<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the forty weeks ended March 1, 1996 Commission file number 0-6566
Thorn Apple Valley, Inc.
-------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Michigan 38-1964066
------------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26999 Central Park Blvd., Southfield, Michigan 48076
------------------------------------------------ ---------------
(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (810) 213-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section II or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
At March 1, 1996, there were 5,781,962 shares of Common stock outstanding.
<PAGE> 2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 1, May 26,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,794,295 $ 4,730,637
Short-term investments 627,560 531,064
Accounts receivable, less allowance for doubtful accounts
(Mar. 1, 1996, $1,046,800; May 26, 1995, $789,100) 68,442,304 40,083,861
Inventories (Note 2) 57,051,419 44,800,792
Refundable income taxes 8,629,978 1,366,231
Deferred income taxes (Note 6) 2,328,000 2,499,000
Prepaid expenses and other current assets 5,942,823 4,073,817
------------ ------------
Total current assets 149,816,379 98,085,402
------------ ------------
Property, plant and equipment :
Land 1,519,606 1,139,439
Buildings and improvements 62,911,351 37,694,988
Machinery and equipment 141,772,006 117,712,476
Transportation equipment 8,096,030 7,529,516
Property under capital leases 10,072,750 7,428,634
Construction in progress 8,064,516 22,206,233
------------ ------------
232,436,259 193,711,286
Less accumulated depreciation 96,409,804 95,643,621
------------ ------------
136,026,455 98,067,665
------------ ------------
Other assets:
Goodwill, net of accumulated amortization of $646,000 (Note 7) 32,926,385
Other 6,293,982 8,143,298
------------ ------------
Total other assets 39,220,367 8,143,298
------------ ------------
$325,063,201 $204,296,365
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 41,619,475 $ 32,474,150
Notes payable, banks 5,960,000
Notes payable, officer 703,650 1,415,241
Accrued liabilities 29,803,909 23,378,430
Current portion of long-term debt (Note 3) 10,447,648 3,100,310
------------ ------------
Total current liabilities 82,574,682 66,328,131
------------ ------------
Long-term debt (Note 3) 149,306,772 35,464,669
------------ ------------
Deferred income taxes (Note 6) 5,379,000 3,908,000
------------ ------------
Shareholders' equity:
Preferred stock: $1 par value; authorized 200,000 shares; issued none
Common nonvoting stock: $.10 par value; authorized 20,000,000 shares; issued none
Common voting stock: $.10 par value; authorized 20,000,000 shares; issued 5,781,962
Mar. 1, 1996 and 5,770,647 shares May 26, 1995 578,196 577,065
Capital in excess of par value 6,960,429 6,771,071
Retained earnings 80,264,122 91,247,429
------------ ------------
87,802,747 98,595,565
------------ ------------
$325,063,201 $204,296,365
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
--------------------------- ----------------------------
March 1, March 3, March 1, March 3,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $228,765,869 $163,555,824 $743,673,559 $585,826,349
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 214,422,963 151,007,669 688,693,744 524,337,231
Selling 7,637,694 5,670,761 28,899,828 18,961,295
General and administrative 7,456,356 4,651,066 25,357,693 17,762,752
Depreciation 3,723,027 2,434,072 11,316,752 8,189,720
------------ ------------ ------------ ------------
233,240,040 163,763,568 754,268,017 569,250,998
------------ ------------ ------------ ------------
Income (loss) from operations (4,474,171) (207,744) (10,594,458) 16,575,351
------------ ------------ ------------ ------------
Other expenses (income):
Interest 2,234,359 790,528 6,781,142 1,970,238
Other, net (1,215,513) (74,290) (1,396,467) (673,426)
------------ ------------ ------------ ------------
1,018,846 716,238 5,384,675 1,296,812
Income (loss) from operations before income taxes (5,493,017) (923,982) (15,979,133) 15,278,539
Provision (benefit) for income taxes (1,836,000) (417,000) (5,400,000) 5,548,000
------------ ------------ ------------ ------------
Net income (loss) ($3,657,017) ($506,982) ($10,579,133) $9,730,539
============ ============ ============ ============
Earnings (loss) per share of common stock: (Note 4) ($0.63) ($0.09) ($1.83) $1.69
