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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended May 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-6566
THORN APPLE VALLEY, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1964066
(State or other jurisdiction (I.R.S Employer Identification No.)
incorporation or organization)
26999 CENTRAL PARK BOULEVARD, SUITE 300,
SOUTHFIELD, MICHIGAN 48076
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 213-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
(Title of class)
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 (or such shorter period that Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES OF THE REGISTRANT AS OF SEPTEMBER 10, 1998, COMPUTED BY REFERENCE
TO THE NASDAQ NATIONAL MARKET CLOSING PRICE ON SUCH DATE, WAS $25,785,168.
THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF
SEPTEMBER 10, 1998 WAS 6,137,423.
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As filed with the Securities and Exchange Commission on September 14, 1998.
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Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
PART I
ITEM 1. BUSINESS
GENERAL
Thorn Apple Valley, Inc. (sometimes referred to hereinafter collectively
with its subsidiaries as the "Company") is a major producer of processed meat
and poultry products ("Processed Meats"). 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 engages in the
production and sale of bacon, hot dogs and lunch meats, hams, smoked sausages
and turkey products. The Company markets its products under premium and other
proprietary brand labels including "Thorn Apple Valley(R)", "Colonial(R)", "Corn
King(R)", "Wilson Certified(R)" and "Cavanaugh Lakeview Farms(R)", as well as
under private labels with major supermarket chains and other customers.
Principal customers of the Company include food wholesalers, supermarkets, food
service operations and other manufacturers located throughout the United States
and in selected international markets.
The Company's business strategy is to increase revenue and regain
profitability by (i) increasing the sales of the Company's higher margin premium
brand 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 production facilities, (iii) developing and marketing new
products, including products targeted to health-conscious consumers, and (iv)
increasing overall sales volume through additional marketing strategies with an
emphasis on sales to select international markets, including, for example,
Korea.
DISCONTINUED OPERATIONS
In May 1998, the Company formalized plans to exit its fresh pork business.
The Company closed its fresh pork facility in July 1998. The Company recorded a
significant after tax charge in the fourth quarter of $39.3 million related to
the closing of its fresh pork operations. Included in the gross charge is an
estimated after-tax loss from operations during the phase out period of
approximately $3.25 million. The Consolidated Financial Statements and related
notes for all years presented separately report the discontinued fresh pork
operations. See Note 13 of the Notes to the Consolidated Financial Statements
for additional information related to the discontinuance of the Company's fresh
pork operations.
PRODUCTS, OPERATIONS AND MARKETING
The Company is engaged in a single segment business with one principal
product category, processed meat and poultry products. The following table shows
for the fiscal periods indicated the net sales and approximate pounds of
products shipped for each of the past five years.
FISCAL FISCAL FISCAL FISCAL FISCAL
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS)
Net sales (in dollars).............................. $416.3 $415.4 $623.0 $598.0 $514.4
Products shipped (in lbs.).......................... 351.7 378.2 507.7 452.1 442.7
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 more 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 more convenient to use and are healthier than
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
existing product alternatives. The Company believes that opportunities exist to
extend its current product lines into related products, thereby leveraging its
current premium brand names. During fiscal 1998, the Company also initiated a
bold new marketing strategy to help increase sales by sponsoring a NASCAR racing
team for a period of three years. The NASCAR sponsorship is a multifaceted
program that provides many tie-in promotional opportunities.
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 consumer demand.
In order to accommodate the increased holiday sales, the Company typically
builds substantial inventories of hams in anticipation of its future holiday
business. Also, the Company's sales of skinless smoked sausages, hot dogs and
bacon products are generally higher during the summer months.
PRINCIPAL PRODUCTS PRODUCED
The Company's business involves 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. Shipments by category of these
products for the five most recent fiscal years were as follows:
Product Category
FISCAL FISCAL FISCAL FISCAL FISCAL
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(IN MILLIONS OF POUNDS)
Bacon.................................................... 100.7 111.3 123.1 110.3 114.3
Hot dogs and lunch meats................................. 72.2 71.1 141.9 117.1 130.8
Hams..................................................... 74.1 85.4 125.9 113.4 91.5
Smoked sausages.......................................... 61.3 64.3 65.2 59.4 59.0
Turkey products.......................................... 24.3 25.2 27.0 24.9 21.3
Other.................................................... 19.1 20.9 24.6 27.0 25.8
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Total............................................... 351.7 378.2 507.7 452.1 442.7
===== ===== ===== ===== =====
The Company's national sales organization, which has regional offices,
markets consumer packaged meat and poultry products through a direct sales force
and through a network of brokers. Price lists, product availability, marketing
programs and payment terms, however, are determined by the corporate office. The
Company's customer base is generally composed of wholesalers, wholesale clubs
and large supermarket chains.
The Thorn Apple Valley-Grand Rapids division of the Company ("Grand
Rapids"), which is located in Grand Rapids, Michigan, is engaged in the
production and sale of approximately 50 varieties of packaged meat products such
as hot dogs, lunch meats (such as bologna, salami and pickle loaf), corned beef
and smoked sausage, under brand names which include "Thorn Apple Valley(R),"
"Colonial(R)," "Wilson Certified(R)" and "Corn King(R)" and other controlled and
private label brands.
The Thorn Apple Valley-Deli & Smoked Meats division of the Company ("Smoked
Meats"), which is located in Detroit, Michigan, is primarily engaged in the
production and sale of premium sliced lunch meats, spiral sliced hams, cooked
hams, deli hams and specialty boneless hams. These products are sold to
supermarket chains under various brand names, including "Thorn Apple Valley(R),"
"Colonial(R)" and "Cavanaugh Lakeview Farms(R)" and other controlled and private
label brands.
The Thorn Apple Valley-Carolina division of the Company ("Carolina"), which
is located in Holly Ridge, North Carolina, produces bacon and related
by-products. These items are sold principally to
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
supermarket chains under brand names which include "Thorn Apple Valley(R),"
"Colonial(R)" and other controlled and private label brands.
The Thorn Apple Valley-Dixie division of the Company ("Dixie"), which is
located in Forrest City, Arkansas, is primarily engaged in the production of hot
dogs. The products are sold to supermarket chains and to international markets
under brand names which include "Wilson Certified(R)," "Corn King(R)" and
"Colonial(R)" and other controlled and private label brands.
The Thorn Apple Valley-Ponca City division of the Company ("Ponca City"),
which is located in Ponca City, Oklahoma, is primarily engaged in the production
of boneless and bone-in hams, premium, double glazed spiral sliced hams and
premium sliced lunch meats such as turkey ham, turkey breast and cooked ham. Its
products are sold to supermarket chains under brand names which include "Thorn
Apple Valley(R)," "Wilson Certified(R)," "Corn King(R)," "Cavanaugh Lakeview
Farms(R)" and "Colonial(R)" and other controlled and private label brands.
TRADEMARKS AND LICENSES
The Company owns or has the right to use over 80 various trademarks,
including those described above. The trademarks are valuable to the Company
because of the significant market advantage that name recognition provides in
the national and international retail markets served by the Company. Most of the
trademarks used by the Company are registered with the appropriate
administrative offices, and the Company intends to renew each such registration
as long as the related trademark is used with respect to a current line of
products.
DISTRIBUTION AND CUSTOMERS
During fiscal 1998 approximately 13.5% of the Company's products were
marketed in Michigan. This percentage was 14.7% and 12.3% for fiscal 1997 and
1996, respectively. The balance of the products were marketed in each of these
years primarily in 46 other states, Washington, D.C., Russia and to Pacific Rim
countries. Sales to customers in foreign countries during fiscal 1998 totaled
approximately $34,168,000. This total was $17,752,000 for fiscal 1997 and
approximately $7,241,000 for fiscal 1996.
On a regular basis, the Company sells its products to more than 500
customers. These customers consist primarily of wholesalers, wholesale clubs and
supermarket chains. For fiscal 1998, approximately 33% of the Company's sales
were made to its 10 largest customers, none of whom accounted for as much as 10%
of the Company's sales. The Company does not have any significant long-term
sales commitments.
In servicing its customers, the Company uses two distribution centers,
strategically located in Edwardsville, Kansas and Detroit, Michigan. The
distribution centers' geographic locations allow the Company greater flexibility
in providing the highest level of service in meeting the needs of the Company's
customers. In addition to increasing the level of customer service, the
distribution centers have allowed the Company to increase its efficiencies,
thereby reducing overall distribution costs.
The Company operates a fleet of refrigerated tractor-trailers and
additional trailers which are used for transporting a portion of its products to
customers and for transporting raw materials to the Company's production
facilities. The Company also engages the services of contract carriers,
including Coast Refrigerated Trucking Co., Inc. and National Food Express, Inc.,
both wholly-owned subsidiaries of the Company. The Company's products are
shipped to supermarket chains, wholesale clubs and wholesalers. In addition to
its own delivery equipment, the Company utilizes non-affiliated carriers or has
customers make their own arrangements for delivery.
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
RAW MATERIALS
The Company's primary raw material is pork. The Company also purchases
poultry, beef and other meats required in its manufacturing processes and other
materials such as seasonings, smoking and curing agents, sausage casings and
packing materials from a number of readily-available sources.
COMPETITION
The meat packing and manufacturing industry is highly competitive. The
Company competes with large national, regional and local companies, some of
which have substantially greater sales volume, brand name recognition and
financial resources than the Company. Competition is encountered both in the
procurement of raw materials and in the sale of products. The Company's products
also compete with other meat, fish and poultry products. Competition exists
mainly with respect to product quality, name recognition, price and service.
EMPLOYEES
The Company has approximately 3,100 employees, approximately 2,300 of whom
are engaged in the production of the processed meat and poultry products, and
approximately 800 of whom are employed in administration, sales or
transportation.
The majority of the Company's production workers are employed under five
union contracts. These contracts are generally for a period of two to four years
and have various expiration dates through the fourth quarter of fiscal 2002. The
Company is presently negotiating with one of its unions whose contract expired
on July 3, 1998. The union is currently working under a short-term contract
extension. The Company has historically maintained good labor relations. The
unexpired portions of the existing agreements contain no significant labor cost
increases.
REGULATION
Like other participants in the meat and poultry processing industry, the
Company is subject to various laws and regulations relating to the construction
and maintenance of facilities, production standards and pollution control
administered by federal, state and other government entities, including the
Environmental Protection Agency and corresponding state agencies such as the
Michigan Department of Natural Resources, the United States Department of
Agriculture, and the Occupational Safety and Health Administration. All of the
Company's existing processed meat and poultry products plants are federally
inspected by the United States Department of Agriculture under the Federal Meat
Inspection Act. The Company believes that it is in compliance with all health,
environmental and other laws and regulations in all material respects and that
continued compliance with existing standards will not have a material effect on
the Company's results of operations or financial condition.
SUPPLY AGREEMENT
In September 1998, the Company entered into a 5 year agreement with one of
the largest slaughterers of hogs and cattle in the United States. Under the
terms of the agreement, the Company has agreed to purchase at least 80% of the
Company's total requirements of beef and pork for use in its processing
operations.
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
ITEM 2. PROPERTIES
The Company's principal plants, distribution centers and corporate
headquarters, all of which are owned by the Company (unless otherwise
indicated), are located as follows:
APPROXIMATE
LAND AREA FLOOR SPACE
LOCATION OPERATION IN ACRES (SQ. FT.)
-------- --------- --------- -----------
Detroit, Michigan(4) Hog slaughtering and boning 3.2 218,000
operations
Ponca City, Oklahoma Producer of boneless and bone-in 42.0 171,000
hams, premium double-glazed spiral
sliced hams and premium sliced lunch
meats
Detroit, Michigan Producer of premium sliced lunch 4.8 150,000
meats, spiral sliced hams, cooked
hams, deli hams and specialty
boneless hams
Holly Ridge, North Carolina Producer of bacon products 179.0 150,000
Grand Rapids, Michigan Producer of hot dogs, lunch meats, 18.5 135,000
corned beef and smoked sausage
Forrest City, Arkansas Producer of hot dogs 11.3 70,000
Edwardsville, Kansas(1) Distribution center -- 60,000
Detroit, Michigan(1)(2) Distribution center -- 50,000
Walker, Michigan Poultry boning and manufacture of 27.0 45,000
pork sausage and corned beef products
Southfield, Michigan(3) Corporate headquarters -- 34,000
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(1) The Company leases warehouse space in these facilities.
(2) This facility is leased from a related party.
(3) The Company leases this office space.
(4) The Company closed this facility in July 1998. See Item 1 -- Discontinued
Operations.
