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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 7, 1997 Commission file number 0-6566
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Thorn Apple Valley, Inc.
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(Exact name of Registrant as specified in its charter)
Michigan 38-1964066
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(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26999 Central Park Blvd., Suite 300, Southfield, Michigan 48076
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(Address of principal executive offices) (zip Code)
Registrant's telephone number, including area code (810) 213-1000
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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 .
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At March 7, 1997, there were 6,090,969 shares of Common Stock outstanding.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 7, May 31,
1997 1996
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Current assets:
Cash and cash equivalents $ 4,717,699 $ 5,809,559
Short-term investments 500,000 627,560
Accounts receivable, less allowance for doubtful accounts
(Mar. 7, 1997, $839,800; May 31, 1996, $621,800) 64,255,468 62,371,990
Inventories (Note 2) 57,780,133 56,263,210
Refundable income taxes 1,118,383 11,490,330
Deferred income taxes (Note 6) 2,650,000 2,199,000
Prepaid expenses and other current assets 4,748,552 5,732,537
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Total current assets 135,770,235 144,494,186
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Property, plant and equipment :
Land 1,276,933 1,519,976
Buildings and improvements 61,873,629 61,640,117
Machinery and equipment 158,760,650 155,911,312
Transportation equipment 7,274,309 7,498,075
Property under capital leases 9,188,344 10,301,819
Construction in progress 6,601,679 4,475,987
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244,975,544 241,347,286
Less accumulated depreciation 110,263,836 98,938,159
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134,711,708 142,409,127
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Other assets:
Intangible assets, net of accumulated amortization of $1,484,915
and $839,300 at March 7, 1997 and May 31, 1996, respectively 32,087,085 32,732,700
Other 6,446,894 5,980,190
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Total other assets 38,533,979 38,712,890
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$309,015,922 $325,616,203
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 41,391,031 $ 46,970,024
Notes payable, banks 14,700,000
Notes payable, officer 5,315 121,366
Accrued liabilities 29,382,916 20,840,961
Current portion of long-term debt (Note 3) 4,304,783 2,818,444
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Total current liabilities 75,084,045 85,450,795
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Long-term debt (Note 3) 150,013,658 159,808,923
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Deferred income taxes (Note 6) 5,422,100 3,631,000
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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 6,090,969 shares Mar. 7, 1997 and 5,786,129 shares May 31, 1996 609,097 578,613
Capital in excess of par value 10,232,570 7,011,361
Retained earnings 67,654,452 69,135,511
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78,496,119 76,725,485
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$309,015,922 $325,616,203
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See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
Twelve Weeks Ended Forty Weeks Ended
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March 7 March 1, March 7 March 1,
1997 1996 1997 1996
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Net sales $205,669,688 $228,765,869 $751,637,251 $743,673,559
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Operating costs and expenses:
Cost of goods sold, including delivery costs 188,337,504 215,697,231 684,740,366 692,442,253
Selling 7,075,542 7,637,694 24,651,229 28,899,828
General and administrative 6,667,754 6,182,088 22,303,335 21,609,184
Depreciation and amortization 4,287,434 3,916,711 13,684,308 11,962,367
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206,368,234 233,433,724 745,379,238 754,913,632
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Income (loss) from operations (698,546) (4,667,855) 6,258,013 (11,240,073)
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Other expenses (income):
Interest 2,782,073 2,234,359 9,784,474 6,781,142
Other, net (672,817) (1,409,197) (1,372,402) (2,042,082)
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2,109,256 825,162 8,412,072 4,739,060
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Loss from operations before income taxes (2,807,802) (5,493,017) (2,154,059) (15,979,133)
Benefit for income taxes (1,022,000) (1,836,000) (673,000) (5,400,000)
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Net loss ($1,785,802) ($3,657,017) ($1,481,059) ($10,579,133)
============= ============ ============ ============
Loss per share of common stock: (Note 4) ($0.29) ($0.63) ($0.25) ($1.83)
============= ============ ============ ============
Weighted average number of shares outstanding (Note 4) 6,084,901 5,780,818 5,972,721 5,776,561
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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 loss (10,579,133)
Cash dividends, $.07 per share (404,174)
Shares issued under employee stock purchase plan 11,315 1,131 189,358
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Balance, March 1, 1996 5,781,962 $578,196 $ 6,960,429 $ 80,264,122
========= ======== =========== ============
Balance, May 31, 1996 5,786,129 $578,613 $7,011,361 $ 69,135,511
Net loss (1,481,059)
Newly issued shares of common stock (Note 7) 279,883 27,988 2,972,358
Shares issued under employee stock purchase plan 12,957 1,296 121,800
Exercise of stock options 12,000 1,200 127,051
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Balance, March 7, 1997 6,090,969 $609,097 $10,232,570 $ 67,654,452
========= ======== =========== ============
See notes to consolidated financial statements.
