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UNITED STATES 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 the fiscal year ended May 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-17896
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HANOVER FOODS CORPORATION
(Exact name of Registrant as specified in its charter)
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PENNSYLVANIA 23-0670710
(State or other jurisdiction of incorporation or organization) (IRS Employer I.D. No.)
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P.O. BOX 334, YORK STREET EXTENDED, HANOVER, PENNSYLVANIA 17331-0334
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (717) 632-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
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Name Of Each Exchange On
Title Of Each Class Which Registered
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Class A Nonvoting Common Stock None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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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 Form 10-K or any amendment to this
Form 10-K. X
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As of August 10, 1998, the estimated aggregate market value of Class B Voting
Common Stock held by non-affiliates of the Registrant was $342,380. As of August
10, 1998, the estimated aggregate market value of Class A Nonvoting Common Stock
held by non-affiliates of the Registrant was $12,761,287. (The exclusion of the
market value of shares owned by any person shall not be deemed an admission that
such person is an "affiliate" of the Registrant.) There were 426,766 shares of
Class B Voting Common Stock outstanding as of August 10, 1998. There were
290,860 shares of Class A Nonvoting Common Stock outstanding as of August 10,
1998.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "projected," or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including but not
limited to quarterly fluctuations in operating results, competition, state and
federal regulation, environmental considerations, foreign operations and risks
associated with the Year 2000 Issue. Such factors, which are discussed in the
Annual Report, could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinion or statements expressed herein with respect to future periods. As a
result, the Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made.
OVERVIEW
Hanover Foods Corporation (as used herein the term "Corporation" refers to
Hanover Foods Corporation and its consolidated subsidiaries) was incorporated on
December 12, 1924 in Harrisburg, Pennsylvania. The Corporation consists of two
(2) operating divisions: Hanover and L. K. Bowman Co.
In addition, the Corporation has five (5) wholly-owned subsidiaries, Tri-Co.
Foods Corp., Consumers Packing Company, d/b/a Hanover Foods - Lancaster
Division, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, Ltd.,
and Nittany Corporation. Tri-Co. Foods Corp. in turn has two (2) wholly-owned
subsidiaries, Alimentos Congelados Monte Bello, S.A., and Sunwise Corporation.
Originally, the Corporation was established to provide seasonal packing of
locally grown peas, beans and other vegetables. From this beginning, the
Corporation has grown to become one of the leading independent processors of
canned vegetables, frozen vegetables, frozen meat products, frozen entrees,
frozen soft pretzels, canned and frozen mushrooms, and fresh foods in the
eastern United States. The Company's raw materials are readily available, and
the Company is not dependent on a single supplier or a few suppliers. This
growth has resulted from the Corporation's extended scope of operations, new
product development and acquisitions. Currently, approximately 52% of the
Corporation's sales volume, primarily frozen sales, is transacted during the
third and fourth quarters of the Corporation's fiscal year and approximately 48%
of the Corporation's sales volume, primarily canned sales, is transacted during
the first and second quarters of the Corporation's fiscal year. See "Risk
Factors - Industry Conditions and Price and Volume Fluctuations."
The Corporation is a vertically integrated processor of vegetable products in
one industry segment. It is involved in the growing, processing, canning,
freezing, freeze-drying, packaging, marketing and distribution of its products
under its own trademarks, as well as other branded, customer and private labels.
"See Risk Factors - General Risks of the Food Industry."
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The Corporation enjoys its strongest retail sales in the mid-Atlantic states and
Florida. Introduction of frozen ethnic blends, specialty vegetables, canned
pasta, a frozen soft pretzel, refrigerated food, canned and frozen mushroom
products has enabled the Corporation to increase and expand its distribution
throughout the eastern seaboard. Distribution in the remainder of the United
States is limited to food service, military and industrial customers.
OPERATIONS
The Corporation has operations at six (6) plants in Pennsylvania, one (1) plant
in Delaware, one plant in New Jersey, and two (2) plants in Guatemala. The Board
of Directors approved construction of a Tomato Paste Plant to be located in
California. Construction cost will be approximately 5 million dollars. The costs
are to be funded from operations.
PRODUCTS
The Corporation markets its products under the brand names HANOVER, HANOVER
FARMS, MYERS, PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL'S, DUTCH
FARMS, SUNWISE, O&C (jarred onions only), SPRING GLEN FRESH FOODS, SUNNYSIDE
FOODS, AND NOTTINGHAM.
The products sold by the Corporation under these brand names include canned
vegetables, beans and pasta as well as frozen vegetables, frozen meat products,
food entrees, refrigerated and fresh foods, and canned and frozen mushrooms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year Ended May 31, 1998 Results of Operations Compared to Year
Ended June 1, 1997" in the 1998 Annual Report attached hereto as Exhibit 13
(Annual Report).
DISTRIBUTION
The Corporation's products are marketed under its brand labels and customer
private labels to the consumer for home use and also to the food service trade
which includes restaurants, fast food chains, hospitals and schools as well as
military and other governmental uses. The Company's ten largest customers
account for approximately 42% of the Company's net sales for the fiscal year
ended May 31, 1998 and 27% of accounts receivable as of May 31, 1998. No single
customer accounted for more than approximately 10% of net sales for the fiscal
years ended May 31, 1998, June 1, 1997, and March 31, 1996. The Corporation's
products are distributed directly to its customers and indirectly via
independent distributors. Sales activities are conducted via Corporation
employed sales personnel and independent sales brokerage firms. The Corporation
also manufactures private label food products for other food companies.
COMPETITION
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The Corporation markets its food products to the retail and food service sectors
in the northeastern, mid-Atlantic, southeastern and midwestern areas of the
United States. See "Risk Factors - Competition."
The principal methods of competition within the food processing industry are:
price, promotion, advertising, product quality and service.
The Corporation competes with national processors such as Curtis Burns and
Campbell and area processors such as Bush.
TRADEMARKS
The Corporation has various registered and unregistered trademarks, service
marks and licenses which are of material importance to the Corporation's
business.
BACKLOG OF ORDERS
The Corporation manufactures against customer forecasts and orders. While at any
given time there may be a backlog of orders, such backlog is not material to
total sales, nor are the changes from time to time significant.
RESEARCH AND DEVELOPMENT
The Corporation engages in research and development of new products and
improvement of existing products as well as the improvement and modernization of
its operating plants and equipment. See Note 1 of the Notes to Consolidated
Financial Statements in the Annual Report.
REGULATION
The Corporation's operations, as is the case of all food companies, are subject
to strict regulation by the U.S. Food and Drug Administration (FDA). The
Corporation is also subject to inspection by the Food Safety and Quality Service
Division (USDA), for its meat and poultry products.
FDA regulates the safety of the food product, the identity of the product, its
purity and identification of ingredients therein. USDA establishes grades for
products and regulates sanitation. The appropriate state agencies regulate the
sanitation of the Corporation's plants and the manufacture of food products
utilizing flour in any baking process.
The Corporation is also regulated by many other federal and state governmental
agencies such as Occupational Safety and Health Administration (OSHA), Federal
Trade Commission and U.S. Environmental Protection Agency. See "Risk Factors -
Regulation" and "Legal Proceedings."
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ENVIRONMENTAL CONSIDERATIONS
The Corporation continually makes investments to comply with all federal, state
and local laws, environmental rules and regulations. To date, such expenditures
have not been material with respect to the Corporation's capital expenditures,
earnings or competitive position, and are not expected to be in the future. See
"Risk Factors - Environmental Risks" and "Legal Proceedings."
SOURCES OF SUPPLY
The Corporation maintains an intimate involvement in all phases of agricultural
crop production as well as direct procurement of fresh vegetables. The
Corporation procures all of its fresh vegetable requirements through direct
contracts with farmers who cultivate and harvest the crops according to the
Corporation's specifications. In addition, the Corporation directly procures
beans, tomato based products, pasta, herbs and other ingredients, as well as
containers and packaging materials from outside vendors throughout the world. No
supplier provides more than 10% of the raw materials or packaging materials
purchased by the Corporation.
EMPLOYEES
The Corporation, its divisions and subsidiaries currently employ approximately
1,645 employees on a full-time and a seasonal basis. Approximately 1,318
employees are employed in the United States and 327 are employed in Guatemala.
A total of 577 production workers at the Hanover, PA, Centre Hall, PA and
Clayton, DE plants are members of the United Food and Commercial Workers Union -
Locals 1776, 72 and 56, respectively. The Hanover and Centre Hall, PA plants
each have their own three (3) year contract beginning January 1, 1997 and ending
December 31, 1999. The Clayton, DE plant has its own three (3) year contract
beginning January 1, 1996 and ending December 31, 1998. There are no union
contracts at any other plants or locations of the Corporation. The Corporation
has never had any strikes or labor disputes interfering with its operations.
Management considers labor relations to be excellent.
FOREIGN OPERATIONS
The Corporation's wholly-owned subsidiary, Tri-Co. Foods Corp., has two (2)
wholly-owned subsidiaries, Alimentos Congelados Monte Bello, S.A., San Jose
Pinula, Guatemala and Sunwise Corporation, Lakeland, Florida.
Alimentos Congelados Monte Bello, S.A. procures, processes and ships vegetables
produced in Guatemala. Alimentos Congelados Monte Bello, S.A. contracts with
approximately 3,000 independent farmers in Guatemala for the growing and
harvesting of broccoli, cauliflower, okra and Brussels sprouts. The raw
vegetable product purchased by the Corporation is frozen at one of two
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Corporation plants located at San Jose Pinula, Guatemala and Teculutan,
Guatemala.
Sunwise Corporation imports and distributes the Guatemalan product to Hanover
Foods Corporation.
The business of the Corporation in Guatemala is subject to the laws of Guatemala
which may place restrictions and controls on such matters as ownership, imports
and exports, prices, product lines and transfer of funds, and is also subject to
the fluctuating exchange rate between the Guatemalan quetzal and the U.S.
dollar. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Impact of Events and Commitment of Future Operations"
and "Risk Factors - Risks Associated With Foreign Operations" in the Annual
Report.
Information with respect to the revenue, cost of sales and identifiable assets
for the Corporation's foreign operations is set forth in Note 10 to the
Consolidated Financial Statements entitled "Foreign Operations" in the Annual
Report.
RISK FACTORS
Industry Conditions and Price and Volume Fluctuations
The Corporation's financial performance and growth are related to conditions in
the food processing industry. The United States food processing industry is a
mature industry. The Corporation's net sales are a function of product
availability and market pricing. In the food processing industry, product
availability and market prices tend to have an inverse relationship: market
prices tend to decrease as more product is available, whereas if less product is
available, market prices tend to increase. Product availability is a direct
result of plantings, growing conditions, crop yields and inventories, all of
which vary from year to year. In addition, price can be affected by the
planting, inventory level and individual pricing decisions of the three or four
largest processors in the industry. Generally, the market prices in the food
processing industry tend to adjust more quickly to variations in product
availability than an individual processor can adjust its cost structure; thus,
in an over-supply situation, a processor's margins likely will weaken, as
suppliers generally are not able to adjust their cost structure as rapidly as
market prices adjust for the over-supply. The Corporation typically has
experienced lower margins during times of industry over-supply. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Seasonality and Quarterly Fluctuations
The Corporation's operations are affected by the growing cycle of the vegetables
it processes. The Corporation's business can be positively or negatively
affected by weather conditions nationally and
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the resulting impact on crop yields. Favorable weather conditions can produce
high crop yields and an oversupply situation in a given year. This oversupply
typically will result in depressed selling prices and reduced profitability to
the Corporation on the inventory produced from that year's crops. Excessive rain
or drought conditions can produce low crop yields and a shortage situation. This
shortage typically will result in higher selling prices and increased
profitability to the Corporation. While the national supply situation controls
the pricing, the supply can differ regionally because of variations in weather.
Because many of the raw materials processed by the Company are agricultural
crops, production of products using these crops is predominantly seasonal. As a
result, the Company needs access to working capital financing to meet its
production requirements during these periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation", in the Annual Report.
Competition
All of the Corporation's products compete with those of other national, major
and small regional food processing companies under highly competitive
conditions. Many of the Corporation's major competitors in the market are larger
and have greater financial and marketing resources than the Corporation.
Continued industry consolidation also may increase the market strength of the
Corporation's larger competitors.
Regulation
United States and foreign governmental laws, regulations and policies directly
affect the agricultural industry and food processing industry. The Corporation
is subject to regulation by the FDA, the USDA, the Federal Trade Commission, the
Environmental Protection Agency and various state agencies with respect to
production, packaging, labeling and distribution of its food products. The
application or modification of existing, or the adoption of new, laws,
regulations or policies could have an adverse effect on the Corporation's
business and results of operations.
General Risks of the Food Industry
Food processors are subject to the risks of adverse changes in general economic
conditions; evolving consumer preferences and nutritional and health-related
concerns; changes in food distribution channels and increasing buying power of
large supermarket chains and other retail outlets that tend to resist price
increases; federal, state and local food processing controls; consumer product
liability claims; and risks of product tampering.
Environmental Risks
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods are subject to various federal, state and local laws and
regulations relating to the protection of
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the environment. Such laws and regulations have had an important effect on the
food processing industry as a whole, requiring substantially all firms in the
industry to incur material expenditures for modification of existing processing
facilities and for construction of upgraded or new waste treatment facilities.
The Corporation cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations will
be administered or interpreted or what environmental conditions may be found to
exist. Enactment of more stringent laws or regulations or more strict
interpretation of existing laws and regulations may require additional
expenditures by the Corporation, some of which could be material.
Risks Associated with Foreign Operations
Foreign operations generally involve greater risks than doing business in the
United States. Foreign economies differ favorably or unfavorably from the United
States' economy in such respects as the level of inflation and debt, which may
result in fluctuations in the value of the country's currency and real property.
Further, there may be less government regulation in various countries, and
difficulty in enforcing legal rights outside the United States. Additionally, in
some foreign countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of property or other assets,
political or social instability or diplomatic developments which could affect
the operations and assets of U.S. companies doing business in that country. Some
of these are more pronounced in third world countries such as Guatemala. At May
31, 1998, the total assets of the Corporation's foreign operations were
approximately $9.3 million.
Year 2000
Many existing computer programs, including those utilized by the Company, use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, any computer applications could fail or create
erroneous results by or at the Year 2000 (the "Year 2000 Issue"). The Company
has retained an outside consultant to manage the Company's efforts to bring its
computer system into Year 2000 compliance. The Company has contacted its
customers, key suppliers and its equipment manufacturers in an attempt to ensure
third party compliance. The Company has estimated the costs associated with
addressing the Year 2000 Issue to be approximately $350,000.
The Company has performed a review of its non-information technology and
believes that all such technology is Year 2000 compliant. Currently the Company
does not have a contingency plan in the event that correction has not been
timely made.
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ITEM 2. PROPERTIES
The following is a list of the Corporation's manufacturing, processing and
warehousing properties. The Corporation owns each of the properties, except as
noted.
UNITED STATES
Hanover, PA - Canned and jarred products processing, repackaging of
frozen vegetables, frozen soft pretzels manufacture,
dry and frozen storage. Corporate research, new
product development and quality assurance laboratory
(corporate headquarters).
Centre Hall, PA - Frozen vegetable processing. Dry and frozen storage.
Lancaster, PA - Frozen mushrooms, peppers, onions and celery,
freeze-dried food and ice manufacture. Dry and frozen
storage.
Plumsteadville, PA - Frozen food entrees, meat pies and soups manufacture.
Dry and frozen storage.
Nottingham, PA - Canned mushrooms, dry storage.
Ephrata, PA - Refrigerated, fresh foods and soups manufacture. Dry,
refrigerated and frozen storage.
Millville, NJ - Refrigerated, fresh foods and soups manufacture. Dry,
refrigerated and frozen storage. The building and
land is leased from Purity Group, Inc. which lease
expires January 15, 2000. All equipment is owned by
the company.
Clayton, DE - Frozen vegetables, meat products, frozen food entrees
and meat pies manufacture. Dry and frozen storage.
GUATEMALA
San Jose Pinula - Frozen vegetable processing, dry and frozen storage,
research and quality assurance laboratory.
Teculutan - Frozen vegetable processing, dry and frozen storage.
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ITEM 3. LEGAL PROCEEDINGS
On February 1, 1995, Michael A. Warehime, J. William Warehime and Elizabeth W.
Stick, three Class B shareholders of the Company, filed a complaint in the Court
of Common Pleas of York County, Pennsylvania against the Company and John A.
Warehime (Chairman of the Corporation), in his capacity as voting trustee of two
voting trusts entitling him to vote approximately 52% of the Class B common
stock. The Court has dismissed various claims and parties in the lawsuit and the
only remaining parties are Michael A. Warehime as plaintiff and John A. Warehime
as defendant. The only remaining claims are (i) a claim for breach of fiduciary
duty based on exercise of powers beyond those granted by certain voting trust
agreements; (ii) a claim for breach of fiduciary duty for use of the voting
trusts in a manner harmful to their beneficiaries, (iii) a count requesting
removal of John A. Warehime as the voting trustee of the voting trusts.
On September 13, 1996, certain Class A common stockholders filed a complaint in
equity against six of the Company's directors and the estate of a former
director in the Court of Common Pleas of York County, Pennsylvania (the
complaint). The suit also names the Company as a nominal defendant. The suit
sought various forms of relief including, but not limited to, rescission of the
board's April 28, 1995 approval of John A. Warehime's 1995 Employment Agreement
and the board's February 10, 1995 adjustment of directors' fees. (Since the
filing of this lawsuit, John A. Warehime's 1995 Employment Agreement was
amended.) In addition, the plaintiffs sought costs and fees incident to bringing
suit. On November 4, 1996, the complaint was amended to add additional
plaintiffs. On June 24, 1997, the Court dismissed the amended complaint for
failure to make a prior demand. An appeal has been filed from the Court's June
24, 1997 Order. On May 12, 1997, a written demand was received by the Company
from the attorney for those Class A common stockholders containing similar
allegations and the allegations raised by the Class A common stockholders were
investigated by a special independent committee of the Board of Directors and
found to be without merit.
