<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 27, 2000
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 August 27, 2000
----- ------------------------------
Class A Common Stock, $25 par value 288,420 shares
Class B Common Stock, $25 par value 426,250 shares
1
<PAGE> 2
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Thirteen Weeks Ended August 27, 2000
<TABLE>
<CAPTION>
Index Page
<S> <C>
Part I -- Financial Information
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets
August 27, 2000 (Unaudited) and May 28 2000..............................................3
Condensed Consolidated Statements of Operations (Unaudited)
Thirteen Weeks Ended August 27, 2000
and August 29, 1999......................................................................5
Condensed Consolidated Statements of Stockholders'
Equity, (Unaudited) Periods Ended August 27, 2000
and May 28, 2000.........................................................................6
Condensed Consolidated Statements of Cash Flows
(Unaudited), Thirteen Weeks Ended August 27, 2000
and August 29, 1999......................................................................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..............................................................................24
Item 4-- Submission of Matters to a Vote of Security Holders..................................24
Item 5-- None.................................................................................24
Item 6-- Exhibits and Reports on Form 8-K.....................................................24
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
August 27, 2000 May 28, 2000
ASSETS (Unaudited)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 3,079,000 $ 6,978,000
Accounts and Notes Receivable, Net 24,656,000 28,382,000
Accounts Receivable from Related Parties, Net 165,000 129,000
Inventories
Finished Goods 60,446,000 44,777,000
Raw Materials and Supplies 13,249,000 14,415,000
Prepaid Expenses 1,968,000 1,563,000
Deferred Income Taxes 917,000 812,000
--------------------------------------------------------------------------------------------------------------
Total Current Assets 104,480,000 97,056,000
--------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
Land and Buildings 49,206,000 47,438,000
Machinery and Equipment 109,206,000 106,691,000
Leasehold Improvements 535,000 531,000
--------------------------------------------------------------------------------------------------------------
158,947,000 154,660,000
Less Accumulated Depreciation and
Amortization 86,510,000 84,697,000
--------------------------------------------------------------------------------------------------------------
72,437,000 69,963,000
Construction in Progress 844,000 3,521,000
--------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 73,281,000 73,484,000
--------------------------------------------------------------------------------------------------------------
Other Assets:
Intangible Assets, Net 3,942,000 4,013,000
Other Assets 5,263,000 4,959,000
--------------------------------------------------------------------------------------------------------------
Total Assets $186,966,000 $179,512,000
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY August 27, 2000 May 28, 2000
(Unaudited)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities:
Notes Payable - Banks $ 54,472,000 $ 52,380,000
Accounts Payable 27,025,000 26,533,000
Accrued Expenses 11,294,000 7,696,000
Current Maturities of Long-Term Debt 1,815,000 1,821,000
Income Taxes Payable 365,000 1,060,000
---------------------------------------------------------------------------------------------------------------
Total Current Liabilities 94,971,000 89,490,000
---------------------------------------------------------------------------------------------------------------
Long-Term Debt, Less Current Maturities 10,737,000 10,741,000
Other Liabilities 2,942,000 2,799,000
Deferred Income Taxes 4,778,000 4,170,000
---------------------------------------------------------------------------------------------------------------
Total Liabilities 113,428,000 107,200,000
---------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Series A & B cumulative convertible preferred, $25 par value;
issuable in series, 120,000 shares authorized;
31,256 shares issued, 14,764 shares outstanding 781,000 781,000
Series C cumulative convertible preferred, $25 par value;
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, 349,282 shares issued,
288,420 shares at May 28, 2000 and August 27, 2000
outstanding 8,731,000 8,731,000
Common stock, Class B, voting, $25 par value;
880,000 shares authorized, 493,123 shares issued,
426,250 shares at May 28, 2000 and August 27, 2000
outstanding 12,328,000 12,328,000
Capital Paid in Excess of Par Value 2,148,000 2,148,000
Retained Earnings 56,522,000 55,478,000
Treasury Stock, at Cost (8,134,000) (8,134,000)
Accumulated Other Comprehensive Income 912,000 730,000
---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 73,538,000 72,312,000
---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $186,966,000 $179,512,000
---------------------------------------------------------------------------------------------------------------
