-----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, WotziYr4cM/VE0f3+pMh4dWa6Bi8ICXiXPQ1t8cRhulDiVAnSJ+5qcNbRe+wm+fl UsYnsFO+hA0ZsuoyE0Wb6w== 0000950124-97-004536.txt : 19970912 0000950124-97-004536.hdr.sgml : 19970911 ACCESSION NUMBER: 0000950124-97-004536 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970530 FILED AS OF DATE: 19970828 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: 10-K SEC ACT: SEC FILE NUMBER: 000-06566 FILM NUMBER: 97672075 BUSINESS ADDRESS: STREET 1: 26999 CENTRAL PARK BLVD STREET 2: SUITE 300 CITY: SOUTHFIELD STATE: MI ZIP: 48076 BUSINESS PHONE: 8102131000 MAIL ADDRESS: STREET 1: 26999 CENTRAL PARK BLVD STREET 2: SUITE 300 CITY: SOUTHFIELD STATE: MI ZIP: 48076 FORMER COMPANY: FORMER CONFORMED NAME: FREDERICK & HERRUD INC DATE OF NAME CHANGE: 19841104 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended May 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-6566
THORN APPLE VALLEY, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-1964066 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
26999 CENTRAL PARK BOULEVARD, SUITE 300, SOUTHFIELD, MICHIGAN 48076 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 213-1000 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 PAR VALUE PER SHARE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF AUGUST 18, 1997, COMPUTED BY REFERENCE TO THE NASDAQ NATIONAL MARKET CLOSING PRICE ON SUCH DATE, WAS $64,300,390. THE NUMBER OF OUTSTANDING SHARES OF REGISTRANT'S COMMON STOCK AS OF AUGUST 18, 1997 WAS 6,115,770. The following document (or portion thereof) has been incorporated by reference in this Annual Report on Form 10-K: The definitive Proxy Statement for the 1997 Annual Meeting of Shareholders to be held on October 29, 1997 (Part III). ================================================================================ As filed with the Securities and Exchange Commission on August 28, 1997. 2 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 PART I ITEM 1. BUSINESS GENERAL Thorn Apple Valley, Inc. (sometimes referred to hereinafter collectively with its subsidiaries as the "Company") is a major producer of processed meat and poultry products ("Processed Meats") and is one of the largest slaughterers of hogs and sellers of related fresh pork products ("Fresh Meats") 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. The Company's Processed Meats division engages in the production 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. 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, Korea and Mexico. PRODUCTS, OPERATIONS AND MARKETING The Company is engaged in a single segment business with two principal product categories: processed meat and poultry products and fresh pork. The following table shows for the fiscal periods indicated the net sales and approximate pounds of products shipped for the Company's Processed Meats division and Fresh Meats division.
FISCAL % OF FISCAL % OF FISCAL % OF FISCAL % OF FISCAL % OF 1993 SALES 1994 SALES 1995 SALES 1996 SALES 1997 SALES ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (IN MILLIONS) NET SALES (IN DOLLARS) Processed Meats......... $386.7 53% $416.3 54% $415.4 56% $623.0 63% $598.0 63% Fresh Meats............. $336.6 46% $349.1 45% $321.8 43% $355.0 36% $353.6 37% PRODUCTS SHIPPED (IN LBS.) Processed Meats......... 337.8 -- 351.7 -- 378.2 -- 507.7 -- 452.1 -- Fresh Meats............. 415.6 -- 419.6 -- 422.2 -- 394.6 -- 364.0 --
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. In recent years, the Company has focused on identifying emerging trends in consumer preferences and on developing Processed Meats products in response to those trends, in an attempt to be a market leader in emerging market segments that offer opportunities for increased sales volume and higher profit margins than those associated with more mature and more competitive market segments. For example, the Company has developed innovative packaging concepts and products that are leaner and have lower fat contents (such as the Company's premium deli-style sliced turkey ham, turkey breast and cooked ham products) to appeal to consumers seeking products that are more convenient to use and are healthier than existing product alternatives. The Company believes that opportunities 3 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 exist to extend its current product lines into related Processed Meats products, thereby leveraging its current premium brand names. 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 sausages, hot dogs and bacon products are generally higher during the summer months. PROCESSED MEATS PRODUCTS The Processed Meats products operations of the Company's business involve the production and sale of consumer-brand labeled, packaged meat and poultry products, such as bacon, hot dogs and lunch meats, hams, smoked sausages and turkey products. Shipments by category of these products for the five most recent fiscal years were as follows: Product Category
FISCAL FISCAL FISCAL FISCAL FISCAL 1993 1994 1995 1996 1997 ------ ------ ------ ------ ------ (IN MILLIONS OF POUNDS) Bacon.................................................... 100.6 100.7 111.3 123.1 110.3 Hot dogs and lunch meats................................. 78.1 72.2 71.1 141.9 117.1 Hams..................................................... 67.2 74.1 85.4 125.9 113.4 Smoked sausages.......................................... 51.6 61.3 64.3 65.2 59.4 Turkey products.......................................... 23.9 24.3 25.2 27.0 24.9 Other.................................................... 16.4 19.1 20.9 24.6 27.0 ----- ----- ----- ----- ----- Total............................................... 337.8 351.7 378.2 507.7 452.1 ===== ===== ===== ===== =====
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, large supermarket chains and food service operations. The Thorn Apple Valley-Grand Rapids division of the Company ("Grand Rapids"), which is located in Grand Rapids, Michigan, is engaged in the production and sale of approximately 50 varieties of packaged meat products such as hot dogs, lunch meats (such as bologna, salami and pickle loaf), corned beef and smoked sausage, under brand names which include "Thorn Apple Valley(R)," "Colonial(R)," "Wilson Certified(R)" and "Corn King(R)" and other controlled and private label brands. The Thorn Apple Valley-Deli & Smoked Meats division of the Company ("Smoked Meats"), which is located in Detroit, Michigan, is primarily engaged in the production and sale of premium sliced lunch meats, spiral sliced hams, cooked hams, deli hams and specialty boneless hams. These products are sold to supermarket chains under various brand names, including "Thorn Apple Valley(R)," "Colonial(R)" and "Cavanaugh Lakeview Farms(R)" and other controlled and private label brands. The Thorn Apple Valley-Carolina division of the Company ("Carolina"), which is located in Holly Ridge, North Carolina, produces bacon and related by-products. These items are sold principally to supermarket chains under brand names which include "Thorn Apple Valley(R)," "Colonial(R)" and other controlled and private label brands. 2 4 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 The Thorn Apple Valley-Dixie division of the Company ("Dixie"), which is located in Forrest City, Arkansas, is primarily engaged in the production of hot dogs. The products are sold to supermarket chains and to international markets under brand names which include "Wilson Certified(R)," "Corn King(R)" and "Colonial(R)" and other controlled and private label brands. The Thorn Apple Valley-Ponca City division of the Company ("Ponca City"), which is located in Ponca City, Oklahoma, is primarily engaged in the production of boneless and bone-in hams, premium, double glazed spiral sliced hams and premium sliced lunch meats such as turkey ham, turkey breast and cooked ham. The Ponca City facility is a newly-constructed, 171,000 square foot 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. During the fourth quarter of fiscal 1997, the Company decided to close its Thorn Apple Valley-Council Bluffs division ("Council Bluffs"), which was engaged in the production of a variety of boneless ham products. The production of these products was moved primarily to the Company's Ponca City division. FRESH MEATS PRODUCTS The Thorn Apple Valley-Fresh Meats division of the Company, 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 3,044,000, 3,339,000 and 3,146,000 hogs were slaughtered by its Fresh Meats division in fiscal years 1997, 1996 and 1995, respectively. The Company's Utah division, which was closed during fiscal 1995, slaughtered approximately 274,000 hogs during fiscal year 1995. Sales of products by the Fresh Meats division are ordinarily initiated and completed by telephone between buyers and Fresh Meats 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 operations. The profit margins experienced by the Company and the fresh pork industry on sales of fresh pork and by-products remained low during fiscal 1997. Fresh pork profit margins continue to remain under pressure as a result of an industry-wide hog shortage and continuing high prices for hogs. The Company is unable to predict at this time when industry-wide profit margins will increase. TRADEMARKS AND LICENSES The Company owns or has the right to use over 80 various trademarks, including those described above. The trademarks are valuable to the Company because of the significant market advantage that name recognition provides in the national and international retail markets served by the Company. Most of the trademarks used by the Company are registered with the appropriate administrative offices, and the Company intends to renew each such registration as long as the related trademark is used with respect to a current line of products. DISTRIBUTION AND CUSTOMERS During fiscal 1997 approximately 17% of the Company's products were marketed in Michigan. This percentage was 16% and 19% for fiscal 1996 and 1995, respectively. The balance of the products were 3 5 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 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 1997 totaled approximately $33,900,000. This total was $24,600,000 for fiscal 1996 and approximately $8,600,000 for fiscal 1995. 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 producers of meat and poultry products. For fiscal 1997, approximately 35% of the Company's sales were made to its 10 largest customers, none of whom accounted for as much as 10% of the Company's sales. The Company does not have any significant long-term sales commitments. In servicing its customers, the Company utilizes two strategically located distribution centers located in Edwardsville, Kansas and Detroit, Michigan. The distribution centers' geographic locations allow the Company greater flexibility in providing the highest level of service in meeting the needs of the Company's customers. In addition to increasing the level of customer service, the distribution centers have allowed the Company to increase its efficiencies thereby reducing overall distribution costs. The Company 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 production facilities. The Company also engages the services of contract carriers, including Coast Refrigerated Trucking Co., Inc. and National Food Express, Inc., both wholly-owned subsidiaries of the Company. The Company reorganized its transportation operations during fiscal 1997 in an effort to reduce overall trucking costs. As part of the reorganization the Company closed Miller's Transport Inc., a contract carrier which was a wholly-owned subsidiary. 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 hogs accounted for approximately 71% of the total purchases of raw materials made by the Company during fiscal 1997. 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 62% of the total hogs purchased by the Company in fiscal 1997 (see "Purchase and Management Agreement" below for further discussion of this agreement). The transportation of hogs to the Company's Fresh Meats processing facility is primarily in tractor-trailers owned and operated by independent contractors. During fiscal 1997, Grand Rapids obtained 32% of all of the pork required in its operations from the Company's Fresh Meats division, which constituted approximately 16% of the cost of the total meat requirements of Grand Rapids. Approximately 78% of the pork processed during fiscal 1997 at Smoked Meats was obtained from the Company's Fresh Meats division, which constituted approximately 67% of its total meat requirements. Approximately 19% of the pork requirements of Ponca City was obtained from the Company's Fresh Meats division, which comprised approximately 13% of its total meat requirements. The Company's Dixie plant received approximately 56% of its pork requirements from the Company's Fresh Meats division, which represented approximately 14% of its total meat requirements. Approximately 66% 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 packing materials from a number of readily-available sources. During the fourth quarter of fiscal 1997, the Company suspended a joint production agreement (the "Production Agreement") with a major meat packing company (the "Producer"), that was assumed in connection with the Wilson acquisition. The suspension of the Production Agreement resulted in the planned 4 6 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 closing of a processed meats facility in Council Bluffs, Iowa, where the Company had some of its boneless ham products produced. The Iowa plant had been operated under the Production Agreement between the Company and 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 was obligated to produce at such facility on an exclusive basis, all boneless ham products which the Company would have required. In return, the Company had agreed to pay and/or reimburse the Producer for all operating and fixed costs incurred at the facility. The Production Agreement had an initial term expiring on June 6, 2001. Production of the Company's boneless ham product lines will be transferred to the Company's Ponca City plant. As a result of the suspension of the Production Agreement, the Company recorded a one-time pre-tax restructuring charge to operations of $5.0 million; see Note 12 to the Notes to the Consolidated Financial Statements for additional information relating to the fiscal 1997 restructuring charge. Additionally in connection with the Wilson acquisition, the Company has also assumed a supply agreement with the Producer which was also suspended in connection with the suspension of the Production Agreement. COMPETITION The meat packing and manufacturing industry is highly competitive. The Company competes with large national, regional and local companies, some of which have substantially greater sales volume, brand name recognition and financial resources than the Company. Competition is encountered both in the procurement of raw materials and in the sale of products. The Company's products also compete with other meat, fish and poultry products. Competition exists mainly with respect to product quality, name recognition, price and service. EMPLOYEES The Company has approximately 4,100 employees, approximately 900 of whom are engaged in slaughtering and cutting hogs, approximately 2,300 of whom are engaged in the production of the processed meat and poultry products, and approximately 900 of whom are employed in administration, sales or transportation. The majority of the Company's production workers are employed under five union contracts. These contracts are generally for a period of two to four years and have various expiration dates through the second quarter of fiscal 2001. The Company has historically maintained good labor relations. The unexpired portions of the existing agreements contain no significant labor cost increases. REGULATION Like other participants in the meat and poultry processing industry, the Company is subject to various laws and regulations relating to the construction and maintenance of facilities, production standards and pollution control administered by federal, state and other government entities, including the Environmental Protection Agency and corresponding state agencies such as the Michigan Department of Natural Resources, the United States Department of Agriculture, and the Occupational Safety and Health Administration. All of the Company's existing fresh pork and processed meat and poultry products plants are federally inspected by the United States Department of Agriculture under the Federal Meat Inspection Act. The Company believes that it is in compliance with all health, environmental and other laws and regulations in all material respects and that continued compliance with existing standards will not have a material effect on the Company's results of operations or financial condition. 5 7 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 PURCHASE AND MANAGEMENT AGREEMENT In November 1994, the Company entered into a 10 year agreement with MLE. Under the terms of the agreement, 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. In accordance with the agreement, the Company has purchased $2.0 million of preferred stock of MLE that pays a 6% dividend. The Company has classified the investment in MLE in other long-term assets on its consolidated balance sheet. ITEM 2. PROPERTIES The Company's principal plants, distribution centers and corporate headquarters, all of which are owned by the Company (unless otherwise indicated), are located as follows:
APPROXIMATE LAND AREA FLOOR SPACE LOCATION OPERATION IN ACRES (SQ. FT.) - -------- --------- --------- ----------- Detroit, Michigan Hog slaughtering and boning 3.2 218,000 operations Ponca City, Oklahoma Producer of boneless and bone-in 42.0 171,000 hams, premium double-glazed spiral sliced hams and premium sliced lunch meats Detroit, Michigan Producer of premium sliced lunch 4.8 150,000 meats, spiral sliced hams, cooked hams, deli hams and specialty boneless hams Holly Ridge, North Carolina Producer of bacon products 179.0 150,000 Grand Rapids, Michigan Producer of hot dogs, lunch meats, 18.5 135,000 corned beef and smoked sausage Forrest City, Arkansas Producer of hot dogs 11.3 70,000 Edwardsville, Kansas(1) Distribution center -- 60,000 Council Bluffs, Iowa(2) Producer of boneless ham -- 53,000 Detroit, Michigan(1)(3) Distribution center -- 50,000 Walker, Michigan Poultry boning and producer of pork 27.0 45,000 sausage and 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. See "Business--Raw Materials." Also see Note 12 to Notes to Consolidated Financial Statements related to the Company's suspension of its production agreement. (3) This facility is leased from a related party. (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 is located (excluding the leased properties) is owned by the Company. The properties described above were subject to mortgages collateralizing outstanding indebtedness in the aggregate amount of approximately $5.0 million as of May 30, 1997. As of the date of this Annual 6 8 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 Report on Form 10-K, substantially all of the Company's assets are subject to liens. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." The Company believes its plants and equipment are in good repair and suitable for the present operation of its business. The production facilities of the plants are being utilized on either a one-shift or two-shift basis. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various ordinary or routine litigation incidental to its business, none of which, in the opinion of management, is expected to have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS As of August 18, 1997 there were 506 shareholders of record of the Company. The shares of the Company's Common Stock are traded in the over-the-counter market and their price is quoted on the Nasdaq National Market under the symbol "TAVI." The table below sets forth the range of the highest and the lowest sales prices and the cash dividends paid for the past two fiscal years. In October 1995, the Company's Board of Directors discontinued the payment of dividends on the Company's Common Stock in order to conserve cash for future operations. Since such date, the Company entered into agreements with various lenders which restrict the Company's ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Financial Condition" below. The Company has no current plans of paying dividends on its Common Stock.
