<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 November 30, 1997
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 November 30, 1997
----- --------------------------------
<S> <C>
Class A Common Stock, $25 par value 291,572 shares
Class B Common Stock, $25 par value 426,985 shares
</TABLE>
<PAGE> 2
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Twenty-Six Weeks Ended November 30, 1997
<TABLE>
<CAPTION>
Index
<S> <C>
Page
Part I -- Financial Information
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets
November 30, 1997 (Unaudited) and June 1, 1997.......................... 3
Condensed Consolidated Statements of Operations
(Unaudited), Thirteen Weeks and Twenty-Six Weeks Ended
November 30, 1997 and December 1, 1996.................................. 5
Condensed Consolidated Statements of Stockholders'
Equity (Unaudited), Periods Ended November 30, 1997
and June 1, 1997........................................................ 6
Condensed Consolidated Statements of Cash Flows
(Unaudited), Twenty-Six Weeks Ended November 30, 1997
and December 1, 1996.................................................... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................................. 8
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 13
Part II -- Other Information........................................................ 17
Item 1 -- Legal Proceedings
Items 2-5 -- None
Item 6 -- Exhibits and Reports on Form 8-K...................................... 23
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
ASSETS November 30, 1997 June 1, 1997
(Unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and Short-Term Cash Investments $ 3,156,000 $ 3,312,000
Accounts and Notes Receivable, Net 25,217,000 22,954,000
Accounts Receivable from Related Parties, Net 61,000 890,000
Inventories 58,018,000 41,424,000
Prepaid Expenses 2,199,000 2,064,000
Deferred Income Taxes 733,000 733,000
- ------------------------------------------------------------------------------------------
Total Current Assets 89,384,000 71,377,000
- ------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land and Buildings 34,043,000 33,398,000
Machinery and Equipment 83,909,000 82,037,000
Leasehold Improvements 359,000 349,000
- ------------------------------------------------------------------------------------------
118,311,000 115,784,000
Less Accumulated Depreciation and
Amortization 69,621,000 66,822,000
- ------------------------------------------------------------------------------------------
48,690,000 48,962,000
Construction in Progress 352,000 760,000
- ------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 49,042,000 49,722,000
- ------------------------------------------------------------------------------------------
Other Assets and Deferred Charges:
Intangible Assets, Less Accumulated
Amortization of $2,008,000 and
$2,001,000 434,000 441,000
Other Assets 1,825,000 2,491,000
- ------------------------------------------------------------------------------------------
Total Assets $ 140,685,000 $ 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 November 30, 1997 June 1, 1997
(Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Notes Payable - Banks $ 27, 489,000 $ 24,114,000
Accounts Payable 25,326,000 21,038,000
Accrued Expenses 11,985,000 6,511,000
Current Maturities of Long-Term Debt 1,984,000 2,234,000
Income Taxes Payable 569,000 358,000
- -------------------------------------------------------------------------------------------------
Total Current Liabilities 67,353,000 54,255,000
- -------------------------------------------------------------------------------------------------
Long-Term Debt, Less Current Maturities 16,219,000 16,219,000
Other Long-Term Liabilities 1,346,000 1,226,000
Deferred Income Taxes 5,273,000 5,174,000
- -------------------------------------------------------------------------------------------------
Total Liabilities 90,191,000 76,874,000
- -------------------------------------------------------------------------------------------------
Stockholders' Equity:
8 1/4% 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
Common stock, Class A, non-voting, $25 par value;
800,000 shares authorized, 349,234 shares issued,
291,572 shares at November 30, 1997 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,
426,985 shares at November 30, 1997 and 427,131
shares at June 1, 1997 outstanding 12,328,000 12,328,000
Capital Paid in Excess of Par Value 1,623,000 1,623,000
Retained Earnings 35,198,000 31,570,000
Treasury Stock, at Cost ( 7,932,000) ( 7,887,000)
Other Reserves ( 240,000) 6,000
- -------------------------------------------------------------------------------------------------
Total Stockholders' Equity 50,494,000 47,157,000
- -------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 140,685,000 $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>
- -----------------------------------------------------------------------------------------------
Twenty-Six Weeks Ended Thirteen Weeks Ended
November 30, December 1, November 30, December 1,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $124,002,000 $125,155,000 $ 68,110,000 $69,036,000