In addition to the Company's plants, the Company owns and leases various
buildings in Michigan and North Carolina. These buildings are used for
maintenance, storage, certain manufacturing, distribution and other ancillary
services and truck garages.
The land on which each of these properties is located (excluding the leased
properties) is owned by the Company. The properties described above were subject
to mortgages collateralizing outstanding indebtedness in the aggregate amount of
approximately $127.1 million as of May 29, 1998. As of the date of this Annual
Report on Form 10-K, substantially all of the Company's assets are subject to
liens. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition."
The Company believes its plants and equipment are in good repair and
suitable for the present operation of its business. The production facilities of
the plants are being utilized on either a one-shift or two-shift basis.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various ordinary or routine litigation
incidental to its business, none of which, in the opinion of management, is
expected to have a material adverse effect on the Company's financial position.
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Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
As of September 9, 1998 there were 493 shareholders of record of the
Company.
The shares of the Company's Common Stock are traded in the over-the-counter
market and their price is quoted on the Nasdaq National Market under the symbol
"TAVI." The table below sets forth the range of the highest and the lowest sales
prices and the cash dividends paid for the past two fiscal years.
In October 1995, the Company's Board of Directors discontinued the payment
of dividends on the Company's Common Stock in order to conserve cash for future
operations. Since such date, the Company entered into agreements with various
lenders which restrict the Company's ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Financial Condition" below. The Company has no current plans of
paying dividends on its Common Stock.
1998 1997
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SALES PRICE SALES PRICE
FISCAL ---------------- ----------------
QUARTER HIGH LOW HIGH LOW
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First..................................................... $19.75 $16.50 $14.25 $ 8.75
Second.................................................... $18.00 $13.62 $15.75 $11.31
Third..................................................... $18.62 $10.00 $16.75 $13.12
Fourth.................................................... $19.75 $13.50 $19.75 $12.25
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED(1)(2)
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MAY 27, 1994 MAY 26, 1995 MAY 31, 1996 MAY 30, 1997 MAY 29, 1998
------------ ------------ ------------ ------------ ------------
Net sales................ $454,508,694 $446,709,607 $628,069,680 $602,207,303 $519,995,976
Income (loss) from
continuing
operations............. $ 9,528,596 $ 3,633,414 $(15,067,174) $ 1,395,487 $ (2,514,985)
Income (loss) from
discontinued
operations............. $ 4,554,777 $ 1,621,472 $ (6,640,570) $ (4,561,728) $ (6,631,791)
Basic earnings per share:
Income (loss) from
continuing
operations.......... $1.62 $.63 $(2.61) $0.23 $(0.41)
Fully diluted earnings
per share:
Income (loss) from
continuing
operations.......... $1.60 $.62 $(2.61) $0.23 $(0.41)
Total assets............. $185,442,085 $204,296,365 $327,140,201 $302,786,457 $263,913,004
Total long-term debt
(excluding current
portion)............... $ 27,936,985 $ 35,464,669 $159,808,923 $150,128,541 $148,249,545
Cash dividends per
share.................. $.27 $.28 $.07 $-- $--
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(1) The Company's fiscal year consists of the 52- or 53-week period ending on
the last Friday in May of each year. Fiscal 1996 was a 53-week fiscal year
and all other years presented in this table were 52-week fiscal years.
(2) Net sales for all fiscal years presented have been restated to reflect the
discontinuance of the fresh pork operations.
For additional discussion of the differences in operating results in fiscal
1998 as compared to fiscal 1997, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
During the fourth quarter of fiscal 1998, the Company formalized a plan to
exit the fresh pork business. The Company announced its plans in June 1998 and
closed its fresh pork facility in July 1998. The Company's current and prior
year comparative Results of Operations exclude the results of the discontinued
fresh pork operations. The Company recorded in the fourth quarter an after-tax
charge related to the loss on disposal of the fresh pork operations of $39.3
million (See Note 13 of the Notes to the Consolidated Financial Statements for
additional information related to the discontinued operations.).
The following discussion analyzes material changes in the financial
information of the Company on a year to year basis.
RESULTS OF OPERATION
Fiscal 1998 as Compared to Fiscal 1997
(52 week fiscal year compared to 52 week fiscal year)
The Company's net loss from continuing operations for the fiscal year ended
May 29, 1998 was approximately $2.5 million compared with net income of $1.4
million in 1997. The fourth-quarter and year-end
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Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
results included an after-tax restructuring charge of $2.4 million (See Note 12
of the Notes to the Consolidated Financial Statements for additional information
related to the restructuring charge.) The LIFO (last in, first out) method of
valuing inventories had the effect after taxes of reducing net loss by
approximately $5.8 million and increasing net income by approximately $3.2
million in fiscal years 1998 and 1997, respectively.
The operating loss was primarily the result of lower margins due to a shift
in product mix resulting in a higher percentage of sales tonnage in lower margin
commodity type products. In addition to a shift in product mix, margins were
negatively impacted by a decrease in sales tonnage and increased competitive
pressures.
Net sales for fiscal 1998 decreased $82.2 million or 13.7% to $520.0
million from $602.2 million in the comparable year. Lower net sales dollars
resulted from lower average selling prices of 12.2% and a reduction in sales
volume of 2.1%. The lower average selling prices resulted from the shift in
product mix, lower average raw material costs as discussed below and increased
competitive pressures.
Cost of goods (including delivery costs) decreased $71.4 million or 13.7%
in fiscal 1998, as compared to fiscal 1997, primarily as a result of sharply
lower raw material costs. The largest component of raw materials during fiscal
1998 was pork. As a percentage of net sales, cost of goods remained unchanged at
86.6%.
Selling expenses were relatively unchanged from the prior year. Selling
expenses as a percentage of net sales increased to 5.4% from 4.7% from the prior
year primarily as a result of lower sales dollars.
General and administrative expenses decreased $2.8 million or 12.2% as
compared to fiscal 1997. The decrease is primarily the result of a cost
reduction program put in place during the third quarter. As a percentage of net
sales, general and administrative expenses remained unchanged at 3.9%
Net interest costs remained relatively unchanged from fiscal 1997. As a
percentage of net sales, net interest costs increased slightly to 1.8% from 1.6%
in the prior year.
The benefit for income taxes resulted from a loss from continuing
operations of $4.5 million as compared with income from operations of $1.7
million in fiscal 1997.
Additionally, the Company recorded in the fourth quarter an extraordinary
after-tax charge of $1.8 million primarily related to a loss on early
extinguishment of debt related to a loan restructuring (See Note 14 of the Notes
to the Consolidated Financial Statements for additional information related to
the extraordinary charge.).
The loss per share of common stock from continuing operations before
extraordinary charge on a basic and fully diluted basis increased to $.41 per
share compared to income of $.23 per share in the comparable year-ago period,
due to decreased profitability resulting from the factors discussed above.
Fiscal 1997 as Compared to Fiscal 1996
(52 week fiscal year compared to 53 week fiscal year)
The Company's net income from continuing operations for the fiscal year
ended May 30, 1997 was $1.4 million compared with a net loss of $15.1 million in
1996. The fourth-quarter and year-end net results include an after-tax
restructuring charge of $3.3 million. The restructuring charge covers an
estimate of future costs associated with the suspension of a joint production
agreement at a processing facility in Council Bluffs, Iowa; see Note 12 of the
Notes to the Consolidated Financial Statements for additional information
related to the restructuring charge. The LIFO (last in, first out) method of
valuing inventories had the effect after taxes of increasing earnings by
approximately $3.2 million compared with an increase to net loss of $8.9 million
in fiscal 1996. The improvement in results is primarily attributable to higher
processed meat operating margins.
Operating profits improved significantly as a result of higher margins,
improved product mix, lower selling expenses and improved plant operating
efficiencies. Offsetting higher margins was a reduction in sales tonnage
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attributable to the Company's planned elimination of lower-margin product lines
and its focus on maintaining reasonable profit margins on high-volume commodity
products.
Net sales for fiscal 1997 decreased $25.9 million or 4.1% to $602.2 million
from $628.1 million in the prior year. Lower net sales resulted form a decrease
in sales volume of 11% offset by increases in average selling prices of 7.9%.
The increase in average selling prices was primarily attributable to the 15%
increase in the cost of pork, the Company's primary raw material.
Cost of goods sold (including delivery costs) decreased $56.8 million or
9.8% in fiscal 1997, as compared to fiscal 1996, primarily as a result of lower
sales volume. As a percentage of net sales, cost of goods sold decreased to
86.6% in fiscal year 1997 from 92.1% in fiscal 1996, principally as a result of
improved operating efficiencies. Operationally, the Company's facilities
continue to run very efficiently on a direct-cost basis.
Selling expenses decreased $5.8 million or 17.2% from the prior year
period, primarily 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 decreased to 4.7% from 5.4%.
General and administrative expenses remained relatively unchanged from the
prior year. As a percentage of net sales, general and administrative expenses
increased to 3.9% from 3.7%.
Net interest costs increased $2.3 million, or 32.3%. The increase is
attributable to an increase in interest expense related to increased borrowings
under the Company's revolving credit agreement, as a result of the Company's
fiscal 1996 operating losses and capital expenditures related to the Ponca City
facility construction and increased interest rates associated with the Company's
restructuring of its long-term revolving credit and private placement note
agreements in September 1996.
The provision for income taxes increased $9.5 million, primarily due to the
increase in pre-tax income from continuing operations of $25.9 million from a
loss of $24.3 million to income of $1.7 million in fiscal year 1997 resulting
from the factors discussed above. The Company's effective tax provision
(benefit) rate increased to 15.8% from (37.9%).
Earnings per share of common stock from continuing operations increased
$2.84 to income of $.23 from a loss of $2.61 per share for the prior year
period. The increase in income resulted from the factors discussed above.
FINANCIAL CONDITION
The Company's business is characterized by high unit sales volume and rapid
turnover of inventories and accounts receivable. The demand for seasonal
borrowings usually peaks in early December when ham inventories and accounts
receivable are at their highest levels. These borrowings are generally repaid in
January when the accounts receivable generated by the sales of these hams are
collected.
The Company has historically maintained lines of credit in excess of the
cash needs of its business. At May 29, 1998, the Company had a revolving credit
agreement with a consortium of participating financial institutions whereby it
could borrow in the aggregate up to $85 million, subject to a borrowing base
limitation measured by eligible inventory and accounts receivable of the
Company, with an additional $10 million for meeting seasonal demands of which
$48.6 million was drawn upon and $8.2 million was used to support letters of
credit. At May 29, 1998, the Company also had a term loan in place with the same
consortium of financial institutions with principal amount outstanding of $75
million. See Note 4 of the Notes to the Consolidated Financial Statements for
information related to the applicable interest rates under the revolving credit
agreement and the term loan at May 29, 1998.
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At May 29, 1998, the Company had approximately $3 million in cash. Cash
provided by operations during the fifty-two weeks ended May 29, 1998 was
approximately $8.5 million. Cash available at the beginning of the year plus
cash generated from operations and acquired from financing and investing
activities was used principally to pay down borrowings under the revolving
credit agreement and other long-term debt of $76.8 million and to fund capital
expenditures of $10.2 million. The Company's net working capital decreased to
$40.0 million at May 29, 1998 from $56.2 million at May 30, 1997.
The Company's debt is collateralized by substantially all of the Company's
assets. In addition, the various loan agreements contain financial covenants
with respect to consolidated net worth and interest coverage ratio (as defined
therein). Furthermore, the agreements limit borrowings, capital expenditures and
investments, and do not allow the payment of cash dividends or repurchase of the
Company's common stock.
On May 29, 1998, the Company was not in compliance with certain financial
covenants relating to its loan and security agreement (the "loan agreement")
with a consortium of lenders (the "lender group"). On September 10, 1998, the
lender group waived the Company's past non-compliance with such financial
covenants and amended certain covenants and other terms and conditions of the
loan agreement. The following is a description of the significant changes to the
loan agreement as a result of the amendment:
1. The maximum amount available under the revolving loan was reduced
by $15 million to $70 million, with an additional $10 million
available to meet seasonal demands.
2. The Company made a principal payment of $5 million on the term
loan, reducing the principal balance outstanding to $70 million.
3. The maturity date under the loan agreement was changed from April
15, 2001 to August 31, 1999.
4. The interest rate on the revolving loan will increase by .75
percentage points, so that the Company may borrow either at the
prime rate plus .75 percent or LIBOR plus 3 percent at the option
of the Company, as provided in the loan agreement.