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THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Forty Weeks Ended
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March 7, March 1,
1997 1996
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Cash flows from operating activities:
Net loss ($1,481,059) ($10,579,133)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 13,038,693 11,316,752
Amortization of intangibles 645,615 645,615
Deferred income taxes 1,340,100 1,642,000
(Gain) loss on disposition of property,
plant and equipment 142,414 (64,574)
Provision for losses on accounts receivable 218,000 257,700
(Increase) decrease in assets:
Accounts receivable (2,101,478) (18,409,435)
Inventories (1,516,923) (3,715,894)
Prepaid expenses and other assets 644,841 (1,848,948)
Refundable income taxes 10,371,947 (7,263,747)
Increase (decrease) in liabilities:
Accounts payable (5,578,993) 9,145,325
Accrued liabilities 8,541,955 3,586,210
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Total adjustments 25,746,171 (4,708,996)
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Net cash provided by (used in) operating activities 24,265,112 (15,288,129)
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Cash flows from investing activities:
Acquisition of a business, net of cash acquired (65,749,414)
Capital expenditures (5,651,915) (35,326,725)
Proceeds from reimbursement of plant construction costs 6,500,000
Proceeds from sale of property, plant and equipment 1,024,591 2,600,608
Proceeds from sale of long-term investments 2,801,063
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Net cash used in investing activities (4,627,324) (89,174,468)
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Cash flows from financing activities:
Proceeds from common stock sold to company officer 3,000,346
Proceeds from long-term debt 118,800,000
Principal payments on long-term debt (9,165,290) (5,388,469)
Net borrowings (payments) under lines of credit (14,700,000) (5,960,000)
Net borrowings from (payments to) officers (116,051) (711,591)
Dividends paid (404,174)
Proceeds from stock options exercised 123,000
Proceeds from employee stock purchase plan 128,347 190,489
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Net cash provided by (used in) financing activities (20,729,648) 106,526,255
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Net increase (decrease) in cash and cash equivalents (1,091,860) 2,063,658
Cash and cash equivalents at beginning of year 5,809,559 4,730,637
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Cash and cash equivalents at end of quarter $4,717,699 $6,794,295
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Supplemental disclosures of cash flow information:
Cash paid during the forty-week period for:
Interest $12,069,429 $7,921,053
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Income taxes paid (refunded), net ($12,385,573) $112,803
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Noncash investing activities:
Capital lease obligations $856,364 $256,852
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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
March 7, 1997 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 forty weeks ended March 7, 1997 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 March
7, 1997 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:
March 7, May 31,
1997 1996
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Supplies $10,853,415 $ 9,559,537
Raw Materials 13,718,032 23,518,145
Work in progress 4,231,770 3,588,512
Finished goods 45,660,916 36,281,016
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74,464,133 72,947,210
Less LIFO reserve 16,684,000 16,684,000
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Inventory balance $57,780,133 $56,263,210
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NOTE 3 - LONG-TERM DEBT:
Under the terms of the Company's amended long-term debt agreements, entered
into on September 11, 1996, the Company was obligated to pursue and obtain by
April 30, 1997, a minimum of $15 million in subordinated debt financing.
On March 25, 1997, the Company completed a public offering of $17,250,000 of
9% Convertible Subordinated Debentures due 2007. The net proceeds from the
Debentures were used to reduce, on a pro-rata basis, the outstanding
balance of the revolving credit notes and the private placement notes, and a
portion of the proceeds are being held in escrow as collateral on certain
letters of credit. (See 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, for additional information related to the Company's long-
term debt).
The amended long-term debt agreements entered into on September 11, 1996,
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 limited obligation revenue and industrial revenue bond agreements
contain restrictive covenants that include the maintenance of a minimum level
of consolidated net worth (as defined therein) and of certain financial
ratios. At March 7, 1997, 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.
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NOTE 4 - EARNINGS PER SHARE OF COMMON STOCK:
Earnings (loss) 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 5 - 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 March 7, 1997,
706,300 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 March 7, 1997, there were 54,500 options granted but not exercised
at $10.25 per share and 545,500 shares remained to be granted under the 1996
Plan. At March 7, 1997, 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 6 - INCOME TAXES:
Deferred income taxes, on a SFAS No. 109 basis, reflect the estimated future
tax effect of temporary differences between the amount of assets and
liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations.
