-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OX7N9ZoFVCIb89xlj6f8tIqXfQeWLdLvOAKje2h6UQyq7LDD9iJ5oHnJmdsfOLBf TlOstP4zLli7oJrrzKe5GQ== 0000893220-97-001498.txt : 19970912 0000893220-97-001498.hdr.sgml : 19970912 ACCESSION NUMBER: 0000893220-97-001498 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970601 FILED AS OF DATE: 19970829 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER FOODS CORP /PA/ CENTRAL INDEX KEY: 0000853733 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FRUITS, VEG & PRESERVES, JAMS & JELLIES [2033] IRS NUMBER: 230670710 STATE OF INCORPORATION: PA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17896 FILM NUMBER: 97673588 BUSINESS ADDRESS: STREET 1: 1486 YORK ST STREET 2: PO BOX 334 CITY: HANOVER STATE: PA ZIP: 17331 BUSINESS PHONE: 7176326000 MAIL ADDRESS: STREET 1: 1486 YORK STREET STREET 2: P O BOX 334 CITY: HANOVER STATE: PA ZIP: 17331 FORMER COMPANY: FORMER CONFORMED NAME: HANOVER BRANDS INC /PA/ DATE OF NAME CHANGE: 19900815 10-K 1 FORM 10-K HANOVER FOODS CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the fiscal year ended June 1, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to ------------------------ ---------------- Commission file number 000-17896 ----------------------------------------------------- HANOVER FOODS CORPORATION (Exact name of Registrant as specified in its charter) PENNSYLVANIA 23-0670710 (State or other jurisdiction) (IRS Employer I.D. No.) P.O. BOX 334, YORK STREET EXTENDED, HANOVER, PENNSYLVANIA 17331-0334 (Address of principal executive offices) (Zip code) Registrant's telephone number including area code (717) 632-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name Of Each Exchange On Title Of Each Class Which Registered ------------------- ---------------- Class A Nonvoting Common None Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ------ As of August 10, 1997, the estimated aggregate market value of Class B Voting Common Stock held by non-affiliates of the Registrant was $510,518. As of August 10, 1997, the estimated aggregate market value of Class A Nonvoting Common Stock held by non-affiliates of the Registrant was $8,547,167. (The exclusion of the market value of shares owned by any person shall not be deemed an admission that such person is an "affiliate" of the Registrant.) There were 427,058 shares of Class B Voting Common Stock outstanding as of August 10, 1997. There were 292,354 shares of Class A Nonvoting Common Stock outstanding as of August 10, 1997. 2 PART I ITEM 1. BUSINESS OVERVIEW Hanover Foods Corporation (as used herein the term "Corporation" refers to Hanover Foods Corporation and its consolidated subsidiaries) was incorporated on December 12, 1924 in Harrisburg, Pennsylvania. The Corporation consists of two (2) operating divisions: Hanover and Myers. In addition, the Corporation has five (5) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers Packing Company, d/b/a Hanover Foods - Lancaster Division, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, Ltd., and Nittany Corporation. Tri-Co. Foods Corp. in turn has two (2) wholly-owned subsidiaries, Alimentos Congelados Monte Bello, S.A., and Sunwise Corporation. Originally, the Corporation was established to provide seasonal packing of locally grown peas, beans and other vegetables. From this beginning, the Corporation has grown to become one of the leading independent processors of canned vegetables, frozen vegetables, frozen meat products, frozen entrees, frozen soft pretzels and fresh foods in the eastern United States. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or a few suppliers. This growth has resulted from the Corporation's extended scope of operations, new product development and acquisitions. Currently, 52% of the Corporation's sales volume, primarily frozen sales, is transacted during the third and fourth quarters of the Corporation's fiscal year and 48% of the Corporation's sales volume, primarily canned sales, is transacted during the first and second quarters of the Corporation's fiscal year. See "Risk Factors - Industry Conditions and Price and Volume Fluctuations." The Corporation is a vertically integrated processor of vegetable products in one industry segment. It is involved in the growing, processing, canning, freezing, freeze-drying, packaging, marketing and distribution of its products under its own trademarks, as well as other branded, customer and private labels. "See Risk Factors - General Risks of the Food Industry." The Corporation enjoys its strongest retail sales in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, canned pasta and frozen soft pretzel products has enabled the Corporation to increase and expand its distribution throughout the eastern seaboard. Distribution in the remainder of the United States is limited to food service, military and industrial customers. OPERATIONS The Corporation has operations at five (5) plants in Pennsylvania, one (1) plant in Delaware and -1- 3 two (2) plants in Guatemala. PRODUCTS The Corporation markets its products under the brand names HANOVER, HANOVER FARMS, MYERS, PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL'S, DUTCH FARMS, SUNWISE, O&C (jarred onions only), and SPRING GLEN FRESH FOODS. The products sold by the Corporation under these brand names include canned vegetables, beans and pasta as well as frozen vegetables, frozen meat products, food entrees, refrigerated and fresh foods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year Ended June 1, 1997 Results of Operations Compared to Year Ended June 2, 1996." DISTRIBUTION The Corporation's products are marketed under its brand labels and customer private labels to the consumer for home use and also to the food service trade which includes restaurants, fast food chains, hospitals and schools as well as military and other governmental uses. The Company's ten largest customers account for approximately 45% of the Company's net sales and accounts receivable with no single customer accounting for more than 10% of net sales for the fiscal years ended June 1, 1997, March 31, 1996 and April 2, 1995. The Corporation's products are distributed directly to its customers and indirectly via independent distributors. Sales activities are conducted via Corporation employed sales personnel and independent sales brokerage firms. The Corporation also manufactures private label food products for other food companies. COMPETITION The Corporation markets its food products to the retail and food service sectors in the northeastern, mid-Atlantic, southeastern and midwestern areas of the United States. See "Risk Factors - Competition." The principal methods of competition within the food processing industry are: price, promotion, advertising, product quality and service. TRADEMARKS The Corporation has various registered and unregistered trademarks, service marks and licenses which are of material importance to the Corporation's business. BACKLOG OF ORDERS The Corporation manufactures against customer forecasts and orders. While at any given time -2- 4 there may be a backlog of orders, such backlog is not material to total sales, nor are the changes from time to time significant. RESEARCH AND DEVELOPMENT The Corporation engages in research and development of new products and improvement of existing products as well as the improvement and modernization of its operating plants and equipment. See Note 1 of the Notes to Consolidated Financial Statements. REGULATION The Corporation's operations, as is the case of all food companies, are subject to strict regulation by the U.S. Food and Drug Administration (FDA). The Corporation is also subject to inspection by the Food Safety and Quality Service Division (USDA), for its meat and poultry products. FDA regulates the safety of the food product, the identity of the product, its purity and identification of ingredients therein. USDA establishes grades for products and regulates sanitation. The appropriate state agencies regulate the sanitation of the Corporation's plants and the manufacture of food products utilizing flour in any baking process. The Corporation is also regulated by many other federal and state governmental agencies such as Occupational Safety and Health Administration (OSHA), Federal Trade Commission and U.S. Environmental Protection Agency. See "Risk Factors - Regulations" and "Legal Proceedings." ENVIRONMENTAL CONSIDERATIONS In the past and currently the Corporation is making investments to comply with all federal, state and local laws, rules and regulations. Such expenditures have not been material with respect to the Corporation's capital expenditures, earnings or competitive position, and are not expected to be in the future. See "Risk Factors - Environmental Risks" and "Legal Proceedings." SOURCES OF SUPPLY The Corporation maintains an intimate involvement in all phases of agricultural crop production as well as direct procurement of fresh vegetables. The Corporation procures all of its fresh vegetable requirements through direct contracts with farmers who cultivate and harvest the crops according to the Corporation's specifications. In addition, the Corporation directly procures beans, tomato based products, pasta, herbs and other ingredients, as well as containers and packaging materials from outside vendors throughout the world. EMPLOYEES The Corporation, its divisions and subsidiaries currently employ approximately 1,512 employees -3- 5 on a full-time and a seasonal basis. Approximately 1,332 employees are employed in the United States and 180 are employed in Guatemala. A total of 714 production workers at the Hanover, PA, Centre Hall, PA and Clayton, DE plants are members of the United Food and Commercial Workers Union - - Locals 1776, 72 and 56, respectively. The Hanover and Centre Hall, PA plants each have their own three (3) year contract beginning January 1, 1997 and ending December 31, 1999. The Clayton, DE plant has its own three (3) year contract beginning January 1, 1996 and ending December 31, 1998. There are no union contracts at any other plants or locations of the Corporation. The Corporation has never had any strikes or labor disputes interfering with its operations. Management considers labor relations to be excellent. FOREIGN OPERATIONS The Corporation's wholly-owned subsidiary, Tri-Co. Foods Corp., has two (2) wholly-owned subsidiaries, Alimentos Congelados Monte Bello, S.A., San Jose Pinula, Guatemala and Sunwise Corporation, Lakeland, Florida. Alimentos Congelados Monte Bello, S.A. procures, processes and ships vegetables produced in Guatemala. Alimentos Congelados Monte Bello, S.A. contracts with approximately 2,500 independent farmers in Guatemala for the growing and harvesting of broccoli, cauliflower, okra and Brussels sprouts. The raw vegetable product purchased by the Corporation is frozen at one of two Corporation plants located at San Jose Pinula, Guatemala and Teculutan, Guatemala. Sunwise Corporation imports and distributes the Guatemalan product to Hanover Foods Corporation. The business of the Corporation in Guatemala is subject to the laws of Guatemala which may place restrictions and controls on such matters as ownership, imports and exports, prices, product lines and transfer of funds, and is also subject to the fluctuating exchange rate between the Guatemalan quetzal and the U.S. dollar. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Impact of Events and Commitment of Future Operations" and "Risk Factors - Risks Associated With Foreign Operations." Information with respect to the revenue, cost of sales and identifiable assets for the Corporation's foreign operations is set forth in Note 10 to the Consolidated Financial Statements entitled "Foreign Operations." RISK FACTORS Industry Conditions and Price and Volume Fluctuations The Corporation's financial performance and growth are related to conditions in the food -4- 6 processing industry. The United States food processing industry is a mature industry. The Corporation's net sales are a function of product availability and market pricing. In the food processing industry, product availability and market prices tend to have an inverse relationship: market prices tend to decrease as more product is available, whereas if less product is available, market prices tend to increase. Product availability is a direct result of plantings, growing conditions, crop yields and inventories, all of which vary from year to year. In addition, price can be affected by the planting, inventory level and individual pricing decisions of the three or four largest processors in the industry. Generally, the market prices in the food processing industry tend to adjust more quickly to variations in product availability than an individual processor can adjust its cost structure; thus, in an over-supply situation, a processor's margins likely will weaken, as suppliers generally are not able to adjust their cost structure as rapidly as market prices adjust for the over-supply. The Corporation typically has experienced lower margins during times of industry over-supply. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Seasonality and Quarterly Fluctuations The Corporation's operations are affected by the growing cycle of the vegetables it processes. The Corporation's business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an oversupply situation in a given year. This oversupply typically will result in depressed selling prices and reduced profitability to the Corporation on the inventory produced from that year's crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This shortage typically will result in higher selling prices and increased profitability to the Corporation. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather. Because many of the raw materials processed by the Company are agricultural crops, production of products using these crops is predominantly seasonal. As a result, the Company needs access to working capital financing to meet its production requirements during these periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." Competition All of the Corporation's products compete with those of other national, major and small regional food processing companies under highly competitive conditions. Many of the Corporation's major competitors in the market are larger and have greater financial and marketing resources than the Corporation. Continued industry consolidation also may increase the market strength of the Corporation's larger competitors. -5- 7 Regulation United States and foreign governmental laws, regulations and policies directly affect the agricultural industry and food processing industry. The Corporation is subject to regulation by the FDA, the USDA, the Federal Trade Commission, the Environmental Protection Agency and various state agencies with respect to production, packaging, labeling and distribution of its food products. The application or modification of existing, or the adoption of new, laws, regulations or policies could have an adverse effect on the Corporation's business and results of operations. General Risks of the Food Industry Food processors are subject to the risks of adverse changes in general economic conditions; evolving consumer preferences and nutritional and health-related concerns; changes in food distribution channels and increasing buying power of large supermarket chains and other retail outlets that tend to resist price increases; federal, state and local food processing controls; consumer product liability claims; and risks of product tampering. Environmental Risks The disposal of solid and liquid waste material resulting from the preparation and processing of foods are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have had an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities. The Corporation cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by the Corporation, some of which could be material. Risks Associated with Foreign Operations Foreign operations generally involve greater risks than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States' economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country's currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in -6- 8 that country. Some of these are more pronounced in third world countries such as Guatemala. At June 1, 1997, the Corporation had $10.0 million in assets invested in its foreign operations. ITEM 2. PROPERTIES The following is a list of the Corporation's manufacturing, processing and warehousing properties. The Corporation owns each of the properties. UNITED STATES Hanover, PA - Canned and jarred products processing, repackaging of frozen vegetables, frozen soft pretzels manufacture, dry and frozen storage. Corporate research, new product development and quality assurance laboratory (corporate headquarters). Centre Hall, PA - Frozen vegetable processing. Dry and frozen storage. Lancaster, PA - Frozen mushrooms, peppers, onions and celery, freeze-dried food and ice manufacture. Dry and frozen storage. Plumsteadville, PA - Frozen food entrees, meat pies and soups manufacture. Dry and frozen storage. Ephrata, PA - Refrigerated, fresh foods and soups manufacture. Dry, refrigerated and frozen storage. Clayton, DE - Frozen vegetables, meat products, frozen food entrees and meat pies manufacture. Dry and frozen storage. GUATEMALA San Jose Pinula - Frozen vegetable processing, dry and frozen storage, research and quality assurance laboratory. Teculutan - Frozen vegetable processing, dry and frozen storage. -7- 9 ITEM 3. 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) and a court 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.) 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. On May 12, 1997, a written demand was received by the Corporation from the attorney for these Class A common stockholders containing similar allegations and these allegations are currently being investigated by a special committee of the Board of Directors. 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 and John A. Warehime, in his capacity as voting trustee, 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 -8- 10 stockholders) 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 shareholder 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 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 important matters specified below, the Amended and Restated Articles permit each of the 10,000 shares of Series C Convertible Preferred Stock the right to cast 35 votes in the election of directors, and each share of Class A Common Stock would have one-tenth (1/10) of a vote per share, thereby enabling them to influence the ultimate result of the election by the Cass 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 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 members of the Warehime family previously named cannot agree in writing on the composition of the Board of Directors or on other 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) 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 -9- 11 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. 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) 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 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are not "interested" directors as defined in Section 1.23 of The American Law Institute "Principles of Corporate Governance: Analysis and Recommendations" (1994); or (iii) persons who qualify as members of the Audit Committee pursuant to Section 303.00 of the New York Stock Exchange's Listed Company Manual. Other Litigation On April 29, 1996 the Corporation settled out of court with federal and Delaware environmental authorities regarding investigations of alleged violations of environmental laws at its Clayton, Delaware facility. As a result of the settlement, the Company paid $60,000 in civil penalties and agreed to undertake certain tasks within eighteen months including upgrading its refrigeration system and providing refrigeration training to its personnel. The approximate cost for training and capital expenditure is $400,000. The Company has made substantially all of the required capital expenditures to upgrade the refrigeration system and has performed the required refrigeration training at its Delaware facility. The Corporation's actions taken as a result of this settlement are subject to the review of the environmental authorities. 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 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. 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 Company's consolidated financial position, results of operations or liquidity. -10- 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS There is no established public trading market for any class of the Corporation's capital stock. No class of capital stock is listed or traded on any stock exchange or with NASDAQ. Since March 1989 there has been limited trading in the outstanding shares of Class A Nonvoting Common Stock through stockbrokers. From March 31, 1996 to August 10, 1997, the Class A Nonvoting Common Stock has traded at prices ranging from $31.00 to $42.00. Due to the lack of an established public trading market, under certain circumstances the Corporation agreed to repurchase shares of Class A Nonvoting Common Stock purchased or owned by employees prior to April 20, 1988. This repurchase agreement by the Corporation is for an indefinite period of time. As of June 1, 1997, there were 10,557 shares outstanding which would be eligible for repurchase. During the fiscal year ended June 1, 1997, the Corporation purchased 1,251 shares of Class A Common Stock at an aggregate cost of $85,068 or an average of approximately $68.00 per share. The repurchase price of the stock is the most recent independent appraised value. The appraisal was performed by Management Planning, Inc., Princeton, New Jersey, an independent appraisal firm. See Note 9 of the Notes to the Consolidated Financial Statements. In addition, on July 27, 1995, the Corporation purchased 5,148 shares of the Company's Class B Voting Common Stock from Cyril T. Noel, individually, and Cyril T. Noel and Frances L. Noel, jointly, at $71.40 per share, as per the appraisal of Management Planning, Inc., Princeton, New Jersey. On April 1, 1996, the Corporation entered into a stock purchase agreement with John R. Miller, Jr. to purchase 1,210 shares of the Corporation's Voting Class B Common Stock and 5,990 shares of the Corporation's Nonvoting Class A Common Stock over a four year period. On April 22, 1997, John R. Miller, Jr. entered into a Voting Agreement with the Corporation's Board of Directors whereby Mr. Miller agrees to vote all shares of the Corporation's stock held by him as directed by the Board of Directors, provided that a majority of Directors Rohrbach, Schaier and Noel vote in favor of the direction. The term of the Voting Agreement is for a period of four years commencing April 1, 1997 and ending on March 31, 2001. The Corporation currently has no outstanding warrants to purchase shares of any class of its capital stock. -11- 13 The only securities convertible into common equity of the Corporation are 15,044 outstanding shares of Cumulative Convertible Preferred Stock (Series A and B). Subsequent to the end of fiscal 1997, the Company amended its Articles of Incorporation to authorize Series C Convertible Preferred Stock, which is convertible to Class A Nonvoting Common Stock at the option of the holder. As of the date hereof, no shares of Series C Convertible Preferred Stock have been issued. At any time, the holders of this class of stock have the option to convert their shares to shares of Class A Nonvoting Common Stock based on the book value of the Class A Nonvoting Common Stock at the time of conversion. As of August 10, 1997, there were 427 holders of record of Class A Nonvoting Common Stock and 41 holders of record of Class B Voting Common Stock. During the two most recent fiscal years ending June 1, 1997 and March 31, 1996, the Corporation paid cash dividends of $1.10 and $1.10 per share respectively to the Class A and Class B Common stockholders. Dividends of the Corporation are declared at the sole discretion of the Board of Directors and will depend upon, among other things, the Corporation's earnings, capital requirements, financial condition and compliance with Pennsylvania law. The December 1, 1991 $25,000,000 long-term financing agreement between the Corporation and Allstate Life Insurance Corporation contains certain restrictions on the Corporation's payment of dividends and purchase of its stock. -12- 14 ITEM 6. SELECTED FINANCIAL DATA HANOVER FOODS CORPORATION AND SUBSIDIARIES The consolidated financial information set forth below should be read in conjunction with the more detailed consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Summary of Operations
- ----------------------------------------------------------------------------------------------------------------------- Fiscal years ended Dollars in thousands -------------------------------------------------------------------------------- (except per share data) Proforma June 1, June 2, March 31, April 2, April 3, March 28, 1997 1996 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Net sales $259,439 $260,694 $262,920 $257,530 $235,189 $216,701 - ----------------------------------------------------------------------------------------------------------------------- Cost of goods sold 195,086 213,234 213,515 199,372 179,892 166,728 Selling expenses 37,453 33,443 35,067 42,089 32,154 27,236 Administrative expenses 12,158 9,250 9,706 9,699 9,525 9,890 - ----------------------------------------------------------------------------------------------------------------------- Operating profit 14,742 4,767 4,632 6,370 13,618 12,847 Interest expense 3,666 4,651 4,639 3,744 3,733 3,637 Other (income) expense - net 89 (516) (640) (60) (343) (58) - ----------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 10,987 632 633 2,686 10,228 9,268 Income taxes 4,281 219 213 798 4,067 3,672 - ----------------------------------------------------------------------------------------------------------------------- Net earnings 6,706 413 420 1,888 6,161 5,596 - ----------------------------------------------------------------------------------------------------------------------- Net earnings applicable to common 6,675 374 389 1,855 6,127 5,562 stock - -----------------------------------------------------------------------------------------------------------------------
Note: Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31. -13- 15 ITEM 6. SELECTED FINANCIAL DATA HANOVER FOODS CORPORATION AND SUBSIDIARIES Common Stock Data and Balance Sheet and Financial Data
- -------------------------------------------------------------------------------------------------------------------- Fiscal years ended Dollars in thousands ---------------------------------------------------------------------- (except per share data) June 1, March 31, April 2, April 3, March 28, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- COMMON STOCK DATA Net earnings $9.26 $0.53 $2.53 $8.29 $7.48 Common dividends $1.10 $1.10 $1.075 $1.00 $1.00 Book value $65.00 $58.27 $59.32 $57.89 $50.59 Average shares outstanding 720,811 729,608 734,252 739,026 743,732 - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEET AND FINANCIAL DATA Working capital $17,122 $15,044 $19,569 $22,279 $21,796 Current ratio 1.32 1.25 1.32 1.44 1.52 Total assets $124,031 $128,368 $132,144 $124,646 $117,834 Long-term debt $16,219 $18,453 $20,658 $24,436 $31,056 Capital lease obligations - long-term - - $233 $578 $1,109 Stockholders' equity $47,157 $42,509 $43,920 $42,990 $37,920 - --------------------------------------------------------------------------------------------------------------------
-14- 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS When used in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. OVERVIEW OF FISCAL 1997 RESULTS The results of operations for fiscal 1997 were impacted by lower operating expenses, increased selling prices and improved inventory management. See "Risk Factors." 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 purchase and sales are competitive with alternate sources of supply and markets. See Note 5 to the Consolidated Financial Statements. Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31. Accordingly, the following discussion compares the results of operations for the fiscal year ended June 1, 1997 to the proforma year ended June 2, 1996, the nine weeks ended June 2, 1996 to the nine weeks ended June 4, 1995 and the fiscal year ended March 31, 1996 to the fiscal year ended April 2, 1995. YEAR ENDED JUNE 1, 1997 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED JUNE 2, 1996 Net Sales Consolidated net sales were $259.4 million for fiscal 1997 compared to $260.7 million for the proforma year ended June 2, 1996, a decrease of $1.3 million or 0.5%. The 0.5% decrease in consolidated net sales was comprised of the following volume and sales price components: -15- 17
Year Ended June 1, 1997 Increase (Decrease) ------------------- Volume Sales Price Combined ------ ----------- -------- Frozen Sales (5.9)% 4.2% (1.7)% Canned Sales (2.1)% 2.7% 0.6% Prepared Foods 0.8% (0.2)% 0.6% ------- ------ ------- (7.2)% 6.7% (0.5)%
