<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the forty weeks ended March 6, 1998 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., Suite 300, Southfield, Michigan 48076
- --------------------------------------------------------- ----------------
(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (248) 213-1000
- -------------------------------------------------- -----------------
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
--- ---
At March 6, 1998, there were 6,130,817 shares of Common Stock outstanding.
<PAGE> 2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
March 6, May 30,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,380,747 $ 6,028,698
Short-term investments 500,000 500,000
Accounts receivable, less allowance for doubtful accounts
(1998, $838,000; 1997, $888,500) 43,363,976 44,888,327
Inventories (Note 2) 58,216,870 65,115,331
Refundable income taxes 1,797,778
Deferred income taxes (Note 6) 2,954,000 2,727,000
Prepaid expenses and other current assets 7,512,744 7,683,296
------------ ------------
Total current assets 117,726,115 126,942,652
------------ ------------
Property, plant and equipment :
Land 1,261,322 1,276,933
Buildings and improvements 66,123,519 67,692,480
Machinery and equipment 157,723,170 158,207,873
Transportation equipment 7,110,493 7,056,966
Property under capital leases 10,084,125 10,162,649
Construction in progress 5,468,874 1,807,098
------------ ------------
247,771,503 246,203,999
Less accumulated depreciation 120,585,568 111,762,145
------------ ------------
127,185,935 134,441,854
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization (1998;
$2,324,215; 1997; $1,678,600) 31,247,785 31,893,400
Deferred income taxes 78,000
Other 8,859,741 9,508,551
------------ ------------
Total other assets 40,185,526 41,401,951
------------ ------------
$285,097,576 $302,786,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,284,494 $ 41,111,001
Accrued liabilities 26,662,568 23,661,536
Current portion of long-term debt 4,640,697 4,566,445
Income Taxes 1,425,403
------------ ------------
Total current liabilities 58,587,759 70,764,385
------------ ------------
Other noncurrent liabilities 3,675,000 3,675,000
Long-term debt (Note 3) 153,030,121 150,128,541
Deferred income taxes (Note 6) 1,138,000
------------ ------------
Total noncurrent liabilities 156,705,121 154,941,541
------------ ------------
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 6,130,817 shares
March 6, 1998 and 6,110,480 shares May 30, 1997 613,082 611,048
Capital in excess of par value 10,745,910 10,500,213
Retained earnings 58,445,704 65,969,270
------------ ------------
69,804,696 77,080,531
------------ ------------
$285,097,576 $302,786,457
============ ============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 3
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Forty Weeks Ended
------------------------------- ------------------------------
March 6, March 7, March 6, March 7,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 169,296,067 $ 205,669,688 $ 673,226,187 $ 751,637,251
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 155,812,949 188,638,485 620,084,522 685,385,974
Selling 8,206,201 7,075,542 24,196,943 24,651,229
General and administrative 4,832,644 6,415,147 18,933,002 21,917,771
Depreciation and amortization 4,285,775 4,287,434 14,200,891 13,684,308
------------- ------------- ------------- -------------
173,137,569 206,416,608 677,415,358 745,639,282
------------- ------------- ------------- -------------
Income (loss) from operations (3,841,502) (746,920) (4,189,171) 5,997,969
------------- ------------- ------------- -------------
Other expenses (income):
Interest, net 2,857,896 2,728,508 8,812,758 9,517,456
Other, net (293,614) (667,626) (1,434,363) (1,365,428)
------------- ------------- ------------- -------------
2,564,282 2,060,882 7,378,395 8,152,028
------------- ------------- ------------- -------------
Loss before income taxes (6,405,784) (2,807,802) (11,567,566) (2,154,059)
Benefit for income taxes (Note 6) (2,211,000) (1,022,000) (4,044,000) (673,000)
