<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 5, 1999 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 5, 1999 , there were 6,147,518
--------------------- -----------------
shares of Common Stock outstanding.
<PAGE> 2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 5, MAY 29,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,396,703 $ 3,072,464
Short-term investments 500,000
Accounts receivable, net of allowance for doubtful accounts
(March 5, 1999, $6,635,000; May 29, 1998, $761,800) (Note 8) 24,481,745 42,434,856
Inventories (Note 3, 8 & 10) 36,130,135 58,715,450
Refundable income taxes 135,000 632,323
Deferred income taxes (Note 7) 3,592,000
Prepaid expenses and other current assets 7,014,794 6,277,836
------------ ------------
Total current assets 70,158,377 115,224,929
------------ ------------
Property, plant and equipment :
Land 1,079,550 1,261,380
Buildings and improvements 45,614,881 48,814,916
Machinery and equipment 114,203,023 112,469,354
Transportation equipment 5,263,964 5,820,609
Property under capital leases 4,714,181 5,966,625
Construction in progress 882,527 1,570,829
------------ ------------
171,758,126 175,903,713
Less accumulated depreciation 90,132,256 84,162,032
------------ ------------
81,625,870 91,741,681
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization (March 5, 1999; $3,163,515;
May 29, 1998; $2,517,900) 30,408,485 31,054,100
Deferred income taxes (Note 7) 1,026,200 7,536,000
Other 5,899,971 8,356,294
------------ ------------
Total other assets 37,334,656 46,946,394
------------ ------------
$189,118,903 $253,913,004
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable (Note 1) $31,143,268
Accrued liabilities (Note 1) 37,135,059
Current portion of long-term debt (Note 1 & 4) 6,959,824
------------ -----------
Total current liabilities 75,238,151
------------ -----------
Liabilities subject to compromise (Note 1):
Accounts payable (Note 1) 24,865,929
Accrued liabilities (Note 1) 27,727,101
Other liabilities (Note 1) 3,597,254
Bank debt and other term notes (Note 1 & 4) 140,168,425
------------ -----------
Total liabilities subject to compromise 196,358,709
------------ -----------
Other noncurrent liabilities (Note 1) 3,330,674
Long-term debt (Note 1 & 4) 148,249,545
------------ -----------
Total noncurrent liabilities 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
6,147,518 shares at March 5, 1999 and 6,133,198 shares at May 29, 1998 614,752 613,320
Capital in excess of par value 10,890,708 10,800,915
Retained earnings (18,745,266) 15,680,399
------------ -----------
(7,239,806) 27,094,634
------------ -----------
$189,118,903 $253,913,004
============ ============
</TABLE>
See notes to consolidated financial statements. 1
<PAGE> 3
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED FORTY WEEKS ENDED
-------------------------------- --------------------------------
MARCH 5, MARCH 6, MARCH 5, MARCH 6,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 94,841,541 $ 105,692,554 $ 353,996,473 $ 408,452,440
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of goods sold, including
delivery costs 83,672,005 93,762,373 309,567,258 359,503,984
Selling 3,793,284 6,863,380 16,923,494 20,636,929
General and administrative 3,830,992 4,394,376 13,668,021 16,546,980
Depreciation and amortization 3,034,624 3,427,177 10,158,281 11,341,515
Product recall charge (Note 10) 5,100,000 5,100,000
Bank financing charge (Note 11) 2,072,270 3,209,543
International restructuring
charge (Note 8) 1,261,406 9,261,406
------------- ------------- ------------- -------------
102,764,581 108,447,306 367,888,003 408,029,408
------------- ------------- ------------- -------------
Income (loss) from operations (7,923,040) (2,754,752) (13,891,530) 423,032
------------- ------------- ------------- -------------
Other expenses (income):
Interest, net 2,969,683 2,757,482 10,733,775 8,583,126
Other, net (400,715) (257,652) (1,687,036) (1,407,627)
------------- ------------- ------------- -------------
2,568,968 2,499,830 9,046,739 7,175,499
------------- ------------- ------------- -------------
Loss from continuing operations
before income taxes (10,492,008) (5,254,582) (22,938,269) (6,752,467)
Income tax expense (benefit)
(Note 7) 8,687,394 (1,805,000) 8,687,394 (2,337,000)
------------- ------------- ------------- -------------
Loss from continuing operations (19,179,402) (3,449,582) (31,625,663) (4,415,467)
Discontinued operations (Note 9):