The decreased volume in frozen sales was principally due to lower sales levels in food service products due to management's decision to improve profit margins by increasing unit sales prices. The decrease in volume was partially offset by an increase in unit sales prices. Canned sales also showed a slight decrease in fiscal 1997 due to decreased volume in bid business. The decrease in volume was offset by the increase in unit sales price, which increase in sales price was planned by management to improve profit margins. Prepared foods showed a slight increase. Cost of Goods Sold Consolidated cost of goods sold represented 75.2% of consolidated net sales for fiscal 1997 compared to 81.8% for fiscal 1996. The consolidated cost of sales decreased $18.1 million from fiscal 1996 to fiscal 1997 of which 68% was due to decreased volume and 32% was due to lower operating costs and lower outside storage costs. Selling Expenses Consolidated selling expenses represented 14.4% of consolidated net sales for fiscal 1997 and 12.8% for fiscal 1996. Promotion expense for fiscal 1997 was $26.8 million as compared to $20.9 million for fiscal 1996. The Corporation spent additional promotion dollars to gain additional market share in both the mid-Atlantic and southern region for its branded business. In addition to promotion expense, the Corporation spent approximately $2.2 million on advertising, including $1.7 million relating to redeemed coupons, for fiscal 1997, compared to $3.6 million in advertising, including $2.4 million for redeemed coupons, for fiscal 1996. Management intends to continue to direct promotional dollars to gain additional market share and increased distribution of its brand. Management is constantly reviewing the effectiveness of its retail promotional program in an effort to increase profitable sales. -16- 18 Administrative Expenses Consolidated administrative expenses were $12.2 million in fiscal 1997, or 4.7% of consolidated net sales versus $9.3 million, or 3.5% of consolidated net sales in 1996. The increase in consolidated administrative expenses as a percent of net sales was the result of bonuses and outside legal and financial services. Included in administrative expenses for fiscal 1997 were $1.2 million in legal fees paid in connection with the litigation described under "Legal Proceedings" in Note 9 to the Consolidated Financial Statements. Interest Expense Consolidated interest expense for fiscal 1997 was $985,000 lower than fiscal 1996. Average seasonal borrowing was lower for an extended period of time to fund lower inventory levels during the pack season and to carry reduced canned and frozen inventory levels. The maximum amount of seasonal borrowing was approximately $35.0 million as compared to the maximum of $45.9 million in fiscal 1996. In addition, approximately $1.8 million in senior unsecured term debt that carried higher interest rates was repaid in fiscal 1997 which contributed to the reduction of the Corporation's interest expense for fiscal 1997. Other Expense Consolidated other expenses increased $605,000 for fiscal 1997 as compared to fiscal 1996. Additional value added tax and foreign exchange and translation adjustment losses during fiscal 1997 accounted for 41% of this additional expense. Interest income was reduced during fiscal 1997 which accounted for 25% of the additional charges. Income Taxes The provision for corporate federal and state income taxes for fiscal 1997 was $4.3 million or 39% of pretax earnings as compared to a provision of $219,000 or 35% of pretax earnings for fiscal 1996. The higher effective rate was due primarily to proportionately higher domestic pretax income versus non-taxable foreign earnings in fiscal 1997 compared to 1996. Net Earnings Consolidated net earnings for fiscal 1997 were $6.7 million, or 2.6% of consolidated net sales. This compared to $413,000, or 0.2% of consolidated net sales for fiscal 1996. Lower operating expenses, interest expenses and increased unit sales prices were the contributing factors to the increased net earnings. Earnings Per Share Earnings per share are computed on the weighted average number of shares outstanding after -17- 19 providing for preferred stock dividends. During fiscal 1997, 2,343 shares of common stock were repurchased by the Corporation compared to 11,465 shares in fiscal 1996. The repurchase of these shares reduced the weighted average number of shares outstanding which is used in the calculation of earnings per share. NINE WEEKS ENDED JUNE 2, 1996 RESULTS OF OPERATIONS COMPARED TO NINE WEEKS ENDED JUNE 4, 1995 Net Sales Consolidated net sales were $34.6 million for the nine week period ended June 2, 1996. This represents a decrease of 6.0% over the nine week period ended June 4, 1995 consolidated net sales of $36.8 million. The decrease of $2.2 million was primarily due to decreased canned and frozen retail sales offset by increases in private label sales and was consistent with the Corporation's business plan. Cost of Goods Sold Cost of goods sold were $28.8 million, or 83.3% of consolidated net sales in the nine week period ended June 2, 1996 and $29.1 million, or 79.1%, of consolidated net sales for the corresponding period in 1995. The increase in cost of goods sold as a percentage of net sales resulted primarily from a decrease in the average selling prices per case of product in the nine week period ended June 2, 1996 compared to the same period in 1995 due to continued intense competition in retail sales. Selling Expenses Selling expenses were $5.5 million or 15.8% of consolidated net sales for the nine week period ended June 2, 1996 as compared to $7.1 million, or 19.3% of consolidated net sales during the corresponding period in 1995. The decrease in selling expenses as a percentage of net sales reflects the lower expenses related to promotional programs, advertising and customer allowances in the nine week period ended June 2, 1996 compared to 1995. Administrative Expenses Administrative expenses as a percentage of consolidated net sales were 4.1% for the nine week period ended June 2, 1996 compared to 5.1% for the corresponding period of 1995. This decrease was attributed to reductions in personnel related costs. Interest Expense Interest expense was $596,000 for the nine week period ended June 2, 1996 as compared to $584,000 for the same period in 1995. The increase in interest was primarily due to higher -18- 20 average borrowings during the 1996 period as compared to the prior period. YEAR ENDED MARCH 31, 1996 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED APRIL 2, 1995 Net Sales Consolidated net sales were $262.9 million for fiscal 1996 compared to $257.5 million for fiscal 1995, an increase of $5.4 million or 2.1%. The 2.1% increase in consolidated net sales was comprised of the following volume and sales price components:
Year Ended March 31, 1996 Increase (Decrease) ------------------- Volume Sales Price Combined ------ ----------- -------- Frozen Sales 2.4% (1.7)% 0.7% Canned Sales 3.1% (2.4)% 0.7% Prepared Foods 0.5% 0.2% 0.7% ------ ------- ------ 6.0% (3.9)% 2.1%
The increased volume in frozen sales was principally due to higher sales levels in direct retail and food service products. The reduction in unit sales prices was caused by intense competition to lower unit prices. Canned sales also showed a slight increase for fiscal 1996. Increased volume in food service and private label canned sales more than offset decreased volume in retail sales. The reduction in unit sales price was caused by intense competition to lower prices in the private label and food service sector. Cost of Goods Sold Consolidated cost of goods sold was 81.2% of consolidated net sales for fiscal 1996 compared to 77.4% for fiscal 1995. Total consolidated cost of sales increased $14.1 million over fiscal 1995 of which 92% was due to increased volume and 8% was due to increased raw material costs and outside frozen storage costs. Selling Expenses Consolidated selling expenses were 13.3% of consolidated net sales for fiscal 1996 and 16.3% for fiscal 1995. The Corporation's frozen products faced intense competition in the mid-Atlantic -19- 21 region from national branded companies attempting to gain market share. Promotion expense for fiscal 1996 was $23.2 million versus $31.9 million for fiscal 1995. In addition to promotion expense, the Corporation spent approximately $3.6 million on advertising, including $2.4 million relating to redeemed coupons, for fiscal 1996, compared to $3.1 million in advertising, including $2.0 million to redeemed coupons, for fiscal 1995. Administrative Expenses Consolidated administrative expenses were $9.7 million in fiscal 1996, or 3.7% of consolidated net sales versus $9.7 million, or 3.8% of consolidated net sales in 1995. The slight decrease in consolidated administrative expenses as a percent of net sales was the net result of reductions in personnel costs offset by increases in other expenses. Included in administrative expenses for fiscal 1996 are $300,000 in legal fees paid in connection with the litigation described in Item 3 above and Notes 5 and 9 to the Consolidated Financial Statements. Interest Expense Consolidated interest expense increased for fiscal 1996 $895,000 as compared to fiscal 1995. Average seasonal borrowing was higher for an extended period of time to fund inventory levels during the fresh pack season and to carry the increased frozen inventory. The maximum amount of seasonal borrowing was approximately $45.9 million as compared to the maximum of $31.2 million in 1995. The additional expense due to increased average borrowing was partially offset by reduced cost of funds for short-term borrowings. Approximately $1.8 million in senior unsecured term debt that carried higher interest rates was repaid in 1996. Income Taxes The provision for corporate federal and state income taxes for fiscal 1996 was $213,000, or 34% of pretax earnings, as compared to a provision of $798,000, or 30% of pretax earnings for fiscal 1995. The higher effective rate was due primarily to proportionately lower non-taxable foreign source earnings in fiscal 1996 offset by a reduction of deferred tax liabilities due to a change in state income tax rates. Net Earnings Consolidated net earnings for fiscal 1996 were $420,000 or 0.2% of consolidated net sales as compared to $1.9 million or 0.7% of consolidated net sales for fiscal 1995. The reduced unit sales prices and higher interest expense described above were the contributing factors to the reduced net earnings. -20- 22 Earnings Per Share Earnings per share are computed on the weighted average number of shares outstanding after providing for preferred stock dividends. During fiscal 1996, 10,937 shares of common stock were repurchased by the Corporation compared to 2,152 shares in fiscal 1995. The repurchase of these shares reduces the weighted average number of shares outstanding which is used in the calculation of earnings per share. LIQUIDITY AND FINANCIAL RESOURCES The discussion and analysis of the Corporation's liquidity and financial resources should be read in conjunction with the Consolidated Statements of Cash Flows. Net cash provided by operations for the fiscal year ended June 1, 1997 was $12.3 million, compared to $4.8 million for the proforma year ended June 2, 1996. Sources of funds totaled $19.1 million consisting of net earnings of $6.7 million, decreased inventory of $5.6 million, decreased prepaid items of $0.3 million, decreased deferred income taxes of $0.2 million, an increase in tax and other liabilities of $0.7 million and depreciation and amortization of $5.6 million. The funds generated from these sources were applied towards the increase in accounts receivable of $6.6 million and the reduction in accounts payable and accrued expenses of $0.2 million. Net cash provided by operations for the fiscal year ended March 31, 1996 was $1.4 million, compared to $10,000 for the fiscal year ended April 2, 1995. Sources of funds totaled $11.6 million consisting of net earnings of $0.4 million, decreased accounts receivable of $0.4 million, decreased inventory of $2.8 million, decreased prepaid items of $1.9 million, an increase in other liabilities of $0.4 million and depreciation and amortization of $5.6 million. The funds generated from these sources were applied towards the reduction in accounts payable and accrued expenses of $9.7 million. Net cash used by investing activities for the fiscal year ended June 1, 1997 was $6.5 million as compared to $4.8 million for the fiscal year ended June 2, 1996. The principal use of funds was the upgrade and acquisition of property, plant and equipment. During the period ended June 1, 1997, $6.6 million was spent on development and modernization of equipment as compared to $4.7 million in the fiscal year ended June 2, 1996. These projects were funded by internally generated funds. The Corporation also uses operating leases to meet other equipment needs. The lease expense for the fiscal year ended June 1, 1997 was $3.6 million, down $0.4 million from the fiscal year ended June 2, 1996. Net cash used by investing activities for the fiscal year ended March 31, 1996 was $6.1 million as compared to $5.6 million for the fiscal year ended April 2, 1995. The principal use of funds was the upgrade and acquisition of property, plant and equipment. During fiscal 1996, $5.5 million was spent on development and modernization of equipment as compared to $6.2 million -21- 23 in fiscal 1995. These projects were funded by internally generated funds and external borrowing. The Corporation also uses operating leases to meet other equipment needs. The lease expense for fiscal 1996 was $4.0 million, up $0.4 million from fiscal 1995. During the first quarter for fiscal 1996, the Corporation purchased a facility located in Teculutan, Guatemala for $250,000 from ARWCO Corporation, a related party, and purchased a tract of land near the Corporation's Centre Hall, Pennsylvania plant for $250,00 from Centre Foods Enterprises, Inc., a related party. See "Transactions With Management and Others" and Note 5 of the Notes to the Consolidated Financial Statements. Net cash used for financing activities was $3.6 million for the fiscal year ended June 1, 1997, compared to cash provided by financing activities of $154,000 for the fiscal year ended June 2, 1996. Seasonal borrowing amounting to $220.7 million was used throughout the fiscal year to fund operational needs. Seasonal borrowing, plus the cash overdraft, did not increase during the fiscal year, while term debt and other obligations had been reduced by $2.7 million. Management continues to monitor and evaluate the most cost effective means to finance its operations. The weighted average cost of seasonal borrowings was 6.1% for the fiscal year ended June 1, 1997 compared to 6.2% for the fiscal year ended June 2, 1996. Net cash provided by financing activities was $5.0 million for the fiscal year ended March 31, 1996 compared to $4.0 million for the fiscal year ended April 2, 1995. Seasonal borrowing was used throughout the period to fund operational needs. Seasonal borrowing, plus the cash overdraft, was $9.5 million higher at year end, while term debt and other obligations had been reduced by $3.3 million. The weighted average cost of seasonal borrowing was 6.2% for the fiscal year ended March 31, 1996 compared to 7.5% for the fiscal year ended April 2, 1995. See Notes 2 and 3 of the Notes to Consolidated Financial Statements. At June 1, 1997 the Corporation has commitments from financial institutions to provide seasonal lines of credit in the amount of $80 million. Additional borrowing is permitted within prescribed parameters in existing debt agreements which contain certain performance covenants. At June 1, 1997 the Corporation was in compliance with all the provisions of its debt agreements. The Corporation paid dividends of $824,000 during fiscal 1997 compared to $831,000 in fiscal 1996. In addition, the Corporation repurchased 2,343 shares of Common Stock at a cost of $132,000 during the year ended June 1, 1997. IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS Competition in the Marketplace The Corporation faced stiff competition from national and regional branded companies during the entire fiscal 1997 in all of its market areas, and management anticipates this competitive environment to continue throughout fiscal year 1998. See "Risk Factors - Competition." -22- 24 New Accounting Standards In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which establishes standards for computing and presenting earnings per share and will be effective for periods ending after December 15, 1997. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" and establishes standards for disclosing information about a company's capital structure, including pertinent rights and privileges of various securities outstanding and will be effective for periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements establish standards for reporting and display of comprehensive income and its components and for reporting information about business segments and products in financial statements and are effective for years beginning after December 15, 1997. Adoption of the above standards is not expected to have a material effect on the Corporation's financial statements. Impact of Inflation and Changing Prices The changes in cost and prices within the Company's business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by the moderate inflation. -23- 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Pages ----- Financial Statements Reports of Independent Certified Public Accountants 26 Consolidated Balance Sheets as of June 1, 1997, June 2, 1996 and March 31, 1996 28 Consolidated Statements of Earnings for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996, Years Ended March 31, 1996 and April 2, 1995 and Proforma Year Ended June 2, 1996 (unaudited) 29 Consolidated Statements of Stockholders' Equity for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996 and the Years Ended March 31, 1996 and April 2, 1995 30 Consolidated Statements of Cash Flows for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996, Years Ended March 31, 1996 and April 2, 1995 and Proforma Year Ended June 2, 1996 (unaudited) 32 Notes to Consolidated Financial Statements 34 Quarterly Financial Data (Unaudited) 57 -24- 26 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Hanover Foods Corporation: We have audited the accompanying consolidated balance sheets of Hanover Foods Corporation and subsidiaries as of June 1, 1997, June 2, 1996, and March 31, 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year ended June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanover Foods Corporation and subsidiaries as of June 1, 1997, June 2, 1996, and March 31, 1996 and the results of their operations and their cash flows for the year ended June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ------------------------------- Harrisburg, Pennsylvania July 24, 1997 27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Hanover Foods Corporation We have audited the consolidated statements of earnings, stockholders' equity and cash flows of Hanover Foods Corporation and subsidiaries for the year ended April 2, 1995. These financial statements are the responsibiity of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the statements referred to above present fairly, in all material respects, the consolidated results of operations of Hanover Foods Corporation and subsidiaries and their consolidated cash flows for the year ended April 2, 1995, in conformity with generally accepted accounting principles. Harry Ness & Company York, Pennsylvania May 26, 1995 28 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 1, 1997, June 2, 1996, and March 31, 1996
- ------------------------------------------------------------------------------------------------------- June 1, June 2, March 31, ASSETS 1997 1996 1996 - ------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 3,312,000 1,112,000 914,000 Accounts and notes receivable - net 22,954,000 17,249,000 25,216,000 Accounts receivable from related parties - net 890,000 61,000 18,000 Inventories: Finished goods 27,446,000 31,506,000 33,930,000 Raw materials and supplies 13,978,000 15,561,000 13,227,000 Prepaid corporate income taxes - 581,000 541,000 Prepaid expenses 2,064,000 1,796,000 1,294,000 Deferred income taxes 733,000 885,000 885,000 - ------------------------------------------------------------------------------------------------------- Total current assets 71,377,000 68,751,000 76,025,000 - ------------------------------------------------------------------------------------------------------- Property, plant, and equipment - at cost: Land and buildings 33,398,000 32,115,000 31,847,000 Machinery and equipment 82,037,000 77,399,000 77,210,000 Leasehold improvements 349,000 349,000 349,000 - ------------------------------------------------------------------------------------------------------- 115,784,000 109,863,000 109,406,000 Less accumulated depreciation and amortization 66,822,000 61,273,000 60,262,000 - ------------------------------------------------------------------------------------------------------- 48,962,000 48,590,000 49,144,000 Construction in progress 760,000 176,000 61,000 - ------------------------------------------------------------------------------------------------------- 49,722,000 48,766,000 49,205,000 - ------------------------------------------------------------------------------------------------------- Other assets: Intangible assets - less accumulated amortization of $2,019,000, $2,004,000, and $2,002,000 441,000 456,000 458,000 Other assets 2,491,000 2,407,000 2,680,000 - ------------------------------------------------------------------------------------------------------- Total assets $ 124,031,000 120,380,000 128,368,000 =======================================================================================================
See accompanying notes to consolidated financial statements. 2 29 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------------- June 1, June 2, March 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 1996 - --------------------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $21,038,000 23,916,000 24,792,000 Notes payable - banks 24,114,000 24,097,000 29,421,000 Accrued expenses 6,511,000 4,052,000 3,966,000 Current maturities of long-term debt 2,234,000 2,499,000 2,499,000 Current maturities of capital lease obligations - 152,000 210,000 Income taxes payable 358,000 110,000 93,000 - --------------------------------------------------------------------------------------------------------------------- Total current liabilities 54,255,000 54,826,000 60,981,000 Long-term debt, less current maturities 16,219,000 18,453,000 18,453,000 Deferred income taxes 5,174,000 5,170,000 5,689,000 Other liabilities 1,226,000 805,000 736,000 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 76,874,000 79,254,000 85,859,000 - --------------------------------------------------------------------------------------------------------------------- Stockholders' equity: 8-1/4% cumulative convertible preferred - $25 par value, issuable in series; 120,000 shares authorized; 31,536 at June 1, 1997, June 2, 1996, and March 31, 1996 shares issued; 15,044 at June 1, 1997, June 2, 1996, and March 31, 1996 shares outstanding 788,000 788,000 788,000 Common stock, Class A - non-voting - $25 par value; 800,000 shares authorized; 349,210 at June 1, 1997, June 2, 1996, and March 31, 1996 shares issued; 292,600 at June 1, 1997, 294,824 at June 2, 1996, and 295,649 at March 31, 1996 shares outstanding 8,729,000 8,729,000 8,729,000 Common stock, Class B - voting - $25 par value; 880,000 shares authorized; 493,123 at June 1, 1997, June 2, 1996, and March 31, 1996 shares issued; 427,131 at June 1, 1997, 427,350 at June 2, 1996, and 427,459 at March 31, 1996 shares outstanding 12,328,000 12,328,000 12,328,000 Capital paid in excess of par value 1,623,000 1,623,000 1,623,000 Retained earnings 31,570,000 25,688,000 27,026,000 Treasury stock, at cost (7,887,000) (7,755,000) (7,708,000) Other 6,000 (275,000) (277,000) - --------------------------------------------------------------------------------------------------------------------- 47,157,000 41,126,000 42,509,000 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $124,031,000 120,380,000 128,368,000 - ---------------------------------------------------------------------------------------------------------------------
3 30 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
- ---------------------------------------------------------------------------------------------------------------------- (Unaudited) Nine weeks Proforma Year ended ended Year ended Year ended year ended June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - ------------------------------------------------------------------------------------------------------------------------ Net sales $ 259,439,000 34,569,000 262,920,000 257,530,000 260,694,000 Cost of goods sold 195,086,000 28,805,000 213,515,000 199,372,000 213,234,000 - ------------------------------------------------------------------------------------------------------------------------ Gross profit 64,353,000 5,764,000 49,405,000 58,158,000 47,460,000 Selling expenses 37,453,000 5,465,000 35,067,000 42,089,000 33,443,000 Administrative expenses 12,158,000 1,433,000 9,706,000 9,699,000 9,250,000 - ------------------------------------------------------------------------------------------------------------------------ Operating profit (loss) 14,742,000 (1,134,000) 4,632,000 6,370,000 4,767,000 Interest expense 3,666,000 596,000 4,639,000 3,744,000 4,651,000 Other (income) expenses - net 89,000 (66,000) (640,000) (60,000) (516,000) - ------------------------------------------------------------------------------------------------------------------------ Earnings (loss) before income taxes 10,987,000 (1,664,000) 633,000 2,686,000 632,000 Income taxes 4,281,000 (533,000) 213,000 798,000 219,000 - ------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) 6,706,000 (1,131,000) 420,000 1,888,000 413,000 Dividends on preferred stock 31,000 8,000 31,000 33,000 39,000 - ------------------------------------------------------------------------------------------------------------------------ Net earnings (loss) applicable to common stock $ 6,675,000 (1,139,000) 389,000 1,855,000 374,000 - ------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per common share $ 9.26 (1.58) 0.53 $2.53 0.51 - ------------------------------------------------------------------------------------------------------------------------ Average common shares outstanding 720,811 722,667 729,608 734,252 728,677 - ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 4 31 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
- ---------------------------------------------------------------------------------------------------------------------- Cumulative convertible preferred stock Common stock Total Series A and Series B Class A shareholders' -------------------------------- --------------------------- equity Shares Amount Shares Amount - ---------------------------------------------------------------------------------------------------------------------- Balance, April 3, 1994 $42,990,000 32,936 $823,000 348,561 $8,714,000 Net earnings 1,888,000 - - - - Cash dividends per share: Preferred - $2.0625 annually (33,000) - - - - Common - $1.075 annually (789,000) - - - - Common stock issuance 3,000 - - 46 - Redemption of common stock (142,000) - - - - Unrealized gain on investments 3,000 - - - - Conversion of preferred for Class A common - (1,120) (28,000) 483 12,000 - ---------------------------------------------------------------------------------------------------------------------- Balance, April 2, 1995 43,920,000 31,816 795,000 349,090 8,726,000 Net earnings 420,000 - - - - Cash dividends per share: Preferred - $2.0625 annually (31,000) - - - - Common - $1.10 annually (800,000) - - - - Redemption of common stock - Class A 5,789 shares, Class B 5,148 shares (760,000) - - - - Conversion of preferred for Class A common - (280) (7,000) 120 3,000 Minimum pension liability adjustment (net of taxes of $235,000) (351,000) - - - - Unrealized gain on investments 111,000 - - - - - ---------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 42,509,000 31,536 788,000 349,210 8,729,000
- --------------------------------------------------------------------------------------------------------------------------------- Common stock Class B Capital paid Treasury stock -------------------------- in excess of Retained ------------------------ Shares Amount par value earnings Shares Amount Other - --------------------------------------------------------------------------------------------------------------------------------- Balance, April 3, 1994 493,123 $12,328,000 $1,603,000 $26,371,000 122,632 ($6,809,000) ($40,000) Net earnings - - - 1,888,000 - - - Cash dividends per share: Preferred - $2.0625 annually - - - (33,000) - - - Common - $1.075 annually - - - (789,000) - - - Common stock issuance - - - - (46) 3,000 - Redemption of common stock - - - - 2,152 (142,000) - Unrealized gain on investments - - - - - - 3,000 Conversion of preferred for Class A common - - 16,000 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, April 2, 1995 493,123 12,328,000 1,619,000 27,437,000 124,738 (6,948,000) (37,000) Net earnings - - - 420,000 - - - Cash dividends per share: Preferred - $2.0625 annually - - - (31,000) - - - Common - $1.10 annually - - - (800,000) - - - Redemption of common stock - Class A 5,789 shares, Class B 5,148 shares - - - - 10,937 (760,000) - Conversion of preferred for Class A common - - 4,000 - - - - Minimum pension liability adjustment (net of taxes of $235,000) - - - - - - (351,000) Unrealized gain on investments - - - - - - 111,000 - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 493,123 12,328,000 1,623,000 27,026,000 135,675 (7,708,000) (277,000)
(Continued) 5 32 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity, Continued