============ ============ ============ ============
Weighted average number of shares outstanding (Note 4) 5,780,818 5,727,202 5,776,561 5,750,320
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common stock Capital in
----------------------- excess of Retained
Shares Amount par value earnings
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, May 27, 1994 5,803,073 $580,307 $4,778,498 $90,811,265
Net income 9,730,539
Cash dividends, $.21 per share (1,206,630)
Exercise of stock options including
related tax benefits 101,067 10,107 2,090,314
Purchase and retirement of common stock (137,071) (13,707) (3,376,997)
--------- -------- ---------- -----------
Balance, March 3, 1995 5,767,069 $576,707 $3,491,815 $99,335,174
========= ======== ========== ===========
Balance, May 26, 1995 5,770,647 $577,065 $6,771,071 $91,247,429
Net income (loss) (10,579,133)
Cash dividends, $.07 per share (404,174)
Employee stock plan purchases 11,315 1,131 189,358
--------- -------- ---------- -----------
Balance, March 1, 1996 5,781,962 $578,196 $6,960,429 $80,264,122
========= ======== ========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Forty Weeks Ended
----------------------------------
March 1, March 3,
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($10,579,133) $9,730,539
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 11,316,752 8,189,720
Amortization of intangibles 645,615
Deferred income taxes 1,642,000 286,700
(Gain) loss on disposition of property,
plant and equipment (64,574) 5,433
Provision for losses on accounts receivable 257,700 229,000
(Increase) decrease in assets:
Accounts receivable (18,409,435) (1,641,958)
Inventories (3,715,894) (3,866,572)
Prepaid expenses and other assets (1,848,948) (2,957,386)
Refundable income taxes (7,263,747)
Increase (decrease) in liabilities:
Accounts payable 9,145,325 (2,846,660)
Accrued liabilities and compensation 3,586,210 1,906,834
Income taxes 840,881
------------ ----------
Total adjustments (4,708,996) 145,992
------------ ----------
Net cash provided by (used in) operating activities (15,288,129) 9,876,531
------------ ----------
Cash flows from investing activities:
Acquisition of a business, net of cash acquired (Note 7) (65,749,414)
Proceeds from sale of property, plant and equipment 2,600,608 262,801
Capital expenditures (35,326,725) (32,235,043)
Proceeds from reimbursement of plant construction costs 6,500,000
Proceeds from sale of long-term investments 2,801,063
------------ ----------
Net cash used in investing activities (89,174,468) (31,972,242)
------------ ----------
Cash flows from financing activities:
Proceeds from long-term borrowings 118,800,000 8,000,000
Proceeds from stock options exercised including
related tax benefits 2,100,421
Principal payments on long-term debt (5,388,469) (1,298,443)
Purchase of common stock (3,390,704)
Net borrowings (payments) under lines of credit (5,960,000) 6,870,000
Net borrowings from (payments to) officers (711,591) 1,208,470
Dividends paid (404,174) (1,206,630)
Proceeds from employee stock plan purchases 190,489
------------ ----------
Net cash provided by financing activities 106,526,255 12,283,114
------------ ----------
Net increase (decrease) in cash and cash equivalents 2,063,658 (9,812,597)
Cash and cash equivalents at beginning of year 4,730,637 17,441,675
------------ ----------
Cash and cash equivalents at end of quarter $6,794,295 $7,629,078
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the forty-week period for:
Interest $7,921,053 $2,313,351
============ ==========
Income taxes $112,803 $3,961,986
============ ==========
Noncash investing activities:
Capital lease obligations $256,852 $2,765,400
============ ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 6
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - The condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
reflect, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of
financial position as of March 1, 1996 and May 26, 1995, and the results
of operations and cash flows for the periods presented. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes contained in Thorn Apple
Valley, Inc.'s Annual Report on Form 10-K for the fiscal year ended May
26, 1995. The results for the forty weeks ended March 1, 1996 are not
necessarily indicative of the results to be expected for the fiscal year
ending May 31, 1996.