1996 1997 ----------------------------- ----------------------------- SALES PRICE SALES PRICE FISCAL ---------------- DIVIDENDS ---------------- DIVIDENDS QUARTER HIGH LOW PAID HIGH LOW PAID - ------- ---- --- --------- ---- --- --------- First................................... $23.50 $18.00 $0.7 $14.25 $ 8.75 -- Second.................................. 19.50 15.12 -- 15.75 11.31 -- Third................................... 17.75 14.00 -- 16.75 13.12 -- Fourth.................................. 15.75 10.25 -- 19.75 12.25 --
7 9 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED(1) ------------------------------------------------------------------------ MAY 28, 1993 MAY 27, 1994 MAY 26, 1995 MAY 31, 1996 MAY 30, 1997 ------------ ------------ ------------ ------------ ------------ Net sales................ $729,909,723 $772,098,333 $744,542,466 $983,084,427 $955,793,588 Net income (loss)........ 13,862,567 14,083,373 5,254,886 (21,707,744) (3,166,241) Net income (loss) per common share(2)........ $2.36 $2.40 $.91 $(3.76) $(.53) Total assets............. $143,948,845 $185,442,085 $204,296,365 $327,140,201 $302,786,457 Total long-term debt (excluding current portion)............... 8,844,391 27,936,985 35,464,669 159,808,923 150,128,541 Cash dividends per share.................. $.20 $.27 $.28 $.07 $--
- ------------------------- (1) The Company's fiscal year consists of the 52- or 53-week period ending on the last Friday in May of each year. Fiscal 1996 was a 53-week fiscal year and all other years presented in this table were 52-week fiscal years. (2) Earnings (loss) per share figures have been restated for all periods presented to reflect a three-for-two stock split, effected as a 50% stock dividend paid on December 23, 1992 to all shareholders of record of the Company as of the close of business on December 1, 1992. For additional discussion of the differences in operating results in fiscal 1997 as compared to fiscal 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Results of Operations." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 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. Negatively affecting the Company and others in the slaughtering industry is the continuing lack of market hogs available for slaughter compared with the industry's slaughter capacity. The continued imbalance between the industry's slaughter capacity and the availability of market hogs has created a situation in which increases in raw material prices have outpaced increases in selling prices. Although the Company does not expect profitability to improve in its Fresh Meats operations in the near term, 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 profitable levels. 8 10 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 The following discussion analyzes material changes in the financial information of the Company on a year to year basis. RESULTS OF OPERATION Fiscal 1997 as Compared to Fiscal 1996 (52 week fiscal year compared to 53 week fiscal year) The Company's net loss for the fiscal year ended May 30, 1997 was $3.2 million compared with a net loss of $21.7 million in 1996. The fourth-quarter and year-end net results include an after-tax restructuring charge of $3.3 million. The restructuring charge covers an estimate of future costs associated with the suspension of a joint production agreement at a processing facility in Council Bluffs, Iowa; see Note 12 of the Notes to the Consolidated Financial Statements for additional information related to the restructuring charge. The LIFO (last in, first out) method of valuing inventories had the effect after taxes of increasing earnings by approximately $3.2 million compared with a decrease to earnings of $8.9 million in fiscal 1996. The improvement in results is primarily attributable to higher processed meat and fresh pork operating margins. Operating profits in the Processed Meats division improved significantly as a result of higher margins, improved product mix, lower selling expenses and improved plant operating efficiencies. Offsetting higher margins was a reduction in sales tonnage attributable to the Company's planned elimination of lower-margin product lines and its focus on maintaining reasonable profit margins on high-volume commodity products. Operating profits in the Fresh Meats division also improved primarily as a result of improved plant operating efficiencies. Offsetting the improved plant efficiencies were lower industry-wide fresh pork margins resulting from the continuing imbalance between the industry's slaughter capacity and the availability of market hogs. Net sales for fiscal 1997 decreased $27.3 million or 2.8 percent to $955.8 million from $983.1 million in the comparable prior year. Net sales in the Company's Processed Meats operations decreased by 4.0% while net sales in the Fresh Meats operations remained even compared to the prior year. Sales volume decreased in the Company's Processed Meats operations and Fresh Meats operations by 11.0% and 7.8%, respectively. Offsetting the lower sales volumes were increases in Processed Meats and Fresh Meats average selling prices of 7.9% and 8.0%, respectively. The increases in average selling prices was primarily attributable to the 15% increase in the cost of live hogs, the Company's primary raw material. Cost of goods sold (including delivery costs) decreased $63.3 million or 6.8% in fiscal 1997, as compared to fiscal 1996, primarily as a result of lower sales volume. As a percentage of net sales, cost of goods sold decreased to 91.0% in fiscal year 1997 from 94.8% in fiscal 1996, principally as a result of improved operating efficiencies in both the Company's Processed Meats and Fresh Meats operations. Operationally, the Company's facilities continue to run very efficiently on a direct-cost basis. Selling expenses decreased $5.1 million or 13.5% from the comparable prior year period, primarily as a result of lower promotional expenses and a reduction in operating costs associated with the sales department's completion of its integration of the Wilson sales function into the Company's business. As a percentage of net sales, selling expenses decreased to 3.4% from 3.8%. General and administrative expenses increased $.6 million, or 2.4%, mainly as the result of general price and wage increases. As a percentage of net sales, general and administrative expenses increased to 2.8% from 2.7%. Net interest costs increased $3.3 million, or 38.5%. The increase is attributable to an increase in interest expense related to increased borrowings under the Company's revolving credit agreement, as a result of the Company's fiscal 1996 operating losses and capital expenditures related to the Ponca City facility construction and increased interest rates associated with the Company's restructuring of its long-term revolving credit and private placement note agreements in September, 1996. 9 11 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 The benefit for income taxes decreased $10.6 million, primarily due to the decrease in pre-tax loss from operations of $29.2 million to a loss of $5.4 million from a loss of $34.6 million in the comparable prior year period, resulting from the factors discussed above. The Company's effective tax benefit rate increased to (41.4%) from (37.2%). Loss per share of common stock decreased $3.23 from a loss of $3.76 to a loss of $.53 per share for the comparable prior year period. The reduction in losses resulted from the factors discussed above. 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 fiscal 1995 restructuring charge. The decrease in profits was primarily attributable to lower fresh pork and processed meat profit margins and higher overhead costs in both the fresh and processed meat 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 plant's operations and the high rate of speed at which the plant 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 volume 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 operation'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 volume was down primarily due to the closing, during fiscal 1995, of the Company's Tri-Miller facility and to an increase in fresh pork 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 Fresh Meats 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 Fresh Meats 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. 10 12 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 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 (37.2%) 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 per share in fiscal 1996, due to decreased profitability resulting from the factors discussed above. FINANCIAL CONDITION The Company's business is characterized by high unit sales volume and rapid turnover of inventories and accounts receivable. The demand for seasonal borrowings usually peaks in early December when ham inventories and accounts receivable are at their highest levels. These borrowings are generally repaid in January when the accounts receivable generated by the sales of these hams are collected. The Company has historically maintained lines of credit in excess of the cash needs of its business. At May 30, 1997, the Company had a revolving credit agreement with four participating financial institutions whereby it could borrow in the aggregate up to $81.6 million of which $62.9 million was drawn upon and $1.75 million was used to support letters of credit. The line of credit bears interest at or below the prime rate charged by major banks. Additionally, in August 1997, the Company obtained a temporary $15.0 million seasonal line of credit with the same four participating institutions which will be used to help finance the Company's traditional holiday inventory buildup. This temporary seasonal line of credit expires February 6, 1998. At May 30, 1997, the Company had approximately $6.0 million in cash. Cash provided by operations during the fifty-two weeks ended May 30, 1997 was approximately $30.0 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 generated from operations and acquired from financing activities was used principally to pay down borrowings under the revolving credit agreement and other long-term debt of $40.9 million and to fund net capital expenditures of $9.7 million. The financing activities included the issuing of $17.25 million of Convertible Subordinated Debentures due April 1, 2007. The debentures bear interest at a fixed rate of 9% and are convertible into shares of the Company's Common Stock at any time prior to maturity at a conversion price of $18.75 per share. Under certain circumstances the debentures are redeemable at the Company's option. See note 4D in the "Notes to Consolidated Financial Statements" included in this Form 10-K for further discussion of the subordinated debt issue. The Company's net working capital decreased to $56.2 million at May 30, 1997 from $59.0 million at May 31, 1996. The Company's debt is secured by substantially all of the Company's assets. In addition, the various loan agreements contain financial covenants with respect to consolidated net worth and interest coverage ratio (as defined therein). 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 Company entered into an Amendment Agreement effective in May 1997 (the "Amendment Agreement") with its secured lenders to amend its various loan agreements and note agreements to exclude 11 13 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 the $5.0 million restructuring charge taken with respect to the closing of the Council Bluffs Facility from the computation of the various financial covenants under such agreements. If the Amendment Agreement had not been entered into, the Company would have been in default under such loan agreements and note agreements as a result of such restructuring charge. The Company anticipates net capital expenditures during fiscal 1998 of approximately $8.0 million, which will be used to upgrade various machinery and equipment with continued emphasis on projects that will further streamline operations, for increased efficiencies and productivity gains. Management believes that funds provided from operations and borrowings under available lines of credit will permit it to continue to finance its current operations and to further develop its business in accordance with its operating strategies. OTHER The Company believes that the impact of inflation and changing prices would not significantly affect the Company's net income reported on a historical cost basis. This belief is based on the following: 1. Substantially all of the Company's inventories are stated on a LIFO basis. 2. Any increase in depreciation expense as a result of increased cost to replace property, plant and equipment is generally offset by productivity gains and cost savings due to improved efficiency resulting from technological improvements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Pages immediately following signature page) ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 14 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Partially incorporated by reference pursuant to Rule 12b-23 from the Company's 1997 Proxy Statement furnished in connection with the Company's Annual Meeting of Shareholders to be held on October 29, 1997. EXECUTIVE OFFICERS OF REGISTRANT
YEAR FIRST BECAME NAME AGE OFFICER POSITION ---- --- ---------- -------- Henry S Dorfman.............. 75 1959 Chairman of the Board Joel Dorfman................. 46 1978 President and Chief Executive Officer Louis Glazier................ 48 1980 Executive Vice President Finance and Administration Keith Jahnke................. 43 1987 Executive Vice President Processed Meats Edward Boan.................. 47 1987 Executive Vice President Pork and Human Resources
The following is a brief account of the business experience of each of the above-named persons during the past five years: Henry S Dorfman, a founder of the Company, has served as Chairman of the Board since 1959. Mr. Dorfman also served as Chief Executive Officer of the Company from 1959 to 1994. Joel Dorfman has served as President of the Company since 1985 and Chief Executive Officer of the Company since 1995. Mr. Dorfman has also been a director of the Company since 1978. Mr. Dorfman also served as Chief Operating Officer of the Company from 1985 to 1994. Joel Dorfman is the son of Henry S Dorfman. Louis Glazier has been Executive Vice President Finance and Administration of the Company since 1988. Mr. Glazier has also been a director of the Company since 1988. 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. Edward Boan became Vice President of Human Resources in 1985. In 1987, he also became General Manager and Vice President Fresh Pork. In 1991, Mr. Boan became Executive Vice President Pork and Human Resources. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference pursuant to Rule 12b-23 from the Company's 1997 Proxy Statement furnished in connection with the Company's Annual Meeting of Shareholders to be held on October 29, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference pursuant to Rule 12b-23 from the Company's 1997 Proxy Statement furnished in connection with the Company's Annual Meeting of Shareholders to be held on October 29, 1997. 13 15 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference pursuant to Rule 12b-23 from the Company's 1997 Proxy Statement furnished in connection with the Company's Annual Meeting of Shareholders to be held on October 29, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14(a)(1) Financial Statements Report of Independent Accountants Consolidated Balance Sheets at May 30, 1997 and May 31, 1996 Consolidated Statements of Operation for the years ended May 30, 1997, May 31, 1996 and May 26, 1995 Consolidated Statements of Shareholders' Equity for the years ended May 30, 1997, May 31, 1996 and May 26, 1995 Consolidated Statements of Cash Flows for the years ended May 30, 1997, May 31, 1996 and May 26, 1995 and Notes to Consolidated Financial Statements Financial statements of subsidiaries of the Company have been omitted because the Company is an operating company and all material subsidiaries are wholly-owned and are not indebted to any person other than the parent or the consolidated subsidiaries in an amount which is material to the total consolidated assets except indebtedness incurred in the ordinary course of business which is not overdue and which matures within one year from the date of its creation. 14(a)(2) Financial Statement Schedule Report of Independent Accountants on Financial Statement Schedules (included in report of independent accountants on financial statements) of Coopers & Lybrand L.L.P. II -- Valuation and qualifying accounts and reserves for the years ended May 30, 1997, May 31, 1996 and May 26, 1995 Schedules other than those referred to are omitted for the reason that they are not required or are not applicable. 14(a)(3) Exhibits (3) (a) Restated Articles of Incorporation Exhibit (3)(a) is incorporated herein by reference to Exhibit 3.1 to the Company's Form S-2 Registration Statement, Registration No. 33-43287. (b) Amendment to Restated Articles of Incorporation Exhibit (3)(b) is incorporated herein by reference to Exhibit (3)(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993. (c) By-laws, as amended to date Exhibit (3)(c) is incorporated herein by reference to Exhibit (3)(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 29, 1981.
