<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 September 18, 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 September 18, 1998, there were 6,137,423 shares of Common Stock outstanding.
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<PAGE> 2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 18, May 29,
1998 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,093,191 $ 3,072,464
Short-term investments 500,000 500,000
Accounts receivable, net of allowance for doubtful accounts
(September 18, 1998, $835,000; May 29, 1998, $761,800) 37,269,105 42,434,856
Inventories (Note 2) 65,482,341 58,715,450
Refundable income taxes 632,423 632,323
Deferred income taxes (Note 6) 3,528,038 3,592,000
Prepaid expenses and other current assets 5,713,210 6,277,836
------------ ------------
Total current assets 115,218,308 115,224,929
------------ ------------
Property, plant and equipment :
Land 1,266,490 1,261,380
Buildings and improvements 48,823,753 48,814,916
Machinery and equipment 113,132,569 112,469,354
Transportation equipment 5,748,660 5,820,609
Property under capital leases 5,966,625 5,966,625
Construction in progress 2,217,111 1,570,829
------------ ------------
177,155,208 175,903,713
Less accumulated depreciation 87,942,075 84,162,032
------------ ------------
89,213,133 91,741,681
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization (September 18, 1998; $2,776,146;
May 29, 1998; $2,517,900) 30,795,854 31,054,100
Deferred income taxes 7,536,000 7,536,000
Other 4,078,499 8,356,294
------------ ------------
Total other assets 42,410,353 46,946,394
------------ ------------
$246,841,794 $253,913,004
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,023,984 $ 31,143,268
Accrued liabilities 28,918,222 37,135,059
Current portion of long-term debt (Note 3) 129,371,678 6,959,824
------------ ------------
Total current liabilities 184,313,884 75,238,151
------------ ------------
Other noncurrent liabilities 2,780,958 3,330,674
Long-term debt (Note 3) 35,473,166 148,249,545
------------ ------------
Total noncurrent liabilities 38,254,124 151,580,219
------------ ------------
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
6,137,423 shares
at September 18, 1998 and 6,133,198 shares at May 29, 1998 613,742 613,320
Capital in excess of par value 10,844,255 10,800,915
Retained earnings 12,815,789 15,680,399
------------ ------------
24,273,786 27,094,634
------------ ------------
$246,841,794 $253,913,004
============= ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Sixteen Weeks Ended
---------------------------------
September 18, September 19,
1998 1997
------------- -------------
<S> <C> <C>
Net sales $139,209,326 $166,298,879
------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 120,541,485 144,845,988
Selling 7,459,016 7,728,757
General and administrative 6,543,359 7,070,316
Depreciation and amortization 4,093,530 4,642,645
------------ ------------
138,637,390 164,287,706
------------ ------------
Income from operations 571,936 2,011,173
------------ ------------
Other expenses (income):
Interest, net 4,209,442 3,453,540
Other, net (772,898) (691,878)
------------ ------------
3,436,544 2,761,662
------------ ------------
Loss from continuing operations before income taxes (2,864,608) (750,489)
Benefit for income taxes (Note 5) (317,000)
------------ ------------
Loss from continuing operations (2,864,608) (433,489)
Discontinued operations (Note 8):
Loss from operations of discontinued fresh pork division (net of tax benefit
of $1,410,000) (2,665,060)
------------- ------------
Loss from discontinued operations (2,665,060)
------------- ------------
Net loss ($2,864,608) ($3,098,549)
============= ============
Basic loss per share:
Continuing operations ($0.47) ($0.07)
============= ============
Loss on discontinued operations ($0.44)
============= ============
Net loss ($0.47) ($0.51)
============= ============
Fully diluted loss per share:
Continuing operations ($0.47) ($0.07)
============= ============
Loss on discontinued operations ($0.44)
============= ============
Net loss ($0.47) ($0.51)
============= ============
Weighted average number of shares outstanding 6,136,310 6,115,175
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------- Excess of Retained
Shares Amount Par Value Earnings
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, May 30, 1997 6,110,480 $611,048 $10,500,213 $65,969,270
Net loss (3,098,549)
Shares issued under employee stock purchase plan 2,788 279 41,483
Exercise of stock options, including related tax benefits (Note 5) 5,000 500 50,750
--------- -------- ----------- -----------
Balance, September 19, 1997 6,118,268 $611,827 $10,592,446 $62,870,721