Cost of Goods Sold 93,878,000 94,694,000 51,185,000 51,454,000
- -----------------------------------------------------------------------------------------------
Gross Profit 30,124,000 30,461,000 16,925,000 17,582,000
Selling Expenses 17,327,000 17,565,000 9,960,000 10,025,000
Administrative Expenses 4,500,000 4,725,000 2,164,000 2,536,000
- -----------------------------------------------------------------------------------------------
Operating Profit 8,297,000 8,171,000 4,801,000 5,021,000
Interest Expense 1,702,000 1,961,000 817,000 1,027,000
Other Expenses, Net 75,000 406,000 ( 161,000) 210,000
- -----------------------------------------------------------------------------------------------
Earnings Before
Income Taxes 6,520,000 5,804,000 4,145,000 3,784,000
Income Taxes 2,481,000 2,239,000 1,633,000 1,470,000
- -----------------------------------------------------------------------------------------------
Net Earnings 4,039,000 3,565,000 2,512,000 2,314,000
Dividends on Preferred Stock 16,000 16,000 8,000 8,000
- -----------------------------------------------------------------------------------------------
Net Earnings Applicable
to Common Stock $ 4,023,000 $ 3,549,000 $ 2,504,000 $ 2,306,000
- -----------------------------------------------------------------------------------------------
Earnings Per Share:
Net Earnings, Primary $ 5.60 $ 4.93 $ 3.48 $ 3.21
Dividends Per Share, Common 0.550 0.550 0.275 0.275
Average Shares Outstanding 718,688 720,556 719,037 719,177
- -----------------------------------------------------------------------------------------------
</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 and Series B Class A Class B
--------------------- ---------- --------
Total
Stockholders'
Equity Shares Amount Shares Amount Shares
<S> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1997 $47,157,000 31,536 $788,000 349,210 $8,729,000 493,123
Net Earnings for the Year 4,039,000
Cash Dividends Per Share:
Preferred Stock ( 16,000)
Common Stock ( 395,000)
Redemption of Common Stock
(Class A 782 Shares and
Class B 146 Shares) ( 45,000)
Unrealized Gain on Investments ( 246,000)
- -------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1997 $ 50,494,000 31,536 $788,000 349,210 $8,729,000 493,123
=========================================================================================================================
<CAPTION>
Treasury
Stock
-----
Capital Paid
in Excess of Retained
Amount Par Value Earnings Shares Amount Other
<S> <C> <C> <C> <C> <C> <C>
Balance, June 1, 1997 $12,328,000 $1,623,000 $31,570,000 138,952 $(7,887,000) $ 6,000
Net Earnings for the Year 4,039,000
Cash Dividends Per Share:
Preferred Stock ( 16,000)
Common Stock ( 395,000)
Redemption of Common Stock
(Class A 782 Shares and
Class B 146 Shares) 928 ( 45,000)
Unrealized Gain on Investments (246,000)
- -------------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1997 $12,328,000 $1,623,000 $35,198,000 139,880 $(7,932,000) $(240,000)
=========================================================================================================================
</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: November 30, 1997 December 1, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Net Earnings $ 4,039,000 $ 3,565,000
Adjustments to Reconcile Net Earnings to Net
Cash Used in Operating Activities:
Depreciation and Amortization 2,805,000 2,704,000
Deferred Income Taxes 99,000 36,000
Changes in Assets and Liabilities:
Accounts Receivable ( 1,433,000) ( 6,545,000)
Inventory ( 16,595,000) ( 12,959,000)
Prepaid Items ( 135,000) 669,000
Accounts Payable and Accrued Expense 9,761,000 9,198,000
Income Taxes Payable 212,000 882,000
Other Liabilities 121,000 205,000
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities ( 1,126,000) ( 2,245,000)
- -------------------------------------------------------------------------------------------------------
Investing Activities:
(Increase) Decrease in Other Non-Current Assets 420,000 568,000
Acquisitions of Property, Plant and Equipment ( 2,119,000) ( 2,810,000)
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities ( 1,699,000) ( 2,242,000)
- -------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (Decrease) in Notes Payable 3,375,000 8,801,000
Payments on Long-Term Debt and Capital Leases ( 250,000) ( 402,000)
Payment of Dividends ( 411,000) ( 413,000)
Redemption of Common Stock ( 45,000) ( 117,000)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,669,000 7,869,000
- -------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalent ( 156,000) 3,382,000
Cash and Cash Equivalents, Beginning of Period 3,312,000 1,112,000
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 3,156,000 $ 4,494,000
- -------------------------------------------------------------------------------------------------------
</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
November 30, 1997 and December 1, 1996
(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 twenty six week periods of November 30, 1997
and December 1, 1996.