14 16
Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 (10) Material Contracts (a) Bond Purchase Agreement, dated as of July 1, 1984, among The Onslow County Industrial Facilities and Pollution Control Financing Authority, Branch Banking and Trust Company and the Company. Exhibit (10)(a) is incorporated herein by reference to Exhibit (10)(f) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (b) Loan Agreement, dated as of July 1, 1984, between The Onslow County Industrial Facilities and Pollution Control Financing Authority and the Company. Exhibit (10)(b) is incorporated herein by reference to Exhibit (10)(g) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (c) Promissory Note in the principal amount of $6,000,000, dated July 1, 1984, from the Company payable to The Onslow County Industrial Facilities and Pollution Control Financing Authority. Exhibit (10)(c) is incorporated herein by reference to Exhibit (10)(h) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (d) Security Agreement, dated as of July 1, 1984, between Branch Banking and Trust Company and the Company. Exhibit (10)(d) is incorporated herein by reference to Exhibit (10)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (e) Guaranty Agreement, dated as of July 1, 1984, from the Company to Branch Banking and Trust Company. Exhibit (10)(e) is incorporated herein by reference to Exhibit (10)(j) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (f) 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. Exhibit (10)(f) is 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. (g) Loan Agreement dated as of December 1, 1993 by and between Michigan Strategic Fund and the Company relating to $5,500,000 Adjustable Rate Demand Limited Obligation Revenue Bonds. Exhibit (10)(g) is incorporated herein by reference to Exhibit (10)(ff) to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 1994. (h) 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.
15 17
Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 Exhibit (10)(h) is 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. (i) Asset Purchase Agreement, dated as of April 29, 1995, by and among the Company and Doskocil Companies Incorporated and Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company. Exhibit (10)(i) is incorporated herein by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995. (j) First Amendment to Asset Purchase Agreement, dated as of May 26, 1995, by and among the Company, Foodbrands America, Inc., successor by merger to Doskocil Companies Incorporated, Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company. Exhibit (10)(j) is incorporated herein by reference to Exhibit 2.2 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995. (k) Noncompete Agreement, dated May 30, 1995, by Foodbrands America, Inc., Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company in favor of the Company. Exhibit (10)(k) is incorporated herein by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995. (l) Note Agreement, dated as of October 1, 1994, by and between the Company and Allstate Life Insurance Company relating to $8,000,000 principal amount 8.42% Senior Notes due October 1, 2003. Exhibit 10(l) is incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1994, as amended. (m) 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. Exhibit (10)(m) is 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. (n) Marketing and Management Agreement dated November 2, 1994 by and among Michigan Livestock Exchange, Indiana Livestock Exchange and the Company. Exhibit 10(n) is 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. (o) 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.
16 18
Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 Exhibit 10(o) is 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, as amended. (p) 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. Exhibit 10(p) is 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, 1994, as amended. (q) 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. Exhibit 10(q) is incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994, as amended. (r) 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. Exhibit 10(r) is 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, 1994, as amended. (s) 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. Exhibit 10(s) is 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, 1994, as amended. (t) Amendment to Reimbursement Agreement, dated as of September 11, 1996, between the Company and Old Kent Bank. Exhibit 10(t) is 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, 1994, as amended. (u) Intercreditor Agreement, dated as of September 11, 1996 among Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as Credit Agent, Seasonal Agent and Collateral Agent, and the lenders party thereto, as acknowledged and agreed to by the Company and its subsidiaries. Exhibit 10(u) is 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, 1994, as amended. (v) 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 Credit Agent.
17 19
Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 Exhibit 10(v) is 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, 1994, as amended. (w) Senior Secured Seasonal Line of Credit, dated as of August 5, 1997, among the Company, the lenders party thereto, and Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as agent for the lenders. (x) Amendment Agreement, dated as of August 8, 1997, among the Company, the Banks (as defined therein), and the Noteholders (as defined therein). (21) Subsidiaries of the registrant. (23) Consent of Coopers & Lybrand LLP. (27) Financial Data Schedule. 14(b) The Company did not file any reports on Form 8-K during the last quarter of the fiscal year covered by this Report. 14(d)(5) Schedules (Pages following signature page)
18 20 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 28, 1997. THORN APPLE VALLEY, INC. (Registrant) By: /s/ Louis Glazier ------------------------------------ Louis Glazier Executive Vice President Finance and Administration Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on August 28, 1997.
SIGNATURE CAPACITY --------- -------- Director - -------------------------------------------- John C. Canepa /s/ Henry S Dorfman Director - -------------------------------------------- Henry S Dorfman /s/ Joel Dorfman President and Director - -------------------------------------------- (principal executive officer) Joel Dorfman Director - -------------------------------------------- Burton D. Farbman /s/ Louis Glazier Executive Vice President Finance and - -------------------------------------------- Administration and Director Louis Glazier (principal financial and accounting officer) /s/ Moniek Milberger Director - -------------------------------------------- Moniek Milberger /s/ Seymour Roberts Director - -------------------------------------------- Seymour Roberts
19 21 COOPERS & LYBRAND LETTERHEAD REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Thorn Apple Valley, Inc. Southfield, Michigan: We have audited the consolidated financial statements and the financial statement schedule of Thorn Apple Valley, Inc. and Subsidiaries listed in item 14(a) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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 30, 1997 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 30, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. Detroit, Michigan July 24, 1997 F-1 22 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 30, MAY 31, 1997 1996 ------- ------- ASSETS Current assets: Cash and cash equivalents................................. $ 6,028,698 $ 5,804,371 Short-term investments.................................... 500,000 627,560 Accounts receivable, net of allowance for doubtful accounts (1997, $888,500; 1996, $621,800)............... 44,888,327 62,908,719 Inventories (Note 2)...................................... 65,115,331 56,263,210 Refundable income taxes................................... 11,490,330 Deferred income taxes (Note 5)............................ 2,727,000 2,199,000 Prepaid expenses and other current assets................. 7,683,296 6,724,994 ------------ ------------ Total current assets............................... 126,942,652 146,018,184 ------------ ------------ Property, plant and equipment: Land...................................................... 1,276,933 1,519,976 Buildings and improvements................................ 67,692,480 61,640,117 Machinery and equipment................................... 158,207,873 155,911,312 Transportation equipment.................................. 7,056,966 7,498,075 Property under capital leases............................. 10,162,649 10,301,819 Construction in progress.................................. 3,245,764 4,475,987 ------------ ------------ 247,642,665 241,347,286 Less accumulated depreciation...................... 111,762,145 98,938,159 ------------ ------------ 135,880,520 142,409,127 ------------ ------------ Other assets: Intangible assets, net of accumulated amortization of $1,678,600 and $839,300................................. 31,893,400 32,732,700 Other..................................................... 8,069,885 5,980,190 ------------ ------------ Total other assets................................. 39,963,285 38,712,890 ------------ ------------ $302,786,457 $327,140,201 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 41,111,001 $ 47,501,565 Notes payable, banks...................................... 14,700,000 Accrued liabilities (Note 3).............................. 23,661,536 21,954,784 Current portion of long-term debt (Note 4)................ 4,566,445 2,818,444 Income taxes.............................................. 1,425,403 ------------ ------------ Total current liabilities.......................... 70,764,385 86,974,793 ------------ ------------ Other noncurrent liabilities (Note 12)...................... 3,675,000 Long-term debt (Note 4)..................................... 150,128,541 159,808,923 Deferred income taxes (Note 5).............................. 1,138,000 3,631,000 ------------ ------------ Total noncurrent liabilities....................... 154,941,541 163,439,923 ------------ ------------ Shareholders' equity: Preferred stock: $1 par value; authorized 200,000 shares; issued none Common nonvoting stock: $.10 par value; authorized 20,000,000 shares; issued none Common voting stock: $.10 par value; authorized 20,000,000 shares; issued 6,110,480 shares in 1997 and 5,786,129 shares in 1996.......................................... 611,048 578,613 Capital in excess of par value............................ 10,500,213 7,011,361 Retained earnings......................................... 65,969,270 69,135,511 ------------ ------------ 77,080,531 76,725,485 ------------ ------------ $302,786,457 $327,140,201 ============ ============
See notes to consolidated financial statements. F-2 23 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED ---------------------------------------------- MAY 30, MAY 31, MAY 26 1997 1996 1995 ------- ------- ------ Net sales......................................... $955,793,588 $ 983,084,427 $744,542,466 ------------ -------------- ------------ Operating costs and expenses: Cost of goods sold, including delivery costs.... 868,826,788 932,130,906 669,068,064 Selling......................................... 32,468,641 37,533,477 25,377,029 General and administrative...................... 27,141,392 26,515,629 22,911,735 Depreciation and amortization................... 17,449,390 15,378,777 9,830,100 Restructuring charge (Note 12).................. 5,000,000 7,857,319 ------------ -------------- ------------ 950,886,211 1,011,558,789 735,044,247 ------------ -------------- ------------ Income (loss) from operations..................... 4,907,377 (28,474,362) 9,498,219 ------------ -------------- ------------ Other expense (income): Interest, net................................... 11,758,695 8,491,769 2,258,674 Other, net...................................... (1,445,077) (2,408,387) (960,341) ------------ -------------- ------------ 10,313,618 6,083,382 1,298,333 ------------ -------------- ------------ Income (loss) before income taxes................. (5,406,241) (34,557,744) 8,199,886 Provision (benefit) for income taxes (Note 5)..... (2,240,000) (12,850,000) 2,945,000 ------------ -------------- ------------ Net income (loss)................................. $ (3,166,241) $ (21,707,744) $ 5,254,886 ============ ============== ============ Earnings (loss) per share of common............. $ (0.53) $ (3.76) $ 0.91 ============ ============== ============
See notes to consolidated financial statements. F-3 24 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 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 6 and Note 7)............... 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 (Note 7).................. 15,482 1,548 240,290 --------- -------- ----------- ----------- Balance, May 31, 1996..................... 5,786,129 578,613 7,011,361 69,135,511 Net loss.................................. (3,166,241) Newly issued shares of common stock (Note 10)..................................... 279,883 27,988 2,972,358 Shares issued under employee stock purchase plan (Note 7).................. 16,968 1,697 176,950 Exercise of stock options, including related tax benefits (Note 6)........... 27,500 2,750 339,544 --------- -------- ----------- ----------- Balance, May 30, 1997..................... 6,110,480 $611,048 $10,500,213 $65,969,270 ========= ======== =========== ===========
See notes to consolidated financial statements. F-4 25 THORN APPLE VALLEY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED ------------------------------------------ MAY 30, MAY 31, MAY 26, 1997 1996 1995 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ (3,166,241) $(21,707,744) $ 5,254,886 ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation.............................................. 16,610,090 14,539,477 9,830,100 Loss on disposition of fixed assets included in restructuring charge.................................... 6,915,646 Amortization of intangibles............................... 839,300 839,300 Deferred income taxes..................................... (3,021,000) 23,000 353,000 (Gain) loss on disposition of property, plant and equipment............................................... 631,652 13,568 (15,451) Provision for losses on accounts receivable............... 339,055 133,951 57,300 Gain on sale of long-term investments..................... (627,802) (INCREASE) DECREASE IN ASSETS: Accounts receivable....................................... 17,681,337 (13,260,829) 4,049,338 Inventories............................................... (8,852,121) (2,949,079) (1,020,608) Refundable income taxes................................... 11,490,330 (10,124,099) (1,366,231) Prepaid expenses and other assets......................... (2,920,437) (3,397,344) (2,425,749) INCREASE (DECREASE) IN LIABILITIES: Accounts payable.......................................... (6,390,564) 15,027,415 (1,496,234) Accrued liabilities....................................... 1,706,752 (6,258,669) 1,512,038 Income taxes payable...................................... 1,425,403 (526,722) Other noncurrent liabilities.............................. 3,675,000 ------------ ------------ ------------ Total adjustments......................................... 33,214,797 (6,041,111) 15,866,427 ------------ ------------ ------------ Net cash provided by (used in) operating activities....... 30,048,556 (27,748,855) 21,121,313 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payment for acquisition of Wilson, net of cash acquired (Note 11)............................................... (64,630,873) Proceeds from sale of long-term investments............... 4,484,005 Capital expenditures...................................... (11,602,699) (38,604,784) (43,367,769) Proceeds from sale of property, plant and equipment....... 1,905,568 2,712,129 412,926 ------------ ------------ ------------ Net cash used in investing activities..................... (9,697,131) (96,039,523) (42,954,843) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt.............................. 17,250,000 122,500,000 8,000,000 Proceeds from common stock sold to company officer........ 3,000,346 Principal payments on long-term debt...................... (26,198,385) (6,215,552) (2,008,117) Net borrowings (payments) under lines of credit........... (14,700,000) 8,740,000 5,960,000 Dividends paid............................................ (404,174) (1,610,575) Proceeds from employee stock purchase plan................ 178,647 241,838 Purchase and retirement of common stock................... (3,390,704) Proceeds from stock options exercised, including related tax benefits............................................ 342,294 2,171,888 ------------ ------------ ------------ Net cash provided by (used in) financing activities....... (20,127,098) 124,862,112 9,122,492 ------------ ------------ ------------ Net increase (decrease) in cash........................... 224,327 1,073,734 (12,711,038) Cash and cash equivalents, beginning of year.............. 5,804,371 4,730,637 17,441,675 ------------ ------------ ------------ Cash and cash equivalents, end of year.................... $ 6,028,698 $ 5,804,371 $ 4,730,637 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest, net of amounts capitalized.................... $ 12,164,297 $ 8,324,648 $ 4,003,000 ============ ============ ============ Income taxes paid (refunded), net....................... $(12,194,253) $ (2,858,701) $ 3,991,000 ============ ============ ============ Noncash investing activities: Capital lease obligations............................... $ 1,016,004 $ 256,852 $ 2,935,020 ============ ============ ============ Acquisition: The Company purchased substantially all of the assets of Wilson (Note 11) In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired........................... $ 75,571,743 Cash paid............................................... (64,630,873) ------------ Liabilities assumed..................................... $ 10,940,870 ============