========= ======== =========== ===========
Balance, May 29, 1998 6,133,198 $613,320 $10,800,915 $15,680,399
Net loss (2,864,608)
Shares issued under employee stock purchase plan 2,725 272 28,115
Exercise of stock options, including related tax benefits (Note 5) 1,500 150 15,225
--------- -------- ----------- -----------
Balance, September 18, 1998 6,137,423 613,742 10,844,255 12,815,791
========= ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Sixteen Weeks Ended
----------------------------------
September 18, September 19,
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,864,608) ($3,098,549)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 3,835,284 5,526,573
Amortization 258,246 258,246
(Gain) loss on disposition of property, plant and equipment (164,677) (284,204)
Provision for losses on accounts receivable 73,200 9,300
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 5,092,551 (11,890,002)
Inventories (6,766,891) 2,423,465
Refundable income taxes (100) 626,018
Prepaid expenses and other assets 4,842,369 (716,331)
Deferred income taxes 64,014 108,000
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (5,119,284) (620,171)
Accrued liabilities (8,216,837) 3,982,295
Income taxes payable (1,425,403)
Other non-current liabilities (549,716)
----------- -----------
Total adjustments (6,651,841) (2,002,214)
----------- -----------
Net cash used in operating activities (9,516,449) (5,100,763)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,674,061) (2,951,388)
Proceeds from sale of property, plant and equipment 532,000 2,018,170
----------- -----------
Net cash used in investing activities (1,142,061) (933,218)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 10,000,000 8,100,000
Principal payments on long-term debt (5,911,936) (1,117,064)
Net proceeds under credit facilities 5,547,411
Proceeds from employee stock purchase plan 28,387 41,762
Proceeds from stock options exercised, including related tax benefits 15,375 51,250
----------- -----------
Net cash provided by (used in) financing activities 9,679,237 7,075,948
----------- -----------
Net increase (decrease) in cash (979,273) 1,041,967
Cash and cash equivalents, beginning of quarter 3,072,464 6,028,698
Cash and cash equivalents, end of quarter $2,093,191 $7,070,665
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $3,084,141 $3,146,898
=========== ===========
Income taxes paid (refunded), net ($63,862) $305,834
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<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
September 18, 1998 and May 29, 1998, 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 29, 1998. Certain amounts from prior
years have been reclassified to conform with the current year presentation.
The results for the sixteen weeks ended September 18, 1998 are not
necessarily indicative of the results to be expected for the fiscal year
ending May 28, 1999.
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. The following is a breakdown of
inventories by classifications:
<TABLE>
<CAPTION>
September 18, May 29,
1998 1998
------------- ------------
<S> <C> <C>
Supplies $ 10,742,359 $ 10,815,336
Raw materials 10,357,661 11,308,353
Work in progress 2,127,097 3,053,048
Finished goods 45,187,224 36,470,713
------------ ------------
68,414,341 61,647,450
Less LIFO reserve 2,932,000 2,932,000
------------ ------------
Inventory balance $ 65,482,341 $ 58,715,450
============ ============
</TABLE>
NOTE 3 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 18, May 29,
1998 1998
------------- ------------
<S> <C> <C>
Revolving credit agreement $ 54,103,847 $ 48,556,436
Term notes 70,000,000 75,000,000
Revenue bonds 7,814,500 8,196,355
Subordinated debentures 27,250,000 17,250,000
Obligations under capital leases 2,853,716 3,227,211
Other note 2,822,781 2,979,367
------------ ------------
164,844,844 155,209,369
Less current portion 129,371,678 6,959,824
------------ ------------
Long-term debt $ 35,473,166 $148,249,545
============ ============
</TABLE>
6
<PAGE> 7
NOTE 3 - LONG-TERM DEBT (CONTINUED):
On May 29, 1998, the Company was not in compliance with certain financial
covenants relating to its loan and security agreement (the "loan agreement")
with a consortium of lenders (the "lending group"). On September 10, 1998 the
lending group waived the Company's past non-compliance with such financial
covenants while amending certain covenants and other terms and conditions of
the loan agreement. The following is a description of the significant changes
to the loan agreement as a result of the amendment:
1. The maximum amount available under the revolving loan was reduced by
$15 million to $70 million, with an additional $10 million available to
meet seasonal demands.