Loss from operations
of discontinued fresh pork
division
(745,202) (3,108,099)
Loss on disposal of fresh pork
division (Note 9) (2,800,000)
------------- ------------- ------------- -------------
Loss from discontinued operations (745,202) (2,800,000) (3,108,099)
------------- ------------- ------------- -------------
Net loss ($ 19,179,402) ($ 4,194,784) ($ 34,425,663) ($ 7,523,566)
============= ============= ============= =============
Basic and Fully Diluted loss per share
(Note 5):
Continuing operations ($ 3.12) ($ 0.56) ($ 5.15) ($ 0.72)
============= ============= ============= =============
Loss on discontinued operations ($ 0.12) ($ 0.46) ($ 0.51)
============= ============= ============= =============
Net loss ($ 3.12) ($ 0.68) ($ 5.61) ($ 1.23)
============= ============= ============= =============
Weighted average number of shares
outstanding 6,146,226 6,125,734 6,140,819 6,120,381
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements. 2
<PAGE> 4
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
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 (Note 6) 5,000 500 50,750
------------ ------------ ------------ ------------
Balance, December 12, 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 (34,425,663)
Shares issued under employee stock
purchase plan 12,820 1,282 74,568
Exercise of stock options, including
related tax benefits (Note 6) 1,500 150 15,225
------------ ------------ ------------ ------------
Balance, March 5, 1999 6,147,518 $ 614,752 $ 10,890,708 ($18,745,266)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements. 3
<PAGE> 5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FORTY WEEKS ENDED
------------------------------
MARCH 5, MARCH 6,
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
------------ ------------
<S> <C> <C>
Net loss ($34,425,663) ($ 7,523,566)
------------ ------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposal of fresh pork division (Note 9) 2,800,000
Depreciation 9,512,666 13,555,276
Amortization 645,615 645,615
Deferred income taxes 300,000
Amortization of bank financing costs (Note 11) 3,209,543
Product recall charge (Note 10) 5,100,000
International restructuring charge (Note 8) 9,261,406
(Gain) loss on disposition of property, plant and equipment 815,216 (234,268)
Provision for losses on accounts receivable (Note 8) (126,800) (50,500)
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 12,079,911 1,574,851
Inventories (Note 8 & 10) 12,843,149 6,898,461
Refundable income taxes 497,323 (1,797,778)
Prepaid expenses and other assets (990,223) 819,362
Deferred income taxes (Note 7) 10,101,852 (1,743,000)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (6,277,339) (13,826,507)
Accrued liabilities (9,794,480) 3,001,032
Other current liabilities 356,634
Income taxes payable (1,425,403)
Other non-current liabilities (1,122,772)
------------ ------------
Total adjustments 48,911,701 7,717,141
------------ ------------
Net cash used in operating activities 14,486,038 193,575
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,758,896) (8,431,719)
Proceeds from sale of property, plant and equipment 2,546,816 2,366,631
------------ ------------
Net cash used in investing activities (212,080) (6,065,088)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 10,000,000
Principal payments on long-term debt (8,739,184) (2,324,168)
Net borrowings (payments) under lines of credit (16,301,760) 5,300,000
Proceeds from employee stock purchase plan 75,850 129,856
Proceeds from stock options exercised, including related tax benefits 15,375 117,875
------------ ------------
Net cash provided by (used in) financing activities (14,949,719) 3,223,563
------------ ------------
Net increase (decrease) in cash (675,761) (2,647,950)
Cash and cash equivalents, beginning of quarter 3,072,464 6,028,698
Cash and cash equivalents, end of quarter $ 2,396,703 $ 3,380,748
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 9,087,588 $ 8,792,847
============ ============
Income taxes paid (refunded), net ($10,101,852) $ 308,339
============ ============
</TABLE>
See notes to consolidated financial statements. 4
<PAGE> 6
THORN APPLE VALLEY, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
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 5, 1999 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 forty weeks ended March 5, 1999 are not necessarily indicative of the
results to be expected for the fiscal year ending May 28, 1999.