5. The interest rate on the term loan will increase by .5 percentage
points, so that the Company may borrow either at the prime rate
plus 1 percent or LIBOR plus 3.25 percent at the option of the
Company, as provided in the loan agreement.
6. The Company will make payments of certain fees to the lender group
either in cash or by delivery of warrants to purchase the Company's
common stock or a combination thereof, at the Company's option, as
follows:
PAYMENT DATE AMOUNT EARNED DATE
------------ ------ -----------
4/30/99............................................. $ 500,000 6/30/99
6/30/99............................................. $1,000,000 8/31/99
8/31/99............................................. $1,500,000 8/31/99
If the Company elects to make any portion of the payment through issuance
of warrants to the lender group, the number of shares of common stock of the
Company subject to the warrants will be determined by dividing the amount of the
payment to be paid with warrants by a $7.50 per share conversion price. In
total, warrants for up to 400,000 shares of common stock may be issued by the
Company to make such payments.
The Company exports a significant portion of its hot dog production to
Russia. As a result of recent economic and political instability, including the
rapid devaluation of its currency, the Company's continued ability to transact
business in this region is uncertain. As of August 28, 1998, the Company had
inventory and accounts receivable of approximately $13 million related to the
production and sale of Russian products. At this time, the Company is unable to
predict if it will sustain losses related to these assets.
10
12
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
The Company anticipates net capital expenditures during fiscal 1999 of
approximately $5.0 million, which will be used to upgrade various machinery and
equipment with continued emphasis on projects that will further streamline
operations, for increased efficiencies and productivity gains. 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.
YEAR 2000
The Company has initiated a Year 2000 compliance program. The compliance
program has established a process for evaluating and managing the risks and
costs associated with this issue. The Company has dedicated internal resources
to address the Year-2000 issue. In fiscal 1996, the Company completed a two-
year project that re-engineered some key accounting and logistics systems all of
which were made Year 2000 compliant. The Company expects to have all remaining
critical systems Year 2000 compliant. As a result of the completion of the
fiscal 1996 project, the Company does not foresee any risks or costs related to
the Year 2000 compliance issue that would have a material adverse effect on the
Company.
OTHER
The Company believes that the impact of inflation and changing prices would
not significantly affect the Company's net income reported on a historical cost
basis. This belief is based on the following:
1. Substantially all of the Company's inventories are stated on a LIFO
basis.
2. Any increase in depreciation expense as a result of increased cost to
replace property, plant and equipment is generally offset by
productivity gains and cost savings due to improved efficiency resulting
from technological improvements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(Pages immediately following signature page)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
13
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The directors of the Company are as follows:
CURRENT
DIRECTOR TERM
NAME AGE POSITION HELD WITH COMPANY SINCE EXPIRES
---- --- -------------------------- -------- -------
Henry S Dorfman...................... 76 Chairman of the Board 1959 1998
Joel Dorfman......................... 47 President, Chief Executive Officer and 1978 1998
Director
Moniek Milberger..................... 68 Director 1959 1999
John C. Canepa....................... 68 Director 1983 1999
Louis Glazier........................ 49 Executive Vice President Finance and 1988 2000
Administration and Director
Burton D. Farbman.................... 55 Director 1988 2000
Seymour Roberts...................... 64 Director 1992 2000
The executive officers of the Company who are not also directors are:
OFFICER
NAME AGE POSITION HELD WITH COMPANY SINCE
---- --- -------------------------- -------
Keith Jahnke......................... 44 Executive Vice President Sales 1987
Edward Boan.......................... 48 Executive Vice President Pork and Labor 1987
Relations
The following is a brief account of the business experience of each of the
above-named persons during the past five years:
Henry S Dorfman, a founder of the Company, has served as Chairman of the
Board since 1959. Mr. Dorfman also served as Chief Executive Officer of the
Company from 1959 to 1994.
Joel Dorfman has served as President of the Company since 1985 and Chief
Executive Officer of the Company since 1995. Mr. Dorfman has also been a
director of the Company since 1978. Mr. Dorfman also served as Chief Operating
Officer of the Company from 1985 to 1994. Joel Dorfman is the son of Henry S
Dorfman.
Moniek Milberger has been a Certified Public Accountant in private practice
since 1960 and serves as a consultant to the Company.
John C. Canepa has been a consulting principal of Crow Chizek, a certified
public accounting and consulting firm, since November, 1995. From 1970 to
November 1995, Mr. Canepa served as President and Chief Executive Officer of Old
Kent Financial Corporation and Old Kent Bank and Trust Company, Grand Rapids,
Michigan.
Louis Glazier has been Executive Vice President Finance and Administration
of the Company since 1988. Mr. Glazier has also been a director of the Company
since 1988.
Burton D. Farbman has been President of The Farbman Group, a real estate
development and management company, since 1987, and prior to that was President
of the Farbman Group in 1977.
12
14
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
Seymour Roberts has been a Senior Vice President and Senior Partner of N.W.
Ayer & Partners, an advertising agency, since February, 1992. From 1973 to 1991,
Mr. Roberts served as Executive Vice President and General Manager of W.B. Doner
& Company, an advertising agency.
Keith Jahnke has been Executive Vice President Sales since May 1998. Mr.
Jahnke served as Executive Vice President Processed Meats from May 1996 to May
1998. Mr. Jahnke also served as Executive Vice President Sales and Marketing for
the Company from 1987 to May 1996.
Edward Boan became Vice President of Human Resources in 1985. In 1987, he
also became General Manager and Vice President Fresh Pork. In 1991, Mr. Boan
became Executive Vice President Pork and Human Resources and, in 1998, he became
Executive Vice President Pork and Labor Relations.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Under the Company's standard arrangements, each director who is not an
officer of the Company receives an annual director's fee in the amount of
$8,750. In addition, during fiscal 1998, Mr. Milberger received $21,800 as
compensation for consulting services rendered to the Company.
COMPENSATION OF EXECUTIVES
The following tables sets forth information with respect to the
compensation paid or accrued by the Company during the last three years ended
May 29, 1998, to or on behalf of each executive officer of the Company including
the Chief Executive Officer (the "Named Officers"), in all capacities in which
they served:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
------------------------------------ COMPENSATION
FISCAL OTHER ANNUAL AWARDS -- ALL OTHER
YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
------ ------ ----- --------------- ------------ ---------------
Joel Dorfman............... 1998 $441,538 21,938 50,000 25,355(3)
President and 1997 486,100 -- 20,003 50,000 31,352(3)
Chief Executive Officer 1996 600,000 -- 12,387 40,000 25,361(3)
Henry S Dorfman............ 1998 -0- 24,270 -- 6,524(3)
Chairman of the Board 1997 207,058 -- 52,943 -- 7,178(3)
1996 500,000 -- 119,262 -- 7,178(3)
Louis Glazier.............. 1998 240,385 8,260 12,500 1,000
Executive Vice President 1997 250,000(3) -- 22,415 12,500 1,000
Finance and
Administration 1996 250,000 -- 13,103 10,000 2,261(3)
Keith Jahnke............... 1998 240,385 2,675 12,500 1,000
Executive Vice President 1997 250,000 -- 2,675 12,500 1,000
Sales 1996 250,000 -- 2,675 10,000 1,000
Edward Boan................ 1998 240,385 2,155 12,500 1,000
Executive Vice President 1997 250,000 -- 2,150 12,500 1,000
Pork and Labor Relations 1996 250,000 -- 1,975 10,000 1,000
- - -------------------------
(1) Includes amounts relating to use of company-owned automobiles and
reimbursement of business, entertainment and other expenses.
13
15
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
(2) Except as noted, consists only of the Company's 401(k) contributions.
(3) Includes premiums paid by the Company for Joel Dorfman, Henry S Dorfman and
Louis Glazier in connection with split dollar life insurance policies
maintained by the Company on their lives in policy amounts (as of May 31,
1998) of $1,938,496, $178,000 and $100,000, respectively. Pursuant to this
arrangement, the Company pays the annual premiums on such policies, each of
which is owned by the spouse of the insured, and the Company has received a
collateral assignment of the policies and will recover the premiums
advanced, without interest, upon the death or termination of employment of
each insured. The aggregate premiums paid (and to be recovered by the
Company) for these policies on the lives of Joel Dorfman, Henry S Dorfman
and Louis Glazier as of May 31, 1998 were $387,330, $221,654 and $12,455,
respectively.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended May 29, 1998 to each of the
executive officers of the Company named in the Summary Compensation Table above:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE
---------------------------------------------------------- AT ASSUMED ANNUAL
PERCENTAGE OF RATES OF STOCK PRICE
TOTAL OPTIONS APPRECIATION AT END OF
GRANTED TO PER SHARE TEN-YEAR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ------- ------------- --------- ---------- -- ---
Joel Dorfman.................. 50,000 20.49% 15.813 February 14, 2008 $497,235 $1,260,090
Henry S Dorfman............... -- -- -- --
Louis Glazier................. 12,500 5.12% 15.813 February 14, 2008 124,309 315,023
Keith Jahnke.................. 12,500 5.12% 15.813 February 14, 2008 124,309 315,023
Edward Boan................... 12,500 5.12% 15.813 February 14, 2008 124,309 315,023
- - -------------------------
(1) Each Option granted in fiscal 1998 is exercisable immediately.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended May 29, 1998, Joel Dorfman, John C. Canepa,
Burton D. Farbman, Moniek Milberger and Seymour Roberts served as members of the
Company's Compensation Committee. Joel Dorfman has been President of the Company
since March, 1985 and Chief Executive Officer since July, 1995.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General. The Compensation Committee's overall compensation policy
applicable to the Company's executive officers is to provide a compensation
program that is intended to attract and retain qualified executives for the
Company and to provide them with incentives to achieve Company goals and
increase shareholder value. The Compensation Committee implements this policy
through establishing salaries and bonuses. The Compensation Committee's current
policy is not to provide significant pension or other retirement benefits for
the Company's employees.
Salaries. The Compensation Committee's policy is to provide salaries that
are generally similar to those of similar executive officers in similar
companies. The Compensation Committee determines comparable salaries through
discussions with candidates for such positions, Company research and the
research of independent consultants concerning the salaries paid by the
Company's competitors.
14
16
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
Bonuses. Messrs. Henry S Dorfman, Joel Dorfman, Glazier, Jahnke and Boan
are eligible to receive cash bonuses pursuant to the Company's Cash Bonus Plan,
which was approved by the shareholders at the 1994 Annual Meeting, and which is
administered by the Executive Compensation Committee. The Company's bonus
program (the "Executive Bonus Program") permits other executive officers, and
certain other participating employees, as selected by the Compensation Committee
in its sole discretion, to earn annual cash bonus awards. The Compensation
Committee's policy is to provide a major portion of each executive officer's
total compensation in the form of such bonuses to provide them with incentives
to achieve the Company's financial and operational goals and increase
shareholder value. Bonuses are generally determined as a percentage of the
Company's pre-tax income in excess of predetermined target levels which vary
from year to year as established by the Compensation Committee at the beginning
of each fiscal year. As a result, the compensation of the Company's executive
officers is made dependent on the Company's overall performance. Such bonuses
are also intended to identify and give priority to the Company's goals by tying
compensation to the Company's business plans. In addition to the foregoing, for
employees who are not covered by the Company's Cash Bonus Plan, the Compensation
Committee takes into account the participant's position, salary level and
individual contributions to the Company in determining a particular bonus award.
Other participants in the Executive Bonus Program are selected from among those
employees of the Company who the Compensation Committee believes have the
capacity to contribute in a substantial way to the successful performance of the
Company. Bonuses are paid following the end of the fiscal year for which the
bonus is earned. None of the Company's executive officers received a cash bonus
in fiscal 1998.
Stock Options. Stock options are awarded by the Stock Option Committee of
the Board of Directors. The Stock Option Committee's policy is to award stock
options to the Company's officers in amounts reflecting the participant's
position and ability to influence the Company's overall performance. Options are
intended to provide participants with an increased incentive to make
contributions to the long-term performance of growth of the Company, to join the
interests of participants with the interests of shareholders of the Company and
to attract and retain qualified employees. The Stock Option Committee's policy
has been to grant options with a term of ten-years to provide a long-term
incentive and to fix the exercise price of the options at the fair market values
of the underlying shares on the date of grant. As a result, such options will
only have value if the price of the underlying shares increases.
Fiscal 1998 Compensation Decisions Regarding Joel Dorfman. In accordance
with the Company's Cash Bonus Plan, the Executive Compensation Committee did not
approve a bonus for Joel Dorfman for fiscal 1998. Joel Dorfman did not
participate in the approval of his own compensation, but did participate in
discussion of the Company's performance for fiscal 1998.