The Company's effective tax benefit rate, was (31.2) percent and (33.8) percent
for the forty weeks ended March 7, 1997 and March 1, 1996, respectively.
NOTE 7 - 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.
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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 and
sellers of related fresh pork products in the United States. The Company is
engaged in a single segment business with two principal product categories;
processed meat and poultry products and fresh pork. The 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,"
"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 connection with the Company's Wilson acquisition in early fiscal 1996,
the Company entered into an agreement with Foodbrands America Inc.
("Foodbrands") whereby Foodbrands has the right to receive, during the next
five years, from the Company up to an additional $10 million in accordance with
what is being referred to as an Earnout Agreement. As of March 7, 1997, the
Company has not paid any amounts to Foodbrands under the Earnout Agreement.
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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TWELVE WEEKS ENDED MARCH 7, 1997 COMPARED TO TWELVE WEEKS ENDED MARCH 1, 1996
For the quarter ended March 7, 1997 net loss decreased by $1.9 million to
a loss of $1.8 million from a net loss of $3.7 million in the year-earlier
period. The improvement is primarily attributable to higher processed meat and
fresh pork operating margins. 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, lower selling
expenses and improved product mix. Lower losses in the fresh pork division was
primarily attributable to increased operating efficiencies.
Despite continuing adverse fresh pork market conditions, margins in the
fresh meat division were higher than the previous year. The Company continued
its improvements in operating efficiencies at its fresh pork facility, which
helped to offset the negative impact resulting from the shortage of available
market hogs. Based upon the most recent U.S.D.A. Hogs and Pigs Inventory
Report, the Company does not expect improved profitability in its fresh pork
operation during the remainder of the fiscal year.
Net sales in the third quarter of fiscal 1997 decreased by $23.1 million,
or 10.1%. The decrease in net sales dollars was the result of a decrease in
processed meat and fresh pork sales of 8.7% and 11.5%, respectively. The
decrease in net sales was primarily attributable to decreases in processed meat
and fresh pork tonnage shipped of 6.8% and 15.6 %, respectively. Average fresh
pork selling prices increased by 3.7% while average processed meat selling
prices decreased by 2.0%.
The Company's processed meat operation's sales volume decreased
principally 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 and the Company's decision to lower production when incremental costs
exceed incremental revenues. The increase in average selling prices primarily
reflects an increase of approximately 13.5% in the cost of live hogs, the
Company's primary raw material.
Cost of goods sold (including delivery costs) decreased by $27.4 million,
or 12.7%, mainly as the result of the reduction in processed meat and fresh
pork sales volume, which was partially offset by an increase in the cost of
live hogs referred to above. As a percentage of net sales, cost of goods sold
decreased to 91.6% from 94.3%, reflecting the result of improved operating
efficiencies in both the processed meat and fresh pork operations.
Selling expenses decreased $.6 million, or 7.4%, principally as a result
of lower promotional expenses and a reduction in operating costs associated
with the sales department's completion of its integration of the Wilson sales
function into the Company's business. As a percentage of net sales, selling
expenses increased slightly to 3.4% from 3.3%.
General and administrative expenses increased $.5 million, or 7.9% as a
result of general price and wages increases. As a percentage of net sales,
general and administrative expenses decreased to 2.4% from 3.0%.
Interest expense increased $.5 million, or 24.5%. 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
facility construction.
The benefit for income taxes decreased by $.8 million, primarily due to
the decrease in pre-tax loss from operations of $2.7 million to a loss of $2.8
million from a loss of $5.5 million in the comparable period, resulting from
the factors discussed above. The Company's effective tax benefit rate
increased to (36.4%) from (33.4%).
Loss per share of common stock decreased by $.34 to a net loss of $.29
from a loss of $.63 per share for the comparable prior year period. The
reduction in losses resulted from the factors discussed above.
The results for the twelve weeks ended March 7, 1997, are not necessarily
indicative of the results to be expected for fiscal 1997.
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FORTY WEEKS ENDED MARCH 7, 1997 COMPARED TO FORTY WEEKS ENDED MARCH 1, 1996.