See notes to consolidated financial statements. F-5 26 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF OPERATIONS: The Company is engaged in the production and sale of bacon, hot dogs, lunch meats, hams, smoked sausage and turkey products, 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. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand, demand deposits and short-term investments with a maturity of three months or less at the date of acquisition. SHORT-TERM INVESTMENTS: Short-term investments are those with a maturity in excess of three months at the date of acquisition and are valued at cost, which approximates market. INVENTORIES: Substantially all inventories are stated at the lower of last-in, first-out ("LIFO") cost or market. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Upon retirement or disposal of property, plant and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in other income. Depreciation is computed on the straight-line basis over the 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 fair value less costs to sell. The Company capitalized interest incurred on debt 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 estimated future cash flows. F-6 27 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED COMMODITY OPTIONS AND FORWARD CONTRACTS: The Company uses a variety of commodity option and forward contracts in an effort to minimize the potential adverse effects from raw material market price level changes. Realized gains and losses are recognized currently in income and expenses. Risk management and hedging activities are often utilized with forward sales contracting, with forward raw material procurement and with margin management. The majority of the Company's finished product sales are not hedged, as they are manufactured from raw material procured from current production. Hedging activities accounted for less than 5 percent of the total quantities of annual processed meats tonnage sold. 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 1997, 1996 and 1995 were 6,002,786, 5,778,559 and 5,754,726 respectively. The potential dilution from shares issuable under employee stock option plans and convertible subordinated debentures are excluded from the computation of the weighted average number of common shares outstanding since they are either not material or antidilutive. Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," was issued in February 1997. Adoption of SFAS 128, effective for reporting periods ending after December 15, 1997, is not expected to have a material effect in reported earnings per share. 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 30, 1997 and May 26, 1995 are for 52-week periods. RECLASSIFICATIONS: Certain amounts from prior years have been reclassified to conform with the current year presentations. 2. INVENTORIES:
1997 1996 ---- ---- At lower of cost or market: Supplies.................................................. $ 9,447,180 $ 9,559,537 Raw materials............................................. 21,911,451 23,518,145 Work in process........................................... 4,016,547 3,588,512 Finished goods............................................ 41,529,153 36,281,016 ----------- ----------- 76,904,331 72,947,210 Less LIFO reserve........................................... 11,789,000 16,684,000 ----------- ----------- $65,115,331 $56,263,210 =========== ===========
The LIFO method of accounting for inventories had the effect (after income taxes) of increasing net income by approximately $3,182,000 ($.53 per share) and $1,282,000 ($.22 per share) for the years ended May 30, 1997 and May 26, 1995, respectively, and decreasing net income by approximately $8,927,000 ($1.54 per share) for the year ended May 31, 1996. F-7 28 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 3. ACCRUED LIABILITIES: Included within accrued liabilities are employee benefits representing self-insured programs of $4,707,813 and $4,588,849 at May 30, 1997 and May 31, 1996, respectively. 4. LONG-TERM DEBT: Long-term debt consists of the following:
MAY 30, MAY 31 1997 1996 ------- ------ A. Revolving credit agreement............................... $ 62,900,000 $ 80,000,000 B. Private placements notes................................. 59,453,846 65,500,000 C. Revenue bonds............................................ 9,455,225 10,629,449 D. Subordinated debentures.................................. 17,250,000 E. Obligations under capital leases......................... 4,559,213 5,143,814 F. Other note............................................... 1,076,702 1,354,104 ------------ ------------ 154,694,986 162,627,367 Less current portion..................................... 4,566,445 2,818,444 ------------ ------------ $150,128,541 $159,808,923 ============ ============
A. At May 30, 1997, the Company has a revolving credit agreement with four participating banks, whereby it could borrow, in the aggregate, up to $81.6 million, bearing interest at variable rates ranging from below prime rate to the prime rate charged by major banks. The commitments under the revolving credit agreement expire on May 30, 1998. The commitment fee on the unused portion of the facility is .25 percent per annum. The weighted average interest rate at May 30, 1997 was 7.63 percent. Unused lines of credit of $17.0 million were available at May 30, 1997. The Company has various agreements between the parties involved in the revolving credit agreement, the private placement lenders (see note 4B) and the limited obligation revenue bond lender (see note 4C), whereby it has granted, on a pro-rata basis, a first lien on substantially all of the Company's assets. These agreements contain financial covenants with respect to consolidated net worth and consolidated earnings available for interest expense (as defined therein). In addition, among other things, the agreements limit borrowings, capital expenditures and investments, and do not allow the payment of cash dividends or repurchase of the Company's common stock. B. At May 30, 1997, the Company has three separate issues of long-term notes in private placements to institutional investors. The first outstanding issue, dated April 1, 1994, has an outstanding principal balance of $13,615,385, bearing interest at a fixed rate of 7.45 percent per annum. The principal is due in equal annual installments of $1,512,820 beginning April 1, 1998, and ending April 1, 2005, with the remaining principal payable at maturity on April 21, 2006. The second outstanding issue, dated October 1, 1994, has an outstanding principal balance of $7,261,538, bearing interest at a fixed rate of 9.42 percent per annum. The principal is due at maturity on October 1, 2003. The third outstanding issue, dated on May 30, 1995, has an outstanding principal balance of $38,576,923, bearing interest at a fixed rate of 8.58 percent per annum. The principal is due in annual installments of $5,510,989 beginning May 15, 1999, and ending at maturity on May 15, 2005. Interest under all of the above issues is payable on a monthly basis. C. At May 30, 1997, the Company has three separate revenue bond issues. The first outstanding issue, referred to as the industrial revenue bond, has an outstanding principal balance of $1,937,500 with varying quarterly principal payments due July 1, 1997 through January 1, 2000, and quarterly interest at 81.1 percent of the current prime rate (at May 30, 1997 the rate was 6.89 percent). F-8 29 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 4. LONG-TERM DEBT -- CONTINUED The second outstanding issue, which is referred to as the limited obligation revenue bond, has an outstanding principal balance of $5,500,000 with monthly interest payments at a variable rate and the principal due at maturity on December 1, 2005. The variable rate of interest paid on the second issue during the month of May 1997 averaged 4.31 percent. The third outstanding issue, referred to as the economic development revenue bond, has an outstanding principal balance of $2,017,725 with varying monthly principal and interest payments through maturity on June 30, 2000, bearing interest at a fixed rate of 6 percent per annum. The first and third bond issues are collateralized by property, plant and equipment. The second bond issue is collateralized by a $5,600,000 letter of credit. The letter of credit is now secured by a first lien on substantially all of the Company's assets as described above. The Company's industrial revenue and economic revenue bond agreements contain restrictive covenants that include the maintenance of a minimum level of consolidated tangible net worth, as defined, and of certain financial ratios. D. On March 25, 1997, the Company completed a public offering of $17,250,000 of Convertible Subordinated Debentures due April 1, 2007, bearing interest at a fixed rate of 9 percent per annum. Interest is payable semi-annually on April 1 and October 1, commencing on October 1, 1997, with interest accruing from the date of issuance. The Debentures are convertible into shares of the Company's Common Stock at any time prior to maturity, at a conversion price of $18.75 per share. Accordingly, each $1,000 principal amount of Debentures is convertible into 53.33 shares of Common Stock, for an aggregate of 920,000 shares, representing approximately 13.1 percent of the outstanding Common Stock after including the converted shares. The Debentures are redeemable at the Company's option, at any time in whole or in part, except that the Debentures may not be redeemed prior to April 1, 2000, unless the closing sale price of the Common Stock equals or exceeds 140 percent of the then current conversion price for any 20 consecutive trading days. The Debentures are subordinated to all existing and future senior indebtedness of the Company. Although the Debentures are cross-defaulted with the Company's existing secured indebtedness, the Debentures do not require the Company to comply with any other financial covenants. E. The Company has obligations under capital leases bearing interest at fixed 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:
1997 1996 ---- ---- Machinery and equipment........................... $10,162,649 $10,301,819 Less accumulated amortization..................... 3,866,704 3,408,120 ----------- ----------- $ 6,295,945 $ 6,893,699 =========== ===========
Future minimum rentals for property under capital leases mature through the year 2001, with a present value of total minimum lease obligation of $4,559,213. F. The Company has a note bearing interest at a fixed rate of 7 percent per annum. Principal and interest are due quarterly through the date of maturity on September 13, 2000. The note is secured by a second lien on certain property, plant and equipment. F-9 30 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 4. LONG-TERM DEBT -- CONTINUED The aggregate maturities of long-term debt (excluding obligations under capital leases) during the five years subsequent to May 30, 1997 are: 1998; $3,069,025, 1999; $71,588,163, 2000; $8,600,116, 2001; $7,258,870, and 2002; $7,023,809. 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. 5. INCOME TAXES: The Company's provision (benefit) for income taxes was as follows:
1997 1996 1995 ---- ---- ---- Currently payable (benefit): Federal...................................... $ 781,000 $ (9,939,000) $2,259,000 State and local.............................. 333,000 ----------- ------------ ---------- Total currently payable (benefit)............ 781,000 (9,939,000) 2,592,000 Deferred: Federal and state............................ (3,021,000) (2,911,000) 353,000 ----------- ------------ ---------- Total provision (benefit).................... $(2,240,000) $(12,850,000) $2,945,000 =========== ============ ==========
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 30, 1997 and May 31, 1996 are as follows:
1997 1996 ------------------------------ ------------------------------ DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ASSETS LIABILITIES ------------ ------------ ------------ ------------ Depreciation............................. $7,875,000 $5,799,000 Employee benefit plans................... $ 1,765,000 $1,721,000 Bad debt expense......................... 333,000 235,000 Capital leases........................... 73,000 215,000 Restructuring charge..................... 1,875,000 Estimated losses on assets held for disposal............................... 197,000 375,000 Amortization of intangibles.............. 1,049,000 525,000 Credit carryforward...................... 5,089,000 3,170,000 Tax benefit of net operating loss carryforward........................... 1,617,000 All other................................ 103,000 393,000 39,000 433,000 ----------- ---------- ---------- ---------- Total deferred taxes................ $10,979,000 $9,390,000 $5,540,000 $6,972,000 =========== ========== ========== ==========
F-10 31 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 5. INCOME TAXES -- CONTINUED A reconciliation of the provision for income taxes is shown below:
1997 1996 1995 ----------------- -------------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ------ - ------ - ------ - Federal income tax (benefit) at statutory rate...................... $(1,892,000) (35) ($12,095,000) (35) $2,870,000 35 State and local income taxes, net of federal income tax benefit.......... 232,000 3 Lower tax rate attributable to foreign sales corporation................... (55,000) (1) (110,000) (138,000) (2) Nondeductible expenses................ 138,000 3 Utilization of tax credits............ (465,000) (9) (873,000) (2.5) Other................................. 34,000 1 228,000 (19,000) ----------- --- ------------ ----- ---------- -- $(2,240,000) (41) $(12,850,000) (37.5) $2,945,000 36 =========== === ============ ===== ========== ==
