-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mk7lwlFQtOvkjkdoWAAKWc6tGJfccPBpLWlOiH2eM2EpQ31rRqr2nOWRT8+iMn0a YvJPN0MrJQ/fi5V2CWTmWQ== 0000950124-97-001620.txt : 19970321 0000950124-97-001620.hdr.sgml : 19970321 ACCESSION NUMBER: 0000950124-97-001620 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970320 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: THORN APPLE VALLEY INC CENTRAL INDEX KEY: 0000038851 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 381964066 STATE OF INCORPORATION: MI FISCAL YEAR END: 0530 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22185 FILM NUMBER: 97559603 BUSINESS ADDRESS: STREET 1: 18700 W TEN MILE RD CITY: SOUTHFIELD STATE: MI ZIP: 48075 BUSINESS PHONE: 8105520700 MAIL ADDRESS: STREET 1: 18700 WEST TEN MILE ROAD STREET 2: 18700 WEST TEN MILE ROAD CITY: SOUTHFIELD STATE: MI ZIP: 48075 FORMER COMPANY: FORMER CONFORMED NAME: FREDERICK & HERRUD INC DATE OF NAME CHANGE: 19841104 S-2/A 1 S-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997 REGISTRATION NO. 333-22185 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ THORN APPLE VALLEY, INC. (Exact name of Registrant as specified in its charter) MICHIGAN 38-1964066 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
26999 CENTRAL PARK BOULEVARD, SUITE 300 SOUTHFIELD, MICHIGAN 48076 (810) 213-1000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) JOEL DORFMAN PRESIDENT 26999 CENTRAL PARK BOULEVARD, SUITE 300 SOUTHFIELD, MICHIGAN 48076 (810) 213-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------ COPY TO: DONALD J. KUNZ, ESQ. PAUL R. RENTENBACH, ESQ, HONIGMAN MILLER SCHWARTZ AND COHN DYKEMA GOSSETT PLLC 2290 FIRST NATIONAL BUILDING 400 RENAISSANCE CENTER DETROIT, MI 48226 DETROIT, MI 48243 (313) 256-7800 (313) 568-6973 FACSIMILE: (313) 962-0176 FACSIMILE: (313) 568-6915
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [ ] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MARCH 20, 1997 PROSPECTUS $15,000,000 LOGO THORN APPLE VALLEY, INC. % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2007 ------------------ The Debentures offered by this Prospectus are convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of Common Stock of Thorn Apple Valley, Inc. (the "Company") at a conversion price of $ per share, subject to adjustment in certain events. On March 19, 1997, the last reported sale price of the Company's Common Stock, as reported on The Nasdaq National Market under the symbol "TAVI", was $16.75 per share. See "Price Range of Common Shares and Dividends". Interest on the Debentures is payable semi-annually on April 1 and October 1, commencing October 1, 1997, and the Debentures will mature on April 1, 2007, unless previously redeemed. The Debentures are redeemable at the option of the Company, at any time in whole or in part, at the redemption prices set forth herein, plus accrued interest; provided, however, that prior to April 1, 2000, the Debentures may not be redeemed, other than in connection with a Sale Event (as defined in this Prospectus), unless the closing sales price of the Common Stock equals or exceeds 140% of the then current conversion price for any 20 trading days within 30 consecutive trading days prior to the date notice of redemption is given to holders of the Debentures. In the event of a Repurchase Event (as defined in this Prospectus), the Company is required to offer to repurchase the Debentures, in whole or in part, for cash, at 101% of the principal amount thereof, plus accrued interest. The Debentures will be unsecured general obligations of the Company subordinate to all existing and future Senior Indebtedness (as defined in this Prospectus). As of March 1, 1997, the Company had approximately $154.4 million of Senior Indebtedness (approximately $ million after giving effect to the application of the proceeds of this Offering). The Debentures and the related indenture (the "Indenture") do not prohibit or limit the ability of the Company to incur additional Senior Indebtedness. See "Description of Debentures". ------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3) - -------------------------------------------------------------------------------------------------------------------------- Per Debenture............................... 100% % % - -------------------------------------------------------------------------------------------------------------------------- Total(4).................................... $15,000,000 $ $ ==========================================================================================================================
(1) Plus accrued interest, if any, from date of issuance. (2) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (3) Before deducting expenses of the offering payable by the Company estimated at $ . (4) The Company has granted the Underwriters a 30-day option to purchase up to an additional $2,250,000 in principal amount of the Debentures on the same terms and conditions to cover over-allotments, if any. If all such additional principal amount of the Debentures is purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting". ------------------ The Debentures are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the Debentures will be made in Detroit, Michigan against payment therefor on or about , 1997. ------------------ (LOGO) , 1997 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition, copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company is an electronic filer, and the Commission maintains a Web site (located at http://www.sec.gov) that contains reports, proxy statements and other information regarding registrants that file electronically. This Prospectus is a part of a Registration Statement filed by the Company with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits certain of the information included in such Registration Statement. The Registration Statement may be inspected by anyone at the office of the Commission without charge, and copies of all or any part of it may be obtained upon payment of the Commission's charge for copying. For further information about the Company and its securities, reference is hereby made to such Registration Statement, and to the exhibits and financial schedules filed as part thereof or otherwise incorporated herein. Each summary herein of additional information included in the Registration Statement or any exhibit thereto is qualified in its entirety by reference to such information or exhibit. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents (and the amendments thereto) filed by the Company (file number 0-6566) with the Commission are hereby incorporated by reference and made a part hereof, except as modified or superseded in this Prospectus: (a) Annual Report on Form 10-K for the fiscal year ended May 31, 1996; and (b) Quarterly Reports on Form 10-Q for the quarters ended September 20, 1996 and December 13, 1996. Any statement contained in a document incorporated by reference or deemed to be incorporated by reference in this Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus (other than exhibits to the information that is incorporated by reference unless such exhibits are expressly incorporated by reference into the information this Prospectus incorporates). Requests should be directed to the Vice President, Finance and Administration, 26999 Central Park Boulevard, Suite 300, Southfield, Michigan 48076 (telephone: (810) 213-1000). IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OFFERED HEREBY OR THE COMMON STOCK OF THE COMPANY, OR BOTH, AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING". 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in or incorporated by reference into this Prospectus. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Unless otherwise specified or the context requires otherwise, all references herein to the Company mean the Company and its consolidated subsidiaries. THE COMPANY Thorn Apple Valley, Inc. (the "Company") is a major producer of processed meat and poultry products ("Processed Meats") and is one of the largest slaughterers of hogs and sellers of related fresh pork products ("Fresh Meats") in the United States. The Company's Processed Meats division engages in the manufacture and sale of bacon, hot dogs and lunch meats, hams, smoked sausages and turkey products. The Company markets its Processed Meats 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. In recent years, the Company has focused on identifying emerging trends in consumer preferences and on developing Processed Meat 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 product segments. For example, the Company has developed innovative packaging concepts and products which 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 which are more convenient to use and are healthier than existing product alternatives. In recent years, the Company's strategy has been to modernize its production facilities, to relocate certain production and distribution facilities to geographically strategic locations and to increase its sales of higher-margin premium brand Processed Meat products. To this end, the Company has accomplished the following: - To respond to consumer demand for certain products and to enhance the Company's manufacturing efficiencies, in November 1995 the Company began operating its newly constructed, 171,000 square foot, state-of-the-art processing facility in Ponca City, Oklahoma, which principally manufactures 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. - To increase manufacturing efficiencies and to meet customers' changing packaging and product variety requirements in the Fresh Meats division, the Company completed a $40 million renovation of its Fresh Meats facility located in Detroit, Michigan (the "Frederick Facility"). - To position the Company as a national distributor of Processed Meats, to strengthen the Company's manufacturing and distribution capabilities in the southern and western United States and to augment the Company's premium brand Processed Meats business, in May 1995 the Company acquired substantially all of the assets (including the brand names "Wilson Certified(R)" and "Corn King(R)") of the Wilson Retail Division of Foodbrands America, Inc., a major manufacturer of premium branded Processed Meats products (the "Wilson Acquisition"). See "Business -- Wilson Acquisition". - To streamline various corporate operations, including purchasing, sales and marketing, the Company relocated and consolidated its corporate headquarters and opened a new 60,000 square foot distribution center in Edwardsville, Kansas. The Company also closed three older, less efficient processing facilities, two of which were acquired in the Wilson Acquisition, and one distribution center. In connection with the Company's expansion and renovation projects described above, the Company experienced both planned and unplanned start-up costs and operating inefficiencies at the Frederick Facility and at the Ponca City plant in fiscal years 1995 and 1996. In addition, during this period the Company, and the entire fresh pork industry, experienced a shortage in the supply of live hogs, a significant increase in the 3 5 price of live hogs and a reduction in profit margins associated with the slaughtering of hogs. As a result of the costs associated with the integration of the Wilson Acquisition, operating inefficiencies and start-up costs experienced at the Ponca City facility and Frederick Facility, reduced profit margins experienced by the Company's Fresh Meats division and the effects of the LIFO method of accounting for inventory, for the fiscal year ended May 31, 1996 the Company experienced a net loss of $21.7 million, compared with net income of $5.3 million during the prior fiscal year. While profit margins in the hog slaughtering industry remain low, in fiscal 1997 the Company has experienced improved efficiency and yields in its Fresh Meats operation, and the Company's Processed Meats Division has benefited from increases in both sales and profitability resulting from the Wilson Acquisition and the other changes instituted by the Company. For the 12 weeks ended December 13, 1996 the Company had net income of $2,017,000, or $.33 per share, compared to a net loss of $1,757,000, or $.30 per share, for the similar period in the prior fiscal year. For the 28 weeks ended December 13, 1996, the Company had net income of $305,000, or $.05 per share, compared to a net loss of $6,922,000, or $1.20 per share, for the similar period in the prior fiscal year. The improved performance resulted primarily from better margins in the Fresh Meats division achieved through direct cost reductions from the facility enhancements and from stronger sales and margins in the Processed Meats division. The Company's business strategy is to increase revenue and enhance profitability by (i) increasing the sales of the Company's higher margin premium brand Processed Meats products while reducing the Company's reliance on sales of lower margin private label products, (ii) continuing to improve production efficiencies in the Company's Fresh Meats and Processed Meats production facilities, (iii) developing and marketing new Processed Meats products, including products targeted to health-conscious consumers, and (iv) increasing overall sales volume through additional marketing strategies with an emphasis on sales to international markets, including Russia and Korea. The Company believes that, under current market conditions, the restructuring accomplished over the last two years will allow it to continue to improve its operating performance. The Company is experiencing improved sales and profitability in its Processed Meats division and increased efficiency and yield at its Fresh Meats facility. The Company has significant excess capacity which would allow the Company to increase sales of its products without significant additional capital expenditures. The Company believes that the recent high levels of hog producer profitability will encourage additional hog production, which should allow this industry segment to return to more normal levels of profitability. The Company also believes that it is well positioned to benefit from increased sales of products and from improved market conditions in the Fresh Meats industry, although the Company is unable to predict if and when market conditions will improve. THE OFFERING SECURITIES OFFERED............ $15,000,000 ($17,250,000 if the Underwriters' over-allotment option is exercised in full) principal amount of % Convertible Subordinated Debentures due April 1, 2007 (the "Debentures"). PAYMENT OF INTEREST........... Semi-annually on each April 1 and October 1, commencing October 1, 1997, with interest accruing from the date of issuance. CONVERSION RIGHTS............. The Debentures are convertible into shares of the Company's Common Stock, $.10 par value per share (the "Common Stock"), at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $ per share, subject to adjustment in certain events as described herein. Accordingly, each $1,000 principal amount of Debentures is convertible into shares of Common Stock, subject to adjustment, for an aggregate of shares, representing approximately % of the outstanding Common Stock on a fully diluted basis. See "Description of Debentures -- Conversion of Debentures" and "Capitalization". 4 6 OPTIONAL REDEMPTION........... Redeemable at the Company's option, at any time in whole or in part, at the redemption prices set forth herein, plus accrued interest; provided, however, that prior to April 1, 2000, the Debentures may not be redeemed (other than in connection with a Sale Event) unless the closing sale price of the Common Stock equals or exceeds 140% of the then current conversion price for any 20 trading days within 30 consecutive trading days prior to the date of notice of redemption. A Sale Event is generally defined to mean (i) the acquisition of 50% or more of the Company's voting stock by a person or group (other than a present holder of 5% or more of the Company's Common Stock, or a group including such a holder) and (ii) certain consolidations, mergers or sales of assets of the Company (excluding certain transactions not involving a change of control of the Company). See "Description of Debentures -- Optional Redemption". REPURCHASE AT OPTION OF HOLDERS UPON CERTAIN EVENTS... Upon a Repurchase Event (as defined in this Prospectus), the Company is required to offer to repurchase any Debentures delivered to it for redemption at 101% of the principal amount thereof, plus accrued interest. A Repurchase Event is generally defined to include: (i) the acquisition of 50% or more of the Company's voting stock by a person (other than a present holder of 5% or more of the Company's Common Stock, or a group including such a holder); (ii) certain changes in the composition of a majority of the Board of Directors; (iii) certain consolidations, mergers or sales of assets of the Company (excluding certain transactions not involving a change of control of the Company); and (iv) certain Company distributions in respect of its capital stock in excess of 30% of the value of such stock. The Company may not have sufficient funds to repurchase the Debentures upon a Repurchase Event. See "Description of Debentures -- Repurchase Event". SUBORDINATION................. The Debentures will be subordinated to all existing and future Senior Indebtedness (as defined in this Prospectus) of the Company. There is no limitation on the amount of Senior Indebtedness that may be incurred by the Company. See "Description of Debentures -- Subordination of Debentures". FINANCIAL COVENANTS........... Although the Debentures are cross-defaulted with the Company's existing secured indebtedness, neither the Debentures nor the Indenture require the Company to comply with any independent financial covenants. See "Risk Factors -- Lack of Financial Covenants in Indenture". USE OF PROCEEDS............... To repay $15.0 million of existing secured indebtedness. See "Use of Proceeds". COMMON STOCK OUTSTANDING...... 6,090,969 shares(1). - ------------------------- (1) Does not include 902,800 shares of Common Stock which, at March 1, 1997, were reserved for issuance upon exercise of outstanding warrants and stock options, 544,500 shares of Common Stock reserved for issuance upon exercise of options available for future grant under the Company's stock option plans or 370,804 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan. 5 7 SUMMARY CONSOLIDATED FINANCIAL DATA
TWENTY-EIGHT FISCAL YEAR ENDED(1) WEEKS ENDED(1) ------------------------------------------------------ -------------------------- MAY 29, MAY 28, MAY 27, MAY 26, MAY 31, DECEMBER 8, DECEMBER 13, 1992 1993 1994 1995 1996(2) 1995(2) 1996(2) ------- ------- ------- ------- ------- ----------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) RESULTS OF OPERATIONS: Net sales....................... $739,733 $729,910 $772,098 $744,542 $ 983,084 $514,908 $545,968 Operating costs and expenses(3)................... 705,579 707,373 748,542 735,044 1,011,559 521,480 539,011 Income (loss) from operations... 34,154 22,537 23,556 9,498 (28,475) (6,572) 6,957 Interest expense................ 2,573 1,844 2,151 2,259 8,492 4,547 7,002 Net income (loss)............... 21,055 13,863 14,083 5,255 (21,708) (6,922) 305 Earnings (loss) per share of common stock(4)............... $ 3.75 $ 2.36 $ 2.40 $ 0.91 $ (3.76) $ (1.20) $ 0.05 Dividends per share of common stock......................... $ .08 $ .20 $ .27 $ .28 $ .07 .$07 $ -- Weighted average shares outstanding................... 5,615 5,884 5,878 5,755 5,779 5,775 5,925 SELECTED OPERATING DATA: Hogs slaughtered................ 3,286 3,150 3,230 3,420 3,339 1,727 1,696 Net sales: Fresh meat products........... $365,748 $336,575 $349,092 $321,844 $ 355,015 $180,302 $202,113 Processed meat products....... 368,384 386,711 416,338 415,358 623,044 331,721 341,036 Other......................... 5,601 6,624 6,668 7,340 5,025 2,885 2,819 -------- -------- -------- -------- ---------- -------- -------- Total........................... $739,733 $729,910 $772,098 $744,542 $ 983,084 $514,908 $545,968 ======== ======== ======== ======== ========== ======== ======== OTHER DATA: EBITDA(5)....................... $ 42,122 $ 30,796 $ 32,714 $ 20,289 $ (10,687) $ 2,107 $ 17,053 EBIT(6)......................... 35,013 23,417 24,451 10,459 (26,066) (5,939) 7,656 Ratio of EBITDA to fixed charges(7).................... 5.8x 4.9x 4.4x 2.2x (0.6x) 0.2x 1.4x Ratio of EBIT to fixed charges(8).................... 4.8x 3.7x 3.3x 1.1x (1.5x) (0.7x) 0.7x Ratio of earnings (loss) to fixed charges(9).............. 5.4x 4.4x 4.0x 1.9x (1.0x) (0.2x) 1.05x
DECEMBER 13, 1996(2) -------------------------- ACTUAL AS ADJUSTED(10) ------ --------------- (UNAUDITED) BALANCE SHEET DATA: Working capital........................................... $ 74,686 Total assets.............................................. 333,820 Long term debt (excluding current portion)................ 165,448 Shareholders' equity...................................... 80,118
- ------------------------- (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 year and all other years presented in this table were 52-week years. The Company's second fiscal quarter consists of twelve weeks and each subsequent fiscal quarter consists of twelve weeks, except that the fourth quarter consists of thirteen weeks in the case of a 53-week fiscal year. (2) On May 31, 1995, the Company completed the Wilson Acquisition. The results of operations of the Company for fiscal 1996 reflect a full year of operations related to the Wilson Acquisition. (3) Operating costs and expenses for fiscal 1995 includes a pre-tax restructuring charge to operations of $7.9 million. The Company closed its Tri-Miller Packing facility in Hyrum, Utah in an effort to eliminate duplicate facilities and excess personnel. The shutdown of this facility was substantially completed by the end of May 1995. The restructuring charge included $5.5 million related to the write-down of plant and equipment that were sold. Another $1.4 million included other costs related to the shutdown of the Tri-Miller facility, which also included employee severance payments. The remaining $1.0 million related to the write-down of real property and equipment to estimated realizable value associated with the relocation to a new corporate headquarters building and of the Company's spiral sliced ham operation to the newly constructed production facility in Ponca City, Oklahoma. 6 8 (4) Restated at May 28, 1993 and May 29, 1992 to reflect a 3-for-2 stock split in December 1992 and at May 29, 1992 to reflect a 3-for-2 stock split in June 1991. (5) EBITDA represents earnings before interest, taxes, depreciation, amortization of intangible assets and deferred financing costs, and extraordinary items. The Company's various secured lenders use EBITDA as a method of measuring and analyzing the financial performance of the Company, because it eliminates the effects of interest, depreciation and amortization of intangibles on net income. EBITDA should not be considered as an alternative to net income as an indicator of the Company's operating performances or to cash flows as a measure of the Company's liquidity. The LIFO method of accounting for inventories had the effect of decreasing income (loss) from operations by approximately $13,734,000 and net income (loss) (after income taxes) by approximately $8,927,000 at May 31, 1996, respectively. For the fiscal year ended May 26, 1995, the LIFO method of accounting for inventories had the effect of increasing income (loss) from operations by approximately $1,972,000 and net income (loss) by approximately $1,282,000, respectively. (6) EBIT represents earnings before interest and taxes. (7) The ratio of EBITDA to fixed charges was computed by dividing EBITDA by fixed charges. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. (8) The ratio EBIT to fixed charges was computed by dividing EBIT by fixed charges. For this purpose "EBIT" represents earnings before interest and taxes. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. (9) The ratio of earnings (loss) to fixed charges was computed by dividing earnings (loss) by fixed charges. For this purpose "earnings (loss)" consists of earnings (loss) before income taxes, extraordinary items and fixed charges. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. (10) As adjusted to give effect to the sale of $15,000,000 principal amount of Debentures offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization". 7 9 RISK FACTORS Prospective investors should carefully consider the factors set forth below, as well as other information included elsewhere herein or incorporated by reference, prior to purchasing the Debentures offered hereby. RECENT RESULTS OF OPERATIONS; RISK OF DEFAULT UNDER SECURED INDEBTEDNESS The Company incurred a net loss of $21.7 million in fiscal 1996 and, following the end of fiscal 1996, the Company was in default under its borrowing arrangements. On September 11, 1996, the Company restructured its borrowing arrangements and granted its lenders security interests in substantially all of the Company's assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". For the 28 weeks ended December 13, 1996, the Company had net income of $305,000, but on December 13, 1996, the Company was in non-compliance with one financial covenant relating to its secured indebtedness. While the Company obtained waivers of such non-compliance from the applicable lenders under the secured indebtedness, such lenders have no obligation to provide waivers of future non-compliance with such covenants and no assurance can be given that the Company could obtain waivers if the Company were to be in non-compliance with such covenants in the future. While the Company is currently in compliance with all financial covenants under its secured indebtedness, no assurance can be given that the Company will continue to remain in compliance. If the Company were to be in non-compliance with such financial covenants in the future and the lenders under the secured indebtedness were to fail to waive such non-compliance, such non-compliance would have a material adverse effect on the Company. See "Risk Factors -- Subordination of Debentures; No Limitation on Senior Indebtedness". In addition, although the Company reported net income of $305,000 for the 28 weeks ended December 13, 1996, the Company expects to report a net loss of between $1.7 million and $1.9 million for the 12 weeks ended March 7, 1997, and no assurance can be given that the Company will report a profit for the entire 1997 fiscal year or for any other future period. MARKET CONSIDERATIONS; RAW MATERIALS The Company's results of operations and financial condition are affected by the costs and supply of live hogs and by the Company's selling prices for many of its products, which are determined by constantly changing market forces of supply and demand, over which the Company has limited control. In addition, profit margins in the Fresh Meats industry, which depend in part on the relationship between the cost of live hogs and the selling prices of primal pork cuts, may fluctuate significantly based upon various market factors over which the Company has limited control. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Raw Materials". 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. There can be no assurance that the Company will be able to compete successfully in the future. See "Business -- Competition". SUBORDINATION OF DEBENTURES; NO LIMITATION ON SENIOR INDEBTEDNESS The Debentures will be subordinate in right of payment to all present and future Senior Indebtedness and will not rank senior to any debt of the Company unless such debt is expressly subordinated to the Debentures. As of , 1997, after giving effect to this offering and the application of the estimated net proceeds therefrom, Senior Indebtedness would have been approximately million. In the event of a default in the payment of the principal of or interest on any Senior Indebtedness of the Company, the Company is prohibited from making any payment with respect to the principal of or interest or premium, if any, on the Debentures unless and until such default has been cured or waived or all Senior Indebtedness has been paid in full. Furthermore, the Indenture does not prohibit or limit the ability of the Company to incur additional Senior 8 10 Indebtedness, including Senior Indebtedness incurred in a highly leveraged transaction initiated by the Company's management or proposed by significant shareholders. Consequently, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Company's ability to service the debt evidenced by the Debentures. In addition, by reason of such subordination, in the event of any insolvency, receivership, liquidation or other reorganization of the Company, holders of Senior Indebtedness must be paid in full before the holders of the Debentures may be paid. Accordingly, there may be insufficient assets remaining after payment of prior claims to pay amounts due on the Debentures. See "Summary -- Summary Consolidated Financial Information", "Selected Consolidated Financial Data", "Description of Debentures -- Subordination of Debentures" and Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". LACK OF FINANCIAL COVENANTS IN INDENTURE Many commercial loan agreements mandate compliance by the borrower with certain financial covenants, such as financial statement ratios, net worth requirements, working capital requirements, interest and fixed charge coverage levels, liquidity or cash flow levels. These requirements are intended to monitor the financial condition of the borrower, provide the lender with a degree of comfort regarding the performance of the borrower and advance warning of certain problems, and require the borrower to operate within certain financial guidelines. Other loan documents, most notably unsecured debt instruments, do not necessarily include these requirements. Although the Indenture does not mandate compliance with financial covenants, the Company's secured indebtedness does mandate compliance with certain financial covenants which affect, among other things, the Company's ability to draw upon its line of credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". The Indenture does not contain any provisions that would provide protection to holders of the Debentures against a sudden and dramatic decline in credit quality of the Company for any reason, including any takeover, recapitalization or similar restructuring, including a highly leveraged transaction initiated by the Company's management or proposed by significant shareholders. REDEMPTION OF DEBENTURES The Debentures may be redeemed in whole or in part by the Company at the redemption prices set forth herein, plus accrued interest to the date of redemption; provided, that prior to April 1, 2000, the Debentures may not be redeemed (other than in connection with a Sale Event) unless the closing sale price of the Common Stock, as reported on The Nasdaq National Market, equals or exceeds 140% of the current conversion price for any 20 trading days within 30 consecutive trading days prior to the date notice of redemption is given to holders of the Debentures. In the event of redemption, holders of the Debentures may receive from the Company less than such holders would have received in the open market absent such redemption provisions. In addition, holders may not be able to locate an investment opportunity with interest rate and provisions which are similar to the Debentures at such time. See "Description of Debentures -- Optional Redemption". Upon a Repurchase Event, the Company is required to offer to repurchase any Debentures delivered to it for redemption at 101% of the principal amount thereof, plus accrued interest. The requirement to redeem the Debentures at a premium may have a deterrent effect on a potential takeover of the Company and, consequently, may have a negative effect on the price of the Common Stock into which the Debentures are convertible. See "Description of Debentures -- Repurchase Event". CONTROL BY PRESENT SHAREHOLDERS Mr. Henry S Dorfman, Chairman of the Board of Directors of the Company, beneficially owns an aggregate of 2,701,061 shares of the Common Stock, or 44.3% of the shares issued and outstanding as of March 1, 1997. As a result, Mr. Henry S Dorfman has the ability to influence significantly most matters requiring approval by shareholders of the Company, including the election of the directors of the Company. 9 11 NO ASSURANCE OF A PUBLIC MARKET No assurance can be given that an active market for the Debentures will develop or, if developed, will continue. If no active market develops, it may be difficult for purchasers to resell their Debentures. The representative of the Underwriters has advised the Company that it intends to make a market for the Debentures although it is under no obligation to continue to do so and were such market making to be discontinued, investors would encounter difficulty effecting purchase or sale transactions in the absence of alternative market makers. See "Underwriting". 10 12 THE COMPANY Thorn Apple Valley, Inc. is a major producer of processed meat and poultry products and is one of the largest slaughterers of hogs and sellers of related fresh pork products in the United States. The Company was originally incorporated in 1959 as a Michigan corporation. It reincorporated in Delaware in 1971 and reincorporated in Michigan in 1977. In 1984, the Company changed its corporate name from Frederick & Herrud, Inc. to Thorn Apple Valley, Inc. The Company's principal executive offices are located at 26999 Central Park Boulevard, Suite 300, Southfield, Michigan 48076 (telephone number: (810) 213-1000). USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Debentures offered by the Company are estimated to be $ million ($ million if the Underwriters' over-allotment option is exercised in full) after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use the net proceeds to repay (on a pro rata basis based on the amounts outstanding at the time of repayment) amounts owing under its (i) $90.0 million revolving credit facility, (ii) $15.0 million 6.45% Notes due April 21, 2006, (iii) $8.0 million 8.42% Notes due October 1, 2003, (iv) $42.5 million 7.58% Notes due May 15, 2005, and (v) $5.5 million limited obligation industrial revenue bonds. The revolving credit facility accrues interest at the rate of prime plus one quarter percent and terminates on May 30, 1998. The 6.45% Notes currently accrue interest at the rate of 8.45%; provided, however, that such rate will be reduced to 7.45% upon completion of this offering. The 8.42% Notes currently accrue interest at the rate of 10.42%; provided, however, that such rate will be reduced to 9.42% upon completion of this offering. The 7.58% Notes currently accrue interest at the rate of 9.58%; provided, however that such rate will be reduced to 8.58% upon completion of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition". 11 13 PRICE RANGE OF COMMON SHARES AND DIVIDENDS The Company's Common Stock is traded on The Nasdaq National Market under the symbol "TAVI". The following table sets forth, for the periods indicated, the high and low sales prices of the Company's Common Stock on The Nasdaq National Market and the dividends per share paid by the Company.