</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>
-----------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED
August 27, 2000 August 29, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $65,034,000 $61,621,000
Cost of Goods Sold 49,185,000 45,751,000
-----------------------------------------------------------------------------------------------
Gross Profit 15,849,000 15,870,000
Selling Expenses 9,559,000 8,511,000
Administrative Expenses 2,889,000 2,918,000
-----------------------------------------------------------------------------------------------
Operating Profit 3,401,000 4,441,000
Interest Expense 1,131,000 821,000
Other Expenses, Net 236,000 654,000
-----------------------------------------------------------------------------------------------
Earnings Before Income Taxes 2,034,000 2,966,000
Income Taxes 783,000 1,206,000
-----------------------------------------------------------------------------------------------
Net Earnings 1,251,000 1,760,000
Dividends on Preferred Stock 10,000 12,000
-----------------------------------------------------------------------------------------------
Net Earnings Applicable to
Common Stock 1,241,000 1,748,000
-----------------------------------------------------------------------------------------------
Earnings Per Share:
Net Earnings Per Common
Share - Basic 1.74 2.44
Net Earnings Per Common
Share - Diluted 1.72 2.41
Dividends per Share, Common 0.275 0.275
Basic Weighted Average Shares 714,670 715,565
Diluted Weighted Average Shares 728,349 729,783
-----------------------------------------------------------------------------------------------
</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 Convertible
Total Preferred Stock Preferred Stock Common Stock Common Stock
Stockholders' Series A & B Series C Class A Class B
Equity Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 28, 2000 $72,312,000 31,256 $781,000 10,000 $250,000 349,282 $8,731,000 493,123 $12,328,000
Net Earnings for the Period 1,251,000
Cash Dividends Per Share:
Preferred Stock (10,000)
Common Stock (197,000)
Other Comprehensive Income 182,000
------------------------------------------------------------------------------------------------------------------------------------
Balance, August 27, 2000 $73,538,000 31,256 $781,000 10,000 $250,000 349,282 $8,731,000 493,123 $12,328,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Capital
Paid In Accumulated
Excess Treasury Stock Other
Of Par Retained Comprehensive
Value Earnings Shares Amount Income
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 28, 2000 $2,148,000 $55,478,000 144,227 $(8,134,000) $730,000
Net Earnings for the Period 1,251,000
Cash Dividends Per Share:
Preferred Stock (10,000)
Common Stock (197,000)
Other Comprehensive Income 182,000
--------------------------------------------------------------------------------------------------------------
Balance, August 27, 2000 $2,148,000 $56,522,000 144,227 $(8,134,000) $912,000
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended
August 27, 2000 August 29, 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Net Earnings $ 1,251,000 $ 1,760,000
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,884,000 1,736,000
Deferred Income Taxes 503,000 329,000
Changes in Assets and Liabilities:
Accounts Receivable 3,690,000 4,469,000
Inventories (14,503,000) (12,375,000)
Prepaid Expenses (405,000) (695,000)
Accounts Payable and Accrued Expenses 4,090,000 8,613,000
Income Taxes Payable (695,000) (397,000)
Other Liabilities 143,000 159,000
----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities (4,042,000) 3,599,000
----------------------------------------------------------------------------------------------------------------
Investing Activities:
Increase in Other Assets (122,000) (625,000)
Acquisitions of Property, Plant and Equipment (1,610,000) (3,435,000)
----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,732,000) (4,060,000)
----------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase in Notes Payable 2,092,000 3,664,000
Payments on Long-Term Debt (10,000) -0-
Payment of Dividends (207,000) (287,000)
Redemption of Common Stock -0- (20,000)
----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,875,000 3,357,000
----------------------------------------------------------------------------------------------------------------
Net Increase(decrease) in Cash and Cash Equivalents (3,899,000) 2,896,000
Cash and Cash Equivalents, Beginning of Period 6,978,000 2,214,000
----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 3,079,000 $ 5,110,000
----------------------------------------------------------------------------------------------------------------
</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 27, 2000 and August 29, 1999
(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 week periods ended August 27, 2000
and August 29, 1999.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in Form 10-K for the Corporation's fiscal year ended
May 28, 2000.
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 the 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 $85.0 million, of which $54,472,000 was borrowed at August
27, 2000. The average cost of funds during the period ended August 27,
2000 was 7.03%.