------------- ------------- ------------- -------------
Net loss ($4,194,784) ($1,785,802) ($7,523,566) ($1,481,059)
============= ============= ============= =============
Basic and Fully Diluted loss per share of common stock:
(Note 4) ($0.68) ($0.29) ($1.23) ($0.25)
============= ============= ============= =============
Weighted average number of shares outstanding (Note 4) 6,125,734 6,084,901 6,120,381 5,972,721
============= ============= ============= =============
</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 31, 1996 5,786,129 $578,613 $ 7,011,361 $69,135,511
Net loss (1,481,059)
Newly issued shares of common stock (Note 7) 279,883 27,988 2,972,358
Shares issued under employee stock purchase plan 12,957 1,296 127,051
Exercise of stock options 12,000 1,200 121,800
---------- -------- ----------- -----------
Balance, March 7, 1997 6,090,969 $609,097 $10,232,570 $67,654,452
========== ======== =========== ===========
Balance, May 30, 1997 6,110,480 $611,048 $10,500,213 $65,969,270
Net loss (7,523,566)
Shares issued under employee stock purchase plan 8,837 884 128,972
Exercise of stock options 11,500 1,150 116,725
---------- -------- ----------- -----------
Balance, March 6, 1998 6,130,817 $613,082 $10,745,910 $58,445,704
========== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Forty Weeks Ended
----------------------------
March 6, March 7,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 7,523,566) ($ 1,481,059)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 13,555,276 13,038,693
Amortization of intangibles 645,615 645,615
Deferred income taxes 300,000 1,340,100
(Gain) loss on disposition of property,
plant and equipment (234,268) 142,414
Provision for losses on accounts receivable (50,500) 218,000
(Increase) decrease in assets:
Accounts receivable 1,574,851 (1,172,710)
Inventories 6,898,461 (1,516,923)
Prepaid expenses and other assets 819,362 576
Refundable income taxes (1,797,778) 10,371,947
Deferred income taxes (1,743,000)
Increase (decrease) in liabilities:
Accounts payable (13,826,507) (5,307,738)
Accrued liabilities 3,001,032 9,186,220
Income taxes payable (1,425,403)
------------ ------------
Total adjustments 7,717,141 26,946,194
------------ ------------
Net cash provided by operating activities 193,575 25,465,135
------------ ------------
Cash flows from investing activities:
Capital expenditures (8,431,719) (5,651,915)
Proceeds from sale of property, plant and equipment 2,366,631 1,024,591
------------ ------------
Net cash used in investing activities (6,065,088) (4,627,324)
------------ ------------
Cash flows from financing activities:
Proceeds from common stock sold to company officer (Note 7) 3,000,346
Principal payments on long-term debt (2,324,168) (9,165,290)
Net borrowings (payments) under lines of credit 5,300,000 (14,700,000)
Net borrowings from (payments to) officers (116,051)
Proceeds from employee stock purchase plan 129,856 128,347
Proceeds from stock options exercised 117,875 123,000
------------ ------------
Net cash provided by (used in) financing activities 3,223,563 (20,729,648)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,647,950) 108,163
Cash and cash equivalents at beginning of year 6,028,698 5,804,371
------------ ------------
Cash and cash equivalents at end of quarter $ 3,380,748 $ 5,912,534
============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net of amounts capitalized $ 8,792,847 $ 12,069,429
============ ============
Income taxes paid (refunded), net $ 308,339 ($12,385,573)
============ ============
Noncash investing activities:
Capital lease obligations $ 856,364
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ACCOUNTING POLICIES:
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 6, 1998 and May 30, 1997, 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 30, 1997. Certain amounts from prior years have been
reclassified to conform with the current year presentation. The results for
the forty weeks ended March 6, 1998 are not necessarily indicative of the
results to be expected for the fiscal year ending May 29, 1998.