SALES PRICES DIVIDENDS PER SHARE ---------------- ------------------- HIGH LOW ---- --- FISCAL 1995 (ENDED MAY 26, 1995) First quarter............................................ $25.25 $22.00 $.07 Second quarter........................................... 30.25 23.00 .07 Third quarter............................................ 30.00 20.00 .07 Fourth quarter........................................... 22.00 16.62 .07 FISCAL 1996 (ENDED MAY 31, 1996) First quarter............................................ 23.50 18.00 .07 Second quarter........................................... 19.50 15.12 -- Third quarter............................................ 17.75 14.00 -- Fourth quarter........................................... 15.75 10.25 -- FISCAL 1997 (ENDING MAY 30, 1997) First quarter............................................ 14.25 8.75 -- Second quarter........................................... 15.75 11.38 -- Third quarter............................................ 16.75 13.13 -- Fourth quarter (through March 19, 1997).................. 16.75 12.25 --
On March 19, 1997, the last reported sales price of the Company's Common Stock, as reported on The Nasdaq National Market under the symbol "TAVI", was $16.75 per share. As of March 1, 1997, there were approximately 525 record holders of the Common Stock based on the records of the Company's transfer agent. The Company has not paid any cash dividends on its Common Stock since October 1995 and presently expects to retain all of its earnings to fund the growth of its business. In addition, under the terms of the Company's secured indebtedness, the Company is prohibited from paying dividends on its Common Stock. As a result, the Company has no present intention of paying any cash dividends on its Common Stock in the foreseeable future. Any future determination as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions and such other factors as the Board of Directors deems relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Capital Stock". 12 14 CAPITALIZATION The table sets forth the capitalization of the Company at December 13, 1996 and as adjusted to give effect to the issuance and sale of the Debentures offered hereby and the proposed application of the estimated net proceeds therefrom. See "Use of Proceeds". This table should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto appearing elsewhere in this Prospectus.
DECEMBER 13, 1996 ----------------------- ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Short-term debt: Notes payable............................................. $ 25 Current portion of long-term debt......................... 4,578 -------- Total short-term debt (1).............................. $ 4,603 ======== Long-term debt (excluding current portion): Secured indebtedness...................................... $165,448 Subordinated unsecured indebtedness....................... -- -------- Total long-term debt (2)............................... $165,448 -------- Shareholders' equity: Preferred stock, 200,000 shares authorized, none issued... -- -- Common stock, 20,000,000 shares authorized, 6,075,152 and 6,075,152 shares outstanding, respectively............. $ 607 $ 607 Capital in excess of par value............................ 10,070 10,070 Retained earnings......................................... 69,440 69,440 -------- ------- Total shareholders' equity............................. 80,117 80,117 -------- ------- Total capitalization................................... $245,565 $ ======== =======
- ------------------------- (1) See Notes 3 and 6 of Notes to the Company's Consolidated Financial Statements for additional information relating to the Company's short-term debt obligations. (2) See Note 6 of Notes to the Company's Consolidated Financial Statements for additional information relating to the Company's long term debt obligations. 13 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the fiscal years indicated were derived from the Company's audited Consolidated Financial Statements. The selected consolidated financial data for the twenty-eight weeks ended December 8, 1995 and December 13, 1996 were derived from unaudited consolidated financial statements appearing elsewhere herein, which include, in the opinion of management, all adjustments, consisting of normal adjustments, necessary to present fairly the results of operations and financial position of the Company for the periods and dates presented. The results for the twenty-eight weeks ended December 13, 1996 are not necessarily indicative of the results to be expected for fiscal 1997. This financial data should be read in conjunction with the Company's Consolidated Financial Statements, including the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Prospectus.
TWENTY-EIGHT FISCAL YEAR ENDED(1) WEEKS ENDED(1) --------------------------------------------------------- -------------------------- MAY 29, MAY 28, MAY 27, MAY 26, MAY 31, DECEMBER 8, DECEMBER 13, 1992 1993 1994 1995 1996(2) 1995(2) 1996(2) ------- ------- ------- ------- ------- ----------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) RESULTS OF OPERATIONS: Net sales......................... $739,733 $729,910 $772,098 $744,542 $ 983,084 $514,908 $545,968 -------- -------- -------- -------- ---------- -------- -------- Operating costs and expenses(3) Cost of goods sold, including delivery costs................ 654,844 655,147 693,784 669,068 932,131 476,745 496,403 Selling......................... 21,502 21,996 24,156 25,377 37,533 21,262 17,576 General and administrative...... 22,124 22,851 22,339 22,912 26,516 15,427 15,635 Depreciation and amortization... 7,109 7,379 8,263 9,830 15,379 8,046 9,397 Restructuring charge............ -- -- -- 7,857(3) -- -- -- -------- -------- -------- -------- ---------- -------- -------- 705,579 707,373 748,542 735,044 1,011,559 521,480 539,011 -------- -------- -------- -------- ---------- -------- -------- Income (loss) from operations..... 34,154 22,537 23,556 9,498 (28,475) (6,572) 6,957 -------- -------- -------- -------- ---------- -------- -------- Other expenses (income): Interest........................ 2,573 1,844 2,151 2,259 8,492 4,547 7,002 Other, net...................... (859) (880) (895) (961) (2,409) (633) (699) -------- -------- -------- -------- ---------- -------- -------- 1,714 964 1,256 1,298 6,083 3,914 6,303 -------- -------- -------- -------- ---------- -------- -------- Income (loss) before income taxes........................... 32,440 21,573 22,300 8,200 (34,558) (10,486) 654 Provision (benefit) for income taxes........................... 11,385 7,710 8,217 2,945 (12,850) (3,564) 349 -------- -------- -------- -------- ---------- -------- -------- Net income (loss)................. $ 21,055 $ 13,863 $ 14,083 $ 5,255 $ (21,708) $ (6,922) $ 305 ======== ======== ======== ======== ========== ======== ======== Earnings (loss) per share of common stock(4)............... $ 3.75 $ 2.36 $ 2.40 $ 0.91 $ (3.76) $ (1.20) $ 0.05 ======== ======== ======== ======== ========== ======== ======== Dividends per share of common stock......................... $ .08 $ .20 $ .27 $ .28 $ .07 $ .07 $ -- Weighted average shares outstanding................... 5,615 5,884 5,878 5,755 5,779 5,775 5,925 SELECTED OPERATING DATA: Hogs slaughtered................ 3,286 3,150 3,230 3,420 3,339 1,727 1,696 Net sales: Fresh meat products........... $365,748 $336,575 $349,092 $321,844 $ 355,015 $180,302 $202,113 Processed meat products....... 368,384 386,711 416,338 415,358 623,044 331,721 341,036 Other......................... 5,601 6,624 6,668 7,340 5,025 2,885 2,819 -------- -------- -------- -------- ---------- -------- -------- Total........................... $739,733 $729,910 $772,098 $744,542 $ 983,084 $514,908 $545,968 ======== ======== ======== ======== ========== ======== ======== OTHER DATA: EBITDA(5)....................... $ 42,122 $ 30,796 $ 32,714 $ 20,289 $ (10,687) $ 2,107 $ 17,053 EBIT(6)......................... 35,013 23,417 24,451 10,459 (26,066) (5,939) 7,656 Ratio of EBITDA to fixed charges(7).................... 5.8x 4.9x 4.4x 2.2x (0.6x) 0.2x 1.4x Ratio of EBIT to fixed charges(8).................... 4.8x 3.7x 3.3x 1.1x (1.5x) (0.7x) 0.7x Ratio of earnings (loss) to fixed charges(9).............. 5.4x 4.4x 4.0x 1.9x (1.0x) (0.2x) 1.05x BALANCE SHEET DATA(2): Working Capital................. $ 50,338 $ 42,467 $ 51,830 $ 31,757 $ 59,043 $ 67,841 $ 74,686 Total assets.................... 132,600 143,949 185,442 204,296 325,616 338,299 333,820 Long term debt (excluding current portion).............. 15,069 8,844 27,937 35,465 159,809 154,735 165,448 Shareholders' equity............ 72,886 86,309 96,170 98,596 76,725 91,399 80,118
- ------------------------- (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 year and all other years presented in this table were 52-week years. The Company's second fiscal 14 16 quarter consists of twelve weeks and each subsequent fiscal quarter consists of twelve weeks, except that the fourth quarter consists of thirteen weeks in the case of a 53-week fiscal year. (2) On May 31, 1995, the Company completed the Wilson Acquisition. The results of operations of the Company for fiscal 1996 reflect a full year of operations related to the Wilson Acquisition. (3) During the fourth quarter of fiscal 1995, the Company recorded a pre-tax restructuring charge to operations of $7.9 million. The Company closed its Tri-Miller Packing facility in Hyrum, Utah in an effort to eliminate duplicate facilities and excess personnel. The shutdown of this facility was substantially completed by the end of May 1995. The restructuring charge included $5.5 million related to the write-down of plant and equipment that were sold. Another $1.4 million included other costs related to the shutdown of the Tri-Miller facility, which also included employee severance payments. The remaining $1.0 million related to the write-down of real property and equipment to estimated realizable value associated with the relocation to a new corporate headquarters building and of the Company's spiral sliced ham operation to the newly constructed production facility in Ponca City, Oklahoma. (4) Restated at May 28, 1993 and May 29, 1992 to reflect a 3-for-2 stock split in December 1992 and at May 29, 1992 to reflect a 3-for-2 stock split in June 1991. (5) EBITDA represents earnings before interest, taxes, depreciation, amortization of intangible assets and deferred financing costs, and extraordinary items. The Company's various secured lenders use EBITDA as a method of measuring and analyzing the financial performance of the Company, because it eliminates the effects of interest, depreciation and amortization of intangibles on net income. EBITDA should not be considered as an alternative to net income as an indicator of the Company's operating performances or to cash flows as a measure of the Company's liquidity. The LIFO method of accounting for inventories had the effect of decreasing income (loss) from operations by approximately $13,734,000 and net income (loss) (after income taxes) by approximately $8,927,000 at May 31, 1996, respectively. For the fiscal year ended May 26, 1995, the LIFO method of accounting for inventories had the effect of increasing income (loss) from operations by approximately $1,972,000 and net income (loss) by approximately $1,282,000, respectively. (6) EBIT represents earnings before interest and taxes. (7) The ratio of EBITDA to fixed charges was computed by dividing EBITDA by fixed charges. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. (8) The ratio EBIT to fixed charges was computed by dividing EBIT by fixed charges. For this purpose "EBIT" represents earnings before interest and taxes. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. (9) The ratio of earnings (loss) to fixed charges was computed by dividing earnings (loss) by fixed charges. For this purpose "earnings (loss)" consists of earnings (loss) before income taxes, extraordinary item and fixed charges. For this purpose "fixed charges" consist of interest expense on indebtedness, amortization of intangible assets and deferred financing costs, and minimum net rent payments. 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Profitability in the hog slaughter industry is affected by the cost and supply of hogs and pork product selling prices. The slaughtering industry has generally been characterized by relatively narrow profit margins and a trend toward larger, higher volume plants in order to reduce per unit costs. Processed meat and poultry processors generally receive higher profit margins on premium labeled items than on fresh pork and by-products. Hog prices represent the principal production cost of pork slaughterers and are an important element in the cost of certain processed meat products as well. Hog prices and hog supply are determined by constantly changing market forces. The ability of hog slaughterers and processors to maintain satisfactory margins may be affected by market factors over which such industry participants have limited control, including, in addition to the supply and price of live hogs, industry-wide slaughter levels, competition, the relative price of substitute products, overall domestic retail demand and the level of exports. CURRENT PERIOD PERFORMANCE Although final results for the 12 weeks ended March 7, 1997 are not available as of the date of this Prospectus, based on preliminary indications management of the Company expects to report a net loss of between $1.7 million and $1.9 million, or between $.28 and $.31 per share for such period, compared to a net loss of $3.7 million, or $.63 per share, for the 12 weeks ended March 1, 1996. For the 40 weeks ended March 7, 1997, management of the Company expects to report a net loss of between $1.4 million and $1.6 million, or between $.23 and $.27 per share, compared to a net loss of $10.6 million, or $1.83 per share, in the comparable period of the prior fiscal year. RESULTS OF OPERATIONS The following discussion analyzes material changes in the financial information of the Company during the Company's last two fiscal years and during the first 28 weeks of fiscal 1997. Twenty-Eight Weeks ended December 13, 1996 as Compared to Twenty-Eight Weeks ended December 8, 1995 The Company's net income in the twenty-eight weeks ended December 13, 1996 increased by $7.2 million to net income of $.3 million from a net loss of $6.9 million for the prior year period. The increase in net income for the first two quarters of fiscal 1997 is attributable to increased sales and improved margins in the Company's Processed Meats and Fresh Meats divisions. The Company's Processed Meats operations have benefitted from the modern design, strategic geographical location, plant operating efficiencies and simplified product mix at the Ponca City plant. Such changes have resulted in significantly lower direct costs leading to improved profit margins. While the Company continued to improve its operating efficiencies at its Fresh Meats facility in the first two quarters of fiscal 1997, the substantial gains were somewhat offset by a further deterioration of profit margins in the Fresh Meats division. The Company believes that the recent high levels of hog producer profitability will encourage additional hog production, which should allow this industry segment to return to more normal levels of profitability. Net sales for the first two quarters of fiscal 1997 increased by $31.0 million, or 6.0%. The increase in net sales dollars was principally the result of increased average selling prices in the Company's Processed Meats and Fresh Meats divisions of 13.7% and 14.4%, respectively. Partially offsetting the increased average selling prices was a reduction in Processed Meats and Fresh Meats tonnage shipped of 9.6% and 2.0%, respectively. The Company's Processed Meats sales (in pounds) decreased as a result of the Company's elimination of certain lower margin product lines, including reduction in sales of some private label products. The Company's Fresh Meats sales (in pounds) were down primarily due to lower slaughter levels resulting from an industry wide shortage of live hogs available for slaughter. The increase in average selling prices primarily reflects an increase of approximately 22% in the cost of live hogs, the Company's primary raw material. 16 18 Cost of goods sold (including delivery costs) increased by $19.7 million, or 4.1%, mainly as the result of the increased cost of live hogs referred to above, which was partially offset by a reduction in Processed Meats and Fresh Meats sales volume (in pounds) and increased Processed Meats and Fresh Meats plant operating efficiencies. As a percentage of net sales, costs of goods sold decreased to 90.9% from 92.6%. Selling expenses decreased $3.7 million, or 17.3%, principally as a result of lower promotional expenses and a reduction in the operating costs associated with the sales department resulting from the completion of the integration of the acquired Wilson sales function into the Company's business. As a percentage of net sales, selling expenses decreased to 3.2% from 4.1%. General and administrative expenses remained relatively unchanged from the prior year period. As a percentage of net sales, general and administrative expenses decreased slightly to 2.9% from 3.0%. Interest expense increased $2.4 million, or 54.0%. The increase was attributable to an increase in borrowings under the Company's revolving credit agreement that primarily was the result of the Company's fiscal 1996 operating losses and capital expenditures related to the Ponca City plant, and increased interest rates related to the restructuring of the Company's long-term revolving credit agreement and private placement note agreements in September, 1996. The provision for income taxes increased by $3.9 million, primarily due to the increase in pre-tax income from operations of $11.1 million to income of $.6 million from a loss of $10.5 million in the comparable prior period. The Company's effective tax rate increased to 53.4% from (34.0%). Earnings per share of common stock increased by $1.25 per share to income of $.05 per share from a net loss of $1.20 per share, due to increased profitability resulting from the factors discussed above. The results for the twenty-eight weeks ended December 13, 1996 are not necessarily indicative of the results to be expected for fiscal 1997. Fiscal 1996 as Compared to Fiscal 1995 (53 week fiscal year compared to 52 week fiscal year) The Company's net loss for the fiscal year ended May 31, 1996 was $21.7 million compared with net income of $5.3 million in fiscal 1995. The Company's fiscal 1995 net income was negatively impacted by a restructuring charge of approximately $5.0 million. (See Note 12 to the Notes to the Consolidated Financial Statements for additional information on the prior year's restructuring charge.) The decrease in profits was primarily attributable to lower Fresh Meats and Processed Meats profit margins and higher overhead costs in both the Fresh Meats and Processed Meats divisions. The LIFO (last in, first out) method of accounting for inventories had the effect after taxes of decreasing earnings for fiscal 1996 by approximately $8.9 million, compared with an increase to earnings of approximately $1.3 million in fiscal 1995. Operating profits for the Processed Meats division were negatively impacted by increased overhead costs associated with the manufacturing facilities acquired as part of the Wilson Acquisition, along with the start-up costs associated with the Ponca City facility. The profit margins experienced by the Fresh Meats division were lower during fiscal 1996 than the margins experienced by the Company in recent years due to adverse industry pricing conditions and inefficiencies at the Company's Fresh Meats facility. The Fresh Meats facility's inefficiencies were due in part to the operational difficulties encountered as a result of the complexities of the facility's operations and high rate of speed at which the facility operates. In response, the Company began assembling a new plant management team in September, 1995. Net sales for fiscal 1996 increased by $238.5 million or 32.0%. Sales (in pounds) and average selling prices in the Company's Processed Meats operations increased by 34.2% and 11.8%, respectively. The Company's Processed Meats operations sales volume increased primarily as a result of the Wilson Acquisition. The Company's Fresh Meats division's net sales increased by 10.3%, due to an increase in average selling prices of 18.0%, offset in part by a decrease in sales tonnage of 6.5%. The increase in average selling prices was significantly less than the increase of approximately 25.7% in the cost of live hogs, the Company's primary raw material. The Company's Fresh Meats sales (in pounds) was down primarily due to the closing, during fiscal 17 19 1995, of the Company's Tri-Miller facility and to a large increase in hams being retained for use in the Company's Processed Meats operations. Cost of goods sold (including delivery costs) increased by $263.0 million in fiscal 1996, or 39.3%, as compared to fiscal 1995, principally as a result of the increase in sales volume related to the Wilson Acquisition and as a result of the increased cost of live hogs referred to above. As a percentage of net sales, costs of goods sold increased from 89.8% in fiscal 1995 to 94.8% in fiscal 1996, primarily as a result of overhead costs associated with the integrated Wilson business and higher overhead costs associated with the recently completed Frederick Facility renovation, additional costs associated with the Ponca City plant and lower margins in the Company's Fresh Meats division. Although the Company believes that the Frederick and Ponca City plants are now operating at acceptable levels, the Company is unable to predict at this time if or when industry fresh pork margins will return to more profitable levels. Selling expenses increased by $12.2 million in fiscal 1996, or 47.9%, as compared to fiscal 1995, principally as a result of the additional sales employees, sales offices, and promotional programs associated with the Wilson Acquisition. As a percentage of net sales, selling expenses increased to 3.8% in fiscal 1996 from 3.4% in fiscal 1995, mainly due to the factors discussed above. General and administrative expenses increased $3.6 million in fiscal 1996, or 15.7%, as compared to fiscal 1995. The increase is primarily due to additional costs associated with the Wilson Acquisition. As a percentage of net sales, general and administrative expenses decreased to 2.7% in fiscal 1996 from 3.1% in fiscal 1995. Interest expense increased $6.2 million in fiscal 1996, or 276.0%, as compared to fiscal 1995. The increase is attributable to the significant increase in long-term debt associated with the Wilson Acquisition. In addition, borrowings under the Company's revolving credit agreement were significantly higher than prior year levels due to the Company's operating losses, and to capital requirements associated with the construction of the Ponca City plant. The provision for income taxes decreased by $15.8 million in fiscal 1996, primarily due to the decrease in pre-tax income from operations of $42.8 million to a pre-tax loss of $34.6 million from pre-tax income of $8.2 million in the comparable prior period, resulting from the factors discussed above. The Company's effective tax rate decreased to (37.5%) in fiscal 1996 from 35.9% in fiscal 1995. Earnings per share of common stock decreased by $4.67 per share to a net loss of $3.76 in fiscal 1996 per share, due to decreased profitability resulting from the factors discussed above. Fiscal 1995 as Compared to Fiscal 1994 (52 week fiscal year compared to 52 week fiscal year) The Company's net income for fiscal 1995 decreased 62.7% to $5.3 million, as compared with net income of $14.1 million in fiscal 1994. The Company accrued a restructuring charge primarily related to the closing of the Company's Tri-Miller Packing facility in Hyrum, Utah. The restructuring charge negatively impacted net income by approximately $5.0 million. (See Note 12 to the Notes to the Consolidated Financial Statements for additional information on the restructuring charge). The LIFO (last-in, first-out) method of accounting for inventories had the effect after taxes of increasing earnings for fiscal 1995 and fiscal 1994 by $1,282,000 and $538,000, respectively. The Company's results (exclusive of the restructuring charge) during 1995 were negatively impacted from decreased operating margins in both the Processed Meats and Fresh Meats divisions. The Processed Meats division margins decreased primarily from continued competitive industry pressures. The Fresh Meats division margins decreased as a result of higher operating costs associated with the renovation and expansion project combined with continued competitive industry margin pressures. The implementation of a very innovative and complex processing floor at the Company's Frederick Facility was significantly more involved and difficult than the Company anticipated. Net sales in fiscal 1995 decreased $27.6 million or 3.6%, as compared with fiscal 1994 levels. The decrease was due primarily to decreases of 7.2% and 8.3% in Processed Meats and Fresh Meats average selling prices, respectively. Offsetting the lower average selling prices were increases of 7.5% and .6% in Processed 18 20 Meats and Fresh Meats tonnage shipped, respectively. The decrease in selling prices was the result of a decrease in raw material costs combined with increased competitive pressure on the Company's Processed Meats pricing structure. The increase in the Processed Meats sales (in pounds) was the result of the continued emphasis by the Company on expanding the distribution of these products. Cost of goods sold (including delivery costs) decreased $24.7 million or 3.6%. The decrease was primarily the result of the decrease of approximately 17.5% in the average cost of live hogs purchased, which was partially offset by additional costs associated with the increase in unit volume. As a percentage of net sales, cost of goods sold remained at 89.9% for fiscal 1995, as in fiscal 1994. Selling expenses increased in fiscal 1995 by $1.2 million or 5.1%, as a result of increased marketing expenditures to enhance the distribution of the Company's products to more retail stores, particularly, in the southwestern and western regions of the United States. As a percentage of net sales, selling expenses increased to 3.4% in fiscal 1995 from 3.1% in fiscal 1994. General and administrative expenses increased slightly by $.6 million or 2.6% primarily due to inflationary cost increases. As a percentage of net sales, general and administrative expenses increased to 3.1% from 2.9%. Interest expense increased $.1 million or 5.0%, as a result of an increase in the Company's average outstanding borrowings. The increase in debt was primarily the result of increased long-term borrowings resulting from the increase in capital expenditures. 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 is a party to secured lending agreements with four financial institutions and with three institutional lenders, as well as certain industrial revenue bond agreements. The Company's secured lending agreements were restructured on September 11, 1996. Prior to the restructuring, the Company had an $80 million unsecured revolving credit agreement with the four financial institutions, as well as a temporary additional $20 million line of credit from the four financial institutions. The lines of credit bore interest at rates no higher than the prime rate. The Company also had outstanding balances on three separate issues of unsecured notes in private placements to institutional investors. The first outstanding issue, issued on April 1, 1994, was in the principal amount of $15,000,000 and bore interest at a fixed rate of 6.45% per annum. The second outstanding issue, issued on October 1, 1994, was in the principal amount of $8,000,000 and bore interest at a fixed rate of 8.42% per annum. The third outstanding issue, issued on May 30, 1995, was in the principal amount of $42,500,000 and bore interest at a fixed rate of 7.58% per annum. Prior to the loan restructuring, the Company was in non-compliance with certain financial covenants relating to its unsecured revolving credit agreement, its private placement note agreements and its $5.5 million limited obligation revenue bond agreement. On September 11, 1996 the Company entered into agreements with the participating lenders to restructure the Company's revolving credit and note agreement facilities and one of the Company's limited revenue industrial bonds. As part of that restructuring, the lenders waived past non-compliances with financial covenants and those covenants were modified on a going-forward basis. The following is a description of the significant changes in the terms of the Company's borrowing agreements: 1. Under the revolving credit agreement the $80 million credit limit was increased to $90 million and the interest under such agreement is payable on a monthly basis at an interest rate equal to prime plus one quarter percent. 2. The interest rates on the private placement note agreements were increased by two percentage points. 3. A $20 million short-term seasonal line of credit was provided, which expired on January 31, 1997, bore interest at an interest rate equal to prime plus two percent and was secured by a first lien on 19 21 substantially all of the Company's assets. Although this seasonal line of credit has expired, under the terms of the Company's secured indebtedness, the Company has the right, subject to certain restrictions contained in the agreements evidencing the secured indebtedness, to obtain an additional seasonal line of credit in the future, secured by a first lien on the Company's assets. 4. The Company granted a second lien on substantially all of the Company's assets which is shared on a pro rata basis by the $90 million revolving credit lenders, the $65.5 million private placement note lenders and the $5.5 million limited obligation lender. 5. Henry S Dorfman, the Chairman of the Board of Directors of the Company and a significant shareholder of the Company, purchased 279,883 shares of newly-issued Common Stock from the Company at a price per share determined by the average closing price of the Company's Common Stock for the 20 trading days preceding the stock purchase. 6. The Company agreed to obtain by April 30, 1997 a minimum of $15 million in subordinated debt financing. The proceeds from this offering will be used to reduce the outstanding balance of the private placement notes, revolving credit notes and limited obligation revenue bonds. See "Use of Proceeds", above. 