- ----------------------------------------------------------------------------------------------------------------------------------- Cumulative convertible preferred stock Common stock Common stock Total Series A and Series B Class A Class B shareholders' --------------------------- ------------------------- ---------------------- equity Shares Amount Shares Amount Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 $42,509,000 31,536 $788,000 349,210 $8,729,000 493,123 $12,328,000 Net earnings (loss) (1,131,000) - - - - - - Cash dividends per share: Preferred - $.515 (8,000) - - - - - - Common - $.275 (199,000) - - - - - - Redemption of common stock - Class A 825 shares, Class B 109 shares (47,000) - - - - - - Unrealized gain on investments 2,000 - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 2, 1996 41,126,000 31,536 788,000 349,210 8,729,000 493,123 12,328,000 Net earnings 6,706,000 - - - - - - Cash dividends per share: Preferred - $2.0625 annually (31,000) - - - - - - Common - $1.10 annually (793,000) - - - - - - Redemption of common stock - Class A 2,124 shares, Class B 219 shares (132,000) - - - - - - Minimum pension liability adjustment (net of taxes of $129,000) 193,000 - - - - - - Unrealized gain on investments 88,000 - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, June 1, 1997 $47,157,000 31,536 $788,000 349,210 $8,729,000 493,123 $12,328,000 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------- Capital paid Treasury stock in excess of Retained ---------------------------- par value earnings Shares Amount Other - ----------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 $1,623,000 $27,026,000 135,675 $ (7,708,000) $ (277,000) Net earnings (loss) - (1,131,000) - - - Cash dividends per share: Preferred - $.515 - (8,000) - - - Common - $.275 - (199,000) - - - Redemption of common stock - Class A 825 shares, Class B 109 shares - - 934 (47,000) - Unrealized gain on investments - - - - 2,000 - ----------------------------------------------------------------------------------------------------------------- Balance, June 2, 1996 1,623,000 25,688,000 136,609 (7,755,000) (275,000) Net earnings - 6,706,000 - - - Cash dividends per share: Preferred - $2.0625 annually - (31,000) - - - Common - $1.10 annually - (793,000) - - - Redemption of common stock - Class A 2,124 shares, Class B 219 shares - - 2,343 (132,000) - Minimum pension liability adjustment (net of taxes of $129,000) - - - - 193,000 Unrealized gain on investments - - - - 88,000 - ----------------------------------------------------------------------------------------------------------------- Balance, June 1, 1997 $1,623,000 $31,570,000 138,952 ($7,887,000) $6,000 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 6 33 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
- --------------------------------------------------------------------------------------------------------------------------- (Unaudited) Nine weeks Proforma Year ended ended Year ended Year ended year ended June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $6,706,000 (1,131,000) 420,000 1,888,000 413,000 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 5,595,000 1,013,000 5,582,000 5,652,000 5,666,000 (Gain) loss on sale of property, plant, and equipment (21,000) - (25,000) (10,000) (25,000) Deferred income taxes 156,000 (519,000) (369,000) 22,000 (319,000) Change in assets and liabilities: Accounts receivable (6,534,000) 7,924,000 388,000 187,000 2,335,000 Inventory 5,643,000 90,000 2,795,000 (7,887,000) 3,414,000 Prepaid items 313,000 (542,000) 1,947,000 (1,892,000) 3,737,000 Accounts payable and accrued expenses (226,000) (790,000) (9,736,000) 2,680,000 (10,838,000) Dividends payable - - - (192,000) - Income taxes payable 248,000 17,000 (24,000) (577,000) (23,000) Other liabilities 421,000 69,000 444,000 139,000 479,000 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,301,000 6,131,000 1,422,000 10,000 4,839,000 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Decrease (increase) in other current assets - - 263,000 - 263,000 Decrease (increase) in other noncurrent assets, net 19,000 275,000 (884,000) 600,000 (373,000) Acquisitions of property, plant, and equipment (6,565,000) (572,000) (5,527,000) (6,235,000) (4,683,000) Proceeds from dispositions of property, plant, and equipment 35,000 - 31,000 30,000 31,000 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (6,511,000) (297,000) (6,117,000) (5,605,000) (4,762,000) - ---------------------------------------------------------------------------------------------------------------------------
(Continued) 7 34 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
- -------------------------------------------------------------------------------------------------------------------------- (Unaudited) Nine weeks Proforma Year ended ended Year ended Year ended year ended June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable $220,739,000 - 131,244,000 119,109,000 126,545,000 Payment on notes payable (220,722,000) (5,324,000) (121,749,000) (107,849,000) (121,749,000) Payment on long-term debt (2,499,000) - (2,989,000) (5,838,000) (2,989,000) Payment on long-term capital lease obligations (152,000) (58,000) (323,000) (474,000) (202,000) Payment of dividends (824,000) (207,000) (831,000) (822,000) (1,038,000) Common stock redemptions (132,000) (47,000) (392,000) (142,000) (413,000) Common stock issuance - - - 3,000 - - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (3,590,000) (5,636,000) 4,960,000 3,987,000 154,000 - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,200,000 198,000 265,000 (1,608,000) 231,000 Cash and cash equivalents, beginning of period 1,112,000 914,000 649,000 2,257,000 881,000 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $3,312,000 1,112,000 914,000 649,000 1,112,000 - -------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $3,653,000 310,000 4,660,000 3,721,000 4,386,000 Income taxes 3,134,000 16,000 462,000 3,452,000 416,000 Non-cash financing activities: The Corporation entered into a note payable agreement to purchase 5,148 shares of Class B common stock for $368,000 from a director of the Corporation during the year ended March 31, 1996 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 8 35 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 1, 1997, June 2, 1996 and March 31, 1996 - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES DESCRIPTION OF BUSINESS Hanover Foods Corporation is a processing, manufacturing, and distribution concern. The Company's principal line of business is the processing and sales of canned and frozen vegetables, frozen entrees, and prepared foods primarily in the Eastern United States. The Company's primary customers include regional grocery and other wholesale and retail food outlets and other food processors and distributors. The Company's ten largest customers account for approximately 45% of the Company's net sales and accounts receivable with no single customer accounting for more than 10% of net sales for the fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or a few suppliers. Revenue is recognized from sales when products are shipped. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Hanover Foods Corporation and its subsidiaries, which are Consumers Packing Company (T/A Hanover Foods - Lancaster Division), Spring Glen Fresh Foods, Inc., Hanover Insurance Company, Ltd., The Nittany Corporation, and Tri-Co. Foods Corp. and its subsidiaries - Alimentos Congelados Monte Bellos, S.A. (ALCOSA) and Sunwise Corporation, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Corporation to credit risk consist of trade receivables. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is not required. The risk associated with the concentration is limited due to the large number of wholesalers and retailers and their geographic dispersion. CASH AND CASH EQUIVALENTS Cash equivalents of $1,028,000, $392,000, and $796,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively, consist of short-term interest-bearing investments with maturities of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. INVESTMENTS Investments of $2,187,000, $1,255,000, and $1,195,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively, classified as available-for-sale securities, are included in other noncurrent assets and measured at fair value. Net unrealized gains and losses are reported as a separate component of stockholders' equity until realized, and amount to gains of $164,000, $76,000, and $74,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively. (Continued) 9 36 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (1) CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable and notes payable approximates fair values due to the short-term maturities of these instruments. The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The amount reported in the consolidated balance sheet for long-term debt approximates fair value. INVENTORIES Inventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method of accounting) or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Plant and equipment under capital leases are stated at the present value of minimum lease payments. Expenditures for maintenance and repairs are charged to expense as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from approximately 3 years to 12 years for equipment and up to 40 years for buildings. Accelerated methods are used for tax reporting purposes. Plant and equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. INTANGIBLE ASSETS It is the Corporation's policy to amortize intangible assets, primarily covenants not to compete, purchased trademarks and goodwill, over periods not in excess of 40 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability will be impacted if estimated future operating cash flows are not achieved. (Continued) 10 37 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (1) CONTINUED INSURANCE The Company, through its wholly-owned insurance subsidiary, is self-insured with respect to certain general liability and workers' compensation claims. Excess insurance coverage is maintained for general liability and workers' compensation claims. Accrued expenses include provision for unpaid claims reported and claims incurred but not reported. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. Research and development costs amounted to $728,000, $134,000, $725,000, $691,000, and $716,000 (unaudited) for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, April 2, 1995, and the pro forma year ended June 2, 1996, respectively. PROMOTIONAL COSTS Promotional costs are expensed as incurred. Accounts and notes receivable are presented net of allowances for bad debts and promotional programs. ADVERTISING COSTS Advertising costs are expensed as incurred. Manufacturer coupons are expensed when payable by the Company (note 9). Advertising expenses amounted to $2,181,000, $842,000, $3,565,000, $3,122,000, and $3,580,000 (unaudited) for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, April 2, 1995, and the pro forma year ended June 2, 1996, respectively (including manufacturer coupon expense of $1,655,000, $542,000, $2,407,000, $2,026,000, and $2,358,000 (unaudited), respectively). (Continued) 11 38 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (1) CONTINUED EARNINGS PER SHARE Earnings per common share are computed on the weighted average number of common shares outstanding during each period after providing for preferred stock dividend requirements. The dilutive effect on earnings per share for conversion of preferred stock is not presented because it results in either dilution of less than 3% or anti-dilution. FISCAL YEAR END Effective June 1, 1996 the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31. The fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the proforma unaudited results for the year ended June 2, 1996 were comprised of 52 weeks. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior amounts have been reclassified to conform to classifications adopted in the current year. (2) NOTES PAYABLE - BANKS The Corporation maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $80,000,000, of which $24,114,000 was borrowed (including an overdraft of $1,413,000) at June 1, 1997 $24,097,000 was borrowed at June 2, 1996, and $29,421,000 was borrowed (including an overdraft of $5,164,000) at March 31, 1996. The Corporation borrows funds under these lines of credit under two methods of cost of funds. The first method used to price the cost of short-term borrowings is based upon LIBOR plus fifty to seventy-five basis points. The second method is based upon the financial institution's "calculated cost of funds" plus an earnings modification. The weighted-average interest rate on short-term borrowings at June 1, 1997, June 2, 1996, and March 31, 1996 was 6.2%, 6.1%, and 6.2%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended June 1, 1997 and March 31, 1996 was approximately $35,024,000 and $45,900,000, respectively, and $29,400,000 for the nine-week period ended June 2, 1996. (Continued) 12 39 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (3) LONG-TERM DEBT The long-term debt of the Corporation and its subsidiaries consists of:
June 1, June 2, March 31, 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------- 8.74% - 9.24% unsecured senior notes payable to an insurance company, due fiscal years ending 1997-2007 $17,857,000 19,643,000 19,643,000 8.5% installment obligation payable to a municipality, due fiscal year ending 1997 - 140,000 140,000 Installment obligation payable to a related party, due in equal annual installments in fiscal years ending 1996-2000; interest at prime rate (8.5% at June 1, 1997) 221,000 294,000 294,000 6.33% installment obligation payable to a related party, due fiscal years ending 1997-1998 375,000 875,000 875,000 - ------------------------------------------------------------------------------------------------------------- Total long-term debt 18,453,000 20,952,000 20,952,000 Less current maturities 2,234,000 2,499,000 2,499,000 - ------------------------------------------------------------------------------------------------------------- Long-term debt, excluding current maturities $16,219,000 18,453,000 18,453,000 - -------------------------------------------------------------------------------------------------------------
The term loan agreements with the insurance company and seasonal borrowing with financial institutions (note 2), contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios. Based on the requirements of the agreements, at June 1, 1997, $23,499,000 of retained earnings are restricted from distribution. The Corporation is in compliance with the restrictive provisions in the agreements. Property, plant, and equipment at cost of approximately $2,500,000 was pledged to secure $375,000 of the long-term obligations at June 1, 1997. (Continued) 13 40 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (3) CONTINUED The aggregate long-term debt maturities follow:
For the fiscal year ending: 1998 $ 2,234,000 1999 1,859,000 2000 1,859,000 2001 1,786,000 2002 1,786,000 Thereafter 8,929,000 ------------------------------------------------------------- Total $ 18,453,000 -------------------------------------------------------------
(4) LEASES The Company was obligated under a noncancelable capital lease for machinery and equipment that expired in 1997. At June 2, 1996 and March 31, 1996, the gross amount of plant and equipment and related accumulated amortization recorded under the capital lease were as follows:
June 2, March 31, 1996 1996 - ------------------------------------------------------------------------------------- Machinery and equipment $ 2,383,000 2,383,000 Less accumulated amortization 918,000 894,000 - ------------------------------------------------------------------------------------- $ 1,465,000 1,489,000 - -------------------------------------------------------------------------------------
Amortization of assets held under capital leases is included with depreciation expense. (Continued) 14 41 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (4) CONTINUED The Company has several noncancelable operating leases, primarily for equipment, that expire over the next three years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995 consisted of the following:
(Unaudited) proforma June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - ------------------------------------------------------------------------------------------------ Minimum rentals $3,586,000 653,000 3,964,000 3,480,000 3,997,000 Contingent rentals - - - 89,000 - - ------------------------------------------------------------------------------------------------ Rental expense $3,586,000 653,000 3,964,000 3,569,000 3,997,000 - ------------------------------------------------------------------------------------------------
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 1, 1997 are:
Operating leases --------------------------------------------------------------- For the fiscal year ending: 1998 $ 1,184,000 1999 877,000 2000 671,000 2001 385,000 2002 178,000 Thereafter 36,000 --------------------------------------------------------------- Total minimum lease payments $ 3,331,000 ---------------------------------------------------------------
(Continued) 15 42 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (5) 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. Transactions with related parties are summarized below:
(Unaudited) Nine-weeks proforma Year ended ended Year ended Year ended Year ended June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - -------------------------------------------------------------------------------------------------------------------------- Revenues: Food Service East, Inc. $ - - - 9,000 - Park 100 Foods, Inc. 3,155,000 118,000 - - 118,000 Corporate charges: Warehime Enterprises, Inc. - - 2,000 3,000 2,000 Snyder's of Hanover, Inc. 175,000 29,000 175,000 337,000 148,000 Expenditures: The Cannery Press, Inc. 14,000 14,000 346,000 387,000 296,000 Patti & John's, Inc. 10,000 4,000 29,000 30,000 28,000 Lippy Brothers, Inc. 1,044,000 - 752,000 1,350,000 749,000 James G. Sturgill 135,000 15,000 65,000 - 80,000 ARWCO Corporation 29,000 24,000 43,000 - 34,000 Warehime Enterprises, Inc. 177,000 1,000 227,000 - 192,000 John A. and Patricia M. Warehime 52,000 7,000 42,000 - 39,000 Snyder's of Hanover, Inc. - - 17,000 - - George E. Lawrence - - 70,000 - 65,000 Park 100 Foods, Inc. 283,000 - - - - Accounts receivable: Snyder's of Hanover, Inc. 15,000 11,000 24,000 23,000 Patti & John's, Inc. - 4,000 3,000 3,000 Food Service East Inc. - - - 3,000 Park 100 Foods, Inc. 906,000 56,000 - - Accounts payable: Warehime Enterprises, Inc. 1,000 - 5,000 - The Cannery Press, Inc. - 4,000 4,000 13,000 Pattie & John's, Inc. - 6,000 - - Park 100 Foods, Inc. 30,000 - - - Notes payable: Warehime Enterprises, Inc. 375,000 875,000 875,000 1,375,000 Cyril T. Noel 221,000 294,000 294,000 - - --------------------------------------------------------------------------------------------------------------------------
(Continued) 16 43 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (5) CONTINUED The Corporation purchased the Teculutan, Guatemala plant property from ARWCO Corporation on April 5, 1995 for $250,000. On June 20, 1995, the Corporation purchased real estate near the Centre Hall facility from Centre Foods Enterprises, Inc. for $250,000. In 1994, the Corporation entered into a one year lease with Food Service East, Inc. to lease 20,931 square feet of dry warehouse and production, refrigerated and frozen storage space. Pursuant to the lease, the Corporation has two unilateral options to extend the term of the lease for two successive one year terms or until May 31, 1997 and an option to purchase based on an independent appraisal. On October 1, 1994 the Corporation increased the rental space to 28,501 square feet for a total annual rent of $96,703. On June 1, 1996, the Corporation exercised its unilateral option to purchase for $904,000 approximately 10.3 acres of land improved by an office/warehouse facility free and clear of all liens, encumbrances and security interests. In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 9), pursuant to applicable state law, the Corporation has agreed to pay directly all expenses (including attorney's fees) and costs in advance of the final disposition of the litigation or any substantially similar or related action, suit, or proceeding. The Corporation has received an undertaking from John A. Warehime to repay all costs and expenses if it is ultimately determined that he is not entitled to be indemnified by the Corporation. The amount paid and expensed by the Corporation under this arrangement for the years ended June 1, 1997 and March 31, 1996 was approximately $303,000 and $300,000, respectively. On April 1, 1996, the Corporation entered into a stock purchase agreement with John R. Miller, Jr. to purchase 1,210 shares of the Company's Voting Class B Common Stock and 5,990 shares of the Company's Nonvoting Class A Common Stock over a four year period. The agreement provides that John R. Miller, Jr. give a proxy to John A. Warehime, Chairman, to vote all shares of both classes of common stock beginning April 1, 1996 and ending March 31, 2001. At June 1, 1997, the Corporation has purchased 328 shares of the Company's Voting Class B Common Stock for $25,000 and 1,720 shares of the Company's Nonvoting Class A Common Stock for $72,000. (Continued) 17 44 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (5) CONTINUED A portion of rental expense included in note 4 was paid to ARWCO Corporation, Warehime Enterprises, Inc., Centre Foods Enterprises, Inc., and Food Service East, Inc., all of which are related companies through common control. The amounts were $307,000, $340,000, and $654,000 for the years ended June 1, 1997, March 31, 1996, and April 2, 1995, respectively. The portion of rental commitments included in note 4 due these companies is summarized as follows:
For the fiscal years ending: 1998 $ 24,000 1999 14,000 2000 15,000 2001 15,000 ------------------------------------------------------
(6) BENEFIT PLANS FROZEN DEFINED BENEFIT RETIREMENT PLANS The Corporation previously amended its noncontributory, defined benefit plans to freeze benefit accruals effective August 31, 1992 and also took action to terminate the plans effective August 31, 1992. On November 12, 1993, the Board of Directors rescinded its previous action to terminate the plans and has placed the plans in a frozen status. (Continued) 18 45 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheet as of:
June 1, 1997 June 2, 1996 March 31, 1996 ---------------------------------------------------------------------- Fully Under Fully Under Fully Under funded funded funded funded funded funded plan plan plan plan plan plan - ----------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $(7,168,000) (655,000) (628,000) (6,621,000) (623,000) (6,594,000) - ----------------------------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date $(7,168,000) (655,000) (628,000) (6,621,000) (623,000) (6,594,000) Plan assets at fair value 7,750,000 598,000 631,000 6,526,000 669,000 6,508,000 - ----------------------------------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 582,000 (57,000) 3,000 (95,000) 46,000 (86,000) Unrecognized (gains) losses 140,000 262,000 230,000 586,000 162,000 586,000 Adjustment to recognize required minimum liability - (264,000) - (586,000) - (586,000) - ----------------------------------------------------------------------------------------------------------------- Prepaid (accrued) pension cost $722,000 (59,000) 233,000 (95,000) 208,000 (86,000) - -----------------------------------------------------------------------------------------------------------------
Net periodic pension cost (income) included the following components:
Nine-week Year ended period ended Year ended Year ended June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Interest cost $520,000 205,000 496,000 440,000 Actual return on plan assets (gain) loss (1,330,000) (156,000) (464,000) 80,000 Amortization of unrecognized loss 11,000 1,000 6,000 6,000 Deferral of asset gain (loss) 823,000 (42,000) (15,000) (580,000) - ---------------------------------------------------------------------------------------------------------------- Net pension cost (income) $24,000 8,000 23,000 (54,000) - ----------------------------------------------------------------------------------------------------------------
The plans' assets include mutual funds, bonds, cash, and cash equivalents. The Corporation funding policy is to contribute annually those amounts necessary to meet ERISA funding requirements. (Continued) 19 46 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED Assumptions used in accounting for the pension plans as of June 1, 1997, June 2, 1996, and March 31, 1996 were:
June 1, June 2, March 31, 1997 1996 1996 - --------------------------------------------------------------------------------------------- Discount rates 7.09 % 7.25 % 7.25 % Expected long-term rate of return on assets 7.0 7.0 7.0 - ---------------------------------------------------------------------------------------------
The assumed rates used above have a significant effect on the amounts reported. For example, decreasing the assumed discount rates by one percentage point at June 1, 1997 would increase the projected benefit obligation by approximately $1,113,000. DEFINED CONTRIBUTION PLAN The Corporation offers a 401(k) plan covering certain of its employees. The Corporation contributes an amount equal to 100% of each employee's deferral up to 5%. The Corporation's contribution to the 401(k) plan for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995 was $557,000, $90,000, $539,000, and $506,000, respectively. (Continued) 20 47 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Certain employees receive postretirement benefits other than pensions. This plan is currently not funded. The Company accounts for these costs by accruing for them over the employee service period. The status of the plan, based on the most recent measurement dates, is as follows:
June 1, June 2, March 31, 1997 1996 1996 - ---------------------------------------------------------------------------------------------- Actuarial present value of accumulated postretirement benefit obligation: Actives eligible to retire $ (129,000) $ (123,000) $ (117,000) Other actives (271,000) (228,000) (254,000) - ---------------------------------------------------------------------------------------------- Total actives (400,000) (351,000) (371,000) Current retirees and disableds (1,174,000) (1,214,000) (1,306,000) - ---------------------------------------------------------------------------------------------- Total obligation (1,574,000) (1,565,000) (1,677,000) Plan assets at fair value - - - - ---------------------------------------------------------------------------------------------- Funded status (1,574,000) (1,565,000) (1,677,000) Unrecognized net (gain) loss (222,000) (189,000) (75,000) Unrecognized transition liability, amortized over 20 years 1,226,000 1,299,000 1,311,000 - ---------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ (570,000) $ (455,000) $ (441,000) - ----------------------------------------------------------------------------------------------
A discount rate of 7.50%, 7.50%, and 7.25% for June 1, 1997, June 2, 1996, and March 31, 1996, respectively, was used in determining the actuarial present value of the accumulated postretirement benefit obligation. The cost of postretirement benefits other than pensions consisted of the following components:
Nine-week Year ended period ended Year ended Year ended June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------------------------- Service cost $ 22,000 4,000 16,000 20,000 Interest cost 113,000 19,000 121,000 124,000 Amortization of transition obligation 73,000 12,000 73,000 73,000 Other amortization and deferral (1,000) - - - - ---------------------------------------------------------------------------------------------------------- $ 207,000 35,000 210,000 217,000 - ----------------------------------------------------------------------------------------------------------