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain
Class A shareholders filed motions for a preliminary injunction against the
Company, John A. Warehime, in his capacity as voting trustee, and all certain
directors of the Company in the Court of Common Pleas of York County,
Pennsylvania against a proposal of the Board of Directors to amend and restate
the Company's Articles of Incorporation in the manner hereafter described.
On February 13, 1997, the Board of Directors proposed an amendment and
restatement of the Company's Articles of Incorporation (the "Amended and
Restated Articles") which provides that if all of the following Class B
shareholders (or their Estates upon the death of such stockholders), Michael A.
Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and Elizabeth
W. Stick (all members of the Warehime family), do not agree in writing to the
composition of the Board of Directors or other important matters specified below
on or after the 1998 annual shareholders meeting, the trustees of the Company's
401(k) Savings Plan (or a similar employee benefit plan), acting as fiduciaries
for the employees who participate in the Plan, and the Class A shareholders may
become entitled to vote in the manner described in the document.
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The Amended and Restated Articles create a Series C Convertible Preferred Stock
and also classified the terms of the Board of Directors commencing with the
election at the 1997 annual shareholders meeting and permit directors to be
elected for four year terms as permitted by Pennsylvania law.
The motions for a preliminary injunction were dismissed by the Court on June 24,
1997. The Class B shareholders on June 25, 1997 approved the Amended and
Restated Articles (John A. Warehime being the sole Class B shareholder voting
affirmatively in his capacity as voting trustee) and the Amended and Restated
Articles became effective June 25, 1997. Appeals have been filed from the denial
of the plaintiffs' motion for a preliminary injunction.
In August 1997, the Board of Directors proposed a further amendment (the
"Amendment") to the Amended and Restated Articles to expand the definition of
"disinterested directors" in the manner described below, and to approve certain
performance based compensation for John A. Warehime solely for the purpose of
making the Corporation eligible for a federal income tax deduction pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended. A special
meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on
these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the
Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime,
in his capacity as voting trustee from voting on these proposals. This motion
was denied on August 11, 1997. Michael A. Warehime has filed an appeal. The
Amendment and the proposal under Section 162(m) were approved by Class B
Shareholders (John A. Warehime was the sole Class B shareholder to vote
affirmatively, in his capacity as voting trustee) on August 14, 1997 and the
Amendment became effective on August 14, 1997.
Under the Amendment, the definition of "disinterested directors" means the
person who, in the opinion of counsel for the Company, meet any of the following
criteria: (i) disinterested directors as defined in Section 1715(e) of the
Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are
not "interested" directors as defined in Section 1.23 of The American Law
Institute "Principles of Corporate Governance: Analysis and Recommendations"
(1994); or (iii) persons who qualify as members of the Audit Committee pursuant
to Section 303.00 of the New York Stock Exchange's Listed Company Manual.
On December 12, 1996, the Occupational Safety and Health Administration (OSHA)
cited the Company with two violations of OSHA regulations arising out of
accidents which occurred at its Clayton, Delaware plant. The proposed penalty
for each violation was $70,000. On December 18, 1996, the Company filed its
Notice of Contest, contesting both alleged violations and the proposed
penalties. On September 22, 1997, pursuant to a final order of the U.S.
Occupational Safety and Health Review Commission, the two violations were
settled between the parties without admission of liability for $4,750 and
$35,000, respectively.
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On March 24, 1997, OSHA cited the Company with twenty-two violations of OSHA
regulations arising out of plant inspections which occurred at its Clayton,
Delaware plant. The proposed penalty for said violations was $498,000. On April
11, 1997, the Company filed its Notice of Contest, contesting all of the alleged
violations and the proposed penalties. On September 22, 1997, pursuant to a
final order of the U.S. Occupational Safety and Health review Commission, three
of the twenty-two violations were settled between the parties without admission
of liability for a total of $65,000. In January 1998, the Company and OSHA
settled the remaining citations, by which the Company paid, without admission of
liability, the sum of $95,000. The settlement was approved by OSHA on February
20, 1998.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
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 STOCKHOLDER MATTERS
Information contained under the caption "Market for the Registrant's Common
Stock and Related Stockholder Matter" on page 34 of the Company's Annual Report
to Shareholders for the year ended May 31, 1998 is incorporated herein by
reference in response to this item.
ITEM 6. SELECTED FINANCIAL DATA
Information contained under the caption "Financial Highlights Five Year" on page
7 of the Company's Annual Report to Shareholders for the year ended May 31, 1998
is incorporated herein by reference in response to this item.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Incorporated by reference from the section entitled Management's Discussion and
Analysis of Financial Condition and Results of Operation in the Company's Annual
Report to Shareholders for the year ended May 31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements for Hanover Foods Corporation and Subsidiaries are
contained on pages 9 through 33 of the Company's Annual Report to Shareholders
for the year ended May 31, 1998, and quarterly financial data is contained on
page 34 of the Company's annual report to shareholders for the year ended May
31, 1998 and are incorporated herein by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated by reference from the Company's 1998 Proxy Statement which was
previously filed with SEC on August 10, 1998.
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(b) EXECUTIVE OFFICERS OF THE CORPORATION WHO ARE NOT ALSO DIRECTORS (AS OF
AUGUST 10, 1997)
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NAME, AGE, AND TERM PRINCIPAL OCCUPATION DURING
OF OFFICE PAST FIVE (5) YEARS
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GARY T. KNISELY, ESQUIRE Executive Vice President - 1995-Present;
Executive Vice President & Secretary Vice President - Administration - 1989-1995;
1995-Present Counsel-1987-Present; Secretary-1987-
Age: 49 Present. Mr. Knisely also acts as Chief
Financial Officer of the Corporation
(January 1996 - Present).
PEITRO D. GIRAFFA, JR. Vice President-Controller-1996-Present;
Vice President-Controller Controller-1984-1996. Mr. Giraffa also
1984-Present Chief Accounting Officer of the Corporation
Age: 52 (1996-Present).
ALAN T. YOUNG Vice President-Transportation-1996-Present;
Vice President-Purchasing & Vice President-Operations-1991-1996;
Transportation Director of Corporate Logistics-1990-1991;
Age: 55 Manager of Corporate Systems-1986-1990.
EDWARD L. BOECKEL, JR. Treasurer-July 1997-Present; Banking &
Treasurer Insurance Manager-1995-1997; Vice
1997-Present President CoreStates Bank-1992-1995.
Age: 47
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(d) FAMILY RELATIONSHIPS OF DIRECTORS AND EXECUTIVE OFFICERS
None.
(h) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that
directors and certain officers of the Corporation file reports of
ownership and changes in ownership with the Securities and Exchange
Commission as to the shares of the Corporation Class A Common Stock
beneficially owned by them.
Based solely on its review of copies of such forms received by it, the
Corporation believes that during the Corporation's fiscal year ended
May 31, 1998, all filing requirements applicable to its directors and
officers were complied with in a timely fashion.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's 1998 Proxy Statement which was
previously filed with SEC on August 10, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
CERTAIN SECURITY HOLDERS
Incorporated by reference from the Corporation's 1998 Proxy Statement which was
previously filed with SEC on August 10, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's 1998 Proxy Statement which was
previously filed with SEC on August 10, 1998.
15
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Hanover Foods Corporation and Subsidiaries (See Exhibit 13)
2. Financial Statement Schedules
None
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the financial statements or
notes thereto.
3. Exhibits
The following exhibits are filed herein or have been
previously filed with the Securities and Exchange Commission
and are incorporated by reference herein.
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
3(a) Registrant's Amended and Restated By-laws enacted
July 24, 1998 are attached as Exhibit 3(a).
3(b) Registrant's Amended and Restated Articles of
Incorporation are attached as Exhibit 3(b).
3(c) Amendment No. 1 to Registrant's Amended and Restated
Articles of Incorporation is attached as Exhibit
3(c).
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
4(a) Note Agreement dated as of December 1, 1991, between
the Corporation and Allstate Life Insurance Company,
with regard to the Corporation's $25,000,000, 8.74%
Senior Notes Due March 15, 2007, is incorporated
herein by reference to the Form 10-K filed June, 1992
wherein such Exhibit is designated as 4(a).
4(b) June 20, 1995 First Amendment to December 1, 1991
Note Agreement between the Corporation and Allstate
Life Insurance Company (the "Note Agreement") and
Waiver of Compliance with Section 5.9 of the Note
Agreement is incorporated herein by reference to
Exhibit 4(b) of the Form 10-K filed on July 3, 1995.
4(c) June 24, 1996 waiver to covenants in the December 1,
1991 Note Agreement between the Corporation and
Allstate Life Insurance Company (the "Note
Agreement") is incorporated herein by reference to
Exhibit 4(c) of the Form 10-K filed on July 2, 1996.
4(d) July 1, 1996 Second Amendment to December 1, 1991
Note Agreement between the Corporation and Allstate
Life Insurance Company (the "Note Agreement") is
incorporated by reference to Exhibit 4(d) of the Form
10-K filed on August 27, 1997.
9(a) April 5, 1988 Voting Trust Agreement is incorporated
herein by reference to the Form 10 filed July 28,
1989, wherein such Exhibit is designated as 9(a).
9(b) December 1, 1988 Voting Trust Agreement is
incorporated herein by reference to the Form 10 filed
July 28, 1989, wherein such Exhibit is designated as
9(b).
9(c) Writing dated April 5, 1988 appointing John A.
Warehime as Successor Voting Trustee under Voting
Trust Agreement dated December 1, 1988, is
incorporated herein by reference to the Form 8-K
filed June 1, 1990, wherein such Exhibit is
designated as 9(c).
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
9(d) Writing dated December 1, 1988 appointing John A.
Warehime as Successor Voting Trustee under Voting
Trust Agreement dated December 1, 1988, is
incorporated herein by reference to the Form 8-K
filed June 1, 1990, wherein such Exhibit is
designated as 9(d).
10(a) April 28, 1988 Sublease Agreement between Warehime
Enterprises, Inc. and Hanover Brands, Inc., is
incorporated herein by reference to the Form 10 filed
July 28, 1989, wherein such Exhibit is designated as
10(a).
10(b) April 28, 1988 Agreement of Sale between Warehime
Enterprises, Inc. and Hanover Brands, Inc., is
incorporated herein by reference to the Form 10 filed
July 28, 1989, wherein such Exhibit is designated as
10(b).
10(c) March 3, 1989 Agreement of Sale between Warehime
Enterprises, Inc. and Hanover Brands, Inc., is
incorporated herein by reference to the Form 10 filed
July 28, 1989, wherein such Exhibit is designated as
10(c).
10(d) November 14, 1986 Employment Agreement between
Hanover Brands, Inc., and Patricia H. Townsend is
incorporated herein by reference to the Form 10 filed
July 28, 1989, wherein such Exhibit is designated as
10(i).
10(e) May 10, 1991 Amendment to April 28, 1988 Agreement of
Sale between Warehime Enterprises, Inc. and Hanover
Brands, Inc., is incorporated herein by reference to
the Form 10-K filed June 29, 1991, wherein such
Exhibit is designated as 10(k).
10(f) October 1, 1994 Amendment to the June 1, 1994 Lease
Agreement between Hanover Foods Corporation and Food
Service East, Inc. is incorporated herein by
reference to Exhibit 10(p) of the Form 10-K filed on
July 3, 1995.
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10(g) June 12, 1995 Employment Agreement between Hanover
Foods Corporation and John A. Warehime is
incorporated herein by reference to Exhibit 10(r) of
the Form 10-K filed on July 3, 1995.
10(h) April 4, 1994 Lease Agreement between John A. and
Patricia M. Warehime and Hanover Foods Corporation is
incorporated herein by reference to Exhibit 10(t) of
the Form 10-K filed on July 2, 1996.
10(i) July 27, 1995 Installment Sales Agreement for the
purchase of 5,148 shares of Hanover Foods Class B
Voting Common Stock from Cyril T. Noel, individually,
and Cyril T. Noel and Frances L. Noel, jointly, is
incorporated herein by reference to Exhibit 10(u) of
the Form 10-K filed on July 2, 1996.
10(j) April 1, 1996 Installment Sales Agreement for the
purchase of 1,210 shares of Hanover Foods Class B
Voting Common Stock and 5,990 shares of Hanover Foods
Class A Nonvoting Common Stock from John R. Miller,
Jr. is incorporated herein by reference to Exhibit
10(v) of the Form 10-K filed on July 2, 1996.
10(k) January 23, 1997 Employment Agreement between Hanover
Foods Corporation and Gary T. Knisely is incorporated
herein by reference to Exhibit 10(k) of the Form 10-K
filed on August 27, 1997.
10(l) February 13, 1997 Amendment No. 1 to June 12, 1995
Employment Agreement between Hanover Foods
Corporation and John A. Warehime is incorporated
herein by reference to Exhibit 10(l) of the Form 10-K
filed on August 27, 1997.
10(m) August 1, 1997 Amendment No. 2 to June 12, 1995
Employment Agreement between Hanover Foods
Corporation and John A. Warehime is incorporated
herein by reference to Exhibit 10(m)of the Form 10-K
filed on August 27, 1997.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
10(n) May 21, 1997 Senior Executive Agreement between
Hanover Foods Corporation and Clement A. Calabrese is
incorporated herein by reference to Exhibit 10(n) of
the Form 10-K filed on August 27, 1997.
10(o) May 21, 1997 Senior Executive Agreement between
Hanover Foods Corporation and Alan T. Young is
incorporated herein by reference to Exhibit 10(o) of
the Form 10-K filed on August 27, 1997.
10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement
is incorporated herein by reference to Exhibit 10(p)
of the Form 10-K filed on August 27, 1997.
10(q) Annual Top Management Cash Bonus Program is attached
as Exhibit 10(q).
11 Computation of Earnings Per Share is incorporated by
reference from Note 11 entitled Reconciliation of
Numerator and Denominator for Basic and Diluted
Earnings per Share in the Company's Annual Report to
Shareholders for the year ended May 31, 1998.
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
13 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following financial statements of Hanover Foods
Corporation and Subsidiaries are incorporated herein
by reference to the Company's Annual Report to
Shareholders for the year ended May 31, 1998.
Independent Auditors' Report
Consolidated Statements of Earnings for the Years
Ended May 31, 1998, June 1, 1997, nine weeks ended
June 2, 1996 and year ended March 31, 1996
Consolidated Balance Sheets for the Years Ended May
31, 1998 and June 1, 1997
Consolidated Statements of Stockholders' Equity for
the Years Ended May 31, 1998, June 1, 1997, nine
weeks ended June 2, 1996 and year ended March 31,
1996
Consolidated Statements of Cash Flows for the Years
Ended May 31, 1998, June 1, 1997, nine weeks ended
June 2, 1996 and year ended March 31, 1996
Notes to Consolidated Financial Statements for the
Years Ended May 31, 1998 and June 1, 1997
21 A list setting forth subsidiaries of the Registrant
is attached as Exhibit 21.
27 The Financial Data Schedule is attached as Exhibit
27.
</TABLE>
(b) Reports on Form 8-K
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of Hanover Foods
Corporation and in the capacity and on the date indicated.
DATE: AUGUST 28, 1998
HANOVER FOODS CORPORATION
By: /s/ John A. Warehime
------------------------------------
JOHN A. WAREHIME
Chairman, President and
Chief Executive Officer
22
<PAGE> 23
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of Hanover Foods
Corporation and in the capacity and on the date indicated.
DATE: AUGUST 28, 1998
By: /s/ John A. Warehime
----------------------------------------
John A. Warehime
Chairman, President,
Chief Executive Officer and Director
By: /s/ Gary T. Knisely
----------------------------------------
Gary T. Knisely
Executive Vice President
(Chief Financial Officer)
By: /s/ Pietro D. Giraffa, Jr.
----------------------------------------
Pietro D. Giraffa, Jr.
Vice President - Controller
(Chief Accounting Officer)
By: /s/ Arthur S. Schaier
----------------------------------------
Arthur S. Schaier
Director
By: /s/ Cyril T. Noel
----------------------------------------
Cyril T. Noel
Director
By: /s/ T. Edward Lippy
----------------------------------------
T. Edward Lippy
Director
By: /s/ Clayton J. Rohrbach, Jr.
----------------------------------------
Clayton J. Rohrbach, Jr.
Director
By: /s/ James G. Sturgill
----------------------------------------
James G. Sturgill
Director
By: /s/ James A. Washburn
----------------------------------------
James A. Washburn
Director
23
<PAGE> 24
HANOVER FOODS CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3(a) Registrant's Amended and Restated By-laws enacted July 24, 1998 are
attached as Exhibit 3(a).
3(b) Registrant's Amended and Restated Articles of Incorporation are
incorporated herein by reference to Exhibit 3(b) of the Form 10-K filed
on August 27, 1997.
3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of
Incorporation is incorporated herein by reference to Exhibit 3(c) of
the Form 10-K filed on August 27, 1997.
4(a) Note Agreement dated as of December 1, 1991, between the Corporation
and Allstate Life Insurance Company, with regard to the Corporation's
$25,000,000, 8.74% Senior Notes Due March 15, 2007, is incorporated
herein by reference to the Form 10-K filed June, 1992 wherein such
Exhibit is incorporated herein by reference to Exhibit 4(a) of the Form
10-K filed on August 27, 1997.
4(b) June 20, 1995 First Amendment to December 1, 1991 Note Agreement
between the Corporation and Allstate Life Insurance Company (the "Note
Agreement") and Waiver of Compliance with Section 5.9 of the Note
Agreement is incorporated herein by reference to Exhibit 4(b) of the
Form 10-K filed on July 3, 1995.
4(c) June 24, 1996 waiver to covenants in the December 1, 1991 Note
Agreement between the Corporation and Allstate Life Insurance Company
(the "Note Agreement") is incorporated herein by reference to Exhibit
4(c) of the Form 10-K filed on July 2, 1996.
4(d) July 1, 1996 Second Amendment to December 1, 1991 Note Agreement
between the Corporation and Allstate Life Insurance Company (the "Note
Agreement") is incorporated herein by reference to Exhibit 4(d) of the
Form 10-K filed on August 27, 1998.
9(a) April 5, 1988 Voting Trust Agreement is incorporated herein by
reference to the Form 10 filed July 28, 1989, wherein such Exhibit is
designated as 9(a).