7. The agreements contain financial covenants with respect to consolidated net worth (as defined therein) and interest coverage. The Company is also required to achieve a prescribed level of consolidated earnings available for interest expense. In addition, 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. The following is a summary of the principal financial covenants contained in the Company's secured indebtedness borrowing agreements: (a) The Company is presently required to maintain a minimum level of consolidated adjusted net worth of at least $72 million through December 14, 1996, increasing to $74 million for the period from December 15, 1996 through March 8, 1997, to $76 million for the period from March 9, 1997 through April 30, 1997, and to $91 million plus 50% of the consolidated net earnings of the Company for each fiscal year commencing with fiscal 1997 for the period from May 1, 1997 through the date on which the loans shall have been paid in full. For purposes of this covenant calculation, consolidated adjusted net worth is defined as the sum of consolidated shareholder's equity less intangible assets incurred after the Company's Wilson acquisition, plus subordinated debt, including the Debentures. At December 13, 1996, the Company's consolidated adjusted net worth was $80.1 million. (b) The Company is required to maintain a minimum interest coverage ratio of 1.65 to 1 for the period from December 13, 1996 through December 12, 1997, of 1.85 to 1 for the period from December 13, 1997 through May 1, 1998, and of 2.0 to 1 for the period from May 2, 1998 through the date on which the loans shall have been paid in full. This ratio is measured at the end of each four week period during each fiscal year. At December 13, 1996, the Company's interest coverage ratio was 2.45 to 1. (c) At any time, the Company must limit its rental payments during the next succeeding 365-day period, for any property other than capital leases, to an aggregate of $9.0 million. At December 13, 1996, the Company's applicable rental payments for the next succeeding 365-day period were approximately $7.64 million. (d) The Company's aggregate amount of consolidated earnings available for interest expense for fiscal 1997 may not be less than $24.6 million. For purposes of this covenant calculation, consolidated earnings available for interest coverage equals EBITDA (as defined in Footnote 5 to the Selected Consolidated Financial Data included elsewhere in this Prospectus). (e) The Company is required to achieve minimum levels of Fresh Meats division earnings available for interest expense for specific year-to-date periods during its 1997 fiscal year. The required aggregate amount of Fresh Meats division earnings available for interest expense for the Company's 20 22 second and third quarter year-to-date periods and for fiscal year 1997 may not be less than $2.0 million, ($1.0) million and ($3.0) million, respectively. For purposes of this covenant calculation, Fresh Meats division earnings available for interest expense equals EBITDA (as defined in Footnote 5 to the Selected Consolidated Financial Data included elsewhere in this Prospectus) for the Fresh Meats division. At December 13, 1996, the Company was not in compliance with its Fresh Meats division earnings available for interest coverage covenant for its second quarter ended December 13, 1996, as its Fresh Meats EBITDA for the period was $818,235. The Company has obtained from its various secured lenders unconditional waivers of such non-compliance. (f) The Company's total capital lease obligations may not exceed $7.0 million at any time. At December 13, 1996, the Company's total capital lease obligations were $5.0 million. (g) The Company's net capital expenditures may not exceed $8.2 million during its fiscal 1997 year or during its fiscal 1998 year. In subsequent fiscal years, net capital expenditures may not exceed $8.2 million plus 25% of consolidated net earnings for each such fiscal year. The Company expects to be in compliance with this covenant for its fiscal 1997 year. The Company's two other revenue bond agreements contain restrictive covenants that include the maintenance of a minimum level of consolidated net worth (as defined therein) and of certain financial ratios. At December 13, 1996, the Company was not in compliance with certain covenants contained in one of its industrial revenue bond agreements and the Company obtained an unconditional waiver of those violations from its lender through July 1, 1997. The Company has classified this obligation as a current liability, as a result of the waiver being less than one year in duration from the balance sheet date. At December 13, 1996, the Company had approximately $7.9 million in cash. Cash provided by operations during the twenty-eight weeks ended December 13, 1996 was approximately $10.0 million. In addition, the Company obtained $3.0 million from the sale of Common Stock to the Chairman of the Company's Board of Directors. Cash available at the beginning of the year plus cash acquired from financing activities was used principally to pay down the revolving credit agreement and other long-term debt of $7.3 million and to fund net capital expenditures of $2.7 million. The Company's net working capital increased to $74.7 million at December 13, 1996 from $59.0 million at May 31, 1996. The Company expects to incur net capital expenditures during fiscal 1997 of approximately $8.2 million. At December 13, 1996, the Company had total lines of credit available under its amended revolving credit agreement and seasonal line of credit agreement from four financial institutions aggregating $110.0 million, of which $20.1 was unused. 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. 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. During calendar 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and SFAS No. 123 "Accounting for Stock-Based Compensation". Both SFAS 121 and 123 are effective for fiscal years commencing after December 15, 1995. The Company has adopted both SFAS No. 121 and 123 for the fiscal year beginning on June 1, 1996. 21 23 BUSINESS GENERAL Thorn Apple Valley, Inc. (the "Company") is a major producer of processed meat and poultry products ("Processed Meats") and is one of the largest slaughterers of hogs and sellers of related fresh pork products ("Fresh Meats") in the United States. The Company's Processed Meats division engages in the manufacture and sale of bacon, hot dogs and lunch meats, hams, smoked sausages and turkey products. The Company markets its Processed Meats 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. In recent years, the Company has focused on identifying emerging trends in consumer preferences and on developing Processed Meat 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 product segments. For example, the Company has developed innovative packaging concepts and products which 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 which are more convenient to use and are healthier than existing product alternatives. THE COMPANY'S RECENT DEVELOPMENTS In recent years, the Company's strategy has been to modernize its production facilities, to relocate certain production and distribution facilities to geographically strategic locations and to increase its sales of higher-margin premium brand Processed Meat products. To this end, the Company has accomplished the following: - To respond to consumer demand for certain products and to enhance the Company's manufacturing efficiencies, in November 1995 the Company began operating its newly constructed, 171,000 square foot, state-of-the-art processing facility in Ponca City, Oklahoma, which principally manufactures 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. - To increase manufacturing efficiencies and to meet customers' changing packaging and product variety requirements in the Fresh Meats division, the Company completed a $40 million renovation of its Fresh Meats facility located in Detroit, Michigan (the "Frederick Facility"). - To position the Company as a national distributor of Processed Meats, to strengthen the Company's manufacturing and distribution capabilities in the southern and western United States and to augment the Company's premium brand Processed Meats business, in May 1995 the Company acquired substantially all of the assets (including the brand names "Wilson Certified(R)" and "Corn King(R)") of the Wilson Retail Division of Foodbrands America, Inc., a major manufacturer of premium branded Processed Meats products (the "Wilson Acquisition"). See "Business -- Wilson Acquisition". - To streamline various corporate operations, including purchasing, sales and marketing, the Company relocated and consolidated its corporate headquarters and opened a new, 60,000 square foot distribution center in Edwardsville, Kansas. The Company also closed three older, less efficient processing facilities, two of which were acquired in the Wilson Acquisition, and one distribution center. In connection with the Company's expansion and renovation projects described above, the Company experienced both planned and unplanned start-up costs and operating inefficiencies at the Frederick Facility and at the Ponca City plant in fiscal years 1995 and 1996. In addition, during this period the Company, and the entire fresh pork industry, experienced a shortage in the supply of live hogs, a significant increase in the price of live hogs and a reduction in profit margins associated with the slaughtering of hogs. As a result of the 22 24 costs associated with the integration of the Wilson Acquisition, operating inefficiencies and start-up costs experienced at the Ponca City facility and Frederick Facility, reduced profit margins experienced by the Company's Fresh Meats division and the effects of the LIFO method of accounting for inventory, for the fiscal year ended May 31, 1996 the Company experienced a net loss of $21.7 million, compared with net income of $5.3 million during the prior fiscal year. While profit margins in the hog slaughtering industry remain low, in fiscal 1997 the Company has experienced improved efficiency and yields in its Fresh Meats operation, and the Company's Processed Meats Division has benefited from increases in both sales and profitability resulting from the Wilson Acquisition and the other changes instituted by the Company. For the 12 weeks ended December 13, 1996 the Company had net income of $2,017,000, or $.33 per share, compared to a net loss of $1,757,000, or $.30 per share, for the similar period in the prior fiscal year. For the 28 weeks ended December 13, 1996, the Company had net income of $305,000, or $.05 per share, compared to a net loss of $6,922,000, or $1.20 per share, for the similar period in the prior fiscal year. The improved performance resulted primarily from better margins in the Fresh Meats division achieved through direct cost reductions from the facility enhancements and from stronger sales and margins in the Processed Meats division. BUSINESS STRATEGY The Company's business strategy is to increase revenue and enhance profitability by (i) increasing the sales of the Company's higher margin premium brand Processed Meats products while reducing the Company's reliance on sales of lower margin private label products, (ii) continuing to improve production efficiencies in the Company's Fresh Meats and Processed Meats production facilities, (iii) developing and marketing new Processed Meats products, including products targeted to health-conscious consumers, and (iv) increasing overall sales volume through additional marketing strategies with an emphasis on sales to international markets, including Russia and Korea. The key elements of this strategy are as follows: Increase Sales of Processed Meats Products. The Company continues to emphasize the marketing of premium brand Processed Meats products because it believes that sales of these products generally provide higher and more consistent profit margins than controlled and private brand label Processed Meats products or Fresh Meats products. In connection with this strategy, the Company has terminated arrangements with several customers pursuant to which the Company was producing private label products under such customers' brand names. Improve Fresh Meats and Processed Meats Production Efficiencies. The Company intends to continue improving the production and operation efficiencies at the Frederick Facility, which were adversely impacted by the $40.0 million expansion and renovation of the Frederick Facility undertaken by the Company in fiscal years 1994 and 1995, and at its Processed Meats facilities. Although the operating inefficiencies resulting from the major renovation project at the Frederick Facility negatively impacted profit margins on sales of Fresh Meats in fiscal years 1995 and 1996, the Company believes that it has remedied most of the significant operating inefficiencies at the Frederick Facility and intends to continue improving operating efficiencies, thereby lowering manufacturing costs and improving profit margins. Develop and Market New Processed Meats Products. The Company plans to continue developing new Processed Meats products to respond to emerging trends in consumer preferences, emphasizing products that offer opportunities for higher profit margins than those associated with more mature and more competitive markets. In particular, the Company continues to expand the use of poultry in its products and to take other steps to provide leaner, lower-fat products to health-conscious consumers and to continue developing innovative packaging concepts. The Company believes that opportunities exist to extend its current product lines into related Processed Meats products, thereby leveraging its current premium brand names. Increase Sales Volume Through Additional Marketing Strategies. The Company is developing various sales and marketing strategies to increase sales of both Processed Meats and Fresh Meats products. These strategies include increasing sales of the Company's products to international markets 23 25 such as Russia and Korea, and cross-selling "Thorn Apple Valley(R)" products to customers of "Wilson Certified(R)" or "Corn King(R)" products and vice versa. The Company believes that, under current market conditions, the restructuring accomplished over the last two years will allow it to continue to improve its operating performance. The Company is experiencing improved sales and profitability in its Processed Meats division and increased efficiency and yield at its Fresh Meats facility. The Company has significant excess capacity which would allow the Company to increase sales of its products without significant additional capital expenditures. The Company believes that the recent high levels of hog producer profitability will encourage additional hog production, which should allow this industry segment to return to more normal levels of profitability. The Company also believes that it is well positioned to benefit from increased sales of products and from improved market conditions in the Fresh Meats industry, although the Company is unable to predict if and when market conditions will improve. WILSON 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' Wilson Retail Division ("Wilson") assets used by Wilson in its business of producing and marketing retail meat products (the "Wilson Acquisition"). The acquired assets included three manufacturing facilities, machinery and equipment, current assets and certain trademarks and tradenames, including the brand names "Wilson Certified(R)" and "Corn King(R)". Two of the facilities acquired were older, less efficient processing facilities which the Company closed in fiscal 1996. The aggregate purchase price for the assets acquired and the assumption of certain liabilities was approximately $64.6 million. During the five year period following the date of the acquisition, Foodbrands has the right to receive from the Company, in accordance with an Earnout Agreement, 12.5% of any increase in the aggregate market price of the Company's outstanding shares of common stock above $156.6 million, up to a total earnout payment of $10.0 million. During fiscal 1996, no amount was paid to Foodbrands under the Earnout Agreement. PRODUCTS, OPERATIONS AND MARKETING The Company is engaged in a single segment business with two principal product categories: processed meat and poultry products ("Processed Meats") and fresh pork ("Fresh Meats"). The Company believes that its Processed Meats division realizes a strategic advantage by being able to procure a substantial portion of its raw materials from the Fresh Meats division. The following table shows for the fiscal years indicated the net 24 26 sales and approximate pounds of products shipped for the Company's Processed Meats division and Fresh Meats division.
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- NET SALES (IN DOLLARS) Processed Meats................................... $368.4 $386.7 $416.3 $415.4 $623.0 Fresh Meats....................................... 365.7 336.6 349.1 321.8 355.0 Other(1).......................................... 5.6 6.6 6.7 7.3 5.1 ------ ------ ------ ------ ------ Total........................................ $739.7 $729.9 $772.1 $744.5 $983.1 NET SALES (%) Processed Meats................................... 50% 53% 54% 56% 63% Fresh Meats....................................... 49 46 45 43 36 Other(1).......................................... 1 1 1 1 1 ------ ------ ------ ------ ------ Total........................................ 100% 100% 100% 100% 100% PRODUCTS SHIPPED (IN LBS.) Processed Meats................................... 320.3 337.8 351.7 378.2 507.7 Fresh Meats....................................... 458.8 415.6 419.6 422.2 394.6 ------ ------ ------ ------ ------ Total........................................ 779.1 753.4 771.3 800.4 902.3 PRODUCTS SHIPPED (%) Processed Meats................................... 41% 45% 46% 47% 56% Fresh Meats....................................... 59 55 54 53 44 ------ ------ ------ ------ ------ Total........................................ 100% 100% 100% 100% 100%
- ------------------------- (1) Other is comprised principally of transportation revenue from transportation services provided to third parties. Due to market conditions, profit margins on sales of Processed Meats products are usually more consistent than profit margins on sales of Fresh Meats and by-products. Processed Meats manufacturers generally receive higher profit margins on premium labeled items. The Company's emphasis in its sales and marketing programs is to expand sales of higher margin products and develop new packaging concepts and product innovations that will appeal to emerging trends in consumer preferences. The Company experiences some seasonality in its business. Specifically, the Company's sales of smoked and spiral sliced 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 sausage, hot dogs and bacon products are generally higher during the summer months. Processed Meats Products The Processed Meats operations of the Company's business involve the production and sale of consumer-brand labeled, packaged meat and poultry products, such as bacon, hot dogs and lunch meats, hams, smoked sausages and turkey products. The Company's Processed Meats sales division, which has regional offices, markets the Company's consumer packaged meat and poultry products using a national sales force which calls on the Company's various customers. Price lists, product availability, marketing programs and payment terms, however, are determined by the corporate office. The Company's customer base is generally comprised of wholesalers or 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 25 27 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 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, and 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, and 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. The Ponca City facility is a newly-constructed, 171,000 processing plant that was put into production in November 1995. 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. The Thorn Apple Valley-Council Bluffs division of the Company ("Council Bluffs") is located in Council Bluffs, Iowa, and is primarily engaged in the production of a variety of boneless ham products. The Council Bluffs facility is operated and managed by a major meat packing company pursuant to a production agreement. See "Raw Materials" below for further discussion of such production agreement. During fiscal 1996, the Company closed its Thorn Apply Valley-Concordia division ("Concordia") and its Thorn Apple Valley-Shreveport division ("Shreveport"). The Concordia division had produced boneless hams and related smoked meat products and the Shreveport division had produced specialty products such as natural casing hot dogs. The production of these products was moved primarily to the Company's Council Bluffs and Smoked Meats divisions. Fresh Meats Products The Thorn Apple Valley-Frederick division of the Company ("Frederick"), which is located in Detroit, Michigan, is engaged in the slaughtering and cutting of hogs and the sale of primal cuts of fresh pork products, including hams, shoulders, loins, ribs, butts and pork bellies, and of related by-products, such as edible renderings and meat trimmings. Approximately 3,339,000, 3,146,000 and 2,891,000 hogs were slaughtered by Frederick in fiscal years 1996, 1995 and 1994, respectively. The Company's Utah division, which was closed during fiscal 1995, slaughtered approximately 274,000 and 339,000 hogs during fiscal years 1995 and 1994, respectively. Sales of products by the Frederick division are ordinarily initiated and completed by telephone between buyers and Frederick sales personnel. Sales are also made through brokers located throughout the United States and abroad. Customers for primal cuts and trimmings are generally wholesalers, supermarket chains, and outside processors. Most edible offal items are cleaned, boxed and frozen for storage until delivery to the customer. Fat trimmings and some inedible items are sold to renderers. The Company also further processes some of its primal cuts into higher margin boneless products. The supply of hogs, plant operating efficiencies, industry slaughter capacity, prevailing prices for competing meat products and consumer demand all affect the profitability of the Company's Fresh Meats 26 28 operations. The profit margins experienced by the Company and the fresh pork industry on sales of Fresh Meats and by-products were lower during fiscal 1996 than the margins experienced by the Company and the industry in recent years. The lower margins resulted from an industry wide hog shortage, and an increase in the price of hogs, as well as from increased costs to produce Fresh Meats products caused by operating inefficiencies at the Company's Frederick Facility (which resulted from an extensive plant renovation project). The Company believes that it has remedied most of the significant operating inefficiencies at the Frederick Facility. TRADEMARKS AND LICENSES The Company owns or has the right to use over 80 various trademarks, including those described above and certain trademarks purchased from Foodbrands. 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 1996 approximately 16% of the Company's products were marketed in Michigan. This percentage was approximately 19% and 20% for fiscal 1995 and 1994, respectively. The balance of the products were marketed in each of these years primarily in 46 other states, Washington, D.C., Canada and to Pacific Rim countries. Sales to customers in foreign countries during fiscal 1996 totaled approximately $14,900,000. This total was approximately $9,300,000 for fiscal 1995 and approximately $11,200,000 for fiscal 1994. On a regular basis, the Company sells its Fresh Meats and Processed Meats products to more than 1,000 customers. These customers consist primarily of wholesalers, supermarket chains and, in the case of the Company's Fresh Meats division, other manufacturers of meat and poultry products. For fiscal 1996, 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 except for the sale of its inedible rendering materials. In April 1996, the Company opened a new, 60,000 square foot distribution center in Edwardsville, Kansas and closed a small distribution center in Clearfield, Utah. The Company believes that this new distribution center, combined with the Company's distribution center in Detroit, Michigan, will enable the Company to provide a higher level of service to the Company's customers. The Company owns and operates a fleet of refrigerated tractor-trailers and additional trailers which are used for transporting a portion of its products to customers and to the Company's manufacturing facilities. The Company also engages the services of contract carriers, including Coast Refrigerated Trucking Co., Inc., National Food Express, Inc. and Millers Transport Inc., all wholly-owned subsidiaries of the Company. Products are shipped to supermarket chains, wholesalers and other meat processors. In addition to its own delivery equipment, the Company utilizes non-affiliated carriers or has customers make their own arrangements for delivery. RAW MATERIALS The Company's primary raw material is live hogs. The purchase of live hogs accounted for approximately 72% of the total purchases of raw materials made by the Company during fiscal 1996. Purchases of live hogs are through a network of buying stations, selected brokers and direct from hog producers mainly in the states of Michigan, Ohio, Indiana and Illinois and in Ontario, Canada. Pursuant to an agreement with Michigan Livestock Exchange ("MLE"), MLE supplied approximately 65% of the total hogs purchased by the Company in fiscal 1996. Under the terms of the agreement, which expires in November 2004, MLE manages the Company's hog buying stations and provides the Company with hogs in accordance with the Company's quantity and quality specifications at MLE's hog costs plus certain expenses. In consideration, the Company pays MLE $83,333 per month as a facilities and use management fee. 27 29 During fiscal 1996, Grand Rapids obtained 24% of all of the pork required in its operations from the Company's Fresh Meats division, which constituted approximately 14% of the cost of the total meat requirements of Grand Rapids. Approximately 68% of the pork processed during fiscal 1996 at Smoked Meats was obtained from the Company's Fresh Meats division, which constituted approximately 49% of its total meat requirements. Approximately 38% of the pork requirements of Ponca City was obtained from the Company's Fresh Meats division, which comprised approximately 22% of its total meat requirements. The Company's Dixie plant received approximately 13% of its pork requirements from the Company's Fresh Meats division, which represented approximately 3% of its total meat requirements. Approximately 53% of the pork bellies processed by Carolina were obtained from the Company's Fresh Meats division. The Company purchases poultry, beef and other meats required for its Processed Meats products and other materials such as seasonings, smoking and curing agents, sausage casings and packaging materials from a number of readily-available sources. In connection with the Wilson Acquisition, the Company assumed a production agreement (the "Production Agreement") with a major meat packing company (the "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 is obligated to produce at such facility, on an exclusive basis, all boneless ham products which the Company may require. In return, the Company has agreed to pay and/or reimburse Producer for all operating and fixed costs incurred at the facility and to pay Producer a fee of approximately $1,375,000 per year during the term of the agreement and any extensions thereof. The Production Agreement has an initial term (the "Initial Term") expiring on June 6, 2001 and may be renewed by the Company for up to five successive three year terms (the "Option Periods"). If the Company fails to renew the Production Agreement for each of the five Option Periods, or if the Company terminates or breaches the Production Agreement, the Company will be obligated to pay the $1,375,000 annual fee for the remainder of the Initial Term, if any, and an annual payment of approximately $408,000 for each remaining year of each of the five Option Periods. In such event, the Producer must use its best efforts to utilize the vacated facility to mitigate costs to the Company. In addition to the Production Agreement, the Company has also assumed a supply agreement with the Producer. The Company has agreed to purchase and the Producer has agreed to supply 400,000 pounds of boneless ham muscles on a weekly basis at a pricing formula equal to or more favorable than prices obtainable from other competitive suppliers. The term of such supply agreement runs concurrent with the term of the Production Agreement described above. 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 had, at March 1, 1997, approximately 4,000 employees, approximately 940 of whom are engaged in slaughtering and cutting hogs, approximately 2,180 of whom are engaged in the production of the processed meat and poultry products, and approximately 880 of whom are employed in administration, sales or transportation. The majority of the Company's production workers are employed under four union contracts. These contracts are generally for a period of two to four years and have various expiration dates through the third quarter of fiscal 2000. The Company has historically maintained good labor relations. The unexpired portions of the existing agreements contain no significant labor cost increases. 28 30 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 Fresh Meats and Processed Meats 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. 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 FLOOR SPACE LOCATION OPERATION (SQ. FT.) -------- --------- ----------- Detroit, Michigan Hog slaughtering and boning operations 218,000 Ponca City, Oklahoma Manufacture of boneless and and bone-in hams, premium 171,000 double-glazed spiral sliced hams and premium sliced lunch meats Detroit, Michigan Manufacture of premium sliced lunch meats, spiral 150,000 sliced hams, cooked hams, deli hams and specialty boneless hams Holly Ridge, North Carolina Manufacture of bacon products 150,000 Grand Rapids, Michigan Manufacture of hot dogs, lunch meats, corned beef and 135,000 smoked sausage Forest City, Arkansas Manufacture of hot dogs 70,000 Edwardsville, Kansas(1) Distribution center 60,000 Council Bluffs, Iowa(2) Manufacture of boneless ham 53,000 Detroit, Michigan(1)(3) Distribution center 50,000 Walker, Michigan Poultry boning and manufacture of pork sausage and 45,000 corned beef products Southfield, Michigan(4) Corporate headquarters 34,000
- ------------------------- (1) The Company leases warehouse space in these facilities. (2) This facility is owned by a third party, but contains production equipment owned by the Company. See "Business -- Raw Materials". (3) This facility is leased from a related party. See Note 4 to Notes to Consolidated Financial Statements. (4) The Company leases this office space. 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 are 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 $6.5 million as of May 31, 1996. As of the date of this Prospectus, 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". 29 31 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. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The directors and executive officers of the Company as of the date of this Prospectus are set forth below.
