<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number -- 0-17896
HANOVER FOODS CORPORATION
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 23-0670710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1486 York Road, P.O. Box 334, Hanover, PA 17331
(Address of principal executive offices) (Zip Code)
717-632-6000
(Registrant's telephone number, including area code)
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 for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of issuer's classes of common stock as
of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 30, 1998
<S> <C>
Class A Common Stock, $25 par value 290,504 shares
Class B Common Stock, $25 par value 426,693 shares
</TABLE>
<PAGE> 2
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Thirteen Weeks Ended August 30, 1998
Index
Page
Part I -- Financial Information
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets
August 30, 1998 (Unaudited) and May 31, 1998................ 3
Condensed Consolidated Statements of Operations
(Unaudited), Thirteen Weeks Ended August 30, 1998
and August 31, 1997......................................... 5
Condensed Consolidated Statements of Stockholders'
Equity (Unaudited), Periods Ended August 30, 1998
and May 31, 1998............................................ 6
Condensed Consolidated Statements of Cash Flows
(Unaudited), Thirteen Weeks Ended August 30, 1998
and August 31, 1997......................................... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 8
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 17
Part II -- Other Information............................................ 21
Item 1 -- Legal Proceedings..................................... 21
Items 2-3 -- None.................................................. 23
Item 4 -- Submission of Matters to a Vote of Security Holders... 23
Item 5 -- None.................................................. 24
Item 6 -- Exhibits and Reports on Form 8-K..................... 24
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS August 30, 1998 May 31, 1998
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and Short-Term Cash Investments $ 3,201,000 $ 2,337,000
Accounts and Notes Receivable, Net 20,848,000 23,429,000
Accounts Receivable from Related Parties, Net 415,000 389,000
Inventories 55,372,000 42,962,000
Prepaid Expenses 3,184,000 2,244,000
Deferred Income Taxes 365,000 365,000
------------ ------------
Total Current Assets 83,385,000 71,726,000
------------ ------------
Property, Plant and Equipment, at Cost:
Land and Buildings 39,965,000 35,171,000
Machinery and Equipment 89,638,000 86,965,000
Leasehold Improvements 381,000 374,000
------------ ------------
129,984,000 122,510,000
Less Accumulated Depreciation and
Amortization 73,855,000 72,641,000
------------ ------------
56,129,000 49,869,000
Construction in Progress 30,000 4,411,000
------------ ------------
Total Property, Plant and Equipment 56,159,000 54,280,000
------------ ------------
Other Assets and Deferred Charges:
Intangible Assets, Net 2,377,000 2,323,000
Other Assets 1,663,000 2,678,000
------------ ------------
Total Assets $143,584,000 $131,007,000
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES --
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY August 30, 1998 May 31, 1998
(Unaudited)
<S> <C> <C>
Current Liabilities:
Notes Payable - Banks $ 28,636,000 $ 19,874,000
Accounts Payable 25,081,000 23,979,000
Accrued Expenses 10,022,000 7,717,000
Current Maturities of Long-Term Debt 1,859,000 1,859,000
Income Taxes Payable 619,000 1,498,000
------------- -------------
Total Current Liabilities 66,217,000 54,927,000
------------- -------------
Long-Term Debt, Less Current Maturities 14,359,000 14,359,000
Other Long-Term Liabilities 1,703,000 1,565,000
Deferred Income Taxes 4,618,000 4,686,000
------------- -------------
Total Liabilities 86,897,000 75,537,000
------------- -------------
Stockholders' Equity:
8.25% cumulative convertible preferred, $25 par value;
issuable in series, 120,000 shares authorized;
31,536 shares issued, 15,044 shares outstanding 788,000 788,000
4.40% cumulative convertible preferred, $25 par value;
issuable in series, 10,000 shares authorized;
10,000 shares issued and outstanding 250,000 250,000
Common stock, Class A, non-voting, $25 par value;
800,000 shares authorized, 349,210 shares issued,
290,504 shares at August 30, 1998 and 290,860
shares at May 31, 1998 outstanding 8,729,000 8,729,000
Common stock, Class B, voting, $25 par value;
880,000 shares authorized, 493,123 shares issued,
426,693 shares at August 30, 1998 and 426,766
shares at May 31, 1998 outstanding 12,328,000 12,328,000
Capital Paid in Excess of Par Value 2,143,000 2,143,000
Retained Earnings 40,487,000 39,179,000
Treasury Stock, at Cost (8,013,000) (7,993,000)
