<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 March 1, 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.
Class Outstanding at March 1, 1998
Class A Common Stock, $25 par value 291,166 shares
Class B Common Stock, $25 par value 426,912 shares
<PAGE> 2
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Thirty-Nine Weeks Ended March 1, 1998
Index
Page
Part I -- Financial Information
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets
March 1, 1998 (Unaudited) and June 1, 1997.......................3-4
Condensed Consolidated Statements of Operations
(Unaudited), Thirteen Weeks and Thirty-Nine Weeks Ended
March 1, 1998 and March 2, 1997................................ 5
Condensed Consolidated Statements of Stockholders'
Equity (Unaudited), Periods Ended March 1, 1998
and June 1, 1997............................................... 6
Condensed Consolidated Statements of Cash Flows
(Unaudited), Thirty-Nine Weeks Ended March 1, 1998
and March 2, 1997.............................................. 7
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................... 8-12
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations......................13-17
Part II -- Other Information
Item 1 -- Legal Proceedings.............................................18-22
Items 2-5 -- None....................................................... 23
Item 6 -- Exhibits and Reports on Form 8-K..............................24-26
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ASSETS March 1, 1998 June 1, 1997
(Unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and Short-Term Cash Investments $ 3,962,000 $ 3,312,000
Accounts and Notes Receivable, Net 26,330,000 22,954,000
Accounts Receivable from Related Parties, Net 235,000 890,000
Inventories 50,535,000 41,424,000
Prepaid Expenses 2,551,000 2,064,000
Deferred Income Taxes 733,000 733,000
- --------------------------------------------------------------------------------------
Total Current Assets 84,346,000 71,377,000
- --------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land and Buildings 34,942,000 33,398,000
Machinery and Equipment 86,189,000 82,037,000
Leasehold Improvements 359,000 349,000
- --------------------------------------------------------------------------------------
121,490,000 115,784,000
Less Accumulated Depreciation and
Amortization 71,125,000 66,822,000
- --------------------------------------------------------------------------------------
50,365,000 48,962,000
Construction in Progress 384,000 760,000
- --------------------------------------------------------------------------------------
Total Property, Plant and Equipment 50,749,000 49,722,000
- --------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Intangible Assets, Less Accumulated
Amortization of $2,029,000 and $2,019,000 530,000 441,000
Other Assets 1,872,000 2,491,000
- --------------------------------------------------------------------------------------
Total Assets $137,497,000 $124,031,000
- --------------------------------------------------------------------------------------
</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 March 1, 1998 (Unaudited) June 1, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Notes Payable - Banks $ 22,182,000 $ 24,114,000
Accounts Payable 23,192,000 21,038,000
Accrued Expenses 13,206,000 6,511,000
Current Maturities of Long-Term Debt 1,859,000 2,234,000
Income Taxes Payable 1,039,000 358,000
- --------------------------------------------------------------------------------------------------
Total Current Liabilities 61,478,000 54,255,000
- --------------------------------------------------------------------------------------------------
Long-Term Debt, Less Current Maturities 16,145,000 16,219,000
Other Long-Term Liabilities 1,349,000 1,226,000
Deferred Income Taxes 5,273,000 5,174,000
- --------------------------------------------------------------------------------------------------
Total Liabilities 84,245,000 76,874,000
- --------------------------------------------------------------------------------------------------
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 at March 1, 1998 250,000 - 0 -
Common stock, Class A, non-voting, $25 par value;
800,000 shares authorized, 349,234 shares issued,
291,106 shares at March 1, 1998 and 292,354
shares at June 1, 1997 outstanding 8,729,000 8,729,000
Common stock, Class B, voting, $25 par value;
880,000 shares authorized, 493,123 shares issued,
426,912 shares at March 1, 1998 and 427,131
shares at June 1, 1997 outstanding 12,328,000 12,328,000
Capital Paid in Excess of Par Value 2,143,000 1,623,000
Retained Earnings 37,146,000 31,570,000
Treasury Stock, at Cost (7,973,000) (7,887,000)
Other Reserves (159,000) 6,000
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 53,252,000 47,157,000
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 137,497,000 $ 124,031,000
- --------------------------------------------------------------------------------------------------
</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
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Thirty-Nine Weeks Ended Thirteen Weeks Ended
March 1, March 2, March 1, March 2,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $191,925,000 $190,935,000 $67,923,000 $65,780,000
Cost of Goods Sold 144,413,000 145,407,000 50,535,000 50,713,000