The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.3% for fiscal year June 1, 1997, decreasing each year to an ultimate rate of 5% in 2002 and thereafter. (Continued) 21 48 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 1, 1997 by $61,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended June 1, 1997 by $4,000. EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENTS On June 12, 1995, the Corporation entered into a five year employment agreement with its Chief Executive Officer, John A Warehime, at an annual base salary of $650,000 with such compensation payable retroactively from April 1, 1994 (the "1995 Employment Agreement"). The 1995 Employment Agreement was amended on February 13, 1997 (the "Amended Employment Agreement") to, among other things, reduce the annual base salary payable under the agreement to $498,866, which modification was applied retroactively to April 1, 1994 (the effective date of the 1995 Employment Agreement) and modified the method of calculating bonuses payable to the employee under such agreement. As a result of these retroactive changes, Mr. Warehime is required to reimburse the Corporation for $83,024 in excess compensation previously paid to him through the deduction of such amount from annual base salary increases provided for under the terms of the Amended Employment Agreement and to waive accrued bonuses payable for fiscal 1997 under the 1995 Employment Agreement which would have equaled $2,250,000. The principal terms of Mr. Warehime's employment arrangements with the Corporation as amended by the Amended Employment Agreement are set forth below. The Amended Employment Agreement provides for annual increases (but not decreases) in the employee's annual salary equal to the greater of 5% of the prior year's salary or the annual percentage increase in the Consumer Price Index (CPI). Mr. Warehime's annual base salary for fiscal 1997 was $550,000. Unless terminated by either party, the Amended Employment Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Amended Employment Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Amended Employment Agreement provides for the same payment to the employee (or in the event of the death of the employee, his spouse, or descendants) for one year and thereafter the payment of supplemental pension benefits as described below. In addition, the Amended Employment Agreement provides for the reimbursement by the Corporation of the employee's legal and accounting fees up to $75,000 per year and reasonable business expenses incurred by the employee in connection with the business of the Corporation. The Amended Employment Agreement also provides the employee with various other benefits including the use of an automobile, disability and life insurance, and a club membership. (Continued) 22 49 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED The annual bonus payable to the employee under the Amended Employment Agreement is equal to $100,000 plus 10% of the Corporation's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Corporation are less than $5.0 million. The Amended Employment Agreement limits salary and the annual bonus payment described above to an aggregate of not more than $1.0 million annually. Annual bonuses can be paid in cash or Class A Common (nonvoting) stock at the option of the employee. For the periods ended June 1, 1997, March 31, 1996, and April 2, 1995, the bonus accrued under this agreement was $450,000, $0, and $659,000, respectively. The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Corporation's performance over the prior five year period as measured by its average sales growth and average increase in operating profits as compared to an industry peer group over the same period. The bonus payable is calculated based upon a formula matrix set forth in the Amended Employment Agreement, with such calculations performed by an independent management consulting firm retained by the Corporation. For the period ended June 1, 1997, the long-term performance bonus accrued under this agreement was $175,000. The Amended Employment Agreement provides for annual supplemental pension benefits, commencing upon the earlier of (a) five years after termination of the employee (or one year following his death or disability) or (b) the date of retirement, payable during the life of the employee and upon his death for the life of his spouse. Such annual supplemental pension benefits are equal to 60% of average total compensation (including bonuses) over the latest three year period prior to retirement, assuming retirement at age 65 or later. Supplemental pension benefits are reduced based upon an established formula to the extent the employee retires prior to age 65. The net present value of the cost of providing this future benefit is recognized by the Corporation over the remaining expected years of service. The expense recognized under this agreement was approximately $350,000 and $295,000 for the years ended May 31, 1997 and March 31, 1996, respectively, and $67,000 for the nine-week period ended May 31, 1996. Based on the estimated present value of the deferred compensation, the estimated present value at retirement (assuming retirement at age seventy) is approximately $9,800,000. (Continued) 23 50 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (6) CONTINUED On January 23, 1997, the Corporation entered into a five year employment agreement with Gary T. Knisely, Executive Vice President, Secretary, and Counsel of the Corporation, at an annual salary of $175,000 with such compensation payable retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by either party, the Knisely Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. The Knisely Agreement provides for annual salary increases (but not decreases) equal to the greater of 5% of the prior year's salary or the annual percentage increase in the CPI, as well as incentive bonuses and various other benefits. As of June 1, 1997, the aggregate liability of the Corporation under this agreement for the next five years is estimated to be $1,000,000, excluding annual performance bonuses. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Knisely Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Knisely Agreement provides for the payment of salary and bonus (including all other benefits) to the employee (or his spouse or other descendants in the event of the employee's death) for the later of one year from the date of such termination or the death of the employee. The agreement also provides for annual supplemental pension benefits equal to 60% of the employee's average annual compensation (including bonuses but excluding other benefits) over the three most recent fiscal years prior to the employee's termination if the employee is no longer employed by the Corporation and the employee has attained the age of 55. Such annual supplemental pension benefits are payable for the remainder of the lifetime of the employee. The net present value of the cost of providing this future pension benefit is recognized by the Corporation over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $47,000 for the year ended June 1, 1997. Based on the estimated present value of the supplemental pension benefit, the estimated present value at retirement (assuming retirement at age sixty-five) could amount to approximately $3,100,000. The Corporation also entered into change in control severance agreements with Clement A. Calabrese and Alan T. Young, which provide termination compensation to the employees upon the occurrence of certain events. The Corporation is also committed to another employee, Patricia H. Townsend, under a previous employment contract, which provides for minimum salary levels, annual adjustments, as well as incentive bonuses and for a term which ends in March 2004. Provisions contained in the agreement provide for continuation of the remuneration for the remainder of the term of the agreement in the event of termination, incapacity, death, or disability. The estimated commitment for future salaries through the duration of the agreement as of June 1, 1997 was approximately $480,000. (Continued) 24 51 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (7) INCOME TAXES Total income taxes (benefit) for the year ended June 1, 1997, the nine-week period ended June 2, 1996, the year ended March 31, 1996 and April 2, 1995, were attributable to the following:
June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ---------------------------------------------------------------------------------------- Income from operations $ 4,281,000 (533,000) 213,000 798,000 Minimum pension liability adjustment 129,000 - (235,000) - - ---------------------------------------------------------------------------------------- $ 4,410,000 (533,000) (22,000) 798,000 - ----------------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income from operations consists of:
Years ended Year ended Nine-weeks ended ------------------------------------------- June 1, 1997 June 2, 1996 March 31, 1996 April 2, 1995 ---------------------- --------------------- --------------------- --------------------- Federal State Federal State Federal State Federal State - ----------------------------------------------------------------------------------------------------------- Current $ 3,644,000 610,000 (14,000) - 448,000 134,000 696,000 80,000 Deferred 47,000 (20,000) (464,000) (55,000) (205,000) (164,000) 86,000 (64,000) - ----------------------------------------------------------------------------------------------------------- $ 3,691,000 590,000 (478,000) (55,000) 243,000 (30,000) 782,000 16,000 - -----------------------------------------------------------------------------------------------------------
There is no income tax attributable to the income from foreign subsidiaries since the foreign entities were not subject to taxes on income in 1997, 1996, and 1995. The significant components of deferred income tax expense attributable to income (loss) from operations for the year ended June 1, 1997, the nine-week period ended June 2, 1996, the years ended March 31, 1996 and April 2, 1995 are as follows:
Nine-week Year ended Year ended period ended ---------------------- June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------------------- Deferred tax expense (exclusive of the effects of other components below) $ 27,000 (519,000) (248,000) 22,000 Effect of change in state tax rate on deferred taxes - - (121,000) - - ----------------------------------------------------------------------------------------------------------------- $ 27,000 (519,000) (369,000) 22,000 - -----------------------------------------------------------------------------------------------------------------
(Continued) 25 52 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (7) (CONTINUED) A reconciliation of the Corporation's effective tax rate to the amount computed by applying the federal income tax rate of 34% to income (loss) before taxes expressed in percentages, follows:
Nine-week Year ended Year ended period ended -------------------------- June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ----------------------------------------------------------------------------------------------------- Federal income tax rate 34.0 % (34.0) % 34.0 % 34.0 % Increase (decrease) in taxes: State taxes - net of federal tax 3.5 - 9.5 3.4 Effect of change in state tax rate on deferred taxes - - (12.6) - Loss (income) in foreign subsidiary with no current tax (1.7) 2.0 2.8 (10.9) Other items - net 3.2 - (0.1) 3.2 - ----------------------------------------------------------------------------------------------------- Effective income tax rate 39.0 % (32.0) % 33.6 % 29.7 % - -----------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995, are as follows:
June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - ------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation $ (5,836,000) (5,576,000) (5,630,000) (5,334,000) Employee benefit obligations (115,000) (129,000) (146,000) (183,000) Capital lease obligations (510,000) (529,000) (519,000) (432,000) Other (172,000) (159,000) (147,000) (591,000) - ------------------------------------------------------------------------------------------------------ Total gross deferred tax liabilities (6,633,000) (6,393,000) (6,442,000) (6,540,000) - ------------------------------------------------------------------------------------------------------ Deferred tax assets: Package design costs 182,000 190,000 185,000 93,000 Inventory valuation 41,000 102,000 102,000 112,000 Group insurance expense 358,000 462,000 400,000 162,000 Compensated absences 205,000 200,000 229,000 213,000 Pension and postretirement benefits 215,000 371,000 420,000 123,000 Compensation expense 498,000 327,000 236,000 405,000 Net operating loss and credit carryforwards 539,000 398,000 - - Other 154,000 58,000 66,000 24,000 - ------------------------------------------------------------------------------------------------------ Total gross deferred tax assets 2,192,000 2,108,000 1,638,000 1,132,000 - ------------------------------------------------------------------------------------------------------ Net deferred tax liability $ (4,441,000) (4,285,000) (4,804,000) (5,408,000) - ------------------------------------------------------------------------------------------------------
(Continued) 26 53 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (7) (CONTINUED) In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company has not recognized a deferred tax liability for the undistributed earnings and tax basis differences of its investment in foreign subsidiaries since the earnings and investment are considered to be permanently invested in the businesses and, under the tax laws, are not subject to such taxes until distributed. The accumulated amount of such undistributed earnings was approximately $2,840,000 at June 1, 1997. (8) CUMULATIVE CONVERTIBLE PREFERRED STOCK The Company has outstanding 15,044 shares of cumulative convertible preferred stock. Cumulative dividends of $.515625 per share are payable quarterly. Each share of preferred stock may be converted at the option of the holder into Class A common stock based on the book value of the common stock at the time of the conversion. At June 1, 1997, the outstanding preferred stock could be converted into 5,786 shares of common stock. (Continued) 27 54 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (9) COMMITMENTS AND CONTINGENCIES LETTER OF CREDIT As of June 1, 1997, the Corporation's wholly-owned reinsurance company had outstanding two letters of credit in the amount of $1,150,000 and $728,000 as security for the reimbursement of losses arising from the reinsurance assumed by the company. LEGAL MATTERS On February 1, 1995, Michael A. Warehime, J. William Warehime, and Elizabeth W. Stick, three shareholders of the Corporation, filed a Complaint against the Corporation and its Chairman in the Court of Common Pleas of York County, Pennsylvania. The suit, when filed, sought various forms of relief including, but not limited to, an order that the court invalidate the Corporation's October 18, 1994 election of directors and reinstate the Board of Directors that existed prior to that date. In addition, the plaintiffs sought all costs and fees incident to bringing suit. On August 16, 1995, the court dismissed J. William Warehime and Elizabeth W. Stick as plaintiffs and the Corporation as a defendant in this case. 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). This suit also names the Corporation as a nominal defendant. The suit seeks 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). In addition, the plaintiffs seek costs and fees incident to bringing suit. On November 4, 1996, the complaint was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed the Complaint as amended for failure to make a prior demand. However, on May 12, 1997, a written demand was received by the Corporation from the attorney for these Class A common stockholders containing similar allegations and these allegations are currently being investigated by a committee of the Board of Directors. (Continued) 28 55 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (9) CONTINUED On February 21, 1997, certain holders of the Corporation's common stock filed motions for a preliminary injunction 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 to, among other things, establish a procedure for electing the Corporation's Board of Directors on or after the 1998 annual meeting in the event designated members of the Warehime family who are Class B common stockholders do not agree on the Board's composition (the "Proposed Amendments"). The motions were dismissed by the Court on June 24, 1997 and the Proposed Amendments became effective June 25, 1997. Appeals have been filed from the denial of the plaintiff's motion for a preliminary injunction. On April 29, 1996 the Corporation settled out of court with federal and Delaware environmental authorities regarding investigations of alleged violations of environmental laws at its Clayton, Delaware facility. As a result of the settlement the Corporation paid $60,000 in civil penalties and agreed to undertake certain tasks within eighteen months including upgrading its refrigeration system and providing refrigeration training to its personnel. The approximate cost for training and capital expenditure is $400,000. The Corporation has made substantially all of the required capital expenditures to upgrade the refrigeration system and has performed the required refrigeration training at its Delaware facility. The Corporation's actions taken as a result of this settlement are subject to the review of the environmental authorities. On December 12, 1996, the Occupational Safety and Health Administration (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 Content, contesting both alleged violations and the proposed penalties. On March 24, 1997, the Occupational Safety and Health Administration (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. 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. The Corporation is involved in various other claims and legal actions including environmental matters arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations or liquidity. (Continued) 29 56 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (9) CONTINUED MANUFACTURER COUPONS The Corporation is contingently liable for unredeemed manufacturer coupons on various products at June 1, 1997 which will expire during 1997. STOCK REPURCHASE PLAN The Corporation has agreed to purchase Hanover Foods Corporation Class A Common Stock purchased or owned by employees prior to April 20, 1988. This guarantee of repurchase by Hanover Foods Corporation is for an indefinite period of time. Shares repurchased under this plan amounted to 1,251; 5,789; and 2,152 during the years ended June 1, 1997, March 31, 1996, and April 2, 1995, respectively. As of June 1, 1997, there are 10,557 shares outstanding which would be eligible for this plan. The maximum commitment, if requested, for all eligible shares would be approximately $718,000, based on the most recent appraised value per share. (10) FOREIGN OPERATIONS AND EXCHANGE RESTRICTIONS FOREIGN OPERATIONS The Corporation's foreign subsidiary, Alimentos Congelados Monte Bello, S.A.. (ALCOSA) produces food products in Guatemala which are sold to Sunwise Corporation in the United States. The revenues generated by the operations in Guatemala and the assets employed in generating those revenues are as follows:
June 1, June 2, March 31, April 2, 1997 1996 1996 1995 - --------------------------------------------------------------------------------------- Revenues $ 13,991,000 1,442,000 18,155,000 20,320,000 Cost of goods sold 12,162,000 1,686,000 17,311,000 17,674,000 Assets 9,968,000 10,734,000 10,756,000 10,760,000 - ---------------------------------------------------------------------------------------
(Continued) 30 57 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (10) CONTINUED ALCOSA maintains its accounting records in quetzales, although, for financial reporting purposes, the accounting records have been remeasured to be expressed in U.S. dollars. The financial statements of ALCOSA have been translated to their U.S. dollar equivalents prior to being consolidated. Assets and liabilities have been translated to their U.S. dollar equivalents based on rates of exchange prevailing at the end of the period except for inventories, fixed assets, deferred and prepaid expenses, and other assets, which have been translated at historical rates. Revenue and expense accounts have been translated at average exchange rates during the period except for depreciation of fixed assets, which is based on the historical rate. The aggregate exchange gains and losses arising from the translation of foreign assets and liabilities and from foreign currency transactions are included in income under the caption of Other Expenses, Net and amount to a loss of $78,000, a gain of $44,000, a loss of $190,000, and a gain of $9,000 for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995, respectively. At June 1, 1997, the prevailing exchange rate was Q6.00 to U.S. $1.00. - -------------------------------------------------------------------------------- 31 58 HANOVER FOODS CORPORATION AND SUBSIDIARIES Quarterly Financial Data
- --------------------------------------------------------------------------------------------------------------------------------- Dollars in thousands First Second Third Fourth (except per share) quarter quarter quarter quarter - --------------------------------------------------------------------------------------------------------------------------------- 1997 Net sales $56,119 $69,036 $65,780 $68,504 Gross profit 12,879 17,582 15,067 18,825 Net earnings 1,251 2,314 1,474 1,667 Net earnings per common share 1.72 3.21 2.03 2.30 Cash dividends per common share 0.275 0.275 0.275 0.275 - --------------------------------------------------------------------------------------------------------------------------------- 1996 Net sales $51,717 $74,850 $70,365 $63,762 Gross profit 11,017 11,981 12,789 11,673 Net earnings (loss) (79) 703 657 (868) Net earnings (loss) per common share (0.12) 0.95 0.89 (1.21) Cash dividends per common share 0.275 0.275 0.275 0.275 - ---------------------------------------------------------------------------------------------------------------------------------
Note: Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. -57- 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -58- 60 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CORPORATION (a) DIRECTORS OF THE CORPORATION (AS OF AUGUST 10, 1997)
NAME, AGE AND TERM PRINCIPAL OCCUPATION DURING OF OFFICE PAST FIVE (5) YEARS - ------------------ --------------------------- JOHN A. WAREHIME Chairman - 1989 to Present; Director - 1985-Present. Mr. Director - 1985-Present; Warehime has 46 years' experience in the food processing Chairman - 1989-Present industry. Age: 59 CLAYTON J. ROHRBACH, JR. Retired Businessman; Vice President - Marketing - CPC Director - 1984-Present International - 1984-1985 Age: 77 JAMES G. STURGILL, CPA Managing Partner - Sturgill & Associates - 1993- Present; Director - 1994-Present 1980-1993 - Sturgill, Rager & Lehman - Chartered and Age: 56 Consultants ARTHUR S. SCHAIER Owner/Vice President and General Manager - Earnhardt's Gilbert Director - 1994-Present Dodge, Inc. - 1981-Present Age: 55 T. EDWARD LIPPY Vice President - Lippy Brothers, Inc., Hampstead, MD - Director 1994-Present, President - 1992-1994; Vice Chairman & Director Age: 67 - Farmers & Merchants Bank - 1989-Present; Director - Ag First Farm Credit Bank - 1988-Present; Chairman - Baltimore Farm Credit Bank - 1990-1992; Chairman - Farm Credit Council, Washington, D.C. - 1993-Present CYRIL T. NOEL Retired Businessman; Vice President - Finance - Hanover Foods Director - 1985-1991 Age: 72 JAMES A. WASHBURN Chairman & Chief Executive Officer - Park 100 Foods, Tipton, Director IN - 1991-Present; President & Chief Executive Officer - Age: 47 Hamilton Medaris Corporation, Fishers, IN; President & Chief Executive Officer - H.M.C. Transportation, Fishers, IN
-59- 61 (b) EXECUTIVE OFFICERS OF THE CORPORATION WHO ARE NOT ALSO DIRECTORS (AS OF AUGUST 10, 1997)
NAME, AGE AND TERM PRINCIPAL OCCUPATION DURING OF OFFICE PAST FIVE (5) YEARS - ------------------ --------------------------- GARY T. KNISELY, ESQUIRE Executive Vice President - 1995-Present; Vice President - Executive Vice President & Secretary Administration - 1989-1995; Counsel - 1987-Present; Secretary 1995-Present - 1987-Present. Mr. Knisely also acts as Chief Financial Age: 48 Officer of the Corporation (January 1996-Present). CLEMENT A. CALABRESE Vice President - Sales & Trade Marketing - 1995- Present; Vice Vice President - Sales & Trade Marketing President - Sales - American Home Foods, Inc. - 1993-1995; 1995-Present Vice President - Retail Sales - Sunshine Biscuits, Inc. - Age: 54 1988-1993 PIETRO D. GIRAFFA, JR. Vice President - Controller - 1996-Present; Controller - Vice President - Controller 1984-1996. Mr. Giraffa also acts as Chief Accounting Officer 1984-Present of the Corporation (1996- Present). Age: 51 WHITNEY J. COOMBS Vice President - Marketing - 1987-Present; Vice President of Vice President - Marketing Marketing - Progresso Foods Division - Ogden Foods, Inc. - 1987-Present 1984-1987; Mr. Coombs has 17 years of marketing experience in Age: 56 the food processing industry. ALAN T. YOUNG Vice President - Transportation - 1996-Present; Vice President Vice President - Purchasing & Transportation - Operations - 1991-1996; Director of Corporate Logistics - 1996-Present 1990-1991; Manager of Corporate Systems - 1986-1990 Age: 54 EDWARD L. BOECKEL, JR. Treasurer - July 1997-Present; Banking & Insurance Manager - Treasurer (Elected July 25, 1997) 1995-1997; Vice President - CoreStates Bank - 1992-1995 1997-Present Age: 46
-60- 62 (d) FAMILY RELATIONSHIPS OF DIRECTORS AND EXECUTIVE OFFICERS None. (h) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires that directors and certain officers of the Corporation file reports of ownership and changes in ownership with the Securities and Exchange Commission as to the shares of Corporation Common Stock beneficially owned by them. Based solely on its review of copies of such forms received by it, the Corporation believes that during the Corporation's fiscal year ended June 1, 1997, all filing requirements applicable to its directors and officers were complied with in a timely fashion. ITEM 11. EXECUTIVE COMPENSATION (b) The following table shows, for the fiscal years ended April 2, 1995, March 31, 1996 and June 1, 1997, the cash compensation paid or accrued, as well as certain other compensation paid or accrued, to the Chief Executive Officer and the next four highly compensated executive officers of the Corporation in all capacities in which they served. -61- 63 Table 1: Summary Compensation Table Annual Compensation
- ------------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (i) - ------------------------------------------------------------------------------------------------------------------------------- Fiscal Other Annual All Other Name and Principal Position Year Salary ($'s) Bonus ($'s) Compensation ($'s) Compensation ($'s) - ------------------------------------------------------------------------------------------------------------------------------- John A. Warehime 1997 633,348 (1) 625,000 (11) 86,269 (8) 389,120 (7) Chairman 1996 650,000 -0- 62,146 332,983 1995 350,000 659,500 -0- 32,982 - ------------------------------------------------------------------------------------------------------------------------------- Gary T. Knisely 1997 171,250 (2) 175,000 -0- 54,729 (3)(9) Executive Vice President, 1996 129,900 -0- -0- 7,191 Secretary & Counsel 1995 117,000 18,428 -0- 7,700 - ------------------------------------------------------------------------------------------------------------------------------- Clement A. Calabrese (10) 1997 140,969 180,000 -0- -0- (4) V.P. - Sales & Trade 1996 67,346 -0- -0- -0- Marketing 1995 -0- -0- -0- -0- - ------------------------------------------------------------------------------------------------------------------------------- Alan T. Young 1997 115,240 115,240 -0- 5,762 (5) V.P. - Purchasing & 1996 113,800 -0- -0- 6,424 Transportation 1995 106,700 16,805 -0- 6,887 - ------------------------------------------------------------------------------------------------------------------------------- Pietro D. Giraffa, Jr. 1997 95,000 95,000 -0- 4,472 (6) V.P. - Controller 1996 89,948 -0- -0- 4,458 1995 78,500 8,831 -0- 5,299 - -------------------------------------------------------------------------------------------------------------------------------
-62- 64 FOOTNOTES: (1) Pursuant to the June 12, 1995 Employment Agreement, as amended February 13, 1997 and August 1, 1997, between the Corporation and John A. Warehime, Chairman. (2) Pursuant to the January 23, 1997 Employment Agreement between the Corporation and Gary T. Knisely. (3) (4) (5) (6) Represents corporate matching contributions to the Corporation's 401(k) Savings Plan. (7) Represents Corporation's payment for premiums of $29,620 for Split- Dollar life insurance policy and the accrual of $350,000 for deferred compensation to be paid pursuant to the June 12, 1995 Warehime Employment Agreement, as amended February 13, 1997. (8) Legal and accounting fees in the amount of $86,269 and other perquisites paid pursuant to the June 12, 1995 Employment Agreement. (9) Accrual of $47,000 for deferred compensation to be paid pursuant to the Knisely January 23, 1997 Employment Agreement. (10) Compensation information is not provided for fiscal year 1995 as Mr. Calabrese was not employed by the Corporation at that time. (11) See "Employment Agreements."
-63- 65 (f) COMPENSATION PURSUANT TO PLANS (1) RETIREMENT BENEFITS The Corporation currently provides retirement benefits via a frozen non- contributory defined benefit pension plan ("Pension Plan") and a 401(k) defined contribution benefit plan. PENSION PLAN On June 5, 1992, the Corporation amended its Pension Plan to freeze benefit accruals effective August 31, 1992 and also took action to terminate the Pension Plan effective August 31, 1992. On November 12, 1993 the Board of Directors rescinded its previous action to terminate the Pension Plan. The Pension Plan continues to be maintained as a frozen plan with benefits frozen as of August 31, 1992. The frozen Pension Plan provides for the payment of a retirement benefit upon attainment of the normal retirement age of 65 and actual retirement from the Corporation and is not subject to offset by Social Security benefits. The normal form of benefit under the frozen Pension Plan is a qualified joint and survivor annuity for a married participant and a single life annuity for an unmarried participant. Certain optional methods of payment are also available. If a participant dies after having met the service requirements for a vested retirement benefit, a survivor benefit is payable under certain conditions. The executive officers of the Corporation listed in the Summary Compensation Table have the following frozen credited years of service and frozen accrued benefits (single life) under the frozen Pension Plan:
YEARS OF ACCRUED CREDITED MONTHLY EXECUTIVE OFFICER SERVICE BENEFITS - ----------------- ------- -------- John A. Warehime 22.67 $4,629 Gary T. Knisely 12.00 1,457 Clement A. Calabrese -0- -0- Alan T. Young 6.50 638 Pietro D. Giraffa, Jr. 18.33 1,637