By the Compensation Committee
JOEL DORFMAN
JOHN C. CANEPA
BARTON D. FARBMAN
MONIEK MILBERGER
SEYMOUR ROBERTS
15
17
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG THORN APPLE VALLEY, INC.,
MEAT PACKING INDEX AND NASDAQ MARKET INDEX
MEASUREMENT PERIOD THORN APPLE INDUSTRY NASDAQ
(FISCAL YEAR COVERED) VALLEY, INC. INDEX MARKET INDEX
1993 100 100 100
1994 126.63 117.68 109.66
1995 91.83 141.79 120.03
1996 71.21 178.53 169.42
1997 89.95 235.18 190.08
1998 81.21 237.34 241.34
- - -------------------------
Assumes $100 invested on May 28, 1993
Assumes dividend reinvested
Fiscal year ending May 29, 1998
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF SECURITIES
As of September 10, 1998, Henry S Dorfman was the beneficial owner of
2,420,642 shares (39.4%) of the Company's Common Stock. Included in the shares
beneficially owned by Henry S Dorfman are (a) 1,700,806 shares of the Company's
Common Stock held by Henry S Dorfman as trustee under charitable remainder
trusts for the benefit of Henry S Dorfman's children, which shares Henry S
Dorfman has the power to vote, and (b) 55,000 shares of the Company's Common
Stock held by the Henry S Dorfman and Mala Dorfman Foundation, which Henry S
Dorfman has the power to vote. Also included in the shares beneficially owned by
Henry S Dorfman are 286,660 shares of the Company's Common Stock that are
subject to a Shareholder Agreement, dated as of August 1, 1988 (the "Shareholder
Agreement"), pursuant to which Henry S Dorfman has the sole power to vote such
shares; such shares are owned by Joel Dorfman, Henry S Dorfman's son.
As of September 10, 1998, Joel Dorfman was the beneficial owner of 638,360
shares (9.8%) of the Company's Common Stock, of which Henry S Dorfman has the
power to vote 286,660 shares. In addition, included in the total number of
shares beneficially owned by Joel Dorfman as of September 10, 1998 are 351,250
shares which Joel Dorfman has the right to acquire within 60 days of such date
pursuant to the Company's 1982 Stock Option Plan, the Company's 1990 Employee
Stock Option Plan and the Company's 1996 Stock Option Plan (collectively
referred to as the "Company's Stock Option Plans") and 450 shares held
16
18
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
in custodial accounts for the benefit of Joel Dorfman's sons. As of September
10, 1998, Henry S Dorfman, together with members of his family, directly or
indirectly beneficially owned 2,771,892 shares (42.7%) of the Company's
outstanding Common Stock. The address of Henry S Dorfman and Joel Dorfman is
26999 Central Park Boulevard, Suite 300, Southfield, Michigan 48076.
As of September 10, 1998, David A. Rocker, a registered investment advisor,
beneficially owned 596,600 shares (9.7%) of the Company's Common Stock, all of
which shares are held in investment advisory accounts managed by Mr. Rocker. Mr.
Rocker has sole voting and investment power over all such shares. The address of
Mr. Rocker is 45 Rockefeller Plaza, New York, New York 10111.
As of September 10, 1998, Heartland Advisors, Inc. ("Heartland"), a
registered investment advisor, beneficially owned 533,595 shares (8.7%) of the
Company's Common Stock, all of which shares are held in investment advisory
accounts of Heartland. Heartland has sole voting and/or investment power over
such shares. The address of Heartland is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202.
As of September 10, 1998, DDJ Capital Management, LLC ("DDJ"), a registered
investment advisor, may be deemed to beneficially own 588,340 shares (9.6%) of
the Company's Common Stock, all of which are held in portfolios of clients
advised by DDJ. In particular, DDJ Overseas Corp., a company advised by and
affiliated with DDJ, owns 515,860 shares of Common Stock, The Copernicus Fund,
L.P., a limited partnership advised by and affiliated with DDJ, owns 50,330
shares of Common Stock, and Kepler Overseas Corp., a company advised by DDJ,
owns 22,150 shares of Common Stock. DDJ Copernicus, an affiliate of DDJ, is the
general partner of The Copernicus Fund, L.P., and may be deemed to beneficially
own the shares of Common Stock owned by The Copernicus Fund, L.P. DDJ Galileo
Corp., an affiliate of DDJ, is the general partner of DDJ Overseas Corp., and
may be deemed to beneficially own the shares of Common Stock owned by DDJ
Overseas Corp. The address of each of DDJ, DDJ Galileo Corp., The Copernicus
Fund, L.P., and DDJ Copernicus, LLC is 141 Linden Street, Suite 4, Wellesly,
Massachusetts 02181. The address of each of DDJ Overseas Corp. and Kepler
Overseas Corp. is c/o Goldman Sachs (Cayman), Harbour Centre, George Town, Post
Office Box 896, Grand Cayman Islands.
As of September 10, 1998, Capital Guardian Trust company ("Capital
Guardian"), a bank as defined in Section 3(a)6 of the Exchange Act, beneficially
owned 405,000 shares (6.6%) of the Company's Common Stock. Capital Guardian a
wholly-owned subsidiary of Capital Group Companies, Inc., serves as an
investment advisor to the various investment accounts in which are held shares
of the Company's Common Stock. The address of Capital Guardian is 333 South Hope
Street, Los Angeles, California 90071.
As of September 10, 1998, Dimensional Fund Advisors Inc. ("Dimensional"), a
registered investment advisor, may be deemed to beneficially own 336,940 shares
(5.5%) of the Company's Common Stock, all of which shares were held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, for all of which
Dimensional serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares. The address of Dimensional is 1299 Ocean Avenue,
11th Floor, Santa Monica, California 90401.
17
19
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
The following table sets forth the stock ownership of the Company's
directors and executive officers as of September 10, 1998.
NUMBER OF PERCENT
NAME SHARES(1) OF CLASS
---- --------- --------
Henry S Dorfman............................................. 2,420,642(1) 39.4
Joel Dorfman................................................ 638,360(1) 9.8
Moniek Milberger............................................ 650 *
John C. Canepa.............................................. 200 *
Louis Glazier............................................... 81,721(2) 1.3
Burton D. Farbman........................................... 1,375 *
Seymour Roberts............................................. 300 *
Keith Jahnke................................................ 70,650(3) 1.1
Edward Boan................................................. 63,037(4) 1.0
All directors and executive officers as a group (9
persons).................................................. 2,989,825(5) 44.7
- - -------------------------
* Less than 1.0%
(1) See page 16 for a description of Henry S Dorfman's and Joel Dorfman's share
holdings.
(2) Louis Glazier owns outright and has the sole voting and investment power for
11,414 shares. In addition, within 60 days of September 10, 1998, Mr.
Glazier has the right to acquire 70,000 shares pursuant to the Company's
Stock Option Plans. Also included in the number listed in the table above
are 307 shares owned by one of Mr. Glazier's daughters.
(3) Keith Jahnke owns outright and has the sole voting and investment power for
650 shares. In addition, within 60 days of September 10, 1998, Keith Jahnke
has the right to acquire 70,000 shares pursuant to the Company's Stock
Option Plans.
(4) Mr. Boan owns outright and has sole voting and investment power for 537
shares. In addition, within 60 days of September 10, 1998, Edward Boan has
the right to acquire 62,500 shares pursuant to the Company's Stock Option
Plans.
(5) Total includes 523,750 shares which such persons have the right to acquire
within 60 days of September 10, 1998 pursuant to the Company's Stock Option
Plans.
Management does not know of any other person who beneficially owned, as of
September 10, 1998, more than 5% of the Company's Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Mr. Milberger, a director, received $21,800 as compensation for consulting
services rendered to the Company.
The Company uses a freezer warehouse facility owned by Freezer Services of
Michigan, Inc., a corporation of which 75% of the stock is owned by Henry S
Dorfman. During fiscal 1998, the Company paid approximately $1,983,000 to
Freezer Services of Michigan for storage charges, blast freezing and handling.
Additionally, the Company paid Freezer Services of Michigan $882,000 for rent
during fiscal 1998 under a one-year lease extension that expires in January
1999. In the opinion of management, the terms of the Company's dealings with
Freezer Services of Michigan were at least as favorable to the Company as
generally available to the Company from independent parties at the time of the
transactions.
18
20
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at May 29, 1998 and May 30, 1997
Consolidated Statements of Operations for the years ended May 29, 1998,
May 30, 1997 and May 31, 1996
Consolidated Statements of Shareholders' Equity for the years ended May
29, 1998, May 30, 1997 and May 31, 1996
Consolidated Statements of Cash Flows for the years ended May 29,
1998, May 30, 1997 and May 31, 1996
Notes to Consolidated Financial Statements
Financial statements of subsidiaries of the Company have been
omitted because the Company is an operating company and all material
subsidiaries are wholly-owned and are not indebted to any person other
than the parent or the consolidated subsidiaries in an amount which is
material to the total consolidated assets except indebtedness incurred
in the ordinary course of business which is not overdue and which
matures within one year from the date of its creation.
14(a)(2) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule
(included in report of independent accountants on financial statements)
of PricewaterhouseCoopers LLP.
II -- Valuation and qualifying accounts and reserves for the years
ended May 29, 1998, May 30, 1997 and May 31, 1996
Schedules other than those referred to are omitted for the reason
that they are not required or are not applicable.
14(a)(3) Exhibits
(3) (a) Restated Articles of Incorporation. Exhibit (3)(a) is
incorporated herein by reference to Exhibit 3.1 to the
Company's Form S-2 Registration Statement, Registration No.
33-43287.
(b) Amendment to Restated Articles of Incorporation. Exhibit
(3)(b) is incorporated herein by reference to Exhibit (3)(b)
to the Company's Annual Report on Form 10-K for the fiscal
year ended May 28, 1993.
(c) Amendment to Restated Articles of Incorporation. Exhibit
(3)(c) is incorporated herein by reference to Exhibit (3)(c)
to the Company's Annual Report on Form 10-K for the fiscal
year ended May 30, 1997.
(d) By-laws, as amended. Exhibit (3)(d) is incorporated herein
by reference to Exhibit (3)(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended May 29, 1981.
(e) First Amendment to By-Laws of the Company. Exhibit (3)(e) is
incorporated herein by reference to Exhibit (3)(e) to the
Company's Annual Report on Form 10-K for the fiscal year
ended May 30, 1997.
19
21
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
(10) Material Contracts
(a) Bond Purchase Agreement, dated as of July 1, 1984, among The
Onslow County Industrial Facilities and Pollution Control
Financing Authority, Branch Banking and Trust Company and
the Company.
Exhibit (10)(a) is incorporated herein by reference
to Exhibit (10)(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991, as
amended by its Form 8 dated October 10, 1991.
(b) Loan Agreement, dated as of July 1, 1984, between The Onslow
County Industrial Facilities and Pollution Control Financing
Authority and the Company.
Exhibit (10)(b) is incorporated herein by reference
to Exhibit (10)(g) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991, as
amended by its Form 8 dated October 10, 1991.
(c) Promissory Note in the principal amount of $6,000,000, dated
July 1, 1984, from the Company payable to The Onslow County
Industrial Facilities and Pollution Control Financing
Authority.
Exhibit (10)(c) is incorporated herein by reference
to Exhibit (10)(h) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991, as
amended by its Form 8 dated October 10, 1991.
(d) Security Agreement, dated as of July 1, 1984, between Branch
Banking and Trust Company and the Company.
Exhibit (10)(d) is incorporated herein by reference
to Exhibit (10)(i) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991, as
amended by its Form 8 dated October 10, 1991.
(e) Guaranty Agreement, dated as of July 1, 1984, from the
Company to Branch Banking and Trust Company.
Exhibit (10)(e) is incorporated herein by reference
to Exhibit (10)(j) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1991, as
amended by its Form 8 dated October 10, 1991.
(f) Loan Agreement dated as of December 1, 1993 by and between
Michigan Strategic Fund and the Company relating to
$5,500,000 Adjustable Rate Demand Limited Obligation Revenue
Bonds.
Exhibit (10)(f) is incorporated herein by reference
to Exhibit (10)(ff) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 27, 1994.
(g) Asset Purchase Agreement, dated as of April 29, 1995, by and
among the Company and Doskocil Companies Incorporated and
Wilson Foods Corporation, Concordia Foods Corporation, Dixie
Foods Company and Shreveport Foods Company.