2. The Company made a principal payment of $5 million on the term loan,
reducing the principal balance outstanding to $70 million.
3. The maturity date under the loan agreement was changed from April 15,
2001 to August 31, 1999.
4. The interest rate on the revolving loan will increase, so that the
Company may borrow either at the prime rate plus .5 percent or LIBOR plus 3
percent at the option of the Company.
5. The interest rate on the term loan will increase, so that the Company
may borrow either at the prime plus 1 percent or the LIBOR plus 3.25
percent at the option of the Company.
6. The Company will make payments of certain fees to the lender group
either in cash or by delivery of warrants to purchase the Company's common
stock or a combination thereof, at the Company's option, as follows:
<TABLE>
<CAPTION>
Payment Date Amount Earned Date
- --------------------------------------------------------------------------------
<S> <C> <C>
4/30/99 $ 500,000 6/30/99
6/30/99 $1,000,000 8/31/99
8/31/99 $1,500,000 8/31/99
</TABLE>
If the Company elects to make any portion of the payment through issuance of
warrants to the lending group, the number of shares of common stock of the
Company subject to the warrants will be determined by dividing the amount of
the payment to be paid with warrants by a $7.50 per share conversion price.
In total, warrants for up to 400,000 shares of common stock may be issued by
the Company to make such payments.
The aggregate maturities of the long-term debt, as amended, (excluding
obligations under capital leases) during the five years subsequent to May 29,
1998 are: 1999; $10,426,854, 2000; $118,570,243, 2001; $235,061, 2002; $0,
and 2003; $0.
At September 18, 1998, the Company had approximately $16.6 million of unused
lines of credit and approximately $5.1 million of availability remaining under
its borrowing base formula.
The Company's debt is secured by substantially all of the Company's assets.
The Company's loan and security agreements contain financial covenants with
respect to consolidated net worth and fixed charge coverage. In addition,
among other things, the agreement limits borrowings, capital expenditures,
other indebtedness and investments, and does not allow the payment of cash
dividends or repurchase of the Company's common stock.
On September 10, 1998 the Company issued a $10 million convertible debenture.
The debenture bears interest at a rate of 6.5 percent per year, payable
quarterly. The principle on the debenture is due September 9, 2003. The
debenture can be converted into shares of the Company's common stock at any
time prior to the close of business on September 9, 2003, at a conversion
price of $14.00 per share. The $10 million debenture is unsecured; however,
it is senior in terms of payment priority to the Company's $17.25 million
subordinated debentures due April 1, 2007.
7
<PAGE> 8
NOTE 4 - EARNINGS PER SHARE OF COMMON STOCK:
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 first quarter and
fiscal year-to-date for fiscal years 1999 and 1998 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 anti-dilutive 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 to prospective employees. At September 18, 1998,
there were 298,500 options granted but not exercised at prices of $10.25 and
$15.81 per share and 301,500 shares remained to be granted under the 1996
Plan.
At September 18, 1998, there were 631,000 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:
The Company has established a valuation allowance in accordance with the
provision of FASB Statement No. 109, Accounting for Income Taxes. The
valuation allowance was increased at September 18, 1998 to offset the
estimated benefit resulting from the loss incurred during the first quarter.
