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 13, 1996 Commission file
number 0-6566
Thorn Apple Valley, Inc.
---------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Michigan 38-1964066
------------------------------- --------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26999 Central Park Blvd., Suite 300, Southfield, Michigan 48076
--------------------------------------------------------- ---------
(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (810) 213-1000
- -------------------------------------------------- --------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 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 13, 1996, there were 6,075,152 shares of Common Stock outstanding.
2
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 13, May 31,
1996 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 7,880,815 $ 5,809,559
Short-term investments 500,000 627,560
Accounts receivable, less allowance for doubtful accounts
(Dec. 13, 1996, $786,000; May 31, 1996, $621,800) 82,394,002 62,371,990
Inventories (Note 2) 58,896,821 56,263,210
Refundable income taxes 11,490,330
Deferred income taxes (Note 7) 2,647,400 2,199,000
Prepaid expenses and other current assets 5,461,050 5,732,537
------------ ------------
Total current assets 157,780,088 144,494,186
------------ ------------
Property, plant and equipment:
Land 1,369,884 1,519,976
Buildings and improvements 62,109,687 61,640,117
Machinery and equipment 158,005,611 155,911,312
Transportation equipment 7,345,743 7,498,075
Property under capital leases 9,956,881 10,301,819
Construction in progress 5,305,274 4,475,987
------------ ------------
244,093,080 241,347,286
Less accumulated depreciation 106,913,308 98,938,159
------------ ------------
137,179,772 142,409,127
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization of $1,291,231 and $839,300 at
Dec. 13, 1996 and May 31, 1996, respectively (Note 8) 32,280,769 32,732,700
Other 6,579,138 5,980,190
------------ ------------
Total other assets 38,859,907 38,712,890
------------ ------------
$333,819,767 $325,616,203
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 48,231,651 $ 46,970,024
Notes payable, banks (Note 3) 14,700,000
Notes payable, officer 24,786 121,366
Accrued liabilities 30,079,170 20,840,961
Current portion of long-term debt 4,578,198 2,818,444
Income taxes 180,361
------------ ------------
Total current liabilities 83,094,166 85,450,795
------------ ------------
Long-term debt (Note 4) 165,447,644 159,808,923
------------ ------------
Deferred income taxes (Note 7) 5,160,000 3,631,000
------------ ------------
Shareholders' equity:
Preferred stock: $1 par value; authorized 200,000 shares; issued none
Common nonvoting stock: $.10 par value; authorized 20,000,000 shares; issued none
Common voting stock: $.10 par value; authorized 20,000,000 shares; issued 6,075,152 shares
Dec. 13, 1996 and 5,786,129 shares May 31, 1996 607,515 578,613
Capital in excess of par value 10,070,188 7,011,361
Retained earnings 69,440,254 69,135,511
------------ ------------
80,117,957 76,725,485
------------ ------------
$333,819,767 $325,616,203
============ ============
See notes to consolidated financial statements.
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3
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
Twelve Weeks Ended Twenty-Eight Weeks Ended
---------------------------------- ---------------------------------
December 13, December 8, December 13, December 8,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales $259,085,335 $251,245,993 $545,967,563 $514,907,690
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs 235,055,389 231,934,319 496,402,862 476,745,022
Selling 7,697,106 8,877,819 17,575,687 21,262,134
General and administrative 6,319,169 7,428,003 15,635,581 15,427,096
Depreciation and amortization 4,038,293 3,613,021 9,396,874 8,045,656
------------ ------------ ------------ ------------
253,109,957 251,853,162 539,011,004 521,479,908
------------ ------------ ------------ ------------
Income (loss) from operations 5,975,378 (607,169) 6,956,559 (6,572,218)
------------ ------------ ------------ ------------
Other expenses (income):
Interest 2,961,320 2,328,838 7,002,401 4,546,783
Other, net (282,308) (290,202) (699,585) (632,885)
------------ ------------ ------------ ------------
2,679,012 2,038,636 6,302,816 3,913,898
------------ ------------ ------------ ------------
Income (loss) from operations before income taxes 3,296,366 (2,645,805) 653,743 (10,486,116)
Provision (benefit) for income taxes (Note 7) 1,279,000 (889,000) 349,000 (3,564,000)
------------ ------------ ------------ ------------
Net income (loss) $ 2,017,366 ($1,756,805) $304,743 ($6,922,116)
============ ============ ============ ============
Earnings (loss) per share of common stock: (Note 5) $0.33 ($0.30) $0.05 ($1.20)
============ ============ ============ ============
Weighted average number of shares outstanding (Note 5) 6,074,780 5,777,188 5,924,644 5,774,736
============ ============ ============ ============
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Common stock Capital in
--------------------- excess of Retained
Shares Amount par value earnings
--------- -------- ----------- -----------
Balance, May 26, 1995 5,770,647 $577,065 $ 6,771,071 $91,247,429
Net income (loss) (6,922,116)
Cash dividends, $.07 per share (404,174)
Shares issued under employee stock purchase plan 7,310 731 129,319
--------- -------- ----------- -----------
Balance, December 8, 1995 5,777,957 $577,796 $ 6,900,390 $83,921,139
========= ======== =========== ===========
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 9) 279,883 27,988 2,972,358
--------- -------- ----------- -----------
Balance, December 13, 1996 6,075,152 $607,515 $10,070,188 $69,440,254
========= ======== =========== ===========
See notes to consolidated financial statements.