Other Comprehensive Income (25,000) 46,000
------------- -------------
Total Stockholders' Equity 56,687,000 55,470,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 143,584,000 $ 131,007,000
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements. 4
<PAGE> 5
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Thirteen Weeks Ended
August 30, 1998 August 31, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net Sales $58,538,000 $55,892,000
Cost of Goods Sold 43,925,000 42,693,000
----------- -----------
Gross Profit 14,613,000 13,199,000
Selling Expenses 8,226,000 7,367,000
Administrative Expenses 2,777,000 2,336,000
----------- -----------
Operating Profit 3,610,000 3,496,000
Interest Expense 764,000 885,000
Other Expenses, Net 77,000 236,000
----------- -----------
Earnings Before Income Taxes 2,769,000 2,375,000
Income Taxes 1,133,000 848,000
----------- -----------
Net Earnings 1,636,000 1,527,000
Dividends on Preferred Stock 12,000 8,000
----------- -----------
Net Earnings Applicable to Common Stock $ 1,624,000 $ 1,519,000
----------- -----------
Earnings Per Share:
Net Earnings Per Common Share - Basic $ 2.26 $ 2.11
Net Earnings Per Common Share - Diluted $ 2.23 $ 2.11
Dividends Per Share, Common $ 0.275 0.275
Basic Weighted Average Shares 717,303 719,496
Diluted Weighted Average Shares 732,224 725,282
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
Unaudited
<TABLE>
<CAPTION>
Cumulative Cumulative
Convertible Preferred Convertible Preferred
Stock Stock Common Stock
Series A and B Series C Class A
Total
Stockholders'
Equity Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1998 $55,470,000 31,536 $788,000 10,000 $ 250,000 349,210 $ 8,729,000
Net Earnings for the Period 1,636,000
Cash Dividends Per Share:
Preferred Stock (12,000)
Common Stock (316,000)
Redemption of Common Stock
(Class A 356 Shares and
Class B 73 Shares) (20,000)
Unrealized Loss on Investments (71,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 30, 1998 $ 56,687,000 31,536 $788,000 10,000 $ 250,000 349,210 $ 8,729,000
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Class B
Treasury Stock
Capital Paid
in Excess of Retained
Shares Amount Par Value Earnings Shares Amount Other
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1998 493,123 $12,328,000 $2,143,000 $39,179,000 141,199 $(7,993,000) $ 46,000
Net Earnings for the Period 1,636,000
Cash Dividends Per Share:
Preferred Stock (12,000)
Common Stock (316,000)
Redemption of Common Stock
(Class A 356 Shares and
Class B 73 Shares) 429 (20,000)
Unrealized Loss on Investments ( 71,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 30, 1998 493,123 $12,328,000 $2,143,000 $40,487,000 141,628 $(8,013,000) $( 25,000)
====================================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Period: August 30, 1998 August 31, 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Net Earnings $ 1,636,000 $ 1,527,000
Adjustments to Reconcile Net Earnings to Net
Cash Used in Operating Activities:
Depreciation and Amortization 1,270,000 1,423,000
Deferred Income Taxes (68,000) 99,000
Changes in Assets and Liabilities:
Accounts Receivable 2,555,000 1,161,000
Inventory (12,410,000) (9,174,000)
Prepaid Expenses (940,000) (853,000)
Accounts Payable and Accrued Expenses 3,407,000 4,210,000
Income Taxes Payable (879,000) 331,000
Other Liabilities 138,000 117,000
------------ ------------
Net Cash Used In Operating Activities (5,291,000) (1,159,000)
------------ ------------
Investing Activities:
(Increase) Decrease in Other Assets 834,000 880,000
Acquisitions of Property, Plant and Equipment (3,093,000) (1,215,000)
------------ ------------
Net Cash Used in Investing Activities (2,259,000) (335,000)
------------ ------------
Financing Activities:
Increase in Notes Payable 8,762,000 2,095,000
Payments on Long-Term Debt 0 (125,000)
Payment of Dividends (328,000) (206,000)
Redemption of Common Stock (20,000) (22,000)
------------ ------------
Net Cash Provided by Financing Activities 8,414,000 1,742,000
------------ ------------
Net Increase in Cash and Cash Equivalents 864,000 248,000
Cash and Cash Equivalents, Beginning of Period 2,337,000 3,312,000
------------ ------------
Cash and Cash Equivalents, End of Period $ 3,201,000 $ 3,560,000
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements. 7
<PAGE> 8
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
August 30, 1998 and August 31, 1997
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of the Corporation
included herein have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Although, certain information normally included in financial statements
prepared in accordance with generally accepted accounting principles
has been omitted, the Registrant believes that the disclosures are
adequate to make the information presented not misleading.