The Company will continue to review the adequacy of the valuation allowance
and will recognize the future tax benefits only as reassessment indicates
that it is more likely than not that the benefits will be realized.
NOTE 7 - INTERNATIONAL UNCERTAINTY:
The Company had exported a portion of its hot dog production to Russia. As a
result of recent economic and political instability, including the rapid
devaluation of its currency, the Company's continued ability to transact
business in this region is uncertain. As of September 18, 1998, the Company
had inventory and accounts receivable of approximately $13 million related to
the production and sale of Russian products. At this time, the Company is
unable to predict if it will sustain losses related to these assets.
NOTE 8 - DISCONTINUED OPERATIONS:
In May 1998, the Company formalized plans to exit its fresh pork business. The
fresh pork facility was closed in July, 1998. The Company recorded in the
fourth quarter of fiscal 1998, an after-tax charge of $39.3 million related
to the disposal of its fresh pork operations. Included in the gross charge
was an estimated pre-tax loss from operations during the phase out period of
$5.0 million. The consolidated financial statements and related notes have
been restated for all quarters presented to separately report the fresh pork
discontinued operations.
8
<PAGE> 9
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 in the United States. The Company is engaged
in a single segment business with one principal product category: processed meat
and poultry products. 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 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 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, for example, Korea.
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, meat and poultry
processors have focused on providing healthier and more convenient 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.
Processed Meats manufacturers generally receive higher profit margins
on premium labeled branded items versus non-premium, or private label items. In
recent years, the Company has focused on identifying emerging trends in consumer
preferences and on developing products in response to those trends in an attempt
to be a market leader in emerging market segments that offer opportunities for
increased sales volume and higher profit margins than those associated with more
mature and competitive market segments. For example, the Company has developed
innovative packaging concepts and products that are leaner and have lower fat
contents (such as the Company's premium deli-style sliced turkey ham, turkey
breast and cooked ham products) to appeal to consumers seeking products that are
convenient to use and are a more healthier alternative than existing products.
The Company believes that opportunities exist to extend its current product
lines into related products, thereby leveraging its current premium brand names.
The Company experiences some seasonality in its business. Specifically,
the Company's sales of smoked hams are typically at their highest levels during
the Christmas and Easter holiday seasons as a result of increased customer
demand. In order to accommodate the increased holiday sales, the Company
typically builds substantial inventories of hams in anticipation of its future
holiday business. In addition, the Company's sales of skinless smoked sausages,
hot dogs and bacon products are generally higher during the summer months.
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.
9
<PAGE> 10
SIXTEEN WEEKS ENDED SEPTEMBER 18, 1998 COMPARED TO SIXTEEN WEEKS ENDED
SEPTEMBER 19, 1997
The Company's net loss from continuing operations for the first quarter
ended September 18, 1998 was approximately $2.9 million compared with a net loss
of approximately $.4 million for the comparable prior year period. The increase
in the loss is primarily attributable to a decrease in processed meat tonnage
sold of 5.9 million pounds or 4.7 %. The Company's margins were not
significantly changed.
Net sales in the first quarter of fiscal 1999 decreased $27 million or
16.3% as compared to the first quarter of fiscal 1998. The reduction in
processed meat sales dollars is attributable to lower average selling prices and
lower unit sales of 13.0% and 4.7%, respectively. The decrease in average
selling price is primarily attributable to lower raw material prices for hams
and pork bellies. The Company's unit volume decreased primarily as a result of
increased domestic competition and the unexpected fall-off of sales to Russia in
August as a result of the political and economic instability in that region. The
Company was selling approximately 1.5 million pounds of hot dogs per week to
Russia. It is uncertain as to whether or when these sales will resume.