NOTE 2 - Inventories are stated at the lower of last-in, first-out (LIFO)
cost or market. Inventories would have been approximately $2,950,000
higher at March 1, 1996 and May 26,1995 if they had been stated at the
lower of first-in, first-out (FIFO) cost or market. The following is a
breakdown of inventories by classifications:
<TABLE>
<CAPTION>
March 1, May 26,
1996 1995
----------- -----------
<S> <C> <C>
Supplies $ 9,993,847 $ 6,824,152
Raw materials 8,126,861 11,389,564
Work in progress 4,123,247 4,914,163
Finished goods 37,757,464 24,622,913
----------- -----------
60,001,419 47,750,792
Less LIFO reserve 2,950,000 2,950,000
----------- -----------
Inventory balance $57,051,419 $44,800,792
=========== ===========
</TABLE>
NOTE 3 - Concurrent with the previously announced acquisition, on May 30,
1995, the Company replaced its existing lines of credit with an $80 million
revolving credit agreement. (See Note 7 to the Notes to the Consolidated
Financial Statements for further discussion related to the acquisition).
The unsecured revolving credit agreement is with four financial
institutions at variable interest rates no higher than the prime rate or
its equivalent. The commitments under the revolving credit agreement
expire on May 30, 1998, but may be extended annually for successive
one-year periods with the consent of the financial institutions. The
commitment fee on the unused portion of the facility is .25% per annum.
The Company is required under the revolving credit agreement to maintain a
minimum level of consolidated net worth. At March 1, 1996, the Company had
$80 million in lines of credit, of which $76.3 million was drawn.
Borrowings under the three year revolving credit agreement are classified
as long-term debt. On March 11, 1996, the Company obtained an additional
$20 million of unsecured temporary short-term lines under its revolving
credit agreement. The temporary short-term lines of credit, if needed,
will be used to fund working capital needs, the lines expire on May 31,
1996.
The Company's various loan agreements contain restrictive covenants that
include the maintenance of a minimum level of consolidated tangible net
worth, as defined, and of certain financial ratios. At March 1, 1996 the
Company was not in compliance with certain covenants contained in its
industrial revenue bond and limited obligation revenue bond agreements. The
Company has obtained a waiver on its limited obligation revenue bond
agreement covenant violations through May 31, 1996. The Company has not
obtained a waiver on its industrial revenue bond agreement covenant violation.
As a result of either no waiver being obtained or a waiver of less than one
year being obtained the Company has reclassified $7.6 million of its debt to
current liabilities. The Company has made every scheduled payment of principal
and interest and does not expect its lenders to call the debt. The Company
will seek to amend these agreements or obtain waivers in excess of one year.
NOTE 4 - Earnings per share of common stock are based on the weighted
average number of common shares outstanding during each quarter. The
potential dilution from shares issuable under employee stock option plans
is excluded from the computation of the weighted average number of common
shares outstanding since it is not material.
NOTE 5 - At March 1, 1996, under the Company's 1982 Employee Stock Option
Plan, 114,000 options exercisable at prices of $2.56 and $19.67 per share
were outstanding. The Company's 1990 Employee Stock Option Plan authorizes
the Company's Stock Option Committee to grant options up to 787,500 shares
of the Company's common stock to present or prospective employees. At
March 1, 1996, there were 403,550 options granted but not exercised at
prices of $17.00, $23.00 and $26.00 per share under the 1990 Plan.
5
<PAGE> 7
NOTE 6 - Deferred income taxes, on a SFAS No. 109 basis, reflect the
estimated future tax effect of temporary differences between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.
The Company's effective tax rate, was (33.8) percent and 36.3 percent for
the forty weeks ended March 1, 1996 and March 3, 1995, respectively.
NOTE 7 - On May 30, 1995, the Company completed the acquisition of certain
assets of the retail division of Foodbrands America, Inc. formerly the
Doskocil Companies. The aggregate purchase price for the assets acquired
and the assumption of certain liabilities was approximately $65.8 million.