- --------------------------------------------------------------------------------------------------------
Gross Profit 47,512,000 45,528,000 17,388,000 15,067,000
Selling Expenses 27,470,000 25,995,000 10,143,000 8,430,000
Administrative Expenses 7,452,000 7,893,000 2,952,000 3,168,000
- --------------------------------------------------------------------------------------------------------
Operating Profit 12,590,000 11,640,000 4,293,000 3,469,000
Interest Expense 2,410,000 2,957,000 708,000 996,000
Other Expenses, Net 245,000 584,000 170,000 178,000
- --------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 9,935,000 8,099,000 3,415,000 2,295,000
Income Taxes 3,740,000 3,060,000 1,259,000 821,000
- --------------------------------------------------------------------------------------------------------
Net Earnings 6,195,000 5,039,000 2,156,000 1,474,000
Dividends on Preferred Stock 26,000 23,000 10,000 7,000
- --------------------------------------------------------------------------------------------------------
Net Earnings Applicable
to Common Stock $ 6,169,000 $ 5,016,000 $ 2,146,000 $ 1,467,000
- --------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Earnings, Basic $ 8.58 $ 6.96 $ 2.98 $ 2.03
Net Earnings, Diluted 8.55 6.93 2.97 2.03
Dividends Per Share, Common 0.825 0.825 0.275 0.275
Average Shares Outstanding,
Basic 718,609 720,556 719,037 720,556
Average Shares Outstanding,
Diluted 724,347 727,160 724,775 727,160
- --------------------------------------------------------------------------------------------------------
</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
Convertible Preferred
Stock Common Stock Common Stock
Series A, B and C Class A Class B
Total
Stockholders'
Equity Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1997 $ 47,157,000 31,536 $ 788,000 349,210 $8,729,000 493,123 $12,328,000
Net Earnings for the Year 6,195,000
Cash Dividends Per Share:
Preferred Stock (26,000)
Common Stock (593,000)
Redemption of Common Stock
(Class A 1,494 Shares and
Class B 292 Shares) (86,000)
Issuance of Preferred Stock Class C 770,000 10,000 250,000
Unrealized Loss on Investments (165,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 1, 1998 $ 53,252,000 41,536 $ 1,038,000 349,210 $8,729,000 493,123 $12,328,000
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock
Capital Paid
in Excess of Retained
Par Value Earnings Shares Amount Other
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1997 $1,623,000 $31,570,000 138,952 $(7,887,000) $ 6,000
Net Earnings for the Year 6,195,000
Cash Dividends Per Share:
Preferred Stock (26,000)
Common Stock (593,000)
Redemption of Common Stock
(Class A 1,494 Shares and
Class B 292 Shares) 1,786 (86,000)
Issuance of Preferred Stock Class C 520,000
Unrealized Loss on Investments (165,000)
- -------------------------------------------------------------------------------------------------------------
Balance, March 1, 1998 $2,143,000 $37,146,000 140,738 $(7,973,000) $(159,000)
=============================================================================================================
</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>
- -----------------------------------------------------------------------------------------------------------
Thirty-Nine Week Period Ended: March 1, 1998 March 2, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Net Earnings $ 6,195,000 $ 5,039,000
Adjustments to Reconcile Net Earnings to Net
Cash Used in Operating Activities:
Depreciation and Amortization 4,313,000 4,097,000
Deferred Income Taxes 99,000 36,000
Changes in Assets and Liabilities:
Accounts Receivable (2,721,000) (7,492,000)
Inventory (9,111,000) (4,700,000)
Prepaid Items (487,000) 509,000
Accounts Payable and Accrued Expenses 8,849,000 3,845,000
Income Taxes Payable 681,000 96,000
Other Liabilities 123,000 304,000
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,941,000 1,734,000
- -----------------------------------------------------------------------------------------------------------
Investing Activities:
(Increase) Decrease in Other Non-Current Assets 355,000 597,000
Acquisitions of Property, Plant and Equipment (5,330,000) (4,228,000)
- -----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,975,000) (3,631,000)
- -----------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (Decrease) in Notes Payable (1,932,000) 5,822,000
Payments on Long-Term Debt and Capital Leases (449,000) (742,000)
Payment of Dividends (619,000) (618,000)
Redemption of Common Stock (86,000) (117,000)
Issuance of 4.4% Preferred Stock 770,000 - 0 -
- -----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (2,316,000) 4,345,000
- -----------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 650,000 2,448,000
Cash and Cash Equivalents, Beginning of Period 3,312,000 1,112,000
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 3,962,000 $ 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
March 1, 1998 and March 2, 1997
(Unaudited)
- --------------------------------------------------------------------------------
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of the Registrant
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 and thirty-nine week periods of March
1, 1998 and March 2, 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 June 1, 1997.