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5
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Eight Weeks Ended
---------------------------
December 13, December 8,
1996 1995
----------- -----------
Cash flows from operating activities:
Net income (loss) $304,743 ($6,922,116)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 8,944,943 7,593,725
Amortization of intangibles 451,931 451,931
Deferred income taxes 1,080,600 792,000
(Gain) loss on disposition of property,
plant and equipment (123,625) 438,885
Provision for losses on accounts receivable 164,200 332,000
(Increase) decrease in assets:
Accounts receivable (20,186,212) (25,713,941)
Inventories (2,633,611) (4,337,133)
Prepaid expenses and other assets (199,901) (1,167,624)
Refundable income taxes 11,490,330 (4,483,342)
Increase (decrease) in liabilities:
Accounts payable 1,261,627 11,679,853
Accrued liabilities and compensation 9,238,209 5,393,046
Income taxes payable 180,361
----------- -----------
Total adjustments 9,668,852 (9,020,600)
----------- -----------
Net cash provided by (used in) operating activities 9,973,595 (15,942,716)
----------- -----------
Cash flows from investing activities:
Acquisition of a business, net of cash acquired (Note 8) (65,749,414)
Capital expenditures (3,539,167) (28,987,088)
Proceeds from sale of property, plant and equipment 803,568 494,110
----------- -----------
Net cash used in investing activities (2,735,599) (94,242,392)
----------- -----------
Cash flows from financing activities:
Proceeds from common stock sold to company officer (Note 9) 3,000,346
Proceeds from long-term debt 8,400,000 122,500,000
Principal payments on long-term debt (14,700,000) (2,966,058)
Net borrowings (payments) under lines of credit (1,857,889) (5,960,000)
Net borrowings from (payments to) officers (96,580) (709,267)
Dividends paid (404,174)
Proceeds from employee stock purchase plan 87,383 130,050
----------- -----------
Net cash provided by (used in) financing activities (5,166,740) 112,590,551
----------- -----------
Net increase in cash and cash equivalents 2,071,256 2,405,443
Cash and cash equivalents at beginning of quarter 5,809,559 4,730,637
----------- -----------
Cash and cash equivalents at end of quarter $7,880,815 $7,136,080
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for:
Interest $8,685,643 $5,465,522
=========== ===========
Income taxes $33,429
=========== ===========
Noncash investing activities:
Capital lease obligations $856,364 $84,740
=========== ===========
See notes to consolidated financial statements
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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 13, 1996
and May 31, 1996, 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 31, 1996. Certain amounts from prior years have been reclassified to
conform with the current year presentation. The results for the twenty-eight
weeks ended December 13, 1996 are not necessarily indicative of the results to
be expected for the fiscal year ending May 30, 1997.
NOTE 2 - INVENTORIES:
Inventories are stated at the lower of last-in, first-out (LIFO) cost or market.
Inventories would have been approximately $16,684,000 higher at December 13,
1996 and May 31, 1996 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:
December 13, May 31,
1996 1996
----------- -----------
Supplies $11,053,156 $ 9,559,537
Raw Materials 13,403,769 23,518,145
Work in progress 4,556,094 3,588,512
Finished goods 46,567,802 36,281,016
----------- -----------
75,580,821 72,947,210
Less LIFO reserve 16,684,000 16,684,000
----------- -----------
Inventory balance $58,896,821 $56,263,210
=========== ===========
NOTE 3 - LINE OF CREDIT:
On September 11, 1996, the Company was provided a $20 million seasonal line of
credit by its four participating banks. The seasonal line of credit expires on
January 31, 1997, and bears interest at an interest rate equal to prime plus
two percent. The seasonal line of credit is secured by a first lien on
substantially all of the Company's assets. At December 13, 1996, none of the
seasonal line of credit was drawn upon.
