<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 twenty-eight weeks ended December 12, 1997 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 December 12, 1997, there were 6,122,817 shares of Common Stock outstanding.
------------------ ---------
<PAGE> 2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
December 12, May 30,
1997 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,076,735 $ 6,028,698
Short-term investments 500,000 500,000
Accounts receivable, less allowance for doubtful accounts
(December 12, 1997, $982,200; May 30, 1997, $888,500) 70,458,000 44,888,327
Inventories (Note 2) 62,778,450 65,115,331
Refundable income taxes 979,836
Deferred income taxes (Note 7) 2,871,000 2,727,000
Prepaid expenses and other current assets 6,612,826 7,683,296
------------ ------------
Total current assets 150,276,847 126,942,652
------------ ------------
Property, plant and equipment:
Land 1,233,933 1,276,933
Buildings and improvements 65,861,620 67,692,480
Machinery and equipment 157,774,561 158,207,873
Transportation equipment 7,325,563 7,056,966
Property under capital leases 10,084,125 10,162,649
Construction in progress 6,423,340 3,245,764
------------ ------------
248,703,142 247,642,665
Less accumulated depreciation 118,684,312 111,762,145
------------ ------------
130,018,830 135,880,520
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization of
$2,130,531 and $1,678,600 31,441,469 31,893,400
Other 7,548,432 8,069,885
------------ ------------
Total other assets 38,989,901 39,963,285
------------ ------------
$319,285,578 $302,786,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 43,467,993 $ 41,111,001
Accrued liabilities 26,987,396 23,661,536
Current portion of long-term debt 147,342,905 4,566,445
Income Taxes 1,425,403
------------ ------------
Total current liabilities 217,798,294 70,764,385
------------ ------------
Other noncurrent liabilities 3,675,000 3,675,000
Long-term debt (Note 4) 22,359,526 150,128,541
Deferred income taxes (Note 7) 1,545,000 1,138,000
------------ ------------
Total noncurrent liabilities 27,579,526 154,941,541
------------ ------------
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 6,122,817 shares
December 12, 1997 and 6,110,480 shares May 30, 1997 612,282 611,048
Capital in excess of par value 10,654,988 10,500,213
Retained earnings 62,640,488 65,969,270
------------ ------------
73,907,758 77,080,531
------------ ------------
$319,285,578 $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 Twenty-Eight Weeks Ended
---------------------------- ------------------------------
December 12, December 13, December 12, December 13,
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $225,997,444 $259,085,335 $503,930,120 $545,967,563
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 207,090,585 234,818,814 464,271,573 496,402,216
Selling 7,067,525 7,697,106 15,990,742 17,575,687
General and administrative 5,984,590 6,630,669 14,100,358 15,847,897
Depreciation and amortization 4,130,297 4,038,293 9,915,116 9,396,874
------------ ------------ ------------ ------------
224,272,997 253,184,882 504,277,789 539,222,674
------------ ------------ ------------ ------------
Income (loss) from operations 1,724,447 5,900,453 (347,669) 6,744,889
------------ ------------ ------------ ------------
Other expenses (income):
Interest, net 2,527,796 2,884,828 5,954,862 6,788,948
Other, net (467,116) (280,741) (1,140,749) (697,802)
------------ ------------ ------------ ------------
2,060,680 2,604,087 4,814,113 6,091,146
------------ ------------ ------------ ------------
Income (loss) from operations before income taxes (336,233) 3,296,366 (5,161,782) 653,743
Provision (benefit) for income taxes (Note 7) (106,000) 1,279,000 (1,833,000) 349,000
------------ ------------ ------------ ------------
Net income (loss) ($230,233) $2,017,366 ($3,328,782) $304,743
============ ============ ============ ============
Earnings (loss) per share of common stock: (Note 5) ($0.04) $0.33 ($0.54) $0.05
============ ============ ============ ============
Weighted average number of shares outstanding (Note 5) 6,121,971 6,074,780 6,118,088 5,924,644
============ ============ ============ ============