Exhibit (10)(g) is incorporated herein by reference
to Exhibit 2.1 to the Company's Report on Form 8-K
dated May 30, 1995, as amended by its Form 8-K/A dated
May 30, 1995.
20
22
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
(h) First Amendment to Asset Purchase Agreement, dated as of May
26, 1995, by and among the Company, Foodbrands America,
Inc., successor by merger to Doskocil Companies
Incorporated, Wilson Foods Corporation, Concordia Foods
Corporation, Dixie Foods Company and Shreveport Foods
Company.
Exhibit (10)(h) is incorporated herein by reference
to Exhibit 2.2 to the Company's Report on Form 8-K
dated May 30, 1995, as amended by its Form 8-K/A dated
May 30, 1995.
(i) Noncompete Agreement, dated May 30, 1995, by Foodbrands
America, Inc., Wilson Foods Corporation, Concordia Foods
Corporation, Dixie Foods Company and Shreveport Foods
Company in favor of the Company.
Exhibit (10)(i) is incorporated herein by reference
to Exhibit 10.1 to the Company's Report on Form 8-K
dated May 30, 1995, as amended by its Form 8-K/A dated
May 30, 1995.
(j) Supply Agreement, dated May 30, 1995, by and among Wilson
Foods Corporation and Foodbrands America, Inc., Dixie Foods
Company and the Company.
Exhibit (10)(j) is incorporated herein by reference
to Exhibit 10.2 to the Company's Report on Form 8-K
dated May 30, 1995, as amended by its Form 8-K/A dated
May 30, 1995.
(k) Transition Service Agreement, dated May 30, 1995, by and
between Foodbrands America, Inc. and the Company.
Exhibit (10)(k) is incorporated herein by reference
to Exhibit 10.3 to the Company's Report on Form 8-K
dated May 30, 1995, as amended by its Form 8-K/A dated
May 30, 1995.
(l) Note Agreement, dated as of October 1, 1994, by and between
the Company and Allstate Life Insurance Company relating to
$8,000,000 principal amount 8.42% Senior Notes due October
1, 2003.
Exhibit 10(l) is incorporated herein by reference to
Exhibit 10(t) to the Company's Annual Report on Form
10-K for the fiscal year ended May 26, 1994, as
amended.
(m) Change of Control Agreement, dated February 24, 1998,
between Edward E. Boan and Thorn Apple Valley, Inc.
Exhibit 10(m) is incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 6, 1998, as amended by
Form 10-Q/A, filed May 14, 1998.
(n) Change of Control Agreement, dated February 24, 1998,
between Keith Jahnke and Thorn Apple Valley, Inc.
Exhibit 10(n) is incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the period ended March 6, 1998, as amended by
Form 10-Q/A, filed May 14, 1998.
(o) Change of Control Agreement, dated February 24, 1998,
between Louis Glazier and Thorn Apple Valley, Inc.
Exhibit 10(o) is incorporated herein by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the period ended March 6, 1998, as amended by
Form 10-Q/A, filed May 14, 1998.
21
23
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
(p) Change of Control Agreement, dated February 24, 1998,
between Joel Dorfman and Thorn Apple Valley, Inc.
Exhibit 10(p) is incorporated herein by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the period ended March 6, 1998, as amended by
Form 10-Q/A, filed May 14, 1998.
(q) Loan and Security Agreement, dated as of April 16, 1998,
between the Company, Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, as Administrative Agent and as a Lender, Heller
Financial, Inc., as Collateral Agent, as Documentation Agent
and as a Lender, Harris Trust and Savings Bank, as Co-Agent
and as a Lender, and the other Lenders from time to time
party thereto.
(r) Waiver and Amendment No. 1 to Loan and Security Agreement,
dated as of September 10, 1998, by and among Heller
Financial, Inc., as a Lender and as Collateral Agent (the
"Collateral Agent") and Documentation Agent (the
"Documentation Agent") for the Lenders, Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, as a Lender and as Administrative Agent (the
"Administrative Agent") for the Lenders, Harris Trust and
Savings Bank, as a Lender and a Co-Agent (the "Co-Agent")
for the Lenders, the other Lenders party thereto and Thorn
Apple Valley, Inc.
(s) $10,000,000 6 1/2% Convertible Debenture, due September 9,
2003, between Thorn Apple Valley, Inc. and IBP, inc.
(21) Subsidiaries of the registrant.
(23) Consent of PricewaterhouseCoopers LLP.
(27) Financial Data Schedule.
14(b) The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year covered by this Report.
14(d)(5) Schedules (Pages following signature page)
22
24
Year Ended
Form 10-K THORN APPLE VALLEY, INC. May 29, 1998
SIGNATURES
Pursuant to the requirements of Section 13 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, on September 10, 1998.
THORN APPLE VALLEY, INC.
(Registrant)
By /s/ LOUIS GLAZIER
------------------------------------
Louis Glazier
Executive Vice President
Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 10, 1998.
SIGNATURE CAPACITY
--------- --------
Director
- - ---------------------------------------------
John C. Canepa
/s/ HENRY S DORFMAN Director
- - ---------------------------------------------
Henry S Dorfman
/s/ JOEL DORFMAN President and Director (principal executive
- - --------------------------------------------- officer)
Joel Dorfman
Director
- - ---------------------------------------------
Burton D. Farbman
/s/ LOUIS GLAZIER Executive Vice President Finance and
- - --------------------------------------------- Administration and Director (principal
Louis Glazier financial and accounting officer)
/s/ MONIEK MILBERGER Director
- - ---------------------------------------------
Moniek Milberger
Director
- - ---------------------------------------------
Seymour Roberts
23
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Thorn Apple Valley, Inc.
Southfield, Michigan:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 17 present fairly, in all material
respects, the financial position of Thorn Apple Valley, Inc. and its
subsidiaries at May 29, 1998 and May 30, 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
May 29, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) on page 18 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan
July 24, 1998, except for the subsequent events
information presented in Notes 4, 9 and 15 for
which the date is September 10, 1998
F-1
26
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 29, MAY 30,
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,072,464 $ 6,028,698
Short-term investments.................................... 500,000 500,000
Accounts receivable, net of allowance for doubtful
accounts (1998, $761,800; 1997, $888,500)............... 42,434,856 44,888,327
Inventories (Note 2)...................................... 58,715,450 65,115,331
Refundable income taxes................................... 632,323
Deferred income taxes (Note 5)............................ 3,592,000 2,727,000
Prepaid expenses and other current assets................. 6,277,836 7,683,296
------------ ------------
Total current assets............................... 115,224,929 126,942,652
------------ ------------
Property, plant and equipment:
Land...................................................... 1,261,380 1,276,933
Buildings and improvements................................ 48,814,916 67,692,480
Machinery and equipment................................... 112,469,354 158,207,873
Transportation equipment.................................. 5,820,609 7,056,966
Property under capital leases............................. 5,966,625 10,162,649
Construction in progress.................................. 1,570,829 1,807,098
------------ ------------
175,903,713 246,203,999
Less accumulated depreciation...................... 84,162,032 111,762,145
------------ ------------
91,741,681 134,441,854
------------ ------------
Other assets:
Intangible assets, net of accumulated amortization (1998;
$2,517,900; 1997; $1,678,600)........................... 31,054,100 31,893,400
Deferred income taxes..................................... 7,536,000
Other..................................................... 8,356,294 9,508,551
------------ ------------
Total other assets................................. 46,946,394 41,401,951
------------ ------------
$253,913,004 $302,786,457
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 31,143,268 $ 41,111,001
Accrued liabilities (Note 3).............................. 37,135,059 23,661,536
Current portion of long-term debt (Note 4)................ 6,959,824 4,566,445
Income Taxes (Note 5)..................................... 1,425,403
------------ ------------
Total current liabilities.......................... 75,238,151 70,764,385
------------ ------------
Other noncurrent liabilities (Note 12)...................... 3,330,674 3,675,000
Long-term debt (Note 4)..................................... 148,249,545 150,128,541
Deferred income taxes (Note 5).............................. 1,138,000
------------ ------------
Total noncurrent liabilities....................... 151,580,219 154,941,541
------------ ------------
Shareholders' equity:
Preferred stock: $1 par value; authorized 200,000 shares;
issued none Common nonvoting stock: $.10 par value;
authorized 20,000,000 shares; issued none Common voting
stock: $.10 par value; authorized 20,000,000 shares;
issued 6,133,198 shares in 1998 and 6,110,480 shares in
1997.................................................... 613,320 611,048
Capital in excess of par value............................ 10,800,915 10,500,213
Retained earnings......................................... 15,680,399 65,969,270
------------ ------------
27,094,634 77,080,531
------------ ------------
$253,913,004 $302,786,457
============ ============
See notes to consolidated financial statements.
F-2
27
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED
--------------------------------------------
MAY 29, MAY 30, MAY 31,
1998 1997 1996
------- ------- -------
Net sales................................................... $519,995,976 $602,207,303 $628,069,680
------------ ------------ ------------
Operating costs and expenses:
Cost of goods sold, including delivery costs.............. 450,212,280 521,646,953 578,439,558
Selling................................................... 28,246,780 28,232,784 34,088,458
General and administrative................................ 20,526,639 23,376,507 23,203,387
Depreciation and amortization............................. 13,930,399 13,749,556 11,793,407
Restructuring charge (Note 12)............................ 3,631,436 5,000,000
------------ ------------ ------------
516,547,534 592,005,800 647,524,810
------------ ------------ ------------
Income (loss) from operations............................... 3,448,442 10,201,503 (19,455,130)
------------ ------------ ------------
Other expenses (income):
Interest, net............................................. 9,525,350 9,428,447 7,126,871
Other, net................................................ (1,600,923) (883,431) (2,316,827)
------------ ------------ ------------
7,924,427 8,545,016 4,810,044
------------ ------------ ------------
Income (loss) from continuing operations before income taxes
and extraordinary item.................................... (4,475,985) 1,656,487 (24,265,174)
Provision (benefit) for income taxes (Note 5)............... (1,961,000) 261,000 (9,198,000)
------------ ------------ ------------
Income (loss) from continuing operations before
extraordinary item........................................ (2,514,985) 1,395,487 (15,067,174)
Discontinued operations (Note 13):
Loss from operations of discontinued fresh pork division
(net of tax benefit of 1998, $3,622,000; 1997,
$2,501,000; 1996, $3,652,000)........................... (6,631,791) (4,561,728) (6,640,570)
Loss on disposal of fresh pork division (including tax
benefit of $1,750,000 for operating losses during
phase-out period) (net of tax benefit of $5,786,000).... (39,318,597)
------------ ------------ ------------
Loss from discontinued operations before extraordinary
item...................................................... (45,950,388) (4,561,728) (6,640,570)
Extraordinary item, loss on early extinguishment of debt
related to loan restructuring, (net of tax benefit of
$982,000) (Note 14)....................................... (1,823,498)
------------ ------------ ------------
Net loss.................................................... $(50,288,871) $ (3,166,241) $(21,707,744)
============ ============ ============
Basic earnings (loss) per share:
Continuing operations before extraordinary item........... $ (0.41) $ 0.23 $ (2.61)
============ ============ ============
Loss on discontinued operations........................... $ (1.08) $ (0.76) $ (1.15)
============ ============ ============
Loss on disposal of discontinued operations............... $ (6.42)
============ ============ ============
Extraordinary loss related to loan restructuring.......... $ (0.30)
============ ============ ============
Net loss.................................................. $ (8.21) $ (0.53) $ (3.76)
============ ============ ============
Fully diluted earnings (loss) per share:
Continuing operations before extraordinary item........... $ (0.41) $ 0.23 $ (2.61)
============ ============ ============
Loss on discontinued operations........................... $ (1.08) $ (0.75) $ (1.15)
============ ============ ============
Loss on disposal of discontinued operations............... $ (6.42)
============ ============ ============
Extraordinary loss related to loan restructuring.......... $ (0.30)
============ ============ ============
Net loss.................................................. $ (8.21) $ (0.52) $ (3.76)
============ ============ ============
See notes to consolidated financial statements.