NOTE 4 - LONG-TERM DEBT:
On September 11, 1996, the Company entered into agreements with its existing
lenders to restructure its long-term revolving credit and note agreement
facilities and the Company's limited obligation revenue bond agreement. As
part of the restructuring, the lenders waived non-compliance with financial
covenants occurring on or before September 10, 1996 and those covenants were
modified on a going-forward basis. The following is a description of the
significant changes in the terms of the Company's borrowing agreements:
1. Under the revolving credit agreement the $80 million credit limit
has been increased to $90 million and the interest under such
agreement will be payable on a monthly basis at an interest rate
equal to prime plus one-quarter percent.
2. The interest rate on the private placement note agreements has
been increased by two percentage points and accrued interest is now
required to be paid on a monthly basis.
3. A $20 million seasonal line of credit has been provided, which
expires on January 31, 1997, and bears interest at an interest rate
equal to prime plus two percent and which is secured by a first lien
on substantially all of the Company's assets.
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NOTE 4 - LONG-TERM DEBT (CONTINUED):
4. The Company has granted a second lien on substantially all of the
Company's assets which is shared on a pro-rata basis by the $90
million revolving credit lenders, the $65.5 million private placement
note lenders and the $5.5 million limited obligation lender.
5. The Chairman of the Board of Directors of the Company, who is also
a significant shareholder of the Company, has purchased approximately
$3.0 million of the Company's newly-issued common stock from the
Company at a price per share determined by the average closing price of
the Company's common stock for the 20 trading days preceding the stock
purchase. The proceeds of such stock purchase were used for working
capital needs.
6. Under the agreements, the Company is obligated to pursue and
obtain by April 30, 1997 a minimum of $15 million in subordinated
debt financing through private placement. If such financing is
obtained, of which there can be no assurance, the proceeds from the
subordinated debt issue will be used to reduce the outstanding
balance of the private placement notes, revolving credit notes and
limited obligation revenue bonds.
7. The 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
investment, and do not allow the payment of cash dividends or
repurchase of the Company's common stock.
The Company's other two revenue bond agreements contain restrictive
covenants that include the maintenance of a minimum level of
consolidated net worth (as defined therein) and of certain financial
ratios. At December 13, 1996, the Company was not in compliance with
certain covenants contained in its industrial revenue bond agreement
and the Company has obtained an unconditional waiver of those
violations from its lender through July 1, 1997. The Company has
classified this obligation as a current liability, as a result of the
waiver being less than one year in duration from the balance sheet
date. The Company does not expect its industrial revenue bond lender
to call the debt at the end of the waiver period.
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 is
excluded from the computation of the weighted average number of common
shares outstanding since it is not material.
NOTE 6 - STOCK OPTION PLANS:
The Company's 1990 Employee Stock Option Plan and the Company's 1996
Employee Stock Option Plan authorize the Company's Stock Option
Committee to grant options for up to 787,500 shares and 600,000 shares,
respectively, of the Company's common stock to present or prospective
employees. At December 13, 1996, 718,300 options were granted but not
exercised at prices of $10.25, $17.00, $23.00 and $26.00 per share and
no shares remain to be granted under the 1990 Plan. At December 13,
1996, there were 49,500 options granted but not exercised at $10.25 per
share and 550,500 shares remained to be granted under the 1996 Plan.
At December 13, 1996, there were 141,000 options granted but not
exercised at prices of $2.56 and $19.67 per share under the 1982
Employee Stock Option 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.
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 rate, was 53.4 percent and (34.0) percent for
the twenty-eight weeks ended December 13, 1996 and December 8, 1995,
respectively.