On January 23, 1997, the Board of Directors took action to terminate its Pension Plan, effective April 15, 1997. The frozen accrued benefits of the participants are calculated as of August 31, 1992. On June 26, 1997, Internal Revenue Service -64- 66 issued a determination letter indicating that the termination of the Pension Plan does not adversely affect its qualification for federal tax purposes. Distribution of the plan assets is anticipated in September 1997. 401(k) PLAN The 401(k) defined contribution benefit plan, known as the Corporation's Retirement Savings Plan, was instituted on April 2, 1990, and amended June 5, 1992, April 4, 1994, April 28, 1995 and July 25, 1997. Certain full-time domestic employees are eligible to participate after completion of one (1) year of service. Each eligible employee has the option to defer up to sixteen (16%) percent of his or her total annual cash compensation per year. On December 31st of each year, the Corporation makes a one hundred (100%) percent matching contribution in cash and or securities of the Corporation to each contributing employee's account for the first five (5%) percent deferred by each employee. Each employee has various investment options. The Plan does permit loans but does not permit early withdrawals. (g) DIRECTOR FEES During fiscal year 1997, the policy of Board compensation was as follows: the directors of the Corporation are paid an annual retainer of $12,000 payable in equal monthly installments of $1,000 and a fee of $1,500 in person or $750 by telephone for each quarterly Board Meeting attended, plus an annual fee of $1,000 per year for service as a committee chairman and a fee of $1,000 in person or $500 by telephone for each Committee Meeting attended. The directors of the Corporation were paid $195,755 as a group for fiscal year 1997 for attendance at fifteen (15) meetings of the Board and Board Committees, including reimbursement for air travel. (h) EMPLOYMENT AGREEMENTS On June 12, 1995, the Corporation entered into a five year employment agreement with its Chief Executive Officer, John A. Warehime, at an annual base salary of $650,000 with such compensation payable retroactively from April 1, 1994 (the "1995 Employment Agreement"). The 1995 Employment Agreement was amended on February 13, 1997 (the "Amended Employment Agreement") to, among other things, reduce the annual base salary payable under the agreement to $498,866, which modification was applied retroactively to April 1, 1994 (the effective date of the 1995 Employment Agreement) and modified the method of calculating bonuses payable to the employee under such agreement. As a result of these retroactive changes, Mr. Warehime is required to reimburse the Corporation -65- 67 for $83,024 in excess compensation previously paid to him through the deduction of such amount from annual base salary increases provided for under the terms of the Amended Employment Agreement and to waive accrued bonuses payable for fiscal 1997 under the 1995 Employment Agreement which would have equaled $2,250,000. The principal terms of Mr. Warehime's employment arrangements with the Corporation as amended by the Amended Employment Agreement are set forth below. The Amended Employment Agreement provides for annual increases (but not decreases) in the employee's annual salary equal to the greater of 5% of the prior year's salary or the annual percentage increase in the Consumer Price Index (CPI). Mr. Warehime's annual base salary for fiscal 1997 was $550,000. Unless terminated by either party, the Amended Employment Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation or similar events, the Amended Employment Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Amended Employment Agreement provides for the same payment to the employee (or in the event of the death of the employee, his spouse or descendants) for one year and thereafter the payment of supplemental pension benefits as described below. In addition, the Amended Employment Agreement provides for the reimbursement by the Corporation of the employee's legal and accounting fees up to $75,000 per year and reasonable business expenses incurred by the employee in connection with the business of the Corporation. The Amended Employment Agreement also provides the employee with various other benefits including the use of an automobile, disability and life insurance and a club membership. The annual bonus payable to the employee under the Amended Employment Agreement is equal to $100,000 plus 10% of the Corporation's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Corporation are less than $5.0 million. The Amended Employment Agreement limits salary and the annual bonus payment described above to an aggregate of not more than $1.0 million annually. Annual bonuses can be paid in cash or Class A Common (nonvoting) stock at the option of the employee. For the periods ended June 1, 1997, March 31, 1996 and April 2, 1995, the bonus accrued under this agreement was $450,000, $0 and $659,000, respectively. The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Corporation's performance over the prior five year period as measured by its average sales growth and average -66- 68 increase in operating profits as compared to an industry peer group over the same period. The bonus payable is calculated based upon a formula matrix set forth in the Amended Employment Agreement, with such calculation performed by an independent management consulting firm retained by the Corporation. For the period ended June 1, 1997, the long-term performance bonus accrued under this agreement was $175,000. The Amended Employment Agreement was revised effective as of August 1, 1997 to make certain clarifying changes and to require that bonus payments to Mr. Warehime in any taxable year in excess of $1.0 million would be subject to shareholder approval. At a meeting of the Class B Shareholders held on August 14, 1997, John A. Warehime, in his capacity as voting trustee of approximately 52% of the Class B Common Stock, approved such bonus payments. The Amended Employment Agreement provides for annual supplemental pension benefits, commencing upon the earlier of (a) five years after termination of the employee (or one year following his death or disability) or (b) the date of retirement, payable during the life of the employee and upon his death, for the life of his spouse. Such annual supplemental pension benefits are equal to 60% of average total compensation (including bonuses) over the latest three year period prior to retirement, assuming retirement at age 65 or later. Supplemental pension benefits are reduced based upon an established formula to the extent the employee retires prior to age 65. The net present value of the cost of providing this future benefit is recognized by the Corporation over the remaining expected years of service. The expense recognized under this agreement was approximately $350,000 and $295,000 for the years ended June 1, 1997 and March 31, 1996, respectively, and $67,000 for the nine-week period ended May 31, 1996. Based on the estimated present value of the deferred compensation, the estimated present value at retirement (assuming retirement at age seventy) is approximately $9,800,000. On January 23, 1997, the Corporation entered into a five year employment agreement with Gary T. Knisely, Executive Vice President, Secretary and Counsel of the Corporation, at an annual salary of $175,000 with such compensation payable retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by either party, the Knisely Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. The Knisely Agreement provides for annual salary increases (but not decreases) equal to the greater of 5% of the prior year's salary or the annual percentage increase in the CPI, as well as incentive bonuses and various other benefits. As of June 1, 1997, the aggregate liability of the Corporation under this agreement for the next five years is estimated to be $1,000,000, excluding annual performance bonuses. In the event the employee is terminated without cause, or -67- 69 in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation or similar events, the Knisely Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Knisely Agreement provides for the payment of salary and bonus (including all other benefits) to the employee (or his spouse or other descendants in the event of the employee's death) for the later of one year from the date of such termination or the death of the employee. The agreement also provides for annual supplemental pension benefits equal to 60% of the employee's average annual compensation (including bonuses but excluding other benefits) over the three most recent fiscal years prior to the employee's termination if the employee is no longer employed by the Corporation and the employee has attained the age of 55. Such annual supplemental pension benefits are payable for the remainder of the lifetime of the employee. The net present value of the cost of providing this future pension benefit is recognized by the Corporation over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $47,000 for the year ended June 1, 1997. Based on the estimated present value of the supplemental pension benefit, the estimated present value at retirement (assuming retirement at age sixty-five) could amount to approximately $3,100,000. The Corporation also entered into change in control severance agreements with Clement A. Calabrese and Alan T. Young, which provide termination compensation to the employees upon the occurrence of certain events. The Corporation is also committed to another employee, Patricia H. Townsend, under a previous employment contract, which provides for minimum salary levels, annual adjustments, as well as incentive bonuses and for a term which ends in March 2004. Provisions contained in the agreement provide for continuation of the remuneration for the remainder of the term of the agreement in the event of termination, incapacity, death or disability. The estimated commitment for future salaries through the duration of the agreement as of June 1, 1997 was approximately $480,000. (j) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION James G. Sturgill served as a member of the Compensation Committee until January 1997. During the 1997 fiscal year, the Corporation retained James G. Sturgill as a financial consultant. See "Certain Relationships and Related Transactions - Transactions with Management and Others." -68- 70 ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS The following table sets forth information regarding beneficial ownership of all classes of capital stock of the Corporation by the directors, executive officers and owners of five (5%) percent or more of any class of capital stock, as well as any future rights of ownership by such individuals, as of August 10, 1997. AS OF AUGUST 10, 1997 (a) BENEFICIAL OWNERS
AMOUNT & NATURE NAME AND ADDRESS OF OF BENEFICIAL % OF CLASS BENEFICIAL OWNER INTEREST CLASS - ----- ---------------- -------- ----- Common A J. William Warehime 8,834 3.0% Common B 257 Frederick Street 78,408 18.4% Hanover, Pennsylvania 17331 Common A Elizabeth W. Stick 15,002 5.1% Common B 35 Peyton Road 44,244 10.4% York, Pennsylvania 17403 Common A Centre Foods Enterprises, Inc. 19,607 6.7% 120 Paul Street Hanover, Pennsylvania 17331 Common A Meta L. Frey 3,872 1.3% Common B 425 Westminster Avenue, Cottage 22 27,720 6.5% Hanover, Pennsylvania 17331 Common A Heartland Advisors, Inc. 50,500 17.2% 790 N. Milwaukee Street Milwaukee, WI 53202
(b) MANAGEMENT
DIRECTORS - --------- Common A John A. Warehime 44 .01% Common B RD 3, Box 281 223,079(1) 52.2% Hanover, Pennsylvania 17331
-69- 71
AMOUNT & NATURE NAME AND ADDRESS OF OF BENEFICIAL % OF CLASS BENEFICIAL OWNER INTEREST CLASS - ----- ---------------- -------- ----- Common A Clayton J. Rohrbach, Jr. 88(2) .03% The Barclay, Apartment 724 3546 South Ocean Boulevard Palm Beach, Florida 33480 Common A Cyril T. Noel 301(2) .10% 344-1/2 North Street McSherrystown, Pennsylvania 17344 Common A T. Edward Lippy 385 .13% 209 Lees Mill Road Hampstead, Maryland 21074 Common A Arthur S. Schaier 500(2) .17% 890 West San Marcos Drive Chandler, Arizona 85224 None James G. Sturgill 0 0 4833 Wentz Road Manchester, Maryland 21102 None James A. Washburn 0 0 12643 Royce Court Carmel, Indiana 46033 EXECUTIVE OFFICERS (NOT DIRECTORS) - ---------------------------------- Common A Gary T. Knisely, Esq. 1,688 .6% Executive Vice President 1051 Cherry Orchard Road Dover, Pennsylvania 17315 None Pietro D. Giraffa, Jr. 0 0 Vice President - Controller 281 Mt. Pleasant Road Hanover, Pennsylvania 17331 None Clement A. Calabrese 0 0 V.P. Sales & Trade Marketing 2199 Wyndtree Lane Malvern, Pennsylvania 19355
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AMOUNT & NATURE NAME AND ADDRESS OF OF BENEFICIAL % OF CLASS BENEFICIAL OWNER INTEREST CLASS - ----- ---------------- -------- ----- Common A Whitney J. Coombs 451 .15% V.P. Marketing 86 Roberts Road Littlestown, Pennsylvania 17340 None Alan T. Young 0 0 V.P. Purchasing & Transportation 21 Laurel Woods Hanover, Pennsylvania 17331 None Edward L. Boeckel, Jr. 0 0 434 Estelle Drive Lancaster, PA 17601 DIRECTORS AND OFFICERS AS A GROUP (13 PERSONS) - ---------------------------------------------- Common A 3,457 1.20% Common B 223,079 52.24%
Footnote: (1) Currently, John A. Warehime owns directly 8,558 shares or 2.0% of the Class B Common Voting Stock. Mr. Warehime is Sole Voting Trustee with regard to the balance of Class B Common Stock shares listed (214,521) (50.2%), pursuant to Voting Trust Agreements dated April 5, 1988 and December 1, 1988, respectively, copies of which are incorporated herein by reference as Exhibits 9(a) and 9(b). Said trusts expire April 5, 1998 and December 1, 1998, respectively. See "Legal Proceedings." (2) Does not include 809 shares of the Corporation's Class B Voting Common Stock and 4,490 shares of the Corporation's Class A Nonvoting Common Stock held by John R. Miller, Jr. which are subject to the April 22, 1997 Voting Agreement. See "Market for the Corporation's Common Stock and Related Stockholder Matters." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHERS During the fiscal year ended June 1, 1997, the Corporation and its subsidiaries, in the normal course of business sold finished goods, provided administrative and manufacturing services to, and leased buildings, equipment and land, purchased contracted vegetables and received travel -71- 73 services from related companies. These transactions are as follows: 1. The Corporation received travel services from The Cannery Press, Inc., doing business as New Horizons Travel, in the amount of $14,000 for fiscal year 1997. 2. The Corporation stored raw potatoes at its Centre Hall, Pennsylvania plant for Snyder's of Hanover, Inc., Hanover, Pennsylvania, for a total rental of $175,000. 3. On April 28, 1988, the Corporation entered into an Agreement of Sale with Warehime Enterprises, Inc. to purchase a frozen food facility for the total sum of $2,500,000. Effective March 1, 1993, the Corporation is obligated to make twenty (20) quarterly principal payments in the amount of $125,000. Interest at the greater of the prime rate or the imputed interest of the Internal Revenue Service accrues on the unpaid balance and is paid monthly. 4. During fiscal year 1996-1997, the Corporation rented equipment from two related parties, ARWCO Corporation and Warehime Enterprises, Inc. The rental payments pursuant to such lease agreements totaled $206,000 for fiscal year 1996- 1997. 5. On June 1, 1994, the Corporation entered into a one (1) year lease with Food Service East, Inc., Hanover, PA, for 20,931 square feet of dry warehouse, production, refrigerated and frozen storage space at Smith Station Road and Route 116, Hanover, PA. Pursuant to the lease, the Corporation has two unilateral options to extend the term of the lease for two (2) successive one (1) year terms or until May 31,1997 and an option to purchase based on an independent appraisal. On October 1, 1994 the Corporation increased the rental space to 28,501 square feet for a total annual rent of $96,703. On June 1, 1996, the Corporation exercised its unilateral option to purchase for $904,058 approximately 10.3 acres of land improved by an office/warehouse facility free and clear of all liens, encumbrances and security interests. 6. On April 5, 1995, the Corporation purchased a facility located in Teculutan, Guatemala, for $250,000 from ARWCO Corporation. A deed of transfer dated October 13, 1995 was recorded March 21, 1996. 7. During fiscal year 1997, the Corporation leased a two story farm house, adjoining one story guest house and adjoining ground located on Trolley Road, R.D. #3, Hanover, Heidelberg Township, Pennsylvania, for customer housing and entertainment and temporary new employee housing from John A. and Patricia M. Warehime for a total of $52,000. 8. Pursuant to the March 3, 1989 Agreement of Sale (Exhibit 10(c)), the Corporation -72- 74 purchased 71.8 acres of real estate located in Penn Township, York County, from Warehime Enterprises, Inc. The total consideration, $460,000, had been paid in full as of April 1, 1993. The Corporation acquired title to the property by deed dated June 13, 1995 and recorded July 7, 1995. 9. During the fiscal year 1997, the Corporation purchased $1,044,000 of contracted vegetables from Lippy Brothers, Inc. 10. During the fiscal year 1997, the Corporation retained director James G. Sturgill as a financial consultant and paid him a total of $135,000 in fees, including reimbursable expenses. 11. The Corporation repurchased 5,148 shares of the Corporation's Class B Common Stock from Cyril T. Noel, individually, and from Cyril T. Noel and Frances L. Noel, jointly, for $367,567. See "Security Ownership of Management and Certain Security Holders." 12. During the fiscal year 1997, the Corporation sold $3,155,000 of frozen food products to Park 100 Foods, Tipton, Indiana. NOTE: The following executive officers, directors or beneficial owners of more than five (5%) percent of the Corporation's Class B Voting Common Stocks are also beneficial owners of the following related parties with which the Corporation has and currently does business:
PERCENTAGE OF VOTING STOCK/ BENEFICIAL INTEREST OF RELATED PARTY RELATED PARTY AUGUST 10, 1997 ------------- --------------- 1. ARWCO CORPORATION ----------------- John A. Warehime........................................................30.3% 2. CENTRE FOODS ENTERPRISES, INC. ------------------------------ ARWCO Corporation.......................................................33.0% John R. Miller, Jr......................................................33.0% 3. FOOD SERVICE EAST, INC. AND SUBSIDIARIES (1) ---------------------------------------- John A. & Patricia M. Warehime.........................................100.0%
-73- 75 4. SNYDER'S OF HANOVER, INC. ------------------------- J. William Warehime.....................................................13.7% Jane Elizabeth Stick.....................................................7.0% John A. & Patricia M. Warehime...........................................7.2% 5. WAREHIME ENTERPRISES, INC. -------------------------- J. William Warehime.....................................................44.4% John A. Warehime........................................................14.8% 6. LIPPY BROTHERS, INC. -------------------- T. Edward Lippy.........................................................37.0% 7. PARK 100 FOODS -------------- James A. Washburn.......................................................80.0%
(1) Food Service East filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on April 22, 1994. This bankruptcy was subsequently converted to Chapter 7 on October 11, 1994. For additional information regarding related party transactions, see Note 5 to the Notes to the Consolidated Financial Statements. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. All Financial Statements Hanover Foods Corporation and Subsidiaries (See Part II, Item 8, Pages _______) 2. Financial Statement Schedules None All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. -74- 76 3. Exhibits The following exhibits are filed herein or have been previously filed with the Securities and Exchange Commission and are incorporated by reference herein.
Number Description - ------ ----------- 3(a) Registrant's Amended and Restated By-laws, enacted April 25, 1997, are attached as Exhibit 3(a). 3(b) Registrant's Amended and Restated Articles of Incorporation are attached as Exhibit 3(b). 3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of Incorporation is attached as Exhibit 3(c). 4(a) Note Agreement dated as of December 1, 1991, between the Corporation and Allstate Life Insurance Company, with regard to the Corporation's $25,000,000, 8.74% Senior Notes Due March 15, 2007, is incorporated herein by reference to the Form 10-K filed June, 1992 wherein such Exhibit is designated as 4(a). 4(b) June 20, 1995 First Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") and Waiver of Compliance with Section 5.9 of the Note Agreement is incorporated herein by reference to Exhibit 4(b) of the Form 10-K filed on July 3, 1995. 4(c) June 24, 1996 waiver to covenants in the December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") is incorporated herein by reference to Exhibit 4(c) of the Form 10-K filed on July 2, 1996. 4(d) July 1, 1996 Second Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") is attached as Exhibit 4(d).
-75- 77
Number DESCRIPTION - ------ ----------- 9(a) April 5, 1988 Voting Trust Agreement is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such 9(b) December 1, 1988 Voting Trust Agreement is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 9(b). 9(c) Writing dated April 5, 1988 appointing John A. Warehime as Successor Voting Trustee under Voting Trust Agreement dated December 1, 1988, is incorporated herein by reference to the Form 8-K filed June 1, 1990, wherein such Exhibit is designated as 9(c). 9(d) Writing dated December 1, 1988 appointing John A. Warehime as Successor Voting Trustee under Voting Trust Agreement dated December 1, 1988, is incorporated herein by reference to the Form 8-K filed June 1, 1990, wherein such Exhibit is designated as 9(d). 10(a) April 28, 1988 Sublease Agreement between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(a). 10(b) April 28, 1988 Agreement of Sale between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(b). 10(c) March 3, 1989 Agreement of Sale between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(c).
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Number Description - ------ ----------- 10(d) November 14, 1986 Employment Agreement between Hanover Brands, Inc., and Patricia H. Townsend is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(i). May 10, 1991 Amendment to April 28, 1988 Agreement of Sale 10(e) between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10-K filed June 29, 1991, wherein such Exhibit is designated as 10(k). 10(f) October 1, 1994 Amendment to the June 1, 1994 Lease Agreement between Hanover Foods Corporation and Food Service East, Inc. is incorporated herein by reference to Exhibit 10(p) of the Form 10-K filed on July 3, 1995. 10(g) June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(r) of the Form 10-K filed on July 3, 1995. 10(h) April 4, 1994 Lease Agreement between John A. and Patricia M. Warehime and Hanover Foods Corporation is incorporated herein by reference to Exhibit 10(t) of the Form 10-K filed on July 2, 1996. 10(i) July 27, 1995 Installment Sales Agreement for the purchase of 5,148 shares of Hanover Foods Class B Voting Common Stock from Cyril T. Noel, individually, and Cyril T. Noel and Frances L. Noel, jointly, is incorporated herein by reference to Exhibit 10(u) of the Form 10-K filed on July 2, 1996. 10(j) April 1, 1996 Installment Sales Agreement for the purchase of 1,210 shares of Hanover Foods Class B Voting Common Stock and 5,990 shares of Hanover Foods Class A Nonvoting Common Stock from John R. Miller, Jr. is incorporated herein by reference to Exhibit 10(v) of the Form 10-K filed on July 2, 1996.
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Number Description - ------ ----------- 10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation and Gary T. Knisely is attached as Exhibit 10(k). 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is attached as Exhibit 10(l). 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is attached as Exhibit 10(m). 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is attached as Exhibit 10(n). 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is attached as Exhibit 10(o). 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is attached as Exhibit 10(p). 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q). 11 Computation of Earnings Per Share is attached as Exhibit 11. 21 A list setting forth subsidiaries of the Registrant is attached as Exhibit 21. 27 The Financial Data Schedule is attached as Exhibit 27.
(b) Reports on Form 8-K None. -78- 80 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of Hanover Foods Corporation and in the capacity and on the date indicated. DATE: AUGUST 29, 1997 HANOVER FOODS CORPORATION By: /s/ John A. Warehime ----------------------------- JOHN A. WAREHIME CHAIRMAN -79- 81 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Hanover Foods Corporation and in the capacities and on the date indicated. DATE: AUGUST 29, 1997 By: /s/ John A. Warehime By: /s/ T. Edward Lippy ----------------------------------- ------------------------------- John A. Warehime T. Edward Lippy Chairman, Director Director (Chief Executive Officer) By: /s/ Gary T. Knisely By: /s/ Clayton J. Rohrbach, Jr. ----------------------------------- ------------------------------- Gary T. Knisely Clayton J. Rohrbach, Jr. Executive Vice President Director (Chief Financial Officer) By: /s/ Pietro D. Giraffa, Jr. By: /s/ James G. Sturgill ----------------------------------- ------------------------------- Pietro D. Giraffa, Jr. James G. Sturgill Vice President - Controller Director (Chief Accounting Officer) By: /s/ Arthur S. Schaier By: /s/ James A. Washburn ----------------------------------- ------------------------------- Arthur S. Schaier James A. Washburn Director Director By: /s/ Cyril T. Noel ----------------------------------- Cyril T. Noel Director -80- 82 HANOVER FOODS CORPORATION EXHIBIT INDEX
Number Description - ------ ----------- 3(a) Registrant's Amended and Restated By-laws, enacted April 25, 1997, are attached as Exhibit 3(a). 3(b) Registrant's Amended and Restated Articles of Incorporation are attached as Exhibit 3(b). 3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of Incorporation is attached as Exhibit 3(c). 4(a) Note Agreement dated as of December 1, 1991, between the Corporation and Allstate Life Insurance Company, with regard to the Corporation's $25,000,000, 8.74% Senior Notes Due March 15, 2007, is incorporated herein by reference to the Form 10-K filed June, 1992 wherein such Exhibit is designated as 4(a). 4(b) June 20, 1995 First Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") and Waiver of Compliance with Section 5.9 of the Note Agreement is incorporated herein by reference to Exhibit 4(b) of the Form 10-K filed on July 3, 1995. 4(c) June 24, 1996 waiver to covenants in the December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") is incorporated herein by reference to Exhibit 4(c) of the Form 10-K filed on July 2, 1996. 4(d) July 1, 1996 Second Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Company (the "Note Agreement") is attached as Exhibit 4(d). 9(a) April 5, 1988 Voting Trust Agreement is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 9(a). 9(b) December 1, 1988 Voting Trust Agreement is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 9(b).
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Number Description - ------ ----------- 9(c) Writing dated April 5, 1988 appointing John A. Warehime as Successor Voting Trustee under Voting Trust Agreement dated December 1, 1988, is incorporated herein by reference to the Form 8- K filed June 1, 1990, wherein such Exhibit is designated as 9(c). 9(d) Writing dated December 1, 1988 appointing John A. Warehime as Successor Voting Trustee under Voting Trust Agreement dated December 1, 1988, is incorporated herein by reference to the Form 8- K filed June 1, 1990, wherein such Exhibit is designated as 9(d). 10(a) April 28, 1988 Sublease Agreement between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(a). 10(b) April 28, 1988 Agreement of Sale between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(b). 10(c) March 3, 1989 Agreement of Sale between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(c). 10(d) November 14, 1986 Employment Agreement between Hanover Brands, Inc., and Patricia H. Townsend is incorporated herein by reference to the Form 10 filed July 28, 1989, wherein such Exhibit is designated as 10(i). 10(e) May 10, 1991 Amendment to April 28, 1988 Agreement of Sale between Warehime Enterprises, Inc. and Hanover Brands, Inc., is incorporated herein by reference to the Form 10-K filed June 29, 1991, wherein such Exhibit is designated as 10(k). 10(f) October 1, 1994 Amendment to the June 1, 1994 Lease Agreement between Hanover Foods Corporation and Food Service East, Inc. is incorporated herein by reference to Exhibit 10(p) of the Form 10-K filed on July 3, 1995. 10(g) June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(r) of the Form 10-K filed on July 3, 1995.
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Number Description - ------ ----------- 10(h) April 4, 1994 Lease Agreement between John A. and Patricia M. Warehime and Hanover Foods Corporation is incorporated herein by reference to Exhibit 10(t) of the Form 10-K filed on July 2, 1996. 10(i) July 27, 1995 Installment Sales Agreement for the purchase of 5,148 shares of Hanover Foods Class B Voting Common Stock from Cyril T. Noel, individually, and Cyril T. Noel and Frances L. Noel, jointly, is incorporated herein by reference to Exhibit 10(u) of the Form 10-K filed on July 2, 1996. 10(j) April 1, 1996 Installment Sales Agreement for the purchase of 1,210 shares of Hanover Foods Class B Voting Common Stock and 5,990 shares of Hanover Foods Class A Nonvoting Common Stock from John R. Miller, Jr. is incorporated herein by reference to Exhibit 10(v) of the Form 10-K filed on July 2, 1996. 10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation and Gary T. Knisely is attached as Exhibit 10(k). 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is attached as Exhibit 10(l). 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is attached as Exhibit 10(m). 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is attached as Exhibit 10(n). 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is attached as Exhibit 10(o). 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is attached as Exhibit 10(p). 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q). 11 Computation of Earnings Per Share is attached as Exhibit 11. 21 A list setting forth subsidiaries of the Registrant is attached as Exhibit 21. 27 The Financial Data Schedule is attached as Exhibit 27.