NOTE 2 - INVENTORIES:
Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. No provision has been made during the current year for last-in,
first-out (LIFO) reserve adjustments. Inventories would have been
approximately $11,789,000 higher at March 6, 1998 and May 30,1997, 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 6, 1998 May 30, 1997
------------- -------------
<S> <C> <C>
Supplies $11,383,713 $ 9,447,180
Raw materials 12,484,129 21,911,451
Work in progress 2,688,710 4,016,547
Finished goods 43,449,318 41,529,153
----------- -----------
70,005,870 76,904,331
Less LIFO reserve 11,789,000 11,789,000
----------- -----------
Inventory balance $58,216,870 $65,115,331
=========== ===========
</TABLE>
NOTE 3 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 6, 1998 May 30, 1997
------------- -------------
<S> <C> <C>
Revolving credit agreement $ 68,200,000 $ 62,900,000
Private placement notes 59,453,846 59,453,846
Revenue bonds 8,473,245 9,455,225
Subordinated debentures 17,250,000 17,250,000
Obligations under capital leases 3,438,080 4,559,213
Other note 855,647 1,076,702
------------ ------------
157,670,818 154,694,986
Less current portion 4,640,697 4,566,445
------------ ------------
Long-term debt $153,030,121 $150,128,541
============ ============
</TABLE>
At March 6, 1998, the Company had a revolving credit agreement with four
participating banks, whereby it could borrow, in the aggregate, up to $81.6
million, bearing interest at variable rates ranging from below prime rate to
the prime rate charged by major banks. Unused lines of credit of $12.2 million
were available under the revolving credit agreement at March 6, 1998.
On April 16, 1998 the Company entered into a new three-year credit agreement
with a consortium of eight participating financial institutions, the agreement
expires on April 15, 2001. The new credit agreement provides for borrowings
and issuance of letters of credit of up to $85 million under a revolving line
of credit facility with an additional $10 million under the revolver for
meeting seasonal demands and a $75 million term-loan. The new revolving credit
facility replaces the Company's existing $81.6 million revolving credit
agreement. Proceeds from the new $75 million term-loan were used to pay down
the $59.4 million private placement notes with the remaining $15.6 million to
pay down borrowings under the Company's $81.6 million revolving credit
agreement and to cover certain costs associated with the financing. Borrowings
under the new credit agreement bear interest at different interest rate
options. Borrowings under the new revolving credit facility will be at either
the
5
<PAGE> 7
NOTE 3 - LONG-TERM DEBT (CONTINUED):
prime rate or LIBOR plus 2.25%. Borrowings under the term-loan will be at
either the prime rate plus .5% or LIBOR plus 2.75%. Interest is payable
monthly under both the new credit facility and term-loan. Under the term-loan
the first installment of $781,250 is due on April 1, 1999, with monthly
installments of $781,250 due thereafter until maturity, with any remaining
balance due payable at maturity.
The Company's debt is secured by substantially all of the Company's assets. In
addition, the various loan agreements, including the new three-year credit
agreement, contain financial covenants with respect to consolidated net worth,
EBITDA and interest coverage (as defined therein). In addition, among other
things, the agreements limit borrowings, capital expenditures, other
indebtedness and investments, and do not allow the payment of cash dividends
or repurchase of the Company's common stock.
The Company's industrial revenue and economic revenue bond agreements contain
restrictive covenants that include the maintenance of a minimum level of
consolidated net worth (as defined therein) and of certain financial ratios.
NOTE 4 - EARNINGS PER SHARE OF COMMON STOCK:
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," that was issued in February 1997. The new
Standard requires presentation of basic and diluted earnings per share. Basic
earnings per share of common stock are based on the weighted average number of
common shares outstanding during each quarter. Diluted earnings per share are
based upon the weighted average number of common shares outstanding after
giving effect to all dilutive potential common shares including shares
issuable under employee stock option plans and convertible subordinated
debentures (if converted, representing an aggregate of 920,000 shares). As a
result of the Company's loss from operations during the third quarter and
fiscal year-to-date for fiscal years 1998 and 1997 respectively, the
calculation of diluted earnings per share excluded the potential common
shares issuable under employee stock option plans and convertible subordinated
debentures as they would have an antidilutive effect on earnings per share.