6
8
NOTE 8 - ACQUISITION:
On May 30, 1995, the Company purchased certain assets from Foodbrands
America, Inc. and its subsidiaries ("Foodbrands"). The Company
acquired substantially all of Foodbrands' Retail Division ("Wilson")
assets used by Wilson in its business of producing and marketing retail
meat products. The aggregate purchase price for the assets acquired
and the assumption of certain liabilities was approximately $64.6
million. During the next five years, Foodbrands has the right to
receive from the Company up to an additional $10 million in accordance
with what is being referred to as an Earnout Agreement. The
acquisition has been accounted for by the purchase method. The
acquired assets included three manufacturing facilities, machinery and
equipment, current assets, certain trademarks and tradenames. The
trademarks and tradenames acquired will be amortized to expense over
their estimated useful lives, determined to be 40 years. The Company
has not paid any amount to Foodbrands under the Earnout Agreement.
During fiscal 1996, the Company closed two of the acquired facilities
that did not fit with the Company's strategic objectives.
NOTE 9 - COMMON STOCK ISSUED:
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 amended long-term debt
agreements entered into on September 11, 1996, as discussed in Note 6
of the Consolidated Financial Statements contained in the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996.
7
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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
consumer packaged meat and poultry products and is one of the largest
slaughterers of hogs 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 processed meat products
operations of the Company's business involve 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'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 markets its products under premium and other proprietary brand
labels including "Thorn Apple Valley," "Wilson Certified", "Corn King",
"Colonial," "Triple M," "Herrud," "Royal Crown," "Bar H," "Olde Virginie,"
and "Cavanaugh Lakeview Farms," and under customer-owned private labels.
The Company sells its products principally to wholesalers, supermarkets and
other manufacturers throughout the United States and in selected
international markets. The Company is the largest purchaser of hogs in the
Michigan, Indiana and Ohio markets.
The Company was originally incorporated in 1959 as a Michigan
corporation. It reincorporated in Delaware in 1971 and reincorporated in
Michigan in 1977.
In early fiscal 1996 the Company purchased certain assets from
Foodbrands America, Inc. and its subsidiaries ("Foodbrands"). The Company
acquired substantially all of Foodbrands' Retail Division ("Wilson") assets
used by Wilson in its business of producing and marketing retail meat
products. The acquired assets included three manufacturing facilities,
machinery and equipment, current assets and certain trademarks and
tradenames. The aggregate purchase price for the assets acquired and the
assumption of certain liabilities was approximately $64.6 million. During
the next five years, Foodbrands has the right to receive from the Company up
to an additional $10 million in accordance with what is being referred to as
an Earnout Agreement. The Company has not paid any amount to Foodbrands
under the Earnout Agreement.
The Wilson acquisition was accounted for using the purchase method. The
tradenames and trademarks acquired are being amortized over their estimated
useful lives, which was determined to be 40 years. During fiscal 1996, the
Company closed two of the acquired facilities that did not fit with the
Company's strategic objectives.
The Company's principal executive offices are located at 26999 Central
Park Blvd., Suite 300, Southfield, Michigan 48076 (telephone number: (810)
213-1000).
RESULTS OF OPERATIONS
As consumers have become more health conscious, hog slaughterers and
meat and poultry 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.
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10
TWELVE WEEKS ENDED DECEMBER 13, 1996 COMPARED TO TWELVE WEEKS ENDED DECEMBER 8,
1995
For the quarter ended December 13, 1996 net income increased by $3.8
million to $2.0 million from a net loss of $1.8 million in the year-earlier
period. The increase is primarily attributable to higher processed meat
margins offset in part by lower margins in the fresh pork operation. Operating
profits for the processed meats division were increased by several factors
which included direct cost reductions made possible by the Company's
construction and renovation of certain facilities, improved plant operating
efficiencies, higher average selling prices and lower selling expenses.
Increased consumer demand during the holiday season for the spiral sliced and
boneless hams also contributed to improved profitability.
Margins in the fresh meat division were lower than the previous year,
reflecting the severe margin pressure resulting from the industry-wide
imbalance between slaughter capacity and the number of market hogs available.
The Company continued to improve its operating efficiencies at its fresh pork
facility, which helped to offset the lower gross margins. Based upon the most
recent pig crop report, the Company does not expect improved profitability in
its fresh pork operation during the remainder of the fiscal year.
Net sales in the second quarter of fiscal 1997 increased by $7.8 million,
or 3.1%. The increase in net sales dollars was the result of an increase in
processed meat and fresh pork sales of 1.3% and 7.6%, respectively. The
increase in net sales was primarily attributable to increases in processed meat
and fresh pork average selling prices of 3.7% and 12.9%, respectively.