The Company's net loss in the forty weeks ended March 7, 1997, was $1.4
million compared with a net loss of $10.6 million for comparable prior year
period. The reduction in net loss through the first three quarters of fiscal
1997 is attributable to increased processed meat and fresh pork margins. The
Company's processed meat operations continued to benefit from its modern plant
designs, strategic geographical locations, and improved plant operating
efficiencies. Those factors plus the simplified product mix at the Ponca City
plant have resulted in significantly lower direct costs leading to improved
processed meat profit margins. The Company continued its improvement in
operating efficiencies at the fresh pork plant. Somewhat offsetting these
substantial operational gains was a continuing deterioration of the fresh pork
industry profit margins. This deterioration of industry profit margins is the
result of the continuing negative imbalance between the industry's slaughter
capacity and the availability of market hogs. Based upon the most recent
U.S.D.A. Hogs and Pigs Inventory Report, the number of hogs available over the
next six months will remain at relatively low levels and will not be sufficient
in meeting industry capacity demands. The Company remains hopeful that the
recent high level of hog producer profitability will encourage hog expansion
that will allow this industry segment to return to more normal levels of
profitability.
Net sales for the first three quarters of fiscal 1997 increased by
approximately $8.0 million, or 1.1%. 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 9.6% and 11.6%, respectively.
Offsetting the increased average selling prices was a reduction in processed
meat and fresh pork tonnage shipped of 8.8% and 6.4%, respectively.
The Company's processed meat operations sales volume decreased primarily
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 available market hogs and
the Company's decision to lower production when incremental costs exceed
incremental revenues. The increase in average selling prices primarily
reflects an increase of approximately 19.5% in the cost of live hogs, the
Company's primary raw material.
Cost of goods sold (including delivery costs) decreased by $7.7 million,
or 1.1%, mainly as the result of a reduction in processed meat and fresh pork
sales volume and increased processed meat and fresh pork plant operating
efficiencies. Partially offsetting these reduced costs was the increase in
cost of live hogs referred to above. As a percentage of net sales, costs of
goods sold decreased to 91.1% from 93.1%.
Selling expenses decreased $4.2 million, or 14.7% , 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 3.3%
from 3.9%, mainly due to the factors discussed above.
General and administrative expenses increased slightly by $.7 million
mainly due to general price and wage increases. As a percentage of net sales,
general and administrative expenses increased slightly to 3.0% from 2.9%.
Interest expense increased $3.0 million, or 44.3%. 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 benefit for income taxes decreased by $4.7 million, primarily due to
the decrease in pre-tax loss from operations of $13.8 million to a loss of $2.2
million from a loss of $16.0 million in the comparable prior year period,
resulting from the factors discussed above. The Company's effective tax
benefit rate decreased to (31.2%) from (33.8%).
Loss per share of common stock decreased by $1.58 per share to a net loss
of $.25 from a net loss of $1.83 per share, due to a reduction in losses
resulting from the factors discussed above.
The results for the forty weeks ended March 7, 1997 are not necessarily
indicative of the results to be expected for fiscal 1997.
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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 March 7,
1997, the Company had total lines of credit available under its amended
revolving credit agreement from four financial institutions aggregating $90.0
million, of which $15.1 million was unused. The Company's $20 million seasonal
line of credit agreement expired on January 31, 1997, and has not been
replaced. 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. (See item 5. below, relating to a subsequent
reduction in both the available credit limit and interest rate).
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. (Section 5. below, relating to the subsequent
reduction in the interest rate).
3. The Company has granted a first 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.
4. 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.
5. Under the amended agreements, the Company was obligated to pursue and
obtain by April 30, 1997, a minimum of $15 million in subordinated debt
financing. On March 25, 1997, the Company completed a public offering of
$17,250,000 of 9% Convertible Subordinated Debentures due 2007. The net
proceeds from the Debentures were used to reduce, on a pro-rata basis, the
outstanding balance of the revolving credit notes, and the private
placement notes, with a portion of the proceeds being held in escrow as
collateral on certain letters of credit. The subsequent payment under
the outstanding lines of credit resulted in a reduction to the amount of
lines available for credit from $90.0 million to $81.6 million. In
addition, the amended revolving credit and private placement note
agreements provide for a reduction in the interest rates, effective with
the payment to the applicable lenders of the net proceeds from the sale
of the convertible subordinated debentures. Under the revolving credit
agreement interest will now be at variable rates no higher than prime or
its equivalent. Under the private placement note agreements the interest
rates will be reduced one percentage point from the rates in effect at
March 7, 1997.
The Company anticipates capital expenditures of approximately $8 million,
primarily to upgrade various machinery and equipment with emphasis on projects
that will further streamline operations. Management believes that funds
provided from operations and borrowings under available lines of credit will
permit the Company to continue to finance its current operations and to further
develop its business in accordance with its operating strategies.
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on form 8-K for the period ending March 7,
1997.
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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 16, 1997 By: \\Louis Glazier
---------------------------
Louis Glazier
Executive Vice President of
Finance and Administration
Chief Financial Officer
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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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27 -- Financial Data Schedule