The Corporation's fiscal year ends at the close of operations on the
Sunday nearest to May 31. Accordingly, these financial statements
reflect activity for the thirteen week periods ended August 30, 1998
and August 31, 1997.
It is suggested that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and
the notes thereto included in Form 10-K for the Corporation's fiscal
year ended May 31, 1998.
The condensed consolidated financial statements included herein reflect
all adjustments (consisting only of normal recurring accruals) which,
in the opinion of management, are necessary to present a fair statement
of the results of the interim period.
The results for interim periods are not necessarily indicative of
trends or results to be expected for a full fiscal year.
(2) SHORT-TERM BORROWINGS
The Corporation and its subsidiaries maintain short-term unsecured
lines of credit with various banks providing credit availability
amounting to $90.0 million of which $28,636,000 was borrowed at August
30, 1998. The average cost of funds during the period ended August 30,
1998 was 6.10%.
8
<PAGE> 9
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(3) LONG-TERM DEBT
The long-term debt of the Corporation and its subsidiaries consist of:
<TABLE>
<CAPTION>
August 30, 1998 May 31, 1998
--------------- ------------
<S> <C> <C>
8.74% unsecured senior notes payable
to an insurance company, due
fiscal years ending 1995-2007 $16,071,000 $16,071,000
Installment obligation payable to a related
party, due in equal annual installments
in fiscal years ending 1996-2000
interest at prime rate (8.50% at
August 30, 1998) 147,000 147,000
----------- -----------
16,218,000 16,218,000
Less current maturities 1,859,000 1,859,000
----------- -----------
Net Long Term Debt 14,359,000 14,359,000
----------- -----------
</TABLE>
The term loan agreements with the insurance company and the agreements for
seasonal borrowing with financial institutions contain various restrictive
provisions including those relating to mergers and acquisitions, additional
borrowing, guarantees of obligations, lease commitments, limitations on
declaration and payment of dividends, repurchase of the Corporation's stock, and
the maintenance of working capital and certain financial ratios.
The Corporation is in compliance with the restrictive provisions in the
agreements.