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
9(b) December 1, 1988 Voting Trust Agreement is incorporated herein by
reference to the Form 10 filed July 28, 1989, wherein such Exhibit is
designated as 9(b).
9(c) Writing dated April 5, 1988 appointing John A. Warehime as Successor
Voting Trustee under Voting Trust Agreement dated December 1, 1988, is
incorporated herein by reference to the Form 8-K filed June 1, 1990,
wherein such Exhibit is designated as 9(c).
9(d) Writing dated December 1, 1988 appointing John A. Warehime as Successor
Voting Trustee under Voting Trust Agreement dated December 1, 1988, is
incorporated herein by reference to the Form 8-K filed June 1, 1990,
wherein such Exhibit is designated as 9(d).
10(a) April 28, 1988 Sublease Agreement between Warehime Enterprises, Inc.
and Hanover Brands, Inc., is incorporated herein by reference to the
Form 10 filed July 28, 1989, wherein such Exhibit is designated as
10(a).
10(b) April 28, 1988 Agreement of Sale between Warehime Enterprises, Inc. and
Hanover Brands, Inc., is incorporated herein by reference to the Form
10 filed July 28, 1989, wherein such Exhibit is designated as 10(b).
10(c) March 3, 1989 Agreement of Sale between Warehime Enterprises, Inc. and
Hanover Brands, Inc., is incorporated herein by reference to the Form
10 filed July 28, 1989, wherein such Exhibit is designated as 10(c).
10(d) November 14, 1986 Employment Agreement between Hanover Brands, Inc.,
and Patricia H. Townsend is incorporated herein by reference to the
Form 10 filed July 28, 1989, wherein such Exhibit is designated as
10(i).
10(e) May 10, 1991 Amendment to April 28, 1988 Agreement of Sale between
Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated
herein by reference to the Form 10-K filed June 29, 1991, wherein such
Exhibit is designated as 10(k).
10(f) October 1, 1994 Amendment to the June 1, 1994 Lease Agreement between
Hanover Foods Corporation and Food Service East, Inc. is incorporated
herein by reference to Exhibit 10(p) of the Form 10-K filed on July 3,
1995.
10(g) June 12, 1995 Employment Agreement between Hanover Foods Corporation
and John A. Warehime is incorporated herein by reference to Exhibit
10(r) of the Form 10-K filed on July 3, 1995.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
10(h) April 4, 1994 Lease Agreement between John A. and Patricia M. Warehime
and Hanover Foods Corporation is incorporated herein by reference to
Exhibit 10(t) of the Form 10-K filed on July 2, 1996.
10(i) July 27, 1995 Installment Sales Agreement for the purchase of 5,148
shares of Hanover Foods Class B Voting Common Stock from Cyril T. Noel,
individually, and Cyril T. Noel and Frances L. Noel, jointly, is
incorporated herein by reference to Exhibit 10(u) of the Form 10-K
filed on July 2, 1996.
10(j) April 1, 1996 Installment Sales Agreement for the purchase of 1,210
shares of Hanover Foods Class B Voting Common Stock and 5,990 shares of
Hanover Foods Class A Nonvoting Common Stock from John R. Miller, Jr.
is incorporated herein by reference to Exhibit 10(v) of the Form 10-K
filed on July 2, 1996.
10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation
and Gary T. Knisely is incorporated herein by reference to Exhibit
10(k) of the Form 10-Kfiled on August 27, 1997.
10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement
between Hanover Foods Corporation and John A. Warehime is incorporated
herein by reference to Exhibit 10(l) of the Form 10-K filed on August
27, 1997.
10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement
between Hanover Foods Corporation and John A. Warehime is incorporated
herein by reference to Exhibit 10(m) of the Form 10-K filed on August
27, 1997.
10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods
Corporation and Clement A. Calabrese is incorporated herein by
reference to Exhibit 10(n) of the Form 10-K filed on August 27, 1997.
10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods
Corporation and Alan T. Young is incorporated herein by reference to as
Exhibit 10(o) of the Form 10-K filed on August 27, 1997.
10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is incorporated
herein by reference to as Exhibit 10(p) of the Form 10-K filed on
August 27, 1997.
10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q).
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
11 Computation of Earnings Per Share is incorporated by reference from
Note 11 entitled Reconciliation of Numerator and Denominator for Basic
and Diluted Earnings per Share in the Company's Annual Report to
Shareholders for the year ended May 31, 1998
13 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following financial statements of Hanover Foods Corporation and
Subsidiaries are incorporated herein by reference to the Company's
Annual Report to Shareholders for the year ended May 31, 1998
Independent Auditors' Report
Consolidated Statements of Earnings for the Years Ended May 31, 1998
and June 1, 1997, nine weeks ended June 2, 1996 and year ended March
31, 1996
Consolidated Balance Sheets for the Years Ended May 31, 1998 and June
1, 1997
Consolidated Statements of Stockholders' Equity for the Years Ended May
31, 1998 and June 1, 1997, nine weeks ended June 2, 1996 and year ended
March 31, 1996
Consolidated Statements of Cash Flows for the Years Ended May 31, 1998
and June 1, 1997, nine weeks ended June 2, 1996 and year ended March
31, 1996
Notes to Consolidated Financial Statements for the Years Ended May 31,
1998 and June 1, 1997
21 A list setting forth subsidiaries of the Registrant is attached as
Exhibit 21.
27 The Financial Data Schedule is attached as Exhibit 27.
</TABLE>
27
<PAGE> 1
EXHIBIT 3(a)
AMENDED AND RESTATED
BY-LAWS OF HANOVER FOODS CORPORATION
These Bylaws are adopted by this Corporation and are supplemental to the
Pennsylvania Business Corporation Law of 1988 as it may from time to time be
amended.
ARTICLE I. GENERAL
Section 1. office
The principal office of Hanover Foods Corporation (the "Company") shall be in
Penn Township, York County, Pennsylvania. (post Office Hanover, Pa.)
Section 2. Seal
The Company shall have a common seal containing the words "Hanover Foods
Corporation - Pennsylvania" in a circle within which the word "SEAL" is
contained.
Section 3. Fiscal Year
The fiscal year of the Company shall end with the close of business on the
Sunday nearest May 31st.
ARTICLE II. SHAREHOLDERS
Section 1. Place of Meetings
All meetings of the shareholders shall be held at the principal office of the
Company or at any other place, within or without the Commonwealth of
Pennsylvania, designated in the notice of the meeting.
Section 2. Annual Meeting
The annual meeting of the shareholders shall be held each year on a date and at
the time and place set by the Board of Directors; or if no date or time is set,
on the third Friday of August at 10:00 a.m.
28
<PAGE> 2
Section 3. Special Meetings
Special meetings of the shareholders may be called at any time by the Chairman,
or at the request of either a majority of the directors, or shareholders
representing twenty percent (201;) of the issued and outstanding Class B Common
Stock or that higher percentage prescribed by the Articles. At any time, upon
written request of any person entitled to call a special meeting, the Secretary
shall call a special meeting of the shareholders to be held at the time as the
Secretary may fix, not less than five (5) nor more than sixty (60) days after
the receipt of the request. If the Secretary does not call the meeting, the
person making the request may do so.
Section 4. Notice of Meetings
The Secretary shall give written notice of shareholders meetings to shareholders
of record entitled to vote at the meeting, at least five (5) days prior to the
date fixed for the meeting unless a greater period of notice in a particular
case is required by law. Ten (10) days notice shall be given if it is a special
meeting called to elect directors. Notice may be given either personally or by
mail, telegram, or facsimile to each shareholder at his address appearing on the
books of the Company. The notice shall specify the place, day, and hour of the
meeting and, in the case of a special meeting, the general nature of the
business to be transacted. No notice of an adjourned meeting or of the business
to be transacted at an adjourned meeting need be given other than by
announcement at the meeting at which adjournment is taken.
Section 5. Waiver of Notice
A waiver of notice in writing signed by the person entitled to notice, whether
before or after the time stated for the meeting, shall be deemed equivalent to
the giving of notice. Attendance of a person either in person or by proxy at any
meeting shall constitute a waiver of notice of the meeting, except where the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting was not
lawfully called or convened.
Section 6. Quorum
The presence in person or by proxy at a shareholders' meeting of a majority of
all votes entitled to be cast with respect to each class of stock shall
constitute a quorum. Shareholders present at a duly organized meeting can
continue to do business until adjournment, notwithstanding the withdrawal of
shareholders which leaves less than a quorum.
29
<PAGE> 3
Section 7. Adjournment of Meeting
If a meeting cannot be organized because a quorum has not attended, those
present may adjourn the meeting to any time and place they determine. In the
case of any meeting called for the election of directors, those present at the
adjourned meeting and who attend the second of any adjourned meetings, although
less than a quorum, shall nevertheless constitute a quorum for the purpose of
electing directors. Any meeting at which directors are to be elected shall be
adjourned only from day to day until the directors have been elected.
Section 8. Voting Power
All voting power incident to the Company's stock shall be vested in the holders
of the Class B common stock. The holders of the Class A common stock shall have
no right to vote at any meeting of shareholders, except as may be specifically
required by law or the Articles of the Company. All questions shall be decided
by the vote of the holders of shares constituting a majority of the voting power
of all shares represented and entitled to vote at any meeting unless otherwise
specifically provided by law or by the Articles of the Company.
Section 9. Proxies
Every shareholder may vote either in person or by proxy. Every proxy shall be
executed in writing by the shareholder or by his duly authorized attorney in
fact and filed with the Secretary of the Company. A proxy, unless coupled with
an interest, shall be revocable at will, not withstanding any other agreement or
any provision in the proxy to the contrary, but the revocation of a proxy shall
not be effective until notice thereof has been given to the Secretary of the
Company. No unnerved proxy shall be valid after eleven (11) months from the date
of its execution.
Section 10. Determination of Shareholders of Record
The Board of Directors may set, in advance, a record date for the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders, or to receive payment of any dividend or to make a determination
of shareholders for any other proper purpose. The date, in any case, shall not
be prior to the close of business on the day the record date is fixed and shall
be not more than sixty (60) days, and in the case of a meeting of shareholders
not less than ten (10) days, before the date on which the meeting or particular
action requiring the determination of shareholders is to be held or taken.
30
<PAGE> 4
In lieu of fixing a record date, the Board of Directors may provide that the
stock transfer books shall be closed for a stated period but not longer than
twenty (20) days. If the stock transfer books are closed for the purpose of
determining shareholders entitled to notice of or to vote at a meeting of
shareholders, the books shall be closed for at least ten (10) days before the
date of the meeting.
Section 11. Voting Lists
The officer or agent having charge of the transfer books for shares of the
Company shall make a complete list of the shareholders entitled to vote at each
meeting of shareholders. The list shall be produced and kept open at the time
and place of the meeting, and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The list shall be arranged in
alphabetical order with the address of and the number of shares held by each
shareholder.
Section 12. Presiding Officer
All meetings of the shareholders shall be called to order and presided over by
the Chairman, or in his absence, by the President, Vice President (in order of
seniority) or Secretary, or if none of them is present, by a chairman elected by
the shareholders. The officer presiding over a shareholders, meeting shall have
the right and authority to prescribe such rules, regulations and procedures and
to do all such acts and things as are necessary or desirable for the proper
conduct of the meetings at which he presides, including, without limitation, the
establishment of the procedures for the maintenance of order, safety,
limitations on the time allotted to questions or comments on the affairs of the
Company, restrictions on entry to any such meeting after the time prescribed for
the commencement thereof, and the opening and closing of the voting polls. The
revocation of a proxy shall not be effective until written notice thereof has
been given to the Secretary of the Company.
ARTICLE III. DIRECTORS
Section 1. Number
The business and affairs of the Company shall be managed by a Board of
Directors, who need not be residents of the Commonwealth of Pennsylvania or
shareholders of the Company. The Board of Directors shall have the power to fix
the number of directors and, from time to time, by proper resolution, to
increase or decrease the number without a vote of the shareholders, provided
that the number so determined shall not be less than seven (7) nor more than
fifteen (15).
31
<PAGE> 5
Section 2. Election and Term
Effective at the annual shareholders meeting to be held in 1997, the Board of
Directors shall be divided into four (4) classes, as nearly as equal in number
as possible, known as Class A, consisting of one (1) director, Class B,
consisting of two (2) directors, Class C, consisting of two (2) directors, and
Class D, consisting of two (2) directors. The Class A director shall serve until
the annual meeting of shareholders to be held in 1998. At the annual meeting of
shareholders to be held in 1998, the Class A director shall be elected for a
term of four (4) years and, after expiration of such term, shall thereafter be
elected every four (4) years for four (4) year terms. The Class B directors
shall serve until the annual meeting of shareholders to be held in 1999. At the
annual meeting of shareholders to be held in 1999, the Class B directors shall
be elected for a term of four (4) years and, after the expiration of such term,
shall thereafter be elected every four (4) years for four (4) year terms. The
Class C directors shall serve until the annual meeting of shareholders to be
held in 2000. At the annual meeting of shareholders to be held in 2000, the
Class C directors shall be elected for a term of four (4) years and, after the
expiration of such term, shall thereafter be elected every four (4) years for
four (4) year terms. The Class D directors shall serve until the annual meeting
of shareholders to be held in 2001. At the annual meeting of shareholders to be
held in 2001, the Class D directors shall be elected for a term of four (4)
years and, after the expiration of such term, shall thereafter be elected every
four (4) years for four (4) year terms. Each director shall serve until his
successor shall have been elected and shall qualify, even though his term of
office as herein provided has otherwise expired, except in the event of his
earlier death, resignation, removal or disqualification.
Section 3. Nominations
Nominations for election to the Board of Directors may be made by the Board of
Directors or by any shareholder of a class of stock entitled to vote for the
election of directors. Nominations, other than those made by or on behalf of the
Board of Directors, shall be made in writing, and shall be delivered to the
Secretary not later than June 1 of the calendar year in which the meeting to
elect the director or directors is to be held. A nomination, other than those
made by or on behalf of the Board of Directors, shall contain or be accompanied
by the following:
(a) The name and address of each proposed nominee;
(b) The qualifications of each proposed nominee;
(c) All other information required by Schedule 14A adopted by the
Securities and Exchange Commission under the Securities
Exchange Act of 1934; and
(d) Written confirmation executed by the proposed nominee that
such proposed nominee has agreed to serve if elected.
32
<PAGE> 6
Nominations not made in accordance with this Section shall be disregarded by the
Chairman of the meeting and the judge or judges of election shall disregard all
votes cast for that nominee.
Section 4. Vacancies
Vacancies in the Board of Directors shall be filled by a majority vote of the
remaining members of the Board even though less than a quorum, and each person
so elected shall serve until his successor is elected. Any vacancy, including
vacancies resulting from death, resignation or an increase in the number of
directors may be filled by the vote of a majority of the remaining directors
though less than a quorum.
Section 5. Regular Meetings
The Board of Directors shall hold an annual meeting within two (2) days after
the annual meeting of the shareholders and may hold other meetings at any time
and place the Board may determine.
Section 6. Special Meetings
The Board of Directors may hold special meetings called by the Chairman, the
Secretary or a majority of the directors. Each meeting shall be held at a time
and place designated in the notice of the meeting.
Section 7. Notice of Meetings
Written notice of all meetings except the annual meeting of the Board of
Directors shall be given by, or at the direction of, the person calling the
meeting at least one (1) day prior to the day named for the meeting.
Section 8. Quorum
A majority of the directors in office shall constitute a quorum for the
transaction of business and the acts of a majority of the directors present at a
meeting at which a quorum is present shall be the acts of the Board of
Directors. If all directors consent in writing to any action to be taken by the
Company, that action shall be as valid a corporate action as though it had been
authorized at a meeting of the Board of Directors. The consent signed by all
directors shall be filed with the Secretary.
33
<PAGE> 7
Section 9. Powers of Board of Directors
Except as otherwise provided by law or by the Articles or by-laws of the
Company, all general and special powers of the Company shall be exercised by or
under the authority of the Board of Directors of the Company. The Board of
Directors may from time to time adopt regulations with respect to the powers and
duties of the officers of the Company and the conduct and management of the
Company's business as the Board deems proper.
Section 10. Financial Reports to Shareholders
The Board of Directors shall cause a financial report as of the closing date of
the preceding fiscal year to be sent to the shareholders within 120 days after
the close of the Company's fiscal year. The report shall give a full, clear and
complete statement of the business and conditions of the Company. The report
shall set forth a balance sheet as of the closing date of the preceding fiscal
year together with a statement of income and profit and loss for the year ended
on that date prepared in the form ordinarily used by accountants for the
particular kind of business carried on by the Company. All reports shall be
verified by a certified public accountant who is not a director or full time
employee of the Company or by a firm of practicing public accountants, at least
one member of which is a certified public accountant.
Section 11. Committees
The Board of Directors may from time to time appoint standing or special
committees as it may deem for the best interests of the Company. No committee
shall have any powers except that expressly conferred upon it by the Board of
Directors.
Section 12. Personal Liability of Directors
A Director of this Company shall not be personally liable as such for monetary
damages for any action taken, or any failure to take any action, unless: (1) the
Director has breached or failed to perform the duties of his office in good
faith, in a manner he reasonably believes to be in the best interests of the
company, and with that care, including reasonable inquiry, skill and diligence,
a person of ordinary prudence would use under similar circumstances; and (2) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
This section shall not limit a Director's liability for monetary damages to the
extent prohibited by the Pennsylvania Business Corporation Law of 1988.
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<PAGE> 8
Section 13. Mandatory Indemnification of Directors, and Officers
The Company shall indemnify any person who is or was a director or officer, or
is or was serving at the request of the company as a director or officer of
another corporation, or fiduciary of an employee benefit plan or trust
("Indemnified Person"), for direct third-party actions and derivative and
corporate actions to the maximum extent permitted by the Pennsylvania Business
Corporation Law of 1988 (as amended from time to time), the Directors Liability
Act or otherwise.
Expenses incurred in defending a civil or criminal action, suit or proceeding
shall be paid by the Company, in advance of the final disposition of any action,
suit or proceeding upon receipt of an undertaking by or on behalf of the
Indemnified Person to repay the amount if it is ultimately determined that he is
not entitled to be indemnified by the Company.