NOTE 2 - CHAPTER 11 FILING AND BASIS OF PRESENTATION
On March 5, 1999 (the "Petition Date"), the Company filed a voluntary petition
for reorganization under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in the United States Bankruptcy Court for the Eastern District
of Michigan. Management determined that filing the Chapter 11 petition would
allow the Company the needed time and flexibility to restructure its
operations and provide the time and protection necessary to restructure the
Company's funding sources.
Since the Petition Date, the Company has continued in possession of its assets
and, as debtor-in-possession, is authorized to operate and manage its business
and enter into all transactions (including obtaining services, inventories and
supplies) that it could have entered into in the ordinary course of business
without approval of the Bankruptcy Court. A statutory Creditors' Committee has
been appointed in the Chapter 11 case.
In a Chapter 11 filing, substantially all liabilities as of the Petition Date
are subject to compromise or other treatment under a plan of reorganization.
For financial reporting purposes, all of the Company's liabilities and
obligations have been classified as liabilities subject to compromise under
reorganization proceedings in the accompanying balance sheet (see Note 4), due
to the fact that their disposition is dependent upon the outcome of the
Chapter 11 filing. Generally, actions to enforce or otherwise effect payment
of all pre-Chapter 11 liabilities as well as all pending litigation against
the Company are stayed while the Company continues its business operations as
Debtor-in-Possession. Subsequent to the Petition Date, the Company received
permission from the court to pay certain pre-petition liabilities that it
deemed essential to maintain the going concern status. Schedules have been
filed by the Company with the Bankruptcy Court setting forth its assets and
liabilities as of the Petition Date as reflected in the accounting records.
Differences between amounts reflected in such schedules and claims filed by
creditors will be investigated and either resolved or adjudicated before the
Bankruptcy Court. The ultimate amount of and settlement terms for such
liabilities are subject to a plan of reorganization and accordingly are not
presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject real estate
leases and other contracts, subject to Bankruptcy Court approval. The Company
will continue to analyze its executory contracts and may assume or reject
additional contracts.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles applicable to a going concern, which
contemplate the realization of assets and the satisfaction of liabilities in
the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of
reorganization could materially change the amounts reported in the
accompanying financial statements, which do not give effect to adjustments to
the carrying values of assets and liabilities, which may be necessary as a
consequence of a plan of reorganization. The Company's ability to continue as
a going concern is contingent upon, among other things, its ability to
formulate a plan of reorganization that will be confirmed by the Bankruptcy
Court, to achieve satisfactory levels of profitability and cash flow from
operations, to maintain compliance with a Post-Petition Loan and Security
Agreement, its modifications and extensions (collectively, the
"Debtor-in-Possession (DIP) Financing Agreement") (see Note 4) and the ability
to obtain sufficient financing sources to meet future obligations.
At this time, a formal plan for reorganization has not been proposed by the
Company. However, the Company has sixty (60) days from the Petition Date to
formulate and present such a plan to the Bankruptcy Courts.
5
<PAGE> 7
NOTE 3 - 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>
MARCH 5, MAY 29,
1999 1998
------------------- -------------------
<S> <C> <C>
Supplies $ 9,492,284 $10,815,336
Raw materials 3,540,967 11,308,353
Work in progress 1,582,697 3,053,048
Finished goods 24,446,187 36,470,713
---------- -----------
39,062,135 61,647,450
Less: LIFO reserve 2,932,000 2,932,000
---------- -----------
$36,130,135 $58,715,450
=========== ===========
</TABLE>
Inventory balances are net of applicable Russian and recall reserves (see Note 8
and 10).