</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 income 304,743
Shares issued under employee stock purchase plan 9,140 914 86,469
Newly issued shares of common stock (Note 8) 279,883 27,988 2,972,358
--------- -------- ----------- -----------
Balance, December 13, 1996 6,075,152 $607,515 $10,070,188 $69,440,254
========= ======== =========== ===========
Balance, May 30, 1997 6,110,480 $611,048 $10,500,213 $65,969,270
Net loss (3,328,782)
Shares issued under employee stock purchase plan 5,837 584 88,800
Exercise of stock options 6,500 650 65,975
--------- ------------------------------------------
Balance, December 12, 1997 6,122,817 $612,282 $10,654,988 $62,640,488
========= ==========================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Eight Weeks Ended
--------------------------------------
December 12, December 13,
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,328,782) $304,743
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 9,463,185 8,944,943
Amortization of intangibles 451,931 451,931
Deferred income taxes 263,000 1,080,600
(Gain) loss on disposition of property,
plant and equipment (323,850) (123,625)
Provision for losses on accounts receivable 93,700 164,200
(Increase) decrease in assets:
Accounts receivable (25,663,373) (19,458,554)
Inventories 2,336,881 (2,633,611)
Prepaid expenses and other assets 1,591,923 (1,866,244)
Refundable income taxes (979,836) 11,490,330
Increase (decrease) in liabilities:
Accounts payable 2,356,992 1,587,655
Accrued liabilities and compensation 3,325,860 10,904,552
Income taxes payable (1,425,403) 180,361
------------ ------------
Total adjustments (8,508,990) 10,722,538
------------ ------------
Net cash provided by (used in) operating activities (11,837,772) 11,027,281
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,369,004) (3,539,167)
Proceeds from sale of property, plant and equipment 2,091,359 803,568
------------ ------------
Net cash used in investing activities (3,277,645) (2,735,599)
------------ ------------
Cash flows from financing activities:
Proceeds from common stock sold to company officer (Note 8) 3,000,346
Proceeds from long-term debt 8,400,000
Principal payments on long-term debt (1,792,555) (1,857,889)
Net borrowings (payments) under lines of credit 16,800,000 (14,700,000)
Net borrowings from (payments to) officers (96,580)
Proceeds from employee stock purchase plan 41,762 87,383
Proceeds from stock options exercised 114,247
------------ ------------
Net cash provided by (used in) financing activities 15,163,454 (5,166,740)
------------ ------------
Net increase in cash and cash equivalents 48,037 3,124,942
Cash and cash equivalents at beginning of year 6,028,698 5,804,371
------------ ------------
Cash and cash equivalents at end of quarter $6,076,735 $8,929,313
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest, net of amounts capitalized $6,407,386 $7,240,242
============ ============
Income taxes paid (refunded), net $308,340 ($12,402,817)
============ ============
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
December 12, 1997 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 twenty-eight weeks ended December 12, 1997 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 December 12, 1997 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>
December 12, May 30,
1997 1997
------------- -----------
<S> <C> <C>
Supplies $12,413,417 $ 9,447,180
Raw Materials 20,348,745 21,911,451
Work in progress 3,673,531 4,016,547
Finished goods 38,131,757 41,529,153
----------- -----------
74,567,450 76,904,331
Less LIFO reserve 11,789,000 11,789,000
----------- -----------
Inventory balance $62,778,450 $65,115,331
=========== ===========
</TABLE>
NOTE 3 - LINE OF CREDIT:
In August 1997, the Company obtained a temporary $15.0 million seasonal line of
credit, with its existing four participating banks, that expires on February 6,
1998, and bears interest at an interest rate equal to the prime rate. The
seasonal line of credit is secured by a first lien on substantially all of the
Company's assets. The temporary seasonal line of credit will be used to help
finance the Company's traditional holiday inventory buildup. At December 12,
1997, none of the seasonal line of credit was drawn upon.