Persons who were directors or officers of the Company prior to the date these
by-laws are approved by the Board of Directors of the Company, but who do not
hold that office on or after such date, shall not be covered by this Section.
No indemnification or advancement or reimbursement of expenses shall be provided
to an indemnified Person (a) for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, and amounts paid in
settlement) which have been paid directly to, or for the benefit of, the
Indemnified Person by an insurance carrier under a policy of officers, and
directors, liability insurance whose premiums are paid by the Company or by an
individual or entity other than the Indemnified Person; and (b) for amounts paid
in settlement of any threatened, pending or completed action, suit or proceeding
without the written consent of the Company, which shall not be unreasonably
withheld.
The right of an Indemnified Person to be indemnified or to receive an
advancement or reimbursement of expenses (i) may be enforced as a contract right
pursuant to which the Indemnified Person may bring suit as if the right were set
forth in a separate written contract between the Corporation and the Indemnified
Person, (ii) to the fullest extent permitted by applicable law, is intended to
be retroactive and shall be available with respect to events occurring prior to
the adoption of this Article, and (iii) shall continue to exist after the
rescission or restrictive modification (as determined by the Indemnified Person)
of this Article with respect to events, acts or omissions occurring before the
rescission or restrictive modification is adopted.
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<PAGE> 9
If a request for indemnification or for the advancement or reimbursement of
expenses is not paid in full by the Corporation within sixty (60) days after a
written claim has been received by the Corporation together with all supporting
information reasonably requested by the Corporation, the Indemnified Person may
thereafter bring suit to recover the unpaid amount of the claim (plus interest
at the prime rate announced from time to time by the Corporation's primary
banker) and, if successful, the expenses (including, but not limited to,
attorney's fees) of prosecuting the claim.
Nothing contained in this Article shall be construed to limit the rights and
powers the Corporation possesses under the Pennsylvania Business Corporation Law
of 1988 (as amended from time to time), the Directors' Liability Act or
otherwise, including, but not limited to, the powers to purchase and maintain
insurance, create funds to secure or insure its indemnification obligations, and
any other rights or powers the Corporation may otherwise have under applicable
law.
Section 14. Telephone Meetings
Members of the Board of Directors and its committees may participate in meetings
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 15. Compensation
Directors may receive an annual fee for their services as directors. In
addition, a fixed sum and expenses of attendance, if any, may be allowed to
directors for attendance at each meeting of the Board of Directors or of any
committee. The amount of the fee, if any, shall be fixed by the Board of
Directors. A director shall not be precluded from serving the Company in any
other capacity and receiving compensation in that capacity.
ARTICLE IV. OFFICERS
Section 1. Election of Officers and Agents
At its annual meeting, the Board of Directors shall elect a Chairman, a
President, one or more Vice Presidents as from time to time may be fixed by the
Board of Directors, a Secretary, a Treasurer, and one or more other officers as
the Board may deem proper. Any two or more offices may be held by the same
person.
36
<PAGE> 10
Section 2. Terms and Compensation
All officers shall be elected for the term and receive compensation as the Board
of Directors may determine. Unless the Board of Directors shall authorize or
approve a written contract for a longer term, each officer shall hold office
until the next annual meeting of the Board of Directors and until his successor
is elected and qualified. Any officer or agent elected or appointed by the Board
of Directors may be removed by the Board of Directors whenever in its judgment
the best interest of the Company will be served, but removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Section 3. Chairman
The Chairman shall be the chief executive officer of the Company. He shall
preside at all meetings of shareholders and directors at which he is present. He
shall be ex-officio a member of all standing committees. He shall make reports
of the Company's business to the Board of Directors as the Board may require.
The Chairman shall be a member of the Board of Directors. He shall have the
duties and authority incident to the office of chief executive officer. The
Chairman shall also be the President of the Company unless another person has
been elected as president.
Section 4. President
The President shall perform such duties and have such authority as are
prescribed by the Chairman or the Board of Directors. In the event of the
incapacity of the Chairman to act, his duties shall be performed by the
President. The President need not be a member of the Board of Directors.
Section 5. Vice-Presidents
The Vice-Presidents shall have the duties and authority assigned to each of them
by the Chairman or the Board of Directors.
Section 6. Secretary
The Secretary shall attend the meetings of the shareholders and of the directors
and keep minutes thereof in suitable books. Unless some other person is
delegated to give notice, the Secretary shall send out notices of all meetings
of shareholders and of directors which may be called or held in accordance with
the provisions of the law and these by-laws. He shall perform all the usual
duties incident to the office of Secretary. He shall have custody of the
corporate seal.
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<PAGE> 11
Section 7. Treasurer
The Treasurer shall have custody of the corporate funds of the Company and keep,
or cause to be kept, accurate accounts of all receipts and payments made in
books kept for that purpose. He shall deposit all money received in the name and
to the credit of the Company in depositories the Board of Directors may
designate. He shall give bond for the faithful discharge of his duties in an
amount and with sureties as the Board of Directors may require. He shall perform
the duties assigned to him by the Chairman or the officer designated by the
Board of Directors as the Chief Financial Officer of the Company.
ARTICLE V. EXECUTION OF DOCUMENTS
Section 1. Checks, Notes, Etc.
The Board of Directors shall from time to time designate the officers or agents
of the Company who shall have power, in its name, to sign and endorse checks and
other negotiable instruments and to borrow money for the Company, and in its
name, to make notes or other evidences of indebtedness.
Section 2. Other Documents
Unless otherwise authorized by the Board of Directors, all contracts, leases,
deeds, deeds of trust, mortgages, powers of attorney to transfer stock and for
other purposes, and all other documents requiring the seal of the Company shall
be executed for and on behalf of the Company by the Chairman, the President or
any Vice President, all of which shall be attested to by the Secretary, and the
corporate seal shall be affixed at his direction.
ARTICLE VI. SHARE CERTIFICATES AND TRANSFERS
Section 1. Share Certificates
Share certificates of the Company shall be in the form that the Board of
Directors may from time to time determine. Every share certificate shall be
signed by the Chairman, or in the absence of the Chairman, by the President, or
any other officer designated by the Board of Directors, and shall be
countersigned by the Secretary, or in the absence of the Secretary, by the
Treasurer, and sealed with the corporate seal.
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<PAGE> 12
Section 2. Transfer of Shares
The shares of the capital stock of the Company shall, upon the surrender and
cancellation of the certificate or certificates representing the same, be
transferred upon the books of the Company at the request of the holder named in
the surrendered certificate in person or by his legal representatives or
attorney duly authorized by a written power of attorney filed with the Company's
transfer agent.
Section 3. Loss or Destruction of Share Certificate
In case of loss or destruction of a share certificate, another may be issued in
lieu thereof in the manner and upon those terms as the Board of Directors shall
authorize in each particular case.
Section 4. Transfer Agents and Registrars
The Board of Directors may appoint an incorporated bank or trust company to act
as registrar of transfers, and also an incorporated bank or trust company to act
as transfer agent. In that event no share certificate thereafter issued shall be
valid or binding upon the Company unless registered by one of the Company
registrars or countersigned by the Company transfer agent before being issued by
one of such registrars.
ARTICLE VII. AMENDMENTS
These by-laws may be altered or amended by a vote of a majority of the members
of the Board of Directors at any regular or special meeting duly convened after
notice of that purpose; subject, however, to the power of the shareholders to
change or repeal the by-laws at any annual or special meeting duly convened
after notice of that purpose.
Hanover, Pennsylvania
DATE: July 24, 1998
I hereby certify that the foregoing is a true and correct copy of the by-laws
(as amended) of Hanover Foods Corporation, a Pennsylvania corporation, and that
the by-laws are in full force and effect as of this date.
/s/ Gary T. Knisely
------------------------------
Gary T. Knisely, Secretary
39
<PAGE> 1
EXHIBIT 10(q)
ANNUAL TOP MANAGEMENT CASH BONUS PROGRAM
The Company maintains a cash bonus plan whereby the executive officers and
salaried marketing department personnel are eligible to receive cash bonuses
equal to a percentage of the executive officer's base salary if certain
corporate pretax profit objectives are achieved. The executive officers selected
each year to participate in the cash bonus plan, as well as the performance
targets on which the cash bonuses are based and the amount of the cash bonuses
are determined each year at the discretion of the Chairman and the Board of
Directors.
Specifically, the Chairman recommends to the Board of Directors certain
executive officers who will participate in the plan each year. Such executive
officers who will participate in the plan as evidenced by written notice from
the Company. The amount of the actual cash bonus paid to the various executive
officers participating in the cash bonus plan is calculated based on the
attainment of the corporate pretax profit objectives set-at the commencement of
each fiscal year.
The cash bonuses are normally paid within the sixty (60) days after the end of
the fiscal year.
40
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Incorporated by reference from the section entitled Management's Discussion and
Analysis of Financial Condition and Results of Operation in the Company's Annual
Report to Shareholders for the year ended May 31, 1998.
FORWARD LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "projected," or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including but not
limited to quarterly fluctuations in operating results, competition, state and
federal regulation, environmental considerations, foreign operations and risks
associated with the Year 2000 Issue. Such factors, which are discussed in the
Annual Report, could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinion or statements expressed herein with respect to future periods. As a
result, the Company wishes to caution readers not to place undue reliance on any
such forward- looking statements, which speak only as of the date made.
DESCRIPTION OF BUSINESS
The Company is a vertically integrated processor of vegetable products in one
industry segment. The Company, through its direct and indirect subsidiaries, is
involved in the growing, processing, canning, freezing, freeze-drying,
packaging, marketing and distribution of its products under its own trademarks
as well as other branded, customer and private labels. The Company has
operations in five plants in Pennsylvania, one plant in Delaware, one plant in
New Jersey and two plants in Guatemala.
YEAR ENDED MAY 31, 1998 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED JUNE 1,
1997
The results of operations for fiscal 1998 were impacted by lower operating
expenses, lower interest expense and lower outside legal costs.
The Company and its subsidiaries, in the normal course of business, purchase and
sell goods and services to related parties. The Company believes that the cost
of such purchases and sales are competitive with alternate sources of supply and
markets. See Note 6 to the Consolidated Financial Statements.
41
<PAGE> 2
Effective April 1, 1996, the Company's fiscal year ends at the close of
operations on the Sunday nearest to May 31. The Company's past fiscal years
ended at the close of operations on the Sunday nearest to March 31. Accordingly,
the following discussion compares the results of operations for the fiscal year
ended May 31, 1998 to the year ended June 1, 1997, the fiscal year ended June 1,
1997 to the proforma year ended June 2, 1996 and the nine weeks ended June 2,
1996 to the nine weeks ended June 4, 1995.
OVERVIEW OF FISCAL 1998 RESULTS
NET SALES
Consolidated net sales were $260.6 million for fiscal 1998 compared to $259.4
million for fiscal 1997, an increase of $1.2 million, or 0.5%. The increase in
consolidated net sales was comprised of the following volume and sales price
components:
YEAR ENDED MAY 31, 1998
INCREASE (DECREASE)
<TABLE>
<CAPTION>
VOLUME SALES PRICE COMBINED
------ ----------- --------
<S> <C> <C> <C>
FROZEN SALES (2.1)% (0.2)% (2.3)%
CANNED SALES 2.1% (0.7)% 1.4%
PREPARED FOODS 1.7% (0.3)% 1.4%
------ ------ ------
1.7% (1.2)% 0.5%
</TABLE>
The decreased volume in frozen sales was principally due to lower sales levels
in retail branded products due to competition from national and regional branded
companies. This decrease in volume was partially offset by increases in food
service product sales.
Canned sales also showed an increase in fiscal 1998 due to increased volume in
government bid business. This increase in volume was partially offset by the
decrease in retail branded products.
Prepared foods showed an increase in sales due to the acquisition of SunnySide
Foods in January 1998 which accounted for 97% of the increase.
COST OF GOODS SOLD
Consolidated cost of goods sold represented 74.2% of consolidated net sales for
fiscal 1998 compared to 75.2% for fiscal 1997. The consolidated cost of sales
decreased $1.7 million to $193.4 million in fiscal 1998 as compared to $195.1
million in fiscal 1997 which was due to lower operating costs, principally
related to raw material, overhead and packaging.
42
<PAGE> 3
SELLING EXPENSES
Consolidated selling expenses represented 14.8% of consolidated net sales for
fiscal 1998 and 14.4% for fiscal 1997. Promotion expense increased $1.5 million
to $28.3 million for fiscal 1998 as compared to $26.8 million for fiscal 1997,
as the Company spent additional promotion dollars to maintain market share in
both the mid-Atlantic and southern region for its branded business.
In addition to promotion expense, the Company spent approximately $659,000 on
advertising, including $228,000 relating to redeemed coupons, for fiscal 1998,
compared to $2.2 million in advertising, including $1.7 million for redeemed
coupons, for fiscal 1997.
Management intends to continue to direct promotional dollars to gain additional
market share and increased distribution of its brand. Management is constantly
reviewing the effectiveness of its retail promotional program in an effort to
increase profitable sales.
ADMINISTRATIVE EXPENSES
Consolidated administrative expenses were $12.3 million in fiscal 1998, or 4.7%
of consolidated net sales, as compared to, $12.2 million, or 4.7% of
consolidated net sales in 1997. The increase in consolidated administrative
expenses was the result of increased pension plan expense partially offset by
decreases in outside legal services. Included in administrative expenses for
fiscal 1998 were $296,000 million in legal fees paid in connection with the
litigation described under "Legal Matters" in Note 9 to the Consolidated
Financial Statements.
INTEREST EXPENSE
Consolidated interest expense for fiscal 1998 decreased $646,000 to $3,020,000
in fiscal 1998 compared to $3,666,000 in fiscal 1997. The decrease resulted from
average seasonal borrowing being lower for an extended period of time to fund
lower inventory levels during the pack season. The maximum amount of seasonal
borrowing was approximately $28.0 million as compared to the maximum of $35.0
million in fiscal 1997. In addition, approximately $1.8 million in senior
unsecured term debt that carried higher interest rates was repaid in fiscal 1998
which contributed to the reduction of the Corporation's interest expense for
fiscal 1998.
OTHER INCOME (EXPENSE)
Consolidated other income increased $634,000 to $545,000 for fiscal 1998 as
compared to expense of $89,000 for fiscal 1997. Foreign exchange and translation
adjustment gains during fiscal 1998 accounted for 24% of this additional income.
Gain on the sale of securities during fiscal 1998 accounted for 36% of the
additional income. Reduced value added tax accounted for 14% of the change.
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<PAGE> 4
INCOME TAXES
The provision for corporate federal and state income taxes for fiscal 1998 was
$5.4 million, or 38.9% of pretax earnings, as compared to a provision of $4.3
million, or 39.0% of pretax earnings for fiscal 1997.
NET EARNINGS
Consolidated net earnings for fiscal 1998 were $8.4 million, or 3.2% of
consolidated net sales as compared to $6.7 million, or 2.6% of consolidated net
sales, for fiscal 1997. Lower operating expenses, interest expenses and
decreased outside legal fees were the contributing factors to the increased net
earnings.
YEAR ENDED JUNE 1, 1997 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED JUNE 2,
1996
NET SALES
Consolidated net sales were $259.4 million for fiscal 1997 compared to $260.7
million for the proforma year ended June 2, 1996, a decrease of $1.3 million or
0.5%. The 0.5% decrease in consolidated net sales was comprised of the following
volume and sales price components:
YEAR ENDED JUNE 1, 1997
INCREASE (DECREASE)
<TABLE>
<CAPTION>
VOLUME SALES PRICE COMBINED
------ ----------- --------
<S> <C> <C> <C>
FROZEN SALES (5.9)% 4.2% (1.7)%
CANNED SALES (2.1)% 2.7% 0.6%
PREPARED FOODS 0.8% (0.2)% 0.6%
------ ------ ------
(7.2)% 6.7% (0.5)%
</TABLE>
The decreased volume in frozen sales was principally due to lower sales level in
food service products due to management's decision to improve profit margins by
increasing unit sales prices. The decrease in volume was partially offset by the
increase in unit sales price. Canned sales also showed a slight decrease in
fiscal 1997 due to decreased volume in bid business. The decrease in volume was
offset by the increase in unit sales price, which increase in sales price was
planned by management to improve profit margins. Prepared foods showed a slight
increase.
COST OF GOODS SOLD
Consolidated cost of goods sold represented 75.2% of consolidated net sales for
fiscal 1997 compared to 81.8% for fiscal 1996. The consolidated cost of sales
decreased $18.1 million from fiscal 1996 to fiscal 1997 of which 68% was due to
decreased volume and 32% was due to lower operating costs and lower outside
storage costs.
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<PAGE> 5
SELLING EXPENSES
Consolidated selling represented 14.4% of consolidated net sales for fiscal 1997
and 12.8% for fiscal 1996. Promotion expense for fiscal 1997 was $26.8 million
as compared to $20.9 million for fiscal 1996. The Company spent additional
promotion dollars to gain additional market share in both the mid-Atlantic and
southern region for its branded business. In addition to promotion expense, the
Company spent approximately $2.2 million on advertising, including $1.7 million
relating to redeemed coupons, for fiscal 1997, compared to $3.6 million in
advertising, including $2.4 million for redeemed coupons, for fiscal 1996.
ADMINISTRATIVE EXPENSES
Consolidated administrative expenses were $12.2 million in fiscal 1997, or 4.7%
of consolidated net sales versus $9.3 million, or 3.5% of consolidated net sales
in 1996. The increase in consolidated administrative expenses as a percent of
net sales was the result of bonuses and outside legal and financial services.
Included in administrative expenses for fiscal 1997 were $1.2 million in legal
fees paid in connection with the litigation described under "Legal Matters" in
Note 9 to the Consolidated Financial Statements.
INTEREST EXPENSE
Consolidated interest expense for fiscal 1997 was $985,000 lower than fiscal
1996. Average seasonal borrowing was lower for an extended period of time to
fund lower inventory levels during the pack season and to carry reduced canned
and frozen inventory levels. The maximum amount of seasonal borrowing was
approximately $35.0 million as compared to the maximum of $45.9 million in
fiscal 1996. In addition, approximately $1.8 million in senior unsecured term
debt that carried higher interest rates was repaid in fiscal 1997 which
contributed to the reduction of the Company's interest expense for fiscal 1997.