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 27, 2000 May 28, 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.74% unsecured senior notes payable
to an insurance company, due
through 2007 $12,500,000 $12,500,000
Other 52,000 62,000
---------------------------------------------------------------------------------------------------------------
12,552,000 12,562,000
Less current maturities 1,815,000 1,821,000
---------------------------------------------------------------------------------------------------------------
Net Long-Term Debt $10,737,000 $10,741,000
---------------------------------------------------------------------------------------------------------------
</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 as amended or waived as of August 27, 2000.
9
<PAGE> 10
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated 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.
Thirteen Weeks Ended
August 27, 2000 August 29, 1999
--------------------------------------------------------------------------------
REVENUES:
Park 100 Foods, Inc. $444,000 $ 736,000
CORPORATE CHARGES:
Snyder's of Hanover, Inc. $ 0 $ 32,000
EXPENDITURES:
ARWCO Corporation $ 1,000 $ 4,000
Warehime Enterprises, Inc. $ 1,000 $ 1,000
John A. & Patricia M. Warehime $ 15,000 $ 18,000
James G. Sturgill $ 6,000 $ 11,000
Lippy Brothers, Inc. $234,000 $ 0
Schaier Travel, Inc. $ 2,000 $ 2,000
-------------------------------------------------------------------------------
10
<PAGE> 11
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
--------------------------------------------------------------------------------
The respective August 27, 2000 and May 28, 2000 account balances with related
companies are as follows:
August 27, 2000 May 28, 2000
-------------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
Snyder's of Hanover, Inc. $ 0 $26,000
Park 100 Foods, Inc. $165,000 $96,000
Lippy Brothers, Inc. $ 0 $ 7,000
-------------------------------------------------------------------------
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) COMPREHENSIVE INCOME
Comprehensive income is determined as follows:
<TABLE>
<CAPTION>
13 Weeks Ended
August 27, 2000 August 29, 1999
<S> <C> <C>
Net Income $1,251,000 $1,760,000
Other Comprehensive Income
Unrealized Gain on Investments $182,000 $ 33,000
---------- ----------
Comprehensive Income $1,433,000 $1,793,000
---------- ----------
</TABLE>
(6) RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC
AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
13 Weeks Ended
August 27, 2000 August 29, 1999
<S> <C> <C>
Numerator for basic earnings per share:
Net earnings applicable to
common stock $1,241,000 $1,748,000
Preferred stock dividends 10,000 12,000
---------- ----------
Net earnings assuming dilution 1,251,000 1,760,000
---------- ----------
Denominator:
Basic weighted average shares 714,670 715,565
Effect of dilutive securities 13,679 14,218
---------- ----------
Diluted weighted average shares 728,349 729,783
</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 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.
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 complaint for failure to make a prior demand. An
appeal was filed from the court's June 24, 1997 Order. On December 2,
1998, the Superior Court of Pennsylvania held that the derivative
plaintiffs had made adequate demand.
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.
The director defendants filed an Answer and New Matter to the Amended
Complaint on March 17, 1999.
13
<PAGE> 14
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. Pursuant to the Company's Bylaws,
nominations for director must be submitted to the Company in the manner
prescribed by the Bylaws no later than June 1 of the year in which the
meeting is to occur.
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.
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,
14
<PAGE> 15
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 and to enjoin the
Amendment. This Motion was denied on August 11, 1997. 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.
Michael Warehime filed an appeal from the denial of his motion to
enjoin the previously described Amendment to the Company's Amended and
Restated Articles. On December 2, 1998, a majority panel of the
Superior Court of Pennsylvania issued a decision holding that although
John Warehime had acted in good faith in voting for the Amendment to
the Amended and Restated Articles as trustee of the Warehime voting
trust, Mr. Warehime breached his fiduciary duty to the beneficiaries of
the Warehime voting trust in voting for the Amendment. On December 16,
1998, John Warehime filed a motion for reargument en banc with the
Superior Court. On December 16, 1998, Michael Warehime filed a motion
for clarification requesting that the Superior Court issue an order
invalidating the Amendment to the Amended and Restated Articles. On
December 23, 1998, the Superior Court denied Michael Warehime's motion
for clarification. On February 8, 1999, the Superior Court denied the
motion for reargument en banc. On March 10, 1999, John Warehime and the
other directors filed a petition for allowance of appeal with the
Supreme Court of Pennsylvania. On March 29, 1999, Michael Warehime
filed a response to the petition for allowance of appeal and a
cross-petition for allowance of appeal with the Supreme Court of
Pennsylvania. On April 13, 1999, John Warehime and the independent
directors of the Company filed a brief in opposition to the conditional
cross-petition for allowance of appeal filed with Michael Warehime.