-83- EX-3.(A) 2 REGISTRANT'S AMENDED AND RESTATED BY-LAWS 1 EXHIBIT 3(a) AMENDED AND RESTATED BY-LAWS OF HANOVER FOODS CORPORATION These Bylaws are adopted by this Corporation and are supplemental to the Pennsylvania Business Corporation Law of 1988 as it may from time to time be amended. ARTICLE I. GENERAL Section 1. Office The principal office of Hanover Foods Corporation (the "Company") shall be in Penn Township, York County, Pennsylvania. (Post Office - Hanover, PA.) Section 2. Seal The Company shall have a common seal containing the words "Hanover Foods Corporation - Pennsylvania" in a circle with which the word "SEAL" is contained. Section 3. Fiscal Year The fiscal year of the Company shall end with the close of business on the Sunday nearest May 31st. ARTICLE II. SHAREHOLDERS Section 1. Place of Meetings All meetings of the shareholders shall be held at the principal office of the Company or at any other place, within or without the Commonwealth of Pennsylvania, designated in the notice of the meeting. Section 2. Annual Meeting The annual meeting of the shareholders shall be held each year on a date and at the time and place set by the Board of Directors; or if no date or time is set, on the third Friday of August at 10:00 a.m. -84- 2 Section 3. Special Meetings Special meetings of the shareholders may be called at anytime by the Chairman, or at the request of either a majority of the directors, or shareholders representing twenty percent (20%) of the issued and outstanding Class B Common Stock or that higher percentage prescribed by the Articles. At any time, upon written request of any person entitled to call a special meeting, the Secretary shall call a special meeting of the shareholders to be held at the time as the Secretary may fix, not less than five (5) nor more than sixty (60) days after the receipt of the request. If the Secretary does not call the meeting, the person making the request may do so. Section 4. Notice of Meetings The Secretary shall give written notice of shareholders meetings to shareholders of record entitled to vote at the meeting, at least five (5) days prior to the date fixed for the meeting unless a greater period of notice in a particular case is required by law. Ten (10) days notice shall be given if it is a special meeting called to elect directors. Notice may be given either personally or by mail, telegram, or facsimile to each shareholder at his address appearing on the books of the Company. The notice shall specify the place, day, and hour of the meeting and, in the case of a special meeting, the general nature of the business to be transacted. No notice of an adjourned meeting or of the business to be transacted at an adjourned meeting need be given other than by announcement at the meeting at which the adjournment is taken. Section 5. Waiver of Notice A waiver of notice in writing signed by the person entitled to notice, whether before or after the time stated for the meeting, shall be deemed equivalent to the giving of notice. Attendance of a person either in person or by proxy at any meeting shall constitute a waiver of notice of the meeting, except where the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 6. Quorum The presence in person or by proxy at a shareholders' meeting of a majority of all votes entitled to be cast with respect to each class of stock shall constitute a quorum. Shareholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of shareholders which leaves less than a quorum. Section 7. Adjournment of Meeting If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting to anytime and place they determine. In the case of any meeting called for the election of directors, those present at the adjourned meeting and who attend the second of any -85- 3 adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. Any meeting at which directors are to be elected shall be adjourned only from day to day until the directors have been elected. Section 8. Voting Power All voting power incident to the company's stock shall be vested in the holders of the Class B common stock. The holders of the Class A common stock shall have no right to vote at any meeting of shareholders, except as may be specifically required by law or the Articles of the Company. All questions shall be decided by the vote of the holders of shares constituting a majority of the voting power of all shares represented and entitled to vote at any meeting unless otherwise specifically provided by law or by the Articles of the Company. Section 9. Proxies Every shareholder may vote either in person or by proxy. Every proxy shall be executed in writing by the shareholder or by his duly authorized attorney in fact and filed with the Secretary of the Company. A proxy, unless coupled with an interest, shall be revocable at will, not withstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the Secretary of the Company. No revoked proxy shall be valid after eleven (11) months from the date of its execution. Section 10. Determination of Shareholders of Record The Board of Directors may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholder, or to receive payment of any dividend or to make a determination of shareholders for any other purpose. The date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than sixty (60) days, and in the case of a meeting of shareholders not less than ten (10) days, before the date on which the meeting or particular action requiring the determination of shareholders is to be held or taken. In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than twenty (20) days. If the stock transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, the books shall be closed for at least ten (10) days before the date of the meeting. Section 11. Voting Lists The officer or agent having charge of the transfer books for shares of the Company shall make a complete list of the shareholders entitled to vote at each meeting of shareholders. The list shall -86- 4 be produced and kept open at the time and place of the meeting, and shall be subject to the inspection of any shareholder during the whole time of the meeting. The list shall be arranged in alphabetical order with the address of and the number of shares held by each shareholder. Section 12. Presiding Officer All meeting of the shareholders shall be called to order and presiding over by the Chairman, or in his absence, by the Secretary, or if neither of them is present, by a chairman elected by the shareholders. ARTICLE III. DIRECTORS Section 1. Number The business and affairs of the Company shall be managed by a Board of Directors, who need not be residents of the Commonwealth of Pennsylvania or shareholders of the Company. The Board of Directors shall have the power to fix the number of directors and, from time to time, by proper resolution, to increase or decrease the number without a vote of the shareholders, provided that the number so determined shall not be less than seven (7) nor more than fifteen (15). Section 2. Election and Term The directors shall be elected at the annual meeting of shareholders, or if not so elected, at a special meeting of shareholders called for that purpose. Each director shall hold office until the next meeting of shareholders at which his successor is elected, or until his resignation, removal from office, or death, whichever is earlier. Section 3. Nominations Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of a class of stock entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the Board of Directors, shall be made in writing, and shall be delivered to the Chairman, at least three (3) days prior to the date of the meeting at which the directors are to be elected. A nomination shall contain the following information to the extent known to the shareholder: (a) The name and address of each proposed nominee; (b) The qualifications of each proposed nominee; (c) Confirmation that the proposed nominee has agreed to serve if elected. -87- 5 Nominations not made in accordance with this Section may be disregarded by the Chairman of the meeting and upon his instructions, the judges of elections may disregard all votes cast for that nominee. Section 4. Vacancies Vacancies in the Board of Directors shall be filled by a majority vote of the remaining members of the Board even though less than a quorum, and each person so elected shall serve until his successor is elected. Any vacancy, including vacancies resulting from death, resignation or an increase in the number of directors may be filled by the vote of a majority of the remaining directors though less than a quorum. Section 5. Regular Meetings The Board of Directors shall hold an annual meeting within two (2) days after the annual meeting of the shareholders and may hold other meetings at any time and place the Board may determine. Section 6. Special Meetings The Board of Directors may hold special meetings called by the Chairman, the Secretary or a majority of the Directors. Each meeting shall be held at a time and place designated in the notice of the meeting. Section 7. Notice of Meetings Written notice of all meetings except the annual meeting of the Board of Directors shall be given by, or at the direction of, the person calling the meeting at least one (1) day prior to the day named for the meeting. Section 8. Quorum A majority of the directors in office shall constitute a quorum for the transaction of business and the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. If all directors consent in writing to any action to be taken by the Company, that action shall be as valid a corporate action as though it had been authorized at a meeting of the Board of Directors. The consent signed by all directors shall be filed with the Secretary. Section 9. Powers of Board of Directors Except as otherwise provided by law or by the Articles or by-laws of the Company, all general and special powers of the Company shall be exercised by or under the authority of the Board of Directors of the Company. The Board of Directors may from time to time adopt regulations with -88- 6 respect to the powers and duties of the officers of the Company and the conduct and management of the Company's business as the Board deems proper. Section 10. Financial Reports to Shareholders The Board of Directors shall cause a financial report as of the closing date of the preceding fiscal year to be sent to the shareholders within 120 days after the close of the company's fiscal year. The report shall give a full, clear and complete statement of the business and conditions of the Company. The report shall set forth a balance sheet as of the closing date of the preceding fiscal year together with a statement of income and profit and loss for the year ended on that date prepared in the form ordinarily used by accountants for the particular kind of business carried on by the Company. All reports shall be verified by a certified public accountant who is not a director or full time employee of the Company or by a firm of practicing public accountants at least one member of which is a certified public accountant. Section 11. Committees The Board of Directors may from time to time appoint standing or special committees as it may deem for the best interests of the Company. No committee shall have any powers except that expressly conferred upon it by the Board of Directors. Section 12. Personal Liability of Directors A Director of this Company shall not be personally liable as such for monetary damages for any action taken, or any failure to take any action, unless: (1) the Director has breached or failed to perform the duties of his office in good faith, in a manner he reasonably believes to be in the best interests of the company, and with that care, including reasonable inquiry, skill and diligence, a person of ordinary prudence would use under similar circumstances; and (2) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. This section shall not limit a Director's liability for monetary damages to the extent prohibited by the Pennsylvania Business Corporation Law of 1988. Section 13. Mandatory Indemnification of Directors and Officers The Company shall indemnify any person who is or was a director or officer, or is or was serving at the request of the company as a director or officer of another corporation, or fiduciary of an employee benefit plan or trust ("Indemnified Person"), for direct third party actions and derivative and corporate actions to the maximum extent permitted by the Pennsylvania Business Corporation Law of 1988 (as amended from time to time), the Directors Liability Act or otherwise. -89- 7 Expenses incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Company, in advance of the final disposition of any action, suit or proceeding upon receipt of an undertaking by or on behalf of the Indemnified Person to repay the amount it is ultimately determined that he is not entitled to be indemnified by the Company. Persons who were directors or officers of the Company prior to the date these by-laws are approved by the Board of Directors of the Company, but who do not hold that office on or after such date, shall not be covered by this Section. No indemnification or advancement or reimbursement of expenses shall be provided to an indemnified Person (a) for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, and amounts paid in settlement) which have been paid directly to, or for the benefit of, the Indemnified Person by an insurance carrier under a policy of officers, and directors' liability insurance whose premiums are paid by the Company or by an individual or entity other than the indemnified Person; and (b) for amounts paid in settlement of any threatened, pending or completed action, suit or proceeding without the written consent of the Company, which shall not be unreasonably withheld. The right of an indemnified Person to be indemnified or to receive an advancement or reimbursement of expenses (i) may be enforced as a contract right pursuant to which the Indemnified Person may bring suit as if the right were set forth in a separate written contract between the Corporation and the Indemnified Person, (ii) to the fullest extent permitted by applicable law, is intended to be retroactive and shall be available with respect to events occurring prior to the adoption of this Article, and (iii) shall continue to exist after the rescission or restrictive modification (as determined by the Indemnified Person) of this Article with respect to events, acts or omissions occurring before the rescission or restrictive modification is adopted. If a request for indemnification or for the advancement or reimbursement of expenses is not paid in full by the corporation within sixty (60) days after a written claim has been received by the Corporation together with all supporting information reasonably requested by the Corporation, the Indemnified Person may thereafter bring suit to recover the unpaid amount of the claim (plus interest at the prime rate announced from time to time by the Corporation's primary banker) and, if successful, the expenses (including, but not limited to, attorney's fees) of prosecuting the claim. Nothing contained in this Article shall be construed to limit the rights and powers the Corporation possesses under Pennsylvania Business Corporation Law of 1988 (as amended from time to time), the Directors' Liability Act or otherwise, including, but not limited to, the powers to purchase and maintain insurance, create funds to secure or insure its indemnification obligations, and any other rights or powers the Corporation may otherwise have under applicable law. -90- 8 Section 14. Telephone Meetings Members of the Board of Directors and its committees may participate in meetings by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 15. Compensation Directors may receive an annual fee for their services as directors. In addition, a fixed sum and expenses of attendance, if any, may be allowed to directors for attendance at each meeting of the Board of Directors or of committee. The amount of the fee, if any, shall be fixed by the Board of Directors. A director shall not be precluded from serving the Company in any other capacity and receiving compensation in that capacity. ARTICLE IV. OFFICERS Section 1. Election of Officers and Agents At its annual meeting, the Board of Directors shall elect a Chairman,, a President, one or more Vice Presidents as from time to time may be fixed by the Board of Directors, a Secretary, a Treasurer, and one or more other officers as the Board may deem proper. Any two or more offices may be held by the same person. Section 2. Terms and Compensation All officers shall be elected for the term and receive compensation as the Board of Directors may determine. Unless the Board of Directors shall authorize or approve a written contract for a longer term, each officer shall hold office until the next annual meeting of the Board of Directors and until his successor is elected and qualified. Any officer or agent elected or appointed y the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interest of the Company will be served, but removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 3. Chairman the Chairman shall be the chief executive officer of the Company. He shall preside at all meetings of shareholders and directors at which he is present. He shall be ex-officio a member of all standing committees. He shall make reports of the Company's business to the Board of Directors as the Board may require. He shall have the duties and authority incident to the office of Chairman. -91- 9 Section 4. President In the event of the incapacity of the Chairman to act, his duties shall be performed by the President. The President shall have the duties and authority assigned by the Chairman or the Board of Directors. Section 5. Vice-Presidents The Vice-Presidents shall have the duties and authority assigned to each of them by the Chairman or the Board of Directors. Section 6. Secretary The Secretary shall attend the meetings of the shareholders and of the directors and keep minutes thereof in suitable books. Unless some other person is delegated to give notice, the Secretary shall send out notices of all meetings of shareholders and its directors which may be called or held in accordance with the provisions of the law and these by-laws. He shall perform all the usual duties incident to the office of Secretary. He shall have custody of the corporate seal. Section 7. Treasurer The Treasurer shall have custody of the corporate funds of the company and keep, or cause to be kept, accurate accounts of all receipts and payments made in books kept for that purpose. He shall deposit all money received in the name and to the credit of the Company in depositories the Board of Directors may designate. He shall give bond for the faithful discharge of his duties in an amount and with sureties as the Board of Directors may require. He shall perform the duties assigned to him by the Chairman or the officer designated by the Board of Directors as the Chief Financial officer of the Company. ARTICLE V. EXECUTION OF DOCUMENTS Section 1. Checks, Notes, Etc. The Board of Directors shall from time to time designate the officers or agents of the Company who shall have power, in its name, to sign and endorse checks and other negotiable instruments and to borrow money for the Company, and in its name, to make notes or other evidences of indebtedness. Section 2. Other Documents Unless otherwise authorized by the Board of Directors, all contracts, leases, deeds, deeds of trust, mortgages, powers of attorney to transfer stock and for other purposes, and all other documents -92- 10 requiring the seal of the Company shall be executed for and on behalf of the Company by the Chairman, the President or any Vice President, all of which shall be attested to by the Secretary, and the corporate seal shall be affixed at his direction. ARTICLE VI. SHARE CERTIFICATES AND TRANSFERS Section 1. Share Certificates Share certificates of the Company shall be in the form that the Board of Directors may from time to time determine. Every share certificate shall be signed by the Chairman, or in the absence of the Chairman, by the President, or any other officer designated by the Board of Directors, and shall be countersigned by the Secretary, or in the absence of the Secretary, by the Treasurer, and sealed with the corporate seal. Section 2. Transfer of Shares The shares of the capital stock of the Company shall, upon the surrender and cancellation of the certificate or certificates representing the same, be transferred upon the books of the Company at the request of the holder named in the surrendered certificate in person or by his legal representatives or attorney duly authorized by a written power of attorney filed with the Company's transfer agent. Section 3. Loss or Destruction of Share Certificate In case of loss or destruction of a share certificate, another may be issued in lieu thereof in the manner and upon those terms as the Board of Directors shall authorize in each particular case. Section 4. Transfer Agents and Registrars The Board of Directors may appoint an incorporate bank or trust company to act as registrar of transfers, and also an incorporated bank or trust company to act as transfer agent. In that event no share certificate thereafter issued shall be valid or binding upon the Company unless registered by one of the Company registrars or countersigned by the Company transfer agent before being issued by one of such registrars. ARTICLE VII. AMENDMENTS These by-laws may be altered or amended by a vote of a majority of the members of the Board of Directors at any regular or special meeting duly convened after notice of that purpose; subject, -93- 11 however, to the power of the shareholders to change or repeal the by-laws at any annual or special meeting duly convened after notice of that purpose. Hanover, Pennsylvania DATE: April 25, 1997 I hereby certify that the foregoing is a true and correct copy of the by-laws (as amended) of Hanover Foods Corporation, a Pennsylvania corporation, and that the by-laws are in full force and effect as of this date. /s/ Gary T. Knisely -------------------------- Gary T. Knisely, Secretary -94- EX-3.(B) 3 REGISTRANT'S AMENDED & RESTATED ARTICLES OF INCORP 1 EXHIBIT 3(b) AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HANOVER FOODS CORPORATION 1. Name The name of the Corporation is: Hanover Foods Corporation 2. Registered Office The location and post office address of its current registered office in the Commonwealth of Pennsylvania is: 1486 York Street P.O. Box 334 Hanover, PA 17331 3. Purpose The purpose or purposes for which the Corporation is incorporated are: To have unlimited power to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the provisions of the Business Corporation Law of 1988, as amended, of the Commonwealth of Pennsylvania. 4. Term The term for which the Corporation is to exist is perpetual. 5. Capital Stock The total number of shares of all classes of stock that the Corporation shall have authority to issue is one million, eight-hundred thousand (1,800,000), consisting of one million, six-hundred and eighty thousand (1,680,000) shares of common stock, par value $25.00 per share -95- 2 (the "Common Stock"), and one hundred and twenty thousand (120,000) shares of preferred stock, par value $25.00 per share (the "Preferred Stock"). The Common Stock shall consist of eight-hundred thousand (800,000) shares of Class A Common Stock (the "Class A Common Stock") and eight hundred and eighty thousand (880,000) shares of Class B Common Stock (the "Class B Common Stock"). All shares of the Class A Common Stock and the Class B Common Stock shall be identical and shall entitle the holders thereof to the same rights and privileges with respect thereto, except that the holders of the Class B Common Stock shall have voting power for the election of directors and on all other corporate matters, and the holders of the Class A Common Stock shall have no voting power with respect to shares of said stock held by them, except as otherwise required by the Pennsylvania Business Corporation Law of 1988 as amended and except as follows: (i) in the event of a proposed amendment to these Amended and Restated Articles of Incorporation which shall affect adversely the holders of the Class A Common Stock, the holders thereof shall have the right, as a separate class, to one vote on such amendment for each share of such stock held and no such amendment shall be adopted without the affirmative vote of the holders of a majority of the shares of the Class A Common Stock; (ii) if no dividend be paid on shares of the Class A Common Stock for three (3) consecutive fiscal years, the holders thereof shall have the right to one vote for each share of such stock held until such time as the payment of dividends is resumed; and (iii) in the event any shares of the Series C Convertible Preferred Stock are issued and outstanding and become entitled to vote or consent on a matter which involves a Disputed Change of Board Control (as hereafter defined), each share of Class A Common Stock shall be entitled to one-tenth (1/10) of a vote per share with respect to such matter involving a Disputed Change of Board Control (as hereafter defined), and, in such event, the shares of Class A Common Stock shall vote together with the shares of Class B Common Stock and shares of Series C Convertible Preferred Stock as a single class of stock, and not as a separate class. The Preferred Stock shall consist of fifteen thousand, two hundred and sixty-eight (15,268) shares of Series A Cumulative Preferred Stock (the "Series A Preferred Stock"), sixteen thousand, two hundred and sixty-eight (16,268) shares of Series B Cumulative Preferred Stock (the "Series B Preferred Stock"), (the Series A Preferred Stock and the Series B Preferred Stock, collectively, the "Cumulative Preferred Stock"), ten thousand (10,000) shares of Series C Convertible Preferred Stock, and such other shares of Preferred Stock as the Board of Directors may issue up to the total amount authorized. Holders of Preferred Stock shall have the option to convert, without consideration, any or all such shares held to shares of Class A Common Stock on an equitable basis, which equitable basis shall, in the case of Series C Convertible Preferred Stock, be deemed to be a conversion of one share of Series C Convertible Preferred Stock for one share of Class A Common Stock. -96- 3 CUMULATIVE PREFERRED STOCK The Cumulative Preferred Stock may be issued in series, each series to be so designated as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors of the Corporation shall have authority, by resolution, to divide any or all of the shares of Cumulative Preferred Stock into one or more series and, with respect to each series so established and prior to the issue thereof to fix and determine a distinguishing designation therefor and the relative rights and preferences thereof with respect to (a) the rate of dividends, and the date from which such dividends shall be cumulative upon all shares of such series issued prior to the record date for the initial dividend thereon, (b) the price at which shares of such series may be redeemed, and (c) the amounts payable thereon in event of voluntary or involuntary liquidation. The holders of Cumulative Preferred Stock shall be entitled to receive and the Corporation shall be obliged to pay, but only when and as declared by its Board of Directors and only out of its surplus or net profits, cash dividends at such rate per share per annum for each particular series as shall have been fixed as aforesaid by the Board of Directors, and no more, payable quarterly on the first day of each January, April, July, and October. Such dividends shall be cumulative from the dates as follows: (a) in the case of shares issued prior to the record date for the initial dividend on shares of the series of which such shares shall constitute a part, then from the date fixed as aforesaid for such purpose by the Board of Directors; (b) if issued during the period commencing immediately after the record date for a dividend on shares of such series and terminating at the close of the payment date for such dividend, then from such dividend payment date; and (c) otherwise from the dividend payment date next preceding the date of issue of such shares. The Statement of Amendments filed on September 30, 1971 and on June 25, 1973 under Section 602 of the Business Corporation Law approved the 5th day of May, 1933, P.L. 364, as amended, which created 8 1/4% Cumulative Preferred Stock, Series A, and 8 1/4% Cumulative Preferred Stock, Series B, respectively, shall continue in full force and effect hereafter, subject to the provisions of Section 1522 of the Pennsylvania Business Corporation Law of 1988 as amended, and subject to an adjustment of the redemption price and liquidation amount to $25.25 and $25.00 per share, respectively, to reflect a four-for-one stock split pursuant to the Certificate of Amendment filed on January 15, 1988. Nothing contained herein shall be construed to adversely affect any share of Cumulative Preferred Stock which is outstanding on the effective date of these Amended and Restated Articles of Incorporation. So long as any of the Cumulative Preferred Stock shall remain outstanding, no dividend (other than dividends payable in Class A Common Stock or Class B Common Stock, or both) shall be paid on shares of any class which, with respect to payment of dividends or distributions in liquidation, shall rank junior to the Cumulative Preferred Stock, unless all dividends on all outstanding Cumulative Preferred Stock for all past quarterly dividend periods shall have been -97- 4 paid and full dividends thereon for the then current quarterly dividend period declared and a sum sufficient for the payment thereof set apart. The Corporation, at the option of the Board of Directors, may redeem all or any of the outstanding Cumulative Preferred Stock upon payment in cash in respect of the shares so redeemed of the redemption price fixed as aforesaid by the Board of Directors in respect of the series of which such shares shall constitute a part, plus an amount equal to all accumulated and unpaid dividends thereon to the date of redemption, whether or not such dividends shall have been earned or declared. Any such redemption shall be in such amount, at such place and in such manner as the Board of Directors may determine. In the case of a redemption of less than all the outstanding Cumulative Preferred Stock, the particular shares to be so redeemed shall be selected by lot. At least 30 days prior to the date fixed for such redemption, written notice thereof shall be mailed by the Corporation to the holders of record of the Cumulative Preferred Stock to be so redeemed, at their respective addresses as the same appear upon the books of the Corporation. From and after the date fixed in any such notice as the date of redemption (unless default shall be made by the Corporation in providing moneys at the time and place specified for the payment of the redemption price pursuant to said notice) all dividends on the Cumulative Preferred Stock thereby called for redemption shall cease to accrue and all rights of the holders thereof as stockholders in the Corporation, except the right to receive the redemption price, shall cease and determine, and such Cumulative Preferred Stock shall not be deemed outstanding for any purpose. All Cumulative Preferred Stock so redeemed shall be canceled and shall not be reissued. On any voluntary or involuntary liquidation of the Corporation, before any payment or distribution shall be made to the holders of any Class A Common Stock or Class B Common Stock, the holders of the outstanding Cumulative Preferred Stock shall be entitled to be paid the liquidation price fixed at $25 per share, plus an amount equal to all accumulated and unpaid dividends thereon to the date of such payment, whether or not such dividends shall have been earned or declared. After such payment shall have been made in full to the holders of Cumulative Preferred Stock, they shall be entitled to no further payment or distribution. A consolidation or merger of the Corporation with any other corporation or corporations shall not be deemed a liquidation within the meaning of this subdivision. Holders of Cumulative Preferred Stock shall have no voting power in respect to shares of such stock held by them, except as otherwise provided by the Pennsylvania Business Corporation Law of 1988 as amended and except as follows: (i) in the event of a proposed amendment to these Amended and Restated Articles of Incorporation which shall affect adversely the holders of Cumulative Preferred Stock, the holders thereof shall have the right to one vote on such amendment for each share of such stock held and no such amendment shall be adopted without the affirmative vote of the holders of a majority of the outstanding shares of Cumulative -98- 5 Preferred Stock, and (ii) if no dividend be paid on shares of Cumulative Preferred Stock for three (3) consecutive fiscal years, the holders thereof shall have the right to one vote for each share of such stock held until such time as the payment of dividends on such stock is resumed. SERIES C CONVERTIBLE PREFERRED STOCK A total of 10,000 shares of Preferred Stock is hereby designated as Series C Convertible Preferred Stock and shall have the following rights and privileges: (i) Such shares may be issued only to trusts which satisfy both of the following conditions: (A) the trust must be an employee benefit plan trust of the Corporation which is intended to qualify under the provisions of Section 401 et seq. of the Internal Revenue Code of 1986, as amended, including, but not limited to, the trust which has been established under the so-called Hanover Foods Corporation 401(k) Savings Plan; and (B) at least a majority of the trustees of the trust must be persons who qualify as "disinterested directors" of the Corporation under Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended, in the opinion of counsel for the Corporation; (ii) Each share of Series C Convertible Preferred Stock shall be convertible into one share of Class A Common Stock of the Corporation (subject to proportional adjustment in the event of a stock split, stock dividend or other recapitalization of the Class A Common Stock) at the option of the holder thereof, except that such conversion shall automatically occur upon the distribution of the shares of Series C Convertible Preferred Stock to beneficiaries of the employee benefit plan trusts if and when such distribution is made by such trusts. Any shares of Class A Common Stock of the Corporation which are received upon conversion of the Series C Convertible Preferred Stock shall be issued out of the authorized but unissued shares of Class A Common Stock; (iii) Each share of Series C Convertible Preferred Stock shall be entitled to the same dividends or other distributions which are paid per share by the Corporation to holders of Class A Common Stock; (iv) Each share of Series C Convertible Preferred Stock shall be entitled to a liquidation preference equal to the par value of $25.00 per share which shall be paid in full prior to a liquidation distribution to the holders of Common Stock. A "merger" or "consolidation" of the Corporation shall not be deemed to be a liquidation. -99- 6 (v) So long as at least a majority of the trustees of the trust are persons who qualify as Disinterested Directors (as defined below), each share of Series C Convertible Preferred Stock shall be entitled to 35 votes per share (subject to proportional adjustment in the event of a stock split, stock dividend or other recapitalization of the Class B Common Stock) with respect to any matter presented to the holders of Class B Common Stock for a vote or consent which involves a Disputed Change of Board Control (as hereafter defined), but shall not be entitled to vote on any other matter presented to the holders of the Class B Common Stock for a vote or consent. The voting rights of the Series C Convertible Preferred Stock