Cost of goods sold (including delivery costs) decreased by $24.4
million, or 16.8%, primarily as a result of the decrease in the cost of hams and
pork bellies, referred to above. As a percentage of net sales, cost of goods
sold decreased to 86.9% from 87.5%, primarily as a result of decreased average
selling prices in both the Company's processed meats and pork division.
Selling expenses decreased approximately $.3 million, or 3.5%. As a
percentage of net sales, selling expenses increased to 5.4% from 4.6%.
General and administrative expenses decreased $.5 million, or 7.5%. The
decrease is primarily the result of a cost reduction program put in place during
the third quarter of fiscal 1998. As a percentage of net sales, general and
administrative expenses increased to 4.7% from 4.3%.
The Company did not recognize the future tax benefit associated with
the operating loss in the first quarter of fiscal 1999. The Company will
recognize a future tax benefit only as reassessment indicates it is more likely
than not that the benefit will be realized.
The loss from discontinued operations for the first quarter of fiscal
year 1998 is the loss from the fresh pork operations that the Company previously
exited.
The loss per share of common stock from continuing operations was $.47
per share compared to a loss per share of $.07 per share in the prior year
period. The increase in loss per share is primarily due to decreased
profitability resulting from factors discussed above.
The results for the sixteen weeks ended September 18, 1998 are not
necessarily indicative of the results to be expected for fiscal 1999.
10
<PAGE> 11
FINANCIAL CONDITION
At September 18, 1998, the Company had a revolving credit agreement
with a consortium of financial institutions whereby it could borrow in the
aggregate up to $80.0 million, of which $54.1 million was drawn upon and $9.2
million was used to support letters of credit. Under the Company's borrowing
base formula, at September 18, 1998, the Company had additional availability of
$5.1 million. 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'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. 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, 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.
On September 10, 1998, the Company entered into a five year agreement
with a U.S. meat packer that slaughters hogs and cattle. Under the
agreement, the Company has agreed to purchase from this packer, at least 80
percent of its total raw material requirements for boneless hams, bone-in hams,
pork bellies and other selected pork and beef products. The raw material
purchases will be priced daily based upon market formulas.
In addition, the meat packer has loaned the Company $10 million
pursuant to the terms of a convertible debenture. The debenture bears interest
at a rate of 6.5 percent per year, payable quarterly. The principal on the
debenture is due September 9, 2003. The debenture can be converted into shares
of the Company's common stock at any time prior to the close of business on
September 9, 2003, at a conversion price of $14.00 per share. The $10 million
debenture is unsecured; however, it is senior in terms of payment priority to
the Company's $17.25 million subordinated debentures due April 1, 2007.
At September 18, 1998, the Company had approximately $2.1 million in
cash. Cash used in operations during the sixteen weeks ended September 18, 1998
was approximately $9.5 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
$5.9 million and to fund net capital expenditures of $1.1 million.
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending September
18, 1998.
11
<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: October 30, 1998 By: \s\Louis Glazier
---------------- ----------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
Financial Data Schedule EX-27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 18, 1998, CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE 16 WEEKS ENDED SEPTEMBER 18, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-28-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> SEP-18-1998
<CASH> 2,093,191
<SECURITIES> 500,000
<RECEIVABLES> 37,269,105
<ALLOWANCES> 835,000
<INVENTORY> 65,482,341
<CURRENT-ASSETS> 115,218,308
<PP&E> 177,155,208
<DEPRECIATION> 87,942,075
<TOTAL-ASSETS> 246,841,794
<CURRENT-LIABILITIES> 184,313,884
<BONDS> 38,254,124
0
0
<COMMON> 613,742
<OTHER-SE> 23,660,044
<TOTAL-LIABILITY-AND-EQUITY> 246,841,794
<SALES> 139,209,326
<TOTAL-REVENUES> 139,209,326
<CGS> 120,541,485
<TOTAL-COSTS> 120,541,485
<OTHER-EXPENSES> 18,095,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,209,442
<INCOME-PRETAX> (2,864,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,864,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,864,608)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