On August 13, 1999, Michael Warehime filed a complaint in equity in the
Court of Common Pleas of York County, Pennsylvania, naming as
defendants Arthur S. Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr.,
John A. Warehime, and the Company. The complaint seeks a court order
declaring that the September 1999 election for the board of directors
of the Company be conducted in accordance with the Articles of
Incorporation of the Company as they existed prior to June 25, 1997, an
order declaring that the Series C
15
<PAGE> 16
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Convertible Preferred Stock cannot be voted, and an order that the
following candidates for the board of directors of the Company proposed
by Michael Warehime. Sally Yelland, Elizabeth Stick and J. William
Warehime be accepted by the Company and listed on the ballot to be
distributed at the annual meeting of shareholders of the Company to be
held on September 16, 1999: Michael Warehime, Daniel Meckley, Elizabeth
Stick, Sonny Bowman, and John Denton. The basis for the complaint was
the December 2, 1998 decision of the Pennsylvania Superior Court, which
is currently on appeal to the Pennsylvania Supreme Court, which held
that John A. Warehime breached his fiduciary duties in voting for the
Amended and Restated Articles as trustee of the Warehime voting trust.
The complaint also requested that John A. Warehime pay all costs
incurred by the Company in response to the suit as well as award
Michael Warehime costs and fees and grant such other relief as equity
and justice require. On September 7, 1999 the Court of Common Pleas of
York County denied a request by Michael Warehime for a temporary
restraining order in this case. An appeal from the denial was taken by
Michael Warehime to the Pennsylvania Superior Court on September 15,
1999; the Pennsylvania Superior Court denied a motion by Michael
Warehime for an expedited appeal. Michael Warehime then filed an appeal
with the Superior Court. Oral argument was held before the Superior
Court on February 15, 2000.
On September 12, 2000, in the matter, Michael A. Warehime v. Arthur
Schaier, Cyril T. Noel, Clayton T. Rohrbach, Jr., John A. Warehime and
Hanover Foods Corporation, (Civil No. 99-SU-03860-07), the Superior
Court of Pennsylvania stated, in a Memorandum decision, that the June
25, 1997 shareholder vote, which adopted the Amended and Restated
Articles of Incorporation of the Company should be set aside, and
remanded the case to the Court of Common Pleas of York County to
determine what further relief would be appropriate. It is anticipated
that reconsideration or a stay of the decision by the Pennsylvania
Superior Court will be sought; and if the Pennsylvania Superior Court
decision is not reconsidered or stayed, the decision will be appealed
to the Pennsylvania Supreme Court, which is currently considering a
related issue.
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
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PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "projected", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including but not
limited to quarterly fluctuations in operating results, competition, state and
federal regulation, environmental considerations, and foreign operations. Such
factors, which are discussed in the Form 10-Q, could affect the Company's
financial performance and could cause the Company's actual result 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 28, 2000.
GENERAL
Prices for processed food tend to rise with overall inflation and not in line
with prices of raw farm products. Generally, price surges in farm products due
to supply shocks and crop problems are not passed on to consumers dollar for
dollar. Management believes consumers often switch from one food product that
has risen to another which has not changed in price. As a result, food
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 Corporation does not expect the overall number
of pounds of product consumed to significantly increase over the next several
years. Generally, the Corporation 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 $65.0 million for the thirteen week period ended
August 27, 2000.This represents an increase of 5.5% over the thirteen week
period ended August 29, 1999 consolidated net sales of $61.6 million. The
increase of $3.4 million was primarily due to increases in sales of York Foods,
Inc., York Snacks, Inc., and Bon Ton Foods, Inc. acquired in January 2000 and
increases in frozen industrial sales. These increases were partially offset by
17
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PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
decreases in canned and frozen Branded Retail Sales, decreases in Private Label
Sales and decreases in Canned Mushroom Sales.