NOTE 5 - STOCK OPTION PLANS:
The Company's 1996 Employee Stock Option Plan authorized the Company's Stock
Option Committee to grant options for up to 600,000 shares of the Company's
common stock to present or prospective employees. At March 6, 1998, there were
298,500 options granted but not exercised at prices of $10.25 and $15.8125 per
share and 301,500 shares remained to be granted under the 1996 Plan.
At March 6, 1998, there were 663,300 options granted but not exercised at
prices of $10.25, $17.00, $23.00 and $26.00 per share and 141,000 options
granted but not exercised at prices of $2.56 and $19.67 per share under the
1990 and 1982 Employee Stock Option Plans, respectively. Under the 1990 and
1982 plans no shares remain to be granted.
The Company's Stock Option Committee may designate any requirements regarding
option price, waiting period or an exercise date for options granted under the
plans, except that incentive stock options may not be exercised at less than
the fair market value of the stock on the date of grant, and no option may
remain outstanding for more than 10 years. Under all plans, the exercise price
of each option equals the market price of the Company's common stock on the
date of grant. Under all plans, the options granted are immediately
exercisable.
NOTE 6 - INCOME TAXES:
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 benefit rate, was (35.0) percent and (31.2) percent
for the forty weeks ended March 6, 1998 and March 7, 1997, respectively.
NOTE 7 - COMMON STOCK ISSUED:
During fiscal 1997, the Company sold to its Chairman of the Board of Directors,
who is also a significant shareholder of the Company, 279,883 newly issued
shares of the Company's common stock for an approximate purchase price of $3.0
million. This sale was in accordance with the long-term debt agreements
entered into on September 11, 1996.
6
<PAGE> 8
THORN APPLE VALLEY, INC.
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
processed meat and poultry products and is one of the largest slaughterers of
hogs and sellers of related fresh pork products in the United States. The
Company is engaged in a single segment business with two principal product
categories; processed meat and poultry products and fresh pork. The Company's
processed meat products operations engages in the production and sale of
consumer-brand labeled, packaged meat and poultry products, such as bacon, hot
dogs and lunch meats, hams, smoked sausages and turkey products. The Company
markets its processed meat products under premium and other proprietary brand
labels including "Thorn Apple Valley," "Colonial", "Corn King", "Wilson
Certified" and "Cavanaugh Lakeview Farms", as well as under customer-owned
private labels with major supermarket chains and other customers. The Company
sells its products principally to wholesalers, supermarkets and other
manufacturers throughout the United States and in selected international
markets. The Company's fresh pork operation is engaged in the slaughtering and
cutting of hogs and the related sale of primal cuts of fresh pork products. 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.
The Company's business strategy is to increase revenue and enhance
profitability by (i) increasing the sales of the Company's higher margin premium
brand processed meats products while reducing the Company's reliance on sales of
lower margin private label products, (ii) continuing to improve production
efficiencies in the Company's fresh pork and processed meats production
facilities, (iii) developing and marketing new processed meat products,
including products targeted to health-conscious consumers, and (iv) increasing
overall sales volume through additional marketing strategies with an emphasis on
sales to international markets, including Russia, Korea and Mexico.
The Company's principal executive offices are located at 26999 Central
Park Blvd., Suite 300, Southfield, Michigan 48076 (telephone number: (248)
213-1000.
RESULTS OF OPERATIONS
As consumers have become more health conscious, hog slaughterers and
meat and poultry processors 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 fresh 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 processors 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 processors 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 6, 1998 COMPARED TO TWELVE WEEKS ENDED MARCH 7, 1997
The Company's net loss for the third quarter ended March 6, 1998, was
$4.2 million compared with net loss of $1.8 million for the comparable period of
the prior year. The decrease in profitability was primarily attributable to
lower margins in both the fresh pork and processed meat operations.