9
<PAGE> 10
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
(4) RELATED PARTY TRANSACTIONS
The Corporation and its subsidiaries, in the normal course of business,
purchase and sell goods and services to related parties. The
Corporation believes that the cost of such purchases and sales are
competitive with alternative sources of supply and markets.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
August 30, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Revenues:
Park 100 Foods, Inc. $ 930,000 $1,747,000
Corporate Charges:
Snyder's of Hanover, Inc. $ 46,000 $ 44,000
Expenditures:
Park 100 Foods Corp. $ 23,000 $ 142,000
ARWCO Corporation $ 4,000 $ 4,000
Warehime Enterprises, Inc. $ 12,000 $ 1,000
John A. & Patricia M. Warehime $ 11,000 $ 16,000
James G. Sturgill $ 18,000 $ 24,000
Lippy Brothers, Inc. $ 1,000 $ 0
---------- ----------
</TABLE>
10
<PAGE> 11
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
The respective August 30, 1998 and May 31, 1998 account balances with related
companies are as follows:
<TABLE>
<CAPTION>
August 30, 1998 May 31, 1998
--------------- ------------
Accounts Receivable:
<S> <C> <C>
Snyder's of Hanover, Inc. $ 33,000 $ 48,000
Park 100 Foods, Inc. $389,000 $346,000
Warehime Enterprises $ 0 $ 3,000
Accounts Payable:
Park 100 Foods, Inc. $ 3,000 $ 0
ARWCO Corporation $ 1,000 $ 1,000
James G. Sturgill $ 0 $ 7,000
Lippy Brothers, Inc. $ 3,000 $ 0
Notes Payable:
Cyril T. Noel $147,000 $147,000
-------- --------
</TABLE>
11
<PAGE> 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
(5) The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" effective with the period ended March 1,
1998, and restated all prior earnings per share amounts to conform to
the provisions thereof.
(6) The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" in the first quarter of the current
fiscal year. Comprehensive income is determined as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
August 30, 1998 August 31, 1997
--------------- --------------
<S> <C> <C>
Net Income $1,636,000 $1,527,000
Other Comprehensive Loss
Unrealized Loss on Investments 71,000 21,000
---------- ----------
Comprehensive Income $1,565,000 $1,506,000
========== ==========
</TABLE>
12
<PAGE> 13
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) CONTINGENCIES
LEGAL PROCEEDINGS
1995 Warehime Family Litigation
On February 1, 1995, Michael A. Warehime, J. William Warehime and
Elizabeth W. Stick, three Class B shareholders of the Corporation,
filed a compliant in the Court of Common Pleas of York County,
Pennsylvania against the Corporation 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.
Derivative Action
On September 13, 1996, certain Class A common stockholders filed a
complaint in equity against six of the Corporation'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
Corporation 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 director's 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
13
<PAGE> 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
(Unaudited)
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 Corporation 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.
1997 Warehime Family Litigation
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and
certain Class A shareholders filed motions for a preliminary injunction
against the Corporation, John A. Warehime, in his capacity as voting
trustee, and all certain directors of the Corporation in the Court of
Common Pleas of York County, Pennsylvania against a Proposal of the
Board of Directors to amend and restate the Corporation's Articles of
Incorporation in the manner hereafter described.
On February 13, 1997, the Board of Directors proposed an amendment and
Restatement of the Corporation'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
Corporation'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.
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.
14
<PAGE> 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Corporation, meet any
of the following criteria: (i) disinterested directors as defined in
Section 17159(e) of the Pennsylvania Business Corporations 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.
15
<PAGE> 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Financial Statements
(Unaudited)
The Corporation 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 Corporation's consolidated financial
position, results of operations or liquidity.
16
<PAGE> 17
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, 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
Form 10-Q, 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.
The following comments should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the Corporation's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales were $58.5 million for the thirteen week period ended
August 30, 1998. This represents an increase of 4.7% over the thirteen week
period ended August 31, 1997 consolidated net sales of $55.9 million. The
increase of $2.6 million was primarily due to by increases in the sales of L.K.
Bowman and Sunnyside Fresh Foods, new acquisitions during the later part of
fiscal 97/98, offset by decreased retail branded sales.
COST OF GOODS SOLD
Cost of goods sold were $43.9 million, or 75.0% of consolidated net sales in the
thirteen week period ended August 30, 1998 and $42.7 million, or 76.4% of
consolidated net sales, for the corresponding period in 1997. The decrease in
cost of goods sold as a percentage of net sales resulted primarily from a
reduction in costs of operations.
17
<PAGE> 18
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
SELLING EXPENSES
Selling expenses were $8.2 million, or 14.1% of consolidated net sales, for the
thirteen week period ended August 30, 1998 as compared to $7.4 million or 13.2%
of consolidated net sales, during the corresponding period in 1997. The increase
in selling expenses as a percentage of net sales reflects higher expenses
related to coupon programs, and increased retail promotional expenses for the
period.