set forth in the immediately preceding sentence shall expire five (5) years after the date on which any of such shares are first issued by the Corporation. The shares of Series C Convertible Preferred Stock shall vote together with the shares of Class B Common Stock and shares of Class A Common Stock as a single class of stock, and not as a separate class. The shares of Series C Convertible Preferred Stock shall not otherwise be entitled to vote in matters presented to holders of the Class B Common Stock. In no event shall the Series C Convertible Preferred Stock be entitled to vote on matters presented to holders of the Class A Common Stock other than a matter which involves a Disputed Change of Board Control as provided herein. Notwithstanding anything to the contrary contained herein, Series C Convertible Preferred Stock shall not be entitled to vote on any proposal (whether or not such proposal involves a Disputed Change of Board Control) if shares of Class A Common Stock are entitled to vote as a separate class on such proposal (except that if a single proposal involves both (A) matters on which the Class A Common Stock is entitled to vote as a separate class and (B) matters on which Class A Common Stock is not so entitled, the single proposal shall be divided into two proposals, on the first of which the Class A Common Stock is entitled to vote as a separate class and the second of which the Class A Common Stock is not entitled to vote as a separate class, and the Series C Convertible Preferred Stock shall be entitled to vote on the second proposal); if no dividend is paid on shares of Class A Common Stock for three (3) consecutive years, Series C Convertible Preferred Stock shall not be entitled to vote until such time as the payment of dividends is resumed. The term "Disputed Change of Board Control" refers to any of the following: (A) any election of directors of the Corporation in which the slate of directors nominated for election by Disinterested Directors (as hereafter defined) of the Corporation is contested by other nominees, unless the nominees contesting the nominees of the Disinterested Directors are unanimously supported in writing by all of the following persons (or their estates, if they are deceased) so long as such persons continue to individually own of record at least 10,000 shares of Class B Common Stock of the Corporation: Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime and Elizabeth W. Stick. (B) any proposal to remove one or more directors of the Corporation which has not been previously approved by the Board of Directors of the Corporation, unless the proposal is unanimously supported in writing by all of the following persons (or their estates, if they are deceased) so long as such persons continue to individually own of record at least 10,000 -100- 7 shares of Class B Common Stock of the Corporation: Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime and Elizabeth W. Stick. (C) any proposal, which has not been previously approved by the Board of Directors of the Corporation, to amend these Amended and Restated Articles of Incorporation or the By-laws of the Corporation, or to effectuate a merger, consolidation, division, or sale of substantially all of the assets of the Corporation, unless the proposal is unanimously supported in writing by all of the following persons (or their estates, if they are deceased) so long as such persons continue to individually own of record at least 10,000 shares of Class B Common Stock of the Corporation: Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime and Elizabeth W. Stick. If Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime or Elizabeth W. Stick (or their estates, if they are deceased) cease to individually own of record at least 10,000 shares of Class B Common Stock of the Corporation, such persons shall be excluded from the list of persons whose unanimous support in writing is required in clauses (A), (B) and (C) above, but unanimous support in writing of the remaining persons shall still be required. If Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime and Elizabeth W. Stick (and their estates, if they are deceased) all cease to individually own of record at least 10,000 shares of Class B Common Stock of the Corporation, each share of Series C Convertible Preferred Stock shall automatically be converted into Class A Common Stock of the Corporation. The term "Disinterested Directors" refers to directors of the Corporation who are considered to be "disinterested directors" under Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended, in the opinion of counsel for the Corporation. In the event of a dispute as to whether a matter constitutes a "Disputed Change of Board Control," the decision by the Disinterested Directors as to whether or not the matter constitutes a Disputed Change of Board Control shall be final and conclusive in the absence of proof by clear and convincing evidence of bad faith by such Disinterested Directors. A Disinterested Director may abstain on any decision. A decision by a majority of the Disinterested Directors who actually vote on a matter shall be considered to be the decision of the Disinterested Directors. REMAINING AUTHORIZED SHARES OF PREFERRED STOCK The remaining authorized shares of Preferred Stock may be issued in series, each series to be so designated as to distinguish the shares thereof from the shares of all other series and classes. The Board of Directors of the Corporation shall have authority, by resolution, to divide any or all of the shares of Preferred Stock into one or more series and, with respect to each series so established and prior to the issue thereof to fix and determine a distinguishing designation therefor and the relative rights and preferences thereof with respect to (a) the rate of dividends, and the date from which such dividends shall be cumulative upon all shares of such series issued -101- 8 prior to the record date for the initial dividend thereon, (b) the price at which shares of such series may be redeemed, and (c) the amounts payable thereon in event of voluntary or involuntary liquidation. 6. No Cumulative Voting The holders of Common Stock of the Corporation shall not have the right to cumulate their votes for the election of directors of the Corporation. 7. Classification of the Board of Directors Effective at the annual shareholders meeting to be held in 1997, the Board of Directors shall be divided into four (4) classes, as nearly as equal in number as possible, known as Class A, consisting of one (1) director, Class B, consisting of one (1) director, Class C, consisting of two (2) directors, and Class D, consisting of two (2) directors. The Class A director shall serve until the annual meeting of shareholders to be held in 1998. At the annual meeting of shareholders to be held in 1998, the Class A director shall be elected for a term of four (4) years and, after expiration of such term, shall thereafter be elected every four (4) years for four (4) year terms. The Class B director shall serve until the annual meeting of shareholders to be held in 1999. At the annual meeting of shareholders to be held in 1999, the Class B director shall be elected for a term of four (4) years and, after the expiration of such term shall thereafter be elected every four (4) years for four (4) year terms. The Class C directors shall serve until the annual meeting of shareholders to be held in 2000. At the annual meeting of shareholders to be held in 2000, the Class C directors shall be elected for a term of four (4) years and, after the expiration of such term, shall thereafter be elected every four (4) years for four (4) year terms. The Class D directors shall serve until the annual meeting of shareholders to be held in 2001. At the annual meeting of shareholders to be held in 2001, the Class D directors shall be elected for a term of four (4) years and, after the expiration of such term, shall thereafter be elected every four (4) years for four (4) year terms. Each director shall serve until his successor shall have been elected and shall qualify, even though his term of office as herein provided has otherwise expired, except in the event of his earlier death, resignation, removal or disqualification. This Article 7, or any portion thereof, may be changed by a by-law amendment which is adopted by all of the then members of the Board of Directors of the Corporation. 8. Severability If any provision contained in these Amended and Restated Articles of Incorporation requires the affirmative vote of the holders of a majority of Class A Common Stock in order to permit such provision to become legally effective, such provision shall not be deemed legally effective until such affirmative vote is obtained; however, the remaining provisions of these Amended and Restated Articles of Incorporation shall nevertheless continue in full force and effect and shall be enforced to the maximum extent permitted by law. -102- EX-3.(C) 4 AMENDMENT NO.1 TO AMEND.&RESTATED ARTICLES OF INC. 1 EXHIBIT 3(c) AMENDMENT NO. 1 TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HANOVER FOODS CORPORATION RESOLVED, that the following provisions of Article 5 of the Amended and Restated Articles of Incorporation of Hanover Foods Corporation, under the heading Series C Convertible Preferred Stock, shall be amended to read in full as follows, but in all other respects Article 5 shall remain unchanged: Change subclause (i)(B), which presently reads: (B) at least a majority of the trustees of the trust must be persons who qualify as "disinterested directors" of the Corporation under Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended, in the opinion of counsel for the Corporation; to read: (B) at least a majority of the trustees of the trust must be persons who qualify, in the opinion of counsel for the Corporation, as "Disinterested Directors" of the Corporation, as hereafter defined. Change the definition of "Disinterested Directors," which presently reads: The term "Disinterested Directors" refers to directors of the Corporation who are considered to be "disinterested directors" under Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended, in the opinion of counsel for the Corporation. to read: The term "Disinterested Directors" refers to directors of the Corporation who are considered, in the opinion of counsel for the Corporation, to meet any of the following criteria: persons who qualify as "disinterested directors" as defined in Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended; 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 persons who qualify as members of an Audit Committee pursuant to Section 303.00 of the New York Stock Exchange's Listed Company Manual. The opinion of counsel for the Corporation as to who is a "Disinterested Director," if rendered in good faith by competent counsel who is not an employee of the Corporation, shall be final, binding and conclusive. -103- EX-4.(D) 5 2ND AMENDEMENT TO NOTE AGREEMENT 1 EXHIBIT 4(d) - ------------------------------------------------------------------------------- HANOVER FOODS CORPORATION SECOND AMENDMENT Dated as of July 1, 1996 To NOTE AGREEMENT Dated as of December 1, 1991 Re: $25,000,000 8.74 Senior Notes, Due March 15, 2007 - ------------------------------------------------------------------------------- -104- 2 SECOND AMENDMENT TO NOTE AGREEMENT THIS SECOND AMENDMENT to Note Agreement dated as of July 1, 1996 (the or this "Second Amendment"), is entered into between Hanover Foods Corporation, a Pennsylvania corporation (the "Company"), and Allstate Life Insurance Company (the "Purchaser"). RECITALS: A. The Company and the Purchaser have heretofore entered into the Note Agreement dated as of December 1, 1991 and the First Amendment to Note Agreement dated as of June 20, 1995 (as amended, the "Note Agreement"). B. The Company and the Purchaser now desire to amend certain of the terms of the Note Agreement in order to reduce the level of financial performance that the Company must achieve for the next year. C. Capitalized terms used herein shall have the respective meanings ascribed thereto in the Note Agreement unless herein defined or the context shall otherwise require. D. All requirements of law have been fully complied with and all other acts and things necessary to make this Second Amendment a valid, legal and binding instrument according to its terms for the purposes herein expressed have been done or performed. NOW, THEREFORE, the Company and the Purchaser, in consideration of good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, do hereby agree as follows: SECTION 1. AMENDMENT. Section 1.1. Section 5.8(a)(3) of the Note Agreement shall be and is hereby amended in its entirety to read as follows: "(3) additional Funded Debt of the Company; provided that at the time of creation, issuance, assumption, guarantee, or incurrence thereof and after giving effect thereto and to the application of the proceeds thereof: (i) Consolidated Funded Debt would not exceed an amount equal to the relevant percentage of Consolidated Total Capitalization (determined as of the end of the most recent quarter) hereinafter specified during the applicable period set forth below: -105- 3
If Funded Debt Maximum Percentage is Incurred of Consolidated During the Period: Total Capitalization: ------------------ --------------------- Closing Date to and including 55% December 1, 1996 December 2, 1996 to 52% March 2, 1997 March 3, 1997 to 51% June 1, 1997 June 2, 1997 and thereafter 50%
and (ii) in the case of the incurrence of any Funded Debt of the Company secured by Liens permitted by Section 5.10(g), the aggregate amount of all Consolidated Funded Debt secured by Liens permitted by Sections 5.10(f) and (g) would not exceed 15% of Consolidated Tangible Net Worth." Section 1.2. Section 5.8(a)(4) of the Note Agreement shall be and is hereby amended in its entirety to read as follows: (4) Current Debt of the Company; provided that for purposes of determining whether additional Funded Debt may be incurred pursuant to Section 5.8(a)(3), if there shall not have been a period of at least 60 consecutive days during the twelve-month period immediately preceding the date of such determination during which no Current Debt of the Company shall have been outstanding, then the daily average outstanding balance of the Company's Current Debt during any period of 60 consecutive days selected by the Company occurring during such twelve-month period shall be deemed to constitute Funded Debt for purposes of such determination; and Section 1.3. Section 5.9 of the Note Agreement shall be and is hereby amended in its entirety to read as follows: "Section 5.9. Interest Charges Coverage Ratio. The Company will keep and maintain the ratio of Net Income Available for Interest Charges to Interest Charges for each period of four consecutive fiscal quarters most recently ended at not less than: (a) 1.10 to 1.00 at all times during the period from and including the Closing Date to, but not including, December 1, 1996, (b) 1.15 to 1.00 at all times during the period from and including December 1, 1996 to, but not including, March 2, 1997, (c) 1.40 to 1.00 at all times during the period from and including March 2, 1997 to, but not including June 2, 1997, (d) 2.40 to 1.00 at all times during the period from and including June 2, 1997 to, -106- 4 but not including, August 31, 1997, (e) 2.65 to 1.00 at all times during the period from and including August 31, 1997 to, but not including, November 30, 1997 and (f) 2.75 to 1.00 at all times from and after November 30, 1997." Section 1.4. A new Section 5.19 of the Note Agreement shall be added as follows: "Section 5.19. Maintenance of Bank Facilities. The Company will, at all times, keep and maintain committed credit facilities from one or more financial institutions aggregating at any one time not less than $60,000,000, each in form and substance reasonably satisfactory to the holders of the Notes." Section 1.5. Section 6.1(d) of the Note Agreement shall be and is hereby amended in its entirety to read as follows: "(d) Default shall occur in the observance or performance of any covenant or agreement contained in Section 5.6 through Section 5.13 or Section 5.19; or" Section 1.6. Section 6.1(f) of the Note Agreement shall be and is hereby amended in its entirety to read as follows: "(f) Default shall be made in the payment when due (whether by lapse of time, by declaration, by call for redemption or otherwise) of the principal of or interest on any Funded Debt or Current Debt (other than the Notes) of the Company or any Restricted Subsidiary in the aggregate unpaid principal amount of $1,000,000 or more and such default shall continue beyond the period of grace, if any, allowed with respect thereto (whether or not any default resulting from such failure shall have been waived by the holders of such Current Debt or Funded Debt); or" Section 1.7. Section 6.1(g) of the Note Agreement shall be and is hereby amended in its entirety to read as follows: "(g) Default or the happening of any event shall occur under any indenture, agreement or other instrument under which any Funded Debt or Current Debt of the Company or any Restricted Subsidiary in the aggregate unpaid principal amount of $1,000,000 or more may be issued and such default or event shall continue for a period of time sufficient to permit the acceleration of the maturity of any Funded Debt or Current Debt of the Company or any Restricted Subsidiary outstanding thereunder (whether or not any default resulting from such failure shall have been waived by the holders of such Current Debt or Funded Debt); or" Section 1.8. From and after January 1, 1996 until November 30, 1997 interest on the Notes shall accrue at a rate per annum equal to the rate set forth in the Notes or the Note Agreement, plus 0.50%. -107- 5 SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Section 2.1. To induce the Purchaser to execute and deliver this Second Amendment, the Company represents and warrants to the Purchaser (which representations shall survive the execution and delivery of this Second Amendment) that: (a) this Second Amendment has been duly authorized, executed and delivered by it and this Second Amendment constitutes the legal, valid and binding obligation, contract and agreement of the Company enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Note Agreement, as amended by this Second Amendment, constitutes the legal, valid and binding obligation, contract and agreement of the Company enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Company of this Second Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, or (B) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 2.1(c); and (d) as of the date hereof and after giving effect to this Second Amendment, no Default or Event of Default has occurred which is continuing. SECTION 3. CONDITIONS TO EFFECTIVENESS OF SECOND AMENDMENT. Section 3.1. This Second Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Second Amendment, duly executed by the Company and the Purchaser, shall have been delivered to the Purchaser; (b) the Purchaser shall have received a fee equal to $10,000; -108- 6 (c) the Purchaser shall have received a copy of the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance by the Company of this Second Amendment, certified by its Secretary or an Assistant Secretary; (d) the representations and warranties of the Company set forth in Section 2 hereof shall be true and correct on and with respect to the date hereof; (e) the Purchaser shall have received the favorable opinion of counsel to the Company as to the matters set forth in Sections 2.1(a), 2.1(b) and 2.1(c) hereof, which opinion shall be in form and substance satisfactory to the Purchaser; and (f) executed counterparts of Credit Agreements, duly executed by the Company and the Banks, which Credit Agreements shall be in form and substance satisfactory to the Purchaser, shall have been delivered to the Purchaser. Upon receipt of all of the foregoing, this Second Amendment shall become effective. SECTION 4. PAYMENT OF PURCHASER'S COUNSEL FEES AND EXPENSES. Section 4.1 The Company agrees to pay upon demand, the reasonable fees and expenses of Chapman and Cutler, counsel to the Purchaser, in connection with the negotiation, preparation, approval, execution and delivery of this Second Amendment. SECTION 5. MISCELLANEOUS. Section 5.1. Except as modified and expressly amended by this Second Amendment, the Note Agreement is in all respects ratified, confirmed and approved and all of the terms, provisions and conditions thereof shall be and remain in full force and effect. Section 5.2. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Second Amendment may refer to the Note Agreement without making specific reference to this Second Amendment but nevertheless all such references shall include this Second Amendment unless the context otherwise requires. Section 5.3. This Second Amendment shall be governed by and construed in accordance with the laws of the State of Pennsylvania. Section 5.4. This Second Amendment may be executed and delivered in any number of counterparts, each of such counterparts constituting an original, but all together only one Second Amendment. -109- 7 IN WITNESS WHEREOF, the Company and the Purchaser have caused this instrument to be executed, all as of the day and year first above written. HANOVER FOODS CORPORATION By /s/ Gary T. Knisely ---------------------------- Its Executive Vice President -110- 8 Accepted and Agreed to: ALLSTATE LIFE INSURANCE COMPANY By /s/ -------------------------- Authorized Officer By /s/ -------------------------- Authorized Officer -111- EX-10.(K) 6 JANUARY 23, 1997 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(k) EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), is made this 23rd day of January 1997, but effective as of June 1, 1996, by and between HANOVER FOODS CORPORATION, a Pennsylvania corporation (the "Employer"), and Gary T. Knisely (the "Employee"). BACKGROUND The Employer is one of the leading independent processors of canned vegetables, frozen meat products, frozen entrees and fresh foods in the eastern United States. The Employee is presently employed by the Employer as its Executive Vice President and General Counsel. The parties desire to enter into a written agreement setting forth the terms and conditions of the Employee's continued employment by the Employer. NOW, THEREFORE, the parties, intending legally to be bound, agree as follows: 1. DEFINITIONS. See Addendum No. 1 for definitions of various terms used in this Agreement. 2. EMPLOYMENT. The Employee shall continue to be employed by the Employer upon the terms and conditions set forth in this Agreement. 3. TERM. The initial Contract Period of the Employee's employment is five (5) years beginning on June 1, 1996. If Employee continues in the employ of the Employer on a full-time basis after June 1, 1997 or each June 1 thereafter without a new written agreement, the Contract Period shall be automatically renewed and the Employee's employment shall continue for the new Contract Period subject to the terms of this Agreement until terminated pursuant to Section 18 of this Agreement. 4. DUTIES. 4.1 The Employee shall be the Executive Vice President, Secretary and General Counsel of the Employer, and in those positions, the Employee's duties shall include, but not be limited to, the duties of those positions described in the By-laws of the Employer. -112- 2 4.2 The Board of Directors through the Chief Executive Officer shall direct, control and supervise the work of the Employee. 4.3 All duties assigned to the Employee shall be fully and faithfully performed, and the Employee's best efforts shall be devoted on behalf of the Employer. 4.4 The Employee shall work for the Employer for the amount of time commensurate with his position. 4.5 If elected, the Employee shall serve as a director of the Employer or as an officer or director of any Related Companies. His compensation for serving in those offices will be established by the Board of Directors. 5. COMPENSATION. 5.1 Salary. For the services to be rendered by the Employee during the Term, the Employee shall be paid in arrears, in equal monthly installments, or more often if the Employer elects, the following amounts (the "Salary"): 5.1.1 During the Initial Contract Year from June 1, 1996 to May 31, 1997, at the rate of One Hundred Seventy-Five Thousand Dollars ($175,000) per annum. 5.1.2 During each Contract Year thereafter, at an annual rate equal to the greater of (i) the Salary being paid during the preceding Contract Year multiplied by a fraction, the numerator of which is the Index on June 1 of the new Contract Year, and the denominator of which is the Index on June 1 of the preceding Contract Year, or (ii) the Salary being paid during the preceding Contract Year multiplied by 1.05. If the Index ceases to be published at intervals other than monthly, the Employer shall select another reasonable method of adjusting the Salary to reflect changes in the cost of living. 6. INCENTIVE COMPENSATION SYSTEM. The Employee shall participate in the Annual Top Management Cash Bonus Program and in any incentive stock option plan or phantom stock plan established during the Term by the Employer for its executive employees. 7. WITHHOLDING. The Employer shall withhold from the Salary and bonuses, all sums authorized by the Employee or required to be withheld by law or court decree, including (but not limited to) income taxes, employment taxes, and employee contributions to benefit plans sponsored by the Employer. 8. FRINGE BENEFITS. If eligible, the Employee shall participate in any fringe benefits, disability benefits, medical expense or insurance plans, or qualified retirement -113- 3 plan or plans the Employer from time to time provides to its executive and management employees. 9. VACATIONS. The Employee may take as much vacation as he desires up to a maximum of four weeks per calendar year if it does not interfere with the performance of the Employee's duties. 10. DISABILITY INSURANCE. So long as the Employee is insurable at standard rates at the times applications are made, the Employer shall purchase and maintain disability insurance, in an amount equal to 60% of the Salary for each Contract Year during the Term as part of its group disability plan. 11. LIFE INSURANCE FOR EMPLOYER'S BENEFIT. If the Employer decides to purchase and be the beneficiary of insurance on the Employee's life, the Employee shall complete whatever applications and submit to whatever examinations are necessary to enable the Employer to obtain this insurance. 12. AUTOMOBILE. The Employee may be required to use an automobile for the performance of the Employee's duties. In that event, the Employer shall reimburse the Employee for all use authorized by the Employer at a rate per mile established from time to time by the Employer and for parking, tolls, and other expenses from time to time authorized by the Employer. 13. BUSINESS EXPENSES. The Employee is expected to incur ordinary, necessary and reasonable expenses for the business of the Employer. The Employer shall reimburse the Employee for these expenses upon substantiation that they are bona fide business expenses. 14. TAXABILITY OF FRINGE BENEFITS. The Employer shall, for income tax purposes, report as additional compensation or as a taxable fringe benefit, as appropriate, any benefit which is not otherwise deductible by the Employer as a business expense for income tax purposes. 15. RESTRICTIONS ON OUTSIDE ACTIVITIES. During the Term: 15.1 The Employee shall not provide personal services to others or engage in any other business without the Employer's prior written consent. If the Employer consents to the provision of services to others or to the Employee's engaging in any other business, all compensation received by the Employee shall be paid to the Employer, unless the Employer waives its right to receive these amounts. 15.2 Except with respect to investments of the Employee existing as of the date of this Agreement, unless approved by the Board of Directors, the Employee shall not -114- 4 invest in any stock, bond, real estate, commodity or other form of investment, if the investment is in a corporation, firm, or other entity which competes directly or indirectly with the Employer. 15.3 Except positions held by the Employee as of the date of this Agreement, the Employee shall not serve as an officer or director for any corporation or other entity (regardless of whether a "for profit" or "not-for-profit" entity) without obtaining the prior written consent of the Board of Directors. This prohibition shall not be deemed to prevent the Employee from serving as a trustee of any trust created by the Employee or any trust created for the benefit of employees of the Employer. 15.4 Whenever the prior written consent of the Employer is required under the terms of this Section, the consent of the Employer shall not be unreasonably withheld, but the Board of Directors may impose one or more conditions to the granting of its consent. 16. CONFIDENTIALITY OBLIGATIONS. 16.1 Property of the Employer. All Trade Secrets, Confidential Information and all books, documents, lists, and records pertaining to the Confidential Information of the Employer's business (collectively, "Records"), whether the Records are written, typed, printed, contained on microfilm, computer disc tape, or in some other medium of expression, are the sole and exclusive property of the Employer. The Employee shall not copy or remove any Records from the Employer's premises without the prior written consent of the Chief Executive Officer of the Employer. Upon the termination of the Employee's employment, he shall promptly return to the Employer all Records and copies which are either in the Employee's possession or which the Employee has removed from the Employer's premises. 16.2 Misappropriation Not Permitted. During and after the period of the Employee's employment with the Employer, the Employee shall not (i) divulge, furnish or make accessible to anyone or in any way or use, for his own benefit or for the benefit of any other individual, firm or entity (other than in the ordinary course of the Employer's business), any Trade Secret or Confidential Information; (ii) take or permit any action to be taken which would reduce the value of the Trade Secrets or Confidential Information to the Employer; or (iii) otherwise misappropriate or suffer the misappropriation of the Trade Secrets or the Confidential Information, within the meaning of the Act. 16.3 Trade Secrets and Confidential Information Defined. The term "Trade Secrets," as used in this Section 16 includes, without limitation, the Employer's (i) pricing to its customers and all other information concerning pricing practices and procedures, (ii) personnel compensation, (iii) sources of supply and prices of inventory and other items, (iv) list of customers and any other customer information, (v) all formulae, patterns, compilations, programs, devices, lists, methods, techniques or processes and (vi) other information that would be deemed to be "trade secrets" within the meaning of the model Uniform Trade Secrets Act (the "Act"). Any other information not qualifying as a Trade Secret but -115- 5 relating to the business of the Employer, which is disclosed by the Employer to the Employee, or is discovered by the Employee in the course of employment, is Confidential Information. The Trade Secrets and the Confidential Information relate to the conduct of the Employer's business, are of independent economic value to the Employer because they are not generally known, and are the subject of efforts by the Employer to maintain their secrecy. The disclosure, or improper use, of Trade Secrets or Confidential Information by the Employee will cause irreparable harm to Employer. 16.4 Information Which is Publicly Known. Notwithstanding anything to the contrary, the obligations of secrecy and confidentiality set forth shall not apply to any information which is now or which subsequently becomes generally publicly known other than as a direct or indirect result of the breach of this Agreement by the Employee. 17. SUSPENSION. The Employer, upon five (5) days' prior written notice, may suspend the Employee's employment with the Employer, with full compensation and benefits, if the Employee is charged with a felony which in the reasonable judgment of the Board of Directors reflects adversely on the Employer. The suspension shall terminate upon any judgment of acquittal by a court of competent jurisdiction. 18. TERMINATION. 18.1 By Employer: 18.1.1 Termination By Employer Without Cause. The Employer may terminate the Employees employment without cause by giving at least two (2) months' notice to the Employee on or before June 1 of any year of the Contract Period. The Employer may not terminate the Employee's employment under this Section 18.1.1 during any Disability Period. 18.1.2 Constructive Termination by Employer. The Employer shall have constructively terminated the Employee, if, without Employee's written consent, (i) the nature and scope of Employee's duties and authority or his responsibilities with Employer, Related Company or any surviving or acquiring entity are reduced to a level below that which he enjoys on the date of this Agreement, (ii) his compensation is reduced to a level below that provided in Section 5 of this Agreement, (iii) the fringe benefits provided to the Employee on the date of this Agreement are materially reduced, (iv) Employee's position or title with Employer or Related Company or any surviving or acquiring entity is reduced from his current position or title, or (v) Employee's principal place of employment is changed to a location greater than forty (40) miles from his current principal place of employment. The Employee shall give Employer twenty (20) days written notice of his intention to claim that the Employer has constructively terminated his employment pursuant to this Section 18.1.2, specifying the reason(s) for such termination. If the Employer has not cured or remedied the reason(s) specified in that notice -116- 6 prior to the expiration of ten (10) days after notice, the constructive termination shall be effective at the end of that period. 18.1.3 Termination by Employer With Cause. The Employer may, at its option, terminate the Employee's employment upon twenty-one (21) days' prior written notice, if the Employee: 18.1.3.1 refuses to faithfully and diligently perform his usual and customary duties for the Employer or to comply with the provisions of this Agreement (unless the refusal is due to the Employee being Disabled); 18.1.3.2 refuses to comply materially with the reasonable written policies, standards and regulations established by the Board of Directors of the Employer from time to time (unless the refusal is due to the Employee being Disabled); 18.1.3.3 is found guilty of unprofessional, unethical, immoral, or fraudulent conduct by any board, institution, organization, or professional society having the right to pass upon the conduct of the Employee, or if the Employee resigns from any professional organization, institution or society under threat of disciplinary action for that conduct; 18.1.3.4 willfully or intentionally and materially injures the Employer or its assets; 18.1.3.5 breaches any negative covenant in this Agreement; or 18.1.3.6 is convicted of a felony, which in the reasonable judgment of the Board of Directors, reflects adversely on the Employer. 18.1.4 Effect of Termination. If the Employee's employment is terminated during the Term pursuant to Sections 18.1.1 or 18.1.2: 18.1.4.1 The Employer shall pay the Employee the Salary and bonuses described in Section 5 and Section 6 and continue all other benefits to which the Employee is entitled under this Agreement until the end of the then existing Contract Period as if the Employee were still employed by the Employer. 