The credit carryforward of $5,089,000 for which the tax benefit has been recognized, consists of general business credits of $2,739,000 which expire between the years 2008 and 2011 and alternative minimum tax credit carryforwards of $2,350,000, which can be carried forward indefinitely. The NOL carryforward of $4,621,000 on a pre-tax basis will expire in the year 2013. 6. STOCK OPTION PLANS: The Company's 1996 Employee Stock Option Plan authorized the Company's Stock Option Committee to grant options for up to 600,000 shares of the Company's common stock to present or prospective employees. At May 30, 1997, there were 54,500 options granted but not exercised at $10.25 per share and 545,500 shares remained to be granted under the 1996 Plan. At May 30, 1997, there were 674,800 options granted but not exercised at prices of $10.25, $17.00, $23.00 and $26.00 per share and 141,000 options granted but not exercised at prices of $2.56 and $19.67 per share under the 1990 and 1982 Employee Stock Option Plans, respectively. Under the 1990 and 1982 plans no shares remain to be granted. The Company's Stock Option Committee may designate any requirements regarding option price, waiting period or an exercise date for options granted under the plans, except that incentive stock options may not be exercised at less than the fair market value of the stock on the date of grant, and no option may remain outstanding for more than 10 years. Under all plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant. Under all plans, the options granted are immediately exercisable. F-11 32 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 6. STOCK OPTION PLANS -- CONTINUED The following is a summary of options granted under the plans:
1997 1996 1995 -------------------------- -------------------------- --------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES ------ ---------------- ------ ---------------- ------ ---------------- Balance, beginning... 646,300 $18.91 484,550 $19.76 465,000 $17.00 Exercised............ (27,500) $10.25 -- -- (100,200) $16.67 Canceled or terminated......... (16,000) $16.02 (33,750) $20.16 (50,750) $21.50 Granted.............. 267,500 $10.25 195,500 $17.00 170,500 $26.00 ------- ------- -------- Balance, ending...... 870,300 $16.57 646,300 $18.91 484,550 $19.76 ======= ======= ========
At May 30, 1997, under all plans, the range of exercise prices on outstanding options is $2.56 to $26.00 per share with a weighted average remaining contractual life of 7.3 years. At May 30, 1997, there were 46 participants in the 1996 Employee Stock Option Plan, 28 participants in the 1990 Employee Stock Option Plan, and 11 participants in the 1982 Employee Stock Option Plan. The Company has adopted the disclosure-only provisions of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company will continue to apply APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If compensation cost for stock option grants had been determined based on the fair value method as prescribed by SFAS No. 123, net loss and loss per share would have been increased to the pro forma amounts indicated in the table below:
1997 1996 ---- ---- Reported net loss........................................... $(3,166,241) $(21,707,744) Pro forma net loss, using SFAS No. 123...................... $(4,022,228) $(22,728,410) Loss per share: Reported.................................................. $(.53) $(3.76) Pro forma, using SFAS No. 123............................. $(.67) (3.93) Weighted-average fair value of options granted.............. $4.92 $8.03
The fair value of each option grant was estimated using the Black-Scholes valuation model. Under the model the annualized assumptions used for options granted in fiscal years 1997 and 1996, respectively, was as follows: Risk-free interest rates of 6.32 and 5.79 percent, dividend yields equal to zero percent and a volatility factor for the expected market price of the Company's common stock of 45 percent. The weighted-average expected life of options for the 1997 and 1996 grants is five years. 7. STOCK PURCHASE PLAN: The Company has an Employee Stock Purchase Plan ("Plan") where employees may subscribe, through payroll withholdings, to purchase shares of the Company's common stock at a discount. The discounted price is equal to 85 percent of the average market value of the common stock. The average market value is computed using the closing prices at the beginning and end of each calendar quarter. Employees may not purchase, under the Plan, in excess of $25,000 in any one year. Under the Plan, the Company is authorized to issue up to 400,000 shares of its common stock, of which 363,105 have not been issued. F-12 33 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 7. STOCK PURCHASE PLAN -- CONTINUED Transactions under the Employee Stock Purchase Plan are summarized as follows:
NUMBER OF SHARES ISSUE PRICE RANGE --------- ----------------- Shares issued during the year ended May 30, 1997............ 16,968 $ 9.56 - $12.54 Shares issued during the year ended May 31, 1996............ 15,482 $12.32 - $17.85 Shares issued during the year ended May 26, 1995............ 4,445 $19.97 - $22.09
8. PENSION PLANS: The Company and its subsidiaries have several defined benefit pension plans covering substantially all of their nonsalaried employees. Benefits under these plans are based on the employee's years of service, and the benefit obligations are based upon the employee's expected date of retirement. Plan assets are invested in corporate and government bonds, common stocks and a bank money market fund. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Net periodic pension cost for 1997, 1996 and 1995 includes the following benefit and cost components:
1997 1996 1995 ---- ---- ---- Service cost......................................... $ 387,204 $ 346,101 $ 332,840 Interest cost........................................ 780,947 711,024 645,329 Actual return on plan assets......................... (990,090) (1,474,259) (885,195) Net amortization and deferral........................ 131,169 738,998 250,402 --------- ----------- --------- Net periodic pension cost............................ $ 309,230 $ 321,864 $ 343,376 ========= =========== =========
As of May 30, 1997 and May 31, 1996, the funded status of the defined benefit plans, using the actuarial present value of the benefit obligation, is as follows:
1997 1996 ---- ---- Vested benefit obligation................................... $10,126,657 $ 9,209,690 Projected and accumulated benefit obligation................ 10,698,129 9,750,990 Plan assets at fair value................................... 11,504,526 10,367,441 ----------- ----------- Projected benefit obligation less than assets............... (806,397) (616,451) Unrecognized net gain....................................... 137,192 186,085 Unrecognized net transition asset........................... 176,704 204,515 Unrecognized prior service cost............................. (42,396) (46,993) ----------- ----------- Prepaid pension cost........................................ $ (534,897) $ (272,844) =========== =========== Actuarial assumptions used for 1997, 1996 and 1995 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 $134,000, $206,000 and $207,000 in 1997, 1996 and 1995, respectively. F-13 34 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 9. COMMITMENTS: OPERATING LEASES: The Company leases transportation, manufacturing equipment and office space under several operating leases expiring through 2005. The majority of the leases contain purchase options at stated amounts or fair market value. Rent expense under all operating leases amounted to approximately $7,792,000, $8,203,000 and $6,817,000 for the years ended 1997, 1996 and 1995, respectively. Total future minimum rentals under noncancelable operating leases as of May 30, 1997, including those discussed below are:
YEAR ENDING AMOUNT ----------- ------ 1998...................................................... $6,610,000 1999...................................................... 4,614,000 2000...................................................... 2,280,000 2001...................................................... 1,223,000 2002...................................................... 1,025,000 Thereafter................................................ 1,840,000
The Company maintains inventory at a freezer warehouse that is 75 percent owned by an officer and director of the Company. Additionally, the Company rents a portion of the freezer warehouse for use as a distribution center. Currently, the Company is operating under a one year lease option that expires in December 1997. Freezer warehouse rent expense amounted to $882,000 for the years ended 1997, 1996 and 1995. Storage and handling expenses paid to this freezer warehouse amounted to approximately $1,482,000, $1,218,000 and $973,000 for the years ended 1997, 1996 and 1995, respectively. LETTERS OF CREDIT: At May 30, 1997, the Company had outstanding letters of credit totaling approximately $9,500,000 which serve as collateral for the limited obligation revenue bond issue, as discussed in Note 4, 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. In consideration the Company will pay MLE $83,333 per month as a facilities use and management fee. The MLE supplied approximately 62 percent of the total hogs purchased by the Company in fiscal 1997. 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. 10. COMMON STOCK ISSUED: The Company sold to its Chairman of the Board of Directors, who is also a significant shareholder of the Company, 279,883 newly issued shares of the Company's common stock for an approximate purchase price of $3.0 million. This sale was in accordance with the long-term debt agreements entered into on September 11, 1996. F-14 35 THORN APPLE VALLEY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995 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. No amounts have been 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. 12. RESTRUCTURING CHARGES: FISCAL 1997: During the fourth quarter of fiscal 1997, the Company recorded a one-time, pre-tax restructuring charge to operations of $5.0 million for an estimate of future costs associated with the suspension of a joint production agreement. The suspension of the Production Agreement resulted in the planned closing of a processed meats facility in Council Bluffs, Iowa, where the Company had some of its boneless ham products produced. The Iowa plant had been operated under the Production Agreement between the Company and another major meat packing company (Producer). Pursuant to the Production Agreement, the Producer constructed a ham production facility and the Company furnished all of the production equipment to be used in such facility. In addition, the Producer was obligated to produce at such facility, on an exclusive basis, all boneless ham products which the Company would have required. In return, the Company had agreed to pay and/or reimburse the Producer for all operating and fixed costs incurred at the facility and to pay the Producer a fee of approximately $1,375,000 per year during the term of the agreement. The Production Agreement had an initial term expiring on June 6, 2001. Production of the Company's boneless ham product lines will be consolidated with its new Ponca City plant operations. The restructuring charge includes $4.6 million related to future annual contractual obligations and $.4 million relates to other costs and carrying charges associated with the shutdown, for which the long-term portion has been included in other noncurrent liabilities. FISCAL 1995: 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. 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-15 36 Year Ended Form 10-K THORN APPLE VALLEY, INC. AND SUBSIDIARIES May 30, 1997 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED MAY 30, 1997, MAY 31, 1996 AND MAY 26, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- ---------- -------- ---------- ---------- --------- ADDITIONS ---------------------- CHARGED CHARGED TO BALANCE AT TO OTHER BALANCE BEGINNING COST AND ACCOUNTS-- (A) AT END CLASSIFICATION OF PERIOD EXPENSES DESCRIBE DEDUCTIONS OF PERIOD -------------- ---------- -------- ---------- ---------- --------- Allowance for doubtful accounts: Year ended May 30, 1997............... $621,800 $356,055 $ 89,355 $888,500 Year ended May 31, 1996............... 789,100 38,673 205,973 621,800 Year ended May 26, 1995............... 731,800 293,810 236,510 789,100
Note A. Write-off of uncollectible accounts, net of recoveries. F-16 37 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- (3) (a) Restated Articles of Incorporation Exhibit (3)(a) is incorporated herein by reference to Exhibit 3.1 to the Company's Form S-2 Registration Statement, Registration No. 33-43287. (b) Amendment to Restated Articles of Incorporation Exhibit (3)(b) is incorporated herein by reference to Exhibit (3)(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 28, 1993. (c) By-laws, as amended to date Exhibit (3)(c) is incorporated herein by reference to Exhibit (3)(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 29, 1981. (10) Material Contracts (a) Bond Purchase Agreement, dated as of July 1, 1984, among The Onslow County Industrial Facilities and Pollution Control Financing Authority, Branch Banking and Trust Company and the Company. Exhibit (10)(a) is incorporated herein by reference to Exhibit (10)(f) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (b) Loan Agreement, dated as of July 1, 1984, between The Onslow County Industrial Facilities and Pollution Control Financing Authority and the Company. Exhibit (10)(b) is incorporated herein by reference to Exhibit (10)(g) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (c) Promissory Note in the principal amount of $6,000,000, dated July 1, 1984, from the Company payable to The Onslow County Industrial Facilities and Pollution Control Financing Authority. Exhibit (10)(c) is incorporated herein by reference to Exhibit (10)(h) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (d) Security Agreement, dated as of July 1, 1984, between Branch Banking and Trust Company and the Company. Exhibit (10)(d) is incorporated herein by reference to Exhibit (10)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991. (e) Guaranty Agreement, dated as of July 1, 1984, from the Company to Branch Banking and Trust Company. Exhibit (10)(e) is incorporated herein by reference to Exhibit (10)(j) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1991, as amended by its Form 8 dated October 10, 1991.
38 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997
EXHIBIT NUMBER DESCRIPTION ------- ----------- (f) 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. Exhibit (10)(f) is 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. (g) Loan Agreement dated as of December 1, 1993 by and between Michigan Strategic Fund and the Company relating to $5,500,000 Adjustable Rate Demand Limited Obligation Revenue Bonds. Exhibit (10)(g) is incorporated herein by reference to Exhibit (10)(ff) to the Company's Annual Report on Form 10-K for the fiscal year ended May 27, 1994. (h) 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. Exhibit (10)(h) is 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. (i) Asset Purchase Agreement, dated as of April 29, 1995, by and among the Company and Doskocil Companies Incorporated and Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company. Exhibit (10)(i) is incorporated herein by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995. (j) First Amendment to Asset Purchase Agreement, dated as of May 26, 1995, by and among the Company, Foodbrands America, Inc., successor by merger to Doskocil Companies Incorporated, Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company. Exhibit (10)(j) is incorporated herein by reference to Exhibit 2.2 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995. (k) Noncompete Agreement, dated May 30, 1995, by Foodbrands America, Inc., Wilson Foods Corporation, Concordia Foods Corporation, Dixie Foods Company and Shreveport Foods Company in favor of the Company. Exhibit (10)(k) is incorporated herein by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated May 30, 1995, as amended by its Form 8-K/A dated May 30, 1995.