F-3
28
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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.................................. (21,707,744)
Cash dividends, $.07 per share............ (404,174)
Shares issued under employee stock
purchase plan (Note 7).................. 15,482 1,548 240,290
--------- -------- ----------- -----------
Balance, May 31, 1996..................... 5,786,129 578,613 7,011,361 69,135,511
Net loss.................................. (3,166,241)
Newly issued shares of common stock (Note
10)..................................... 279,883 27,988 2,972,358
Shares issued under employee stock
purchase plan (Note 7).................. 16,968 1,697 176,950
Exercise of stock options, including
related tax benefits (Note 6)........... 27,500 2,750 339,544
--------- -------- ----------- -----------
Balance, May 30, 1997..................... 6,110,480 611,048 10,500,213 65,969,270
Net loss.................................. (50,288,871)
Shares issued under employee stock
purchase plan (Note 7).................. 11,218 1,122 160,089
Exercise of stock options, including
related tax benefits (Note 6)........... 11,500 1,150 140,613
--------- -------- ----------- -----------
Balance, May 29, 1998..................... 6,133,198 $613,320 $10,800,915 $15,680,399
========= ======== =========== ===========
See notes to consolidated financial statements.
F-4
29
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED
------------------------------------------
MAY 29, MAY 30, MAY 31,
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. ($50,288,871) ($ 3,166,241) ($21,707,744)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposal of fresh pork division (Note 13)......... 39,318,597
Loss on early extinguishment of debt (Note 14)............ 1,823,498
Depreciation.............................................. 16,748,890 16,610,090 14,539,477
Amortization.............................................. 839,300 839,300 839,300
Loss on disposition of property, plant and equipment...... 3,097,263 631,652 13,568
Provision for losses on accounts receivable............... (111,698) 339,055 133,951
Gain on sale of long-term investments..................... (627,802)
(INCREASE) DECREASE IN ASSETS:
Accounts receivable....................................... 2,165,169 17,681,337 (13,260,829)
Inventories............................................... 5,349,881 (8,852,121) (2,949,079)
Refundable income taxes................................... (632,323) 11,490,330 (10,124,099)
Prepaid expenses and other assets......................... 3,429,079 (2,920,437) (3,397,344)
Deferred income taxes..................................... (2,771,052) (3,021,000) 23,000
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable.......................................... (9,967,733) (6,390,564) 15,027,415
Accrued liabilities....................................... 1,303,523 1,706,752 (6,258,669)
Income taxes payable...................................... (1,425,403) 1,425,403
Other noncurrent liabilities.............................. (344,326) 3,675,000
------------ ------------ ------------
Total adjustments......................................... 58,822,665 33,214,797 (6,041,111)
------------ ------------ ------------
Net cash provided by (used in) operating activities....... 8,533,794 30,048,556 (27,748,855)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for acquisition of Wilson, net of cash acquired
(Note 11)............................................... (64,630,873)
Capital expenditures...................................... (10,174,102) (11,602,699) (38,604,784)
Proceeds from sale of property, plant and equipment....... 2,696,525 1,905,568 2,712,129
Proceeds from sale of long-term investments............... 4,484,005
------------ ------------ ------------
Net cash used in investing activities..................... (7,477,577) (9,697,131) (96,039,523)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 75,000,000 17,250,000 42,500,000
Net proceeds (repayments) long-term credit facilities..... (14,343,564) (17,100,000) 79,712,564
Proceeds from common stock sold to company officer........ 3,000,346
Principal payments on long-term debt...................... (62,462,038) (9,098,385) (5,928,116)
Net borrowings (payments) under lines of credit........... (14,700,000) 8,740,000
Payments for debt issue costs............................. (2,509,823)
Proceeds from employee stock purchase plan................ 161,211 178,647 241,838
Proceeds from stock options exercised, including related
tax benefits............................................ 141,763 342,294
Dividends paid............................................ (404,174)
------------ ------------ ------------
Net cash provided by (used in) financing activities....... (4,012,451) (20,127,098) 124,862,112
------------ ------------ ------------
Net increase (decrease) in cash........................... (2,956,234) 224,327 1,073,734
Cash and cash equivalents, beginning of year.............. 6,028,698 5,804,371 4,730,637
------------ ------------ ------------
Cash and cash equivalents, end of year.................... $ 3,072,464 $ 6,028,698 $ 5,804,371
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 11,980,278 $ 12,164,297 $ 8,324,648
============ ============ ============
Income taxes paid (refunded), net....................... ($ 806,074) ($12,194,253) ($ 2,858,701)
============ ============ ============
NONCASH INVESTING ACTIVITIES:
Notes payable issued in conjunction with new debt
financing............................................... $ 2,200,000
============
Capital lease obligations................................. $ 1,016,004 $ 256,852
============ ============
ACQUISITION:
The Company purchased substantially all of the assets of
Wilson (Note 11)
In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired........................... $ 75,571,743
Cash paid............................................... (64,630,873)
------------
Liabilities assumed..................................... $ 10,940,870
============
See notes to consolidated financial statements.
F-5
30
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
The Company is engaged in the production and sale of bacon, hot dogs, lunch
meats, hams, smoked sausage and turkey products. The Company announced in June
1998, its decision to exit the fresh pork business, see Note 13 for information
relating to its discontinued operations. The Company sells its products
principally to wholesalers, supermarkets and other manufacturers throughout the
United States and in selected international markets.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash on hand, demand deposits and
short-term investments with a maturity of three months or less at the date of
acquisition.
SHORT-TERM INVESTMENTS:
Short-term investments are those with a maturity in excess of three months
at the date of acquisition and are valued at cost, which approximates market.
INVENTORIES:
Substantially all inventories are stated at the lower of last-in, first-out
("LIFO") cost or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Upon retirement or
disposal of property, plant and equipment, the cost and accumulated depreciation
are removed from the accounts, and any gain or loss is included in other income.
Depreciation is computed on the straight-line basis over the assets' estimated
useful lives, ranging from 3 to 10 years for machinery and equipment and 20 to
40 years for buildings and improvements. The cost of repairs and maintenance is
charged against results of operations as incurred. Inactive assets held for sale
are recorded at the lower of net book value (cost less accumulated depreciation)
or fair value less costs to sell. The Company capitalized interest incurred on
debt during the course of major projects which approximated $1,092,000 during
fiscal 1996.
INTANGIBLE ASSETS:
The Company's intangible assets consist of trademarks and tradenames and
are amortized on a straight-line basis over their estimated useful lives,
determined to be 40 years. Intangible assets are periodically reviewed for
impairment based on an assessment of estimated future cash flows.
F-6
31
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
COMMODITY OPTIONS AND FORWARD CONTRACTS:
The Company uses a variety of commodity option and forward contracts in an
effort to minimize the potential adverse effects from raw material market price
level changes. Gains and losses from contracts that hedge firm commitments are
deferred and recognized as part of the economic basis of the transactions
underlying the commitments when the associated hedged transaction occurs. Risk
management and hedging activities are often utilized with forward sales
contracting, with forward raw material procurement and with margin management.
The majority of the Company's finished product sales are not hedged, as they are
manufactured from raw material procured from current production. Hedging
activities accounted for approximately 5 percent of the total quantities of
annual processed meats tonnage sold.
EARNINGS PER SHARE OF COMMON STOCK:
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," that was issued in February 1997. The new
Standard requires presentation of basic and diluted earnings per share. Basic
earnings per share of common stock are based on the weighted average number of
common shares outstanding during each respective fiscal year. 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 during each respective fiscal year. As a result of the
Company's loss from continuing operations during fiscal years 1998 and 1996
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 antidilutive effect on
earnings per share. The weighted average number of shares outstanding for 1998,
1997 and 1996 were 6,123,176, 6,002,786 and 5,778,559 respectively. The fully
diluted shares outstanding for 1997 was 6,073,747.
FISCAL YEAR:
The Company's fiscal year is reported on a 52/53-week period which ends on
the last Friday in May. Fiscal year ended May 31, 1996 is a 53-week period.
Fiscal years ended May 29, 1998 and May 30, 1997 are for 52-week periods.
RECLASSIFICATIONS:
Certain amounts from prior years have been reclassified to conform with the
current year presentations.
2. INVENTORIES:
1998 1997
---- ----
At lower of cost or market:
Supplies.................................................. $10,815,336 $ 9,447,180
Raw materials............................................. 11,308,353 21,911,451
Work in process........................................... 3,053,048 4,016,547
Finished goods............................................ 36,470,713 41,529,153
----------- -----------
61,647,450 76,904,331
Less LIFO reserve........................................... 2,932,000 11,789,000
----------- -----------
$58,715,450 $65,115,331
=========== ===========
F-7
32
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
2. INVENTORIES -- CONTINUED
The LIFO method of accounting for inventories had the effect (after income
taxes) of reducing net loss by approximately $5,757,000 ($.94 per share) and
increasing net income by approximately $3,182,000 ($.53 per share) and
increasing net loss by approximately $8,927,000 ($1.54 per share) for the years
ended May 29, 1998, May 30, 1997 and May 31, 1996, respectively.
3. ACCRUED LIABILITIES:
Included within accrued liabilities are employee benefits representing
self-insured programs of $6,346,483 and $4,707,813 at May 29, 1998 and May 30,
1997, respectively.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
MAY 29, MAY 30,
1998 1997
------- -------
A. Revolving credit agreement............................... $ 48,556,436 $ 62,900,000
B. Term notes............................................... 75,000,000
B. Private placements notes................................. 59,453,846
C. Revenue bonds............................................ 8,196,355 9,455,225
D. Subordinated debentures.................................. 17,250,000 17,250,000
E. Obligations under capital leases......................... 3,227,211 4,559,213
F. Other note............................................... 2,979,367 1,076,702
------------ ------------
155,209,369 154,694,986
Less current portion..................................... 6,959,824 4,566,445
------------ ------------
$148,249,545 $150,128,541
============ ============
A. On April 16, 1998 the Company executed a new three-year loan and
security agreement with a consortium of participating financial institutions;
the agreement expires on April 15, 2001. The new loan and security agreement
provides for borrowings and issuance of letters of credit of up to $85 million
under a revolving line of credit facility, subject to a borrowing base
limitation measured by eligible inventory and accounts receivable of the
Company, with an additional $10 million for meeting seasonal demands and a $75
million term-loan. Proceeds from the $75 million term-loan were used to pay down
$59.4 million of private placement notes with the remaining $15.6 million to pay
down borrowings under the Company's revolving credit agreement and to cover
certain costs associated with the financing. Borrowings under the revolving
credit facility will be at either the prime rate or LIBOR plus 2.25 percent.
Borrowings under the term-long will be at either the prime rate plus .5
percent or LIBOR plus 2.75 percent. Interest is payable monthly under both the
new revolving credit facility and term-loan. The commitment fee on the unused
portion of the revolving credit facility is .375 percent per annum. The weighted
average interest rates applicable to revolving credit borrowings at May 29, 1998
and May 30, 1997 were 7.97 percent and 7.63 percent, respectively. The rate of
interest on the term notes at May 29, 1998 was 8.45 percent. At May 29, 1998,
the Company had outstanding letters of credit totaling approximately $8,200,000
which serve as collateral for the limited obligation revenue bond issue and
various self insured agreements. Unused lines of credit of $29.1 million were
available at May 29, 1998, under the borrowing base formula the amount of
available unused lines of credit was $13.1 million. Under the term-loan the
first principal payment of $781,250 is due on April 1, 1999, with monthly
installments of $781,250 due thereafter until maturity, with any remaining
balance due at maturity.
F-8
33
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
4. LONG-TERM DEBT -- CONTINUED
The Company's debt is secured by substantially all of the Company's assets.
The Company's new three-year loan and security agreement, contains financial
covenants with respect to consolidated net worth, EBITDA and fixed charge
coverage. The Company was not in compliance with its fixed charge coverage ratio
at May 29, 1998. The net worth and EBITDA ratio covenants under the new loan and
security agreement become effective at the end of the Company's first quarter of
fiscal 1999. In addition, among other things, the agreement limits borrowings,
capital expenditures, other indebtedness and investments, and does not allow the
payment of cash dividends or repurchase of the Company's common stock.
B. As a result of the new loan and security agreement, as discussed in Note
4A above, the Company retired the entire balance of the private placement note
obligations.
C. At May 29, 1998, the outstanding principal balance of the revenue bonds
consisted of three separate bond issues. The first outstanding issue, referred
to as the industrial revenue bond, has an outstanding principal balance of
$1,275,000 with varying quarterly principal payments due July 1, 1998 through
January 1, 2000, and quarterly interest at 81.1 percent of the current prime
rate (at May 29, 1998 the rate was 6.89 percent).
The second outstanding issue, which is referred to as the limited
obligation revenue bond, has an outstanding principal balance of $5,500,000 with
monthly interest payments at a variable rate and the principal due at maturity
on December 1, 2005. The variable rate of interest paid on the second issue
during the month of May 1998 averaged 4.3 percent.