NOTE 4- BANK DEBT AND OTHER TERM NOTES:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 5, MAY 29,
1999 1998
----------------------- ------------------
<S> <C> <C>
Revolving credit agreement $ 30,622,864 $ 48,556,436
Term notes 70,000,000 75,000,000
Revenue bonds 7,146,377 8,196,355
Subordinated debentures 27,250,000 17,250,000
Obligations under capital leases 1,074,944 3,227,211
Other notes 4,074,240 2,979,367
-------------- -------------
140,168,425 155,209,369
Less current portion 0 6,959,824
============== =============
Long-term debt $ 0 $ 148,249,545
============== =============
Bank debt and other term notes $ 140,168,425 $ 0
============== =============
</TABLE>
A significant portion of the Company's debt is collateralized by substantially
all of the Company's assets.
As a result of the Chapter 11 filing, the Company has obtained an interim
order that allows it to use Debtor-In-Possession (DIP) financing, which is
provided by a consortium of lenders (The "Bank group"). A final hearing date
for the DIP financing is scheduled for April 22, 1999. The Bank Group is made
up of the same lenders that provided the Company with its revolving credit and
term loan financing agreement prior to the Chapter 11 filing.
The terms of the DIP financing are as follows:
1. A total DIP financing credit line of $47,413,275, which allows the
Company to borrow an additional $7 million of new funds. The
outstanding amount of the revolving credit line is converted into
the DIP financing loan.
2. Interest on the DIP financing accrues at 2.75% above the prime rate,
payable monthly at .75% above the prime rate with the additional 2%
due at the end of the DIP financing agreement.
3. The DIP Facility shall mature and all obligations thereunder shall
be repaid in full on the earlier to occur of: a) May 31, 1999, if a
letter of intent acceptable to the Lender for the sale of
substantially all of the assets of the Company has not been entered
into by such date, b) June 30, 1999, if the sale of substantially
all of the assets of the Company, pursuant to any such letter of
intent has not occurred by such date, and c) the effective date of a
plan of reorganization for the Company.
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.
6
<PAGE> 8
NOTE 4 - BANK DEBT (CONTINUED):
In addition, the Company has various Standby Letters of Credit issued by its
bank group. The letters of credit are part of the Revolving Credit and DIP
Financing agreements. As of March 5, 1999, the letters of credit in the
aggregate totaled $9,790,411 and serve as collateral for the limited
obligation revenue bond issue, trade payables and various self-insured
payables.
NOTE 5 - 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 third 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 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 March 5, 1999, there
were 403,500 options granted but not exercised at prices of $5.00, $7.50,
$10.25 and $15.81 per share and 196,500 shares remained to be granted under
the 1996 Plan.
At March 5, 1999, there were 631,200 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 plan,
196,500 shares remain to be granted. No shares remain to be granted under the
1982 plan.
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:
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 March 5, 1999 to offset the estimated
benefit resulting from the loss incurred during fiscal 1999. In addition,
during the third quarter ending March 5, 1999, the Company also increased its
valuation allowance by $8,676,453 which offsets the deferred tax asset. 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 8 - INTERNATIONAL RESTRUCTURING:
The Company had exported a portion of its hot dog production to Russia. As a
result of the economic and political instability in Russia, including the
rapid devaluation of its currency, the Company's continued ability to transact
business in this region is uncertain. During the second quarter ending
December 11, 1998, the Company recorded a reserve of $8.0 million, of which
$6.0 million is related to the uncertain collection of Russian accounts
receivable and $2.0 million was charged against inventory resulting from a
decline in market value. During the third quarter ending March 5, 1999, the
Company recorded an additional $1.3 million reserve for additional losses
incurred related to the further decline in inventory value.
NOTE 9 - 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.
During the second quarter of fiscal 1999 the Company recorded an additional
loss on the disposal of its fresh pork division of $2.8 million related to the
declining value of its remaining frozen pork inventory. The consolidated
financial statements and related notes have been restated for all quarters
presented to separately report the fresh pork discontinued operations.
7
<PAGE> 9
NOTE 10 - PRODUCT RECALL:
On December 30, 1998, the Company, in conjunction with the United States
Department of Agriculture (USDA), temporarily suspended its operations at its
Forrest City, Arkansas plant, as a result of the detection of a bacteria known
as Listeria.