Margins in the processed meat division were lower primarily as a result
of the following factors: lower sales volumes of higher margin products;
continued shifts in production location of certain product lines in attempts to
optimize operational throughput and a decline in raw material prices relative
to inventory carrying values of a particular product line. The Company had
accumulated inventory in anticipation of filling a significant premium product
order, the customer however, did not fulfill its contract as expected.
Fresh pork profit margins remained under pressure during the third
quarter despite an increase in available market hogs and an increase in
slaughter levels from comparable year-ago levels. Negatively impacting the third
quarter margins was the impact caused by several new USDA regulations required
to be implemented for hog slaughtering operations. The implementation of these
new USDA regulations resulted in substantial downtime while addressing USDA
areas of immediate concerns and potential future situations. The Company
believes that all food safety issues have been resolved following its proactive
response, which included significant, permanent procedural changes and physical
plant improvements.
Net sales in the third quarter of fiscal 1998 were down $36.4 million,
or 17.7%. The decline in sales was the result of lower processed meat sales and
fresh pork sales of 19.4% and 16.1%, respectively. The reduction in processed
meat sales dollars was primarily attributable to lower average selling prices
and lower unit sales of 12.6% and 7.8%, respectively. The lower sales volume was
partly due to a later Easter Holiday than usual that resulted in ham shipments
falling into the fourth quarter.
Lower fresh pork sales was principally due to a reduction in average
selling prices of 23.0%. Partially offsetting the effect of lower average
selling prices was an increase in fresh pork tonnage sold of 9.0%. The lower
average selling prices was principally due to the increase in available market
hogs which resulted in a 19.8 % decrease in the cost of live hogs, the Company's
primary raw material.
Cost of goods sold (including delivery costs) decreased by $32.8
million, or 17.4%, primarily as a result of the decrease in the cost of live
hogs referred to above. As a percentage of net sales, cost of goods sold
increased to 92.0% from 91.7%, primarily as a result of lower average selling
prices in both the Company's processed meat and fresh pork divisions.
Selling expenses increased approximately $1.1 million, or 16.0%. As a
percentage of net sales, selling expenses increased to 4.8% from 3.4%. The
increase in selling expense is primarily attributable to promotional activities
associated with the Company's new NASCAR sponsorship marketing program.
General and administrative expenses decreased $1.6 million, or 24.7%.
The decrease is primarily the result of a cost reduction program put in place
during the third quarter. As a percentage of net sales, general and
administrative expenses decreased to 2.9% from 3.1%.
Interest expense remained relatively unchanged with a slight increase
of $.1 million, or 4.7% compared with the third quarter of fiscal 1997.
The benefit for income taxes was approximately $1.2 million higher,
primarily due to the $3.6 million increase in pre-tax loss from operations from
a loss of $2.8 million in fiscal 1997 to a loss of $6.4 million in the third
quarter of fiscal 1998, resulting from the factors discussed above. The
Company's effective tax benefit rate was (34.5%) compared to a tax benefit rate
of (36.4)% in the third quarter of fiscal 1997.
The loss per share of common stock increased to $.68 per share compared
to a loss of $.29 per share in the comparable year-ago period, due to decreased
profitability resulting from the factors discussed above.
The results for the twelve weeks ended March 6, 1998 are not
necessarily indicative of the results to be expected for fiscal 1998.
8
<PAGE> 10
FORTY WEEKS ENDED MARCH 6, 1998 COMPARED TO FORTY WEEKS ENDED MARCH 7,
1997.
The Company's net loss for the forty weeks ended March 6, 1998 was $7.5
million compared to a net loss of $1.5 million for the prior-year period. The
net loss through the first three quarters of fiscal 1998 is primarily
attributable to lower processed meat and fresh pork margins.