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 for 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 $27,489,000 was borrowed at
November 1, 1997. The average cost of funds during the period ended
November 30, 1997 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>
November 30, 1997 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
November 30, 1997) 221,000 221,000
6.33% installment obligation payable to a
related party, due fiscal years ending
1996-1998 125,000 375,000
- -------------------------------------------------------------------------------------------
18,203,000 18,453,000
Less current maturities 1,984,000 2,234,000
- -------------------------------------------------------------------------------------------
Net Long Term Debt 16,219,000 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>
Twenty Six Weeks Ended Thirteen Weeks Ended
November 30, December 1, November 30, December 1,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Park 100 Foods, Inc. $2,465,000 $724,000 $718,000 $446,000
Corporate Charges:
Snyder's of Hanover, Inc. 88,000 87,000 44,000 43,000
Expenditures:
Park 100 Foods, Inc. 142,000 161,000 0 69,000
Patty & John's, Inc. 0 10,000 0 0
The Cannery Press, Inc. 0 14,000 0 0
ARWCO Corporation 10,000 7,000 6,000 4,000
Warehime Enterprises, Inc. 2,000 47,000 1,000 1,000
John A. & Patricia M. Warehime 30,000 23,000 14,000 12,000
James G. Sturgill 40,000 38,000 16,000 38,000
Sturgill & Associates 0 23,000 0 7,000
Lippy Brothers, Inc. 69,000 179,000 69,000 179,000
- -----------------------------------------------------------------------------------------------------
</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 November 30, 1997 and June 1, 1997 account balances with related
companies are as follows:
<TABLE>
<CAPTION>
November 30, 1997 June 1, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts Receivable:
Snyder's of Hanover, Inc. $ 20,000 $ 16,000
Park 100 Foods, Inc. 279,000 906,000
Accounts Payable:
Park 100 Foods, Inc. 2,000 30,000
Arwco Corporation 1,000 - 0 -
Warehime Enterprises, Inc. - 0 - 1,000
Lippy Brothers, Inc. 235,000 - 0 -
Notes Payable:
Warehime Enterprises, Inc. 125,000 375,000
Cyril T. Noel 221,000 221,000
- -------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
(5) 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.
YEAR 2000
Many existing computer programs, including those utilized the 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, many
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 and has
determined that such cost is not reasonably likely to affect the
Company's future financial results, not is it likely to cause the
Company's reported financial information not to be necessarily
indicative of future operating results or future financial condition.
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 vegetable processing
industry has matured in North America. The overall number of pounds of frozen
and canned vegetables consumed will not significantly increase from year to
year. Sales growth by processor 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 $124.0 million for the twenty six week period ended
November 30, 1997. The represents a decrease of .9% over the twenty six week
period ended December 1, 1996 consolidated net sales of $125.2 million.
Consolidated net sales were $68.1 million for the thirteen week period ended
November 30, 1997, a 1.3% decrease from consolidated net sales of $69.0 million
for the corresponding period in the prior year. The decrease was due to
decreases in canned and frozen branded sales offset by increased food service,
private label and industrial sales.
COST OF GOODS SOLD
Cost of goods sold were $93.9 million, or 75.7% of consolidated net sales in
the twenty six week period ended November 1, 1997 as compared to $94.7 million,
or 75.7% of consolidated net sales, for the corresponding period in 1996. Cost
of goods sold was $51.2 million, or 75.2% 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 November 30, 1997 as
compared to 51.5 million, or 74.5% of consolidated net sales, for the
corresponding period in 1996. The increase in cost of goods sold as a
percentage of net sales for the thirteen week period ended November 30, 1997
resulted from a decrease in the average selling prices per case of product,
offset by decreases in the cost of operations. The cost of goods sold as a
percentage of net sales for the twenty six week period ended November 30, 1997
remains consistent with the prior year periods.
SELLING EXPENSES
Selling expenses were $17.3 million, or 14.0% of consolidated net sales, for
the twenty six week period ended November 30, 1997 as compared to $17.6 million
or 14.0% of consolidated net sales during the corresponding period in 1996.
Selling expenses were $10.0 million or 14.6% of consolidated net sales for the
thirteen week period ended November 30, 1997 compared to $10.0 million, or
14.5% of consolidated net sales, during the corresponding period in 1996. The
decrease in selling expenses reflects lower expenses related to coupon
programs.