Subsequently, on January 22, 1999, the Company voluntarily recalled all
production from this facility for the period of July 6, 1998, to December 30,
1998. The production from this facility during this time period was
approximately 31 million pounds, primarily consisting of hot dogs and lunch
combinations. The Company is not aware of any illness conclusively linked to
the consumption of the recalled products.
"On April 13, 1999, the U.S. Department of Agriculture issued a press release
headlined "USDA Declares Product From Thorn Apple Valley Unfit for Human
Consumption". That press release indicated that the USDA had determined that
the approximately 10 million pounds of product that had been produced by the
Company's Forest City Arkansas plant and is now held in storage as a result of
the recall could not be resold for human consumption. Because the Company
has fully reserved for its inability to sell that product, the substance of
the USDA's press release had no effect on the Company's financial statements.
The broad headline of the press release has, however, adversely affected the
Company's relationships with consumers and its customers."
As a result, the Company recorded in the third quarter ending March 5, 1999, a
charge of $5.1 million related to the recall. Approximately, $3.1 million of
the charge is related to the write-down of the Company's remaining Russian hot
dog inventory that was included in the recall. The additional $2 million of
the charge is related to the write-off of inventory on hand at the time of the
recall, expenses related to the recall and credits issued to customers for
returned products.
NOTE 11 - BANK FINANCING CHARGE:
The Company had significant expenses that it had incurred with the Bank Group,
in financing its business. The Company was amortizing these expenses over the
life of the loan. In September 1998, the Bank Group changed the date of
maturity of the related loans. As a result of this change, a more rapid
amortization of these financing costs occurred. Subsequently, on March 5,
1999, the Company filed a petition for Chapter 11 Bankruptcy. As a result of
this filing, the Company elected to write-off the remaining unamortized
portion of the financing costs. Due to the significant amount of these costs,
the Company has reclassified this charge to a separate expense line item in
the Consolidated Statements of Operations for the Quarter Ending March 5,
1999. The following schedule illustrates the amortized amounts previously
included in general and administration expense:
<TABLE>
<S> <C>
First Quarter Ending: September 18, 1998 $ 465,750
Second Quarter Ending: December 11, 1998 $ 671,523
----------
Total amortized Bank Financing Costs $1,137,273
Year-to-Date Expense, Ending March 5, 1999 $3,209,543
----------
Third Quarter Ending: March 5, 1999 $2,072,270
</TABLE>
8
<PAGE> 10
THORN APPLE VALLEY, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Thorn Apple Valley, Inc., debtor-in-possession, 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, 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.)
PROCEEDINGS UNDER CHAPTER 11
On March 5, 1999, (the "Petition Date"), the Company commenced a
reorganization case by filing a voluntary petition (the "Chapter 11 Petition")
for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code
(as amended from time to time, the "Bankruptcy Code") in the United States
Bankruptcy Court in the Eastern District of Michigan (the "Bankruptcy Court"),
case number 99-43645. Management determined that the filing of the Chapter 11
Petition would allow the needed time and flexibility to restructure the
Company's operations and provide the time and protection necessary to
restructure the Company's funding sources.
Since the Petition Date, the Company has continued in possession of its
assets and, as debtor-in-possession, is authorized to operate and manage its
business and enter into all transactions (including obtaining services,
inventories and supplies) that it could have entered into in the ordinary course
of business without approval of the Bankruptcy Court. A statutory Creditors'
Committee has been appointed in the Chapter 11 case.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles applicable to a going concern,
which contemplate the realization of assets and the satisfaction of liabilities
in the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, such realization of assets and
satisfaction of liabilities is subject to uncertainty. A plan of reorganization
could materially change the amounts reported in the accompanying financial
statements, which do not give effect to adjustments to the carrying values of
assets and liabilities, which may be necessary as a consequence of a plan of
reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, to maintain
compliance with a Post-Petition Loan and Security Agreement, its modifications
and extensions (collectively, the "Debtor-in-Possession (DIP) Financing
Agreement") (see Note 4) and the ability to obtain sufficient financing sources
to meet future obligations.