39 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997
EXHIBIT NUMBER DESCRIPTION ------- ----------- (l) Note Agreement, dated as of October 1, 1994, by and between the Company and Allstate Life Insurance Company relating to $8,000,000 principal amount 8.42% Senior Notes due October 1, 2003. Exhibit 10(l) is incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1994, as amended. (m) 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. Exhibit (10)(m) is 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. (n) Marketing and Management Agreement dated November 2, 1994 by and among Michigan Livestock Exchange, Indiana Livestock Exchange and the Company. Exhibit 10(n) is 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. (o) 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. Exhibit 10(o) is 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, as amended. (p) 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. Exhibit 10(p) is 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, 1994, as amended. (q) 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. Exhibit 10(q) is incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994, as amended. (r) 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. Exhibit 10(r) is 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, 1994, as amended.
40 Year Ended Form 10-K THORN APPLE VALLEY, INC. May 30, 1997
EXHIBIT NUMBER DESCRIPTION ------- ----------- (s) 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. Exhibit 10(s) is 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, 1994, as amended. (t) Amendment to Reimbursement Agreement, dated as of September 11, 1996, between the Company and Old Kent Bank. Exhibit 10(t) is 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, 1994, as amended. (u) Intercreditor Agreement, dated as of September 11, 1996 among Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as Credit Agent, Seasonal Agent and Collateral Agent, and the lenders party thereto, as acknowledged and agreed to by the Company and its subsidiaries. Exhibit 10(u) is 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, 1994, as amended. (v) 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 Credit Agent. Exhibit 10(v) is 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, 1994, as amended. (w) Senior Secured Seasonal Line of Credit, dated as of August 5, 1997, among the Company, the lenders party thereto, and Cooperatieve Centrale Raiffeisen-Boerenleen Bank B.A., New York Branch, as agent for the lenders. (x) Amendment Agreement, dated as of August 8, 1997, among the Company, the Banks (as defined therein), and the Noteholders (as defined therein). (21) Subsidiaries of the registrant. (23) Consent of Coopers & Lybrand LLP. (27) Financial Data Schedule.
EX-10.W 2 EXHIBIT 10.W 1 EXHIBIT 10(w) Dated as of August 5, 1997 Thorn Apple Valley, Inc. 26999 Central Park Boulevard Suite 300 Southfield, Michigan 48076-4178 Re: Senior Secured Seasonal Line of Credit Gentlemen/Ladies: Thorn Apple Valley, Inc. (hereinafter referred to as "Borrower"), the undersigned Lenders (herein collectively called "Lenders" and individually called "Lender") and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch ("RBN") as Agent for the Lenders (the "Agent") hereby agree as follows : 1. COMMITMENTS, BORROWING PROCEDURES AND NOTES 1.1 Commitments. On the terms and subject to the conditions of this Agreement(including Section 4), each Lender severally agrees to make Loans (such term and others being used herein as defined in Section 9 below) pursuant to the Commitments described in this Section 1.1. 1.1.1 Commitment of Each Lender. From time to time on any Business Day occurring prior to the Commitment Termination Date, each Lender will make loans (relative to such Lender, its "Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing requested by the Borrower to be made on such day. The commitment of each Lender described in this Section 1.1.1 is herein referred to as its "Commitment." On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Loans. 1.1.2 Lenders Not Required To Make Loans. No Lender shall be required to make any Loan (x) if, after giving effect thereto, the aggregate outstanding principal amount of all Loans (a) of all Lenders would exceed the lesser of (i) the Available Borrowing Base and (ii) the Commitment Amount, or (b) of such Lender would exceed such Lender's Percentage of the lesser of (i) the Available Borrowing Base and (ii) the Commitment Amount, or 2 (y) if, after giving effect thereto, any of the "Commitment Amount" as defined in the Credit Agreement remains unused. 1.2 Reduction of Commitment Amount. The Borrower may, from time to time on any Business Day occurring after the time of the initial Borrowing hereunder, voluntarily reduce the Commitment Amount; provided, however, that all such reductions shall require at least five Business Days' prior notice to the Agent and be permanent, and any partial reduction of the Commitment Amount shall be in a minimum amount of $1,000,000 and in an integral multiple of $1,000,000. 1.3 Borrowing Procedure. By delivering a Borrowing Request to the Agent on or before 12:00 Noon, New York City time, on a Business Day, the Borrower may from time to time irrevocably request, on the day of the requested Borrowing, that a Borrowing be made in a minimum amount of $500,000 and an integral multiple of $100,000 or in the unused amount of the Commitments. The Agent shall promptly advise each Lender of such Borrowing Request. On the terms and subject to the conditions of this Agreement, each Borrowing shall be comprised of Loans, and shall be made on the Business Day, specified in such Borrowing Request. On or before 2:00 p.m., New York City time, each Lender shall deposit with the Agent same-day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Agent shall make such funds available to the Borrower by wire transfer to the accounts the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. 1.4 Notes. Each Lender's Loans under its Commitment shall be evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage of the original Commitment Amount. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Note (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of and the outstanding principal of the Loans evidenced thereby. Such notations shall be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower. -2- 3 2. REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 2.1 Repayments and Prepayments. The Borrower shall repay in full the unpaid principal amount of each Loan upon the Stated Maturity Date therefor. Prior thereto, the Borrower: (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that (i) any such prepayment shall be made pro rata among the Loans of all Lenders; and (ii) all such voluntary partial prepayments shall be in an aggregate minimum amount of $500,000 and an integral multiple of $100,000; (b) shall, if on any date the aggregate principal amount of outstanding Loans exceeds the Available Borrowing Base, as calculated in the then most recently delivered Borrowing Base Certificate, make a mandatory prepayment of all Loans equal to such excess; and (c) shall, immediately upon any acceleration of the Stated Maturity Date of any Loans pursuant to Section 7.2 or Section 7.3, repay all Loans, unless, pursuant to Section 7.3, only a portion of all Loans is so accelerated. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 3.4. No mandatory prepayment of principal under Section 2.1(b) or voluntary prepayment of principal of any Loans shall cause a reduction in the Commitment Amount unless so specified. 2.2 Interest Provisions. Interest on the outstanding principal amount of Loans shall accrue and be payable in accordance with this Section 2.2. 2.2.1 Rates. The Loans shall accrue interest at a rate per annum equal to the Alternate Base Rate from time to time in effect. 2.2.2 Post-Maturity Rates. After the date any principal amount of any Loan is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to the rate which would otherwise be in effect, plus a margin of 2%. -3- 4 2.2.3 Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) if the Borrower reduces the Commitment to zero, on the date of any payment or prepayment, in whole, of the principal outstanding on such Loan pursuant to Section 2.1(a); (c) on each Monthly Payment Date occurring after the Effective Date; and (d) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 7.2 or Section 7.3, immediately upon such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Agreement Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. 2.3 Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender, for the period (including any portion thereof when its Commitment is suspended by reason of the Borrower's inability to satisfy any condition of Section 4) commencing on the Effective Date and continuing through such Lender's Commitment Termination Date, a commitment fee at the rate of .25 of 1% per annum on such Lender's Percentage of the sum of the average daily unused portion of the Commitment Amount. Such commitment fees shall be payable by the Borrower in arrears on each Monthly Payment Date, commencing with the first such day following the Effective Date and on such Lender's Commitment Termination Date. All such fees shall be non-refundable. 3. CERTAIN PROVISIONS 3.1 Increased Capital Costs. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitment or the Loans made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, -4- 5 then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. 3.2 Taxes. All payments by the Borrower of principal of, and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's net income or receipts (such non-excluded items being called "Taxes"). In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender hereunder, the Agent or such Lender may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such Person would have received had not such Taxes been asserted. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or -5- 6 other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 3.2, a distribution hereunder by the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. Upon the request of the Borrower or the Agent, each Lender that is organized under the laws of a jurisdiction other than the United States shall, prior to the due date of any payments under the Notes, execute and deliver to the Borrower and the Agent, on or about the first scheduled payment date in each Fiscal Year, one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or such other forms or documents (or successor forms or documents), appropriately completed, as may be applicable to establish the extent, if any, to which a payment to such Lender is exempt from withholding or deduction of Taxes. 3.3 Payments, Computations, etc. Unless otherwise expressly provided, all payments by the Borrower pursuant to this Agreement, the Notes or any other Agreement Document shall be made by the Borrower to the Agent for the pro rata account of the Lenders entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 11:00 a.m., New York City time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in same day funds to each Lender its share, if any, of such payments received by the Agent for the account of such Lender. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 365 days or, if appropriate, 366 days. Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. 3.4 Sharing of Payments. If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan (other than pursuant to the terms of Section 3.1) in excess of its pro rata share of payments then or therewith obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other -6- 7 recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender to (b) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 3.5) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. 3.5 Setoff. Each Lender shall, upon the occurrence of any Default described in clauses (a) through (d) of Section 8.1.9 of the Credit Agreement or any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with such Lender; provided, however, that any such appropriation and application shall be subject to the provisions of Section 3.4 and the Intercreditor Agreement. Each Lender agrees promptly to notify the Borrower and the Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. -7- 8 3.6 Use of Proceeds. Proceeds of each Borrowing shall be used for general corporate purposes and working capital purposes of the Borrower and its Subsidiaries. Without limiting the foregoing, no proceeds of any Loan will be used to acquire any equity security of a class which is registered pursuant to Section 12 of the Securities Exchange Act of 1934 or any "margin stock," as defined in F.R.S. Board Regulation U. 4. CONDITIONS TO BORROWING 4.1 Initial Borrowing. The obligation of each Lender to fund the initial Borrowing hereunder shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 4.1 and in Section 4.2. 4.1.1 Resolutions, etc. The Agent shall have received from the Borrower and each Subsidiary a certificate, dated a date satisfactory to the Agent, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Notes and each other Agreement Document to be executed by it; and (b) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Notes and each other Agreement Document executed by it, upon which certificate each Lender may conclusively rely until it shall have received a further certificate of the Secretary or Assistant Secretary of the Borrower or such Subsidiary, as the case may be, canceling or amending such prior certificate. 4.1.2 Delivery of Notes. The Agent shall have received, for the account of each Lender, its Notes duly executed and delivered by the Borrower. 4.1.3 Opinions of Counsel. The Agent shall have received opinions, dated the date of the initial Borrowing and addressed to the Agent and all Lenders, from Honigman, Miller, Schwartz & Cohn, counsel to the Borrower, substantially in the form of Exhibit C hereto. 4.1.4 Intercreditor Agreement Certificate. The Borrower shall have certified to the Creditor Parties under the Intercreditor Agreement that the Commitment Amount shall be sufficient to meet the Borrower's projected borrowing needs for the next Seasonal Period and that this Agreement and the other Agreement Documents shall constitute the sole Replacement -8- 9 Seasonal Line of Credit Agreement while this Agreement is outstanding. 4.1.5 Closing Fees, Expenses, etc. The Agent shall have received for its own account, or for the account of each Lender, as the case may be, all fees, costs and expenses due and payable pursuant to Sections 2.4 and 10.2, if then invoiced. 4.2 All Borrowings. The obligation of each Lender to fund any Loan on the occasion of any Borrowing shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 4.2. 4.2.1 Compliance with Warranties, No Default, etc. Both before and after giving effect to any Borrowing (but, if any Default of the nature referred to in Section 8.1.5 of the Credit Agreement shall have occurred with respect to any other Indebtedness, without giving effect to the application, directly or indirectly, of the proceeds thereof) the following statements shall be true and correct: (a) the representations and warranties set forth in Section 5 hereof and in Article VI of the Credit Agreement (excluding, however, those contained in Section 6.7 of the Credit Agreement) shall be true and correct with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7 of the Credit Agreement: (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might materially adversely affect the Borrower's consolidated business, operations, assets, revenues, properties or prospects or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Agreement Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might materially adversely affect the consolidated businesses, -9- 10 operations, assets, revenues, properties or prospects of the Borrower and its Subsidiaries; (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries are in material violation of any law or governmental regulation or court order or decree; and (d) the aggregate outstanding principal amount of the Loans shall not exceed the Available Borrowing Base, as calculated in the then most recently delivered Borrowing Base Certificate pursuant to the Credit Agreement, and the Borrower shall not be delinquent in the delivery of any Borrowing Base Certificate pursuant to the Credit Agreement. 4.2.2 Borrowing Request. The Agent shall have received a Borrowing Request for such Borrowing. Each of the delivery of a Borrowing Request and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof) the statements made in Section 4.2.1 are true and correct. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS 5.1 Representations and Warranties. In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this Section 5 and as set forth in Article VI of the Credit Agreement. 5.2 Organization, etc. The Borrower is a corporation validly organized and existing and in good standing under the laws of the State of its incorporation, and it has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its obligations under this Agreement and each other Agreement Document to which it is a party. 