During the next five years, Foodbrands has the right to receive from the
Company up to an additional $10 million in accordance with what is being
referred to as an Earnout Agreement. The acquisition has been accounted
for by the purchase method. The acquired assets include three
manufacturing facilities, machinery and equipment, current assets, certain
trademarks and trade names and goodwill. The goodwill acquired will be
amortized to expense over 40 years.
Concurrent with the acquisition the Company issued $42.5 million of
long-term unsecured senior notes in a private placement and replaced its
existing lines of credit with an $80 million long-term revolving credit
agreement. The long-term unsecured debt is at a fixed rate of 7.58% per
annum, having a maturity of ten years, interest is payable semi-annually on
May 15 and November 15 of each year. The principal on the notes is due in
equal annual installments of $6,071,429 beginning May 15, 1999, and ending
May 15, 2004, with the remaining principal payable at maturity on May 15,
2005. The Company is required, pursuant to the terms and covenants of the
unsecured notes agreement, to maintain a minimum level of consolidated net
worth.
6
<PAGE> 8
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Thorn Apple Valley, Inc., (referred to hereinafter collectively with its
predecessors and subsidiaries as the "Company") is a major producer of consumer
packaged meat and poultry products and is one of the largest slaughterers of
hogs in the United States. The Company is engaged in the manufacture and sale
of bacon, hot dogs, lunch meats, hams, smoked sausages and turkey products, as
well as the slaughtering of hogs and the related sale of fresh pork products.
The Company markets its products under premium and other proprietary brand
labels including "Thorn Apple Valley", "Wilson Certified", "Corn King",
"Colonial", "Triple M", "Herrud", "Royal Crown", "Bar H", "Olde Virginie" and
"Cavanaugh Lakeview Farms", and under customer-owned private labels. The
Company sells its products principally to wholesalers, supermarkets and other
manufacturers throughout the United States and in selected international
markets. The Company is the largest purchaser of hogs in the Michigan, Indiana
and Ohio markets.
The Company was originally incorporated in 1959 as a Michigan corporation.
It reincorporated in Delaware in 1971 and reincorporated in Michigan in 1977.
On May 30, 1995, the Company purchased certain assets from Foodbrands
America, Inc. and its subsidiaries ("Foodbrands"). The Company acquired
substantially all of Foodbrands' Retail Division ("Wilson") assets used by
Wilson in its business of producing and marketing retail meat products. The
acquired assets include three manufacturing facilities, machinery and
equipment, certain trademarks and trade names, certain other assets and
goodwill. The aggregate purchase price for the assets acquired and the
assumption of certain liabilities was approximately $65.8 million. During the
next five years, Foodbrands has the right to receive from the Company up to an
additional $10 million in accordance with what is being referred to as an
Earnout Agreement (see Note 7 to the Notes to the Consolidated Financial
Statements for further discussion related to the acquisition). Because the
Wilson acquisition occurred during the first week of fiscal 1996 and was
accounted for as a purchase, the Wilson acquisition had no effect (other than
the description set forth in Note 7 to the Notes to Consolidated Financial
Statements) on the Company's financial statement for fiscal 1995 or for earlier
periods.
The Company's principal executive offices are located at 26999 Central
Park Blvd., Suite 300, Southfield, Michigan 48076 (telephone number: (810)
213-1000).
RESULTS OF OPERATIONS
As consumers have become more health conscious, hog slaughterers and meat
and poultry manufacturers have focused on providing healthier and more
convenient fresh pork and processed meat products to successfully compete
against other protein sources, particularly poultry and seafood. In addition,
increased amounts of poultry are being used in processed meat products which
were traditionally made with only beef and pork. Per capita pork consumption
has remained relatively stable in the United States in recent years.
Profitability in the hog slaughter industry is affected by the cost and
supply of hogs and pork product selling prices. The slaughtering industry has
generally been characterized by relatively narrow profit margins and a trend
toward larger, higher volume plants in order to reduce per unit costs.
Consumer packaged meat and poultry manufacturers generally receive higher
profit margins on premium labeled items than on fresh pork and by-products.
Hog prices represent the principal production cost of pork slaughterers
and are an important element in the cost of certain processed meat products as
well. Hog prices and hog supply are determined by constantly changing market
forces of supply and demand. The ability of hog slaughterers and manufacturers
to maintain satisfactory margins may be affected by a multitude of market
factors over which such industry participants have limited control, including
industry-wide slaughter levels, competition, the relative price of substitute
products, overall domestic retail demand and the level of exports.