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> 11
TWELVE WEEKS ENDED MARCH 5, 1999 COMPARED TO TWELVE WEEKS ENDED MARCH 6, 1998
The Company's loss from continuing operations for the third quarter
ended March 5, 1999 was approximately $19.2 million compared with a loss from
continuing operations of approximately $3.5 million for the comparable prior
year period. The increase in the loss is primarily attributable to the write-off
of expenses related to: 1) the product recall charge of $5.1 million (see Note
10), 2) the amortization of bank financing costs of $2.1 M (see Note 11), 3) the
recording of a valuation allowance against the deferred tax asset (see Note 7)
and 4) the charge related to the Company's Russian operations of approximately
$1.3 M (see Note 8). In addition, sales volume was down due to reduced
production capacity (see Note 10) and a significant reduction of our export hot
dog business.
Net sales in the third quarter of fiscal 1999 decreased $10.9 million
or 10.3% as compared to the third quarter of fiscal 1998. The reduction in
processed meat sales dollars is attributable to lower average selling prices and
lower unit sales of 5.0% and 5.9%, 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 of
fiscal 1998 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 $10.1
million, or 10.8%, primarily as a result of the decrease in the cost of hams and
pork bellies, referred to above, and a decrease in processed meat tonnage sold
of approximately 6.3 million pounds or 5.9%. As a percentage of net sales, cost
of goods sold decreased to 88.2% from 88.7%.
Selling expenses decreased approximately $3.1 million, or 44.7%. As a
percentage of net sales, selling expenses decreased to 4.0% from 6.5%. General
and administrative expenses decreased $.6 million, or 12.8%. As a percentage of
net sales, general and administrative expenses decreased to 4.0% from 4.2%. The
decrease in Selling, General and Administration expenses is primarily the result
of a cost reduction program put in place during the second quarter of fiscal
1999.
The Company did not recognize the future tax benefit associated with
the operating loss in the third 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 second quarter of fiscal
year 1998 is the loss from the fresh pork operations that the Company previously
exited. In the second quarter of fiscal 1999, the Company recorded an additional
$2.8 million loss on disposal of its fresh pork division. The additional loss
was the result of declining values of its remaining frozen pork inventory.
The loss per share of common stock from continuing operations was $3.12
per share compared to a loss per share of $.56 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 twelve weeks ended March 5, 1999 are not
necessarily indicative of the results to be expected for fiscal 1999.
10
<PAGE> 12
FORTY WEEKS ENDED MARCH 5, 1999 COMPARED TO FORTY WEEKS ENDED MARCH 5, 1998
The Company's loss from continuing operations for the forty weeks ended
March 5, 1999 was approximately $31.6 million compared with a loss from
continuing operations of approximately $4.4 million for the comparable prior
year period. The increase in the loss is to the write-off of expenses related
to: 1) the product recall charge of $5.1 million (see Note 10), 2) the
amortization of bank financing costs of $ 3.2 M(see Note 11), 3) the recording
of a valuation allowance against the deferred tax asset (see Note 7) and 40 the
charge related to the Company's Russian operations of approximately $9.3 M (see
Note 8). In addition, sales volume was down due to reduced production capacity
(see Note 10) and a significant reduction of our export hot dog business.
Net sales for the first three quarters of fiscal 1999 decreased $54.5
million or 13.3% as compared to the first three quarters of fiscal 1998. The
reduction in processed meat sales dollars is attributable to lower average
selling prices and lower unit sales of 8.7% and 5.4%, 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.
Cost of goods sold (including delivery costs) decreased by $50 million,
or 14%, primarily as a result of the decrease in the cost of hams and pork
bellies, referred to above and a decrease in processed meats tonnage sold of
approximately 18.2 million pounds or 5.4%. As a percentage of net sales, cost of
goods sold decreased to 87.4% from 88.0%.
Selling expenses decreased approximately $3.7 million, or 18.0%. As a
percentage of net sales, selling expenses decreased to 4.8% from 5.1%. General
and administrative expenses decreased $2.9 million, or 17.4%. As a percentage of
net sales, general and administrative expenses decreased to 3.9% from 4.1%. The
decrease in Selling, General and Administrative expenses is primarily the result
of a cost reduction program put in place during the last two fiscal years.