OTHER EXPENSE
Consolidated other expenses increased $605,000 for fiscal 1997 as compared to
fiscal 1996. Additional value added tax and foreign exchange and translation
adjustment losses during fiscal 1997 accounted for 41% of this additional
expense. Interest income was reduced during fiscal 1997 which accounted for 25%
of the additional changes.
INCOME TAXES
The provision for corporate federal and state income taxes for fiscal 1997 was
$4.3 million or 39% of pretax earnings as compared to a provision of $219,000 or
35% of pretax earnings for fiscal 1996. The higher effective rate was due
primarily to proportionately higher domestic pretax income versus non-taxable
foreign earnings in fiscal 1997 compared to 1996.
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<PAGE> 6
NET EARNINGS
Consolidated net earnings for fiscal 1997 were $6.7 million, or 2.6% of
consolidated net sales. This compared to $413,000, or 0.2% of consolidated net
sales for fiscal 1996. Lower operating expenses, interest expenses and increased
unit sales prices were the contributing factors to the increased net earnings.
NINE WEEKS ENDED JUNE 2, 1996 RESULTS OF OPERATIONS COMPARED TO NINE WEEKS ENDED
JUNE 4, 1995
NET SALES
Consolidated net sales were $34.6 million for the nine week period ended June 2,
1996. This represents a decrease of 6.0% over the nine week period ended June 4,
1995 consolidated net sales of $36.8 million. The decrease of $2.2 million was
primarily due to decreased canned and frozen retail sales offset by increases in
private label sales and was consistent with the Company's business plan.
COST OF GOODS SOLD
Cost of goods sold were $28.8 million, or 83.3% of consolidated net sales in the
nine week period ended June 2, 1996 and $29.1 million, or 79.1%, of
consolidated net sales for the corresponding period in 1995. The increase in
cost of goods sold as a percentage of net sales resulted primarily from a
decrease in the average selling prices per case of product in the nine week
period ended June 2, 1996 compared to the same period in 1995 due to continued
intense competition in retail sales.
SELLING EXPENSES
Selling expenses were $5.5 million or 15.8% of consolidated net sales for the
nine week period ended June 2, 1996 as compared to $7.1 million, or 19.3% of
consolidated net sales during the corresponding period in 1995. The decrease in
selling expenses as a percentage of net sales reflects the lower expenses
related to promotional programs, advertising and customer allowances in the nine
week period ended June 2, 1996 compared to 1995.
ADMINISTRATIVE EXPENSES
Administrative expenses as a percentage of consolidated net sales were 4.1%
for the nine week period ended June 2, 1996 compared to 5.1% for the
corresponding period of 1995. This decrease was attributed to reductions in
personnel related costs.
INTEREST EXPENSE
Interest expense was $596,000 for the nine week period ended June 2, 1996 as
compared to $584,000
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<PAGE> 7
for the same period in 1995. The increase in interest was primarily due to
higher average borrowings during the 1996 period as compared to the prior
period.
LIQUIDITY AND CAPITAL RESOURCES
The discussion and analysis of the Company's liquidity and capital resources
should be read in conjunction with the Consolidated Statements of Cash Flows,
contained elsewhere herein.
Net working capital was $16.8 million at May 31, 1998 and $17.1 million at June
1, 1997. The current ratios were 1.31 and 1.32 on May 31, 1998 and June 1, 1997,
respectively.
Net cash provided by operations for the fiscal year ended May 31, 1998 was $22.7
million, compared to $12.3 million for the fiscal year ended June 1, 1997.
Sources of net cash provided by operations consisted principally of net earnings
of $8.4 million, net of non-cash depreciation and amoritization expense of $5.9
million, decreased inventory of $2.8 million, increased accounts payable and
accrued expenses of $2.5 million, increased income taxes payable and other
liabilities of $1.5 million, and decreased accounts receivable of $1.9 million.
Net cash provided by operations for the fiscal year ended June 1, 1997 was $12.3
million, compared to $4.8 million for the proforma year ended June 2, 1996.
Sources of funds totaled $19.1 million consisting of net earnings of $6.7
million, decreased inventory of $5.6 million, decreased prepaid items of
$300,000, decreased deferred income taxes of $200,000, an increase in tax and
other liabilities of $700,000 and depreciation and amortization of $5.6 million.
The funds generated from these sources were applied towards the increase in
accounts receivable of $6.6 million and the reduction in accounts payable and
accrued expenses of $200,000.
Net cash used by investing activities for the fiscal year ended May 31, 1998 was
$14.0 million as compared to $6.5 million for the fiscal year ended June 1,
1997. The principal use of funds was the upgrade and acquisition of property,
plant, equipment and the purchase of businesses. During the period ended May 31,
1998, $8.1 million was spent on development and modernization of equipment as
compared to $6.6 million in the fiscal year ended June 1, 1997. During the
period ended May 31, 1998, $ 5.6 million was spent for the acquisition of other
businesses. These projects were funded by internally generated funds. The
Company also uses operating leases to meet other equipment needs. The lease
expense for the fiscal year ended May 31, 1998 was $3.3 million, down $0.3
million from the fiscal year ended June 1, 1997.
Net cash used by investing activities for the fiscal year ended June 1, 1997 was
$6.5 million as compared to $4.8 million for the fiscal year ended June 2, 1996.
The principal use of funds was the upgrade and acquisition of property, plant
and equipment. During the period ended June 1, 1997, $6.6 million was spent on
development and modernization of equipment as compared to $4.7 million in the
fiscal year ended June 2, 1996. These projects were funded by internally
generated funds. The Company also uses operating leases to meet other equipment
needs. The lease expense for fiscal year ended June 1, 1997 was $3.6 million,
down $0.4 million from the fiscal year ended June 2, 1996.
47
<PAGE> 8
Net cash used for financing activities was $9.6 million for the fiscal year
ended May 31, 1998, compared to cash used for financing activities of $3.6
million for the fiscal year ended June 1, 1997. Seasonal borrowing amounting to
$144.3 million was used throughout the fiscal year to fund operational needs.
Seasonal borrowing, plus the cash overdraft, decreased by $4.2 million at May
31, 1998 compared to June 1, 1997. Payments on long-term debt were $5.2 million.
Management continues to monitor and evaluate the most cost effective means to
finance its operations. The weighted average cost of seasonal borrowings was
6.1% for the fiscal year ended May 31, 1998 compared to 6.1% for the fiscal year
ended June 1, 1997.
Net cash used for financing activities was $3.6 million for the fiscal year
ended June 1, 1997 compared to cash provided by financing activities of $154,000
for the fiscal year ended June 2, 1996. Seasonal borrowing amounting to $220.7
million was used throughout the fiscal year to fund operational needs. Seasonal
borrowing, plus the cash overdraft, did not increase during the fiscal year,
while term debt and other obligations had been reduced by $2.7 million. The
weighted average cost of seasonal borrowings was 6.1% for the fiscal year ended
May 31, 1998 compared to 6.1% for the fiscal year ended June 1, 1997.
At May 31, 1998 the Company has commitments from financial institutions to
provide seasonal lines of credit in the amount of $90 million. Additional
borrowing is permitted within prescribed parameters in existing debt agreements
which contain certain performance covenants. At May 31, 1998 the Company was in
compliance with all the provisions of its debt agreements.
The Company paid dividends of $828,000 during fiscal 1998 compared to $824,000
in fiscal 1997. In addition, the Company repurchased 2,247 shares of Class A
Common Stock at a cost of $106,000 during the year ended May 31, 1998.
The Company believes that it has sufficient working capital and availability
from seasonal lines of credit to meet its cash flow needs.
IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS
COMPETITION IN THE MARKETPLACE
The Company faced stiff competition from national and regional branded companies
during the entire fiscal 1998 in all of its market areas and management
anticipates this competitive environment to continue throughout fiscal year
1999.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements establish standards for reporting and display of
comprehensive income and its components and for
48
<PAGE> 9
reporting information about business segments and products in financial
statements and are effective for years beginning after December 15, 1997.
In January 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement establishes new
disclosure requirements relating to pension and other postretirement benefits
and is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes new accounting and
reporting standards for derivative instruments and for hedging activities and is
effective for fiscal years beginning after June 15, 1999.
Adoption of the aforestated standards is not expected to have a material effect
on the Company's financial statements.
YEAR 2000
Many existing computer programs, including those utilized by the Company, use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, any computer applications could fail or create
erroneous results by or at the Year 2000 (the "Year 2000 Issue"). The Company
has retained an outside consultant to manage the Company's efforts to bring its
computer system into Year 2000 compliance. The Company has contacted its
customers, key suppliers and its equipment manufacturers in an attempt to ensure
third party compliance. The Company has estimated the costs associated with
addressing the Year 2000 Issue to be approximately $350,000 and anticipates that
such costs will not materially affect the Company's future financial results.
IMPACT OF INFLATION AND CHANGING PRICES
The changes in cost and prices within the Company's business due to inflation
were not significantly different from inflation in the United States economy as
a whole. Levels of capital investment, pricing and inventory investment were not
materially affected by the moderate inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the Company's financial statements, the notes
thereto, and the independent auditors report included in the Company's Annual
Report to Shareholders for the year ended May 31, 1998.
49
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Hanover Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hanover Foods
Corporation and subsidiaries as of May 31, 1998 and June 1, 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the years ended May 31, 1998 and June 1, 1997, the nine-week period
ended June 2, 1996, and the year ended March 31, 1996. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Foods
Corporation and subsidiaries as of May 31, 1998 and June 1, 1997 and the results
of their operations and their cash flows for the years ended May 31, 1998 and
June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March
31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
July 10, 1998
50
<PAGE> 11
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal years ended May 31, 1998, June 1, 1997, March 31, 1996, and the nine
weeks ended June 2, 1996
<TABLE>
<CAPTION>
(Unaudited)
Nine weeks Pro forma
Year ended Year ended ended Year ended year ended
May 31, June 1, June 2, March 31, June 2,
1998 1997 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $260,621,000 259,439,000 34,569,000 262,920,000 260,694,000
Cost of goods sold 193,357,000 195,086,000 28,805,000 213,515,000 213,234,000
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 67,264,000 64,353,000 5,764,000 49,405,000 47,460,000
Selling expenses 38,656,000 37,453,000 5,465,000 35,067,000 33,443,000
Administrative expenses 12,329,000 12,158,000 1,433,000 9,706,000 9,250,000
- ----------------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 16,279,000 14,742,000 (1,134,000) 4,632,000 4,767,000
Interest expense 3,020,000 3,666,000 596,000 4,639,000 4,651,000
Other (income) expenses - net (545,000) 89,000 (66,000) (640,000) (516,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 13,804,000 10,987,000 (1,664,000) 633,000 632,000
Income taxes 5,367,000 4,281,000 (533,000) 213,000 219,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) 8,437,000 6,706,000 (1,131,000) 420,000 413,000
Dividends on preferred stock 37,000 31,000 8,000 31,000 39,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) applicable to
common stock $ 8,400,000 6,675,000 (1,139,000) 389,000 374,000
==================================================================================================================================
Basic earnings (loss) per
common share $ 11.69 9.26 (1.58) 0.53 0.51
==================================================================================================================================
Diluted earnings (loss) per
common share $ 11.62 9.22 (1.58) 0.53 0.51
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 12
HANOVER FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
May 31, 1998 and June 1, 1997
<TABLE>
<CAPTION>
May 31, June 1,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,337,000 3,312,000
Accounts and notes receivable - net 23,429,000 22,954,000
Accounts receivable from related parties - net 389,000 890,000
Inventories:
Finished goods 31,185,000 27,446,000
Raw materials and supplies 11,777,000 13,978,000
Prepaid expenses 2,244,000 2,064,000
Deferred income taxes 365,000 733,000
- ---------------------------------------------------------------------------------------------------------
Total current assets 71,726,000 71,377,000
- ---------------------------------------------------------------------------------------------------------
Property, plant, and equipment - at cost:
Land and buildings 35,171,000 33,398,000
Machinery and equipment 86,965,000 82,037,000
Leasehold improvements 374,000 349,000
- ---------------------------------------------------------------------------------------------------------
122,510,000 115,784,000
Less accumulated depreciation and amortization 72,641,000 66,822,000
- ---------------------------------------------------------------------------------------------------------
49,869,000 48,962,000
Construction in progress 4,411,000 760,000
- ---------------------------------------------------------------------------------------------------------
54,280,000 49,722,000
- ---------------------------------------------------------------------------------------------------------
Other assets:
Intangible assets - less accumulated amortization
of $2,054,000 and $2,019,000 2,323,000 441,000
Other assets 2,678,000 2,491,000
- ---------------------------------------------------------------------------------------------------------
Total assets $131,007,000 124,031,000
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE> 13
HANOVER FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
May 31, June 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 23,979,000 21,038,000
Notes payable - banks 19,874,000 24,114,000
Accrued expenses 7,717,000 6,511,000
Current maturities of long-term debt 1,859,000 2,234,000
Income taxes payable 1,498,000 358,000
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 54,927,000 54,255,000
Long-term debt, less current maturities 14,359,000 16,219,000
Deferred income taxes 4,686,000 5,174,000
Other liabilities 1,565,000 1,226,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 75,537,000 76,874,000
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Series A and B 8-1/4% cumulative convertible preferred stock 788,000 788,000
Series C 4.4% cumulative convertible preferred stock 250,000 -
Common stock, Class A - non-voting 8,729,000 8,729,000
Common stock, Class B - voting 12,328,000 12,328,000
Capital paid in excess of par value 2,143,000 1,623,000
Retained earnings 39,179,000 31,570,000
Treasury stock, at cost (7,993,000) (7,887,000)
Other 46,000 6,000
- -------------------------------------------------------------------------------------------------------------------
55,470,000 47,157,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $131,007,000 124,031,000
===================================================================================================================
</TABLE>
53
<PAGE> 14
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MAY 31, 1998, JUNE 1, 1997,
MARCH 31, 1996, AND THE NINE WEEKS ENDED JUNE 2, 1996
<TABLE>
<CAPTION>
(Unaudited)
Nine weeks Pro forma
Year ended Year ended ended Year ended year ended
May 31, June 1, June 2, March 31, June 2,
1998 1997 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 8,437,000 6,706,000 (1,131,000) 420,000 413,000
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,939,000 5,595,000 1,013,000 5,582,000 5,666,000
Gain on sale of property,
plant, and equipment (6,000) (21,000) - (25,000) (25,000)
Deferred income taxes (120,000) 156,000 (519,000) (369,000) (319,000)
Change in assets and liabilities:
Accounts and notes receivable 1,856,000 (6,534,000) 7,924,000 388,000 2,335,000
Inventories 2,774,000 5,643,000 90,000 2,795,000 3,414,000
Prepaid expenses (139,000) 313,000 (542,000) 1,947,000 3,737,000
Accounts payable and
accrued expenses 2,467,000 (226,000) (790,000) (9,736,000) (10,838,000)
Income taxes payable 1,140,000 248,000 17,000 (24,000) (23,000)
Other liabilities 339,000 421,000 69,000 444,000 479,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 22,687,000 12,301,000 6,131,000 1,422,000 4,839,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of businesses, net of
cash acquired (5,578,000) - - - -
Decrease in other current assets - - - 263,000 263,000
Decrease (increase) in other
assets, net (352,000) 19,000 275,000 (884,000) (373,000)
Acquisitions of property, plant, and
equipment (8,133,000) (6,565,000) (572,000) (5,527,000) (4,683,000)
Proceeds from dispositions of
property, plant, and equipment 15,000 35,000 - 31,000 31,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,048,000) (6,511,000) (297,000) (6,117,000) (4,762,000)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 15
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
(Unaudited)
Nine weeks Pro forma
Year ended Year ended ended Year ended year ended
May 31, June 1, June 2, March 31, June 2,
1998 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable $ 144,289,000 220,739,000 - 131,244,000 126,545,000
Payment on notes payable (148,529,000) (220,722,000) (5,324,000) (121,749,000) (121,749,000)
Payment on long-term debt (5,210,000) (2,499,000) - (2,989,000) (2,989,000)
Payment on long-term capital
lease obligations - (152,000) (58,000) (323,000) (202,000)
Payment of dividends (828,000) (824,000) (207,000) (831,000) (1,038,000)
Common stock redemptions (106,000) (132,000) (47,000) (392,000) (413,000)
Preferred stock issuance 770,000 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (9,614,000) (3,590,000) (5,636,000) 4,960,000 154,000
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (975,000) 2,200,000 198,000 265,000 231,000
Cash and cash equivalents, beginning
of period 3,312,000 1,112,000 914,000 649,000 881,000
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 2,337,000 3,312,000 1,112,000 914,000 1,112,000
================================================================================================================================
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 2,979,000 3,653,000 310,000 4,660,000 4,386,000
Income taxes 4,594,000 3,134,000 16,000 462,000 416,000
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE> 16
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED MAY 31, 1998, JUNE 1, 1997,
MARCH 31, 1996, AND THE NINE WEEKS ENDED JUNE 2, 1996
<TABLE>
<CAPTION>
Cumulative Cumulative
convertible Convertible
preferred stock preferred stock Common stock
Total Series A and Series B Series C Class A
stockholders' -------------------- ----------------- ------------------
equity Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 1995 $43,920,000 31,816 795,000 - - 349,000 $8,726,000
Net earnings 420,000 - - - - - -
Cash dividends per share:
Preferred - $2.0625 annually (31,000) - - - - - -
Common - $1.10 annually (800,000) - - - - - -
Redemption of common stock -
Class A 5,789 shares,
Class B 5,148 shares (760,000) - - - - - -
Conversion of preferred for
Class A common - (280) (7,000) - - 120 3,000
Minimum pension liability
adjustment (net of taxes
of $235,000) (351,000) - - - - - -
Unrealized gain on investments 111,000 - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 42,509,000 31,536 788,000 - - 349,120 8,729,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 17
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
Common stock
Class B Capital paid Treasury stock
------------------------- in excess of Retained ------------------
Shares Amount par value earnings Shares Amount Other
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 2, 1995 493,123 $12,328,000 1,619,000 $27,437,000 124,738 $(6,948,000) $ (37,000)
Net earnings - - - 420,000 - - -
Cash dividends per share:
Preferred - $2.0625
annually - - - (31,000) - - -
Common - $1.10 annually - - - (800,000) - - -
Redemption of common stock -
Class A 5,789 shares,
Class B 5,148 shares - - - - 10,937 (760,000) -
Conversion of preferred for
Class A common - - 4,000 - - - -
Minimum pension liability
adjustment (net of taxes
of $235,000) - - - - - - (351,000)
Unrealized gain on investments - - - - - - 111,000
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 493,123 12,328,000 1,623,000 27,026,000 135,675 (7,708,000) (277,000)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 18
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
Cumulative Cumulative
convertible Convertible
preferred stock preferred stock Common stock
Total Series A and Series B Series C Class A
stockholders' --------------------- ------------------- --------------------
equity Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 $ 42,509,000 31,536 $788,000 - $ - 349,210 $8,729,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (1,131,000) - - - - - -
Cash dividends per share:
Preferred - $.515 (8,000) - - - - - -
Common - $.275 (199,000) - - - - - -
Redemption of common stock -
Class A 825 shares,
Class B 109 shares (47,000) - - - - - -
Unrealized gain on investments 2,000 - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 2, 1996 41,126,000 31,536 788,000 - - 349,210 8,729,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings 6,706,000 - - - - - -
Cash dividends per share:
Preferred - $2.0625 annually (31,000) - - - - - -
Common - $1.10 annually (793,000) - - - - - -
Redemption of common stock -
Class A 2,124 shares,
Class B 219 shares (132,000) - - - - - -
Minimum pension liability
adjustment (net of taxes
of $129,000) 193,000 - - - - - -
Unrealized gain on investments 88,000 - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 1, 1997 47,157,000 31,536 788,000 - - 349,210 8,729,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings 8,437,000 - - - - - -
Cash dividends per share:
Preferred - $2.0625 annually (37,000) - - - - - -
Common - $1.10 annually (791,000) - - - - - -
Issuance of preferred stock 770,000 - - 10,000 250,000 - -
Redemption of common stock -
Class A 1,882 shares,
Class B 365 shares (106,000) - - - - - -
Minimum pension liability
adjustment (net of taxes
of $106,000) 158,000 - - - - - -
Unrealized (loss) on investments (118,000) - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 $ 55,470,000 31,536 $788,000 10,000 $250,000 349,210 $8,729,000
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 19
HANOVER FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
Common stock Capital paid
Class B in excess of Retained Treasury stock
Shares Amount par value earnings Shares Amount Other
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 493,123 $12,328,000 $1,623,000 $ 27,026,000 135,675 $(7,708,000) $(277,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - - - (1,131,000) - - -
Cash dividends per share:
Preferred - $.515 - - - (8,000) - - -
Common - $.275 - - - (199,000) - - -
Redemption of common stock
Class A 825 shares,
Class B 109 shares - - - - 934 (47,000) -
Unrealized gain on investments - - - - - - 2,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 2, 1996 493,123 12,328,000 1,623,000 25,688,000 136,609 (7,755,000) (275,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 6,706,000 - - -
Cash dividends per share:
Preferred - $2.0625 annually - - - (31,000) - - -
Common - $1.10 annually - - - (793,000) - - -
Redemption of common stock
Class A 2,124 shares,
Class B 219 shares - - - - 2,343 (132,000) -
Minimum pension liability
adjustment (net of taxes
of $129,000) - - - - - - 193,000
Unrealized gain on investments - - - - - - 88,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 1, 1997 493,123 12,328,000 1,623,000 31,570,000 138,952 (7,887,000) 6,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 8,437,000 - - -
Cash dividends per share:
Preferred - $2.0625 annually - - - (37,000) - - -
Common - $1.10 annually - - - (791,000) - - -
Issuance of preferred stock - - 520,000 - - - -
Redemption of common stock
Class A 1,882 shares,
Class B 365 shares - - - - 2,247 (106,000) -
Minimum pension liability
adjustment (net of taxes
of $106,000) - - - - - - 158,000
Unrealized (loss) on investments - - - - - - (118,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 493,123 $12,328,000 $2,143,000 $ 39,179,000 141,199 $(7,993,000) $ 46,000
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 20
HANOVER FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND JUNE 1, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hanover Foods Corporation (the Company) is a vertically integrated processor of
vegetable products in one industry segment. The Company, through its direct and
indirect subsidiaries, is involved in the growing, processing, canning,
freezing, freeze-drying, packaging, marketing, and distribution of its products
under its own trademarks as well as other branded, customer, and private labels.