The first quarter of each fiscal year consists of sixteen weeks, and each
subsequent quarter consists of twelve weeks, except that the fourth quarter
consists of thirteen weeks in the case of a 53-week fiscal year. The following
discussion analyzes material changes in the financial information on a period
to period basis.
7
<PAGE> 9
Twelve weeks ended March 1, 1996 compared to twelve weeks ended March 3,
1995.
The Company's net loss for the third quarter ended March 1, 1996, was $3.6
million compared with a net loss of $500,000 for the comparable period of the
prior year. The decrease is primarily attributable to lower margins in the
Company's fresh pork division and higher overhead costs in the processed meat
division. Operating profits for the processed meat division were reduced by
increased overhead costs that resulted from having additional manufacturing
facilities, due to the Wilson acquisition, along with the costs associated with
our newly opened Ponca City facility.
Third quarter operating results for the Company's fresh pork division were
down as a result of lower hog slaughter margins and increased costs in
operating the Company's recently expanded and renovated slaughter facility.
Net sales dollars in the third quarter of fiscal 1996 increased by $65.2
million or 39.9%. The increase in net sales dollars was the result of an
increase in both processed meat and fresh pork sales of 60.1% and 17.3%,
respectively. The increase in processed meat sales and fresh pork sales was
primarily attributable to increases in tonnage shipped of 31.9% and 6.4%,
respectively, and to increases in average selling prices of 21.4% and 10.2%,
respectively.
The Company's processed meat operation sales volume increased primarily as
a result of the Wilson acquisition. Sales at previously existing accounts
increased by approximately 2% during the third quarter. The increase in
average selling prices primarily reflects an increase of approximately 21% in
the cost of live hogs, the Company's primary raw material.
Cost of goods sold (including delivery costs) increased by $63.2 million,
or 41.8%, mainly as the result of the increase in sales volume related to the
Wilson business and as a result of the increased cost of live hogs referred to
above. As a percentage of net sales, cost of goods sold increased from 92.3%
to 93.6%, primarily as a result of overhead costs associated with the
integrated Wilson business and higher overhead costs related to the recently
completed fresh pork slaughter facility expansion along with additional
overhead costs resulting from the Company's newly opened Ponca City facility.
The higher than expected fresh pork slaughter overhead costs are the result of
our continuing to operate at less than targeted capacity levels. The Company
has begun to achieve some of the expected volume and yield improvements from
the renovated slaughter facility, although the gains experienced were more than
offset by lower hog margins.
Selling expenses increased $2.0 million, or 34.7%, principally as a result
of the additional employees, sales offices, and promotional programs associated
with the integrated Wilson business. As a percentage of net sales, selling
expenses decreased to 3.3% from 3.5%.
General and administrative expenses increased $3.0 million, or 65.5%. The
increase is primarily due to additional costs associated with the integrated
Wilson business. As a percentage of net sales, general and administrative
expenses increased to 3.4% from 2.8%.
Interest expense increased $1.4 million, or 182.6%. The increase is
attributable to the significant increase in long-term debt associated with the
Wilson acquisition and the Company's aggressive capital expenditure programs,
such as the construction of the Ponca City plant and the hog slaughter facility
renovation project.
The provision for income taxes decreased $1.4 million, primarily due to a
pre-tax loss of $5.5 million compared to a loss of $924,000 in the comparable
prior period resulting from the factors discussed above. The Company's
effective tax rate was (33.4%) compared with (45.1%) from the comparable
prior-year period.
Earnings per share of common stock decreased by $.72 per share to a net
loss of $.63 per share, due to decreased profitability resulting from the
factors discussed above.
The results for the twelve weeks ended March 1, 1996 are not necessarily
indicative of the results to be expected for fiscal 1996.
8
<PAGE> 10
Forty weeks ended March 1, 1996 compared to forty weeks ended March 3,
1995.