The Company did not recognize the future tax benefit associated with
the operating loss for the first two quarters 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 forty weeks of fiscal
year 1998 is the loss from the fresh pork operations that the Company previously
exited. In the second quarter of fiscal 1999, the Company recorded an additional
$2.8 million loss on disposal of its fresh pork division. The additional loss
was primarily the result of declining values of its remaining frozen pork
inventory.
The loss per share of common stock from continuing operations was $5.15
per share compared to a loss per share of $.72 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 forty weeks ended March 5, 1999 are not necessarily
indicative of the results to be expected for fiscal 1999.
11
<PAGE> 13
FINANCIAL CONDITION
At March 5, 1999, the Company had a revolving credit agreement with a
consortium of financial institutions whereby it could borrow, subject to a
borrowing base formula in the aggregate up to $80.0 million, of which $30.3
million was drawn upon and $9.7 million was used to support letters of credit.
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.
As a result of the Chapter 11 filing, on March 11, 1999, the Company
has obtained an interim order that allows it to use Debtor-In-Possession (DIP)
financing, which is provided by a consortium of lenders (The "Bank group"). A
final hearing date for the DIP financing is scheduled for April 22, 1999. The
Bank Group is made up of the same lenders that provided the Company with its
revolving credit and term loan financing agreement prior to the Chapter 11
filing.
The terms of the DIP financing are as follows:
1. A total DIP financing credit line of $47,413,275,
which allows the Company to borrow an additional $7
million of new funds. The outstanding amount of the
revolving credit line is converted into the DIP
financing loan.
2. Interest on the DIP financing accrues at 2.75% above
the prime rate, payable monthly at .75% above the prime
rate with the additional 2% due at the end of the DIP
financing agreement.
3. The DIP Facility shall mature and all obligations
thereunder shall be repaid in full on the earlier to
occur of: a) May 31, 1999, if a letter of intent
acceptable to the Lender for the sale of substantially
all of the assets of the Company has not been entered
into by such date, b) June 30, 1999, if the sale of
substantially all of the assets of the Company,
pursuant to any such letter of intent has not occurred
by such date, and c) the effective date of a plan of
reorganization for the Company.
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
collateralized by substantially all of the Company's assets.
The Company is working with its lenders to provide adequate funding for
the continued operation of the Company and its subsidiaries, although there can
be no assurance that this can be obtained.
12
<PAGE> 14
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 March 5, 1999, the Company had approximately $2.4 million in cash.
Cash provided by operations during the forty weeks ended March 5, 1999 was
approximately $14.5 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
$8.7 million and to fund net capital expenditures of $.2 million.
"On April 13, 1999, the U.S. Department of Agriculture issued a press
release headlined "USDA Declares Product From Thorn Apple Valley Unfit for Human
Consumption". That press release indicated that the USDA had determined that
the approximately 10 million pounds of product that had been produced by the
Company's Forest City Arkansas plant and is now held in storage as a result of
the recall could not be resold for human consumption. Because the Company has
fully reserved for its inability to sell that product, the substance of the
USDA's press release had no effect on the Company's financial statements. The
broad headline of the press release has, however, adversely affected the
Company's relationships with consumers and its customers."
YEAR 2000
The Year 2000 Issue is a result of computer programs that were written
using two digits rather than four digits to define the applicable year. If the
Company's computer programs and other systems with date sensitive functions are
not Year 2000 compliant, they may recognize the year input as "00" to be defined
as the year 1900 and not the appropriate year 2000. This could result in a
system failure or related miscalculations causing potential disruptions in
operations, including but not limited to, a temporary inability to process daily
transactions. The Company has evaluated its Year 200 state of readiness by
identifying three major components: internal information technology systems,
non-information technology systems (including internal embedded chip technology)
and third party risks.