ADMINISTRATIVE EXPENSES
Administration expenses as a percentage of consolidated net sales were 4.7% for
the thirteen week period ended August 30, 1998 compared to 4.2% for the
corresponding period of 1997. The increase is attributed to outside consulting
services dealing with the Year 2000 conversion and the administrative expenses
of L.K. Bowman and Sunnyside Fresh Foods which were acquired last year.
INTEREST EXPENSE
Interest expense was $764,000 for the thirteen week period ended August 30, 1998
as compared to $885,000 for the same period in 1997. The decreased in interest
in mainly due to lower average borrowings of higher interest rate debt during
the current period.
INCOME TAXES
The provision for corporate federal and state income taxes for the thirteen week
period ended August 30, 1998 was $1.1 million, or 40.9% of pretax earnings, as
compared to $0.8 million, or 35.7% of pretax earnings for the same period in
1997. The increase in the effective tax rate is due to decreased earnings in
foreign jurisdictions with lower tax rates in the current year period as
compared to the prior period.
18
<PAGE> 19
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
OPERATING ACTIVITIES
Cash used by operating activities for the thirteen week period ended August 30,
1998 was $5.3 million as compared to $1.2 million during the same period of
1997. The combination of increased inventory levels offset by decreases in
accounts payable and accrued expenses, utilized more cash flow. By comparison
for the same period in 1997, the combination of increased inventory levels
offset by decreases in accounts receivable and increases in accounts payable and
accrued expenses utilized less cash flow.
INVESTING ACTIVITIES
During the thirteen week period ended August 30, 1998 the Corporation spent
approximately $3.1 million for the purchase of land and plant upgrades and
expansions. This compares to $1.2 million spent during the same period last year
for capital projects.
FINANCING ACTIVITIES
The increase in notes payable of approximately $8.8 million during the thirteen
week period ended August 30, 1998 represents borrowings made against available
seasonal lines of credit from financial institutions for use in operations and
plant upgrades and expansions.
The Corporation has available seasonal lines-of-credit from financial
institutions in the amount of $90.0 million of which $28.6 million was utilized
as of August 30, 1998. Additional borrowings are permitted within parameters in
existing debt agreements.
Management believes these credit facilities provide adequate cash availability
for seasonal operating requirements.
19
<PAGE> 20
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
YEAR 2000
Many existing computer programs, including those utilized by the Corporation,
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
Corporation has retained an outside consultant to manage the Corporation's
efforts to bring its computer system into Year 2000 compliance. The Corporation
has contacted its customers, key suppliers and its equipment manufacturers in an
attempt to ensure third party compliance.
In 1997, the Corporation established a management team to assess the
Corporation's Year 2000 issues and to implement the Corporation's Year 2000
compliance program. The management team includes members of the Corporation's
Management Information, Accounting and Finance Departments and certain officers
of the Corporation. The Corporation has completed the majority of its
implementation and testing program and currently anticipates having all of its
information technology systems as well as non-information technology systems
(which include the Corporation's telecommunications systems and food processing
equipment) Year 2000 compliant by the end of the first quarter of 1999. The
Corporation is also in the process of developing a contingency plan in the event
its systems are not Year 2000 compliant on a timely basis. The Corporation
currently estimates the total costs associated with addressing the Year 2000
Issue to be approximately $350,000 and anticipates that such costs will not
materially affect the Corporation's future financial results.
As part of its Year 2000 compliance program, the Corporation is contacting and
surveying vendors and customers with whom which the Corporation does a material
amount of business to determine whether these parties' systems (to the extent
they relate to the Corporation's business) are subject to Year 2000 issues. The
failure of the Corporation's material vendors or customers to convert their
systems on a timely basis may have a material adverse effect on the
Corporation's operations. The Corporation is in the process of developing a
contingency plan in the event these vendors or customers with which the
Corporation does a material amount of business are not Year 2000 compliant on a
timely basis.