NAME AGE POSITIONS WITH THE COMPANY ---- --- -------------------------- Henry S Dorfman...................... 75 Chairman of the Board Joel Dorfman......................... 45 President and Chief Executive Officer Louis Glazier........................ 47 Executive Vice President Finance and Administration Keith Jahnke......................... 43 Executive Vice President Processed Meats Edward E. Boan....................... 46 Executive Vice President Fresh Meats and Human Resources Moniek Milberger..................... 66 Director John C. Canepa....................... 66 Director Burton D. Farbman.................... 54 Director Seymour Roberts...................... 62 Director
Henry S Dorfman has served as Chairman of the Board of Directors since 1959. Mr. Dorfman also served as Chief Executive Officer of the Company from 1959 to July, 1995. Mr. Dorfman was a founder of the Company. Joel Dorfman has been a director since 1978. Mr. Joel Dorfman has served as President of the Company since March, 1985 and Chief Executive Officer of the Company since July, 1995. Mr. Dorfman joined the Company in September, 1973. Louis Glazier has been a director of the Company since 1988. Mr. Glazier has been Executive Vice President Finance and Administration of the Company since July, 1988. Mr. Glazier joined the Company in March, 1975. Keith Jahnke has been Executive Vice President Processed Meats since May 1996. Mr. Jahnke also served as Executive Vice President Sales and Marketing for the Company from 1987 to May 1996. Mr. Jahnke joined the Company in July, 1973. Edward E. Boan has been Executive Vice President Fresh Meats and Human Resources since 1991. Mr. Boan also served as General Manager and Vice President Fresh Meats from 1987 to 1991, and Vice President of Human Resources from 1985 to 1991. Moniek Milberger has been a director of the Company since the Company's inception. Mr. 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 director of the Company since 1983. Mr. Canepa has been a consulting principal of Crowe 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. Burton D. Farbman has been a director of the Company since 1988. Mr. 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. Seymour Roberts has been director of the Company since 1992. Mr. 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. 30 32 DESCRIPTION OF DEBENTURES The Debentures will be issued under an Indenture to be dated as of March , 1997, between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"). The Debentures will represent unsecured general obligations of the Company, subordinated in right of payment to certain other obligations of the Company as described under "Subordination of Debentures" and convertible into Common Stock as described under "Conversion of Debentures". The Debentures will be limited to $17,250,000 aggregate principal amount, will be issued in fully registered form only in denominations of $1,000 or any integral multiple thereof and will mature on April 1, 2007. The following statements are subject to the detailed provisions of the Indenture and are qualified in their entirety by reference to the Indenture, a copy of which is filed as an exhibit to the Registration Statement and is also available for inspection at the office of the Trustee. Whenever particular provisions of the Indenture are referred to, such provisions are incorporated by reference as a part of the statements made in this Prospectus, and the statements are qualified in their entirety by such reference. The Debentures will bear interest from their date of original issuance, at the annual rate set forth on the cover page of this Prospectus, payable semi-annually on April 1 and October 1, commencing on October 1, 1997, to holders of record at the close of business on the preceding March 15 and September 15, respectively. Principal and premium, if any, will be paid and the Debentures may be presented for conversion, registration of transfer, and exchange, without service charge, at the corporate trust office of the Trustee in Detroit, Michigan. Interest will be paid by checks mailed to holders of record unless the Trustee determines such method of payment to be inappropriate in the circumstances. The statements under this caption relating to the Debentures and the Indenture are summaries and do not purport to be complete. Such summaries make use of certain terms defined in the Indenture and are qualified in their entirety by express reference to the Indenture, a copy of which is filed as an exhibit to the Registration Statement. As used under this caption, the term "Company" refers only to Thorn Apple Valley, Inc., a Michigan corporation, and not to any of its subsidiaries. CONVERSION OF DEBENTURES The holders of Debentures will be entitled at any time prior to the close of business on the business day preceding April 1, 2007, subject to prior redemption, to convert the Debentures or portions thereof (which are $1,000 or integral multiples thereof) into shares of Common Stock of the Company, at the conversion price set forth on the cover page of this Prospectus, subject to adjustment as described below. Except as described below, no adjustment will be made on conversion of any Debenture for interest accrued thereon or for dividends on any shares of Common Stock issued. If any Debenture not called for redemption is converted between a record date for the payment of interest and the related interest payment date, the Debentures must be accompanied by funds equal to the interest payable on such interest payment date on the principal amount so converted. The Company is not permitted to issue fractional shares of Common Stock upon conversion of Debentures and, in lieu thereof, will pay a cash adjustment based upon the average closing sales price of the Common Stock on The Nasdaq National Market (or the principal securities exchange where the Common Stock is then traded) on the last five trading days prior to the date of conversion. In the case of Debentures called for redemption, conversion rights will expire at the close of business on the business day preceding the redemption date. The conversion price is subject to adjustment, under formulas set forth in the Indenture, upon the occurrence of certain events, including the issuance of shares of Common Stock of the Company as a dividend or distribution on the Common Stock, subdivisions and combinations of the Common Stock, the issuance to all holders of Common Stock of certain rights or warrants entitling them for a period not exceeding 45 days to subscribe for Common Stock at less than the then current market price (as defined); and the distribution to all holders of Common Stock of any securities (other than Common Stock) or evidences of indebtedness of the Company or of assets (excluding cash dividends or distributions from retained earnings) or rights or warrants to subscribe for or purchase any of its securities (excluding those referred to above). No adjustment in the conversion price will be required unless such adjustment would require a change of at least $0.25 in the 31 33 conversion price then in effect; provided, however, that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. The Company reserves the right to make such reductions in the conversion price, in addition to those required by the foregoing provisions, as the Company in its discretion shall determine to be advisable in order that certain share-related distributions made by the Company to its shareholders after the date of this Prospectus will not be taxable. Except as stated above, the conversion price will not be adjusted for the issuance of shares of Common Stock or any securities convertible into or exchangeable for Common Stock, or carrying the right to purchase any of the foregoing, in exchange for cash, property, or services. In the case of a reclassification, consolidation, merger or statutory share exchange involving the Company as a result of which holders of Common Stock will be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for shares of Common Stock or in the case of a sale or conveyance to another corporation of all or substantially all of the property and assets of the Company, the holders of the Debentures then outstanding will be entitled thereafter to convert such Debentures into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, consolidation, merger, statutory share exchange, sale or conveyance had such Debentures been converted to shares of Common Stock immediately prior to such reclassification, consolidation, merger, statutory share exchange, sale or conveyance. In addition to the right to receive shares of Common Stock upon conversion, if the Company has distributed, or established a record date for distribution of, shares of the stock or other equity interest of any subsidiary to all of the holders of the Common Stock on a pro rata basis at any time between the date of the Indenture and the date of such conversion, then the Company and such subsidiary will execute a supplemental indenture providing that each Debenture shall be convertible into, and upon conversion the holder of each Debenture shall be entitled to receive, in addition to (and not in lieu of) such shares of Common Stock, the kind and amount of shares of stock or other equity interest receivable upon such distribution by a holder of the number of shares of Common Stock issuable upon conversion of such Debenture immediately prior to such distribution. In the event of a taxable distribution to holders of Common Stock which results in an adjustment of the conversion price, the holders of Debentures may, in certain circumstances, be deemed to have received a distribution subject to United States income tax as a dividend; the absence of such an adjustment in certain other circumstances may also result in a taxable dividend to the holders of Common Stock. OPTIONAL REDEMPTION The Debentures will be redeemable on at least 30 and not more than 60 days' notice, at the option of the Company, as a whole or in part, at any time after issuance, at the following prices (expressed as percentages of the principal amount), together with accrued interest to the date fixed for redemption if redeemed during the periods indicated below:
REDEMPTION REDEMPTION PERIOD PRICE ---------- ---------- April 1, 1997 to March 31, 1998..................... 106% April 1, 1998 to March 31, 1999..................... 105% April 1, 1999 to March 31, 2000..................... 104% April 1, 2000 to March 31, 2001..................... 103% April 1, 2001 to March 31, 2002..................... 102% April 1, 2002 to March 31, 2003..................... 101% April 1, 2003 and thereafter........................ 100%
However, the Debentures may not be redeemed prior to April 1, 2000, except (i) in connection with a "Sale Event" (as defined below) or (ii) unless the last reported sales price (determined as provided in the Indenture) of the Common Stock equals or exceeds 140% of the then effective conversion price (as described above) for any 20 trading days within a period of 30 consecutive trading days prior to the date notice of 32 34 redemption is given to the holders of Debentures. A "Sale Event" means (a) the acquisition of 50% or more of the voting power of the Company's voting stock by a person or group, other than any current holder of 5% or more of the Common Stock (or a group including such a holder) or (b) a consolidation or merger involving the Company or a sale of 66 2/3% or more of the assets of the Company (generally, all consolidations, mergers and asset sales other than "migratory" mergers, mergers in which the outstanding capital stock is not affected, certain intercompany transactions, and transactions after which no person or group, other than a current holder of 5% or more of the Common Stock, or a group including such a holder, has more than 50% of the ordinary voting power of the surviving corporation). SUBORDINATION OF DEBENTURES The payment of the principal of, premium, if any, and interest on the Debentures will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness of the Company. No payment on account of principal, premium, if any, or interest on the Debentures and no purchase, redemption or other acquisition of the Debentures may be made unless (i) at the time proposed for any such payment, redemption, purchase or other acquisition, full payment of amounts then due for principal, premium, if any, and interest and of all other amounts then due on all Senior Indebtedness shall have been made or duly provided for pursuant to the terms of the instrument governing such Senior Indebtedness, and (ii) at the time for, or immediately after giving effect to, any such payment, redemption, purchase or other acquisition, there shall not exist under any Senior Indebtedness or any agreement pursuant to which any Senior Indebtedness has been issued, any default which shall not have been cured or waived and which shall have resulted in such Senior Indebtedness being declared due and payable. In addition, the Indenture will also provide that if the holders of any Senior Indebtedness notify the Company that an event of default has occurred giving the holders of such Senior Indebtedness the right to accelerate the maturity thereof, no payment of principal or interest on the Debentures will be made, except accelerated within 270 days after the holders of such Senior Indebtedness have given notice of such event of default to the Company, such payments on the Debentures (otherwise than by reason of acceleration thereof) may be made so long as the maturity of such Senior Indebtedness is not accelerated. Upon any distribution of its assets in connection with any dissolution, winding-up, liquidation or reorganization of the Company, all Seniors Indebtedness must be paid in full before the Holders of the Debentures are entitled to any payments whatsoever. By reason of such subordination, in the event of insolvency, general creditors of the Company may recover less, ratably, than holders of Senior Indebtedness and may recover more, ratably, than Holders of Debentures or other subordinated indebtedness. "Senior Indebtedness" is defined as the principal of, premium, if any, interest on and other amounts due on any indebtedness (other than the Debentures), whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed by the Company for money borrowed from others (including, for this purpose, all obligations incurred under capitalized leases or purchase money mortgages) or in connection with the acquisition by it or a Subsidiary of any other business or entity and, in each case, all renewals, extensions and refundings thereof, unless the terms of the instrument creating or evidencing such indebtedness expressly provide that such indebtedness is not superior in right of payment to the payment of the principal of, premium, if any, and interest on the Debentures. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness shall not include (a) indebtedness on amounts owed or compensation to employees, for goods or materials purchased in the ordinary course of business, or for services or (b) indebtedness of the Company to any of its Subsidiaries for money borrowed or advances from such Subsidiaries. As of March 1, 1997, the Company had approximately $154.4 million of Senior Indebtedness (approximately $ million after giving effect to the application of the proceeds of this Offering). The Debentures and the Indenture do not prohibit or limit the ability of the Company to incur additional Senior Indebtedness. Following the Offering, the Company intends to incur additional indebtedness under its revolving line of credit and to enter into capital leases, and may incur additional indebtedness in connection 33 35 with the acquisition of other businesses, including through joint ventures, which indebtedness and capital leases will constitute Senior Indebtedness. The Indenture permits the Trustee to become a creditor of the Company and does not preclude the Trustee from enforcing its rights as a creditor, including rights as a holder of Senior Indebtedness. REPURCHASE EVENT The Company has agreed in the Indenture that, upon the occurrence of a Repurchase Event (as defined below), the Company will offer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of a holder's Debentures (the "Repurchase Offer") at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Repurchase Payment"). Within 30 days after the occurrence of a Repurchase Event, the Company shall mail a notice to each holder stating among other things: (i) the Repurchase Payment and the purchase date, which shall not be earlier than 45 days nor later than 60 days from the date such notice is mailed or such later date as may be necessary for the Company to comply with the requirements of the Exchange Act (the "Repurchase Date"); (ii) that any Debenture not tendered will continue to accrue interest; (iii) that, unless the Company defaults in the payment of the Repurchase Payment, all Debentures accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest after the Repurchase Date; and (iv) the procedures that a holder must follow to accept a Repurchase Offer or to withdraw such acceptance. The Company will comply with any applicable requirements of the Exchange Act and other securities laws, and the regulations thereunder, governing the repurchase of the Debentures in connection with a Repurchase Event and may modify a Repurchase Offer to effect such compliance. A Repurchase Event is generally defined to include (i) the acquisition of 50% or more of the voting power of the Company's voting stock by a person or group, other than any current holder of 5% or more of the Common Stock (or a group including such a holder); (ii) a change, over a two-year period, in the composition of the Company's Board of Directors such that, with limited exceptions, the Board members at the beginning of the period, and Board members who were elected, or nominated for election, by the vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, no longer constitute a majority of the Board; (iii) the signing of a definitive agreement providing for a consolidation or merger involving the Company or the sale of 66 2/3% or more of the assets of the Company (generally, all consolidations, mergers and asset sales other than "migratory" mergers, mergers in which the outstanding capital stock is not affected, certain intercompany transactions, and transactions after which no person or group, other than a current holder of 5% or more of the Common Stock, or group including such a holder, has more than 50% of the ordinary voting power of the surviving corporation); and (iv) a distribution of cash or other properties to the Company's shareholders if the sum of (a) the ratio of the fair market value of the amount paid in such distribution to the then fair market value of the Company's outstanding capital stock, plus (b) the similar ratios for all other distributions during the prior 12-month period, exceeds 30%. For purposes of the Repurchase Event tests, the Company's "voting stock" means the Common Stock plus any other class or classes of stock which may be issued and have general voting power in the election of the Company's Board of Directors. The Company's "capital stock" means any stock which does not have dividend or liquidation priority over other stock of the Company, irrespective of relative voting powers. On or before 10:00 a.m., Eastern Time, on the Repurchase Date, the Company will deposit with the Trustee an amount equal to the Repurchase Payment in respect of all Debentures or portions thereof that have been properly tendered. The Trustee shall promptly mail to each holder of Debentures accepted for payment an amount equal to the Repurchase Price for such Debentures, and the Trustee shall promptly authenticate and mail to each holder a new Debenture equal in principal amount to any unpurchased portion of the Debentures surrendered. Except as described above with respect to a Repurchase Event, the Indenture does not contain any other provisions that permit the holders of the Debentures to require that the Company repurchase or redeem the Debentures in the event of a takeover or similar transaction. The provisions of the Indenture relating to the purchase of Debentures upon a Repurchase Event may impede the completion of a merger, tender offer or 34 36 other takeover attempt. Neither the Trustee nor the Company's Board of Directors may relieve the Company of its obligation to repurchase Debentures. Credit agreements or other agreements relating to Senior Indebtedness to which the Company becomes a party may prohibit the Company from purchasing any Debentures or may provide that certain change in control events with respect to the Company would constitute a default under such agreements. In the event a Repurchase Event occurs at a time when the Company is prohibited from purchasing Debentures under its secured indebtedness or any other Senior Indebtedness, the Company could seek the consent of its lenders for the purchase of Debentures or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Debentures. In such case, the Company's failure to purchase tendered Debentures would constitute an Event of Default under the indenture. In such circumstances, the subordination provisions in the Indenture would restrict payments to the holders of Debentures. The Company may not have sufficient funds to repurchase the Debentures upon a Repurchase Event. EVENTS OF DEFAULT An Event of Default is defined in the Indenture to include: (i) a default in payment of principal or premium, if any, on the Debentures when the same becomes due and payable at maturity, upon redemption or otherwise, whether or not prohibited by the subordination provisions of the Indenture; (ii) a default in the payment of any interest upon any Debenture when it becomes due and payable, and continuance of such default for a period of 15 days; (iii) a default by the Company in the performance or breach of any other covenant or warranty in the Indenture which continues for 30 days after the Company has received notice of such default from the holders of at least 25% of the outstanding principal amount of the Debentures; (iv) certain defaults under any obligations for money borrowed aggregating $1,000,000 or more; or (v) certain events involving bankruptcy, insolvency or reorganization of the Company or a significant subsidiary. The Indenture provides that the Trustee is required, within 90 days after the occurrence of a default which is known to the Trustee and is continuing, to give to the holders of the Debentures notice of such default; provided that, except in the case of default in the payment of principal or premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the holders of the Debentures. The Indenture provides that if any Event of Default shall have occurred and be continuing, the Trustee or the holders of not less than 25% in principal amount of the Debentures then outstanding may declare the principal of all the Debentures to be due and payable immediately, but if the Company shall cure all defaults (other than the nonpayment of interest and premium, if any, on and principal of any Debentures which shall have become due solely by reason of acceleration) and certain other conditions are met, such declaration may be annulled and past defaults may be waived by the holders of 50% in principal amount of the Debentures then outstanding. The holders of a majority in principal amount of the Debentures then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee subject to certain limitations specified in the Indenture. In certain cases, the holders of a majority in principal amount of the outstanding Debentures may on behalf of the holders of all Debentures waive any past default except, unless theretofore cured, a default in the payment of the principal of, premium, if any, or interest on any of the Debentures (other than the nonpayment of interest and premium, if any, on and principal of any Debentures which shall become due by acceleration) or a default relating to an obligation of the Company which cannot be modified without the consent of the holder of each Debenture affected. MERGERS AND SALES OF ASSETS BY THE COMPANY Subject to the provisions described above under "Repurchase Event", the Company may consolidate with or merge into any other corporation, sell or transfer all or substantially all of its assets to any person, provided that the Company is not otherwise in default under the Indenture after giving effect to the transaction and that 35 37 the successor (or the acquiror of the Managed Care business) shall be organized and existing under the laws of the United States or any State thereof and shall assume all of the obligations of the Company under the Indenture and shall make provision for the conversion rights. MODIFICATION OF THE INDENTURE Under the Indenture, the rights and obligations of the Company and the rights of Holders of the Debentures may be modified by the Company and the Trustee only with the consent of the Holders of not less than a majority in principal amount of the Debentures then outstanding; but no extension of the maturity of any Debenture, or reduction in the interest rate or premium, if any, or extension of the time of payment of interest, or any other modification in the terms or payment of the principal of, or premium, if any, or interest on the Debentures, or any modification of the subordination provisions in a manner adverse to the Holders, or adversely affecting the conversion rights or reducing the percentage required for modification, will be effective against any Holder without his consent. MISCELLANEOUS No holder of a Debenture may institute any action against the Company under the Indenture (except actions for payment of overdue principal, premium, if any, or interest or the conversion of the Debentures) unless the holders of at least 25% of the principal amount of Debentures then outstanding shall have requested the Trustee to institute such action, and the Trustee shall not have instituted such action within 60 days of such request. No recourse shall be had for the payment of the principal, interest or premium, if any, on the Debentures or for any claim based thereon or otherwise in respect thereof or based on or in respect of the Indenture against any shareholder, officer, director, agent or employee of the Company. Each holder of Debentures by accepting a Debenture agrees to the foregoing provision. As long as any Debentures are outstanding, the Company will furnish holders of Debentures all quarterly and annual financial reports sent to the holders of the Common Stock of the Company. CONCERNING THE TRUSTEE State Street Bank and Trust Company, a Massachusetts banking corporation, will be the Trustee under the Indenture. The Indenture will contain certain limitations on the right of the Trustee, as a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest, as defined in the Trust Indenture Act, it must eliminate such conflict or resign. The Holders of a majority in principal amount of all outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, provided that such direction does not conflict with any rule of law or with the Indenture. The Indenture will provide that in case an Event of Default shall occur and be known to the Trustee (which shall not be cured) the Trustee will be required to use the degree of care of a prudent man in the conduct of his own affairs in the exercise of its power. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the Holders, unless they shall have offered to the Trustee security and indemnity satisfactory to it. The Company has no outstanding borrowings from, and no other business relationship with, the Trustee. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 200,000 shares of Preferred Stock, $1.00 par value per share, 20,000,000 shares of Nonvoting Common Stock, $0.10 par value per share, and 20,000,000 shares of Common Stock, $.10 par value per share. The terms and conditions of the Company's capital stock are governed by the laws of Michigan, as well as by the Company's Articles of Incorporation and By-Laws. 36 38 PREFERRED STOCK Preferred Stock may be issued from time to time in series having such designated preferences and rights, qualifications and limitations as the Board of Directors may determine without any approval of shareholders. Preferred Stock could be given voting and conversion rights which would dilute the voting power and equity liquidation rights. None of the Preferred Stock is outstanding and the Company has no present plans to issue any such shares. In addition, the issuance of Preferred Stock by the Board of Directors could be utilized, under certain circumstances, as a method preventing a takeover of the Company. COMMON STOCK As of March 1, 1997, the Company had 6,090,969 shares of Common Stock issued and outstanding, all of which are fully paid, validly issued and non-assessable. As of March 1, 1997, there were 525 holders of record of the Common Stock. Holders of Common Stock are entitled to one vote per share and do not have cumulative voting rights. Shareholders have no pre-emptive rights to purchase additional shares. Subject to preferences which may be granted to holders of Preferred Stock, holders of Common Stock are entitled to share in such dividends as the Board of Directors, in its discretion, may validly declare from funds legally available. In the event of liquidation, each outstanding share of Common Stock entitles its holder to participate ratably in the assets remaining after payment of liabilities. As of March 1, 1997, the Company had no shares of Nonvoting Common Stock outstanding and the Company has no present plans to issue any such shares. The Nonvoting Common Stock is identical in all respects to the Common Stock, except as to voting. Except as otherwise required by law, holders of Nonvoting Common Stock are not entitled to vote on matters as to which a vote of the shareholders of the Company is to be taken. ANTI-TAKEOVER LEGISLATION Michigan law provides that the Company shall furnish to a shareholder upon request and without charge a full statement of the designations, relative rights, preferences and limitations of the shares of each class authorized to be issued, and the authority of the Board of Directors to designate and prescribe the relative rights, preferences and limitations of preferred shares. Chapters 7A and 7B of the Michigan Business Corporation Act may affect attempts to acquire control of the Company. In general, under Chapter 7A, "business combinations" (defined to include, among other transactions, certain mergers, dispositions of assets or shares and recapitalization) between covered Michigan business corporations or their subsidiaries and an "interested shareholder" (defined as the direct or indirect beneficial owner of at least 10 percent of the voting power of a covered corporation's outstanding shares) can only be consummated if approved by at least 90 percent of the votes of each class of the corporation's shares entitled to vote and by at least two-thirds of such voting shares not held by the interested shareholder or affiliates, unless five years have elapsed after the person involved became an "interested shareholder" and unless certain price and other conditions are satisfied. The Board of Directors has the power to elect to be subject to Chapter 7A as to specifically identified or unidentified interested shareholders. Upon completion of the Offering, Mr. Henry S Dorfman will continue to beneficially own more than 30 percent of the outstanding Common Stock and, if the Board of Directors elects to be subject to Chapter 7A, Mr. Dorfman will be able to prevent the attainment of the required supermajority approval. In general, under Chapter 7B, an entity that acquires "Control Shares" of the Company may vote the Control Shares on any matter only if a majority of all shares, and of all non-"Interested Shares", of each class of stock entitled to vote as a class, approve such voting rights. Interested Shares are shares owned by officers of the Company, employee-directors of the company and the entity making the Control Share Acquisition. Control Shares are shares that, when added to shares already owned by an entity, would give the entity voting power in the election of directors or any of three thresholds: one-fifth, one-third and a majority. The effect of the statue is to condition the acquisition of voting control of a corporation on the approval of a majority of the pre-existing disinterested shareholders. The Board of Directors may amend the bylaws before a Control Share Acquisition occurs to provide that Chapter 7B does not apply to the Company. 37 39 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is National City Bank, Cleveland, Ohio. UNDERWRITING Subject to the terms and conditions of the underwriting agreement (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Roney & Co. is acting as representative (the "Representative"), have individually agreed to purchase from the Company the principal amounts of Debentures set forth below opposite their respective names at the public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such Debentures if any are purchased.