Partially offsetting higher average selling prices were decreases in processed
meat and fresh pork tonnage shipped of 2.3% and 4.7%, respectively.
Although the Company's processed meat operation was very successful in
expanding lines of its various boneless ham product lines overall sales volume
decreased as a result of its planned elimination of lower margin product lines.
The Company's fresh pork sales volume was down reflecting the Company's
proportionate share in the industry wide shortage of market hogs available for
slaughter. The increase in average selling prices primarily reflects an
increase of approximately 22% in the cost of live hogs, the Company's primary
raw material.
Cost of goods sold (including delivery costs) increased by $3.1 million,
or 1.3%, mainly as the result of the increase in the cost of live hogs referred
to above, which was partially offset by the reduction in processed meat and
fresh pork sales volume. As a percentage of net sales, cost of goods sold
decreased to 90.7% from 92.3%, reflecting the result of improved operating
efficiencies in both the processed meat and fresh pork operations.
Selling expenses decreased $1.2 million, or 13.3%, principally as a result
of lower promotional expenses and a reduction in operating costs associated
with the sales department in connection with the Company's completion of its
integration of the Wilson sales function into the Company's business. As a
percentage of net sales, selling expenses decreased to 3.0% from 3.5%.
General and administrative expenses decreased $1.1 million, or 14.9%. As
a percentage of net sales, general and administrative expenses decreased to
2.4% from 3.0%.
Interest expense increased $.6 million, or 27.2%. The increase is
attributable to higher interest rates associated with the Company's
restructured long-term debt agreements with its revolving credit and private
placement lenders in September, 1996, and to an increase in borrowings under
the Company's revolving credit agreement that was primarily the result of the
Company's fiscal 1996 losses and capital expenditures related to the Ponca City
construction.
The provision for income taxes increased by $2.2 million, primarily due to
the increase in pre-tax income from operations of $5.9 million to income of
$3.3 million from a loss of $2.6 million in the comparable prior period,
resulting from the factors discussed above. The Company's effective tax rate
increased to 38.8% from (33.6%).
Earnings per share of common stock increased by $.63 per share to net
income of $.33 per share from a loss of $.30 per share for the comparable prior
year period, due to increased profitability resulting from the factors
discussed above.
The results for the twelve weeks ended December 13, 1996 are not
necessarily indicative of the results to be expected for fiscal 1997.
9
11
TWENTY-EIGHT WEEKS ENDED DECEMBER 13, 1996 COMPARED TO TWENTY-EIGHT
WEEKS ENDED DECEMBER 8, 1995.
The Company's net income in the twenty-eight weeks ended December 13, 1996
increased by $7.2 million to income of $.3 million from a loss of $6.9 million
for the prior-year period. The increase in profits through the first two
quarters of fiscal 1997 is attributable to increased processed meat and fresh
pork margins. The Company's processed meat operations has benefited from the
modern design, strategic geographical location, plant operating efficiencies
and simplified product mix at the Ponca City plant which have resulted in
significantly lower direct costs leading to improved profit margins. The
Company continued to improve its operating efficiencies at its fresh pork
plant, however, the substantial gains were somewhat offset by a further
deterioration of profit margins resulting from the continued negative imbalance
between the industry's slaughter capacity and market hogs available. The
Company is hopeful that the recent high level of hog producer profitability
will encourage hog expansion which will allow this industry segment to return
to more normal levels of profitability.
Net sales for the first two quarters of fiscal 1997 increased by $31.0
million, or 6.0%. The increase in net sales dollars was principally the result
of increased average selling prices in the Company's processed meats and fresh
pork divisions of 13.7% and 14.4%, respectively. Partially offsetting the
increased average selling prices was a reduction in processed meat and fresh
pork tonnage shipped of 9.6% and 2.0%, respectively.
The Company's processed meat operations sales volume decreased as a result
of the Company eliminating lower margin product lines. The Company's fresh
pork sales volume was down primarily due to lower slaughter levels resulting
from an industry wide shortage of market hogs available. The increase in
average selling prices primarily reflects an increase of approximately 22% in
the cost of live hogs, the Company's primary raw material.
Cost of goods sold (including delivery costs) increased by $19.7 million,
or 4.1%, mainly as the result of the increased cost of live hogs referred to
above, which was partially offset by a reduction in processed meat and fresh
pork sales volume and increased processed meat and fresh pork plant operating
efficiencies. As a percentage of net sales, costs of goods sold decreased to
90.9% from 92.6%.