The Company has operations in five plants in Pennsylvania, one plant in
Delaware, one plant in New Jersey, and two plants in Guatemala. The Company's
ten largest customers accounted for approximately 42%, 45%, and 45% of the
Company's net sales for the fiscal years ended May 31, 1998, June 1, 1997, and
March 31, 1996, respectively. The Company's ten largest customers account for
approximately 27% and 45% of the Company's accounts receivable as of May 31,
1998 and June 1, 1997, respectively. No single customer accounted for more than
10% of net sales for the fiscal years ended May 31, 1998, June 1, 1997, and
March 31, 1996. The Company's raw materials are readily available, and the
Company is not dependent on a single supplier or a few suppliers. Revenue is
recognized from sales when products are shipped.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Hanover Foods Corporation and its subsidiaries, which are Consumers Packing
Company (T/A Hanover Foods - Lancaster Division), Spring Glen Fresh Foods, Inc.,
Hanover Insurance Company, Ltd., The Nittany Corporation, and Tri-Co. Foods
Corp. and its subsidiaries - Alimentos Congelados Monte Bellos, S.A. (ALCOSA)
and Sunwise Corporation, all of which are wholly-owned. During the year ended
May 31, 1998, the Company purchased L. K. Bowman, Inc. and L. K. Bowman Pacific,
Inc., which are included as part of Hanover Foods, and purchased certain assets
of Sunnyside Foods, which are included in Spring Glen Fresh Foods, Inc. These
purchases were not material to the Company's results of operations for the year
ended May 31, 1998. All significant intercompany balances and transactions have
been eliminated.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. Wholesale and retail food distributors comprise a
significant portion of the trade receivables; collateral is not required. The
risk associated with the concentration is limited due to the large number of
wholesalers and retailers and their geographic dispersion.
60
<PAGE> 21
NOTE 1: CONTINUED
CASH AND CASH EQUIVALENTS
Cash equivalents of $707,000 and $743,000 at May 31, 1998 and June 1, 1997,
respectively, consist of short-term interest-bearing investments with maturities
of less than three months. For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
INVESTMENTS
Investments of $2,447,000 and $2,187,000, at May 31, 1998 and June 1, 1997,
respectively, classified as available-for-sale securities, are included in other
noncurrent assets and measured at fair value. Net unrealized gains and losses
are reported as a separate component of stockholders' equity until realized, and
amount to gains of $46,000, $164,000, and $76,000 at May 31, 1998, June 1, 1997,
and June 2, 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts and notes receivable,
accounts payable and notes payable approximates fair values due to the
short-term maturities of these instruments.
The fair values of each of the Company's long-term debt instruments are based on
the amount of future cash flows associated with each instrument discounted using
the Company's current borrowing rate for similar debt instruments of comparable
maturity. The amount reported in the consolidated balance sheet for long-term
debt approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (determined by average cost which
approximates the first-in, first-out method) or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Plant and equipment under
capital leases are stated at the present value of minimum lease payments.
Expenditures for maintenance and repairs are charged to expense as incurred;
additions and betterments that materially increase the lives of the related
assets are capitalized. Upon retirement, sale, or other disposition of buildings
and equipment, cost and accumulated depreciation are eliminated from the
accounts and gain or loss is included in operations.
61
<PAGE> 22
NOTE 1: CONTINUED
Depreciation on property, plant, and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives range from approximately 3 years to 12 years for equipment and up
to 40 years for buildings. Accelerated methods are used for tax reporting
purposes. Plant and equipment held under capital leases are amortized
straight-line over the shorter of the lease term or estimated useful life of the
asset.
INTANGIBLE ASSETS
The Company amortizes intangible assets, primarily covenants not to compete,
purchased trademarks and goodwill, over periods ranging from 3 to 40 years. The
Company assesses the recoverability of intangible assets by determining whether
the amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows. The amount of impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability will be impacted if estimated future operating cash flows are
not achieved.
INSURANCE
The Company, through its wholly-owned insurance subsidiary, is self-insured with
respect to certain general liability and workers' compensation claims. Excess
insurance coverage is maintained for general liability and workers' compensation
claims. Accrued expenses include provision for unpaid claims reported and claims
incurred but not reported.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs amounted to $588,000, $622,000, $134,000, $725,000, and
$716,000 (unaudited) for the periods ended May 31, 1998, June 1, 1997, June 2,
1996, March 31, 1996, and the pro forma year ended June 2, 1996, respectively.
62
<PAGE> 23
NOTE 1: CONTINUED
PROMOTIONAL COSTS
Promotional costs are expensed as incurred. Accounts and notes receivable are
presented net of allowances for bad debts and promotional programs.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses amounted to
$659,000, $2,184,000, $842,000, $3,565,000, and $3,580,000 (unaudited) for the
periods ended May 31, 1998, June 1, 1997, June 2, 1996, March 31, 1996, and the
pro forma year ended June 2, 1996, respectively (including manufacturer coupon
expense of $228,000, $1,655,000, $542,000, $2,407,000, and $2,358,000
(unaudited), respectively).
EARNINGS PER SHARE
The Company adopted the provisions of SFAS No. 128, Earnings per Share, during
the year ended May 31, 1998. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. SFAS No. 128
requires restatement of all prior-period earnings per share data presented
FISCAL YEAR END
Effective April 1, 1996, the Company's fiscal year ends at the close of
operations on the Sunday nearest to May 31. The Company's past fiscal years
ended at the close of operations on the Sunday nearest to March 31. The fiscal
years ended May 31, 1998, June 1, 1997, March 31, 1996, and the pro forma
unaudited results for the year ended June 2, 1996 were comprised of 52 weeks.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue and expenses, and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
63
<PAGE> 24
NOTE 2: NOTES PAYABLE - BANKS
RECLASSIFICATIONS
Certain prior amounts have been reclassified to conform to classifications
adopted in the current year.
The Company maintains short-term unsecured lines of credit with various banks
providing credit availability amounting to $90,000,000, of which $19,874,000 was
borrowed (including an overdraft of $2,108,000) at May 31, 1998 and $24,114,000
was borrowed (including an overdraft of $1,413,000) at June 1, 1997. The Company
borrows funds under these lines of credit under two methods of cost of funds.
The first method used to price the cost of short-term borrowings is based upon
LIBOR plus fifty to seventy-five basis points. The second method is based upon
the financial institution's "calculated cost of funds" plus an earnings
modification. The weighted-average interest rate on short-term borrowings at May
31, 1998 and June 1, 1997, was 6.1% and 6.2%, respectively. The maximum amount
of borrowings outstanding under short-term lines of credit at any one time
during the years ended May 31, 1998 and June 1, 1997 and March 31, 1996 was
approximately $27,999,000, $35,024,000, and $45,900,000, respectively, and
$29,400,000 for the nine-week period ended June 2, 1996.
64
<PAGE> 25
NOTE 3: LONG-TERM DEBT
The long-term debt of the Company and its subsidiaries consists of:
<TABLE>
<CAPTION>
May 31, 1998 June 1, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
8.74% - 9.24% unsecured senior notes payable to
an insurance company, due fiscal years
ending 1997-2007 $16,071,000 17,857,000
Installment obligation payable to a related party, due in
equal annual installments in fiscal years
ending 1996-2000; interest at prime rate (8.5% at
May 31, 1998) 147,000 221,000
6.33% installment obligation payable to a related party,
due fiscal years ending 1997-1998 -- 375,000
- --------------------------------------------------------------------------------------------
Total long-term debt 16,218,000 18,453,000
Less current maturities 1,859,000 2,234,000
- --------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $14,359,000 16,219,000
============================================================================================
</TABLE>
The term loan agreements with the insurance company and seasonal borrowing with
financial institutions (note 2), contain various restrictive provisions
including those relating to mergers and acquisitions, additional borrowing,
guarantee of obligations, lease commitments, limitations to declare or pay
dividends, repurchase stock, and the maintenance of working capital and certain
financial ratios. Based on the requirements of the agreements, at May 31, 1998,
$30,591,000 of retained earnings are restricted from distribution. The Company
is in compliance with the restrictive provisions in the agreements.
The aggregate long-term debt maturities follow:
<TABLE>
<S> <C>
For the fiscal year ending:
1999 $ 1,859,000
2000 1,859,000
2001 1,786,000
2002 1,786,000
2003 1,786,000
Thereafter 7,142,000
------------------------------------------------------
Total $ 16,218,000
======================================================
</TABLE>
NOTE 4: LEASES
The Company has several noncancelable operating leases, primarily for equipment,
that expire over the next three years. These leases generally contain renewal
options for periods ranging from three to five years and require the Company to
pay all executory costs such as maintenance and insurance. Rental expense for
operating leases (except those with lease terms of a month or less that were not
renewed) during the periods ended May 31, 1998, June 1, 1997, June 2, 1996, and
March 31, 1996 amounted to $3,330,000, $3,586,000, $653,000, and $3,964,000,
respectively.
65
<PAGE> 26
NOTE 4: CONTINUED
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) as of May 31, 1998 are:
<TABLE>
<CAPTION>
Operating
leases
----------------------------------------------
<S> <C>
For the fiscal year ending:
1999 $ 965,000
2000 685,000
2001 383,000
2002 233,000
2003 48,000
Thereafter -
----------------------------------------------
Total minimum lease payments $ 2,314,000
==============================================
</TABLE>
NOTE 5: CAPITAL STOCK
The Company's capital stock consists of Class A Nonvoting Common Stock, Class B
Voting Common Stock, 8 1/4% Series A and B Cumulative Convertible Preferred
Stock, and 4.4% Series C Convertible Preferred Stock. Holders of Class B Common
Stock have one vote per share. No other classes of stock have voting rights
except as discussed below.
The Company's Amended and Restated Articles of Incorporation authorize the Board
of Directors to issue up to 10,000 shares of Series C Convertible Preferred
Stock to the trustees of the Company's 401(k) Savings Plan (or a similar
employee benefit plan). At least a majority of the trustees of the Company's
401(k) Savings Plan (or similar employee benefit plan), who are appointed by the
Board of Directors, must be "disinterested directors" of the Company. If the
Class B shareholders cannot unanimously agree in writing on the composition of
the Board of Directors or on other important matters specified below, the
Amended and Restated Articles permit each of the 10,000 shares of Series C
Convertible Preferred Stock the right to cast 35 votes in the election of
directors, and each share of Class A Common Stock would have one-tenth (1/10) of
a vote per share, thereby enabling them to influence the ultimate result of the
election by the Class B shareholders. The Amended and Restated Articles also
permit the trustees and the Class A shareholders to similarly vote on proposals
to remove directors, and in connection with any proposal (not previously
approved by the Board of Directors) to further amend the Articles of
Incorporation or By-Laws or to effectuate a merger, consolidation, division, or
sale of substantially all of the assets of the Company. The voting power of the
Series C Convertible Preferred Stock ceases five (5) years after its issuance.
Under the Amended and Restated Articles, each of the shares of Series C
Convertible Preferred Stock is convertible into one share of Class A Common
Stock and is not entitled to vote except in the event that the Class B
shareholders cannot agree in writing on the composition of the Board of
Directors or on other important matters specified above.
66
<PAGE> 27
NOTE 5: CONTINUED
The following summarizes the Company's capital stock at May 31, 1998 and June 1,
1997:
<TABLE>
<CAPTION>
May 31, 1998 June 1, 1997
Issued Outstanding Issued Outstanding
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A 8 1/4% cumulative
convertible preferred stock - $25
par value, 60,000 shares authorized 15,268 6,548 15,268 6,548
Series B 8 1/4% cumulative
convertible preferred stock - $25
par value, 60,000 shares authorized 16,268 8,496 16,268 8,496
Series C 4.4% cumulative convertible
preferred stock - $25 par value,
10,000 shares authorized 10,000 10,000 -- --
Class A nonvoting common stock -
$25 par value, 800,000 shares
authorized 349,210 290,860 349,210 292,600
Class B voting common stock -
$25 par value, 880,000 shares
authorized 493,123 426,766 493,123 427,131
- -----------------------------------------------------------------------------------------------
</TABLE>
At any time, the holders of the Cumulative Convertible Preferred Stock have the
option to convert their shares to shares of Class A Nonvoting Common Stock based
on the book value of the Class A Nonvoting Common Stock at the time of
conversion. At May 31, 1998, the outstanding Preferred Stock could be converted
into 8,193 shares of Class A Common Stock.
67
<PAGE> 28
NOTE 6: RELATED PARTY TRANSACTIONS
The Company and its subsidiaries, in the normal course of business, purchase and
sell goods and services to related parties. The Company believes that the cost
of such purchases and sales are competitive with alternative sources of supply
and markets. Transactions with related parties are summarized below:
<TABLE>
<CAPTION>
(Unaudited)
Nine-weeks Pro forma
Year ended Year ended ended Year ended year ended
May 31, June 1, June 2, March 31, June 2,
1998 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Park 100 Foods, Inc. $4,365,000 3,155,000 118,000 -- 118,000
Corporate charges:
Warehime Enterprises, Inc. -- -- -- 2,000 2,000
Snyder's of Hanover, Inc. 181,000 175,000 29,000 175,000 148,000
Expenditures:
The Cannery Press, Inc. -- 14,000 14,000 346,000 296,000
Patti & John's, Inc. -- 10,000 4,000 29,000 28,000
Lippy Brothers, Inc. 304,000 1,044,000 -- 752,000 749,000
James G. Sturgill 68,000 135,000 15,000 65,000 80,000
ARWCO Corporation 33,000 29,000 24,000 43,000 34,000
Warehime Enterprises, Inc. 125,000 177,000 1,000 227,000 192,000
John A. and Patricia M
Warehime 56,000 52,000 7,000 42,000 39,000
Snyder's of Hanover, Inc. -- -- -- 17,000 --
George E. Lawrence -- -- -- 70,000 65,000
Park 100 Foods, Inc. 209,000 283,000 -- -- --
Accounts receivable:
Snyder's of Hanover, Inc. 48,000 15,000 11,000 24,000 --
Patti & John's, Inc. -- -- 4,000 3,000 --
Warehime Enterprises 3,000 -- -- -- --
Park 100 Foods, Inc. 346,000 906,000 56,000 -- --
Accounts payable:
Warehime Enterprises, Inc. -- 1,000 -- 5,000 --
The Cannery Press, Inc. -- -- 4,000 4,000 --
Pattie & John's, Inc. -- -- 6,000 -- --
Park 100 Foods, Inc. -- 30,000 -- -- --
James G. Sturgill 7,000 -- -- -- --
ARWCO Corporation 1,000 -- -- -- --
Notes payable:
Warehime Enterprises, Inc. -- 375,000 875,000 875,000 --
Cyril T. Noel 147,000 221,000 294,000 294,000 --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE> 29
NOTE 6: CONTINUED
The Company purchased the Teculutan, Guatemala plant property from ARWCO
Corporation on April 5, 1995 for $250,000. On June 20, 1995, the Company
purchased real estate near the Centre Hall facility from Centre Foods
Enterprises, Inc. for $250,000.