5.3 Due Authorization, Non-Contravention, etc. The execution, delivery and performance by the Borrower of this Agreement and each other Agreement Document executed or to be executed by it are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene its Organic Documents; (ii) contravene any contractual restriction, law or governmental regulation or court decree or order binding on -10- 11 or affecting it except for such contraventions, which, in the aggregate, could not reasonably be expected to have a Material Adverse Effect; or (iii) result in, or require the creation or imposition of, any lien on any of its properties other than pursuant to the Security Documents. 5.4 Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower of this Agreement or any other Agreement Document to which it is a party or for the Borrower's participation in the consummation of the Restructuring (other than those required for the provision and perfection of Liens under the Security Documents and those the failure to obtain or effect could not reasonably be expected to have a Material Adverse Effect). 5.5 Validity, etc. This Agreement constitutes, and each other Agreement Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms. 6. Covenants; Security. The Borrower agrees to perform and comply with each and every covenant and undertaking set forth in Appendix A hereto. The Borrower shall cause all Obligations hereunder to be secured by the Security Documents in accordance with the terms thereof and of the Intercreditor Agreement. The Borrower agrees that this Agreement and the other Agreement Documents shall constitute the sole Replacement Seasonal Line of Credit Agreement while this Agreement is outstanding. 7. Events of Default. 7.1 Listing of Events of Default. Each of the following events or occurrences described in this Section 7.1 shall constitute an "Event of Default". (i) the Borrower shall default in the payment or prepayment when due of any principal of or interest on any Loan, or in the payment when due of any commitment fee or of any other Obligation and such default shall continue unremedied for two Business Days; or (ii) any Event of Default (as defined in the Credit Agreement) shall occur, regardless of whether such Credit Agreement is in full force and effect; or (iii) the Credit Agreement shall terminate; or -11- 12 (iv) the Borrower shall default in the due performance and observance of any of its obligations under Section 1.8 or Section 2 of Appendix A; or (v) the Borrower shall default in the due performance and observance of any other agreement contained herein or in any other Agreement Document executed by it and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to the Borrower by the Agent or any Lender. 7.2 Action if Bankruptcy. If any Event of Default described in clauses (a) through (d) of Section 8.1.9 of the Credit Agreement) shall occur, the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice or demand. 7.3 Action if Other Event of Default. If any Event of Default (other than any Event of Default described in clauses (a) through (d) of Section 8.1.9 of the Credit Agreement) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable and/or Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate. 8. Agent. 8.1 Actions. Each Lender hereby appoints RBN as its Agent under and for purposes of this Agreement, the Notes and each other Agreement Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the Notes and each other Agreement Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or -12- 13 expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Notes and any other Agreement Document, including reasonable attorneys' fees, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent shall not be required to take any action hereunder, under the Notes or under any other Agreement Document, or to prosecute or defend any suit in respect of this Agreement, the Notes or any other Agreement Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. 8.2 Exculpation. Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Agreement Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Agreement Document, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Agreement Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. 8.3 Successor. The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may (with the written consent of the Borrower which consent shall not be unreasonably withheld or delayed) appoint another Lender as a successor Agent, which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may (with the written consent of the Borrower which consent shall not be unreasonably withheld or delayed), on behalf of the Lenders, -13- 14 appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of: (a) this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.2 and Section 10.3 shall continue to inure to its benefit. 8.4 Loans by RBN. RBN shall have the same rights and powers with respect to (x) the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. RBN and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if RBN were not the Agent hereunder. 8.5 Credit Decisions. Each Lender acknowledges that it has, independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Agreement Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitment. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Agreement Document. 8.6 Copies, etc. The Agent shall give prompt notice to each Lender of each notice or request required or permitted to be given to the Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each -14- 15 document or instrument received for its account and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. 9. Definitions. 9.1 Definitions. The following definitions (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof and to all genders): "Agent" has the meaning set forth in the introductory paragraph hereto. "Agreement" means, on any date, this Line of Credit as originally in effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Agreement Document" means this Agreement, the Notes, the Intercreditor Agreement, the Security Documents, the Subsidiaries Guaranty and each other relevant agreement, document or instrument delivered in connection with this Agreement, as each such agreement, document or instrument may be amended, supplemented, restated or otherwise modified from time to time. "Alternate Base Rate" means, on any date a fluctuating rate of interest per annum equal to the higher of: (i) the rate of interest announced by the Agent from time to time in New York, New York as its base rate; or (ii) one percent (1%) per annum above the fluctuating rate of interest that is the rate determined by RBN to be the opening rate per annum paid or payable by it on the day in question in New York, New York for federal funds purchased overnight from other banking institutions. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by the RBN in connection with extensions of credit. Changes in the rate of interest on the Loans will take effect simultaneously with each change in the Alternate Base Rate. The Agent will give notice promptly to the Borrower and the Lenders of changes in the Alternate Base Rate. "Authorized Officer" means, relative to the Borrower, those of its officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to Section 4.1.2. -15- 16 "Available Borrowing Base" means, at any time, the excess (if any) of the Borrowing Base, as calculated in the then most recently delivered Borrowing Base Certificate, over the aggregate principal amount of all outstanding Other Borrowing Base Debt (including, without limitation, the Effective Amount of all L/C Obligations). "Borrower" means Thorn Apple Valley, Inc. "Borrowing" means the Loans made by all Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 1.1. "Borrowing Request" means an Borrowing Request and certificate signed by an Authorized Officer of the Borrower substantially in the form of Exhibit B, with appropriate insertions. "Collateral Agent" is defined in the definition of "Intercreditor Agreement" in this Section. "Commitment" is defined in Section 1.1.1. "Commitment Amount" means, on any date, $15,000,000 as such amount may be reduced from time to time pursuant to Section 1.2. "Commitment Termination Date" means February 7, 1998. "Credit Agreement" means the Amended and Restated Credit Agreement dated as of September 11, 1996, among the Borrower, the Agent, the Lenders and the other commercial lending institutions as or may become parties thereto, as such agreement is amended, supplemented, restated or otherwise modified from time to time. "Default" means any Event of Default or any Unmatured Event of Default. "Effective Date" means the date this Agreement becomes effective pursuant to Section 10.9. "Event of Default" is defined in Section 7.1. "Indemnified Parties" is defined in Section 10.3. "Indemnified Liabilities" is defined in Section 10.3. "Intercreditor Agreement" means the Intercreditor Agreement dated as of September 11, 1996 among RBN as Collateral Agent (in such capacity, the "Collateral Agent"), RBN as Agent, the Lenders and other lenders to the Borrower, as such agreement is amended, supplemented, restated or otherwise modified from time to time. -16- 17 "Lender" has the meaning set forth in the introductory paragraph hereto. "Loans" is defined in Section 1.1.1. "Note" means a promissory note of the Borrower payable to any Lender, in the form of Exhibit A hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Obligations" means all obligations (monetary or otherwise) of the Borrower arising under or in connection with this Agreement, the Notes and each other Agreement Document. "Organic Document" means, relative to any Person, its certificate of incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "Other Borrowing Base Debt" means any Indebtedness (including, without limitation, the Effective Amount of all L/C Obligations) outstanding under the Credit Agreement. "Percentage" means, relative to any Lender, the percentage set forth opposite its signature hereto, as such Percentage may be adjusted from time to time to reflect assignments made by such Lender of which the Agent has notice and to which the Agent has consented. "Person" means any natural person, corporation, partnership, firm, association, trust, government agency or any other entity, whether acting in an individual, fiduciary or other capacity. "RBN" is defined in the introductory paragraph hereto. "Required Lenders" means, at any time, Lenders holding at least 66-2/3% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, Lenders having at least 66-2/3% of the Commitments. "Security Documents" is defined in the Intercreditor Agreement. "Stated Maturity Date" means February 7, 1998. -17- 18 "Unmatured Event of Default" means any condition, occurrence or event that after notice or lapse of time or both would constitute an Event of Default. 9.2 Credit Agreement Definitions. Capitalized words used in this Agreement which are not defined in Section 9.1 above shall have the meaning ascribed to them in the Credit Agreement. 10. GENERAL. 10.1 Waivers, Amendments, etc. The provisions of this Agreement and of each other Agreement Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, change the definition of "Required Lenders," increase the Commitment Amount or the Percentage of any Lender, reduce any fees described in Section 2, or extend the Commitment Termination Date shall be made without the consent of each Lender and each holder of a Note; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Agreement Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender or the holder of any Note under this Agreement or any other Agreement Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder -18- 19 shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. 10.2 Expenses. The Borrower agrees to pay on demand all expenses of the Agent (including the fees and out-of-pocket expenses of counsel to the Agent and of local counsel, if any, who may be retained by counsel to the Agent) in connection with: (a) asset or collateral inspection and auditing and financial consultants, (b) the negotiation, preparation, execution and delivery of this Agreement and of each other Agreement Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Agreement Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated, and (c) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Agreement document. The Borrower further agrees to pay, and to save the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or any other Agreement Documents (but not including, to the extent reimbursement is prohibited by applicable law, the Oklahoma real estate mortgage tax). The Borrower also agrees to reimburse the Agent and each Lender upon demand for all reasonable out-of-pocket expenses (including Lenders' travel expenses, attorneys' fees and legal expenses) incurred by the Agent or such Lender in connection with (x) the negotiation of any restructuring (including the Restructuring) or "work-out," whether or not consummated, of any Obligations and (y) the enforcement of any Obligations. 10.3 Responsibility and Indemnity. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender and each of their respective affiliates, officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party or the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified -19- 20 Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to: (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance of this Agreement and any other Agreement Document by any of the Indemnified Parties (including any action by of on behalf of the Borrower as the result of any determination by the Required Lenders pursuant to Section 4 not to fund any Borrowing); (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the Stock or assets of any Person, whether or not the Agent or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by the Borrower or any of its Subsidiaries of any Hazardous Materials; or (e) the presence on or under, or escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Borrower or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary; except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. 10.4 Survival. The obligations of the Borrower under Sections 3.1, 10.2 and 10.3, and the obligations of the Lenders under Section 8.1, shall in each case survive any termination of this Agreement, the payment in full of all Obligations and the termination of all Commitments. -20- 21 10.5 Notices. All notices and other communications provided to any party hereto under this Agreement or any other Agreement Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address, or facsimile number set forth on Schedule 10.5 or at such other address, Telex or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. 10.6 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 10.7 Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND EACH OTHER AGREEMENT DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. This Agreement, the Notes and the other Agreement Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. 10.8 Assigns. This Agreement shall be binding upon and shall inure to the benefit of, the respective successors and assigns of the parties hereto, except that the Borrower may not assign its rights or obligations hereunder. 10.9 Execution in Counterparts, Effectiveness, etc.; Waiver. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of the Borrower and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent and the conditions set forth in Section 4.1 are met. 10.10 Waiver of Jury Trial. The Agent, each Lender and the Borrower each waives any right to a trial by jury in any action or proceeding to enforce or defend any rights under or relating to this Agreement, or any amendment, instrument, document or agreement delivered or which may in the future be delivered in connection herewith or arising from any banking relationship existing in connection with this Agreement, and agrees that any -21- 22 such action or proceeding shall be tried before a court and not before a jury. If the foregoing is acceptable to the Borrower, please indicate agreement therewith by having an authorized officer execute this Agreement where indicated below. COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., NEW YORK BRANCH as Agent By /s/ Kathleen M. Auda ------------------------------------- Title: By /s/ W. Jeffrey Vollack ------------------------------------- Title: SENIOR SECURED SEASONAL LINE OF CREDIT AGREEMENT S-1 23 PERCENTAGE LENDERS ------------------------------------------------------- 31.25% COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., NEW YORK BRANCH By /s/ Kathleen M. Auda ------------------------------------- Title: By /s/ W. Jeffrey Vollack ------------------------------------- Title: 25% OLD KENT BANK By /s/ Timothy O'Rourke ------------------------------------- Title: 25% NATIONAL CITY BANK By /s/ Marybeth S. Howe ------------------------------------- Title: 18.75% HARRIS TRUST AND SAVINGS BANK By /s/ Carl A. Blackham ------------------------------------- Title: ____ 100% ==== Agreed and Accepted: THORN APPLE VALLEY, INC. By /s/ Louis Glazier ------------------------------------- Title: SENIOR SECURED SEASONAL LINE OF CREDIT AGREEMENT S-2 24 APPENDIX, SCHEDULE AND EXHIBITS APPENDIX A Covenants Appendix SCHEDULE 10.5 Notice Addresses EXHIBIT A Note EXHIBIT B Form of Borrowing Request EXHIBIT C Form of Opinion of Messrs. Honigman Miller Schwartz and Cohn, counsel to the Borrower (See Paragraph 4.1.3) 25 EXHIBIT A NOTE $___________ _________________, 1997 FOR VALUE RECEIVED, the undersigned, THORN APPLE VALLEY, INC., a Michigan corporation (the "Borrower"), promises to pay to the order of ______________________ (the "Lender") on February 7, 1998 the principal sum of __________________ DOLLARS ($___________) or, if less, the aggregate unpaid principal amount of all Loans shown on the schedule attached hereto (and any continuation thereof) made by the Lender pursuant to that certain Senior Secured Seasonal Line of Credit, dated as of August 5, 1997 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Line of Credit"), among the Borrower, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch, as Agent, and the various financial institutions (including the Lender) as are, or may from time to time become, parties thereto. The Borrower also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rates per annum and on the dates specified in the Line of Credit. Payments of both principal and interest are to be made in lawful money of the United States of America in same day or immediately available funds to the account designated by the Agent pursuant to the Line of Credit. This Note is a Note referred to in, and evidences Indebtedness incurred under, the Line of Credit, to which reference is made for a description of the security for this Note and for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Indebtedness evidenced by this Note and on which such Indebtedness may be declared to be immediately due and payable. Unless otherwise defined, terms used herein have the meanings provided in the Line of Credit. All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. 