The Company's net income in the forty weeks ended March 1, 1996 decreased
by $20.3 million to a loss of $10.6 million from income of $9.7 million for the
prior-year period. The decrease in profits through the first three quarters of
fiscal 1996 is attributable to reduced processed meat and fresh pork margins,
lower than expected processed meat sales volumes and higher overhead costs in
both the Company's processed meat and fresh pork operations.
Net sales for the first three quarters of fiscal 1996 increased by $157.8
million or 26.9%. The increase in net sales dollars was principally the result
of increased volume and average selling prices in the Company's processed meat
division of 32.6% and 12.0%, respectively. In addition, the Company's fresh
meat operation's net sales increased by 1.8% which was primarily due to an
increase in average selling prices of 15.2%, offset in part by a decrease in
sales tonnage of 11.6%.
The Company's processed meat operations sales volume increased as a result
of the Wilson acquisition. Sales at previously existing accounts decreased by
approximately 3.7% primarily as a result of increased competitive pressures.
The Company's fresh pork sales volume was down primarily due to the closing,
during fiscal 1995, of the Company's Tri-Miller facility and a large increase
in hams being retained for use in the Company's processed meat operations.
The increase in average selling prices primarily reflects an increase of
approximately 22.5% in the cost of live hogs, the Company's primary raw
material.
Cost of goods sold (including delivery costs) increased by $164.4 million,
or 31.3%, mainly as the result of the increase in sales volume related to the
Wilson business and as a result of the increased cost of live hogs referred to
above. As a percentage of net sales, costs of goods sold increased from 89.5%
to 92.6%, primarily as a result of overhead costs associated with the
integrated Wilson business and higher overhead costs associated with the
recently completed fresh pork slaughter facility renovation and costs
associated with our newly opened Ponca City plant. As a result of the fresh
pork management and personnel changes that were made during the later part of
calendar 1995, the Company is continuing its progress in achieving some of the
expected volume and yield improvements at its renovated slaughter facility.
The operational benefits achieved at the slaughter facility, however, were more
than offset by lower hog margins. The Company is unable to predict at this
time when hog margins will return to more profitable levels. The Company
anticipates it will likely require the balance of the calendar year to obtain
the expected yields and efficiencies at the Ponca City facility.
Selling expenses increased $9.9 million, or 52.4%, principally as a result
of the additional sales employees, sales offices, and promotional programs
associated with the integrated Wilson business. As a percentage of net sales,
selling expenses increased to 3.9% from 3.2%, mainly due to the factors
discussed above.
General and administrative expenses increased $7.6 million, or 42.8%. The
increase is primarily due to additional costs associated with the integrated
Wilson business. As a percentage of net sales, general and administrative
expenses increased to 3.4% from 3.0%.
Interest expense increased $4.8 million, or 244.2%. The increase is
attributable to the significant increase in long-term debt associated with the
Wilson acquisition and the construction of the Ponca City plant and renovation
of the Company's hog slaughter facility.
The provision for income taxes decreased by $10.9 million, primarily due
to the decrease in pre-tax income from operations of $31.3 million to a loss of
$16.0 million from income of $15.3 million in the comparable prior period,
resulting from the factors discussed above. The Company's effective tax rate
decreased to (33.8%) from 36.3%.
Earnings per share of common stock decreased by $3.52 per share to a net
loss of $1.83 per share, due to decreased profitability resulting from the
factors discussed above.
The results for the forty weeks ended March 1, 1996 are not necessarily
indicative of the results to be expected for fiscal 1996.
9
<PAGE> 11
FINANCIAL CONDITION
The Company's business is characterized by high unit sales volume and
rapid turnover of inventories and accounts receivable. Because of the rapid
turnover rate, the Company considers its inventories and accounts receivable to
be highly liquid and readily convertible into cash. Borrowings under the
revolving credit agreement are used when needed to finance increases in the
levels of inventories and accounts receivable resulting from seasonal and other
market-related fluctuations in raw material costs and quantities. The demand
for seasonal borrowings usually peaks in early December when ham inventories
and accounts receivable are at their highest levels, and these borrowings are
generally repaid in January when the accounts receivable generated by the sales
of these hams are collected.