The processed meat operation's margins remained under pressure due to
competitive pressures and an unsatisfactory product mix, that has resulted in a
shift of sales volume from higher to lower margin products.
The fresh pork operation's margins were lower from the comparable
prior-year period primarily due to continuing lower industry-wide gross margins
and due to the negative impact on operations caused by implementing new USDA
regulations during the third quarter. The Company's hog slaughter levels
increased during the third quarter as compared with year-ago levels, which
confirms the March 1, USDA Hogs and Pigs Inventory Report which reported an
overall 8% increase in total inventory of hogs from the previous year. The large
inventory of hogs suggests continued year-over-year increases in market hogs
available for slaughter for the next several quarters.
Net sales for the first three quarters of fiscal 1998 decreased by
$78.4 million, or 10.4%. The decline in net sales was the result of lower
processed meat sales and fresh pork sales of 14.1 % and 4.7%, respectively. The
reduction in processed meat sales was primarily attributable to lower average
selling prices and lower unit sales of 11.1% and 3.4%, respectively. Lower
average selling prices resulted from several factors; lower raw material costs,
an unsatisfactory product mix and increased competitive pressures.
Lower fresh pork sales was principally the result of lower average
selling prices of 11.1%. Partially offsetting the effect of lower average
selling prices was an increase in fresh pork tonnage sold of 7.2%. The lower
average selling prices was principally due to the increase in available market
hogs which resulted in a 14.4% decrease in the cost of live hogs, the Company's
primary raw material.
Cost of goods sold (including delivery costs) decreased by $65.3
million, or 9.5%, mainly as the result of a decrease in the cost of live hogs
referred to above and lower net sales dollars. As a percentage of net sales,
costs of goods sold increased to 92.1% from 91.2%.
Selling expenses decreased $.4 million, or 1.8%. As a percentage of net
sales, selling expenses increased slightly to 3.6% from 3.3%.
General and administrative expenses decreased by $2.9 million, or
13.6%. The decrease is primarily the result of the suspension of a joint
production agreement at a Council Bluffs, Iowa processing facility as well as
cost reductions throughout the organization. As a percentage of net sales,
general and administrative expenses decreased slightly to 2.8% from 2.9%.
Interest expense decreased $.7 million, or 7.4%. The decrease is
attributable to lower average interest rates under the Company's revolving
credit agreement and lower average interest rates under the Company's long-term
private placement note agreements.
The benefit for income taxes was $4.0 million primarily due to the
pre-tax loss from operations of $11.6 million in the forty weeks ended March 6,
1998, resulting from the factors discussed above. The Company had a benefit of
$.7 million for the forty weeks ended March 7, 1997, as a result of pre-tax loss
of $2.1 million. The Company's effective tax benefit rate was (35.0%) compared
to a benefit rate of (31.2%) in the prior year comparable period.
The loss per share of common stock was $1.23 per share compared to loss
per share of $.25 in the comparable year-ago period, due to decreased
profitability resulting from the factors discussed above.
The results for the forty weeks ended March 6, 1998 are not necessarily
indicative of the results to be expected for fiscal 1998.
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 6, 1998, the Company had a revolving
credit agreement with four participating financial institutions whereby it could
borrow in the aggregate up to $81.6 million, of which $68.2 million was drawn
upon and $1.25 million was used to support letters of credit.
On April 16, 1998, the Company completed a new three-year loan
agreement with a consortium of eight participating financial institutions. The
new loan agreement includes a $75 million term-loan and a $85 million revolving
credit facility including various letters of credit with an additional $10
million in order to meet seasonal borrowing demands. Under the terms of the new
agreement, the proceeds received from the $75 million term-loan were used to
pay off the Company's existing private placement note lenders, which totaled
$59.4 million, with the remaining $15.6 million used to pay down borrowings
under its old revolving credit agreement and to cover certain costs associated
with the financing. The new loan agreement expires on April 15, 2001.