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 $22,182,000 was borrowed at March
1, 1998. The average cost of funds during the period ended March 1,
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>
March 1, 1998 June 1, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
8.74% unsecured senior notes payable
to an insurance company, due
fiscal years ending 1995-2007 $17,857,000 $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 (8.50% at
March 1, 1998) 147,000 221,000
6.33% installment obligation payable to a
related party, due fiscal years ending
1996-1998 - 0 - 375,000
- -------------------------------------------------------------------------------------------------
18,004,000 18,453,000
Less current maturities 1,859,000 2,234,000
- -------------------------------------------------------------------------------------------------
Net Long Term Debt 16,145,000 16,219,000
- -------------------------------------------------------------------------------------------------
</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>
Thirty-Nine Weeks Ended Thirteen Weeks Ended
March 1, March 2, March 1, March 2,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Park 100 Foods, Inc. $3,559,000 $1,362,000 $1,094,000 $ 638,000
Corporate Charges:
Snyder's of Hanover, Inc. 135,000 131,000 47,000 44,000
Expenditures:
Park 100 Foods, Inc. 165,000 240,000 23,000 79,000
Patty & John's, Inc. 0 10,000 0 0
The Cannery Press, Inc. 0 14,000 0 14,000
ARWCO Corporation 15,000 11,000 5,000 4,000
Warehime Enterprises, Inc. 97,000 177,000 95,000 130,000
John A. & Patricia M
Warehime 45,000 37,000 15,000 14,000
James G. Sturgill 59,000 95,000 19,000 50,000
Lippy Brothers, Inc. 304,000 1,044,000 235,000 865,000
- -------------------------------------------------------------------------------------------------------------
</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 March 1, 1998 and June 1, 1997 account balances with related
companies are as follows:
<TABLE>
<CAPTION>
March 1, 1998 June 1, 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Accounts Receivable:
Snyder's of Hanover, Inc. $ 33,000 $ 15,000
Park 100 Foods, Inc. 209,000 906,000
Accounts Payable:
Park 100 Foods, Inc. 7,000 30,000
Warehime Enterprises, Inc. - 0 - 1,000
Notes Payable:
Warehime Enterprises, Inc. - 0 - 375,000
Cyril T. Noel 147,000 221,000
- -------------------------------------------------------------------------------------
</TABLE>
(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.
11
<PAGE> 12
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
(6) CONTINGENCIES
LEGAL MATTERS
The Corporation is involved in various 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.
See "Legal Proceedings" for a further description of certain legal
proceedings in which the Corporation is currently involved.
12
<PAGE> 13
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 June 1, 1997.
GENERAL
Prices for processed food tend to rise with overall inflation and not in line
with raw farm products. Price surges in farm products due to supply shocks and
crop problems are not passed on to consumers dollar for dollar. Consumers often
switch from one food product that has risen to another which has not changed in
price. Processors tend to absorb raw farm product price increases to remain
competitive. However, when raw farm product prices drop, food processors
try to retain some of the savings. The Company does not expect the overall
number of pounds of frozen and canned vegetables consumed to significantly
increase over the next several years. Generally, the Company expects sales
growth by processors beyond expected inflation rates and population growth will
come at the expense of and loss of market share by another processor. Sales
growth can increase internationally and through promotions to increase
consumption through the introduction of new or improved food products.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales were $191.9 million for the thirty-nine week period ended
March 1, 1998. This represents a decrease of .5% over the thirty-nine week
period ended March 2, 1997 consolidated net sales of $190.9 million.
Consolidated net sales were $67.9 million for the thirteen week period ended
March 1, 1998, a 3.3% increase from consolidated net sales of $65.8 million for
the corresponding period in the prior year. The increase was due to increases in
canned and frozen branded sales as well as prepared salad sales.
COST OF GOODS SOLD
Cost of goods sold were $144.4 million, or 75.2% of consolidated net sales in
the thirty-nine week period ended March 1, 1998 as compared to $145.4 million,
or 76.1% of consolidated net sales, for the corresponding period in 1997. Cost
of goods sold was $50.5 million, or 74.4% of
13
<PAGE> 14
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
consolidated net sales, for the thirteen week period March 1, 1998 as compared
to 50.7 million, or 77.1% of consolidated net sales, for the corresponding
period in 1997. The decrease in cost of goods sold as a percentage of net sales
for the thirteen week period ended March 1, 1998 resulted from a decrease in
costs of operations, offset by a decrease in the average selling prices per case
of product. The cost of goods sold as a percentage of net sales for the
thirty-nine week period ended March 1, 1998 decreased due to reduced operation
costs.