PRINCIPAL NAME AMOUNT ---- --------- Roney & Co, L.L.C........................................... $ ----------- Total................................................ $15,000,000 ===========
The Underwriters propose to offer the Debentures to the public initially at the offering price set forth on the cover page of this Prospectus and to certain broker dealers at such offering price less a concession not to exceed % of the principal amount. The Underwriters may allow, and such broker dealers may re-allow, a concession, not to exceed % of the principal amount, on sales to other broker dealers. The offering price and concessions to broker dealers may be changed by the Underwriters after the initial offering. The offering of the Debentures is made for delivery when, as and if accepted by the Underwriters, subject to prior sale and withdrawal, cancellation or modification of the offer without notice. The Company has granted to the Underwriters an option, exercisable not later than 30 days from the date of this Prospectus, to purchase up to an additional $2,250,000 principal amount of Debentures to cover over-allotments. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the $15,000,000 principal amount of Debentures offered hereby. If purchased, the Underwriters will sell such additional Debentures on the same terms on which the $15,000,000 principal amount of Debentures are being offered. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. In connection with this offering, certain Underwriters and selling group members, if any, or their respective affiliates may engage in passive market making transactions in the Common Stock on The Nasdaq National Market in accordance with Rule 103 of Regulation M. Passive market making consists of, among other things, displaying bids limited by the bid prices of independent market makers and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and all possible market making activity must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. 38 40 LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Honigman Miller Schwartz and Cohn, Detroit, Michigan. Certain legal matters in connection with the issuance of the Debentures offered hereby will be passed upon for the Underwriters by Dykema Gossett PLLC, Detroit, Michigan. EXPERTS The audited consolidated financial statements and financial statement schedule of the Company as of May 26, 1995 and May 31, 1996, and for each of the three years in the period ended May 31, 1996, included in this Prospectus and incorporated herein by reference to the Company's Annual Report on Form 10-K have been included and incorporated herein in reliance upon the reports of Coopers & Lybrand L.L.P., independent accountants, given upon their authority as experts in accounting and auditing. The reports of Coopers & Lybrand L.L.P. are dual dated to include Note 6 to the 1996 audited consolidated financial statements which discloses the amendment of the Company's secured indebtedness, which amendment occurred subsequent to the date of their original report. 39 41 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements of Thorn Apple Valley, Inc. and Subsidiaries:
Page Report of Independent Accountants........................... F-2 Consolidated Balance Sheets as of May 26, 1995 and May 31, 1996 and December 13, 1996 (Unaudited).................... F-3 Consolidated Statements of Operations for the Years Ended May 27, 1994, May 26, 1995 and May 31, 1996 and the Twenty-Eight Weeks Ended December 8, 1995 and December 13, 1996 (Unaudited).......................................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended May 27, 1994, May 26, 1995 and May 31, 1996 and the Twenty-Eight Weeks Ended December 13, 1996 (Unaudited)............................................... F-5 Consolidated Statements of Cash Flows for the Years Ended May 27, 1994, May 26, 1995 and May 31, 1996 and the Twenty-Eight Weeks Ended December 13, 1996 (Unaudited).... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Thorn Apple Valley, Inc. Southfield, Michigan We have audited the accompanying consolidated balance sheets of Thorn Apple Valley, Inc. and Subsidiaries as of May 26, 1995 and May 31, 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility for the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thorn Apple Valley, Inc. and Subsidiaries as of May 26, 1995 and May 31, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 1996 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Detroit, Michigan August 26, 1996, except as to the information presented as a subsequent event in Note 6, for which the date is September 12, 1996 F-2 43 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 26, MAY 31, DECEMBER 13, 1995 1996 1996 ------- ------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,730,637 $ 5,809,559 $ 7,880,815 Short-term investments.................................... 531,064 627,560 500,000 Accounts receivable, net of allowance for doubtful accounts (May 1995, $789,100; May 1996, $621,800; December 1996, $786,000)................................ 40,083,861 62,371,990 82,394,002 Inventories (Note 2)...................................... 44,800,792 56,263,210 58,896,821 Refundable income taxes................................... 1,366,231 11,490,330 Deferred income taxes (Note 7)............................ 2,499,000 2,199,000 2,647,400 Prepaid expenses and other current assets................. 4,073,817 5,732,537 5,461,050 ------------ ------------ ------------ Total current assets.................................... 98,085,402 144,494,186 157,780,088 ------------ ------------ ------------ Property, plant and equipment: Land...................................................... 1,139,439 1,519,976 1,369,884 Buildings and improvements................................ 37,694,988 61,640,117 62,109,687 Machinery and equipment................................... 117,712,476 155,911,312 158,005,611 Transportation equipment.................................. 7,529,516 7,498,075 7,345,743 Property under capital leases............................. 7,428,634 10,301,819 9,956,881 Construction in progress.................................. 22,206,233 4,475,987 5,305,274 ------------ ------------ ------------ 193,711,286 241,347,286 244,093,080 Less accumulated depreciation........................... 95,643,621 98,938,159 106,913,308 ------------ ------------ ------------ 98,067,665 142,409,127 137,179,772 ------------ ------------ ------------ Other assets: Intangible assets, net of accumulated amortization of $839,300 and $1,291,231 at May 31,1996 and December 13, 1996, respectively...................................... 32,732,700 32,280,769 Other..................................................... 8,143,298 5,980,190 6,579,138 ------------ ------------ ------------ Total other assets...................................... 8,143,298 38,712,890 38,859,907 ------------ ------------ ------------ $204,296,365 $325,616,203 $333,819,767 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 32,474,150 $ 46,970,024 $ 48,231,651 Notes payable, banks (Note 3)............................. 5,960,000 14,700,000 Notes payable, officer (Note 4)........................... 1,415,241 121,366 24,786 Accrued liabilities (Note 5).............................. 23,378,430 20,840,961 30,079,170 Current portion of long-term debt (Note 6)................ 3,100,310 2,818,444 4,578,198 Income taxes.............................................. 180,361 ------------ ------------ ------------ Total current liabilities............................... 66,328,131 85,450,795 83,094,166 ------------ ------------ ------------ Long-term debt (Note 6)..................................... 35,464,669 159,808,923 165,447,644 ------------ ------------ ------------ Deferred income taxes (Note 7).............................. 3,908,000 3,631,000 5,160,000 ------------ ------------ ------------ Shareholders' equity: Preferred stock: $1 par value; authorized 200,000 shares; issued none Common nonvoting stock: $.10 par value; authorized 20,000,000 shares; issued none Common voting stock: $.10 par value; authorized 20,000,000 shares; issued 5,770,647 shares in May 1995; 5,786,129 shares in May 1996 and 6,075,152 shares in December 1996.................................................... 577,065 578,613 607,515 Capital in excess of par value............................ 6,771,071 7,011,361 10,070,188 Retained earnings......................................... 91,247,429 69,135,511 69,440,254 ------------ ------------ ------------ 98,595,565 76,725,485 80,117,957 ------------ ------------ ------------ $204,296,365 $325,616,203 $333,819,767 ============ ============ ============
See notes to consolidated financial statements. F-3 44 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED TWENTY-EIGHT WEEKS ENDED -------------------------------------------- --------------------------- MAY 27, MAY 26, MAY 31, DECEMBER 8, DECEMBER 13, 1994 1995 1996 1995 1996 ------- ------- ------- ----------- ------------ (UNAUDITED) Net sales.................. $772,098,333 $744,542,466 $ 983,084,427 $514,907,690 $545,967,563 Operating costs and expenses: Cost of goods sold, including delivery costs................. 693,784,481 669,068,064 932,130,906 476,745,022 496,402,862 Selling.................. 24,155,852 25,377,029 37,533,477 21,262,134 17,575,687 General and administrative........ 22,339,197 22,911,735 26,515,629 15,427,096 15,635,581 Depreciation and amortization.......... 8,262,515 9,830,100 15,378,777 8,045,656 9,396,874 Restructuring charge (Note 12)............. 7,857,319 ------------ ------------ -------------- ------------ ------------ 748,542,045 735,044,247 1,011,558,789 521,479,908 539,011,004 ------------ ------------ -------------- ------------ ------------ Income (loss) from operations............... 23,556,288 9,498,219 (28,474,362) (6,572,218) 6,956,559 ------------ ------------ -------------- ------------ ------------ Other expense (income): Interest, net............ 2,151,359 2,258,674 8,491,769 4,546,783 7,002,401 Other, net............... (895,444) (960,341) (2,408,387) (632,885) (699,585) ------------ ------------ -------------- ------------ ------------ 1,255,915 1,298,333 6,083,382 3,913,898 6,302,816 ------------ ------------ -------------- ------------ ------------ Income (loss) before income taxes.................... 22,300,373 8,199,886 (34,557,744) (10,486,116) 653,743 Provision (benefit) for income taxes (Note 7).... 8,217,000 2,945,000 (12,850,000) (3,564,000) 349,000 ------------ ------------ -------------- ------------ ------------ Net income (loss).......... $ 14,083,373 $ 5,254,886 $ (21,707,744) $ (6,922,116) $ 304,743 ============ ============ ============== ============ ============ Earnings (loss) per share of common stock.......... $2.40 $0.91 $(3.76) $(1.20) $0.05 ============ ============ ============== ============ ============
See notes to consolidated financial statements. F-4 45 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 28, 1993......................... 5,920,106 $592,011 $ 7,405,250 $ 78,311,895 Net income.................................... 14,083,373 Cash dividends, $.27 per share................ (1,584,003) Exercise of stock options including related tax benefits (Note 8)....................... 9,500 950 133,039 Purchase and retirement of common stock....... (126,533) (12,654) (2,759,791) --------- -------- ----------- ------------ Balance, May 27, 1994......................... 5,803,073 580,307 4,778,498 90,811,265 Net income.................................... 5,254,886 Cash dividends, $.28 per share................ (1,610,575) Exercise of stock options including related tax benefits and other stock plans (Note 8).......................................... 104,645 10,465 2,161,423 Purchase and retirement of common stock....... (137,071) (13,707) (168,850) (3,208,147) --------- -------- ----------- ------------ 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........................................ 15,482 1,548 240,290 --------- -------- ----------- ------------ Balance, May 31, 1996......................... 5,786,129 578,613 7,011,361 69,135,511 (UNAUDITED INTERIM INFORMATION) Net income.................................... 304,743 Sale of common stock to an officer of the Company..................................... 279,883 27,988 2,972,358 Shares issued under employee stock purchase plan........................................ 9,140 914 86,469 --------- -------- ----------- ------------ Balance, December 13, 1996.................... 6,075,152 $607,515 $10,070,188 $ 69,440,254 ========= ======== =========== ============
See notes to consolidated financial statements. F-5 46 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED TWENTY-EIGHT WEEKS ENDED ------------------------------------------ --------------------------- MAY 27, MAY 26, MAY 31, DECEMBER 8, DECEMBER 13, 1994 1995 1996 1995 1996 ------- ------- ------- ----------- ------------ (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)............................... $ 14,083,373 $ 5,254,886 $(21,707,744) $ (6,922,116) $ 304,743 ------------ ------------ ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation.................................... 8,262,515 9,830,100 14,539,477 7,593,725 8,944,943 Restructuring charge............................ 6,915,646 Amortization of intangibles..................... 839,300 451,931 451,931 Deferred income taxes........................... 656,000 353,000 23,000 792,000 1,080,600 (Gain) loss on disposition of property, plant and equipment................................. (813) (15,451) 13,568 438,885 (123,625) Provision for losses on accounts receivable..... (100,500) 57,300 133,951 332,000 164,200 Gain on sale of long-term investments........... (627,802) (INCREASE) DECREASE IN ASSETS: Accounts receivable............................. (6,800,467) 4,049,338 (12,724,100) (25,713,941) (20,186,212) Inventories..................................... (5,610,119) (1,020,608) (2,949,079) (4,337,133) (2,633,611) Refundable income taxes......................... 528,574 (1,366,231) (10,124,099) (4,483,342) 11,490,330 Prepaid expenses and other assets............... (362,919) (2,425,749) (2,404,887) (1,167,624) (199,901) INCREASE (DECREASE) IN LIABILITIES: Accounts payable................................ 7,289,671 (1,496,234) 14,495,874 11,679,853 1,261,627 Accrued liabilities............................. 3,452,205 2,094,826 (5,957,251) 5,393,046 9,238,209 Income taxes payable............................ 526,722 (526,722) 180,361 ------------ ------------ ------------ ------------ ------------ Total adjustments............................... 7,840,869 16,449,215 (4,742,048) (9,020,600) 9,668,852 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities.................................... 21,924,242 21,704,101 (26,449,792) (15,942,716) 9,973,595 ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payment for acquisition of Wilson, net of cash acquired (Note 11)............................ (64,630,873) (65,749,414) Proceeds from sale of long-term investments..... 4,484,005 Proceeds from sale of property, plant and equipment..................................... 2,311,269 412,926 2,712,129 494,110 803,568 Capital expenditures............................ (30,197,956) (43,367,769) (38,604,784) (28,987,088) (3,539,167) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities........... (27,886,687) (42,954,843) (96,039,523) (94,242,392) (2,735,599) ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock sold to company officer....................................... 3,000,346 Proceeds from long-term debt.................... 20,500,000 8,000,000 122,500,000 122,500,000 8,400,000 Principal payments on long-term debt............ (1,940,256) (2,008,117) (6,215,552) (2,966,058) (1,857,889) Net borrowings (payments) under lines of credit........................................ 5,960,000 8,740,000 (5,960,000) (14,700,000) Net borrowings from (payments to) officers...... 387,406 (582,788) (1,293,875) (709,267) (96,580) Dividends paid.................................. (1,584,003) (1,610,575) (404,174) (404,174) Proceeds from employee stock purchase plan...... 241,838 130,050 87,383 Purchase and retirement of common stock......... (2,772,445) (3,390,704) Proceeds from stock options exercised including related tax benefits.......................... 133,989 2,171,888 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities.................................... 14,724,691 8,539,704 123,568,237 112,590,551 (5,166,740) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash................. 8,762,246 (12,711,038) 1,078,922 2,405,443 2,071,256 Cash and cash equivalents, beginning of year.... 8,679,429 17,441,675 4,730,637 4,730,637 5,809,559 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents, end of year.......... $ 17,441,675 $ 4,730,637 $ 5,809,559 $ 7,136,080 $ 7,880,815 ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest, net of amounts capitalized.......... $ 2,336,000 $ 4,003,000 $ 10,877,142 $ 5,465,522 $ 8,685,643 ============ ============ ============ ============ ============ Income taxes paid (refunded), net............. $ 6,207,000 $ 3,991,000 $ (2,858,701) $ 33,429 $(12,402,817) ============ ============ ============ ============ ============ Noncash investing activities: Capital lease obligations..................... $ 895,578 $ 2,935,020 $ 256,852 $ 84,740 $ 856,364 ============ ============ ============ ============ ============ 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-6 47 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1996, MAY 26, 1995 AND MAY 27, 1994 AND THE TWENTY-EIGHT WEEKS ENDED DECEMBER 13, 1996 AND DECEMBER 8, 1995 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF OPERATIONS: The Company is engaged in the manufacture and sale of bacon, hot dogs, lunch meats, hams, smoked sausage and turkey products, as well as the slaughtering of hogs and the sale of related fresh meat products. 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. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): The consolidated financial statements as of and for the twenty-eight weeks ending December 13, 1996 and December 8, 1995 are unaudited. In the opinion of management, they include all adjustments consisting of normal recurring items, necessary for a fair presentation of financial position and results of operations. The results of operations are not necessarily indicative of the results which may be expected for the full year. 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 for financial reporting purposes generally on the straight-line basis over the estimated useful lives of the assets. 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 net realizable value. The Company capitalized interest incurred on debt F-7 48 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED during the course of major projects which approximated $1,092,000 and $1,048,000 during fiscal 1996 and 1995, respectively. 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 future operations. IMPAIRMENT OF LONG-LIVED ASSETS: In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that carrying values of long-lived assets and certain identifiable intangible assets be evaluated based on the future (undiscounted and without interest charges) cash flows expected to be realized from the use of the asset and its eventual disposition. If the sum of the expected future cash flows from an asset is less than the carrying value, an impairment loss must be recognized. SFAS No. 121 is effective for fiscal years commencing after December 15, 1995. The Company will adopt SFAS No. 121 in the fiscal year beginning on June 1, 1996, the impact is not expected to be material to the Company's financial position or results of operations. COMMODITY OPTIONS AND FORWARD CONTRACTS: The Company has a variety of commodity option and forward contracts. Realized gains and losses are recognized currently in income and expenses. The Company utilizes price risk management activities and hedging procedures in an effort to minimize the potential adverse effects from raw material market price level changes. Risk management and hedging activities are often utilized with forward sales contracting, with forward raw material procurement and with margin management. Hedging approaches are typically used to protect margins on forward sales obligations and for freezer inventories. The majority of the Company's finished product sales are not hedged as they are manufactured from raw material procured from current production. EARNINGS PER SHARE OF COMMON STOCK: Earnings per share of common stock are based on the weighted average number of common shares outstanding during each year. The weighted average number of shares for 1996, 1995 and 1994 were 5,778,559, 5,754,726 and 5,877,789, respectively. The potential dilution from shares issuable under employee stock option plans is excluded from the computation of the weighted average number of common shares outstanding since it is not material. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): The weighted average number of shares for the twenty-eight weeks ended December 13, 1996 and December 8, 1995 were 5,924,644 and 5,774,736, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement requires the Company either to recognize an expense for stock compensation in the financial statements using a fair-value-based method or to continue to measure compensation expense using the intrinsic value method prescribed in Accounting Principles Board Opinion F-8 49 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED ("APBO") No. 25, "Accounting for Stock Issued to Employees," with additional pro forma footnote disclosure regarding the impact on net earnings and net earnings per share as if the fair-value-based method of accounting had been applied. SFAS No. 123 is effective for fiscal years commencing after December 15, 1995. The Company will adopt SFAS No. 123 in the fiscal year beginning June 1, 1996. 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 26, 1995 and May 27, 1994 are for 52-week periods. RECLASSIFICATIONS: Certain amounts from prior years have been reclassified to conform with the current year presentations. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): Certain amounts from prior years have been reclassified to conform with the current years interim period financial presentation. 2. INVENTORIES:
1996 1995 ---- ---- At lower of cost or market: Supplies.................................................... $ 9,559,537 $ 6,824,152 Raw materials............................................... 23,518,145 11,389,564 Work in process............................................. 3,588,512 4,914,163 Finished goods.............................................. 36,281,016 24,622,913 ----------- ----------- 72,947,210 47,750,792 Less LIFO reserve........................................... 16,684,000 2,950,000 ----------- ----------- $56,263,210 $44,800,792 =========== ===========
The LIFO method of accounting for inventories had the effect (after income taxes) of decreasing net income by approximately $8,927,000 ($1.54 per share) for the year ended May 31, 1996 and increasing net income by approximately $1,282,000 ($.22 per share) and $538,000 ($.09 per share) for the years ended May 26, 1995 and May 27, 1994, respectively. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): No provision has been made during the current fiscal year for last-in, first-out (LIFO) reserve adjustments. Inventories would have been approximately $16,684,000 higher at December 13, 1996 if the first-in, first-out (FIFO) method had been used for inventory valuation. 3. LINES OF CREDIT AND SHORT-TERM BORROWINGS: At May 31, 1996, the Company had $20 million in temporary unsecured lines of credit with four participating banks, of which $5,300,000 was unused. The temporary, short-term lines, with interest at the prime rate of 8.25% at May 31, 1996, were used to fund working capital needs and were set to expire on May 31, 1996, however, the financial institutions have agreed as part of the debt amendments to replace these short-term lines with a new seasonal line of credit expiring January 31, 1997 (see Note 6 for further discussion of long-term debt amendments). F-9 50 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 3. LINES OF CREDIT AND SHORT-TERM BORROWINGS -- (CONTINUED) FISCAL 1997 INTERIM INFORMATION (UNAUDITED): At December 13, 1996 none of the seasonal line of credit was drawn upon. 4. NOTES PAYABLE, OFFICER, AND OTHER RELATED PARTY TRANSACTIONS: Notes payable, officer, are due on demand, with interest payable monthly at approximately 1 percent below the prime rate. Interest expense on the notes payable, officer, amounted to approximately $76,600, $226,400 and $150,600 for the years ended 1996, 1995 and 1994, respectively. Accounts receivable include a noninterest-bearing note receivable from a trust that has purchased life insurance policies for certain officers and other employees. The balance of the note was approximately $804,000 and $1,700,000 at May 31, 1996 and May 26, 1995, respectively. The Company leased its previous sales division office building from entities controlled by certain officers/shareholders of the Company. During 1996, 1995 and 1994, the Company paid rent of approximately $165,500, $174,600 and $174,600, respectively, for the use of this location. The Company maintains inventory at a freezer warehouse that is 75 percent owned by an officer and director of the Company. Storage and handling expenses paid to this freezer warehouse amounted to approximately $2,076,000, $2,311,000 and $1,071,000 for the years ended 1996, 1995 and 1994, respectively. 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 1997. Freezer warehouse rent expense amounted to $882,000 for the years ended 1996, 1995 and 1994. 5. ACCRUED LIABILITIES: Included within accrued liabilities are employee benefits representing self insured programs of $4,588,849 and $3,842,068 at May 31, 1996 and May 26, 1995, respectively. 6. LONG-TERM DEBT: Long-term debt consists of the following:
1996 1995 ---- ---- A. Revolving credit agreement.............................. $ 80,000,000 B. Private placements notes................................ 65,500,000 $23,000,000 C. Revenue bonds........................................... 10,629,449 9,785,733 D. Obligations under capital leases........................ 5,143,814 4,096,304 E. Other note.............................................. 1,354,104 1,682,942 ------------ ----------- 162,627,367 38,564,979 Less current portion................................... 2,818,444 3,100,310 ------------ ----------- $159,808,923 $35,464,669 ============ ===========
A. The unsecured revolving credit agreement is with four financial institutions at variable interest rates no higher than the prime rate or its equivalent. The commitments under the revolving credit agreement expire on May 30, 1998, but may be extended annually for successive one-year periods with the consent of the financial institutions. The commitment fee on the unused portion of the facility is .25 percent per annum. The weighted average interest rate at May 31, 1996 was 6.60 percent. F-10 51 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 6. LONG-TERM DEBT -- (CONTINUED) B. At May 31, 1996, the outstanding balance consisted of three separate issues of unsecured notes in private placements to institutional investors. The first outstanding issue, issued on April 1, 1994, was in the principal amount of $15,000,000 and bore interest at a fixed rate of 6.45 percent per annum. The principal on the first issue is due in equal annual installments of $1,666,666 beginning April 1, 1998, and ending April 1, 2005, with the remaining principal payable at maturity on April 21, 2006. The second outstanding issue, issued on October 1, 1994, was in the principal amount of $8,000,000 and bore interest at a fixed rate of 8.42 percent per annum. The principal on the second issue is due at maturity on October 1, 2003. Interest on the first two issues is payable semi-annually on the first day of April and October of each year. The third outstanding issue, issued on May 30, 1995, was in the principal amount of $42,500,000, and bore interest at a fixed rate of 7.58 percent per annum. The principal on the third issue is due in annual installments of $6,071,429 beginning May 15, 1999, and ending May 15, 2004, with the remaining principal payable at maturity on May 15, 2005. Interest is payable semi-annually on the fifteenth day of May and November of each year. C. At May 31, 1996, 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, is at $2,550,000 with varying quarterly principal payments due July 1, 1996 through January 1, 2000, and quarterly interest at 81.1042 percent of the current prime rate (at May 31, 1996 the interest rate was 6.69 percent). The second outstanding issue, which is referred to as the limited obligation revenue bond, is at $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 1996, averaged 4.21 percent. The third outstanding issue referred to as the economic development revenue bond, is at $2,579,449 with varying monthly principal and interest at 6 percent per annum through maturity on June 30, 2000. The first and third issues are collateralized by property, plant and equipment, while the second bond issue is collateralized by a $5,600,000 letter of credit. D. The obligations under capital leases are at fixed interest rates ranging from 5.5 percent to 11 percent and are collateralized by property, plant and equipment. Property under capital leases consists of the following:
1996 1995 ---- ---- Machinery and equipment..................................... $10,301,819 $7,428,634 Less accumulated amortization............................. 3,408,120 2,752,543 ----------- ---------- $ 6,893,699 $4,676,091 =========== ==========
Future minimum rentals for property under capital leases are as follows:
YEAR ENDING AMOUNT - ----------- ------ 1997........................................................ $1,768,780 1998........................................................ 1,684,065 1999........................................................ 1,601,654 2000........................................................ 647,424 2001........................................................ 161,811 ---------- Total minimum lease obligation.............................. 5,863,734 Less interest............................................. 719,920 ---------- Present value of total minimum lease obligation............. $5,143,814 ==========
F-11 52 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 6. LONG-TERM DEBT -- (CONTINUED) E. The note is secured by a second lien on certain property, plant and equipment. Principal and interest are due quarterly through the date of maturity on September 13, 2000. The interest is at a fixed rate of 7 percent per annum. The aggregate maturities of long-term debt (excluding obligations under capital leases) during the five years subsequent to May 31, 1996 are: 1997, $1,390,889, 1998, $3,222,871, 1999, $89,402,449, 2000, $9,314,402, and 2001, $8,033,894. 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 AMENDMENTS: On May 31, 1996, the Company was in non-compliance with certain financial covenants relating to its unsecured revolving credit agreement, its private placement note agreements, and a $5.5 million limited obligation revenue bond agreement. On September 11, 1996, the Company entered into agreements with the participating lenders to restructure the Company's revolving credit and note agreement facilities and the Company's limited obligation revenue bond agreement. As part of that restructuring, the lenders waived past non-compliance's with financial covenants and covenants were modified on a going-forward basis. The following is a description of the significant changes in the terms of the Company's borrowing agreements: 1. Under the revolving credit agreement the $80 million credit limit has been increased to $90 million and the interest under such agreement will be payable on a monthly basis at an interest rate equal to prime plus one quarter percent. 2. The interest rate on the private placement note agreements has been increased by two percentage points and accrued interest is now required to be paid on a monthly basis. 3. A $20 million short-term line of credit has been provided, which expires on January 31, 1997, and bears interest at an interest rate equal to prime plus two percent and which is secured by a first lien on substantially all of the Company's assets. 4. The Company has granted a second lien on substantially all of the Company's assets which is shared on a pro-rata basis by the $90 million revolving credit lenders, the $65.5 million private placement note lenders and the $5.5 million limited obligation lender. 5. The Chairman of the Board of Directors of the Company, who is also a significant shareholder of the Company, has purchased approximately $3.0 million of the Company's newly-issued common stock from the Company at a price per share determined by the average closing price of the Company's common stock for the 20 trading days preceding the stock purchase. The proceeds of such stock purchase will be used for working capital needs. 6. Under the agreements, the Company is obligated to pursue and obtain by April 30, 1997 a minimum of $15 million in subordinated debt financing through private placement. If such financing is obtained, of which there can be no assurance, the proceeds from the subordinated debt issue will be used to reduce the outstanding balance of the private placement notes, revolving credit notes and limited obligation revenue bonds. 7. The agreements contain financial covenants with respect to consolidated net worth (as defined therein) and interest coverage. The Company is also required to achieve a prescribed level of consolidated earnings available for interest expense. In addition, among other things, 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. F-12 53 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 6. LONG-TERM DEBT -- (CONTINUED) The Company's two other revenue bond agreements contain restrictive covenants that include the maintenance of a minimum level of consolidated net worth (as defined therein) and of certain financial ratios. At May 31, 1996, the Company was not in compliance with certain covenants contained in one of its other revenue bond agreements and the Company has obtained unconditional waivers of those violations from its lender through July 1, 1997. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): The Company's other two revenue bond agreements contain restrictive covenants that include the maintenance of a minimum level of consolidated net worth (as defined therein) and of certain financial ratios. At December 13, 1996, the Company was not in compliance with certain covenants contained in its industrial revenue bond agreement and the Company has obtained an unconditional waiver of those violations from its lender through July 1, 1997. The Company has classified this obligation as a current liability, as a result of the waiver being less than one year in duration from the balance sheet date. The Company does not expect its industrial revenue bond lender to call the debt at the end of the waiver period. 7. INCOME TAXES: The Company's provision (benefit) for income taxes was as follows:
1996 1995 1994 ---- ---- ---- Currently payable (benefit): Federal.............................................. $ (9,939,000) $2,259,000 $6,874,000 State and local...................................... 333,000 638,000 ------------ ---------- ---------- Total currently payable (benefit)............... (9,939,000) 2,592,000 7,512,000 Deferred: Federal and state.................................... (2,911,000) 353,000 705,000 ------------ ---------- ---------- Total provision................................. $(12,850,000) $2,945,000 $8,217,000 ============ ========== ==========
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 31, 1996 and May 26, 1995 are as follows:
1996 1995 --------------------------- --------------------------- DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ASSETS LIABILITIES ------------ ------------ ------------ ------------ Depreciation................................. $5,799,195 $3,449,100 Employee benefit plans....................... $1,720,818 $1,440,776 Bad debt expense............................. 234,635 297,373 Capital leases............................... 214,970 183,794 Restructuring charge......................... 916,901 Estimated losses on assets held for disposal................................... 375,000 Amortization of intangibles.................. 524,563 Credit carryforward.......................... 3,169,895 All other.................................... 39,512 433,132 33,062 464,218 ---------- ---------- ---------- ---------- Total deferred taxes.................... $5,539,860 $6,971,860 $2,688,112 $4,097,112 ========== ========== ========== ==========
F-13 54 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 7. INCOME TAXES -- (CONTINUED) A reconciliation of the provision for income taxes is shown below:
1996 1995 1994 -------------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ------ - ------ - ------ - Federal income tax (benefit) at statutory rate................................... $(12,095,000) (35) $2,870,000 35 $7,805,000 35 State and local income taxes, net of federal income tax benefit............. 232,000 3 445,000 2 Lower tax rate attributable to foreign sales corporation...................... (110,000) (138,000) (2) (202,000) (1) Utilization of tax credits............... (873,000) (2.5) Other.................................... 228,000 (19,000) 169,000 1 ------------ ----- ---------- --- ---------- --- $(12,850,000) (37.5) $2,945,000 36 $8,217,000 37 ============ ===== ========== === ========== ===
The credit carryforward of $3,169,895, for which the tax benefit has been recognized, consists of general business credits of $1,552,729, which expire between the years 2008 and 2011, and alternative minimum tax credit carryforwards of $1,617,166, which can be carried forward indefinitely. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): The Company's effective tax rate, was 53.4 percent and (34.0) percent for the twenty-eight weeks ended December 13, 1996 and December 8, 1995, respectively. 8. STOCK OPTION PLANS: The Company's 1990 Employee Stock Option Plan authorizes the Company's Stock Option Committee to grant options for up to 787,500 shares of the Company's common stock to present or prospective employees. At May 31, 1996, 505,300 options were granted but not exercised and 213,000 shares remain to be granted under the 1990 Plan. At May 31, 1996, there were 141,000 options granted but not exercised under the 1982 Employee Stock Option Plan. The Company's Stock Option Committee may designate any requirements regarding option price, waiting period or an exercise date for options granted under the Plans, except that incentive stock options may not be exercised at less than the fair market value of the stock on the date of grant, and no option may remain outstanding for more than 10 years. The following is a summary of options granted under the Plans:
1996 1995 1994 ----------------------- ------------------------ ---------------------- SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE ------ ------------ ------ ------------ ------ ------------ Balance, beginning...... 484,550 $2.56-$26.00 465,000 $2.56-$23.00 315,000 $2.56-$23.00 Exercised............... (100,200) $2.56-$26.00 (9,500) $2.56-$17.00 Canceled or terminated............ (33,750) $17.00-$26.00 (50,750) $17.00-$26.00 Granted................. 195,500 $17.00 170,500 $26.00 159,500 $17.00 ------- -------- ------- Balance, ending......... 646,300 $2.56-$26.00 484,550 $2.56-$26.00 465,000 $2.56-$23.00 ======= ======== =======
At May 31, 1996, there were 11 participants in the 1982 Employee Stock Option Plan and 30 participants in the 1990 Employee Stock Option Plan. F-14 55 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 9. 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 1996, 1995 and 1994 includes the following benefit and cost components:
1996 1995 1994 ---- ---- ---- Service cost.............................................. $ 346,101 $332,840 $ 320,182 Interest cost............................................. 711,024 645,329 597,299 Actual return on plan assets.............................. (1,474,259) (885,195) (282,059) Net amortization and deferral............................. 738,998 250,402 (328,786) ----------- -------- --------- Net periodic pension cost................................. $ 321,864 $343,376 $ 306,636 =========== ======== =========
As of May 31, 1996 and May 26, 1995, the funded status of the defined benefit plans, using the actuarial present value of the benefit obligation, is as follows:
1996 1995 ---- ---- Vested benefit obligation................................... $ 9,209,690 $8,338,358 Projected and accumulated benefit obligation................ $ 9,750,990 $8,863,460 Plan assets at fair value................................... 10,367,441 8,627,451 ----------- ---------- Projected benefit obligation (less than) greater than assets.................................................... (616,451) 236,009 Unrecognized net gain (loss)................................ 186,085 (365,170) Unrecognized net transition asset........................... 204,515 232,326 Unrecognized prior service cost............................. (46,993) (51,592) ----------- ---------- (Prepaid) accrued pension cost.............................. $ (272,844) $ 51,573 =========== ========== Actuarial assumptions used for 1996, 1995 and 1994 are: Discount rate............................................. 8% 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 $206,000, $207,000 and $169,000 in 1996, 1995 and 1994, respectively. 10. 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. The Company also leases various office space, as well as freezer storage space at a freezer warehouse (Note 4). Rent expense under all operating leases amounted to approximately $8,203,000, F-15 56 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. COMMITMENTS -- (CONTINUED) $6,817,000 and $5,338,000 for the years ended 1996, 1995 and 1994, respectively. Total future minimum rentals under noncancelable operating leases as of May 31, 1996, including those discussed in Note 4, are:
YEAR ENDING AMOUNT ----------- ------ 1997...................................................... $7,643,000 1998...................................................... 6,061,000 1999...................................................... 4,450,000 2000...................................................... 2,018,000 2001...................................................... 800,000 Thereafter................................................ 2,239,000
LETTERS OF CREDIT: At May 31, 1996, the Company had outstanding letters of credit totaling approximately $8,040,000 which serve as collateral for an industrial revenue bond issue, as discussed in Note 6, and various self-insured agreements. FISCAL 1997 INTERIM INFORMATION (UNAUDITED): At December 13, 1996, the Company had outstanding letters of credit totaling approximately $9,540,000 which serves as collateral for an industrial revenue bond issue as discussed in Note 6, and various self-insured agreements. PURCHASE AND MANAGEMENT AGREEMENT: In November, 1994 the Company entered into a 10-year agreement with Michigan Livestock Exchange ("MLE"). Under the terms of the agreement, MLE has agreed to manage and operate the Company's hog buying stations and to provide the Company with hogs in accordance with the Company's quantity and quality specifications at MLE's hog costs plus certain operating expenses. The MLE supplied approximately 65% of the total hogs purchased by the Company in fiscal 1996. In consideration the Company will pay MLE $83,333 per month as a facilities use and management fee. In accordance with the agreement, the Company has purchased $2.0 million of preferred stock of MLE that pays a 6 percent dividend. The Company has classified the investment in MLE in other long-term assets on its consolidated balance sheet. HAM PURCHASE AND PRODUCTION AGREEMENT: In connection with the Wilson acquisition (see Note 11 to the Notes to the Consolidated Financial Statements for further discussion related to the acquisition), the Company assumed a production agreement (the "Production Agreement") with a major meat packing company (the "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 is obligated to produce at such facility, on an exclusive basis, all boneless ham products which the Company may require. In return, the Company has 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 and any extensions thereof. The Production Agreement has an initial term (the "Initial Term") expiring on June 6, 2001 and may be renewed by the Company for up to five successive three year terms (the "Option Periods"). If the Company fails to renew the Production Agreement for each of the five Option Periods, or if the Company terminates or breaches the Production Agreement, the Company will be obligated to pay the $1,375,000 annual fee for the remainder of the Initial Term, if any, and an annual payment of approximately F-16 57 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. COMMITMENTS -- (CONTINUED) $408,000 for each remaining year of the five Option Periods. In such event, the Producer must use its best efforts to utilize the vacated facility to mitigate costs to the Company. In addition to the Production Agreement, the Company has also assumed a supply agreement with the Producer. The Company has agreed to purchase and the Producer has agreed to supply 400,000 pounds of boneless ham muscles on a weekly basis at a pricing formula equal to or more favorable than prices obtainable from other competitive suppliers. The term of such supply agreement runs concurrent with the term of the Production Agreement described above. 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. The aggregate purchase price for the assets acquired and the assumption of certain liabilities was approximately $64.6 million. During the next five years, Foodbrands has the right to receive from the Company up to an additional $10 million in accordance with what is being referred to as an Earnout Agreement, in the event of increases in the market price of the Company's common stock. During fiscal 1996, no amount was paid to Foodbrands under the Earnout Agreement. The acquisition has been accounted for by the purchase method. The acquired assets included three manufacturing facilities, machinery and equipment, current assets, certain trademarks and tradenames. The tradename and trademarks acquired will be amortized to expense over their estimated useful lives, determined to be 40 years. The results of operations of the Company for the 53 week period ending May 31, 1996 reflect a full year of operation related to the acquired Wilson assets. The following unaudited, pro forma, condensed, combined financial information assumes the acquisition occurred at the beginning of fiscal 1995. The results do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal 1995, or of the results which may occur in the future.