20
<PAGE> 21
PART II -- OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
1995 Warehime Family Litigation
On February 1, 1995, Michael A. Warehime, J. William Warehime and Elizabeth W.
Stick, three Class B shareholders of the Corporation, filed a complaint in the
Court of Common Pleas of York County, Pennsylvania against the Corporation 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.
Derivation Action
On September 13, 1996, certain Class A common stockholders filed a complaint in
equity against six of the Corporation'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 Corporation 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 director's 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
Corporation 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.
21
<PAGE> 22
PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
1997 Warehime Family Litigation
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain
Class A shareholders filed motions for a preliminary injunction against the
Corporation, John A. Warehime, in his capacity as voting trustee, and all
certain directors of the Corporation in the Court of Common Pleas of York
County, Pennsylvania against a Proposal of the Board of Directors to amend and
restate the Corporation's Articles of Incorporation the manner hereafter
described.
On February 13, 1997, the Board of Directors proposed an amendment and
Restatement of the Corporation'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
Corporation'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.
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 plaintiff's 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
22
<PAGE> 23
PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
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 become effective on August 14, 1997.
Under the Amendment, the definition of "disinterested directors" means the
person who, in the opinion of counsel for the Corporation, meet any the
following criteria: (i) disinterested directors as defined in Section 1719(e) of
the Pennsylvania Business Corporations 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.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - The
Corporation held its Annual Meeting of Shareholders on September
10,1998 to elect one director of the Corporation. The following
provides information regarding the total votes cash for each nominee
for election as a director.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Cyril T. Noel 557,575 5,503 -
G. Steven McKnoly 233,752 - -
</TABLE>
23
<PAGE> 24
PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Accordingly Cyril T. Noel was elected a director of the Corporation for
a term of four years and until his successor is elected and qualified.
Directors remaining in office include John A. Warehime, Clayton J.
Rohrbach, Jr., T. Edward Lippy, Arthur S. Schaier, James G. Sturgill
and James A. Washburn.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
(a) Exhibits
S-K Exhibit
Number Description of Exhibit
------ ----------------------
11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended August 30,
1998.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANOVER FOODS CORPORATION
Date By: /s/ Gary T. Knisely
---------------------------------- --------------------------------
Gary T. Knisely
Executive Vice President
By: /s/ Pietro Giraffa
--------------------------------
Pietro Giraffa
Controller
25
<PAGE> 1
EXHIBIT 11
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Thirteen Weeks Ended
August 30, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
PRIMARY
Earnings:
Net Earnings $ 1,636,000 $ 1,527,000
Preferred stock dividends $ (12,000) $ (8,000)
----------- -----------
Net earnings applicable to common stock $ 1,624,000 $ 1,519,000
----------- -----------
SHARES
Weighted average number
of shares outstanding
Basic 717,703 719,496
----------- -----------
SHARES
Weighted average number
of shares outstanding
Diluted 732,224 725,282
----------- -----------
Net earnings per share
Basic $ 2.26 $ 2.11
----------- -----------
Net earnings per share
Diluted $ 2.23 $ 2.11
----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
QUARTERLY FINANCIAL STATEMENTS OF HANOVER FOODS CORPORATION AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-30-1998
<CASH> 3,201
<SECURITIES> 0
<RECEIVABLES> 21,263
<ALLOWANCES> 0
<INVENTORY> 55,372
<CURRENT-ASSETS> 83,385
<PP&E> 129,984
<DEPRECIATION> 73,855
<TOTAL-ASSETS> 143,584
<CURRENT-LIABILITIES> 66,217
<BONDS> 14,359
0
1,038
<COMMON> 21,057
<OTHER-SE> 34,592
<TOTAL-LIABILITY-AND-EQUITY> 143,584
<SALES> 58,538
<TOTAL-REVENUES> 58,538
<CGS> 43,925
<TOTAL-COSTS> 43,925
<OTHER-EXPENSES> 11,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 764
<INCOME-PRETAX> 2,769
<INCOME-TAX> 1,133
<INCOME-CONTINUING> 1,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,636
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.23
</TABLE>