SELLING EXPENSES
Selling expenses were $27.5 million, or 14.3% of consolidated net sales, for the
thirty-nine week period ended March 1, 1998 as compared to $26.0 million or
13.6% of consolidated net sales during the corresponding period in 1997. Selling
expenses were $10.1 million or 14.9% of consolidated net sales for the thirteen
week period ended March 1, 1998 compared to $8.4 million, or 12.8% of
consolidated net sales, during the corresponding period in 1997. The increase in
selling expenses reflects increased expenses related to branded promotional
programs during the periods reported.
ADMINISTRATIVE EXPENSES
Administration expenses as a percentage of consolidated net sales were 3.9% for
the thirty-nine week period ended March 1, 1998 compared to 4.1% for the
corresponding period of 1997. Administrative expenses as a percentage of
consolidated net sales were 4.3% for the thirty-nine week period ended March 1,
1998 compared to 4.8% of consolidated net sales during the corresponding period
in 1997. This decrease is attributed to decreases in outside professional
services, both legal and financial.
INTEREST EXPENSE
Interest expense was $2,410,000 for the thirty-nine week period ended March 1,
1998 as compared to $2,957,000 for the same period in 1997. Interest expense was
$0.7 million for the thirteen week period ended March 1, 1998 compared to $1.0
million for the same period in 1997. The decrease is mainly due to lower average
short-term borrowings during the current period, as well as lower borrowing
rates.
14
<PAGE> 15
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
OTHER EXPENSES, NET
Other expenses, net was $245,000 for the thirty-nine week period ended March 1,
1998 as compared to $584,000 for the same period in 1997. Other expenses, net
was $170,000 in income for the thirteen week period ended March 1, 1998 compared
to expense of $178,000 for the same period in 1997. Gain on sale of investments,
foreign exchange gain and increased interest earned attributed to the decreased
expenses during both the thirty-nine and thirteen week periods compared to the
prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Management's discussion of the Corporation's financial condition should be read
in conjunction with the condensed consolidated statements of cash flows
appearing on page 7 of this report.
OPERATING ACTIVITIES
Cash used by operating activities for the thirty-nine week period ended March 1,
1998 was $7.8 million as compared to $1.7 million during the same period of
1997. The combination of increased net earnings, inventory levels and accounts
receivable levels, offset by increases in accounts payable and accrued expenses,
increased cash flow. By comparison the same period in 1997 consumed more cash
for increased accounts receivable offset by less cash consumed for increased
inventory levels and less cash generated from net earnings, increased accounts
payable and accrued expenses.
INVESTING ACTIVITIES
During the thirty-nine week period ended March 1, 1998, the Corporation spent
approximately $5.3 million for the purchase of land and plant upgrades and
expansions. This compares to $4.2 million spent during the same period last year
for capital projects.
15
<PAGE> 16
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
The decrease in notes payable of approximately $1.9 million during the
thirty-nine week period ended March 1, 1998 represents lower borrowings made
against available seasonal lines of credit from financial institutions for use
in operations.
The Corporation issued $.8 million in preferred stock during the thirteen week
period ending March 1,1998.
The Corporation has available seasonal lines-of-credit from financial
institutions in the amount of $90.0 million of which $22.2 million was utilized
as of March 1, 1998. Additional borrowings are permitted within parameters in
existing debt agreements. Management believes these credit facilities provide
adequate cash availability for seasonal operating requirements.
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 reporting information about
business segments and products in financial statements.
These Statements are effective for fiscal years beginning after December 15,
1997.
In January 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This Statements establishes new
disclosure requirements relating to pension and other postretirement benefits
and is effective for fiscal years beginning after December 15, 1997.
Adoption of the above statements is not expected to have a material affect on
the Corporation's financial statements.
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
- --------------------------------------------------------------------------------
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 evaluated the costs associated with addressing the Year 2000 Issue to be
$350,000 and has determined that such cost is not reasonably likely to
materially affect the Company's future financial results.
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, Year 2000 remediation plans,
and foreign operations. Such factors, which are discussed in the Form 10-Q,
could affect the Corporation's financial performance and could cause the
Corporation'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 Corporation wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.
17
<PAGE> 18
PART II -- OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 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) and 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 suit also named 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 directors' fees. (Since the filing of this lawsuit,
John A. Warehime's 1995 Employment Agreement was amended. See Note 6 to
Consolidated Financial Statements contained in the Form 10-K Report of
the Corporation for the fiscal year ended June 1, 1997.) 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.
18
<PAGE> 19
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 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) 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 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 below: Michael A. Warehime, John A. Warehime, Sally W.
