, 2002. The Company
pays a 1.5% per annum fee on the amount of the letter of credit and fees of the bond trustee




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estimated at 0.5% of the bond principal per year. Monthly payments of bond principal into a sinking fund began May 1, 2000, totaled $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 made four loans to the Company for the meat plant, a $1,280,000 real estate loan and three equipment loans totalling $2,614,788. The real estate loan was
made in December 1999, bears a fixed rate of interest of 9.1% per annum and is payable in equal monthly payments of principal and interest over its 25 year term. Each equipment loan bears a variable rate of interest and is payable in equal monthly
payments of principal plus interest over its term, with issue date, initial amount, term and rate as follows: July 1999, $1,000,000, 7 year, banks Base Rate; September 1999, $1,200,000, 7 year, banks Base Rate
plus 0.25%; and December 1999, $414,788, 5 year, banks Base Rate plus 0.75%.





All parts of the
credit facility are secured by substantially all of the Companys assets, including accounts receivable, inventory, equipment and fixtures, the Companys two pasta buildings and the meat plant, none of which is otherwise encumbered. The
credit facility prohibits mergers, acquisitions, purchase or disposal of assets, borrowing, granting security interests, and changes of management and requires a tangible net worth greater than $8,900,000, increasing by $200,000 each quarter after
June 30, 2002; working capital not less than negative $425,000 increasing by $200,000 each quarter after June 30, 2002; debt service coverage not less than 1.3; and quarterly dividends not exceeding the net income of the prior quarter. The Company
was in compliance with the covenants at June 30, 2002 and expects to be in compliance with all covenants at September 30 and December 31, 2002.





Cash decreased $125,385 in the 1st half of 2002 compared to a $41,867 decrease in the 1st half of 2001. Operating activities provided $624,907 of cash primarily from net earnings, depreciation and
amortization, increases in accrued liabilities and income taxes payable and decreases in accounts receivable and deferred tax assets, partially offset by increases in inventories and prepaid expenses. Inventories increased as a result of increased
sales. Investing activities used $54,451 of cash for modest additions to property and equipment, and financing activities used $695,841 of cash for payments on long term debt and the capital lease obligation and repayments of the bank line of
credit.





Commitments and Contingencies





The following table shows the long-term debt principal
and capital lease obligation payments due in the specified periods. The lease payments are estimates because they are proportional to pounds of a product sold.





Totals

Six Months Ended December 31, 2002

Year Ended December 31,

Thereafter2003

2004

2005

2006(amounts in thousands)Long-Term Debt

$
6,605

209

504

504

435

341

4,612Capital Lease Obligation


516

62

113

113

113

115

-0-Totals

$
7,121

271

617

617

548

456

4,612





The Company expects that its operations and bank line of credit
will provide adequate working capital to satisfy the normal needs of its operations for the foreseeable future, including cash flow to service its debt.




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The Company believes that it has a good relationship with Comerica
Bank-California, as evidenced by the banks previous over-advances under the line of credit, waivers in prior years of defaults under the financial covenants and modifications of the financial covenants. That relationship is crucial to the
Company, because the line of credit is payable on demand, the Company could not make an immediate repayment of the line of credit, and a failure to repay the line after demand would render the entire credit facility in default. As a result, neither
a default under a financial covenant nor the banks waiver of such a default affects the banks power to cause the credit facility to be in default and require that it be restructured or refinanced. The Company was in compliance with the
financial covenants at June 30, 2002.





Critical Accounting Policies





In December 2001, the Securities and Exchange Commission
requested that all registrants list their most critical accounting policies in Managements Discussion and Analysis of Financial Condition and Results of Operations, and indicated that a critical accounting policy is one
which is both important to the portrayal of the registrants financial condition and results of operations and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Critical for the Company is determining the allowance for doubtful accounts because of the risk of failing to foresee a major credit loss, and inventory valuation when inventory cost may exceed fair
value less cost to sell because of the difficulty of determining the latter.





New Accounting Standards





The Financial Accounting Standards Board in June 2001 issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations applicable to business combinations initiated after June 30, 2001, SFAS No. 142, Goodwill and Other Intangible Assets
effective January 1, 2002 and SFAS No. 143, Accounting for Asset Retirement Obligations effective January 1, 2003; in August 2001 issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
effective January 1, 2002; and in April 2002 issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections effective May 15, 2002. These standards are adopted by the
Company as they become effective and, in the opinion of management, have not had and will not have a material effect on the Companys financial position, results of operations or liquidity.





Item 3.Quantitative and Qualitative Disclosure About Market Risk





The industrial
development bonds, the bank line of credit, and the equipment loans bear variable rates of interest (see Liquidity and Capital Resources under Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations) which tend to follow market interest rates and change the Companys interest expense in the same direction as changes in interest rates. A 1% per annum change in the rate borne by the industrial development bonds would change
annual interest expense by almost $40,000. Assuming an average bank line of credit balance of $3,700,000 plus $1,600,000 average principal balance of equipment loans, a 1% per annum change in the rate borne by those borrowings would change annual
interest expense by $53,000.




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##### Table of Contents

PART II.    OTHER INFORMATION





Item 1.Legal Proceedings





No significant litigation.





Item 2.Changes in Securities





None.





Item 3.Defaults Upon Senior Securities





None.





Item 4.Submission of Matters to a Vote of Security Holders





The Company held its
annual meeting of shareholders on Tuesday, April 30, 2002, at 11:00 a.m. at the Companys principal office. Shareholders representing 2,393,696 or 77.5% of the 3,089,516 shares entitled to vote were present in person or by proxy, with 23,942
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:





Nominee

For

Withheld

Without AuthorityJohn D. Determan

2,388,696

0

5,000Theodore L. Arena

2,388,696

0

5,000Ronald A. Provera

2,387,096

1,600

5,000Santo Zito

2,387,096

1,600

5,000Thomas J. Mulroney

2,388,696

0

5,000Louis A. Arena

2,388,696

0

5,000Joseph W. Wolbers

2,387,096

1,600

5,000John M. Boukather

2,388,696

0

5,000





Item 5.Other Information





Common Stock Repurchase and Sale





The Company did not purchase any of its shares
during the 1st half of 2001 under its stock repurchase program.





During the 1st half of 2002, the Company sold
28,172 newly issued shares of its common stock under its 1988 Employee Stock Purchase Plan, at an average selling price of $1.44 per share. From inception of the Plan through June 30, 2002, employees have purchased a total of 639,234 shares.





American Stock Exchange Listing





The Companys stock trades on the American Stock
Exchange under the ticker symbol PZA.




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Cash Dividends





No cash dividends were paid in the 1st six months of 2002.





Management Stock Transactions





No purchases or sales of the Companys common
stock by officers or directors were reported during the 2nd quarter of 2002.





Item 6.Exhibits and Reports on Form 8-K





(a)  No exhibits are filed with
this report.





(b)  No reports on Form 8-K were filed during the three months ended June 30, 2002.





SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





PROVENA FOODSBy:

/s/    THOMAS J.
MULRONEYThomas J. Mulroney Vice
President and Chief Financial Officer


Date: July 27, 2002




10