The Company's debt is secured by substantially all of the Company's
assets. In addition, the various loan agreements, including the Company's new
three-year loan agreement, contain financial covenants with respect to
consolidated net worth, EBITDA and interest coverage (as defined therein). In
addition, the agreements limit borrowings, capital expenditures, other
indebtedness and investments, and do not allow the payment of cash dividends or
repurchase of the Company's common stock
The Company's two other revenue bond agreements contain restrictive
covenants that include the maintenance of a minimum level of consolidated net
worth (as defined therein) and of certain financial ratios.
At March 6, 1998, the Company had approximately $3.3 million in cash.
Cash used in operations during the forty weeks ended March 6, 1998 was
approximately $.2 million. Cash available at the beginning of the quarter less
cash used in operations plus cash acquired from financing activities was used
principally to pay down borrowings of other long-term debt of approximately $2.3
million and to fund net capital expenditures of $6.1 million.
Management believes that funds provided from operations and borrowings
under available lines of credit will permit it to continue to finance its
current operations and to further develop its business in accordance with its
operating strategies.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on October 29,
1997. The following matters were submitted and voted upon by the shareholders
with results of the voting as noted:
(1) The election of seven directors to serve until the next Annual Meeting of
Shareholders and until their successors shall have been duly elected and
qualified, unless the Classified Board Proposal is approved, in which case such
directors will serve for the applicable terms of their respective classes.
The following directors were submitted and approved for reelection on
the Company's Board of Directors: Henry S Dorfman, Joel Dorfman, Moniek
Milberger, John C. Canepa, Louis Glazier, Burton D. Farbman, Seymour Roberts
(2) A proposal (the "Classified Board Proposal") to amend the Company's Restated
Articles of Incorporation and By-Laws to provide (i) for a classified Board of
Directors who will serve staggered terms and (ii) that a director may be removed
prior to the expiration of his or her term for cause only.
Proposal (2) above was approved by the shareholder's of the Company:
Votes cast were as follows: For - 3,219,202, Against - 1,607,299, Withheld -
10,089
10
<PAGE> 12
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED):
(3) A proposal (the "Shareholder Consent and Advanced Notice Proposal") to amend
the Company's Restated Articles of Incorporation and By-Laws (i) to provide that
shareholders may take action at a duly called meeting or by unanimous written
consent only and (ii) to require a shareholder to disclose to the Corporation,
in advance of a shareholder meeting, certain information with respect to each
proposed nominee for director and with respect to each proposed business item to
be acted upon at the meeting.
Proposal (3) above was approved by the shareholders' of the Company:
Votes cast were as follows: For - 3,218,217, Against - 1,608,661, Withheld -
9,712
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending March 6,
1998.
11
<PAGE> 13
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 20, 1998 By: \\Louis Glazier
-----------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET OF MARCH 6, 1998, CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOR THE 40 WEEKS ENDED MARCH 6, 1998 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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-29-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAR-06-1998
<CASH> 3,380,747
<SECURITIES> 500,000
<RECEIVABLES> 44,201,976
<ALLOWANCES> 838,000
<INVENTORY> 58,216,870
<CURRENT-ASSETS> 117,726,115
<PP&E> 247,771,503
<DEPRECIATION> 120,585,568
<TOTAL-ASSETS> 285,097,576
<CURRENT-LIABILITIES> 58,587,759
<BONDS> 153,030,121
0
0
<COMMON> 613,082
<OTHER-SE> 69,191,614
<TOTAL-LIABILITY-AND-EQUITY> 285,097,576
<SALES> 673,226,187
<TOTAL-REVENUES> 673,226,187
<CGS> 620,084,522
<TOTAL-COSTS> 620,084,522
<OTHER-EXPENSES> 57,330,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,812,758
<INCOME-PRETAX> (11,567,566)
<INCOME-TAX> (4,044,000)
<INCOME-CONTINUING> (7,523,566)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,523,566)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