26 THIS NOTE HAS BEEN DELIVERED IN CHICAGO, ILLINOIS AND SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. THORN APPLE VALLEY INC. By_____________________________ Title: S-2 27 LOANS AND PRINCIPAL PAYMENTS ________________________________________________________________________________ Amount of Unpaid Amount of Principal Principal Loan Made Repaid Balance Made By --------- --------- --------- ------- ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ S-3 28 EXHIBIT B BORROWING REQUEST Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch 245 Park Avenue New York, New York 10167 Attention: [Name] [Title] THORN APPLE VALLEY, INC. Gentlemen and Ladies: This Borrowing Request is delivered to you pursuant to Section 1.3 of the Senior Secured Seasonal Line of Credit Agreement, dated as of August 5, 1997 (together with all amendments, if any, from time to time made thereto, the "Line of Credit"), among Thorn Apple Valley, Inc., a Michigan corporation (the "Borrower"), certain financial institutions and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., New York Branch (the "Agent"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that a Loan be made in the aggregate principal amount of $__________ on __________, 19___. The Borrower hereby acknowledges that, pursuant to Section 4.2.2 of the Line of Credit, each of the delivery of this Borrowing Request and the acceptance by the Borrower of the proceeds of the Loans requested hereby constitute a representation and warranty by the Borrower that, on the date of such Loans, and before and after giving effect thereto and to the application of the proceeds therefrom, all statements set forth in Section 4.2.1 are true and correct in all material respects. The Borrower agrees that if prior to the time of the Borrowing requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the Borrowing requested hereby the Agent shall receive written notice to the contrary from the 29 Borrower, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made. Please wire transfer the proceeds of the Borrowing to the accounts of the following persons at the financial institutions indicated respectively: Person to be Paid Amount to be -------------------------- Name, Address, etc. Transferred Name Account No. of Transferee Lender - ------------ ---- ----------- -------------------- $___________ ____________ __________ ____________________ ____________________ Attention: _________ $___________ ____________ __________ ____________________ ____________________ Attention: _________ Balance of The Borrower ___________ ____________________ such proceeds ____________________ Attention: _________ The Borrower has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officer this ___ day of ___________, 19___. THORN APPLE VALLEY, INC. By _______________________________ Title: S-2 EX-10.X 3 EXHIBIT 10.X 1 EXHIBIT 10(X) AMENDMENT AGREEMENT This AMENDMENT AGREEMENT (as amended, restated or otherwise modified from time to time, this "Amendment Agreement") dated as of August 8, 1997, is among Thorn Apple Valley, Inc. (the "Company"), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., NEW YORK BRANCH ("Rabobank"), Old Kent Bank & Trust Co. ("Old Kent"), National City Bank ("National City"), Harris Trust and Savings Bank ("Harris Bank") (each of such banks, a "Bank" and such banks collectively, the "Banks"), Allstate Life Insurance Company ("Allstate"), Principal Mutual Life Insurance Company ("Principal Mutual") and Great-West Life & Annuity Insurance Company ("Great-West") (each of such insurance companies, a "Noteholder," and such insurance companies collective, the "Noteholders"). RECITALS WHEREAS, the Company is party to an Amended and Restated Credit Agreement (the "Credit Agreement") dated as of September 11, 1996 with the Banks, as the Lenders, and Rabobank, as the Agent for the Lenders, pursuant to which the Banks agreed to provide the Company with a $90,000,000 revolving credit facility; WHEREAS, the Company is party to a Senior Secured Seasonal Line of Credit Agreement dated as of August 5, 1997 (the "Seasonal Line of Credit Agreement") with the Banks pursuant to which the Banks agreed to provide the Company with a $15,000,000 seasonal line of credit facility; WHEREAS, the Company is party to a Note Agreement dated as of April 1, 1994, as amended pursuant to an Amendment Agreement dated as of September 11, 1996 (as amended, the "April 1 Note Agreement"), with Allstate pursuant to which Allstate purchased an aggregate of $15,000,000 of senior notes of the Company; 2 WHEREAS, the Company is party to a Note Agreement dated as of October 1, 1994, as amended pursuant to an Amendment Agreement dated as of September 11, 1996 (as amended, the "October 1 Note Agreement"), with Allstate pursuant to which Allstate purchased an aggregate of $8,000,000 of senior notes of the Company; WHEREAS, the Company is party to a Note Agreement dated as of May 15, 1995, as amended pursuant to an Amendment Agreement dated as of September 11, 1996 (as amended, the "May 15 Note Agreement" and together with the April 1 Note Agreement and the October 1 Note Agreement, the "Note Agreements"), with the Noteholders pursuant to which the Noteholders purchased an aggregate of $42,500,000 of senior notes of the Company; WHEREAS, the Company is party to a Reimbursement Agreement dated as of December 1, 1993, as amended on September 11, 1996 (as amended, the "Old Kent IRB Reimbursement Agreement"), with Old Kent relating to that certain Irrevocable Transferable Letter of Credit No. 8934 dated December 8, 1993, issued by Old Kent to PNC Bank, Ohio, National Association, as trustee; WHEREAS, the Company is party to Reimbursement Agreements dated as of August 25, 1995, May 25, 1995, July 25, 1995 and July 28, 1988, respectively, as each such Reimbursement Agreement was amended on September 11, 1996 (as amended, collectively, the "Old Kent Workers Compensation Reimbursement Agreements"), with Old Kent relating to that certain Irrevocable Transferable Letter of Credit No. 10064 dated August 28, 1995, issued by Old Kent to United Pacific Insurance Company, that certain Irrevocable Transferable Letter of Credit No. 9911 dated May 26, 1995, issued by Old Kent to the Louisiana Department of Labor Office of Worker's Compensation, that certain Irrevocable Transferable Letter of Credit No. 10009 dated July 26, 1995, issued by Old Kent to United Pacific Insurance Company, and that certain 2 3 Irrevocable Transferable Letter of Credit No. 5993 dated September 21, 1988, issued by Old Kent to the Bureau of Worker's Disability Compensation, Office of the Director; WHEREAS, the Company, as assignee of the rights and obligations of Doskocil Companies, Incorporated, is party to a Production Agreement (as amended on May 17, 1996), an Agreement to Supply Boneless Ham Muscles and an Equipment Agreement, each dated October 14, 1993 (collectively, the "IBP Agreements"), with IBP, Inc. ("IBP"), pursuant to which (i) IBP constructed a ham processing facility in Council Bluffs, Iowa (the "Council Bluffs Facility"), (ii) the Company furnished all of the production equipment used in such facility, (iii) IBP became obligated to produce at such facility, on an exclusive basis, all boneless ham products which the Company may require, and (iv) the Company agreed to pay and/or reimburse IBP for all operating and fixed costs incurred at the Council Bluffs Facility and to pay IBP an annual management fee; WHEREAS, the Company has determined that it is in its best interest to discontinue operations at the Council Bluffs Facility and to terminate the IBP Agreements as of the fourth quarter of the Company's 1997 fiscal year (the "Fourth Quarter"); WHEREAS, in connection with the discontinuation of operations at the Council Bluffs Facility and the termination of the IBP Agreements, the Company incurred a restructuring charge during the Fourth Quarter in an amount not to exceed $5,000,000 (the "Restructuring Charge"); WHEREAS, the incurrence of the Restructuring Charge by the Company has caused the Company to fail to comply with certain covenants contained in the Credit Agreement, the Seasonal Line of Credit Agreement, the Note Agreements, the Old Kent IRB Reimbursement Agreement, the Old Kent Workers Compensation Reimbursement Agreements (collectively, the "Loan Agreements") and may cause the Company to fail to comply in the future with other covenants and agreements contained in the Loan Agreements; 3 4 WHEREAS, the Company, the Banks and the Noteholders desire to make an agreement that the Restructuring Charge shall not be taken into account in determining the Company's compliance with the terms, conditions and covenants contained in the various Loan Agreements; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties to this Amendment Agreement hereby agree as follows: 1. Exclusion of Restructuring Charge. Notwithstanding anything in any of the Loan Agreements to the contrary, from and after the Effective Date (as defined below) the Restructuring Charge shall not be taken into account in determining the Company's compliance with any of the covenants contained in the Loan Agreements, and calculations necessary to determine the Company's compliance with any applicable financial covenants contained in the Loan Agreements shall exclude the Restructuring Charge. If the Company incurs any restructuring charge in excess of the Restructuring Charge, such additional restructuring charge shall be included in connection with such determination. 2. Conditions Precedent. This Amendment Agreement shall become effective when all of the conditions set forth below have been satisfied: (a) Each of the Banks and the Noteholders shall have received all of the following, each duly executed and dated the date of its delivery and in form and substance satisfactory to each of the Banks and the Noteholders, and each in sufficient number of signed counterparts to provide one for each of the Banks and Noteholders; (i) Counterpart originals of this Amendment Agreement, duly executed by the Company, the Banks and the Noteholders; and (ii) a certificate from an officer of the Company certifying that, other than as a result of the Restructuring Charge, no Event of Default or Default has occurred and is 4 5 continuing under any of the Loan Agreements and that the representations and warranties contained in the Loan Agreements are true and correct as of the date hereof, after giving effect to the transactions contemplated hereby. (b) The Company shall have provided to each of the Noteholders a copy of the fully executed and effective Seasonal Line of Credit Agreement. (c) The Company shall have provided to each of the Noteholders a calculation of the prepayment premium owed to each of the Noteholders under Section 2.1(c) of each of the Note Agreements arising from the payment of the Scheduled Amount (as defined in the applicable Note Agreements). 3. Effectiveness of this Amendment Agreement. Upon satisfaction of the conditions precedent set forth in Section 2 hereof, this Amendment Agreement shall be deemed to be effective as of the date of the Restructuring Charge (the "Effective Date"). 4. Miscellaneous. This Amendment Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Illinois. This Amendment Agreement may be executed in counterparts, and by different parties on different counterparts, each of which shall constitute one and the same agreement. Any reference to any Loan Agreement after the date hereof shall be deemed to refer to such Loan Agreement, as amended hereby, unless expressly stated otherwise. The Loan Agreements, as amended hereby, shall remain in full force and effect. This Amendment Agreement constitutes the final entire agreement by the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, and discussions, whether written or oral. 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be executed by their duly authorized officers as of the date first above written. THORN APPLE VALLEY, INC. By: /s/ Louis Glazier ---------------------------------- Title: Vice President Finance and Administration COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., NEW YORK BRANCH By: /s/ Kathleen M. Auda ---------------------------------- Title:Vice President By: /s/ W. Jeffrey Vollack ---------------------------------- Title:Vice President, Manager OLD KENT BANK & TRUST CO. By: /s/ Timothy O'Rourke ---------------------------------- Title:Vice President NATIONAL CITY BANK By: /s/ Marybeth S. Howe ---------------------------------- Title:Vice President HARRIS TRUST AND SAVINGS BANK By: /s/ Carl A. Blackham ---------------------------------- Title:Vice President [signatures continued on next page] 6 7 [signatures continued from previous page] ALLSTATE LIFE INSURANCE COMPANY By: /s/ Authorized Signature ------------------------------------- Title: ---------------------------- By: /s/ Authorized Signature ------------------------------------- Title: ---------------------------- PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By: /s/ Clint Woods ------------------------------------- Title:Counsel By: /s/ Christopher Henderson ------------------------------------- Title:Counsel GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ Ernie P. Friesen ------------------------------------- Title:Assistant Vice President By: /s/ F. A. Marr ------------------------------------- Title:Assistant Vice President AMENDMENT AGREEMENT 7 EX-21 4 EXHIBIT 21 1 Form 10-K THORN APPLE VALLEY, INC. Year Ended May 30, 1997 EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT
STATE OF NAME INCORPORATION ---- ------------- Coast Refrigerated Trucking Co., Inc........................ North Carolina Cavanaugh Lakeview Farms, Ltd............................... Michigan Crown West, Inc............................................. Michigan Frederick Holdings, Inc..................................... Michigan Gunsberg Corned Beef Company................................ Michigan Millers Transport Inc....................................... Utah National Food Express, Inc.................................. Michigan Ponca Holdings, Inc......................................... Michigan Thorn Apple Valley Foreign Sales Corporation................ Virgin Islands (U.S.) Thorn Apple Valley Holdings of Indiana, Inc................. Michigan Tillman Holdings, Inc....................................... Michigan Tri-Miller Packing Co....................................... Utah Tri-Miller Transportation Company Inc.*..................... Utah TAV Brands, Inc............................................. Michigan TAV Swine Buying Stations, Inc.............................. Michigan
- ------------------------- * 100% of the stock is owned by Tri-Miller Packing Co. and Millers Transport Inc. EX-23 5 EXHIBIT 23 1 [COOPERS & LYBRAND LETTERHEAD] EXHIBIT (23) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Thorn Apple Valley, Inc. and Subsidiaries on Form S-8 of our report dated July 24, 1997, on our audits of the consolidated financial statements and the financial statement schedule of Thorn Apple Valley, Inc. and Subsidiaries as of May 30, 1997 and May 31, 1996, and for each of the three years in the period ended May 30, 1997, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P. Detroit, Michigan August 26, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS MAY-30-1997 JUN-01-1996 MAY-30-1997 6,528,698 0 45,776,827 888,500 65,115,331 126,942,652 247,642,665 111,762,145 302,786,457 70,764,385 150,128,541 0 0 611,048 76,469,483 302,786,457 955,793,588 955,793,588 868,826,788 868,826,788 82,059,423 0 11,758,695 (5,406,241) (2,240,000) (3,166,241) 0 0 0 (3,166,241) (.53) (.53)
-----END PRIVACY-ENHANCED MESSAGE-----