The Company has historically maintained lines of credit in excess of the
cash needs of its business. At March 1, 1996, the Company had total lines of
credit under its revolving credit agreement from four financial institutions
aggregating $80.0 million, of which $3.7 million was unused. As a result of
the Company's recent financial performance, on March 11, 1996 the Company has
obtained an additional $20 million of unsecured temporary short-term lines of
credit under its revolving credit agreement. The temporary short-term lines if
needed will be used to fund working capital needs, the lines expire on May 31,
1996.
The Company's various loan agreements contain restrictive covenants that
include the maintenance of a minimum level of consolidated net worth, as
defined, and of certain financial ratios. At March 1, 1996, the Company was
not in compliance with certain covenants contained in its industrial revenue
bond and limited obligation revenue bond agreements. The Company has obtained
a waiver on its limited obligation revenue bond agreement covenant violations
through May 31, 1996. The Company has not obtained on its industrial revenue
bond agreement covenant violation. As a result of either no waiver being
obtained or a waiver of less than one year being obtained the Company has
reclassified $7.6 million of its debt to current liabilities. The Company has
made every scheduled payment of principal and interest and does not expect its
lenders to call the debt. The Company will seek to amend these agreements or
obtain waivers in excess of one year.
In addition to the approximately $22 million of capital expenditures
related to the Wilson acquisition, the Company anticipates net capital
expenditures during fiscal 1996 of approximately $36 million, primarily to
complete the construction of its new manufacturing facility in Ponca City,
Oklahoma, and to complete the planned modernization of its various
manufacturing and slaughter facilities. The Company's Ponca City facility was
completed in November, 1995. The Company began limited operations in mid
October and have adopted a very aggressive schedule to bring production up to
its planned capacity, the plant is currently operating in excess of 50% of its
operating capacity. Looking forward to fiscal 1997, the Company does not
anticipate any significant capital expenditures. The Company's capital
expenditure program will be geared towards maintaining and upgrading its
various equipment in the ordinary course of business.
With the opening of the Company's Ponca City plant during the second
quarter, and some limited reconfiguring of some other facilities, the Company
has closed two of the formerly acquired Wilson operating facilities.
Notification of the plant closures was done in compliance with the federal
Worker Adjustment and Retraining Notification ("WARN") Act. The Company is
unable at this time to determine whether a charge against income will result
from these plant closings and is actively marketing these facilities for sale.
Management believes that funds provided from operations and borrowings
under available lines of credit will permit it to continue to finance its
current operations an to further develop its business In accordance with its
operating strategies.
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending March 1,
1996.
10
<PAGE> 12
SIGNATURES
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.
THORN APPLE VALLEY, INC.
------------------------
(Registrant)
Date: April 19, 1996 By: By: //Louis Glazier
---------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
11
<PAGE> 13
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT MARCH 1, 1996, CONSOLIDATED STATEMENTS OF INCOME FOR THE 40
WEEKS ENDED MARCH 1, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q, QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> MAY-27-1995
<PERIOD-END> MAR-01-1996
<CASH> 7,421,855
<SECURITIES> 0
<RECEIVABLES> 69,489,104
<ALLOWANCES> 1,046,800
<INVENTORY> 57,051,419
<CURRENT-ASSETS> 149,816,379
<PP&E> 232,436,259
<DEPRECIATION> 96,409,804
<TOTAL-ASSETS> 325,063,201
<CURRENT-LIABILITIES> 82,574,682
<BONDS> 149,306,772
0
0
<COMMON> 578,196
<OTHER-SE> 87,224,551
<TOTAL-LIABILITY-AND-EQUITY> 325,063,201
<SALES> 743,673,559
<TOTAL-REVENUES> 743,673,559
<CGS> 688,693,744
<TOTAL-COSTS> 688,693,744
<OTHER-EXPENSES> 65,574,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,781,142
<INCOME-PRETAX> (15,979,133)
<INCOME-TAX> (5,400,000)
<INCOME-CONTINUING> (10,579,133)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,579,133)
<EPS-PRIMARY> (1.83)
<EPS-DILUTED> (1.83)
</TABLE>