Selling expenses decreased $3.7 million, or 17.3% , 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 decreased to 3.2%
from 4.1%, mainly due to the factors discussed above.
General and administrative expenses remained relatively unchanged from the
prior year period. As a percentage of net sales, general and administrative
expenses decreased slightly to 2.9% from 3.0%.
Interest expense increased $2.4 million, or 54.0%. The increase is
attributable to an increase in borrowings under the Company's revolving credit
agreement that primarily was the result of the Company's Fiscal 1996 operating
losses and capital expenditures related to the Ponca City plant and increased
interest rates related to the restructuring of the Company's long-term
revolving credit agreement and private placement note agreements in September,
1996.
The provision for income taxes increased by $3.9 million, primarily due to
the increase in pre-tax income from operations of $11.1 million to income of
$.6 million from a loss of $10.5 million in the comparable prior period,
resulting from the factors discussed above. The Company's effective tax rate
increased to 53.4% from (34.0%).
Earnings per share of common stock increased by $1.25 per share to income
of $.05 per share from a net loss of $1.20 per share, due to increased
profitability resulting from the factors discussed above.
The results for the twenty-eight weeks ended December 13, 1996 are not
necessarily indicative of the results to be expected for fiscal 1997.
10
12
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. On September 11, 1996, the Company entered
into agreements with its existing lenders to restructure the Company's
revolving credit and note agreement facilities and the Company's limited
obligation revenue bond agreement. As part of that restructuring, the
lenders waived past non-compliance with financial covenants occurring on or
before September 10, 1996 and those covenants were modified on a
going-forward basis. At December 13, 1996, the Company had total lines of
credit available under its amended revolving credit agreement and seasonal
line of credit agreement from four financial institutions aggregating $110.0
million, of which $20.1 million was unused. The following is a description
of the significant changes in the terms of the Company's borrowing
agreements:
1. Under the revolving credit agreement the $80 million credit limit
has been increased to $90 million and the interest under such
agreement will be payable on a monthly basis at an interest rate
equal to prime plus one-quarter percent.
2. The interest rate on the private placement note agreements has
been increased by two percentage points and accrued interest is now
required to be paid on a monthly basis.
3. A $20 million seasonal line of credit has been provided, which
expires on January 31, 1997, and bears interest at an interest rate
equal to prime plus two percent and which is secured by a first lien
on substantially all of the Company's assets.
4. The Company has granted a second lien on substantially all of the
Company's assets which is shared on a pro-rata basis by the $90
million revolving credit lenders, the $65.5 million private placement
note lenders and the $5.5 million limited obligation lender.
5. The Chairman of the Board of Directors of the Company, who is also
a significant shareholder of the Company, has purchased approximately
$3.0 million of the Company's newly-issued common stock from the
Company at a price per share determined by the average closing price
of the Company's common stock for the 20 trading days preceding the
stock purchase. The proceeds of such stock purchase will be used for
working capital needs.
6. Under the agreements, the Company is obligated to pursue and
obtain by April 30, 1997 a minimum of $15 million in subordinated
debt financing through private placement. If such financing is
obtained, of which there can be no assurance, the proceeds from the
subordinated debt issue will be used to reduce the outstanding
balance of the private placement notes, revolving credit notes and
limited obligation revenue bonds.
7 The 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
investment, and do not allow the payment of cash dividends or
repurchase of the Company's common stock.
The Company's two other revenue bond agreements contain restrictive
covenants that include the maintenance of a minimum level of consolidated
net worth (as defined therein) and of certain financial ratios. At December
13, 1996, the Company was not in compliance with certain covenants contained
in its industrial revenue bond agreement and the Company has obtained
unconditional waivers of those violations from its lender through July 1,
1997. The Company has classified this obligation as a current liability, as
a result of the waiver being less than one year in duration from the balance
sheet date. The Company does not expect its industrial revenue bond lender
to call the debt at the end of the waiver period and expects to receive
another waiver if it is still in non-compliance.
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. Additionally, the Company continues to pursue the
issuance of a minimum of $15 million of subordinated debt. Management
believes that it will be able to obtain the required additional $15 million
of subordinated debt by the April 30, 1997 deadline.
11
13
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending December
13, 1996.
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 21, 1997 By: /s/ Louis Glazier
---------------- ---------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
12
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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27 Financial Data Schedule