Internal Information Technology Systems
The Company has initiated a Year 2000 compliance program, utilizing its
internal Information Systems Tech Team, which has established a process for
evaluating and managing the potential risks and costs associated with the Year
2000 Issue. In fiscal 1996, the Company completed a two-year project that
re-engineered some key financial and logistics systems, a majority of which are
now believed to be Year 2000 compliant. Such systems believed to be Year 2000
compliant are the: Order Entry Invoicing, Accounts Receivable, Accounts Payable,
General Ledger, Fixed Assets, Electronic Data Interchange (EDI) and Inventory
Warehouse Control systems. However, the Company is aware of two systems that are
not Year 2000 compliant: the Payroll and Human Resource systems. These systems
are expected to be Year 2000 compliant by the fall of calendar year 1999. Based
on this information, the Company believes that it will be in full compliance
with its internal information technology systems before the year 2000. Because a
substantial portion of the Company's internal information technology systems are
believed to, or will be Year 2000 compliant, contingency plans have not been
established. Since each of the above described internal information technology
systems have either been made compliant or will be made compliant by the
Company's internal Information Systems department, the cost associated with the
Year 2000 compliance program are not deemed to be material and have been treated
for accounting purposes as expenses incurred through the normal course of
operations.
Non-financial and Internal Embedded Chip Technology
The Company is in the data gathering phase with regards to internal
embedded chip technology and the impact of the Year 2000 Issue on its
non-financial technology systems. The Company believes that a substantial
portion of its internal embedded chip technology as well as other non-financial
technology systems are Year 2000 compliant. The Company will be making inquiries
with its providers of alarm and other related security systems to ensure that
these systems are Year 2000 compliant. Management believes that even if the
Company is unable to achieve Year 2000 compliance for its major non-financial
technology systems, Year 2000 Issues that may result, will not have a material
impact on the operations of the Company. In light of this assessment, the
Company does not have a contingency plan in place for either its non-financial
or internal embedded chip technology systems risks.
Third Party Risks
The Company has identified and is in the process of contacting its
major customers, vendors and financial services organizations to determine the
extent to which the Company's operations and interface systems would be
vulnerable to those third parties failure to remedy their own Year 2000 Issues.
The Company has implemented and is currently using a conversion program, with
regards to its EDI system that will convert non-Year 2000 information into our
Year 2000 compliant format. The Company's EDI system is used to receive purchase
orders from its customers. In the event that some of the Company's customers are
not Year 2000 compliant, management does not foresee any interruptions in its
order entry system due to the fact that a contingency plan is in place to take
the orders manually. Management believes that, while the Company could
experience
13
<PAGE> 15
Third Party Risks (continued)
temporary delays in collecting receivables from its customers or receiving
shipments from its suppliers, the impact of such delays will not be
significantly impact its business.
EXHIBITS AND REPORTS ON FORM 8-K
There was one report filed on form 8-K for the period ending March 5,
1999. The report was filed on March 9, 1999 and discussed matters related to the
filing of a voluntary petition by the Company, for Chapter 11 bankruptcy.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THORN APPLE VALLEY, INC.
(Registrant)
Date: April 19, 1999 By: \s\Louis Glazier
-------------- -------------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
15
<PAGE> 17
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
EX-27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT MARCH 5, 1999, CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH
FLOWS FOR THE 40 WEEKS ENDED MARCH 5, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q, QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-28-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAR-05-1999
<CASH> 2,396,703
<SECURITIES> 0
<RECEIVABLES> 31,116,745
<ALLOWANCES> 6,635,000
<INVENTORY> 36,130,135
<CURRENT-ASSETS> 70,158,377
<PP&E> 171,758,126
<DEPRECIATION> 90,132,256
<TOTAL-ASSETS> 189,118,903
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 614,752
<OTHER-SE> (7,854,558)
<TOTAL-LIABILITY-AND-EQUITY> 189,118,903
<SALES> 353,996,473
<TOTAL-REVENUES> 353,996,473
<CGS> 309,567,258
<TOTAL-COSTS> 309,567,258
<OTHER-EXPENSES> 58,320,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,733,775
<INCOME-PRETAX> (22,938,269)
<INCOME-TAX> 8,687,394
<INCOME-CONTINUING> (31,625,663)
<DISCONTINUED> (2,800,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,425,663)
<EPS-PRIMARY> (5.61)
<EPS-DILUTED> (5.61)
</TABLE>