The third outstanding issue referred to as the economic development revenue
bond, has an outstanding principal balance of $1,421,355 with varying monthly
principal and interest payments through maturity on June 30, 2000, bearing
interest at a fixed rate of 6 percent per annum.
The first and third bond issues are collateralized by property, plant and
equipment. The second bond issue is collateralized by a $5,600,000 letter of
credit. The letter of credit is secured by a first lien on substantially all of
the Company's assets.
The Company's industrial revenue and economic revenue bond agreements
contain restrictive covenants that include the maintenance of a minimum level of
consolidated tangible net worth, as defined, and of certain financial ratios.
D. On March 25, 1997, the Company completed a public offering of
$17,250,000 of Convertible Subordinated Debentures due April 1, 2007, bearing
interest at a fixed rate of 9 percent per annum. Interest is payable
semi-annually on April 1 and October 1. The Debentures are convertible into
shares of the Company's Common Stock at any time prior to maturity, at a
conversion price of $18.75 per share. Accordingly, each $1,000 principal amount
of Debentures is convertible into 53.33 shares of Common Stock, for an aggregate
of 920,000 shares, representing approximately 13 percent of the outstanding
Common Stock after including the converted shares. The Debentures are redeemable
at the Company's option, at any time in whole or in part, except that the
Debentures may not be redeemed prior to April 1, 2000, unless the closing sale
price of the Common Stock equals or exceeds 140 percent of the then current
conversion price for any 20 consecutive trading days.
The Debentures are subordinated to all existing and future senior
indebtedness of the Company. Although the Debentures are cross-defaulted with
the Company's existing secured indebtedness, the Debentures do not require the
Company to comply with any other financial covenants.
E. The obligations under capital leases are at fixed rates ranging from 5.5
percent to 11 percent and are collateralized by property, plant and equipment.
F-9
34
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
4. LONG-TERM DEBT -- CONTINUED
F. The Company's other notes is comprised of four various notes with
remaining outstanding principal balances ranging from $779,367 to $2,200,000 and
fixed annual interest rates in the range of 7% to 12%. The maturity dates of the
various notes range from April 16, 1999 to September 13, 2000.
The fair value of the Company's long-term debt approximates the carrying
amount based on the current rates offered to the Company on similar debt.
SUBSEQUENT EVENT -- LONG TERM DEBT AMENDMENT
On May 29, 1998, the Company was in non-compliance with certain financial
covenants relating to its loan and security agreement ( the "loan agreement")
with a consortium of lenders (the "lender group"). On September 10, 1998, the
lender group waived the Company's past non-compliance with such financial
covenants and amended certain covenants and other terms and conditions of the
loan agreement. The following is a description of the significant changes to the
loan agreement as a result of the amendment:
1. The maximum amount available under the revolving loan was reduced
by $15 million to $70 million, with an additional $10 million available to
meet seasonal demands.
2. The Company made a principal payment of $5 million on the term
loan, reducing the principal balance outstanding of $70 million.
3. The maturity date under the loan agreement was changed from April
15, 2001 to August 31, 1999.
4. The interest rate on the revolving loan will increase, so that the
Company may borrow either at the prime rate plus .5 percent or LIBOR plus 3
percent at the option of the Company.
5. The interest rate on the term loan will increase, so that the
Company may borrow either at the prime rate plus 1 percent or LIBOR plus
3.25 percent at the option of the Company.
6. The Company will make payments of certain fees to the lender group
either in cash or by delivery of warrants to purchase the Company's common
stock or a combination thereof, at the Company's option, as follows:
PAYMENT DATE AMOUNT EARNED DATE
------------ ------ -----------
4/30/99................................................ $ 500,000 6/30/99
6/30/99................................................ $1,000,000 8/31/99
8/31/99................................................ $1,500,000 8/31/99
If the Company elects to make any portion of the payment through issuance
of warrants to the lender group, the number of shares of common stock of the
Company subject to the warrants will be determined by dividing the amount of the
payment to be paid with warrants by a $7.50 per share conversion price. In
total, warrants for up to 400,000 shares of common stock may be issued by the
Company to make such payments.
The aggregate maturities of long-term debt, as amended, (excluding
obligations under capital leases) during the five years subsequent to May 29,
1998 are: 1999; $10,426,854, 2000; $118,570,243, 2001; $235,061, 2002; $0, and
2003; $0.
F-10
35
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
5. INCOME TAXES:
The Company's provision (benefit) for income taxes was as follows:
1998 1997 1996
---- ---- ----
Currently payable (benefit):
Federal...................................... $ (131,000) $ 3,282,000 $(6,287,000)
State and local..............................
----------- ----------- -----------
Total currently payable (benefit)............ (131,000) 3,282,000) (6,287,000)
Deferred:
Federal and state............................ (1,830,000) (3,021,000) (2,911,000)
----------- ----------- -----------
Total benefit................................ $(1,961,000) $ 261,000) $(9,198,000)
=========== =========== ===========
Deferred income taxes reflect the estimated future tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
The components of deferred income tax assets and liabilities as of May 29,
1998 and May 30, 1997 are as follows:
1998 1997
------------------------------ ------------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
Depreciation.......................... $ 8,454,000 $7,875,000
Employee benefit plans................ $ 2,380,000 $ 1,765,000
Bad debt expense...................... 286,000 333,000
Capital leases........................ 80,000 73,000
Restructuring charge.................. 1,827,000 1,875,000
Estimated losses on assets held for
disposal............................ 338,000 197,000
Amortization of intangibles........... 1,574,000 1,049,000
Credit carryforward................... 4,564,000 5,089,000
Tax benefit of net operating loss
carryforward........................ 5,934,000 1,617,000
Loss on disposal...................... 15,786,000
Pension expense....................... 320,000
All other............................. 499,000 58,000 103,000 393,000
Valuation allowance................... (10,000,000)
------------ ----------- ----------- ----------
Total deferred taxes............. $ 21,614,000 $10,486,000 $10,979,000 $9,390,000
============ =========== =========== ==========
F-11
36
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
5. INCOME TAXES -- CONTINUED
A reconciliation of the provision for income taxes is shown below:
1998 1997 1996
----------------- --------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
Federal income tax (benefit) at
statutory
rate.................................. $(1,566,000) (35) $ 580,000 35 $(8,493,000) (35)
State and local income taxes, net of
federal income tax benefit............
Lower tax rate attributable to foreign
sales corporation..................... (83,000) (2) (55,000) (3) (110,000)
Nondeductible expenses.................. 225,000 5 138,000 8
Utilization of tax credits.............. (525,000) (12) (465,000) (28) (883,000) (4)
Other................................... (12,000) 63,000 4 278,000 1
----------- --- --------- --- ----------- ---
$(1,961,000) (44) $ 261,000 16 $(9,198,000) (38)
=========== === ========= === =========== ===
The credit carryforward of $4,564,000 for which the tax benefit has been
recognized, consists of general business credits of $2,527,000 which expire
between the years 2008 and 2013 and alternative minimum tax credit carryforwards
of $2,037,000, which can be carried forward indefinitely. The NOL carryforward
of $22,096,000 on a pre-tax basis will expire between years 2012 and 2013.
The Company has established a valuation allowance in accordance with the
provision of FASB Statement No. 109, Accounting for Income Taxes. The allowance
was recorded on the Statement of Operations as a reduction of the tax benefits
related to the loss on disposal of the discontinued operations. 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.
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 May 29, 1998,
there were 298,500 options granted but not exercised at $15.81 and $10.25 per
share and 301,500 shares remained to be granted under the 1996 Plan.
At May 29, 1998, there were 632,500 options granted but not exercised at
prices of $10.25, $17.00, $23.00 and $26.00 per share and 141,000 options
granted but not exercised at prices of $2.56 and $19.67 per share under the 1990
and 1982 Employee Stock Option Plans, respectively. Under the 1990 and 1982
plans no shares remain to be granted.
The Company's Stock Option Committee may designate any requirements
regarding option price, waiting period or an exercise date for options granted
under the plans, except that incentive stock options may not be exercised at
less than the fair market value of the stock on the date of grant, and no option
may remain outstanding for more than 10 years. Under all plans, the exercise
price of each option equals the market price of the Company's common stock on
the date of grant. Under all plans, the options granted are immediately
exercisable.
F-12
37
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
6. STOCK OPTION PLANS -- CONTINUED
The following is a summary of options granted under the plans:
1998 1997 1996
---------------------------- -------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
------ ---------------- ------ ---------------- ------ ----------------
Balance, beginning... 870,300 $16.57 646,300 $18.91 484,550 $19.76
Exercised............ (11,500) $10.25 (27,500) $10.25
Canceled or
terminated......... (30,800) $19.63 (16,000) $16.02 (33,750) $20.16
Granted.............. 244,000 $15.81 267,500 $10.25 195,500 $17.00
--------- ------- -------
Balance, ending...... 1,072,000 $16.38 870,300 $16.57 646,300 $18.91
========= ======= =======
At May 29, 1998, under all plans, the range of exercise prices on
outstanding options is $2.56 to $26.00 per share with a weighted average
remaining contractual life of 7.0 years.
At May 29, 1998, there were 47 participants in the 1996 Employee Stock
Option Plan, 41 participants in the 1990 Employee Stock Option Plan and 11
participants in the 1982 Employee Stock Option Plan.
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS No. 123, the Company
will continue to apply APB Opinion 25 and related interpretations in accounting
for its stock option plans and, accordingly, does not recognize compensation
cost. If compensation cost for stock option grants had been determined based on
the fair value method as prescribed by SFAS No. 123, net loss and loss per share
would have been increased to the pro forma amounts indicated in the table below:
1998 1997
---- ----
Reported net loss........................................... $(50,288,871) $(3,166,241)
Pro forma net loss, using SFAS No. 123...................... $(51,416,549) $(4,022,228)
Loss per share:
Reported.................................................. $(8.21) $(.53)
Pro forma, using SFAS No. 123............................. $(8.49) $(.67)
Weighted-average fair value of options granted.............. $ 7.11 $4.92
The fair value of each option grant was estimated using the Black-Scholes
valuation model. Under the model the annualized assumptions used for options
granted in fiscal years 1998 and 1997, respectively, was as follows: Risk-free
interest rates of 5.47 percent and 6.32 percent, dividend yields equal to zero
percent and a volatility factor for the expected market price of the Company's
common stock of 42.3 percent. The weighted-average expected life of options for
the 1998 and 1997 grants is five years.
7. STOCK PURCHASE PLAN:
The Company has an Employee Stock Purchase Plan ("Plan") where employees
may subscribe, through payroll withholdings, to purchase shares of the Company's
common stock at a discount. The discounted price is equal to 85 percent of the
average market value of the common stock. The average market value is computed
using the closing prices at the beginning and end of each calendar quarter.
Employees may not purchase, under the Plan, in excess of $25,000 in any one
year. Under the Plan, the Company is authorized to issue up to 400,000 shares of
its common stock, of which 351,887 have not been issued.
F-13
38
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
7. STOCK PURCHASE PLAN -- CONTINUED
Transactions under the Employee Stock Purchase Plan are summarized as
follows:
NUMBER OF
SHARES ISSUE PRICE RANGE
--------- -----------------
Shares issued during the year ended May 29, 1998............ 11,218 $13.17 - $15.62
Shares issued during the year ended May 30, 1997............ 16,968 $ 9.56 - $12.54
Shares issued during the year ended May 31, 1996............ 15,482 $12.32 - $17.85
8. PENSION PLANS:
The Company and its subsidiaries have several defined benefit pension plans
covering substantially all of their nonsalaried employees. Benefits under these
plans are based on the employee's years of service, and the benefit obligations
are based upon the employee's expected date of retirement. Plan assets are
invested in corporate and government bonds, common stocks and a bank money
market fund. The Company's general funding policy is to contribute amounts
deductible for federal income tax purposes.