Yelland, J. William Warehime and Elizabeth W. Stick. The above-named
Class B shareholders are all members of the Warehime family.
The Amended and Restated Articles create a Series C Convertible
Preferred Stock and authorize the Board of Directors to issue up to
10,000 shares of such stock to the trustees of the Corporation's 401(k)
Savings Plan (or a similar employee benefit plan). At least a majority
of the trustees of the Corporation's 401(k) Savings Plan (or similar
employee benefit plan), who are appointed by the Board of Directors,
must be "disinterested directors" of the Corporation. If the Class B
shareholders named above cannot unanimously agree in writing on the
composition of the Board of Directors or on other 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
shares. 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
19
<PAGE> 20
PART II -- OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
sale of substantially all of the assets of the Corporation. The voting
power of the Series C Convertible Preferred Stock would cease 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 previously named
cannot agree in writing on the composition of the Board of Directors or
on the important matters specified above.
The Amended and Restated Articles 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.
20
<PAGE> 21
PART II -- OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 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.
Other Litigation
On December 12, 1996, OSHA cited the Corporation with two violations of
OSHA regulations arising out of accidents which occurred at its
Clayton, Delaware plant. The proposed penalty for each violation is
$70,000. On December 18, 1996, the Corporation 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 Corporation 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 is $498,000. On April 11,
1997, the Corporation 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 Corporation and OSHA settled the
remaining citations, by which the Corporation paid, without admission
of liability, the sum of $95,000. The settlement was approved by OSHA
on February 20, 1998.
21
<PAGE> 22
PART II -- OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
2-5 None
6 Exhibits and Reports on 8-K.
(a) Exhibits
11 - Computation of Earnings Per Share
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the period from
which this report is filed.
22
<PAGE> 23
SIGNATURES
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.
Date: April 14, 1998
HANOVER FOODS CORPORATION
BY /s/ Gary T. Knisely
-------------------------------
Gary T. Knisely
Executive Vice President
BY /s/ Pietro Giraffa
-------------------------------
Pietro Giraffa, Controller
23
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share
- --------------------------------------------------------------------------------------------------------------------
Thirty-Nine Weeks Ended Thirteen Weeks Ended
March 1, March 2, March 1, March 2,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC
Earnings:
Net Earnings $ 6,195,000 $ 5,039,000 $ 2,156,000 $ 1,474,000
Preferred stock dividends (26,000) (23,000) (10,000) (7,000)
- --------------------------------------------------------------------------------------------------------------------
Net earnings applicable to
common stock $ 6,169,000 $ 5,016,000 $ 2,146,000 $ 1,467,000
- --------------------------------------------------------------------------------------------------------------------
SHARES
Weighted average number
of shares outstanding 718,609 720,556 718,609 720,556
- --------------------------------------------------------------------------------------------------------------------
Net earnings per share --
basic $ 8.58 $ 6.96 $ 2.99 $ 2.04
- --------------------------------------------------------------------------------------------------------------------
DILUTED
Net Earnings $ 6,195,000 $ 5,039,000 $ 2,156,000 $ 1,479,000
- --------------------------------------------------------------------------------------------------------------------
SHARES
Weighted average number
of shares outstanding 718,609 720,556 719,037 720,556
Effect of Convertible
Preferred Shares 5,738 6,604 5,738 6,604
- --------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares used for diluted
earnings per share 724,347 727,160 724,775 727,160
- --------------------------------------------------------------------------------------------------------------------
Net earnings per share
Diluted $ 8.55 $ 6.93 $ 2.97 $ 2.03
- --------------------------------------------------------------------------------------------------------------------
24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> MAR-01-1998
<CASH> 3,962
<SECURITIES> 0
<RECEIVABLES> 26,565
<ALLOWANCES> 0
<INVENTORY> 50,535
<CURRENT-ASSETS> 84,346
<PP&E> 121,874
<DEPRECIATION> 71,125
<TOTAL-ASSETS> 137,497
<CURRENT-LIABILITIES> 61,478
<BONDS> 16,145
0
1,038
<COMMON> 21,057
<OTHER-SE> 31,157
<TOTAL-LIABILITY-AND-EQUITY> 137,497
<SALES> 191,925
<TOTAL-REVENUES> 191,925
<CGS> 144,413
<TOTAL-COSTS> 144,413
<OTHER-EXPENSES> 35,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,410
<INCOME-PRETAX> 9,935
<INCOME-TAX> 3,740
<INCOME-CONTINUING> 6,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,195
<EPS-PRIMARY> 8.58
<EPS-DILUTED> 8.58
</TABLE>