COST OF GOODS SOLD
Cost of goods sold were $49.2 million, or 75.6% of consolidated net sales in the
thirteen week period ended August 27, 2000 and $45.8 million or 74.2% of
consolidated net sales for the corresponding period in 1999. The increase in
cost of goods sold as a percentage of net sales resulted primarily from a
reduction in higher margin Premium Branded Retail Sales. Also, decreased Canned
Mushroom and Private Label Sales as well as increased frozen storage expense due
to increased frozen inventory levels contributed to lower margins. These sales
decreases were offset by increases in lower margin Snack Food Sales and Frozen
Industrial Sales.
SELLING EXPENSES
Selling expenses were $9.6 million, or 14.7% of consolidated net sales for the
thirteen week period ended August 27, 2000 as compared to $8.5 million or 13.8%
of consolidated net sales for the corresponding period in 1999. The increase in
selling expense primarily reflects increases at York Foods, Inc., York Snacks,
Inc., and Bon Ton Foods, Inc. acquired in January 2000.
ADMINISTRATIVE EXPENSES
Administrative expenses as a percentage of consolidated net sales were 4.4% for
the thirteen week period ended August 27, 2000 and 4.7% for the corresponding
period of 1999. Consolidation of administration functions among all divisions
contributed to the decrease in these expenses.
INTEREST EXPENSE
Interest expense was $1,131,000 for the thirteen week period ended August 27,
2000 as compared to $821,000 for the same period in 1999. The increase in
interest is mainly due to higher average borrowings, as well as higher average
cost of funds, during the current period.
OTHER EXPENSES
Other expenses were $236,000 for the thirteen week period ended August 27, 2000
as compared to $654,000 for the same period in 1999. The decrease in other
expenses is primarily due to a decreased foreign translation adjustment compared
to the prior year period.
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PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
INCOME TAXES
The provision for corporate federal and state income taxes for the thirteen week
period ended August 27, 2000 was $783,000, or 38.5% of pretax earnings, as
compared to $1.2 million, or 40.7% of pre-tax earnings for the same period in
1999. The decrease in the effective tax rate is primarily due to increased
earnings, that were not subject to income taxes, in foreign jurisdictions in the
current year period as compared to the prior period.
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
Net working capital was $9.5 million at August 27, 2000 and $7.6 million at May
28, 2000. The current ratios were 1.10 and 1.08 on August 27, 2000 and May 28,
2000, respectively.
Cash used in operating activities for the thirteen week period ended August 27,
2000 was a $4.0 million as compared to cash provided by operating activities of
$3.6 million during the same period of 1999. The combination of decreased
accounts receivable, increased accounts payable and accrued expenses offset by
increased inventory levels utilized more cash flow in the thirteen week period
ended August 27, 2000 compared to the prior year period.
INVESTING ACTIVITIES
During the thirteen week period ended August 27, 2000, the Corporation spent
approximately $1.6 million for the purchase of land and plant upgrades and
expansions. This compares to $3.4 million spent during the same period last year
for capital projects.
FINANCING ACTIVITIES
The increase in note payable of approximately $2.1 million during the thirteen
week period ended August 27, 2000 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 $85.0 million, of which $54.5 million was utilized
as of August 27, 2000. Additional borrowing is permitted within prescribed
parameters in existing debt agreements, which contain certain performance
covenants.
The Company believes that it has sufficient working capital and availability
from seasonal lines of credit to meet its cash flow needs.
19
<PAGE> 20
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.
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 complaint for
failure to make a prior demand. An appeal was filed from the court's June 24,
1997 Order. On December 2, 1998, the Superior Court of Pennsylvania held that
the derivative plaintiffs had made adequate demand.
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.
The director defendants filed an Answer and New Matter to the Amended Complaint
on March 17, 1999.
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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), 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. Pursuant to the Company's Bylaws, nominations for director must be
submitted to the Company in the manner prescribed by the Bylaws no later than
June 1 of the year in which the meeting is to occur.
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.
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 and to enjoin
the Amendment. This Motion was denied on August 11, 1997. 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,
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PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
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 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.
Michael Warehime filed an appeal from the denial of his motion to enjoin the
previously described Amendment to the Company's Amended and Restated Articles.