Net periodic pension cost for 1998, 1997 and 1996 includes the following
benefit and cost components:
1998 1997 1996
---- ---- ----
Service cost....................................... $ 385,194 $ 387,204 $ 346,101
Interest cost...................................... 799,850 780,947 711,024
Actual return on plan assets....................... (1,855,611) (990,090) (1,474,259)
Net amortization and deferral...................... 885,630 131,169 738,998
----------- --------- -----------
Net periodic pension cost.......................... $ 215,063 $ 309,230 $ 321,864
=========== ========= ===========
As of May 29, 1998 and May 30, 1997, the funded status of the defined
benefit plans, using the actuarial present value of the benefit obligation, is
as follows:
1998 1997
---- ----
Vested benefit obligation................................... $11,835,775 $10,126,657
Projected and accumulated benefit obligation................ 12,090,945 10,698,129
Plan assets at fair value................................... 13,740,481 11,504,526
----------- -----------
Projected benefit obligation less than assets............... (1,649,536) (806,397)
Unrecognized net gain....................................... 376,074 137,192
Unrecognized net transition asset........................... 148,893 176,704
Unrecognized prior service cost............................. (37,798) (42,396)
----------- -----------
Prepaid pension cost........................................ $(1,162,367) $ (534,897)
=========== ===========
Actuarial assumptions used for 1998, 1997 and 1996 are:
Discount rate.......................................... 7%
Expected rate of return on plan assets................. 8%
The Company also makes contributions to union-sponsored, multi-employer
plans in accordance with negotiated labor contracts. Information on the
actuarial present value of accumulated plan benefits and net assets available
for benefits relating to these plans is not available. Contributions to all such
plans were approximately $122,000, $134,000 and $206,000 in 1998, 1997 and 1996,
respectively.
F-14
39
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 30, 1998, MAY 31, 1997 AND MAY 26, 1996
9. COMMITMENTS:
OPERATING LEASES:
The Company leases transportation, manufacturing equipment and office space
under several operating leases expiring through 2005. The majority of the leases
contain purchase options at stated amounts or fair market value. Rent expense
under all operating leases amounted to approximately $7,747,000, $7,792,000 and
$8,203,000 for the years ended 1998, 1997 and 1996, respectively. Total future
minimum rentals under noncancelable operating leases as of May 29, 1998,
including those discussed below are:
YEAR ENDING AMOUNT
----------- ------
1999...................................................... $5,786,000
2000...................................................... 3,008,000
2001...................................................... 1,580,000
2002...................................................... 1,308,000
2003...................................................... 974,000
Thereafter................................................ 1,294,000
The Company maintains inventory at a freezer warehouse that is 75 percent
owned by an officer and director of the Company. Additionally, the Company rents
a portion of the freezer warehouse for use as a distribution center. Currently,
the Company is operating under a one-year lease option that expires in January
1999. Freezer warehouse rent expense amounted to $882,000 for the years ended
1998, 1997 and 1996. Storage and handling expenses paid to this freezer
warehouse amounted to approximately $1,953,000, $1,482,000 and $1,218,000 for
the years ended 1998, 1997 and 1996, respectively.
MARKETING COMMITMENT:
In December 1997 the Company entered into a three-year agreement to sponsor
a NASCAR Winston Cup automobile racing team. The future minimum commitment
related to this marketing agreement is approximately, $2,716,000, $3,675,000,
$1,909,000 for the fiscal years 1999, 2000, and 2001 respectively. In addition,
the agreements specify various incentive payments tied to finishing position for
each race, Winston Cup series rankings, and to the increase in the price of the
Company's stock.
SUBSEQUENT EVENT -- SUPPLY AND SUBORDINATED DEBT AGREEMENT
On September 10, 1998, the Company entered into a five year agreement with
a major U.S. meat packer that slaughters hogs and cattle. Under the agreement,
the Company has agreed to purchase from this meat 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 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.
F-15
40
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
10. 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 long-term debt agreements entered into on
September 11, 1996.
11. 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. During
the next two 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, in the event of increases in the market price of the
Company's common stock. No amounts have been paid to Foodbrands under the
Earnout Agreement. The Earnout Agreement stipulates if the Company's common
stock ceases to be publically traded the entire $10 million would become
currently payable.
12. RESTRUCTURING CHARGES:
During the fourth quarter of fiscal 1997, the Company recorded a pre-tax
restructuring charge to operations of $5.0 million for an estimate of future
costs associated with the suspension of a joint Production Agreement. During
fiscal 1998, the Company recorded an additional $2.6 million pre-tax charge
resulting from its termination of the Production Agreement. The suspension of
the Production Agreement resulted in the planned closing of a processed meats
facility in Council Bluffs, Iowa, where the Company had some of its boneless ham
products produced. The Iowa plant had been operated under the Production
Agreement between the Company and another major meat packing company (Producer).
Pursuant to the Production Agreement, the Producer constructed a ham production
facility and the Company furnished all of the production equipment to be used in
such facility. In addition, the Producer was obligated to produce at such
facility, on an exclusive basis, all boneless ham products which the Company
would have required. In return, the Company had agreed to pay and/or reimburse
the Producer for all operating and fixed costs incurred at the facility and to
pay the Producer a fee of approximately $1,375,000 per year during the term of
the agreement. The Production Agreement had an initial term expiring on June 6,
2001. Production of the Company's boneless ham product lines will be
consolidated with its new Ponca City plant operations. The restructuring charges
consisted of $5.2 million related to future annual contractual obligations and
$2.4 million related to other costs and carrying charges associated with the
shutdown and for losses on disposal of machinery and equipment, for which the
long-term accrued portion has been included in other noncurrent liabilities.
During the fourth quarter of fiscal 1998, in addition to the $2.6 million
pre-tax charge referred to above, the Company recorded an additional $1.0
million pre-tax charge associated with the write-off of assets as the results of
the discontinuance of a product-line unrelated to the Production Agreement.
13. DISCONTINUED OPERATIONS:
FISCAL 1998:
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 an after tax charge of $39.3 million related to the disposal of
its fresh pork operations. Included in the gross charge is an estimated pre-tax
loss from operations during the phase out period of $5.0 million. Corporate
office expenses and interest costs, historically allocated and charged to the
fresh pork operations, were reversed and allocated back to continuing operations
F-16
41
THORN APPLE VALLEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
13. DISCONTINUED OPERATIONS -- CONTINUED
as these expenses were not considered to be directly attributable to
discontinued operations. Interest on borrowings under the Company's general
credit facilities was allocated to discontinued operations based upon the fresh
pork operations' net working capital needs. Interest expense allocated to fresh
pork operations totaled $2,007,330, $1,928,122 and $1,364,699 for fiscal years
1998, 1997 and 1996, respectively. The consolidated financial statements and
related notes have been restated for all years presented to separately report
the fresh pork discontinued operations.
Net sales of the discontinued fresh pork operation are as follows:
MAY 29, 1998 MAY 30, 1997 MAY 31, 1996
------------ ------------ ------------
Net sales........................................... $319,663,437 $353,586,285 $355,014,747
============ ============ ============
The total assets of the discontinued fresh pork operation at May 29, 1998,
approximated $27 million; and consisted of receivables, inventory and net
property, plant and equipment. Without regards to the shutdown provisions,
current liabilities at May 29, 1998 were approximately $6.3 million.
14. EXTRAORDINARY CHARGE:
In connection with the new financing agreement entered into on April 16,
1998, the Company recognized an extraordinary pre-tax loss of $2.8 million. The
extraordinary loss primarily resulted from a "make whole" provision ($2.2
million) contained in the Company's private placement notes that were retired
using the proceeds received under its new financing facility (see Note 4A). The
remaining $.6 million of the loss related to the write-off of unamortized debt
issue costs.
15. SUBSEQUENT EVENT -- INTERNATIONAL UNCERTAINTY
The Company exports a significant portion of its hot dog production to
Russia. As a result of recent economic and political instability, including the
rapid devaluation of its currency, the Company's continued ability to transact
business in this region is uncertain. As of September 9, 1998, the Company had
inventory and accounts receivable of approximately $13 million related to the
production and sale of Russian products. At this time, the Company is unable to
predict if it will sustain losses related to these assets.
F-17
42
Year Ended
Form 10-K THORN APPLE VALLEY, INC. AND SUBSIDIARIES May 29, 1998
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 29, 1998, MAY 30, 1997 AND MAY 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ---------- ---------- ---------------- ---------- ---------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER ACCOUNTS-- (A) AT END
CLASSIFICATION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS OF PERIOD
-------------- ---------- ---------- ---------------- ---------- ---------
Allowance for doubtful accounts:
Year ended May 29, 1998............ $888,500 $111,698 $238,398 $761,800
Year ended May 30, 1997............ $621,800 $356,055 $ 89,355 $888,500
Year ended May 31, 1996............ $789,100 $ 38,673 $205,973 $621,800
Note A. Write-off of uncollectible accounts, net of recoveries.
F-18
43
Year Ended
Form 10-K THORN APPLE VALLEY, INC. AND SUBSIDIARIES May 29, 1998
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
- - ----------- ----
(3) (a) Restated Articles of Incorporation.
(b) Amendment to Restated Articles of Incorporation.
(c) Second Amendment to Restated Articles of Incorporation.
(d) By-laws, as amended to date.
(e) First Amendment to By-Laws of the Company.
(10) Material Contracts
(a) Bond Purchase Agreement, dated as of July 1, 1984, among The
Onslow County Industrial Facilities and Pollution Control
Financing Authority, Branch Banking and Trust Company and
the Company.
(b) Loan Agreement, dated as of July 1, 1984, between The Onslow
County Industrial Facilities and Pollution Control Financing
Authority and the Company.
(c) Promissory Note in the principal amount of $6,000,000, dated
July 1, 1984, from the Company payable to The Onslow County
Industrial Facilities and Pollution Control Financing
Authority.
(d) Security Agreement, dated as of July 1, 1984, between Branch
Banking and Trust Company and the Company.
(e) Guaranty Agreement, dated as of July 1, 1984, from the
Company to Branch Banking and Trust Company.
(f) Loan Agreement dated as of December 1, 1993 by and between
Michigan Strategic Fund and the Company relating to
$5,500,000 Adjustable Rate Demand Limited Obligation Revenue
Bonds.
(g) Asset Purchase Agreement, dated as of April 29, 1995, by and
among the Company and Doskocil Companies Incorporated and
Wilson Foods Corporation, Concordia Foods Corporation, Dixie
Foods Company and Shreveport Foods Company.
(h) First Amendment to Asset Purchase Agreement, dated as of May
26, 1995, by and among the Company, Foodbrands America,
Inc., successor by merger to Doskocil Companies
Incorporated, Wilson Foods Corporation, Concordia Foods
Corporation, Dixie Foods Company and Shreveport Foods
Company.
(i) Noncompete Agreement, dated May 30, 1995, by Foodbrands
America, Inc., Wilson Foods Corporation, Concordia Foods
Corporation, Dixie Foods Company and Shreveport Foods
Company in favor of the Company.
(j) Supply Agreement, dated May 30, 1995, by and among Wilson
Foods Corporation and Foodbrands America, Inc., Dixie Foods
Company and the Company.
(k) Transition Service Agreement, dated May 30, 1995, by and
between Foodbrands America, Inc. and the Company.
(l) Note Agreement, dated as of October 1, 1994, by and between
the Company and Allstate Life Insurance Company relating to
$8,000,000 principal amount 8.42% Senior Notes due October
1, 2003.
(m) Change of Control Agreement, dated February 24, 1998,
between Edward E. Boan and Thorn Apple Valley, Inc.
44
Year Ended
Form 10-K THORN APPLE VALLEY, INC. AND SUBSIDIARIES May 29, 1998
EXHIBIT NO. PAGE
- - ----------- ----
(n) Change of Control Agreement, dated February 24, 1998,
between Keith Jahnke and Thorn Apple Valley, Inc.
(o) Change of Control Agreement, dated February 24, 1998,
between Louis Glazier and Thorn Apple Valley, Inc.
(p) Change of Control Agreement, dated February 24, 1998,
between Joel Dorfman and Thorn Apple Valley, Inc.
(q) Loan and Security Agreement, dated as of April 16, 1998,
between the Company, Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, as Administrative Agent and as a Lender, Heller
Financial, Inc., as Collateral Agent, as Documentation Agent
and as a Lender, Harris Trust and Savings Bank, as Co-Agent
and as a Lender, and the other Lenders from time to time
party thereto.
(r) Waiver and Amendment No. 1 to Loan and Security Agreement,
dated as of September 10, 1998, by and among Heller
Financial, Inc., as a Lender and as Collateral Agent (the
"Collateral Agent") and Documentation Agent (the
"Documentation Agent") for the Lenders, Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, as a Lender and as Administrative Agent (the
"Administrative Agent") for the Lenders, Harris Trust and
Savings Bank, as a Lender and a Co-Agent (the "Co-Agent")
for the Lenders, the other Lenders party thereto and Thorn
Apple Valley, Inc.
(s) $10,000,000 6 1/2 % Convertible Debenture, due September 9,
2003, between Thorn Apple Valley, Inc. and IBP, Inc.
(21) Subsidiaries of the registrant.
(23) Consent of PricewaterhouseCoopers LLP.
(27) Financial Data Schedule.