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 12, May 30,
1997 1997
------------ ----------
<S> <C> <C>
Revolving credit agreement $ 79,700,000 $ 62,900,000
Private placements notes 59,453,846 59,453,846
Revenue bonds 8,786,687 9,455,225
Subordinated debentures 17,250,000 17,250,000
Obligations under capital leases 3,656,251 4,559,213
Other note 855,647 1,076,702
----------- -----------
169,702,431 154,694,986
Less current portion 147,342,905 4,566,445
----------- -----------
Long-term debt $ 22,359,526 $150,128,541
=========== ===========
</TABLE>
At December 12, 1997, the Company has 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 $650,000
were available at December 12, 1997. The revolving credit agreement expires
on May 30, 1998, accordingly, the Company has classified borrowings under the
revolving credit agreement as current debt at December 12, 1997.
The Company has various agreements between parties involved in the revolving
credit agreement, the private placement lenders and the limited obligation
revenue bond lender, whereby it has granted on a pro-rata basis, a first lien
on substantially all of the Company's assets. These agreements contain
financial covenants with respect to consolidated net worth and consolidated
earnings available for interest expense (as defined therein). In addition,
among other things, the agreements limit borrowings, capital expenditures and
investments, and do not allow the payment of cash dividends or repurchase of
the Company's common stock.
At December 12, 1997, the Company was not in compliance with an interest
coverage ratio covenant contained within its revolving credit and private
placement and limited obligation revenue bond agreements. Subsequent to
December 12, 1997, the Company was not able to meet its minimum consolidated
adjusted net worth financial covenant. The Company has not received a waiver
from its lenders with respect to these covenant violations. Accordingly, the
Company has classified borrowings under these agreements as current debt at
December 12, 1997.
5
<PAGE> 7
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 5 - EARNINGS PER SHARE OF COMMON STOCK:
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 and convertible subordinated
debentures are excluded from the computation of the weighted average number of
common shares outstanding since they are either not material or antidilutive.
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," was issued in February 1997. Adoption of SFAS 128, effective for
reporting periods ending after December 15, 1997, is not expected to have a
material effect in reported earnings per share.
NOTE 6 - 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 December 12, 1997, there
were 54,500 options granted but not exercised at $10.25 per share and 545,500
shares remained to be granted under the 1996 Plan.
At December 12, 1997, there were 668,300 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 7 - 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 (35.5) percent and 53.4 percent
for the twenty-eight weeks ended December 12, 1997 and December 13, 1996,
respectively.
NOTE 8 - 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 DECEMBER 12, 1997 COMPARED TO TWELVE WEEKS ENDED
DECEMBER 13, 1996
The Company's net loss for the second quarter ended December 12, 1997, was
$230,000 compared with net income of $2.0 million for the comparable period of
the prior year. The decrease is primarily attributable to lower margins in the
processed meat operations.
Margins in the processed meat division were lower primarily as a result of
increased pressures on selling prices, excessive raw material inventory
build-up during a period when raw material prices were declining, lower sales
volumes of higher margin products and some operational difficulties experienced
at the Company's Ponca City plant. Fresh pork profit margins remained under
pressure during the second quarter as a result of an industry-wide market hog
shortage which finally appears to be ending. Based upon the December 1, USDA
Hogs and Pigs Inventory Report the Company is optimistic that hog production
has started a strong expansion. The December 1, USDA Hogs and Pigs Inventory
Report showed a 5% increase in year-ago breeding herd levels. In addition, the
report indicates a 9% increase in farrowings during the projected upcoming
December to February sow farrowing period, over the prior-year levels. The
Company has experienced a much stronger increase in slaughtering levels during
the first part of January, 1998, than had been expected based upon the
September 1, USDA Hogs and Pigs Inventory Report.
Net sales in the second quarter of fiscal 1998 were down $33.1 million, or
12.8%. The decrease in net sales dollars was the result of a decrease in
processed meat sales and fresh pork sales of 19.3% and 1.5%, respectively. The
decrease in processed meat product sales was primarily attributable to
decreases in average selling prices and units shipped of 14.4% and 5.7%,
respectively. The decrease in fresh pork sales was principally due to an
decrease in average selling prices of 11.5%. Partially offsetting lower
average fresh pork selling prices was an increase in tonnage shipped of 11.3%.
The decrease in average selling prices of both the fresh pork and processed
meats was primarily the result of a 14.0 % decrease in the cost of live hogs,
the Company's primary raw material.