On December 2, 1998, a majority panel of the Superior Court of Pennsylvania
issued a decision holding that although John Warehime had acted in good faith in
voting for the Amendment to the Amended and Restated Articles as trustee of the
Warehime voting trust, Mr. Warehime breached his fiduciary duty to the
beneficiaries of the Warehime voting trust in voting for the Amendment. On
December 16, 1998, John Warehime filed a motion for reargument en banc with the
Superior Court. On December 16, 1998, Michael Warehime filed a motion for
clarification requesting that the Superior Court issue an order invalidating the
Amendment to the Amended and Restated Articles. On December 23, 1998, the
Superior Court denied Michael Warehime's motion for clarification. On February
8, 1999, the Superior Court denied the motion for reargument en banc. On March
10, 1999, John Warehime and the other directors filed a petition for allowance
of appeal with the Supreme Court of Pennsylvania. On March 29, 1999, Michael
Warehime filed a response to the petition for allowance of appeal and a
cross-petition for allowance of appeal with the Supreme Court of Pennsylvania.
On April 13, 1999, John Warehime and the independent directors of the Company
filed a brief in opposition to the conditional cross-petition for allowance of
appeal filed with Michael Warehime.
On August 13, 1999, Michael Warehime filed a complaint in equity in the Court of
Common Pleas of York County, Pennsylvania, naming as defendants Arthur S.
Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr., John A. Warehime, and the
Company. The complaint seeks a court order declaring that the September 1999
election for the board of directors of the Company be conducted in accordance
with the Articles of Incorporation of the Company as they existed prior to June
25, 1997, an order declaring that the Series C Convertible Preferred Stock
cannot be voted, and an order that the following candidates for the board of
directors of the Company proposed by Michael Warehime. Sally Yelland, Elizabeth
Stick and J. William Warehime be accepted by the Company and listed on the
ballot to be distributed at the annual meeting of shareholders of the Company to
be held on September 16, 1999: Michael Warehime, Daniel Meckley, Elizabeth
Stick, Sonny Bowman, and John Denton. The basis for the complaint was the
December 2, 1998 decision of the Pennsylvania Superior Court, which is currently
on appeal to the Pennsylvania Superior Court, which held that John A. Warehime
had breached his
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PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
fiduciary duties in voting for the Amended and Restated Articles as trustee of
the Warehime voting trust. The complaint also requested that John A. Warehime
pay all costs incurred by the Company in response to the suit as well as award
Michael Warehime costs and fees and grant such other relief as equity and
justice require. On September 7, 1999 the Court of Common Pleas of York County
denied a request by Michael Warehime for a temporary restraining order in this
case. An appeal from the denial was taken by Michael Warehime to the
Pennsylvania Superior Court on September 15, 1999; the Pennsylvania Superior
Court denied a motion by Michael Warehime for an expedited appeal. Michael
Warehime then filed an appeal with the Superior Court. Oral argument was held
before the Superior Court on February 15, 2000.
On September 12, 2000, in the matter, Michael A. Warehime v. Arthur Schaier,
Cyril T. Noel, Clayton T. Rohrbach, Jr., John A. Warehime and Hanover Foods
Corporation, (Civil No. 99-SU-03860-07), the Superior Court of Pennsylvania
stated, in a Memorandum decision, that the June 25, 1997 shareholder vote, which
adopted the Amended and Restated Articles of Incorporation of the Company should
be set aside, and remanded the case to the Court of Common Pleas of York County
to determine what further relief would be appropriate. It is anticipated that
reconsideration or a stay of the decision by the Pennsylvania Superior Court
will be sought; and if the Pennsylvania Superior Court decision is not
reconsidered or stayed, the decision will be appealed to the Pennsylvania
Supreme Court, which is currently considering a related issue.
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.
ITEM 2. CHANGES IN SECURITIES -- None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- None
ITEM 5. OTHER INFORMATION -- None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -- None
(a) Exhibits
S-K Exhibit
Number Description of Exhibit
------ ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended August 27,
2000.
23
<PAGE> 24
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: October 10, 2000 By: /s/ Gary T. Knisely
---------------------------------
Gary T. Knisely
Executive Vice President
By: /s/ Pietro Giraffa
---------------------------------
Pietro Giraffa
Controller
24