ADMINISTRATIVE EXPENSES
Administration expenses as a percentage of consolidated net sales were 3.6% for
the twenty six week period ended November 30, 1997 compared to 3.8% for the
corresponding period of 1996. Administrative expenses as a percentage of
consolidated net sales were 3.2% for the thirteen week period ended November
30, 1997 compared to 3.7% of consolidated net sales during the corresponding
period in 1996. This decrease is attributed to decreases in outside consulting
services, both legal and financial.
INTEREST EXPENSE
Interest expense was $1,702,000 for the twenty six week period ended November
30, 1997 as compared to $1,961,000 for the same period in 1996. Interest
expense was $0.8 million for the thirteen week period ended November 30, 1997
compared to $1.0 million for the same period in 1996. The decrease in interest
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 $75,000 for the twenty six week period ended November
30, 1997 as compared to $406,000 for the same period in 1996. Other expenses,
net was $161,000 in income for the thirteen week period ended November 30, 1997
compared to expense of $210,000 for the same period in 1996. Gain on sale of
investments, foreign exchange gain and increased interest earned attributed to
the decreased expenses during both the twenty six 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 twenty six week period ended November
30, 1997 was $1.1 million as compared to $2.2 million during the same period of
1996. The combination of increased inventory levels and accounts receivable
levels, offset by increases in accounts payable and accrued expenses, utilized
less cash flow. By comparison the same period in 1996 consumed more cash for
increased accounts receivable offset by less cash consumed for increased
inventory levels and less cash generated from increased accounts payable and
accrued expenses.
INVESTING ACTIVITIES
During the twenty six week period ended November 30, 1997 the Corporation spent
approximately $2.1 million for the purchase of land and plant upgrades and
expansions. This compares to $2.8 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 increase in notes payable of approximately $3.4 million during the twenty
six week period ended November 30, 1997 represents borrowings made against
available seasonal lines of credit from financial institutions for use in
operations.
The Corporation has available seasonal lines-of-credit from financial
institutions in the amount of $90.0 million of which $27.5 million was utilized
as of November 30, 1997. Additional borrowings are permitted within prescribed
parameters in existing debt agreements.
Management believes these credit facilities provide adequate cash availability
for seasonal operating requirements.
16
<PAGE> 17
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
these allegations are currently being investigated by a special
committee of the Board of Directors.
17
<PAGE> 18
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
18
<PAGE> 19
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.
19
<PAGE> 20
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. The Corporation and
OSHA have reached a tentative settlement agreement regarding the
remaining citations, by which the Corporation shall pay, without
admission of liability, the sum of $95,000. The agreement will be
formalized and submitted for approval in the month of January, 1998.
20
<PAGE> 21
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.
21
<PAGE> 22
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: January 14, 1998
HANOVER FOODS CORPORATION
BY /s/ GARY T. KNISELY
----------------------------------
Gary T. Knisely
Executive Vice President
BY /s/ PIETRO GIRAFFA
----------------------------------
Pietro Giraffa, Controller
22
<PAGE> 1
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
November 30, 1997 December 1, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIMARY
Earnings:
Net Earnings $4,039,000 $3,565,000
Preferred stock dividends ( 16,000) ( 16,000)
- ------------------------------------------------------------------------------------------------
Net earnings applicable to
common stock $4,023,000 $3,549,000
- ------------------------------------------------------------------------------------------------
SHARES
Weighted average number of
shares outstanding 718,688 720,556
- ------------------------------------------------------------------------------------------------
Net earnings per share --
primary $ 5.60 $ 4.93
- ------------------------------------------------------------------------------------------------
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-02-1997
<PERIOD-END> NOV-30-1997
<CASH> 3,156
<SECURITIES> 0
<RECEIVABLES> 25,278
<ALLOWANCES> 0
<INVENTORY> 58,018
<CURRENT-ASSETS> 89,384
<PP&E> 118,311
<DEPRECIATION> 69,621
<TOTAL-ASSETS> 140,685
<CURRENT-LIABILITIES> 67,353
<BONDS> 18,202
0
788
<COMMON> 21,057
<OTHER-SE> 28,649
<TOTAL-LIABILITY-AND-EQUITY> 140,685
<SALES> 124,002
<TOTAL-REVENUES> 124,002
<CGS> 93,878
<TOTAL-COSTS> 93,878
<OTHER-EXPENSES> 21,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,702
<INCOME-PRETAX> 6,520
<INCOME-TAX> 2,481
<INCOME-CONTINUING> 4,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,039
<EPS-PRIMARY> 5.60
<EPS-DILUTED> 5.60
</TABLE>