FISCAL YEAR ENDED MAY 26, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) ---------------------- Net sales................................................... $965,780 Income from operations...................................... $ 11,192 Net income.................................................. $ 2,377 Earnings per share.......................................... $ 0.41
12. RESTRUCTURING CHARGES: During the fourth quarter of fiscal 1995, the Company recorded a one-time, pre-tax restructuring charge to operations of $7.9 million. The Company closed its Tri-Miller Packing facility in Hyrum, Utah, in an effort to eliminate duplicate facilities and excess personnel. The closing reduced ongoing manufacturing costs and was made possible by the expansion of the Company's Grand Rapids, Michigan, facility. Under the restructuring plan, the Company identified approximately 400 employees, both production and management, that were terminated. The shut down of this facility was substantially completed by the end of May 1995. The restructuring charge included $5.5 million related to the write-down of plant and equipment that were sold. Another $1.4 million included other costs related to shutdown of the Tri-Miller facility, which also included employee severance payments. The remaining $1.0 million related to the write-down of real property and equipment to estimated realizable value associated with the relocation to a new corporate headquarters building and of the Company's spiral sliced ham operation to the newly constructed production facility in Ponca City, Oklahoma. F-17 58 ========================================================= NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE DEBENTURES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE DEBENTURES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information................... 2 Incorporation of Certain Documents by Reference............................. 2 Prospectus Summary...................... 3 Risk Factors............................ 8 The Company............................. 11 Use of Proceeds......................... 11 Price Range of Common Shares and Dividends............................. 12 Capitalization.......................... 13 Selected Consolidated Financial Data.... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 16 Business................................ 22 Management.............................. 30 Description of Debentures............... 31 Description of Capital Stock............ 36 Underwriting............................ 38 Legal Matters........................... 39 Experts................................. 39 Index to Consolidated Financial Statements............................ F-1
========================================================= ========================================================= $15,000,000 [THORN APPLE VALLEY LOGO] THORN APPLE VALLEY, INC. % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2007 -------------------------- PROSPECTUS -------------------------- [RONEY & CO. LOGO] , 1997 ========================================================= 59 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following statement sets forth the estimated amounts of expenses to be home by the Company in connection with the distribution of the securities offered hereby: Securities and Exchange Commission registration fee......... $ 5,227 NASD filing fee............................................. 2,225 Printing and engraving expenses............................. 60,000 Accounting fees and expenses................................ 50,000 Legal fees and expenses..................................... 100,000 Blue sky fees and expenses.................................. 2,000 Trustee fee................................................. 20,000 Miscellaneous expenses...................................... 35,548 -------- Total expenses.............................................. $275,000 ========
All of the figures above, other than the Securities and Exchange Commission registration fee and the NASD filing fee, are estimated. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is organized under the Michigan Business Corporation Act (the "MBA") which, in general, empowers Michigan corporations to indemnify a person who was or is a party or threatened to be made a party to any civil, criminal, administrative or investigative action, suit or proceeding (other than actions by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or of another enterprise at such corporation's request, against expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred in connection therewith if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or its shareholders and, in the case of a criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. If a person is successful in defending against a derivative action or third-party action, the MBA requires that a Michigan corporation indemnify the person against expenses incurred in the action. The MBA also empowers Michigan corporations to provide similar indemnity against amounts paid in settlement and expenses actually and reasonably incurred by such a person in actions or suits by or in the right of the corporation except in respect of any claim, issue or matter as to which such person is adjudged to be liable to the corporation, unless and only to the extent that a court determines that, despite the adjudication of the liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity. The Company's bylaws generally require the Company to indemnify its directors and officers to the fullest extent permissible under Michigan law, require the advancement and reimbursement of expenses under certain circumstances and establish a procedure for determination of when indemnification is proper. The MBA permits Michigan corporations to limit the personal liability of directors for a breach of their fiduciary duty. The Company's Articles of Incorporation, which limit liability to the maximum extent permitted by law, provide that a director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for breach of the director's fiduciary duty. However, the MBA and the Articles of Incorporation do not eliminate or limit the liability of a director for any of the following: (i) a breach of the director's duty of loyalty to the Company or its shareholders; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) declaration of an unlawful II-1 60 dividend, stock purchase or redemption; (iv) a transaction from which the director derives an improper personal benefit; and (v) an act or omission occurring prior to the date when the provision becomes effective. As a result of the inclusion of such a provision, shareholders of the Company may be unable to recover monetary damages against directors for actions taken by them which constitute negligence or gross negligence or which are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. These provisions, however, do not affect liability under the Securities Act of 1933. Under an insurance policy maintained by the Company, the directors and officers of the Company are insured, within the limits and subject to the limitations of the policy, against certain expenses and liabilities incurred in connection with the defense of certain claims, actions, suits or proceedings which may be brought against them by reason of being or having been directors or officers. Reference is also made to Section 8 of the Underwriting Agreement with respect to undertakings to indemnify the Company, its directors and officers and each person who controls the Company within the meaning of the Securities Act of 1933 against certain civil liabilities, including certain liabilities under the Securities Act of 1933. ITEM 16. EXHIBITS A list of exhibits included as part of this Registration Statement is set forth in the Exhibit Index which immediately precedes such exhibits and is incorporated herein by reference. ITEM 17. UNDERTAKINGS 1. The undersigned registrant hereby undertakes that insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. 2. The undersigned registrant hereby undertakes that: (i) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance on Rule A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective and (ii) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-2 61 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Southfield, State of Michigan on the 19th day of March, 1997. THORN APPLE VALLEY, INC. By: /s/ JOEL DORFMAN ------------------------------------ Joel Dorfman, Chief Executive Officer and President POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Registration Statement has been signed below by the following persons in the capacities indicated on March 19, 1997.
NAME TITLE ---- ----- /s/ JOEL DORFMAN Chief Executive Officer, President and - -------------------------------------------- Director Joel Dorfman (principal executive officer) * Executive Vice President Finance and - -------------------------------------------- Administration and Director (principal Louis Glazier financial and accounting officer) * Director - -------------------------------------------- Henry S Dorfman Director - -------------------------------------------- Moniek Milberger Director - -------------------------------------------- John C. Canepa Director - -------------------------------------------- Burton D. Farbman * Director - -------------------------------------------- Seymour Roberts *By /s/ JOEL DORFMAN Attorney-in-fact - -------------------------------------------- Joel Dorfman
II-3 62 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1* Form of Underwriting Agreement. 4.1 Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Company's Form S-2 Registration Statement, Registration No. 33-43287). 4.2 Amendment to Restated Articles of Incorporation (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). 4.3 By-laws of the Company, as amended to date (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). 4.4** Form of Indenture between the Company and State Street Bank and Trust Company, as Trustee. 5.1** Opinion of Honigman Miller Schwartz and Cohn 10.1 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 (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). 10.2 Loan Agreement, dated as of July 1, 1984, between The Onslow County Industrial Facilities and Pollution Control Financing Authority and the Company (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). 10.3 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 (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). 10.4 Security Agreement, dated as of July 1, 1984, between Branch Banking and Trust Company and the Company (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). 10.5 Guaranty Agreement, dated as of July 1, 1984, from the Company to Branch Banking and Trust Company (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). 10.6 Note Agreement dated as of April 1, 1994 by and between the Company and Allstate Life Insurance Company relating to $15,000,000 principal amount 6.45% Senior Notes due April 21, 2006 (incorporated herein by reference to Exhibit (10)(ee) to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 1994). 10.7 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 (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). 10.8 Reimbursement Agreement dated as of December 1, 1993 by and between the Company and Old Kent Bank relating to $5,500,000 Adjustable Rate Demand Limited Obligation Revenue Bonds (incorporated herein by reference to Exhibit (10)(gg) to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 1994).
63
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.9 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 (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). 10.10 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 (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). 10.11 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 (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). 10.12 Supply Agreement, dated May 30, 1995, by and among Wilson Foods Corporation and Foodbrands America, Inc., Dixie Foods Company and the Company (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). 10.13 Transition Service Agreement, dated May 30, 1995, by and between Foodbrands America, Inc. and the Company (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). 10.14 Credit Agreement, dated as of May 30, 1995, among Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., Old Kent Bank, National City Bank, Harris Trust and Savings Bank and the Company (incorporated herein by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1995, as amended). 10.15 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 (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). 10.16 Note Agreement, dated as of May 15, 1995, among the Company, Allstate Life Insurance Company, Principal Mutual Life Insurance Company and Great-West Life & Annuity Insurance Company (incorporated herein by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1994, as amended). 10.17 Marketing and Management Agreement dated November 2, 1994 by and among Michigan Livestock Exchange, Indiana Livestock Exchange and the Company (incorporated herein by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1994, as amended). 10.18 Amended and Restated Credit Agreement, dated as of September 11, 1996, among the Company, the lenders party thereto, and Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as agent for the lenders (incorporated herein by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.19 Senior Secured Seasonal Line of Credit Agreement, dated as of September 11, 1996, among the Company, the lenders party thereto, and Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as agent for the lenders (incorporated herein by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996).
64
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.20 Amendment Agreement, dated as of September 11, 1996, between the Company and Allstate Life Insurance Company relating to $15,000,000 principal amount note due April 21, 2006 (incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.21 Amendment Agreement, dated as of September 11, 1996, between the Company and Allstate Life Insurance Company relating to $8,000,000 principal amount note due October 1, 2003 (incorporated herein by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.22 Amendment Agreement, dated as of September 11, 1996, among the Company, Allstate Life Insurance Company, Principal Mutual Life Insurance Company and Great-West Life & Annuity Insurance Company (incorporated herein by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.23 Amendment to Reimbursement Agreement, dated as of September 11, 1996, between the Company and Old Kent Bank (incorporated herein by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.24 Intercreditor Agreement, dated as of September 11, 1996, among Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as Agent, Seasonal Agent and Collateral Agent, and the lenders party hereto, as acknowledged and agreed to by the Company and its subsidiaries (incorporated herein by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 10.25 Security Agreement, dated as of September 11, 1996, among the Company, the subsidiaries of the Company party thereto, and Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as Collateral Agent and/or Credit Agent (incorporated herein by reference to Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996). 23.1** Consent of Coopers & Lybrand LLP. 23.2 Consent of Honigman Miller Schwartz and Cohn (contained in their opinion cited as Exhibit 5.1). 24 Power of Attorney (See page II-3). 25** Statement of Eligibility and Qualification on Form T-1.
- ------------------------- * Previously filed. ** Filed herewith. EX-4.4 2 EXHIBIT 4.4 1 EXHIBIT 4.4 ================================================================================ INDENTURE between THORN APPLE VALLEY, INC. and ________________________, Trustee Dated as of March __, 1997 $17,250,000 [_____%] Convertible Subordinated Debentures Due April 1, 2007 ================================================================================ 2 CROSS-REFERENCE TABLE
TIA Section Indenture - ----------- --------- 310 (a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.08;9.101 2.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. 311 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. 312 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.03 313 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.02 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06 314 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.06;12.02 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.04 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.04 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05 315 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(b) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.05;11.02 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11 316 (a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.06 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.05 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.04 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N. A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.07 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.01 N.A. means not applicable
i 3 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02 Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 1.03 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 2 THE SECURITIES SECTION 2.01 Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.02 Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.03 Registrar; Paying Agent and Conversion Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2.04 Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.05 Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.06 Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.07 Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.08 Outstanding Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 2.09 Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.10 Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.11 Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 3 REDEMPTION SECTION 3.01 Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3.02 Selection of Securities to be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.03 Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.04 Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3.05 Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 3.06 Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 4 CONVERSION OF SECURITIES SECTION 4.01 Right to Convert; Conversion Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.02 Issuance of Shares on Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 4.03 No Adjustment for Interest or Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.04 Antidilution Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 4.05 No Fractional Shares to be Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 4.06 Effect of Consolidation, Merger, Conveyance or Transfer . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 4.07 Notice to Holders Prior to Certain Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 4.08 Company to Reserve Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 4.09 Compliance with Governmental Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 4.10 Taxes on Shares Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 4.11 Responsibility of Trustee for Conversion Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 17
ii 4 ARTICLE 5 SUBORDINATION SECTION 5.01 Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 SECTION 5.02 No Payment of Securities if Senior Indebtedness in Default . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 5.03 Distribution upon Acceleration of Securities; Dissolution and Reorganization; Subrogation of' Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 5.04 Reliance by Senior Indebtedness on Subordination Provisions . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 5.05 Other Provisions Subject Hereto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE 6 COVENANTS SECTION 6.01 Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 6.02 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 6.03 Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 6.04 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 6.05 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 6.06 SEC Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 6.07 Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 6.08 Purchase of Securities Upon Repurchase Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 7 SUCCESSOR CORPORATION SECTION 7.01 When Company May Merge, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 8 DEFAULTS AND REMEDIES SECTION 8.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 8.02 Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 8.03 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 8.04 Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 8.05 Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 8.06 Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 8.07 Rights of Holders to Receive Payment and to Convert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 8.08 Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 8.09 Trustee May File Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 8.10 Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 8.11 Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 9 TRUSTEE SECTION 9.01 Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 9.02 Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 9.03 Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 9.04 Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 9.05 Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 9.06 Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 9.07 Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
iii 5 SECTION 9.08 Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 9.09 Successor Trustee by Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 9.10 Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 9.11 Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 10 DISCHARGE OF INDENTURE SECTION 10.01 Termination of Company's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 10.02 Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 10.03 Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 11 AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 11.01 Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 11.02 With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 11.03 Compliance with TIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 11.04 Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 11.05 Notation on or Exchange of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 12 MISCELLANEOUS SECTION 12.01 Trust Indenture Act Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 12.03 Communication by Holder with Other Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 12.04 Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 12.05 Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 12.06 When Treasury Securities Disregarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 12.07 Rules by Trustee, Paying Agent, Conversion Agent, Registrar . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 12.08 Legal Holiday . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 12.09 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 12.10 No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 12.11 No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 12.12 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 12.13 Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SIGNATURES 41 EXHIBIT A - FORM OF SECURITY A-1 EXHIBIT B - FORM OF CONVERSION NOTICE B-1
iv 6 INDENTURE dated as of April 1, 1997, between THORN APPLE VALLEY, INC., a Michigan corporation ("Company"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation ("Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's____% Convertible Subordinated Debentures due April 1, 2007 ("Securities"): ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions. "Bankruptcy Law" shall have the meaning provided in Section 8.01. "Board of Directors" means the Board of Directors of the Company or any committee of the Board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee. "Business Day" means a day that is not a Legal Holiday. "Company" means the party named as such in this Indenture until a successor replaces it and thereafter means the successor. "Conversion Agent" shall have the meaning provided in Section 2.03. "conversion price" shall have the meaning provided in Section 4.01. "Custodian" shall have the meaning provided in Section 8.01. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Exchange Act" means the federal Securities and Exchange Act of 1934, as amended. "Event of Default" shall have the meaning provided in Section 8.01. "Holder" or "Securityholder" means the person in whose name a Security is registered on the Registrar's books. "Indenture" means this Indenture as amended or supplemented from time to time. 7 "Legal Holiday" shall have the meaning provided in Section 12.08. "Material Subsidiary" means any wholly-owned subsidiary of the Company the total tangible assets of which equal or exceed 20% of the consolidated total tangible assets of the Company and its consolidated subsidiaries. "Nasdaq Stock Market" means the National Market System of the National Association of Securities Dealers, Inc., Automated Quotations System. "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer, or the Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers or by an Officer and an Assistant Treasurer or Assistant Secretary of the Company. See Sections 12.04 and 12.05. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. See Sections 12.04 and 12.05. "Paying Agent" shall have the meaning provided in Section 2.03. "person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof "principal" of a debt security means the principal of the security plus, when appropriate, the premium, if any, on the security. "Registrar" shall have the meaning provided in Section 2.03. "Repurchase Event" means any of the following: (a) such time as a "person" or "group" (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the total outstanding voting stock of the Company; or (b) such time as a change in the composition of the Board of Directors of the Company occurs in which those persons who, at the beginning of the two year period immediately preceding such change in directors of the Company, constituted the Board of Directors (together with any other person elected or appointed as a director by a two-thirds vote of the directors then in office who were directors at the begining of such two year 2 8 period) cease for any reason to constitute a majority of the Company's Board of Directors; or (c) such time as the Company shall have entered into a definitive agreement providing for the merger or consolidation of the Company with or into any other Person, or any sale or transfer of 66-2/3% or more of the Company's assets to another Person, other than (i) a merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of capital stock of the Company, (ii) a merger that is done solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock, (iii) a consolidation with or merger of the Company into a wholly-owned subsidiary of the Company or any sale or transfer by the Company of 66- 2/3% or more of its assets to one or more of its wholly-owned subsidiaries; provided, in any such case, that the resulting corporation or such wholly-owned subsidiary assumes the Company's obligations under the Securities and provides for appropriate conversion rights, or (iv) any such transaction where (y) outstanding voting stock of the Company is reclassified or changed into or exchanged for voting stock of the surviving corporation and (z) no Person or "group," other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, is or becomes the "beneficial owner" of more than fifty percent (50%) of the voting stock of the surviving corporation immediately after such transaction; or (d) either (i) the distribution by the Company, directly or indirectly, of cash, securities or other property in respect of its capital stock (other than a distribution paid solely in capital stock or rights to acquired capital stock), or (ii) the purchase or other acquisition by the Company, directly or indirectly, of any capital stock (other than an acquisition of capital stock solely in exchange for or upon conversion of capital stock or rights to acquire capital stock), if the sum of the Applicable Equity Percentages (as defined below) for such distribution or acquisition and all other such distributions and acquisitions effected after the date of original issue of the Securities and during the 12-month period ending on the date on which such distribution or acquisition is effected exceeds thirty percent (30%). For purposes of this definition, "Applicable Equity Percentage" means, for any distribution or acquisition, the percentage obtained by dividing (A) the fair market value on the Valuation Date (as defined below) of the cash, securities and other property distributed in respect of, or paid or otherwise exchanged to acquire, capital stock in such distribution or acquisition, by (B) the fair market value on the Reference Date (as defined below) of the capital stock outstanding on the Reference Date; and "Valuation Date" means (A) for any distribution, the record date therefor or (B) for any acquisition, the date thereof; "Reference Date" means (A) for any distribution, the day before the earlier of the record date for such distribution or the first date on which the capital stock trades without the right to receive such distribution or (B) for any acquisition, the day before the date of such acquisition. 3 9 "Responsible Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Sale Event" means either of the following: (a) such time as a "person" or "group" (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than fifty percent (50%) of the total outstanding voting stock of the Company; or (b) such time as the Company shall have entered into a definitive agreement providing for the merger or consolidation of the Company with or into any other Person, or any sale or transfer of 66-2/3% or more of the Company's assets to another Person, other than (i) a merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of capital stock of the Company, (ii) a merger that is done solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock, (iii) a consolidation with or merger of the Company into a wholly-owned subsidiary of the Company or any sale or transfer by the Company of 66- 2/3% or more of its assets to one or more of its wholly-owned subsidiaries; provided, in any such case, that the resulting corporation or such wholly-owned subsidiary assumes the Company's obligations under the Securities and provides for appropriate conversion rights, or (iv) any such transaction where (y) outstanding voting stock of the Company is reclassified or changed into or exchanged for voting stock of the surviving corporation and (z) no Person or "group," other than any holder on the date hereof of five percent (5%) or more of the outstanding Common Stock or any group including such holder, is or becomes the "beneficial owner" of more than fifty percent (50%) of the voting stock of the surviving corporation immediately after such transaction. "SEC" means the Securities and Exchange Commission. "Securities" means the securities as amended or supplemented from time to time that are authenticated and issued under this Indenture. "Senior Indebtedness" shall have the meaning provided in Section 5.01. "Shares" means the shares of common stock, par value $0.10 per share, of the Company, as the same existed on the date of execution of this Indenture. "Subsidiary" means (i) any corporation of which at least a majority in interest of the outstanding stock having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any 4 10 other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by the Company, or by one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, or by the Company and one or more other corporations a majority in interest of such stock of which is similarly owned or controlled and (ii) any person (other than a corporation) in which the Company or any Subsidiary, directly or indirectly, has at least a 50% ownership interest. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code, Sections 77aaa-77bbbb) as in effect on the date of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it and thereafter means the successor. SECTION 1.02 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meaning: "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder or Holder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor on the indenture securities" means the Company All other TIA terms used in this Indenture. that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them. SECTION 1.03 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it, (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (3) "or" is not exclusive; and (4) words in the singular include the plural, and the plural include the singular. 5 11 ARTICLE 2 THE SECURITIES SECTION 2.01 Form and Dating. The Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. SECTION 2.02 Execution and Authentication. Two Officers shall sign the Securities for the Company by facsimile signature. The Company's seal shall be reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Securities for original issue in the aggregate principal amount of $17,250,000 upon a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer of the Company. The aggregate principal amount of Securities outstanding at any time may not exceed $17,250,000, except as provided in Section 2.07. SECTION 2.03 Registrar; Paying Agent and Conversion Agent. The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for payment ("Paying Agent") and an office or agency where Securities may be surrendered for conversion ("Conversion Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars, one or more additional paying agents and one or more additional conversion agents. The term "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent, Conversion Agent or co-registrar not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such. The Company initially appoints the Trustee as Registrar, Paying Agent and Conversion Agent. SECTION 2.04 Paying Agent to Hold Money in Trust. Each Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by the Paying Agent for the 6 12 payment of principal or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate the money and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon doing so the Paying Agent shall have no further liability for the money. SECTION 2.05 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each semiannual interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders. SECTION 2.06 Transfer and Exchange. Where a Security is presented to the Registrar or a co-registrar with a request to register the transfer, the Registrar shall register the transfer as requested if the Security is duly endorsed or is accompanied by a written instrument of transfer in form satisfactory to the Registrar, duly executed by the Holder thereof or his attorneys duly authorized in writing. Where Securities are presented to the Registrar or a co-registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit transfers and exchanges, the Trustee shall authenticate Securities at the Registrar's request. The Securities may be transferred or exchanged without charge, however the Company may require payment of a sum sufficient to pay any taxes or governmental charges assessed with respect to a transfer or exchange of the Securities. SECTION 2.07 Replacement Securities. If the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Holder of such Security furnishes to the Trustee evidence reasonably accept able to it of the ownership and destruction, loss or theft of such Security. An indemnity bond must be sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Conversion Agent, the Registrar or any co-registrar from any loss which any of them may suffer if a Security is replaced. Each of Company and the Trustee may charge for its expenses in replacing a Security. SECTION 2.08 Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those canceled by it and those described in this Section. A Security does not cease to be outstanding because the Company or one of its affiliates holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the Paying Agent holds on a redemption date or maturity date money sufficient to pay Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. 7 13 SECTION 2.09 Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare, and the Trustee shall authenticate, definitive Securities in exchange for temporary Securities. SECTION 2.10 Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar, the Paying Agent and the Conversion Agent shall forward to the Trustee any Securities surrendered to them for transfer, exchange, payment or conversion. The Trustee and no one else shall cancel and destroy all Securities surrendered for transfer, exchange, payment, conversion or cancellation. The Company may not issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation. SECTION 2.11 Defaulted Interest. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix the special record date and payment date. At least 15 days before the special record date, the Company shall mail to each Securityholder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. The Company may pay defaulted interest in any other lawful manner. ARTICLE 3 REDEMPTION SECTION 3.01 Notices to Trustee. If the Company wants to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee of the redemption date and the principal amount of Securities to be redeemed. If the Company wants to reduce the principal amount of Securities to be redeemed pursuant to paragraph 6 of the Securities, it shall notify the Trustee of the amount of the reduction and the basis for it. If the Company wants to credit against any such redemption Securities it has not previously delivered to the Trustee for cancellation, it shall deliver the Securities with the notice. The Company shall give each notice provided for in this Section at least 30 days before the redemption date, provided, however, that if the Company desires the Trustee to mail notice of redemption in accordance with Section 3.03, it shall give such notice at least 60 days before the redemption date, or such shorter period as is acceptable to the Trustee. SECTION 3.02 Selection of Securities to be Redeemed. If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed either pro rata or by lot. The Trustee shall make the selection from Securities outstanding not previously called for redemption. Securities in denominations of $1,000 may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 or any integral multiple thereof) of the principal 8 14 of Securities that have denominations larger than $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated as outstanding for the purpose of such selection. SECTION 3.03 Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price, (3) the name and address of the Paying Agent; (4) the conversion price, the date on which the right to convert the principal of the Securities or the portions thereof to be redeemed will terminate and the place or places where such securities may be surrendered for conversion, (5) in the event that any Security is to be redeemed in part only, the portion of the principal amount thereof to be redeemed and that on and after the redemption date, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued; (6) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; and (7) that interest on Securities called for redemption ceases to accrue on and after the redemption date. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. SECTION 3.04 Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price, plus accrued interest to the redemption date. SECTION 3.05 Deposit of Redemption Price. On or before 10:00 a.m., Eastern Time, on the redemption date, the Company shall deposit with the Paying Agent money sufficient to pay the redemption price of, and accrued interest on, all Securities to be redeemed on that date other than any Securities or portions thereof called for redemption on that date which have been converted pursuant to Article 4 on or prior to the date of such deposit. 9 15 SECTION 3.06 Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 CONVERSION OF SECURITIES SECTION 4.01 Right to Convert; Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of a Holder, any Security in the principal amount of $1,000 or an integral multiple of $1,000, at any time at or before the close of business on the business day preceding April 1, 2007, or in case such Security or a portion thereof has called for redemption prior to April 1, 2007, then until and including the close of business on the business day preceding the redemption date, may be converted into duly authorized, validly issued, fully paid and nonassessable Shares at the initial conversion price of $_____ per Share, or, in case an adjustment in the conversion price has taken place pursuant to the provisions of Section 4.04, then at the applicable conversion price as so adjusted, upon surrender of the Security to be converted at any time during usual business hours at the office or agency of the Conversion Agent, accompanied by written notice substantially in the form set forth as Exhibit B. The initial conversion price specified in this Section 4.01, as adjusted from time to time pursuant to the provisions of this Article 4, is referred to as the "conversion price". SECTION 4.02 Issuance of Shares on Conversion. As promptly as practicable after the surrender of any Security for conversion, the Company shall deliver or cause to be delivered, at the office or agency of the Conversion Agent, to or upon the written order of the Holder of the Security so surrendered a certificate or certificates representing the number of duly authorized, validly issued, fully paid and non- assessable Shares into which such Security may be converted in accordance with the provisions of this Article. Such conversion shall be deemed to have been made at the time that such Security has been surrendered for conversion and the notice required by Section 4.01 has been received by the Company at the office or agency of the Conversion Agent. The rights of the Holder of such Security, as a Holder, shall cease at such time and the person or persons entitled to receive Shares upon conversion of such Security shall be treated for all purposes as having become the record holder or holders of such Shares at such time and such conversion shall be at the conversion price in effect at such time. In the case of any Security which is converted in part only, upon conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder, without any service charge, a new Security, of any authorized denomination or denominations requested by the Holder in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. SECTION 4.03 No Adjustment for Interest or Dividends. Subject to paragraphs 2 and 9 of the Securities and Section 4.04 hereof, no payment or adjustment shall be made on conversion of any Security for interest accrued thereon or for dividends on Shares issued upon conversion of Securities. 10 16 SECTION 4.04 Antidilution Adjustments. The conversion price in effect at any time shall be subject to adjustment as follows: A. In case the Company shall (i) declare a dividend on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing person), the conversion price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder of any Security surrendered for conversion after such time shall be entitled to receive the aggregate number of Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Security been converted immediately prior to the happening of such event (or the record date therefor). Such adjustment shall be made successively whenever any event listed above shall occur. B. In case the Company shall fix a record date for the issuance of rights or warrants to the holders of its Shares entitling them (for a period expiring within 45 days after such record date) to subscribe for or purchase Shares or securities convertible into Shares at a price per Share (or having an initial conversion price per share) less than the current market price per Share (as defined in Paragraph G below) on such record date, the conversion price shall be adjusted so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to such record date by a fraction, of which the numerator shall be the number of Shares outstanding on such record date plus the number of additional Shares which the aggregate offering price of the total number of Shares so offered (or the aggregate initial conversion price of the convertible securities so offered) would purchase at such current market price per Share, and of which the denominator shall be the number of Shares outstanding on such record date plus the number of Shares offered for subscription or purchase (or into which the convertible securities so offered are initially convertible). Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the conversion price shall again be adjusted to be the conversion price which would then be in effect if such record date had not been fixed, but such subsequent adjustment shall not affect the number of Shares issued upon any conversion prior to the date such adjustment is made. C. In case the Company shall fix a record date for the making of a distribution to the holders of its Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing person) of evidences of its indebtedness or assets (other than cash dividends out of retained earnings) or subscription rights or warrants (excluding those referred to in Paragraph B above), then in each such case the conversion price in effect after such record date shall be determined by multiplying the conversion price in effect immediately prior to such record date by a fraction, of which the 11 17 numerator shall be the current market price per Share (as defined in Paragraph G below) as of such record date less the fair market value as of such record date (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board resolution filed with the Trustee and each Conversion Agent) of the portion applicable to one Share of the assets or evidences of indebtedness or subscription rights or warrants so to be distributed, and of which the denominator shall be such current market price per Share. Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not made, the conversion price shall again be adjusted to be the conversion price which would be in effect if such record date had not been fixed; but such subsequent adjustment shall not affect the number of Shares issued upon any conversion prior to the date such adjustment is made. D. In case the Company shall issue Shares for a consideration per share less than the current market price per Share (as defined in Paragraph G below) on the date the Company fixes the offering price for such additional Shares (excluding Shares issued (i) in any of the transactions described in Paragraph A above, (ii) upon conversion of Securities, or upon conversion or exchange of other securities issued after the date hereof, convertible into or exchangeable for Shares, (iii) upon exercise of options or rights previously granted or granted hereafter pursuant to employee benefit or stock option plans in effect at the effective date of this Indenture or pursuant to employee benefit or stock option plans hereafter approved by the holders of Shares, (iv) upon exercise of rights or warrants issued to the holders of Shares, (v) to shareholders of any corporation which merges into the Company in an arm's- length transaction between the Company and one or more unaffiliated third parties in proportion to their stock holdings of such corporation immediately prior to such merger, upon such merger, or (vi) in a bona fide public offering pursuant to a firm commitment underwriting), the conversion price shall be adjusted immediately after the issuance of such additional Shares so that it shall equal the price determined by multiplying the conversion price in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares outstanding immediately prior to the issuance of such additional shares plus the number of shares which the aggregate consideration received (determined as provided in Paragraph F below) for the issuance of such additional Shares would purchase at such current market price per Share, and of which the denominator shall be the number of Shares outstanding immediately after the issuance of such additional Shares. Such adjustment shall be made successively whenever such an issuance is made. E. In case the Company shall issue any securities convertible into or exchangeable for Shares for a consideration per Share initially deliverable upon conversion or exchange of such securities (determined as provided in Paragraph F below) less than the current market price per Share (as defined in Paragraph G below) in effect immediately prior to the issuance of such securities (excluding securities issued in transactions described in Paragraphs A, B and C above) or issued in transactions excluded from the provisions of Paragraph D above, the conversion price shall be adjusted immediately thereafter so that it 12 18 shall equal the price determined by multiplying the conversion price in effect immediately prior thereto by a fraction, of which the numerator shall be the number of Shares outstanding immediately prior to the issuance of such securities plus the number of Shares which the aggregate consideration received (determined as provided in Paragraph F below) from the issuance of such securities would purchase at such current market price per Share, and of which the denominator shall be the number of Shares outstanding immediately prior to such issuance plus the maximum number of Shares deliverable upon conversion of or in exchange for such securities at the initial conversion or exchange price or rate. Such adjustment shall be made successively whenever such an issuance is made. F. For purposes of any computation respecting consideration received pursuant to Paragraphs D and E above, the following shall apply: (i) in the case of the issuance of Shares for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Company (irrespective of the accounting treatment thereof), whose determination shall be conclusive and described in a Board Resolution; and (iii) in the case of the issuance of securities convertible into or exchangeable for Shares, the aggregate consideration received from the issuance of such Securities shall be deemed to be the consideration received by the Company for the issuance of such securities plus the additional minimum consideration, if any, to be received by the Company upon conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this Paragraph F). G. For the purposes of any computation under Paragraphs B, C, D and E above and under Section 4.05, the current market price per Share on any record date shall be deemed to be the average of the daily closing prices for 20 consecutive Business Days commencing on the 30th Business Day before such date. The closing price for each day shall be the last sale price regular way or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case on the New York Stock Exchange, or, if the Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Shares are listed or admitted to trading, or if the Shares are not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of the Shares on Nasdaq Stock Market or any comparable system, or if the Shares are not listed on Nasdaq Stock Market or a comparable 13 19 system, the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc., selected from time to time by the Company for that purpose. H. No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least twenty-five cents ($0.25) in such price; provided, however, that any adjustments which by reason of this Paragraph H are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 4 shall be made to the nearest cent or to the nearest one-thousandth of a Share, as the case may be. Anything in this Section to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Conversion Price, in addition to those required by this Section, as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable. I. Whenever the conversion price is adjusted, as herein provided, the Company shall promptly file with the Trustee and with the Conversion Agent a certificate of a firm of independent public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) setting forth the conversion price after such adjustment and setting forth a brief statement of the facts requiring such adjustment and a computation thereof. Such certificate shall be conclusive evidence of the correctness of such adjustment. Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such certificate or any facts set forth therein except to exhibit said certificate from time to time to any Holder desiring to inspect the same upon reasonable prior notice. The Company shall promptly cause a notice setting forth the adjusted conversion price to be mailed to the Holders, at their last addresses appearing in the register of Securities. J. In the event that at any time, as a result of an adjustment made pursuant to Paragraph A above, the Holder of any Security thereafter surrendered for conversion shall become entitled to receive any shares of the Company other than Shares, thereafter the number of such other shares so receivable upon conversion of any Security shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in Paragraphs A to I, inclusive, above, and the provisions of Section 4.02 and 4.05 to 4.10, inclusive, with respect to the Shares shall apply on like terms to any such other shares. SECTION 4.05 No Fractional Shares to be Issued. No fractional Shares shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof to the extent permitted hereby) so surrendered. In lieu of issuing any 14 20 fractional Share, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the current market price of a Share (determined as provided in Paragraph G of Section 4.04) on the day of conversion. SECTION 4.06 Effect of Consolidation, Merger, Conveyance or Transfer. In case of any reclassification (excluding those referred to in Paragraph A of Section 4.04), in case of any consolidation of the Company with, or merger of the Company into, any other person (other than a consolidation or merger in which the Company is the continuing person), or in case of any conveyance or transfer of the property and assets of the Company substantially as an entirety, the person formed by such reclassification or consolidation or into which the Company shall have been merged or the person which shall have acquired by conveyance or transfer such property and assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have, in lieu of the right to convert such Security into Shares, the right thereafter to convert such Security into the kind and amount of shares of stock and other securities and property receivable upon such reclassification, consolidation, merger, conveyance or transfer by a holder of the number and kind of Shares into which such Security might have been converted immediately prior to such reclassification, consolidation, merger, conveyance or transfer. Such supplemental indenture shall conform to the provisions of the TIA as then in effect and shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. Neither the Trustee nor any Conversion Agent shall be under any responsibility to determine the correctness of any provision contained in any such supplemental indenture relating either to the kind or amount of shares of stock or other securities or property receivable by Holders upon the conversion of their Securities after any such reclassification, consolidation, merger, conveyance, or transfer, or to any adjustment to be made with respect thereto and, subject to the provisions of Section 9.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, an Opinion of Counsel with respect thereto. The above provisions of this Section shall similarly apply to successive reclassifications, consolidations, mergers, conveyances or transfers. SECTION 4.07 Notice to Holders Prior to Certain Actions. In case: (a) the Company shall authorize the issuance to all holders of Shares of rights or warrants to subscribe for or purchase Shares or securities convertible into Shares or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of Shares of evidences of its indebtedness or assets (other than cash dividends out of earned surplus); or (c) of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety; or 15 21 (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company proposes to take any action (other than actions of the character described in Paragraph A of Section 4.04) which would require an adjustment of the conversion price pursuant to Section 4.04; then the Company shall cause to be filed with the Trustee and the Conversion Agent, and shall cause to be mailed to the Holders, at their last addresses appearing in the register of Securities, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, a notice stating (i) the date as of which the holders of Shares of record to be entitled to receive any such rights, warrants or distribution are expected to be determined, or (ii) the date on which any such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Shares of record shall be entitled to exchange their Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section or any defect therein shall not affect the legality or validity of any distribution, right, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any such action. SECTION 4.08 Company to Reserve Shares. The Company covenants that it will at all times reserve and keep available out of its authorized Shares, free from preemptive rights, solely for the purpose of issue upon conversion of Securities as herein provided, such number of Shares as shall then be issuable upon the conversion of all outstanding Securities. The Company covenants that all Shares which shall be so issuable shall, when issued, be duly and validly issued and fully paid and nonassessable. The Company covenants that, upon conversion of Securities as herein provided, there will be credited to the capital account with respect to the Shares from the consideration for which the Shares issuable upon such conversion are issued an amount per Share so issued as determined by the Board of Directors, which amount shall not be less than the amount required by law and by the Company's articles of incorporation, as amended, as in effect on the date of such conversion. For the purposes of this covenant the principal amount of the Securities converted, less the amount of cash paid in lieu of the issuance of fractional shares on such conversion, shall be deemed to be the amount of consideration for which the Shares issuable upon such conversion are issued. SECTION 4.09 Compliance with Governmental Requirements. The Company covenants that if any Shares required to be reserved for purposes of conversion of Securities hereunder require registration with or approval of any governmental authority under any federal or state law, or any national securities exchange, before such Shares may be issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to cause such Shares to be duly registered or approved, as the case may be. 16 22 SECTION 4.10 Taxes on Shares Issued. The issuance of certificates for Shares upon the conversion of Securities shall be made without charge to the converting Holders for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the Holders of the Securities converted; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the Holder of the Security converted, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 4.11 Responsibility of Trustee for Conversion Provisions. The Trustee and any Conversion Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist which may require any adjustment of the conversion price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any Shares, or of any other securities or property, which may at any time be issued or delivered upon the conversion of any Security; and it or they do not make any representation with respect thereto. Neither the Trustee nor any Conversion Agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any Shares or certificates therefor or other securities or property upon the surrender of any Security for the purpose of conversion, and the Trustee, subject to the provisions of Section 9.01, and any Conversion Agent shall not be responsible for any failure of the Company to comply with any of the covenants of the Company contained in this Article. ARTICLE 5 SUBORDINATION SECTION 5.01 Agreement to Subordinate. The Company, for itself and its successors, and each Holder, by his acceptance of Securities, agrees that the payment of the principal of, interest on or any other amounts due on the Securities is subordinated in right of payment, to the extent and in the manner stated in this Article 5, to the prior payment in full of all Senior Indebtedness. Each Holder by his acceptance of the Securities authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to effectuate, as between the holders of Senior Indebtedness and such Holder, the subordination provided in this Article 5 and appoints the Trustee his attorney-in-fact for such purpose. If the Trustee does not file a proper claim or proof of debt in the form required in any voluntary or involuntary dissolution, winding up, liquidation, reorganization, arrangement or similar proceedings relating to the Company prior to 30 days before the expiration of time to file such claim or claims, then any holder or holders of Senior Indebtedness or their representative or representatives are hereby authorized to and have the right to file an appropriate claim for and on behalf of the Securityholders. 17 23 For purposes of this Article 5, "Senior Indebtedness" means the principal of, interest on and other amounts due on any indebtedness (other than the Securities), whether outstanding on the date of this Indenture or thereafter created, incurred, assumed or guaranteed by the Company for money borrowed from others (including, for this purpose, all obligations incurred under capitalized leases or purchase money mortgages) or in connection with the acquisition by it or a Subsidiary of any other business or entity, and, in each case, all renewals, extensions and refundings thereof, unless the terms of the instrument creating or such expressly provide that such indebtedness is not superior in right of payment to the payment of principal of and interest on the Securities. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness shall not include (a) indebtedness of or amounts owed by the Company for compensation to employees, or for goods or materials purchased in the ordinary course of business, or for services, and (b) indebtedness of the Company to a Subsidiary for money borrowed or advances from such Subsidiary. For purposes hereof, a "capitalized lease" shall be deemed to mean a lease of real or personal property which, in accordance with generally accepted accounting principles, has been capitalized. SECTION 5.02 No Payment of Securities if Senior Indebtedness in Default. Anything in this Indenture to the contrary notwithstanding, no payment on account of principal of, mandatory redemption of, interest on or other amounts due on the Securities, and no redemption, purchase, or other acquisition of the Securities, shall be made by or on behalf of the Company -- (i) unless full payment of amounts when due for principal, sinking funds and interest and of all other amounts then due on all Senior Indebtedness has been made or duly provided for pursuant to the terms of the instrument governing such Senior Indebtedness, (ii) if, at the time of such payment, redemption, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Indebtedness, or any agreement pursuant to which any such Senior Indebtedness is issued, any default, which default shall not have been cured or waived and which default shall have resulted in the full amount of such Senior Indebtedness being declared due and payable, or (iii) if, at the time of such payment, redemption, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Indebtedness, or any agreement pursuant to which such Senior Indebtedness is issued, any default, which default shall not have been cured or waived, permitting the holders thereof to declare the full amount of such Senior Indebtedness due and payable, upon written notice of such default given to the Company and the Trustee by the holder or holders of such Senior Indebtedness or their representative or representatives, provided, however, that if such Senior Indebtedness shall not have been declared due and payable within a period of 270 days after the date of the written notice hereinabove referred to, payments on account of principal of, mandatory redemption of or interest on the Securities (other than amounts due and payable by reason of the acceleration of the maturity of the Securities) and redemptions, purchases or other acquisitions may be made by or on behalf of the Company, and provided, further, that the failure to give notice as herein provided shall not constitute a waiver of the rights of such 18 24 holder or holders of Senior Indebtedness hereunder and such period of 270 days shall commence upon the giving of such notice. The provisions of this Section 5.02 shall not prevent a mandatory redemption payment in respect of Securities made in Securities properly acquired prior to the happening of such default. In the event that notwithstanding the provisions of this Section 5.02, payments are made by or on behalf of the Company in contravention of the provisions of this Section 5.02, such payments shall be held by the Trustee, any Paying Agent or the Securityholders, as applicable, in trust for the benefit of, and shall be paid over to and delivered to, the holders of Senior Indebtedness or their representative or the trustee under the indenture or other agreement (if any), pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with the terms of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. SECTION 5.03 Distribution upon Acceleration of Securities; Dissolution and Reorganization; Subrogation of Securities. (a) Upon (i) any acceleration of the principal amount due on the Securities because of an Event of Default or (ii) any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company): (1) the holders of all Senior Indebtedness shall first be entitled to receive payment in full in lawful money of the United States of the principal thereof, the interest thereon and any other amounts due thereon before the Holders are entitled to receive payment on account of the principal, interest or any other amounts due on the Securities; (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article 5 with respect to the Securities, to the payment in full without diminution or modification by such plan of all Senior Indebtedness) to which the Holders or the Trustee would be entitled except for the provisions of this Article 5 shall be paid by the liquidating trustee or agent or other person making such a payment or distribution, directly to the holders of Senior Indebtedness (or their representatives) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of and interest on the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and 19 25 (3) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article 5 with respect to the Securities, to the payment in full without diminution or modification by such plan of Senior Indebtedness) shall be received by the Trustee or the Holders before all Senior Indebtedness is paid in full, such payment or distribution shall be held in trust for the benefit of, and be paid over to, the holders of the Senior Indebtedness remaining unpaid (or their representatives) or trustee(s) acting on their behalf), ratably as aforesaid, for application to the payment of such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness. the Holders shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal of and interest on the Securities shall be paid in full, and, for purposes of such subrogation, no such payments or distributions to the holders of Senior Indebtedness of cash, property or securities which otherwise would have been payable or distributable to Holders shall, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders, be deemed to be a payment by the Company to or on account of the Securities. Nothing contained in this Article 5 or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holders, the obligation of the Company, which is unconditional and absolute, to pay to the Holders the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holders from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 5 of the holders of Senior Indebtedness in respect of cash, property and securities of the Company received upon the exercise of any such remedy. Upon distribution of assets of the Company referred to in this Article 5, the Trustee, subject to the provisions of Section 9.01, and the Holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable or distributed thereon and all thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 5. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness. Nothing contained in this Article 5 or elsewhere in this Indenture, or in any of the Securities, shall prevent the application by the Trustee of any moneys which were deposited with it hereunder, prior to its receipt of written notice of facts which would prohibit such application, 20 26 for the purpose of the payment of or on account of the principal of, or interest on, the Securities unless, prior to the date on which such application is made by the Trustee, the Trustee shall be charged with notice under Section 5.03(c) hereof of the facts which would prohibit the making of such application. (b) The provisions of this Article 5 shall not be applicable to any cash, properties or securities received by the Trustee or by any other Holder when received as a holder of Senior Indebtedness and nothing in Section 9.11 or elsewhere in this Indenture shall deprive the Trustee or such Holder of any of its rights as such holder. (c) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities pursuant to the provisions of this Article 5. The Trustee, subject to the provisions of Section 9.01, shall be entitled to assume that no such fact exists unless the Company or any holder of Senior Indebtedness or any trustee therefor has given such notice to the Trustee. Notwithstanding the provisions of this Article 5 or any other provisions of this Indenture, the Trustee shall not be charged with knowledge of the existence of any fact which would prohibit the making of any payment of moneys to or by the Trustee in respect of the Securities pursuant to the provisions in this Article 5, unless and until the Trustee shall have received written notice thereof from the Company or any holder or holders of Senior Indebtedness or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.01, shall be entitled in all respects conclusively to assume that no such fact exists; provided that if on or before the Business Day immediately preceding the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the principal of or interest on any Security, and any amounts immediately due and payable upon the execution of any instrument acknowledging satisfaction and discharge of this Indenture, as provided in Article 10 hereof), the Trustee shall not have received with respect to such moneys the notice provided for in this Section 5.03(c), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee on behalf of any such holder or holders). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article 5, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article 5, and, if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment; nor shall the Trustee 21 27 be charged with knowledge of the curing or waiving of any default of the character specified in Section 5.02 or that any event or any condition preventing any payment in respect of the Securities shall have ceased to exist, unless and until the Trustee shall have received an Officers' Certificate to such effect. (d) The provisions of this Section 5.03 applicable to the Trustee shall also apply to any Paying Agent for the Company. SECTION 5.04 Reliance by Senior Indebtedness on Subordination Provisions. Each Holder of any Security by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness, and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. Notice of any default in the payment of any Senior Indebtedness, except as expressly stated in this Article 5, and notice of acceptance of the provisions hereof are hereby expressly waived. Except as otherwise expressly provided herein, no waiver, forbearance or release by any holder of Senior Indebtedness under such Senior Indebtedness or under this Article 5 shall constitute a release of any of the obligations or liabilities of the Trustee or Holders of the Securities provided in this Article 5. Except as otherwise expressly provided herein, no right of any present or future holder of Senior Indebtedness to enforce the subordination provisions hereof shall at any time or in any way be prejudiced or impaired by any act or failure to act on the part of the Company or any such holder or by any noncompliance by the Company with the terms, provisions or covenants of this Indenture, regardless of any knowledge thereof which such holder may have or otherwise be charged with. SECTION 5.05 Other Provisions Subject Hereto. Except as expressly stated in this Article 5, notwithstanding anything contained in this Indenture to the contrary, all the provisions of this Indenture and the Securities are subject to the provisions of this Article 5. ARTICLE 6 COVENANTS SECTION 6.01 Payment of Securities. The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. An installment of principal or interest shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date money designated for and sufficient to pay the installment. The Company shall pay interest on overdue principal at the rate borne by the Securities; it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 6.02 Corporate Existence. Subject to Article 7, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate 22 28 existence and that of each Subsidiary and the rights (charter and statutory) and franchises of the Company and its Subsidiaries, provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors, or the board of directors of the Subsidiary concerned, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or any Subsidiary and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 6.03 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the material property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 6.04 Maintenance of Properties. The Company will cause all material properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Company or the Subsidiary concerned, desirable in the conduct of the business of the Company or any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 6.05 Compliance Certificate. The Company shall deliver to the Trustee within 90 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers know of any default by the Company in performing its covenants in Sections 6.02, 6.03, and 6.04. If they do know of such a default, the certificate shall describe the default. The certificate need not comply with Section 12.05. SECTION 6.06 SEC Reports. The Company shall file with the Trustee, within 15 days after it files them with the SEC, copies of the quarterly and annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company also shall comply with the other provisions of TIA Section 314(a). So long as the Securities remain outstanding, the Company shall cause its annual reports to shareholders and any other financial reports furnished by it to shareholders 23 29 generally, to be mailed to the Holders at their addresses appearing in the register of Securities maintained by the Registrar. With respect to such reports, the Trustee's sole responsibility prior to the occurrence and continuance of an Event of Default shall be to monitor the Company's timely delivery of such reports, and not to monitor or confirm on a continuing basis or otherwise the Company's compliance with any covenants contained herein. SECTION 6.07 Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, any stay or extension law or any usury law or other law, which would prohibit or forgive the Company from paying all or any portion of the principal of and/or interest on the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.08 Purchase of Securities Upon Repurchase Event. (a) If a Repurchase Event occurs, the Company shall make an offer to purchase all outstanding Securities. The Company's offer must remain open for at least 45 days and not more than 60 days after the date the Repurchase Event Notice described below is mailed to Holders, or such later date as is required for the Company to comply with the Exchange Act, and must be made at a price of 101% of the principal amount of the Securities, plus accrued and unpaid interest through the date of repurchase, provided the Holders comply with the requirements of this Section 6.08. (b) The Company shall give written notice (the "Repurchase Event Notice") of a Repurchase Event within 30 days after it occurs, together with its offer to purchase all of the Securities as specified above. The Trustee is not required to inquire about, or learn of, the occurrence of a Repurchase Event. The Repurchase Event Notice shall include instructions and materials necessary or helpful to enable Holders to tender Securities for repurchase, and shall also include the following: (1) a description of the Repurchase Event and the date on which it is deemed to have occurred, together with a brief description of any material developments in the Company's business since the date of its latest annual or quarterly report filed with the Trustee pursuant to Section 6.06 and, if material, any pro forma financial information; (2) the date by which a Holder must give notice of his intention to tender Securities, as provided in paragraph (c) below; (3) the repurchase price (101% of par) and the date on which the Company will pay the repurchase price to a Holder who tenders Securities pursuant to the Company's offer; 24 30 (4) that any Securities not tendered will continue to earn interest and be outstanding obligations of the Company; (5) that Securities accepted by the Company will become due and payable on the date set by the Company for repurchase of Securities and will cease to earn interest after that date; and (6) any procedures that a Holder must follow to tender Securities and the procedures for withdrawing a tender of Securities prior to the date set by the Company for repurchase of the Securities. (c) A Holder may tender Securities for repurchase pursuant to this Section 6.08 by (1) delivering to any Paying Agent, prior to the date set by the Company for the giving of notice of his intention to tender, written notice identifying the certificate numbers of those certificates he intends to tender and stating the principal amount of Securities that the Holder wishes to tender, which must be $1,000 or an intergral multiple thereof and (2) delivering, within the time limits specified by the Company in the original Repurchase Event Notice, the Securities being tendered together with all required additional information or signature guarantees. If a Holder elects to tender only a portion of the Securities represented by a particular certificate, the Company shall execute and the Trustee will authenticate and deliver to the Holder, without charge to the Holder, one or more new certificates evidencing the principal amount of the Securities not puchased by the Company. Any Securities tendered to the Company, or any portions of the principal amount of a Security represented by a certificate that is not purchased by the Compay, shall continue to be an outstanding Security and shall continue to bear interest at its stated rate until it matures. (d) If a Security is tendered for purchase by a Holder pursuant to this Section 6.08 and not validly withdrawn by the Holder, the Holder shall be entitled to receive solely the repurchase price (101% of par, plus accrued interest), which amount the Company shall pay or cause the Trustee to pay promptly following the date set by the Company for the redemption of Securities. On or before 10:00 a.m., Eastern Time on the date fixed for payment, the Company shall deposit with the Trustee an amount of money sufficient to pay the principal amount of, and accued but unpaid interest on, the Securities tendered for purchse on that date. If a Security is tendered but not paid in accordance with this Section 6.08, the principal amount of such Security shall continue to bear interest at the rate stated on the Security until the purchase price is paid in full by the Company. (f) In making the offer to repurchase Securities required by this Section 6.08, the Company shall comply with all applicable rules and regulations, including (but not limited to) Rule 14e-1 under the Exchange Act. (g) A Holder may withdraw a tender of Securities by notifying the Paying Agent in writing, by facsimile message or letter, at least three days prior to the date set by the Company for the repurchase of Securities to occur, of his request to withdraw the tender of Securities, specifying in such written notice the certificate number of the Securities to be withdrawn from the tender, the 25 31 principal amount of Securities being withdrawn and the principal amount of Securites, if any, that the Holder wishes to have repurchased by the Company. If a Holder notifies a Paying Agent of his desire to withdraw tendered Securities from the repurchase, the Paying Agent will promptly return to the Holder any withdrawn Securities. ARTICLE 7 SUCCESSOR CORPORATION SECTION 7.01 When Company May Merge, etc. The Company shall not consolidate with or merge into any other corporation or transfer its properties and assets substantially as an entirety to any person, unless: (1) either the Company shall be the continuing corporation, or the corporation (if other than the Company) formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company substantially as an entirety are transferred shall be a corporation organized and existing under the laws of the United States of America or any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. The successor corporation formed by such consolidation or into which the Company is merged or to which such transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter the predecessor corporation shall be relieved of all obligations and covenants under the Indenture and the Securities, and in the event of such conveyance or transfer any such predecessor corporation may be dissolved and liquidated. ARTICLE 8 DEFAULTS AND REMEDIES SECTION 8.01 Events of Default. An "Event of Default" occurs if: 26 32 (1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and the default continues for a period of 30 days; or (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon redemption or otherwise; or (3) the Company fails to comply with any of its other agreements in the Securities or this Indenture and the default continues for the period and after the notice specified below; or (4) an event or events of default, as defined in any one or more mortgages, indentures, or instruments under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company or any Material Subsidiary, whether such indebtedness now exists or shall hereafter be created, shall happen and shall result in indebtedness in an aggregate amount of at least $1,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, and such acceleration shall not have been rescinded or annulled, or such indebtedness shall not have been discharged within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the outstanding Securities a written notice specifying such event or events of default and requiring the Company or any Material Subsidiary to cause such acceleration to be rescinded or annulled or to cause such indebtedness to be discharged and stating that such notice is a "Notice of Default" hereunder; or (5) the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case, (B) appoints a Custodian of the Company or for all or substantially all of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days. 27 33 The term "Bankruptcy Law" means title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A default under clause (3) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the Securities notify the Company of the default and the Company does not cure the default within 60 days after receipt of the notice. The notice must specify the default, demand that it be remedied and state that the notice is a "Notice of Default." SECTION 8.02 Acceleration. If an Event of Default occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Securities to be due and payable immediately. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if all existing Events of Default have been cured or waived and if the rescission would not conflict with any judgment or decree. SECTION 8.03 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 8.04 Waiver of Past Defaults. Subject to Section 11.02, the Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences. When a Default or Event of Default is waived, it is cured and stops continuing. SECTION 8.05 Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that is unduly prejudicial to the rights of another Securityholder, or that would involve the Trustee in personal liability. SECTION 8.06 Limitation on Suits. A Securityholder may not pursue any remedy with respect to this Indenture or the Securities unless: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; 28 34 (2) the Holders of at least 25% in principal amount of the Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; and (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 8.07 Rights of Holders to Receive Payment and to Convert. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates expressed in the Security, to convert such Security in accordance with Article 4 or to bring suit for the enforcement of any such payment on or after such respective dates and for the enforcement of the right to convert, shall not be impaired or affected without the consent of the Holder. SECTION 8.08 Collection Suit by Trustee. If an Event of Default in payment of interest or principal specified in Section 8.01 (1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid. SECTION 8.09 Trustee May File Proof of Claim. The Trustee may file such proofs of claim and other papers or documents and take other such actions (including sitting on a committee of creditors) as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property. SECTION 8.10 Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee, the Conversion Agent, the Paying Agent or the Registrar for amounts due under Section 9.07; Second: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Third: to the Company. The Trustee may fix a record date and payment date for any payment to Securityholders. 29 35 SECTION 8.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit other than the Trustee of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 8.07, or a suit by Holders of more than 10% in principal amount of the Securities. 30 36 ARTICLE 9 TRUSTEE SECTION 9.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise its rights and powers and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform, and shall not be liable, except for the performance of only those duties that are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Responsible Officer was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense (including reasonable attorney's fees). (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. (g) The Trustee shall not be deemed to have notice of any fact or matter with respect to this Indenture, including (without limitation) the occurrence of a Default or an Event of Default, unless such fact or matter is actually known to a Responsible Officer of the Trustee charged with the responsibility of administering this Indenture or unless the Trustee is notified of such fact or manner in a writing received by the Trustee and making specific reference to this Indenture. 31 37 (g) The Trustee shall not be deemed to have notice of any fact or matter with respect to this Indenture, including (without limitation) the occurrence of a Default or an Event of Default, unless such fact or matter is actually known to a Responsible Officer of the Trustee charged with the responsibility of administering this Indenture or unless the Trustee is notified of such fact or manner in writing received by the Trustee and making specific reference to this Indenture. SECTION 9.02 Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or represented by the proper person. The Trustee need not investigate any fact or matter stated in the document; (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Certificate or Opinion; (c) The Trustee may act through agents and attorneys and shall not be responsible for the misconduct or negligence of any agent or attorney appointed with due care; (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; (e) The Trustee may consult with counsel and any written advice of such counsel or Opinion of Counsel shall be full and complete authorization and protection for any action taken or omitted by the Trustee hereunder in good faith reliance thereon; and (f) Prior to the occurrence of an Event of Default and after the cure or waiver of all Events of Default that may have occurred, the Trustee shall not be bound to make any investigation into the facts or matters stated in any document, unless requested to do in writing by the Holders of at least a majority of the Outstanding Securities; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation are, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding. SECTION 9.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. Any Paying Agent, Conversion Agent, Registrar or co-registrar may do the same with like rights. However, the Trustee must comply with Sections 9.10 and 9.11. SECTION 9.04 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than its certificate of authentication. SECTION 9.05 Notice of Defaults. If a Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Securityholder notice of the Default within 90 days after it occurs. Except in the case of a Default in payment on any Security, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice the interests of Securityholders. SECTION 9.06 Reports by Trustee to Holders. Within 60 days after each May 15, beginning with the May 15 following the date of this Indenture, the Trustee shall mail to each Securityholder a brief report dated as of such May 15 that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange on which the Securities are listed. SECTION 9.07 Compensation and Indemnity. The Company shall pay to the Trustee, the Conversion Agent, the Paying Agent and the Registrar from time to time reasonable compensation for their respective services, such compensation not to be limited by any law regarding compensation of an express trust. The Company shall reimburse the Trustee, the Conversion Agent, the Paying Agent and the Registrar upon request for all reasonable out-of-pocket expenses incurred by them. Such expenses may 32 38 include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee, the Conversion Agent, the Paying Agent and the Registrar against any loss or liability incurred by any of them. The Trustee shall notify the Company promptly of any claim for which any of them may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence, bad faith or willful misconduct. To secure the Company's payment obligations in this Section, the Trustee, the Conversion Agent, the Paying Agent and the Registrar shall each have a lien prior to the Securities on all money or property held or collected by the Trustee, except that which is held in trust to pay principal and interest on particular Securities. SECTION 9.08 Replacement of Trustee. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the removed Trustee and may appoint a successor Trustee with the Company's consent. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 9.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property: or (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Securityholder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the Securities may petition any court of competent Jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. 33 39 SECTION 9.09 Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust assets or business to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. SECTION 9.10 Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9). SECTION 9.11 Preferential Collection of Claims Against Company. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated. ARTICLE 10 DISCHARGE OF INDENTURE SECTION 10.01 Termination of Company's Obligations. This Indenture shall cease to be of further effect (except as provided below) and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07 and (ii) Securities for whose payment money has theretofore been held in trust and thereafter repaid to the Company, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their date of maturity within six months, or (iii) are to be called for redemption within six months under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the date of maturity or redemption date. as the case may be, 34 40 (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company, and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to pay principal and interest on the securities (which shall be absolute and unconditional) and its obligations in paragraph 13 of the Securities and in Sections 2.03, 2.04. 2.05, 2.06, 2.07, 9.07, 9.08 and Article 4 shall survive. The Trustee shall give notice in the name of and at the expense of the Company to the Holders of the immediate availability of the amounts referred to in clause (1) of this Section 10.01. SECTION 10.02 Application of Trust Money. The Trustee shall hold in trust money deposited with it pursuant to Section 10.01. It shall apply the deposited money through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. SECTION 10.03 Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years. ARTICLE 11 AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 11.01 Without Consent of Holders. The Company may amend or supplement this Indenture or the Securities without notice to or consent of any Securityholder: (1) to cure any ambiguity, defect or inconsistency; (2) to comply with Article 7; (3) to provide for uncertificated Securities in addition to or in place of certificated Securities; or (4) to make any change that does not materially adversely affect the right of any Securityholder. SECTION 11.02 With Consent of Holders. The Company may amend or supplement this Indenture or the Securities without notice to any Securityholder but with the written consent of 35 41 the Holders of at least a majority in principal amount of the Securities. The Holders of a majority in principal amount of the Securities may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 8.04, may not: (1) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or extend the time for payment of interest on any Security; (3) reduce the principal of or extend the fixed maturity of any Security or alter the redemption provisions with respect thereto; (4) waive a default in the payment of the principal of or interest on any Security; (5) modify the provisions of Article 5 in a manner adverse to the Holders; (6) make any Security payable in money other than that stated in the Security; or (7) adversely affect the right to convert any Security its provided in Article 4. SECTION 11.03 Compliance with TIA. Every amendment to or supplement of this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 11.04 Revocation and Effect of Consents. A consent to an amendment, supplement or waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security. The Trustee must receive the notice of revocation before the date the amendment, supplement or waiver becomes effective. After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder unless it makes a change described in clause (1), (2), (3), (4), (5), (6) or (7) of Section 11.02. In that case the amendment, supplement or waiver shall bind each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security. SECTION 11.05 Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so 36 42 determine, the Company in exchange for the Security shall issue, and the Trustee shall authenticate, a new Security that reflects the changed terms. SECTION 11.06 Trustee to Sign Amendments, etc. The Trustee shall sign any amendment, supplement or waiver authorized pursuant to this Article if the amendment, supplement or waiver does not adversely affect the rights of the Trustee. If it does, the Trustee may but need not sign it. The Company may not sign an amendment or supplement until the Board of Directors approves it. In signing any amendment, supplement or waiver, the Trustee shall be entitled to receive, if requested, an indemnity reasonably satisfactory to it and to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver pursuant to this Article 11 is authorized or permitted by this Indenture. ARTICLE 12 MISCELLANEOUS SECTION 12.01 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required to be included in this Indenture by the TIA or the TIA as amended after the date hereof, the required provision shall control. SECTION 12.02 Notices. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Company: Thorn Apple Valley, Inc. 26999 Central Park, Suite 300 Southfield, MI 48076 Attention: President with a copy to: Honigman Miller Schwartz and Cohn 2290 First National Building Detroit, MI 48226 Attention: Donald J. Kunz if to the Trustee: ___________________ State Street Bank and Trust Company ___________________ 2 International Place, 4th Floor ___________________ Boston, Massachusetts 02110 Attention: Corporate Trust Department Re: Thorn Apple Valley, Inc. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. 37 43 Any notice or communication mailed to a Securityholder shall be mailed to him at his address as it appears on the registration books of the Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 12.03 Communication by Holder with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 12.05 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 12.06 When Treasury Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or 38 44 consent, Securities owned by the Company or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. SECTION 12.07 Rules by Trustee, Paying Agent, Conversion Agent, Registrar. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Paying Agent, Conversion Agent or Registrar each may make reasonable rules for its functions. SECTION 12.08 Legal Holiday. A "Legal Holiday" is a Saturday, a Sunday, a legal holiday or a day on which banking institutions are not required to be open in Detroit, Michigan, and in the state in which the corporate trust office of the Trustee is located. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 12.09 Governing Law. The laws of the State of Michigan shall govern this Indenture and the Securities. SECTION 12.10 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.11 No Recourse Against Others. All liability described in paragraph 20 of the Securities of any director, officer, employee or shareholders, as such, of the Company is waived and released. SECTION 12.12 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 12.13 Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 39 45 SIGNATURES: THORN APPLE VALLEY, INC. By: _______________________________ Joel Dorfman, President Attest: __________________________ Ronald D. Risher, Secretary STATE STREET BANK AND TRUST COMPANY By: _________________________ Its: _________________________ 40 46 EXHIBIT A [FRONT OF SECURITY] ___% CONVERTIBLE SUBORDINATED DEBENTURE DUE APRIL 1, 2007 Interest Payment Dates: April 1 and October 1 Record Dates: March 15 and September 15 No. __________________ $ ____________________ CUSIP No. ____________ THORN APPLE VALLEY, INC. promises to pay to __________________________________________________ or registered assigns, the principal sum of _______________________________ Dollars on April 1, 2007, THORN APPLE VALLEY, INC. Secretary Chairman Date: ____________________ Authenticated: _________________ STATE STREET BANK AND TRUST COMPANY as Trustee By __________________________ Authorized Signer A-1 47 [REVERSE OF SECURITY] THORN APPLE VALLEY, INC. ____% CONVERTIBLE SUBORDINATED DEBENTURE DUE APRIL 1, 2007 1. Interest. Thorn Apple Valley, Inc., a Michigan corporation ("Company"), promises to pay interest on the principal amount of this Debenture at the rate per annum shown above. The Company will pay interest semi-annually on April 1, and October 1 of each year, commencing with October 1, 1997. Interest on the Debentures will accrue from the most recent date to which interest has been paid or if no interest has been paid from April 1, 1997. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Debentures; it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment. The Company will pay interest on the Debentures (except defaulted interest) to the persons who are registered Holders of Debentures at the close of business on the March 15 or September 15 next preceding the interest payment date ("Record Date"), even though the Debentures are canceled after the Record Date and on or before the interest payment date. Holders must surrender Debentures to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest by its check payable in such money. It may mail an interest check to a Holder's registered address. 3. Paying Agent, Conversion Agent and Registrar. Initially, State Street Bank and Trust Company ("Trustee") will act as Paying Agent, Conversion Agent and Registrar. The Company may change any Paying Agent, Conversion Agent, Registrar or co-registrar without notice. The Company or any of its Subsidiaries may act as Paying Agent, Conversion Agent, Registrar or co-registrar. 4, Indenture. The Company issued the Debentures under an Indenture dated as of April 1, 1997 ("Indenture"), between the Company and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, 15 U.S. Code Sections 77aaa-77bbbb ("Act"), as in effect on the date of the Indenture. The A-2 48 Debentures are subject to all such terms, and Debentureholders are referred to the Indenture and the Act for a statement of them. 5. Optional Redemption. The Company may redeem any or all Debentures at any time on or after April 1, 2000, at the following redemption prices (expressed in percentages of principal amount), if redeemed during the periods indicated below, plus accrued interest to the redemption date: Period of Redemption Percentage -------------------- ---------- April 1, 1997 through March 31, 1998 106% April 1, 1998 through March 31, 1999 105% April 1, 1999 through March 31, 2000 104% April 1, 2000 through March 31, 2001 103% April 1, 2001 through March 31, 2002 102% April 1, 2002 through March 31, 2003 101% April 1, 2003 and thereafter 100% However, the Debentures may not be redeemed prior to April 1, 2000, except (i) after the occurrence of a Sale Event (as defined in the Indenture) or (ii) if the closing price for the Company's common stock, par value $0.10 per share, on the Nasdaq National Stock Market shall have been equal to or exceeded 140% of the conversion price then in effect for any 20 trading days within a period of 30 consecutive trading days prior to the date notice of redemption is given to Holders of the Debentures. 6. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Debentures to be redeemed at his registered address. Debentures in denominations larger than $1,000 may be redeemed in part. On and after the redemption date interest ceases to accrue on Debentures or portions of them called for redemption. 7. Conversion. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Debenture is entitled, at his option, at any time on or before the close of business on the business day prior to April 1, 2007, or in case this Debenture or some portion hereof shall have been called for redemption prior to such date, then in respect of this Debenture or such portion hereof until and including, but (unless the Company shall default in payment due upon the redemption thereof) not after, the close of business on the redemption date, to convert this Debenture (or in case this Debenture is of a denomination in excess of $1,000, any portion hereof which is $1.00 or an integral multiple thereof), into fully paid and nonassessable shares of common stock, par value $0.10 per share ("Shares"), of the Company at the initial conversion price of $_____ per Share, subject to such adjustment or adjustments, if any, of such conversion price and the securities or other property issuable upon conversion, as may be required by the provisions of the Indenture, upon surrender of this Debenture, duly endorsed or assigned to the Company or in blank, to the Company at the office or agency of the Conversion A-3 49 Agent, with the Conversion Notice set forth below, or accompanied by a separate written notice substantially in the form of such Conversion Notice, duly executed by the Holder and stating that the Holder hereof elects to convert this Debenture, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, all in accordance with the provisions of the Indenture. Except as otherwise provided in the Indenture, no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends issued on securities issued on conversion. No fractional Shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment as provided in the Indenture. 8. Subordination. The Debentures will be subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) of the Company 9. Denominations, Transfer, Exchange. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples thereof. A Holder may transfer or exchange Debentures in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Debentures selected for redemption. Also, it need not transfer or exchange any Debentures for a period of 15 days before a selection of Debentures to be redeemed. 10. Persons Deemed Owners. The registered Holder of a Debenture may be treated as the owner of it for all purposes. 11. Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent will pay the money back to the Company at its request. After that, Holders entitled to the money must look to the Company for payment unless an abandoned property law designates another person. 12. Discharge Prior to Redemption or Maturity. The Indenture will be discharged and canceled except for certain Sections thereof, subject to the terms of the Indenture, upon the payment of all the Debentures or upon the deposit with the Trustee, within not more than six months prior to the maturity or redemption of the Debentures, of funds sufficient for such payment or redemption. In the case of such a deposit, Holders must look to the deposited money for payment. A-4 50 13. Amendment, Supplement, Waiver. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Debentures, and any past default or compliance with any provision may be waived with the consent of the Holders of a majority in principal amount of the Debentures. Without the consent of any Holder, the Company may amend or supplement the Indenture or the Debentures to cure any ambiguity, defect or inconsistency or to provide for uncertificated Debentures in addition to or in place of certificated Debentures or to make any change that does not materially adversely affect the rights of any Holder. 14. Restrictive Covenants. The Debentures are general unsecured obligations of the Company limited to the aggregate principal amount of $17,250,000. The Indenture does not limit other unsecured debt nor does it limit the payment of dividends on, or purchases of, capital stock, by the Company. The Company is obligated to maintain its corporate existence and that of its subsidiaries (subject to certain exceptions), to pay all lawful taxes and other claims and to maintain all of its material properties in good condition, repair and working order. Once a year the Company must report to the Trustee on compliance with such covenants. 15. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the Debentures and the Indenture, the predecessor corporation will be released from those obligations. 16. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Debentures; default in payment of principal on them; failure by the Company for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Debentures; acceleration of at least $1,000,000 aggregate amount of indebtedness of the Company or any Material Subsidiary, unless cured within 30 days after notice to the Company by the Trustee or Holders of at least 25% in aggregate principal amount of the Debentures then outstanding; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Debentures may declare all the Debentures to be due and payable immediately. Holders may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may require indemnity reasonably satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, Holders of a majority in principal amount of the Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. A-5 51 17. Trustee Dealings with Company. State Street Bank and Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its affiliates, and may otherwise deal with the Company or its affiliates, as if it were not Trustee. 18. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Debentures or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Debentureholder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. 19. Authentication. This Debenture shall not be valid until the Trustee signs the certificate of authentication on the other side of this Debenture. 20. Abbreviations. Customary abbreviations may be used in the name of a Debentureholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Secretary, Thorn Apple Valley, Inc., 26999 Central Park Boulevard, Suite 300, Southfield, Michigan 48076. [FORM OF ASSIGNMENT] I or we assign and transfer this Debenture to _______________________________ _______________________________ _______________________________ (Print or type name, address and zip code of assignee) Social security or other identifying number of assignee: ___________________ A-6 52 and irrevocably appoint ______________________________ agent to transfer this Debenture on the books of the Company. The agent may substitute another person to act for him. Dated: ________________________ Signed:_____________________________ (Sign exactly as name appears on the other side of this Debenture) ______________________________ Signature Guaranteed By A-7 53 EXHIBIT B [FORM OF CONVERSION NOTICE] To Thorn Apple Valley, Inc.: The undersigned owner of this Debenture hereby irrevocably exercises the option to convert this Debenture, or portion hereof below designated, into Shares of Common Stock of Thorn Apple Valley, Inc., in accordance with the terms of the Indenture referred to in this Debenture, and directs that the Shares issuable and deliverable upon conversion, together with any check in payment for fractional Shares and any Debentures representing any unconverted principal amount hereof, be issued and delivered to the undersigned unless a different name has been indicated below. If Shares are to be registered in the name of a person other than the undersigned, the undersigned will pay any transfer taxes payable with respect thereto. Dated: _____________________________ Signature: __________________________ Signature Guaranteed By: ___________________________________ Principal Amount to be Converted: ___________________________ (if less than all) Fill in for registration of Shares and Debentures only if otherwise than in name and address of registered holder. ___________________________ ___________________________ (Name) (Address) ___________________________ ___________________________ (City and State) (Tax Identification Number) (Please print name and address including zip code number) B-1 EX-5.1 3 EXHIBIT 5.1 1 March 19, 1997 EXHIBIT 5.1 Thorn Apple Valley, Inc. 26999 Central Park Boulevard Suite 300 Southfield, Michigan 48076 Re: Registration Statement on Form S-2 Ladies and Gentlemen: We have acted as counsel for Thorn Apple Valley, Inc., a Michigan corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of a Registration Statement on Form S-2 (the "Registration Statement") relating to the offering by the Company through Roney & Company, L.L.C., as representative of the several underwriters, in the manner described in the Registration Statement, of up to $17,250,000 principal amount of its Convertible Subordinated Debentures due 2007 (the "Debentures") and an indeterminate number of shares of the Company's common stock, $0.10 par value (the "Common Stock"), issuable upon conversion of the Debentures. In so acting, we have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such corporate records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. Based upon the foregoing, we are of the opinion that: 1. The Company has been duly incorporated and is in good standing under the laws of the State of Michigan. 2. The Debentures to which the Registration Statement relates will be, when issued in the manner specified in the Registration Statement, legally issued, valid and binding obligations of the Company. 3. The shares of Common Stock to which the Registration Statement relates will be, when issued in the manner specified in the Registration Statement, legally issued, fully paid and non-assessable. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement. We further consent to the reference to our firm under the heading "Legal Matters" in the 2 Thorn Apple Valley, Inc. March 19, 1997 Page 2 Registration Statement. In giving such consent, we do not concede that we are experts within the meaning of the Act or the rules or regulations thereunder or that this consent is required by Section 7 of the Act. Very truly yours, HONIGMAN MILLER SCHWARTZ AND COHN DF/DAB/DEB EX-23.1 4 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 2 to the Registration Statement on Form S-2 and incorporation herein by reference to the Annual Report on Form 10-K, of our reports, dated August 26, 1996, except as to the information presented as a subsequent event in Note 6, for which the date is September 12, 1996, on our audits of the consolidated financial statements and financial statement schedule of Thorn Apple Valley, Inc. and subsidiaries as of May 31, 1996 and May 26, 1995, and for each of the three years in the period ended May 31, 1996. We consent to the reference to our firm under the caption "Experts." Coopers & Lybrand L.L.P. Detroit, Michigan March 19, 1997 EX-25 5 EXHIBIT 25 1 EXHIBIT 25 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 _________ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Senior Vice President and Corporate Secretary 225 Franklin Street, Boston, Massachusetts 02110 (617)654-3253 (Name, address and telephone number of agent for service) _____________________ THORN APPLE VALLEY, INC. (Exact name of obligor as specified in its charter) MICHIGAN (38-1964066) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26999 CENTRAL PARK BOULEVARD, SUITE 300 SOUTHFIELD, MICHIGAN 48076 (810) 213-1000 (Address of principal executive offices) (Zip Code) CONVERTIBLE SUBORDINATED DEBENTURES (Title of indenture securities) 2 GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(b) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 13th day of March, 1997. STATE STREET BANK AND TRUST COMPANY By: /s/ Patrick E. Thebado ---------------------------------- PARTICK E. THEBADO ASSISTANT VICE PRESIDENT 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by THORN APPLE VALLEY, INC. of its CONVERTIBLE SUBORDINATED DEBENTURES, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ Patrick E. Thebado ------------------------------- PATRICK E. THEBADO ASSISTANT VICE PRESIDENT DATED: MARCH 13, 1997 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company of Boston, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1996, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ......................................... 1,561,409 Interest-bearing balances .................................................................. 7,562,240 Securities .............................................................................................. 9,388,513 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary ........................................................ 5,622,962 Loans and lease financing receivables: Loans and leases, net of unearned income ............ 4,858,187 Allowance for loan and lease losses ................. 72,614 Loans and leases, net of unearned income and allowances .................................... 4,785,573 Assets held in trading accounts ......................................................................... 874,700 Premises and fixed assets ............................................................................... 383,955 Other real estate owned ................................................................................. 870 Investments in unconsolidated subsidiaries .............................................................. 93,621 Customers' liability to this bank on acceptances outstanding ............................................ 35,022 Intangible assets ....................................................................................... 148,190 Other assets............................................................................................. 932,673 ----------- Total assets ............................................................................................ 31,389,728 =========== LIABILITIES Deposits: In domestic offices ........................................................................ 8,508,096 Noninterest-bearing .............................. 6,435,131 Interest-bearing ................................. 2,072,965 In foreign offices and Edge subsidiary ..................................................... 11,395,724 Noninterest-bearing .............................. 27,508 Interest-bearing ................................. 11,368,216 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary ........................................................ 7,518,222 Demand notes issued to the U.S. Treasury and Trading Liabilities ........................................ 733,935 Other borrowed money .................................................................................... 650,578 Bank's liability on acceptances executed and outstanding ................................................ 35,022 Other liabilities ....................................................................................... 770,029 ----------- Total liabilities ....................................................................................... 29,611,606 ----------- EQUITY CAPITAL Common stock ............................................................................................ 29,931 Surplus ................................................................................................. 358,146 Undivided profits ....................................................................................... 1,389,720 Cumulative foreign currency translation adjustments .................................................... 325 ----------- Total equity capital .................................................................................... 1,778,122 ----------- Total liabilities and equity capital .................................................................... 31,389,728 ===========
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Charles F. Kaye 5 -----END PRIVACY-ENHANCED MESSAGE-----