Cost of goods sold (including delivery costs) decreased by $27.7 million,
or 11.8%, as a result primarily of the decrease in the cost of live hogs
referred to above. As a percentage of net sales, cost of goods sold increased
to 91.6% from 90.6%, primarily as a result of decreased average selling prices
in both the Company's processed meat and fresh pork divisions.
Selling expenses decreased approximately $.6 million, or 8.2%. As a
percentage of net sales, selling expenses increased to 3.1% from 3.2%.
General and administrative expenses decreased $.6 million, or 9.7%. This
decrease is attributable to several factors including a reduction in the
Company's provision for the Michigan Single Business Tax (SBT) (a non corporate
income tax expense) as a result of mandated state changes, lower professional
fees and cost reductions throughout the organization. As a percentage of net
sales, general and administrative expenses remained unchanged at 2.6%.
Interest expense decreased approximately $.4 million, or 12.4%. 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 $.1 million, primarily due to the pre-tax
loss from operations of $.3 million in the second quarter of fiscal 1998,
resulting from the factors discussed above. The Company had a provision of
$1.3 million for the second quarter of fiscal 1997, primarily as a result of
pre-tax income of $3.3 million. The Company's effective tax benefit rate was
(35.5%) compared to a tax rate of 38.8% in the second quarter of fiscal 1997.
The loss per share of common stock was $.04 per share compared to net
income per share of $.33 in the comparable year-ago period, due to decreased
profitability resulting from the factors discussed above.
The results for the twelve weeks ended December 12, 1997 are not
necessarily indicative of the results to be expected for fiscal 1998.
8
<PAGE> 10
TWENTY-EIGHT WEEKS ENDED DECEMBER 12, 1997 COMPARED TO TWENTY-EIGHT WEEKS ENDED
DECEMBER 13, 1996.
The Company's net loss for the twenty-eight weeks ended December 12,
1997 was $3.3 million compared to a net income of $.3 million for the
prior-year period. The net loss through the first two quarters of fiscal 1998
is primarily attributable to lower processed meat and fresh pork margins.
The Company's processed meat operations margins remained under
pressure, due to unsatisfactory product mix, during the second quarter which
negatively impacted our average selling prices, although year-to-date unit
volume was down only slightly from year-ago levels. The lower sales volume was
principally due to poor sales execution during the holiday ham season and the
loss of a ham contract which primarily affected the Company's holiday ham
sales. The Company's fresh pork operations losses were higher from the
comparable prior-year period primarily due to lower industry-wide hog gross
margins. The Company is optimistic that the long industry-wide market hog
shortage period is beginning to end. The Company has experienced an increase
in hog slaughter levels during the first half of January, 1998, which confirms
the September 1, and December 1, USDA Hogs and Pigs Inventory Reports which
projected an increase in market hogs during calendar 1998.
Net sales for the first two quarters of fiscal 1998 decreased by $42.0
million, or 7.7%. The decrease in net sales dollars was the result of a
decrease in processed meat sales and fresh pork sales of 12.1 % and .5%,
respectively. The decrease in net sales dollars was principally the result of
decreased average selling prices in the Company's processed meats and fresh
pork divisions of 10.7% and 7.4%, respectively, and lower processed meat units
shipped of 1.6%. Reduced average processed meat selling prices were primarily
the result of the change in product mix. Partially offsetting decreased
average fresh pork selling prices was an increase in fresh pork tonnage shipped
of 7.4%. The Company's processed meat operations sales volume decreased as a
result of the Company eliminating lower margin product lines and poor sales
execution during the holiday ham season. The decrease in average selling
prices primarily reflects increased competitve pressure combined with a
decrease of approximately 8% in the cost of live hogs, the Company's primary
raw material.
Cost of goods sold (including delivery costs) decreased by $32.1
million, or 6.5%, mainly as the result of lower net sales dollars, along with
the decrease in the cost of live hogs referred to above. As a percentage of
net sales, costs of goods sold increased to 92.1% from 90.9%.