In 1994 the Company entered into a one year lease with Food Service East, Inc.
to lease 20,931 square feet of dry warehouse and production, refrigerated and
frozen storage space. Pursuant to the lease, the Company has two unilateral
options to extend the term of the lease for two successive one-year terms or
until May 31, 1997, and an option to purchase based on an independent appraisal.
On October 1, 1994 the Company increased the rental space to 28,501 square feet
for a total annual rent of $96,703. On June 1, 1996, the Company exercised its
unilateral option to purchase for $904,000 approximately 10.3 acres of land
improved by an office/warehouse facility free and clear of all liens,
encumbrances and security interests.
In connection with the amended complaint filed by Michael A. Warehime versus
John A. Warehime (note 9), pursuant to applicable state law, the Company has
agreed to pay directly all expenses (including attorney's fees) and costs in
advance of the final disposition of the litigation or any substantially similar
or related action, suit, or proceeding. The Company has received an undertaking
from John A. Warehime to repay all costs and expenses if it is ultimately
determined that he is not entitled to be indemnified by the Company. The amount
paid and expensed by the Company under this arrangement for the years ended May
31, 1998, June 1, 1997, and March 31, 1996 was approximately $37,000, $303,000,
and $300,000, respectively.
On April 1, 1996, the Company entered into a stock purchase agreement with John
R. Miller, Jr. to purchase 1,210 shares of the Company's Voting Class B Common
Stock and 5,990 shares of the Company's Nonvoting Class A Common Stock over a
four-year period. The April 22, 1997 Voting Agreement provides that John R.
Miller, Jr. will vote all shares of the Company Common Stock, which he is
entitled to vote as directed by the Board of Directors, provided Clayton J.
Rohrbach, Jr., Arthur S. Schaier, and Cyril T. Noel, or a majority of them, vote
in favor of the matter to vote all shares of both classes of common stock
beginning April 1, 1996 and ending March 31, 2001. At May 31, 1998, the Company
has purchased 693 shares of the Company's Voting Class B Common Stock for
$52,000 and 3,500 shares of the Company's Nonvoting Class A Common Stock for
$147,000.
69
<PAGE> 30
NOTE 6: CONTINUED
A portion of rental expense included in note 4 was paid to ARWCO Corporation;
Warehime Enterprises, Inc.; Centre Foods Enterprises, Inc.; and Food Service
East, Inc., all of which are related companies through common control. The
amounts were $149,000, $307,000, and $340,000 for the years ended May 31, 1998,
June 1, 1997, and March 31, 1996, respectively. The portion of rental
commitments included in note 4 due these companies is summarized as follows:
<TABLE>
<S> <C>
For the fiscal years ending:
1999 $ 88,000
2000 15,000
2001 15,000
------------------------------------
</TABLE>
NOTE 7: BENEFIT PLANS
FROZEN DEFINED BENEFIT RETIREMENT PLANS
The Company previously amended its noncontributory, defined benefit plans to
freeze benefit accruals effective August 31, 1992, and also took action to
terminate the plans effective August 31, 1992. On November 12, 1993, the Board
of Directors rescinded its previous action to terminate the plans and has placed
the plans in a frozen status. During September 1997 the Company terminated the
plans and distributed certain net assets to the participants.
The following table sets forth the plans' funded status and amounts recognized
in the Company's consolidated balance sheet as of:
70
<PAGE> 31
<TABLE>
<CAPTION>
May 31, 1998 June 1, 1997
----------------- --------------------------
Fully Under Fully Under
funded funded funded funded
plan plan plan plan
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit
obligation:
Vested $-- -- (7,168,000) (655,000)
===============================================================================
Projected benefit obligation
for service rendered to
date $-- -- (7,168,000) (655,000)
Plan assets at fair value -- -- 7,750,000 598,000
- -------------------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation -- -- 582,000 (57,000)
Unrecognized (gains) losses -- -- 140,000 262,000
Adjustment to recognize
required minimum
liability -- -- -- (264,000)
- -------------------------------------------------------------------------------
Prepaid (accrued) pension
cost $-- -- 722,000 (59,000)
===============================================================================
</TABLE>
Net periodic pension cost (income) included the following components:
<TABLE>
<CAPTION>
Nine-week
Year ended Year ended period ended Year ended
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest cost $ 555,000 520,000 205,000 496,000
Actual return on plan assets (gain) loss (362,000) (1,330,000) (156,000) (464,000)
Amortization of unrecognized loss 5,000 11,000 1,000 6,000
Deferral of asset gain (loss) and other costs 736,000 823,000 (42,000) (15,000)
- ---------------------------------------------------------------------------------------------------------------
Net pension cost $ 934,000 24,000 8,000 23,000
===============================================================================================================
</TABLE>
Net pension cost for the year ended May 31, 1998 includes loss on termination of
the Plans and adjustment of prior year additional minimum pension liability.
Assumptions used in accounting for the pension plans include discount rates
ranging from 7.09% to 7.25% and an expected long-term rate of return on assets
of 7.0%.
DEFINED CONTRIBUTION PLAN
The Company offers a 401(k) plan covering certain of its employees. The Company
contributes an amount equal to 100% of each employee's deferral up to 5%.
Effective July 25, 1997, the plan was amended to permit matching contributions
to be made in cash and/or securities of the Company (see note 5). The Company's
contribution to the 401(k) plan for the periods ended May 31, 1998, June 1,
1997, June 2, 1996, and March 31, 1996 was $583,000, $557,000, $90,000, and
$539,000, respectively.
71
<PAGE> 32
NOTE 7: CONTINUED
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain employees receive postretirement benefits other than pensions. This plan
is currently not funded. The Company accounts for these costs by accruing for
them over the employee service period. The status of the plan, based on the most
recent measurement dates, is as follows:
<TABLE>
<CAPTION>
May 31, June 1,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Actives eligible to retire $ (159,000) (129,000)
Other actives (282,000) (271,000)
- -----------------------------------------------------------------------------
Total actives (441,000) (400,000)
Current retirees and disableds (2,150,000) (1,174,000)
- -----------------------------------------------------------------------------
Total obligation (2,591,000) (1,574,000)
Plan assets at fair value -- --
- -----------------------------------------------------------------------------
Funded status (2,591,000) (1,574,000)
Unrecognized net (gain) loss 745,000 (222,000)
Unrecognized transition liability,
amortized over 20 years 1,153,000 1,226,000
- -----------------------------------------------------------------------------
Accrued postretirement benefit cost $ (693,000) (570,000)
==============================================================================
</TABLE>
A discount rate of 7.00%, and 7.50% for May 31, 1998 and June 1, 1997,
respectively, was used in determining the actuarial present value of the
accumulated postretirement benefit obligation.
The cost of postretirement benefits other than pensions consisted of the
following components:
<TABLE>
<CAPTION>
Nine-week
Year ended Year ended period ended Year ended
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 16,000 22,000 4,000 16,000
Interest cost 177,000 113,000 19,000 121,000
Amortization of transition
obligation 73,000 73,000 12,000 73,000
Other amortization and deferral 20,000 (1,000) -- --
- ------------------------------------------------------------------------------------------------------
$286,000 207,000 35,000 210,000
======================================================================================================
</TABLE>
The assumed postretirement health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 7.8% for fiscal year May 31,
1998, decreasing each year to an ultimate rate of 5% in 2002 and thereafter.
72
<PAGE> 33
NOTE 7: CONTINUED
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of May 31, 1998 by $173,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended May 31, 1998 by $11,000.
EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENTS
On June 12, 1995, the Company entered into a five-year employment agreement with
its Chief Executive Officer, John A Warehime, at an annual base salary of
$650,000 with such compensation payable retroactively from April 1, 1994 (the
"1995 Employment Agreement"). The 1995 Employment Agreement was amended on
February 13, 1997 (the "Amended Employment Agreement") to, among other things,
reduce the annual base salary payable under the agreement to $498,866, which
modification was applied retroactively to April 1, 1994 (the effective date of
the 1995 Employment Agreement) and modified the method of calculating bonuses
payable to the employee under such agreement. As a result of these retroactive
changes, Mr. Warehime is required to reimburse the Company for $83,024 in excess
compensation previously paid to him through the deduction of such amount from
annual base salary increases provided for under the terms of the Amended
Employment Agreement and to waive accrued bonuses payable for fiscal 1997 under
the 1995 Employment Agreement which would have equaled $2,250,000. The principal
terms of Mr. Warehime's employment arrangements with the Company as amended by
the Amended Employment Agreement are set forth below.
The Amended Employment Agreement provides for annual increases (but not
decreases) in the employee's annual salary equal to the greater of 5% of the
prior year's salary or the annual percentage increase in the Consumer Price
Index (CPI). Mr. Warehime's annual base salary for fiscal 1998 and 1997 was
$578,000 and $550,000, respectively. Unless terminated by either party, the
Amended Employment Agreement automatically renews annually on each anniversary
date so that five years always remain on the term of the agreement. In the event
the employee is terminated without cause, or in the event the employee
terminates his employment after a reduction (without his written consent) of his
duties or authority, compensation, or similar events, the Amended Employment
Agreement provides for the payment of the salary and bonus (including all other
benefits) over the remaining term of the agreement. In the event of termination
due to death or disability, the Amended Employment Agreement provides for the
same payment to the employee (or in the event of the death of the employee, his
spouse, or descendants) for one year and thereafter the payment of supplemental
pension benefits as described below. In addition, the Amended Employment
Agreement provides for the reimbursement by the Company of the employee's legal
and accounting fees up to $75,000 per year and reasonable business expenses
incurred by the employee in connection with the business of the Company. The
Amended Employment Agreement
73
<PAGE> 34
NOTE 7: CONTINUED
also provides the employee with various other benefits including the use of an
automobile, disability and life insurance, and a club membership.
The annual bonus payable to the employee under the Amended Employment Agreement
is equal to $100,000 plus 10% of the Company's pretax earnings over $5.0 million
provided that no annual bonus is payable if pretax earnings of the Company are
less than $5.0 million. The Amended Employment Agreement limits salary and the
annual bonus payment described above to an aggregate of not more than $1.0
million annually. Annual bonuses can be paid in cash or Class A Common
(nonvoting) Stock at the option of the employee. For the years ended May 31,
1998, June 1, 1997, and March 31, 1996, the bonus accrued under this agreement
was $422,000, $450,000, and $0, respectively.
The Amended Employment Agreement also provides for the annual payment of a
long-term performance bonus based upon the Company's performance over the prior
five-year period as measured by its average sales growth and average increase in
operating profits as compared to an industry peer group over the same period.
The bonus payable is calculated based upon a formula matrix set forth in the
Amended Employment Agreement, with such formula being recommended by an
independent management consulting firm retained by the Company and approved by
the Compensation Committee of the Board of Directors. For the years ended May
31, 1998 and June 1, 1997, the long-term performance bonus accrued under this
agreement was $162,000 and $175,000, respectively.
The Amended Employment Agreement provides for annual supplemental pension
benefits, commencing upon the earlier of (a) five years after termination of the
employee (or one year following his death or disability) or (b) the date of
retirement, payable during the life of the employee and upon his death for the
life of his spouse. Such annual supplemental pension benefits are equal to 60%
of average total compensation (including bonuses) over the latest three-year
period prior to retirement, assuming retirement at age 65 or later. Supplemental
pension benefits are reduced based upon an established formula to the extent the
employee retires prior to age 65. The net present value of the cost of providing
this future benefit is recognized by the Company over the remaining expected
years of service. The expense recognized under this agreement was approximately
$411,000, $350,000, and $295,000 for the years ended May 31, 1998, June 1, 1997,
and March 31, 1996, respectively, and $67,000 for the nine-week period ended May
31, 1996. Based on the estimated present value of the deferred compensation, the
estimated present value at retirement (assuming retirement at age seventy) is
approximately $10,300,000.
The Amended Employment Agreement was revised effective as of August 1, 1997 to
make certain clarifying changes and to require that bonus payments to Mr.
Warehime in any taxable year in excess of $1.0 million would be subject to
shareholder approval.
74
<PAGE> 35
NOTE 7: CONTINUED
On January 23, 1997, the Company entered into a five-year employment agreement
with Gary T. Knisely, Executive Vice President, Secretary, and Counsel of the
Company, at an annual salary of $175,000 with such compensation payable
retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by
either party, the Knisely Agreement automatically renews annually on each
anniversary date so that five years always remain on the term of the agreement.
The Knisely Agreement provides for annual salary increases (but not decreases)
equal to the greater of 5% of the prior year's salary or the annual percentage
increase in the CPI, as well as incentive bonuses and various other benefits. As
of May 31, 1998, the aggregate liability of the Company under this agreement for
the next five years is estimated to be $1,117,000, excluding annual performance
bonuses. In the event the employee is terminated without cause, or in the event
the employee terminates his employment after a reduction (without his written
consent) of his duties or authority, compensation, or similar events, the
Knisely Agreement provides for the payment of the salary and bonus (including
all other benefits) over the remaining term of the agreement. In the event of
termination due to death or disability, the Knisely Agreement provides for the
payment of salary and bonus (including all other benefits) to the employee (or
his spouse or other descendants in the event of the employee's death) for the
later of one year from the date of such termination or the death of the
employee.
The Knisely Agreement also provides for annual supplemental pension benefits
equal to 60% of the employee's average annual compensation (including bonuses
but excluding other benefits) over the three most recent fiscal years prior to
the employee's termination if the employee is no longer employed by the Company
and the employee has attained the age of 55. Such annual supplemental pension
benefits are payable for the remainder of the lifetime of the employee. The net
present value of the cost of providing this future pension benefit is recognized
by the Company over Mr. Knisely's expected remaining years of service. The
expense recognized for supplemental pension benefits under this agreement was
approximately $60,000 and $47,000 for the years ended May 31, 1998 and June 1,
1997, respectively. Based on the estimated present value of the supplemental
pension benefit, the estimated present value at retirement (assuming retirement
at age sixty-five) could amount to approximately $3,700,000.
The Company also entered into a change in control severance agreement with Alan
T. Young, which provides for termination compensation if Mr. Young's employment
is terminated: (i) involuntarily or (ii) involuntarily, following a reduction in
base salary, duties, and responsibilities, within 24 months of a change in
control. A "change in control" shall be deemed to occur if John A. Warehime
ceases to be Chief Executive Officer of the Company or ceases to have the power
and authority of the Chief Executive Officer. Pursuant to the terms of this
agreement, any payment due thereunder shall be made over a two year period no
less frequently than monthly and all payments during any twelve month period
shall not in the aggregate exceed the officer's total cash compensation (salary
and bonus) received from the Company during fiscal 1997.
75
<PAGE> 36
NOTE 7: CONTINUED
All payments made pursuant to this agreement are subject to the further
conditions that: (i) the officer maintain the confidentiality of the Company's
trade secrets, customer lists, and other proprietary information of the Company;
(ii) for a period of two years following the termination of the officer, neither
the officer or his employer or business associate shall enter into or attempt to
enter into any business relationship, solicit for employment or employ any
person, employed by the Company or its affiliates at any time within the six
months prior to the officer's termination; and (iii) for a period of two years
following the termination, the officer shall not directly or indirectly own,
manage, operate, join, or participate in any capacity, any entity which is
primarily engaged in a business which competes with any significant business of
the Company or its affiliates. If Mr. Young was terminated on May 31, 1998 under
circumstances entitling him to severance payments pursuant to this agreement,
the aggregate amount due to Mr. Young under this agreement was $380,000.
The Company is also committed to another employee, Patricia H. Townsend, under a
previous employment contract, which provides for minimum salary levels, annual
adjustments, as well as incentive bonuses and for a term which ends in March
2004. Provisions contained in the agreement provide for continuation of the
remuneration for the remainder of the term of the agreement in the event of
termination, incapacity, death, or disability. The estimated commitment for
future salaries through the duration of the agreement as of May 31, 1998 was
approximately $391,000.
NOTE 8: INCOME TAXES
Total income taxes (benefit) for the year ended May 31, 1998, June 1, 1997, the
nine-week period ended June 2, 1996, and the year ended March 31, 1996 were
attributable to the following:
<TABLE>
<CAPTION>
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income from operations $5,367,000 4,281,000 (533,000) 213,000
Minimum pension liability
adjustment 106,000 129,000 -- (235,000)
- -------------------------------------------------------------------------------------------------------
$5,473,000 4,410,000 (533,000) (22,000)
=======================================================================================================
</TABLE>
Income tax expense (benefit) attributable to income from operations consists of:
<TABLE>
<CAPTION>
Year ended Year ended Nine-weeks ended Year ended
May 31, 1998 June 1, 1997 June 2, 1996 March 31, 1996
----------------------------- ------------------------ ------------------------ -----------------------
Federal State Federal State Federal State Federal State
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 4,866,000 905,000 3,644,000 610,000 (14,000) -- 448,000 134,000
Deferred (311,000) (93,000) 47,000 (20,000) (464,000) (55,000) (205,000) (164,000)
- ----------------------------------------------------------------------------------------------------------------------------------
$ 4,555,000 812,000 3,691,000 590,000 (478,000) (55,000) 243,000 (30,000)
==================================================================================================================================
</TABLE>
76
<PAGE> 37
There is no income tax attributable to the income from foreign subsidiaries
since the foreign entities were not subject to taxes on income in 1998, 1997,
and 1996.