Selling expenses decreased $1.6 million, or 9.0% , principally as a
result of lower promotional expenses and a reduction in the operating costs
associated with the sales department as a direct result from the completion of
the integration of the acquired Wilson sales function into the Company's
business. As a percentage of net sales, selling expenses remained unchanged at
3.2%.
General and administrative expenses decreased by $1.7 million, or
11.0%. The decrease is attributable to several factors including a reduction
in the Company's provision for the Michigan Single Business TAX (SBT) (a non
corporate income tax expense) and as a result of 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 $.8 million, or 12.3%. 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 $1.8 million primarily due to the
pre-tax loss from operations of $5.2 million in the twenty-eight weeks ended
December 12, 1997, resulting from the factors discussed above. The Company
had a provision of $.3 million for the twenty-eight weeks ended December
13,1996, as a result of pre-tax income of $.7 million. The Company's effective
tax benefit rate was (35.5%) compared to a tax rate of 53.4% in the prior year
comparable period.
The loss per share of common stock was $.54 per share compared to net
income per share of $.05 in the comparable year-ago period, due to decreased
profitability resulting from the factors discussed above.
The results for the twenty-eight weeks ended December 12, 1997 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 December 12, 1997, the Company has a
revolving credit agreement with four participating financial institutions
whereby it could borrow in the aggregate up to $81.6 million and an additional
seasonal line of $5 million, of which $79.7 million was drawn upon and $1.25
million was used to support letters of credit. The revolving credit agreement
expires on May 30, 1998.
At December 12, 1997, the Company had approximately $6.1 million in
cash. Cash used in operations during the twenty-eight weeks ended December 12,
1997 was approximately $11.8 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 $1.8 million and to fund net capital expenditures of $3.3
million.
The Company's debt is secured by substantially all of the Company's
assets. In addition, the various loan agreements contain financial covenants
with respect to consolidated net worth and interest coverage ratio (as defined
therein). In addition, the agreements limit borrowings, capital expenditures
and investments, and do not allow the payment of cash dividends or repurchase
of the Company's common stock. At December 12, 1997, the Company was not in
compliance with an interest coverage ratio covenant within its revolving credit
and private placement and limited obligation revenue bond agreements.
Subsequent to December 12, 1997, the Company was unable to meet its minimum
consolidated adjusted net worth financial covenant. Accordingly the Company
has classified borrowings under these agreements as current debt at December
12, 1997. The Company is presently seeking an unconditional waiver from it
private placement and revolving credit agreement lenders. The Company is also
currently working towards obtaining, in the near term, a new commitment from a
consortium of lenders that will replace its private placement notes and
revolving credit agreements. Although the Company is optimistic that such a
commitment will be obtained, the failure to obtain such a commitment or an
unconditional waiver could have a material adverse effect on the Company.
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.
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
(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.
Propsal (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 December
12, 1997.
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: January 23, 1998 By: \s\ 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 DECEMBER 12, 1997, CONSOLIDATED STATEMENTS OF OPERATIONS AND
CASH FLOWS FOR THE 28 WEEKS ENDED DECEMBER 12, 1997, 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> 6-MOS
<FISCAL-YEAR-END> MAY-29-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> DEC-12-1997
<CASH> 6,076,735
<SECURITIES> 500,000
<RECEIVABLES> 71,440,200
<ALLOWANCES> 982,200
<INVENTORY> 62,778,450
<CURRENT-ASSETS> 150,276,847
<PP&E> 248,703,142
<DEPRECIATION> 118,684,312
<TOTAL-ASSETS> 319,285,578
<CURRENT-LIABILITIES> 217,798,294
<BONDS> 22,359,526
0
0
<COMMON> 612,282
<OTHER-SE> 73,295,476
<TOTAL-LIABILITY-AND-EQUITY> 319,285,578
<SALES> 503,930,120
<TOTAL-REVENUES> 503,930,120
<CGS> 464,271,573
<TOTAL-COSTS> 464,271,573
<OTHER-EXPENSES> 40,006,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,954,862
<INCOME-PRETAX> (5,161,782)
<INCOME-TAX> (1,833,000)
<INCOME-CONTINUING> (3,328,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,328,782)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