The significant components of deferred income tax expense attributable to income
(loss) from operations for the year ended May 31, 1998, June 1, 1997, the
nine-week period ended June 2, 1996, and the year ended March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Nine-week
Year ended Year ended period ended Year ended
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax expense (exclusive of the effects
of other components below) $(404,000) 27,000 (519,000) (248,000)
Effect of change in state tax rate on deferred taxes -- -- -- (121,000)
- -------------------------------------------------------------------------------------------------------------------------
$(404,000) 27,000 (519,000) (369,000)
=========================================================================================================================
</TABLE>
A reconciliation of the Company's effective tax rate to the amount computed by
applying the federal income tax rate of 35% to income (loss) before taxes
expressed in percentages, follows:
<TABLE>
<CAPTION>
Nine-week
Year Year period Year
ended ended ended ended
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% (35.0)% 35.0%
Increase (decrease) in taxes:
State taxes - net of federal tax 3.9 3.5 -- 9.5
Effect of change in state tax rate
on deferred taxes -- -- -- (12.6)
Loss (income) in foreign subsidiary
with no current tax (0.3) (1.7) 2.0 2.8
Other items - net 0.3 2.2 1.0 (1.1)
- ----------------------------------------------------------------------------------------------------
Effective income tax rate 38.9% 39.0% (32.0)% 33.6%
====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax liabilities and deferred tax assets at May 31, 1998 and June 1,
1997, follow:
77
<PAGE> 38
<TABLE>
<CAPTION>
May 31, June 1,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax
liabilities:
Depreciation $(5,445,000) (5,836,000)
Employee benefit obligations (217,000) (115,000)
Capital lease obligations (430,000) (510,000)
Other (208,000) (172,000)
- -----------------------------------------------------------------------------
Total gross deferred tax liabilities (6,300,000) (6,633,000)
- -----------------------------------------------------------------------------
Deferred tax assets:
Inventory costs 172,000 223,000
Other accrued liabilities 1,016,000 1,061,000
Pension and postretirement benefits 298,000 215,000
Net operating loss and credit
carryforwards 371,000 539,000
Other 122,000 154,000
- -----------------------------------------------------------------------------
Total gross deferred tax assets 1,979,000 2,192,000
- -----------------------------------------------------------------------------
Net deferred tax liability $(4,321,000) (4,441,000)
=============================================================================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these
deductible differences. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The Company has not recognized a deferred tax liability for the undistributed
earnings and tax basis differences of its investment in foreign subsidiaries
since the earnings and investment are considered to be permanently invested in
the businesses and, under the tax laws, are not subject to such taxes until
distributed. The accumulated amount of such undistributed earnings was
approximately $2,855,000 at May 31, 1998.
NOTE 9: COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT
As of May 31, 1998, the Company's wholly-owned reinsurance company had
outstanding two letters of credit in the amount of $1,206,000 and $650,000 as
security for the reimbursement of losses arising from the reinsurance assumed by
the Company.
78
<PAGE> 39
NOTE 9: CONTINUED
LEGAL MATTERS
On February 1, 1995, Michael A. Warehime, J. William Warehime, and Elizabeth W.
Stick, three Class B shareholders of the Company, filed a Complaint in the Court
of Common Pleas of York County, Pennsylvania against the Company and John A.
Warehime (Chairman of the Company), in his capacity as voting trustee of two
voting trusts entitling him to vote approximately 52% of the Class B common
stock. The Court has dismissed various claims and parties in the lawsuit and the
only remaining parties are Michael A. Warehime as plaintiff and John A Warehime
as defendant. The only remaining claims are (i) a claim for breach of fiduciary
duty based on exercise of powers beyond those granted by certain voting trust
agreements; (ii) a claim for breach of fiduciary duty for use of the voting
trusts in a manner harmful to their beneficiaries; and (iii) a count requesting
removal of John A. Warehime as the voting trustee of the voting trusts.
On September 13, 1996, certain Class A common stockholders filed a complaint in
equity against six of the Company's directors and the estate of a former
director in the Court of Common Pleas of York County, Pennsylvania (the
complaint). This suit also names the Company as a nominal defendant. The suit
sought various forms of relief including, but not limited to, rescission of the
board's April 28, 1995 approval of John A. Warehime's 1995 Employment Agreement
and the board's February 10, 1995 adjustment of directors' fees. (Since the
filing of this lawsuit, John A. Warehime's 1995 Employment Agreement was
amended. See note 7.) In addition, the plaintiffs sought costs and fees incident
to bringing suit. On November 4, 1996, the complaint was amended to add
additional plaintiffs. On June 24, 1997, the Court dismissed the complaint as
amended for failure to make a prior demand. An appeal has been filed from the
Court's June 24, 1997 Order. On May 12, 1997, a written demand was received by
the Company from the attorney for those Class A common stockholders containing
similar allegations and the allegations raised by the Class A common
stockholders were investigated by a special independent committee of the Board
of Directors and found to be without merit.
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain
Class A shareholders filed motions for a preliminary injunction against the
Company, John A Warehime, in his capacity as a voting trustee, and all certain
directors of the Company in the Court of Common Pleas of York County,
Pennsylvania against a proposal of the Board of Directors to amend and restate
the Company's Articles of Incorporation in the manner hereafter described.
On February 13, 1997, the Board of Directors proposed an amendment and
restatement of the Company's Articles of Incorporation (the "Amended and
Restated Articles") which provides that if all of the following Class B
shareholders (or their Estates upon death of such stockholders) Michael A.
Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and Elizabeth
W. Stick (all members of the Warehime family), do not agree in writing to
composition of the Board of Directors or other important matters specified below
on or after the 1998 annual shareholders meeting, the trustees of the Company's
401(k) Savings Plan (or a
79
<PAGE> 40
NOTE 9: CONTINUED
similar employee benefit plan), acting as fiduciaries for the employees who
participate in the Plan, and the Class A shareholders may become entitled to
vote in the manner described in note 5.
The Amended and Restated Articles create a Series C Convertible Preferred Stock
(see note 5) and also classified the terms of the Board of Directors commencing
with the election at the 1997 annual shareholders meeting and permit directors
to be elected for four year terms as permitted by Pennsylvania law.
The motions for a preliminary injunction were dismissed by the Court on June 24,
1997. The Class B shareholders on June 25, 1997 approved the Amended and
Restated Articles (John A. Warehime being the sole Class B shareholder voting
affirmatively, in his capacity as voting trustee) and the Amended and Restated
Articles became effective June 25, 1997. Appeals have been filed from the denial
of the plaintiffs' motion for a preliminary injunction.
In August 1997, the Board of Directors proposed a further amendment (the
"Amendment") to the Amended and Restated Articles to expand the definition of
"disinterested directors" in the manner described below, and to approve certain
performance based compensation for John A. Warehime solely for the purpose of
making the Company eligible for a federal income tax deduction pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended. A special
meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on
these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the
Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime,
in his capacity as voting trustee, from voting on these proposals. This motion
was denied on August 11, 1997. Michael A. Warehime has filed an appeal. The
Amendment and the proposal under Section 162(m) were approved by Class B
Shareholders (John A. Warehime was the sole Class B shareholder to vote
affirmatively, in his capacity as voting trustee) on August 14, 1997 and the
Amendment became effective on August 14, 1997.
Under the Amendment, the definition of "disinterested directors" means the
person who, in the opinion of counsel for the Company, meet any of the following
criteria: (i) disinterested directors as defined in Section 1715(e) of the
Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are
not "interested" directors as defined in Section 1.23 of The American Law
Institute "Principles of Corporate Governance: Analysis of Recommendations"
(1994); or (iii) persons who qualify as members of the Audit Committee pursuant
to Section 303.00 of the New York Stock Exchange's Listed Company Manual.
80
<PAGE> 41
NOTE 9: CONTINUED
On December 12, 1996, the Occupational Safety and Health Administration (OSHA)
cited the Company with two violations of OSHA regulations arising out of
accidents which occurred at its Clayton, Delaware plant. The proposed penalty
for each violation was $70,000. On December 18, 1996, the Company filed its
Notice of Contest, contesting both alleged violations and the proposed
penalties. On September 22, 1997, pursuant to a final order of the U.S.
Occupational Safety and Health Review Commission, the two violations were
settled between the parties without admission of liability for $4,750 and
$35,000, respectively.
On March 24, 1997, OSHA cited the Company with 22 violations of OSHA regulations
arising out of plant inspections which occurred at its Clayton, Delaware plant.
The proposed penalty for said violations was $498,000. On April 11, 1997, the
Company filed its Notice of Contest, contesting all of the alleged violations
and the proposed penalties. On September 22, 1997, pursuant to a final order of
the U.S. Occupational Safety and Health Review Commission, three of the
twenty-two violations were settled between the parties without admission of
liability for a total of $65,000. In January 1998, the Company and OSHA settled
the remaining citations, by which the Company paid, without admission of
liability, the sum of $95,000. The settlement was approved by OSHA on February
20, 1998.
The Company is involved in various other claims and legal actions including
environmental matters arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
STOCK REPURCHASE PLAN
The Company has agreed to purchase the Company's Class A Common Stock purchased
or owned by employees prior to April 20, 1988. This guarantee of repurchase by
the Company is for an indefinite period of time. No shares were repurchased
under this plan for the year ended May 31, 1998. Shares repurchased under this
plan amounted to 1,251 and 5,789 during the years ended June 1, 1997, and March
31, 1996, respectively. As of May 31, 1998, there are 10,579 shares outstanding
which would be eligible for this plan. The maximum commitment, if requested, for
all eligible shares would be approximately $910,000, based on the most recent
appraised value per share as of March 31, 1998.
NOTE 10: FOREIGN OPERATIONS AND EXCHANGE RESTRICTIONS
FOREIGN OPERATIONS
The Company's foreign subsidiary, Alimentos Congelados Monte Bello, S.A.
(ALCOSA) produces food products in Guatemala which are sold to Sunwise
Corporation in the United States. The revenues generated by the operations in
Guatemala and the assets employed in generating those revenues are as follows:
81
<PAGE> 42
<TABLE>
<CAPTION>
May 31, June 1, June 2, March 31,
1998 1997 1996 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,190,000 13,991,000 1,442,000 18,155,000
Cost of goods sold 10,433,000 12,162,000 1,686,000 17,311,000
Assets 9,344,000 9,968,000 10,734,000 10,756,000
===========================================================================================
</TABLE>
ALCOSA maintains its accounting records in quetzales, although, for financial
reporting purposes, the accounting records have been remeasured to be expressed
in U.S. dollars. The financial statements of ALCOSA have been translated to
their U.S. dollar equivalents prior to being consolidated. Assets and
liabilities have been translated to their U.S. dollar equivalents based on rates
of exchange prevailing at the end of the period except for inventories, fixed
assets, deferred and prepaid expenses, and other assets, which have been
translated at historical rates. Revenue and expense accounts have been
translated at average exchange rates during the period except for depreciation
of fixed assets, which is based on the historical rate. The aggregate exchange
gains and losses arising from the translation of foreign assets and liabilities
and from foreign currency transactions are included in income under the caption
of Other (income) expenses - net and amount to a gain of $73,000, a loss of
$78,000, a gain of $44,000, and a loss of $190,000 for the periods ended May 31,
1998, June 1, 1997, June 2, 1996, and March 31, 1996, respectively. At May 31,
1998, the prevailing exchange rate was Q6.27 to U.S. $1.00.
82
<PAGE> 43
NOTE 11: RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED
EARNINGS PER SHARE
<TABLE>
<CAPTION>
(Unaudited)
Nine weeks Pro forma
Year ended Year ended ended Year ended year ended
May 31, June 1, June 2, March 31, June 2,
1998 1997 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NUMERATOR FOR BASIC EARNINGS
PER SHARE:
Net earnings (loss) applicable
to common stock $8,400,000 6,675,000 (1,139,000) 389,000 374,000
- -------------------------------------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
8 1/4% cumulative convertible
preferred stock* 31,000 31,000 -- -- --
4.40% cumulative convertible
preferred stock 6,000 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) assuming dilution $8,437,000 6,706,000 (1,139,000) 389,000 374,000
=========================================================================================================================
DENOMINATOR:
Basic weighted-average shares 718,712 720,811 722,667 729,608 728,677
EFFECT OF DILUTIVE SECURITIES:
8 1/4% cumulative convertible
preferred stock* 5,786 6,604 -- -- --
4.40% cumulative convertible
preferred stock 1,603 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Diluted weighted-average shares 726,101 727,415 722,667 729,608 728,677
=========================================================================================================================
Basic earnings (loss) per share $ 11.69 9.26 (1.58) 0.53 0.51
Diluted earnings (loss) per share 11.62 9.22 (1.58) 0.53 0.51
=========================================================================================================================
</TABLE>
* For the period ended June 2, 1996, and the years ended March 31, 1996 and
June 2, 1996 (unaudited), the effect of cumulative convertible preferred
stock was antidilutive.
NOTE 12: STATEMENT OF CASH FLOW INFORMATION
The fair value of assets acquired during the year ended May 31, 1998 was
$10,391,000. Cash paid for purchase of these assets was $5,578,000.
Liabilities assumed were $4,813,000.
The Company entered into a note payable agreement to purchase 5,148 shares of
Class B common stock for $368,000 from a director of the Company during the year
ended March 31, 1996.
-83-
<PAGE> 44
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Dollars in thousands First Second Third Fourth
(except per share) quarter quarter quarter quarter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net sales $ 55,892 $ 68,110 $ 67,923 $ 68,696
Gross profit 13,199 16,925 17,388 19,752
Net earnings 1,527 2,512 2,156 2,242
Net earnings per common share - Basic 2.11 3.48 2.98 3.10
Net earnings per common share - Diluted 2.11 3.47 2.96 3.08
Cash Dividends per common share 0.275 0.275 0.275 0.275
- ---------------------------------------------------------------------------------------------------------------------
1997
Net sales $ 56,119 $ 69,036 $ 65,780 $ 68,504
Gross profit 12,879 17,582 15,067 18,825
Net earnings 1,251 2,314 1,474 1,667
Net earnings per common share - Basic 1.72 3.21 2.04 2.31
Net earnings per common share - Diluted 1.72 3.19 2.03 2.30
Cash Dividends per common share 0.275 0.275 0.275 0.275
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Although the Company's Class A. Common Stock is currently traded on the NASDAQ
Bulletin Board under the symbol "HNFSA," trading in the Class A Common Stock is
very sporadic. As a result of the limited market for Class A Common Stock,
shareholders are cautioned not to place undue reliance on bid prices contained
herein as indicators of the true value of the shares of Class A Common Stock.
The following table sets forth the high and low bid prices per share of the
Class A Common Stock on a quarterly basis of the past two fiscal years as
provided by NASDAQ, as well as dividends paid per share.
-84-
<PAGE> 45
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
------------- ---- --- ---------
<S> <C> <C> <C>
September 1, 1996 $ 40.00 $ 40.00 $ 0.275
December 1, 1996 32.00 31.00 0.275
March 2, 1997 35.00 31.00 0.275
June 1, 1997 36.00 34.00 0.275
August 31, 1997 41.50 35.50 0.275
November 30, 1997 44.00 36.75 0.275
March 1, 1998 43.50 43.50 0.275
May 31, 1998 53.00 43.50 0.275
</TABLE>
As of May 31, 1998 there were 409 record holders and approximately 550
beneficial holders of the Class A Common Stock.
DIVIDEND POLICY
The Company has maintained a policy of paying a quarterly dividend of $0.275 per
share. The continuing payment by the Company of dividends in the future is the
sole discretion of its Board of Directors and will depend, among other things,
upon the Company's earnings, its capital requirements and financial condition,
as well as other relevant factors.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 4:00 p.m., September 10,
1998, at the offices of the Company located at 1486 York Street, Hanover,
Pennsylvania.
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-K for its fiscal
year ended May 31, 1998, with the Securities and Exchange Commission. Copies of
the Form 10-K annual report and the Company's quarterly reports may be obtained
without charge by contacting:
Gary T. Knisely
Hanover Foods Corporation
1486 York Road
P.O. Box 334
Hanover, PA 17331
717-632-6000
-85-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY 1 STATE OF INCORPORATION
- --------------------- ----------------------
<S> <C>
Tri-Co. Foods Corp. Pennsylvania
Spring Glen Fresh Foods, Inc. Pennsylvania
Consumers Packing Company Pennsylvania
d/b/a Hanover Foods - Lancaster Division
Hanover Insurance Company Ltd Grand Cayman, B.W.I.
Nittany Corporation Delaware
Pennsylvania
SunnySide Fresh Foods
NOTE: Tri-Co. Foods Corporation has two wholly-owned subsidiaries:
Alimentos Congelados Monte Bello S.A. Republic of Guatemala
Sunwise Corporation Florida
</TABLE>
1: 100% owned by Parent
-86-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> MAY-31-1998
<CASH> 2,337
<SECURITIES> 0
<RECEIVABLES> 23,429
<ALLOWANCES> 0
<INVENTORY> 42,962
<CURRENT-ASSETS> 71,726
<PP&E> 122,510
<DEPRECIATION> 72,641
<TOTAL-ASSETS> 131,007
<CURRENT-LIABILITIES> 54,927
<BONDS> 16,218
1,038
0
<COMMON> 21,057
<OTHER-SE> 33,375
<TOTAL-LIABILITY-AND-EQUITY> 131,007
<SALES> 260,621
<TOTAL-REVENUES> 260,621
<CGS> 193,357
<TOTAL-COSTS> 193,357
<OTHER-EXPENSES> 50,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,020
<INCOME-PRETAX> 13,804
<INCOME-TAX> 5,367
<INCOME-CONTINUING> 8,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,437
<EPS-PRIMARY> 11.69
<EPS-DILUTED> 11.62
</TABLE>