18.1.4.2 For the first two (2) Contract Years following the date of termination, if the termination occurs pursuant to Section 18.1.1, or for two (2) calendar years from the date of a constructive termination, if the termination occurs pursuant to Section 18.1.2, the Employee shall assist the Employer to the fullest extent possible to retain its customers and shall render to the Employer advisory or consulting services which the Employer -117- 7 reasonably requests, so that the Employer may continue to benefit from the Employee's experience, knowledge, reputation, and contacts. The Employee shall be available in person or by telephone to provide the advisory or consulting services. After the age of sixty-five (65), the Employee shall not be required to render services to the extent that the Employee would not be eligible for full Social Security benefits. 18.1.4.3 The payments required by Section 18.1.4.1 shall not be offset or reduced by any income or earnings received from any other employment or other activity the Employee may engage in during the Contract Period. The Employee shall have no duty to mitigate damages. 18.1.5 Effect of Termination For Cause. If Employee's employment with Employer is terminated for cause pursuant to Section 18.1.3, Employer shall not be obligated to make any further payments to the Employee. 18.2 By Death or Disability. 18.2.1 Automatic. The employment of the Employee by the Employer will terminate automatically and immediately upon the death of the Employee. 18.2.2 Termination Because of Disability. If any Disability Period continues for six (6) months, the Employer may terminate the Employee's employment by sending thirty (30) days' notice to him, provided he is still Disabled at the time the notice is sent. 18.2.3 Effect of Termination. If the Employee dies or Employee's employment with Employer is terminated because he is Disabled for six (6) months, the Employer shall pay or provide to the Employee, the Employee's surviving spouse, or if there is no surviving spouse, to the Employee's surviving descendants, per stirpes, the Salary described in Section 5, and all benefits to which the Employee is entitled under this Agreement until the later of (i) one (1) year from the date of termination, or (ii) the death of the Employee. 18.3 Termination by Employee. 18.3.1 By Employee. The Employee may terminate his employment by giving at least two (2) months' notice to the Employer on or before June 1 of any year of the Contract Period. 18.3.2 Effect of Termination. If Employee terminates his employment under Section 18.3.1, the Employer shall not be obligated to make any further payments to the Employee after the end of the current Contract Year. 19. RETIREMENT. At any time after the age of fifty-five (55), the Employee may retire from the employ of the Employer if, at least six (6) months before the intended date of -118- 8 retirement, the Employee gives the Employer written notice specifying the intended date of retirement. After the Employee retires, the Employee shall assist the Employer to the fullest extent possible to retain its customers and shall render to the Employer advisory or consulting services which the Employer reasonably requests, so that the Employer may continue to benefit from the Employee's experience, knowledge, reputation, and contacts. The Employee shall be available in person or by telephone to provide those services. In no event, however, shall the Employee be required to render services to the extent that the Employee would not be eligible for full Social Security benefits. 20. SUPPLEMENTAL PENSION BENEFIT. 20.1 Benefit. If the Employee is no longer employed by the Employer and the Employee has attained the age of fifty-five (55), the Employee may elect (the "Election"), by written notice to the Employer to receive a supplemental pension benefit (as defined below) in consideration of Employee's past services. Commencing not later than thirty (30) days after the date of the Election, Employer shall pay a supplemental pension benefit (the "Benefit") to Employee for his lifetime at a per annum rate equal to 60% of the amount of the Employee's Average Annual Compensation during the Measurement Period, subject to reduction pursuant to Section 20.2. The Benefit shall be adjusted each year, beginning one (1) year from the effective date of the Election, by multiplying the Benefit by a fraction, the numerator of which is the Index on each anniversary of the effective date of the Election, and the denominator of which is the Index on the effective date of the Election. Employer shall make the benefit payment on the first day of each month following the effective date of the Election in an amount equal to 1/12 of the Benefit. The Employee shall not be entitled to receive Benefit payments if compensation required under Section 18.1 is being paid. The Benefit shall not be offset or reduced by any income or earnings received from any other employment or other activity of the Employee during the time the Employee is receiving the Benefit under this Section 20.1. Employee shall have no duty to mitigate damages. 20.2 Benefit Reduction Calculation. If the Employee elects to receive the Benefit prior to attaining the age of sixty-five (65), the Benefit shall be reduced by five-ninths of one percent (5/9%) for each of the first sixty (60) calendar months by which the effective date of the Election precedes the Employee attaining the age of sixty-five (65), and by five-eighteenths of one percent (5/18%) for each calendar month in excess of sixty (60) by which the effective date of the Election precedes the Employee attaining the age of sixty-five (65). 21. RESTRICTIVE COVENANT. 21.1 Restrictions. For a period of two (2) years immediately following the Termination Date, the Employee shall not, directly or indirectly, for himself, or on behalf of any other person, firm, corporation or other entity (except the Employer or Related Company), whether as principal, agent, employee, stockholder, partner, officer, member, director, sole proprietor, or otherwise: -119- 9 21.1.1 Customers or Prospective Customers. Solicit the sale or sell to any Customer or Prospective Customer of frozen or canned fruits or vegetables, or other products or services identical or similar to the products or services sold or in the process of being developed by the Employer. 21.1.2 Other Employees. Hire, engage, solicit, participate in or promote the solicitation of any person who was employed by the Employer or Related Company at any time during the Pretermination Period to leave the employ of the Employer. 21.1.3 Disparaging Remarks. Make any disparaging remarks about the Employer's business, products, services or personnel. 21.1.4 Interference. Interfere in any way with the Employer's business, prospects or personnel. 21.1.5 Modification. The Employee acknowledges that the covenants contained in this Section 21.1 are necessary in order to protect the goodwill of the Employer's business and that these covenants are reasonable. However, if any court determines that any restriction set forth in this Section 21.1 is unenforceable in accordance with its terms regarding duration, or scope of prohibited activity, the covenant shall not terminate. Instead, with respect to its operation in the jurisdiction of the court which makes the adjudication, the covenant shall be deemed to have been amended to the extent required to render it valid and enforceable. The adjudication shall not be deemed to affect the validity or enforceability of the covenant in any jurisdiction other than the one in which the adjudication is made. 21.2 Extension. If the Employee violates the restrictions set forth in Section 21.1, the Employer shall not be deprived of the full benefit of the period of the covenant. Accordingly, the duration of that covenant shall be extended by the period of any violation of that covenant. 22. REMEDIES - RESTRICTIVE COVENANT, TRADE SECRETS AND CONFIDENTIAL INFORMATION. 22.1 The Employer shall be entitled to injunctive or other equitable relief because a breach of the provisions of Sections 16 or 21 will cause irreparable injury and damage. The right to injunctive relief shall include the right to both preliminary and permanent injunctions. The Employer shall not be required to post a bond or other similar assurance if it brings an action to enforce the provisions of either Section 16 or 21. The Employer's right to equitable relief shall not preclude any other rights or remedies which the Employer may have, all of which rights and remedies are cumulative. -120- 10 22.2 If the Employer files suit to enforce its rights under Sections 16 or 21: 22.2.1 The Employer shall be entitled to recover from the Employee all expenses incurred by it, including, but not limited to, investigative costs, court costs and reasonable attorney's fees. 22.2.2 While the case is pending, the Employer may stop payments of Salary, bonuses and Benefits until a Court of competent jurisdiction determines whether the Employer is entitled to the relief it seeks. 22.2.3 If a Court of competent jurisdiction determines that the Employee has violated either of Sections 16 or 21, the Employer shall be released from any obligation to pay future Benefits. 23. ACCELERATION. If the Employer fails to pay the Employee any compensation or benefits, including supplemental pension benefits, due to him under this Agreement, within thirty (30) days after written notice from the Employee of such failure to pay, the Employee shall have the right to accelerate future payments of all sums due to Employee under this Agreement. 24. NOTICES. 24.1 How Sent. All notices, requests, demands, acceptances, and other communications pursuant to this Agreement ("Notices") shall be in writing and either delivered personally or sent by telecopier or facsimile, overnight delivery, express mail, or certified mail, postage prepaid, return-receipt requested. Notices to the Employer shall be delivered personally to its Chief Executive Officer or sent to his attention. 24.2 Where Sent. If sent by mail, a Notice shall be addressed (i) to the Employer at P.O. Box 334, Hanover, Pennsylvania 17331 or (ii) to the Employee or his surviving spouse at the last known address shown on the records of the Employer. Copies of all Notices shall be sent to Robert M. Hankin, Esq., Weinberg & Green LLC, 100 South Charles Street, Baltimore, Maryland 21201. If sent by telecopier or facsimile, a Notice shall be sent (i) to the Employer at (717)-632-6000 or (ii) to the Employee at his telecopier number on file with the Employer. 24.3 When Effective. A Notice delivered personally shall be deemed to have been delivered when personally delivered but shall be effective only if the delivery is acknowledged in writing by the party to whom given. A Notice sent by telecopier shall be deemed to have been delivered when transmitted, provided that the sender receives written acknowledgment of its receipt. A Notice sent by overnight delivery or express mail shall be deemed to have been delivered twenty-four (24) hours after having been sent. A Notice that is -121- 11 properly addressed and is sent by certified mail with postage fully prepaid will be deemed to have been delivered when it is deposited in the U.S. mail. 24.4 Change in Addressees or Addresses. Either party may designate substitute addressees, addresses or telecopier numbers for Notices and copies, and thereafter, Notices and copies are to be directed to those substitute addressees or addresses or telecopier numbers. 25. COSTS OF LITIGATION. If either party files suit to enforce its or his rights under this agreement, the prevailing party is entitled to recover from the other party all expenses incurred in preparing for and in trying the case, including, but not limited to, investigative costs, court costs and reasonable attorneys' fees. For this purpose the "prevailing party" is the plaintiff if (i) in a case where only damages are sought, 51% or more of the damages sought are awarded, (ii) in a case where only equitable relief is sought, the relief sought is granted (each application for equitable relief being considered for these purposes as a separate action) or (iii) in a case where both damages and equitable relief are sought, either fifty-one percent (51%) or more of the damages sought are awarded or the equitable relief sought is granted; otherwise, the defendant is the "prevailing party." 26. SECURITY. 26.1 In order to secure Employer's obligations to Employee and his surviving spouse under this Agreement, Employer shall, if and when requested by the Employee or his surviving spouse, and provided that the cost does not exceed $10,000 per annum, cause a reputable bank reasonably acceptable to Employee to issue a Letter of Credit, in the face amount of at least twice the Employee's base annual salary on the date of termination and in the form attached as Exhibit "A" ("Letter of Credit"), to be issued to the Employee or his surviving spouse as beneficiary. In lieu thereof, the parties may establish a mutually acceptable escrow arrangement. The Letter of Credit shall not expire sooner than one year and thirty (30) days after the date of its issuance. Employer shall maintain the Letter of Credit in effect at all times during the Term and any other period of time during which the Employee is entitled to any benefits under this Agreement. 26.2 Employee will not present a draft under the Letter of Credit for payment unless (i) he shall have first made written demand on Employer for direct payment of the amount sought and Employer has not made full payment in cash to the Employee as required by this Agreement within thirty (30) days after notice of the written demand or (ii) a renewed Letter of Credit is not provided to the Employer at least thirty (30) days prior to the expiration date of the existing Letter of Credit. Employee shall not draw any funds under the Letter of Credit with respect to costs or expenses already reimbursed to him by Employer. 27. MISCELLANEOUS. -122- 12 27.1 Governing Law. The laws of the Commonwealth of Pennsylvania applicable to contracts made to be performed in Pennsylvania will govern the validity and construction of this Agreement. 27.2 Consent to Jurisdiction. The parties submit to the jurisdiction and venue of the courts of the Commonwealth of Pennsylvania. 27.3 NO JURY TRIAL. NEITHER PARTY SHALL ELECT A TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT. 27.4 Confidentiality. Neither party shall disclose the contents of this Agreement or of any other contemporaneous agreement to any person, firm or entity, except the agents or representatives of the parties, or except as required by law. 27.5 Word Forms. Whenever used, the singular shall include the plural and vice versa. The use of any gender, tense or conjugation shall include all genders, tenses and conjugations. 27.6 Headings. The Section headings have been included for convenience only, are not part of this Agreement, and are not to be used to interpret any provision hereof. 27.7 Amendments and Modifications. This Agreement may be amended, waived, changed, modified or discharged only by a writing signed by the party against whom the modification is sought to be enforced. 27.8 Binding Effect and Benefit. This Agreement shall be binding upon and inure to the benefit of the parties, their successors, heirs, personal representatives and other legal representatives. This Agreement may be assigned by the Employer to any entity which acquires substantially all of the Employer's assets. However, the Employee may not assign this Agreement. 27.9 Entire Agreement. This Agreement constitutes the entire agreement between the parties. 27.10 Separability. The covenants contained in this Agreement are separable, and if any court of competent jurisdiction declares any of them to be invalid or unenforceable, that declaration of invalidity or unenforceability shall not affect the validity or enforceability of any of the other covenants, each of which shall remain in full force and effect. 27.11 Consent or Approval. Whenever under the terms of this Agreement the approval or consent of the Employer is required or the Employer must make any -123- 13 determination, the Employer, unless this Agreement specifically requires otherwise, may withhold or delay that consent or approval or may make that determination, as the case may be, in the Employer's sole and absolute discretion. 27.12 Background. The Background is a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. ATTEST: HANOVER FOODS CORPORATION /s/ Patricia H. Townsend By: /s/ John A. Warehime (SEAL) - ----------------------------- ------------------------------------ Patricia Townsend, John A. Warehime, Chairman Assistant Secretary WITNESS: EMPLOYEE: /s/ Diane C. Beaver /s/ Gary T. Knisely (SEAL) - ----------------------------- ---------------------------------------- Gary T. Knisely -124- 14 Exhibit A NAME AND ADDRESS OF BANK ISSUING IRREVOCABLE LETTER OF CREDIT DATE: _________________ NON-NEGOTIABLE Expires: -------------------- Irrevocable Letter of Credit No. --------------- Amount: $ ----------------- To: Gary T. Knisely, or his surviving spouse --------------------------------- --------------------------------- You are hereby irrevocably authorized to draw at sight on the undersigned, for the account of Hanover Foods Corporation, up to an aggregate of [________________] ($[____________________]), by one or more drafts, payable to your order, each draft bearing the clause "Drawn under (Name of Undersigned) Letter of Credit No. ............................" and accompanied by the following Document (together with the required supporting attachment): A sworn statement executed by you, in the form attached hereto as Document No. 1 (the "Affidavit"), with the appropriate blanks completed and with a copy attached of the notice referred to in paragraph C of the Affidavit. No draft will be honored (i) if the draft is not accompanied by the aforesaid Document (together with the required supporting attachment) or (ii) if the aggregate amount drawn by you, taking into consideration the subject draft, would exceed the face amount of this Letter of Credit. No draft will be honored unless it is drawn and presented for payment on or after the date hereof and no later than the expiration date. The undersigned hereby agrees that a draft drawn under this Letter of Credit and in compliance with the foregoing will be duly honored during the period stated above on due presentation to the undersigned in compliance with the terms of this Letter of Credit by you. -125- 15 The amount of each draft must be noted on this Letter of Credit. The original of this Letter of Credit will be retained by the undersigned for the purpose of making such notations. Yours very truly, NAME OF ISSUING BANK By: ------------------------- -126- 16 LETTER OF CREDIT NO.___________ DOCUMENT NO. 1 Affidavit STATE OF ) ) ss. COUNTY OF ) [_______________________], being duly sworn according to law, hereby deposes and says that: A. The draft which this Affidavit accompanies (hereinafter called the "Draft ") is for payment to the undersigned of monies owed the undersigned pursuant to that certain Agreement dated [________________], 1997 (the "Agreement") by and between Hanover Foods Corporation ("Hanover") and Gary T. Knisely. B. The amount of the Draft does not exceed the aggregate of the amounts specified in the Agreement which are owed to the undersigned by Hanover for which the Letter of Credit is intended as security and which Hanover has not already directly paid to the undersigned. C. A true and correct copy of the written demand on Hanover for direct payment of the amount sought in the Draft is attached hereto and Hanover has not made full payment in cash to the undersigned as required by the Agreement within thirty (30) days after said written notice was delivered to Hanover. Dated: ----------------- --------------------------------- Signature of Drawing Beneficiary Subscribed and sworn to before me this ___ day of __________, 1995. Notary Public in and for said County/State of _______. ------------------------------- Notary Public My Commission Expires: --------------------- -127- 17 Addendum No. 1 1.1 "Average Annual Compensation" shall mean the Employee's average annual cash compensation during the Measurement Period, including cash bonuses under the Employer's bonus plans, but excluding other fringe benefits. 1.2 "Board of Directors" means the board of directors of the Employer. 1.3 "Contract Period" means each five (5) year period of the Employee's employment by the Employer beginning on June 1, 1996 and June 1 of subsequent years. 1.4 "Contract Year" means each twelve (12) month period of the Employee's employment by the Employer beginning on June 1, 1996 and June 1 of each subsequent year. 1.5 "Customer" means any Person to which the Employer has sold products or rendered services at any time during the Pretermination Period. 1.6 "Disability Period" means the time during which the Employee is Disabled. 1.7 "Disabled" means the first to occur of: 1.7.1 The Employee being declared legally incompetent under the laws of the Commonwealth of Pennsylvania, in which event the date the Employee becomes Disabled shall be deemed to be the date of such declaration. 1.7.2 The Employer receiving a written opinion from a physician designated by the Employer to the effect that the Employee has incurred a mental or physical condition that can reasonably be expected to prevent the Employee from carrying out the Employee's material duties for the Employer for a period of six (6) months or longer from the date of the examination of the Employee, in which event the date the Employee shall be deemed Disabled to be the date of the physician's examination. The Employee shall cooperate with any physician designated by the Employer to determine whether the Employee has become Disabled, provided that any physician designated by the Employer shall consult with any physician designated by, or on behalf of, the Employee. 1.7.3 The Employer or Employee being entitled to receive a payment under any disability policy withrespect to the Employee, in which event the Employee -128- 18 shall be deemed Disabled on the date which the Employee was first found to be disabled pursuant to the disability policy. 1.8 "Index" means the Consumer Price Index, All Cities Average (1982-84 = 100), published by the U.S. Department of Labor, Bureau of Labor Statistics. 1.9 "Initial Contract Year" means the period from June 1, 1996 to May 31, 1997. 1.10 "Measurement Period" means the most recent three (3) fiscal years of the Employer ending prior to the date of termination of the Employee. 1.11 "Person" means an individual, corporation or any officer, director or employee or a partnership, any partner or employee of which the Employee had any contact with during the Pretermination Period. 1.12 "Pretermination Period" means the 12-month period immediately preceding the Termination Date. 1.13 "Prospective Customer" means any Person which has been actively solicited to purchase products or services from the Employer at any time during the Pretermination Period. 1.14 "Related Company" means any corporation, partnership, limited liability company, business association, business organization, or other form of entity now or in the future controlled by the Employer and/or controlled by any of the equityholders of the Employer and the equityholders of any of the controlled entities, separately or collectively. 1.15 "Term" means the entire period of the Employee's employment. 1.16 "Termination Date" means the date on which the Employee ceases to be employed by the Employer. -129- EX-10.(L) 7 AMENDMENT NO.1 TO JUNE 12,1995 EMPLOYEMENT AGRMNT 1 EXHIBIT 10(l) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT BETWEEN HANOVER FOODS CORPORATION AND JOHN A. WAREHIME This document, dated as of February 13, 1997, shall constitute Amendment No. 1 to an Employment Agreement dated as of June 12, 1995 (the "Employment Agreement") between Hanover Foods Corporation (the "Employer")and John A. Warehime (the "Employee). Background As of June 12, 1995, Employer and Employee entered into the Employment Agreement. The parties desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, the parties, intending to be legally bound, agree as follows: 1. Definitions The definitions contained in the Employment Agreement shall apply to this Amendment No. 1. 2. Amendments The following provisions of the Employment Agreement shall be amended as follows: Section 4.1.1 Change this Section to read in full as follows, effective retroactively as if such change were originally contained in the Employment Agreement: "4.1.1 During the initial Contract Year of the Term from April 1, 1994 to April 1, 1995, at the rate of Four Hundred and Ninety-eight Thousand, Eight Hundred and Sixty-six ($498,866) Dollars per annum." Section 7.: Change this Section to read in full as follows, effective retroactively as if such change were originally contained in the Employment Agreement: "7. BONUSES The Employer shall pay an annual bonus in cash or Class A common stock of the Employer of equal value, at the sole option of the Employee. "7.1 The bonus shall be equal to the sum of the following: -130- 2 "7.1.1 if Pre-tax Earnings of the Employer are $5 million or more in any Contract Year of the Term, the bonus shall equal $100,000 plus ten (10%) percent of Pre-tax Earnings over $5 million, but in no event shall the total bonus payable under this Section 7.1.1, plus the total amount payable under Section 4 hereof, exceed $1 million in any Contract Year; if Pre-tax Earnings of the Employer are below $5 million in any Contract Year of the Term, no bonus is payable under this Section 7.1.1. Plus "7.1.2 a bonus equal to the gross dollar value (if any) of 1,500 performance units which shall be valued at the end of each Contract Year of the Term as set forth in Addendum No. 2 hereto. The bonus computed pursuant to Addendum No. 2 is based upon the relative prior five-year performance of the Employer (using the five-year average sales growth and operating profits) as compared to an industry peer group. The industry peer group shall consist of the following companies: Curtice Burns Foods (Rochester, NY), Seneca Foods Corp. (Pittsford, NY), Stokely USA, Inc. (Green Bay, WI), United Foods, Inc. (Bells, TN) and Dean Foods (Franklin Park, IL). It is the intention of the parties that the industry peer group data will be appropriately and fairly adjusted to provide, to the extent feasible, a consistent method of comparing the performance of the Employee against the performance of top management in the industry peer group. In the case of any dispute concerning the interpretation of Addendum No. 2, the firm of Towers Perrin shall resolve such dispute and their determination shall be final, binding and conclusive upon the Employer and the Employee. "7.2 For purposes of determining the Employee's bonuses under this Section 7, the Pre-Tax Earnings of the Employer shall be adjusted to account for the impact of any changes in accounting methods and to eliminate the effect of any unusual or non-recurring items." The Employee hereby agrees to waive any accrued rights he may have under the unamended Employment Agreement to a bonus for the Contract Year beginning April 1, 1996, which bonus the Employee and Employer acknowledge could amount, based upon the projected Pre-tax Earnings of the Employer, to over $2 million, and, instead, Employee hereby agrees to accept the bonus formula set forth in this Amendment No. 1 for the Contract Year beginning April 1, 1996. The Employee shall repay to the Employer the amount of the net excess compensation overpayment for Contract Years beginning prior to April 1, 1996 as a result of the changes made in this Amendment No. 1 to Section 4 and Section 7 of the Employment Agreement, which changes are retroactive to the date of the Employment Agreement; such repayment to the Employer shall be made without interest. It is agreed that the amount of the repayment due from the Employee to the Employer for such net excess compensation overpayment with respect to Contract Years beginning prior to April 1, 1996 is $83,024. The $83,024 shall be repaid by the Employee to the Employer solely out of the amount of the Salary increases hereafter due to the -131- 3 Employee for Contract Years beginning on and after April 1, 1997 by reason of the provisions of Section 4.1.2, and the Employee shall have no other liability for such repayment. Section 9.1: Add the following sentence to the end of Section 9.1: "Notwithstanding the foregoing, if the Employer, acting through its Board of Directors (provided that a majority of its members were also directors on January 1, 1997), at any time after January 1, 1998, requests that the Employee cease to be Chairman of the Board and Chairman of the Employer, but continue as Chief Executive Officer and President of the Employer, the Employee shall relinquish his title as Chairman of the Board and Chairman of the Employer, but shall continue as Chief Executive Officer and President of the Employer with all of the powers, duties and authorities normally associated with those positions; in such event, the By-Laws of the Employer shall be amended to reflect that the Chief Executive Officer need not be Chairman of the Board or Chairman of the Employer." Section 12: Add the following sentence to the end of Section 12: "Notwithstanding the foregoing, in no event may the total vacation time exceed six weeks during any Contract Year." Section 22.5: Change the words "termination pay" to "supplemental pension payments" in Section 22.5 and change the words "termination benefits" to "supplemental pension benefits." Section 22.5.1.1 Change the words in Section 22.5.1.1 from "Without cause; or" to "Without cause by the Employer; or" Section 23: Change the first sentence to read in full as follows: "At any time after January 1, 1998, the Employee may retire from the employ of the Employer if the Employee, at least thirty (30) days before the intended date of retirement, gives the Employer written notice specifying the intended date of retirement." Add the following sentence at the end of Section 23: "If the Employee elects to retire prior to the age of 65, the supplemental pension payments provided for in Section 24 shall be reduced by using the following formula: for each of the first sixty (60) calendar months by which the retirement date precedes the age of 65, the supplemental pension payments shall be reduced by five-ninths (5/9) of one percent and for each such calendar month in excess of sixty (60) calendar months the supplemental pension payments shall be reduced by five-eighteenths (5/18) of one percent. Section 24: Change the first sentence of this Section to read in full as follows: "Commencing not later than thirty (30) days after the applicable Triggering Date or, if earlier, the date the Employee elects to retire, and in consideration of Employee's past services, Employer shall pay compensation to Employee or to his surviving spouse at a per annum rate equal to 60% of the amount of the Employee's Average Annual Compensation during the -132- 4 Measurement Period, subject to reduction pursuant to Section 23 in the event the Employee elects to retire prior to age 65." Section 25: Change the words "termination benefits" to "supplemental pension benefits" in Section 25. Section 25.1.2: Delete this provision. Section 25.2: Delete this provision. Section 25.3: Delete this provision. Section 25.4: Delete this provision. Section 26: Change the title of Section 26 from "Security" to "Security and Acceleration." Change Section 26 to read in full as follows: "26.1 In order to secure Employer's obligations to Employee and his surviving spouse under this Agreement, Employer shall, if and when requested by the Employee or his surviving spouse at any time after January 1, 1998, and provided that the cost does not exceed $25,000 per annum, cause a reputable bank reasonably acceptable to Employee to issue a Letter of Credit, in the face amount designated by Employee and in the form attached as Exhibit "A" ("Letter of Credit"), to be issued to the Employee or his surviving spouse as beneficiary, or, in lieu thereof, establish a mutually acceptable escrow arrangement. The Letter of Credit shall not expire sooner than one year and thirty (30) days after the date of its issuance. Employer shall maintain the Letter of Credit in effect at all times during the Term and any other period of time during which the Employee is entitled to any payments or benefits under Sections 22.5, 24 or 25 of this Agreement. "26.2 Employee will not present a draft under the Letter of Credit for payment unless (i) he shall have first made written demand on Employer for direct payment of the amount sought and Employer has not made full payment in cash to the Employee as required by this Agreement within thirty (30) days after the date of delivery of the written demand or (ii) a renewed Letter of Credit is not provided to the Employer at least thirty (30) days prior to the expiration date of the existing Letter of Credit. Employee shall not draw any funds under the Letter of Credit with respect of costs or expenses already reimbursed to him by Employer. "26.3 If the Employer fails to pay the Employee any of the compensation or benefits (including, but not limited to, the supplemental pension payments and benefits) due to him under this Agreement, within thirty (30) days after having received written notice from the Employee of such failure to pay, the Employee shall have the right to accelerate future payments of all sums due to Employee under this Agreement." -133- 5 3. Amended Employment Agreement Continues in Full Force and Effect. There are no amendments to the Employment Agreement except as specified herein. The Employment Agreement, as amended hereby, shall continue in full force and effect and constitutes the entire understanding of the parties with respect to its subject matter. Employee agrees that the compensation set forth in this Amendment No. 1 for the Contract Year of the Term beginning April 1, 1996 shall constitute his sole compensation due from the Employer with respect to such Contract Year, and hereby waives any rights to additional compensation for any period prior to the date of this Amendment No. 1. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. ATTEST/WITNESS: HANOVER FOODS CORPORATION /s/ Patricia H. Townsend By: /s/ Gary T. Knisely (SEAL) - ------------------------------- ------------------------------ WITNESS/ATTEST: EMPLOYEE: /s/ Diane C. Beaver /s/ John A. Warehime (SEAL) - ------------------------------- ---------------------------------- -134- 6 HANOVER FOODS CORPORATION APPENDIX NO. 2 CEO INCENTIVE ALTERNATIVES LONG TERM COMPONENT Features: At the beginning of each year, 1,500 performance units are granted to the CEO. Units valued at the end of the year based on performance relative to industry peers. Performance measures are five year average Sales Growth and Pre-Tax Earnings. No cap on unit values. Unit values at different performance levels are represented in matrix form as follows: 110% 0 90 108 116 124 132 140 148 109% 0 86 104 112 120 128 136 144 108% 0 82 100 108 116 124 132 140 107% 0 78 96 104 112 120 128 136 106% 0 74 92 100 108 116 124 132 105% 0 70 88 96 104 112 120 128 104% 0 66 84 92 100 108 116 124 103% 0 62 80 88 96 104 112 120 Average 102% 0 58 76 84 92 100 108 116 Sales 101% 0 54 72 80 88 96 104 112 Growth 100% 0 50 68 76 84 92 100 108 99% 0 46 64 72 80 88 96 104 98% 0 42 60 68 76 84 92 100 97% 0 38 56 64 72 80 88 96 96% 0 34 52 60 68 76 84 92 95% 0 30 48 56 64 72 80 88 94% 0 26 44 52 60 68 76 84 93% 0 22 40 48 56 64 72 80 92% 0 18 36 44 52 60 68 76 91% 0 14 32 40 48 56 64 72 90% 0 10 18 26 34 42 50 58 - ----------------------------------------------------------------------------------------------------------------------------------- 0 0 0 0 0 0 0 0 90% 92% 94% 96% 98% 100% 102% Average Earnings
110% 156 164 172 180 109% 152 160 168 176 108% 148 156 164 172 107% 144 152 160 168 106% 140 148 156 164 105% 136 144 152 160 104% 132 140 148 156 103% 128 136 144 152 Average 102% 124 132 140 148 Sales 101% 120 128 136 144 Growth 100% 116 124 132 140 99% 112 120 128 136 98% 108 116 124 132 97% 104 112 120 128 96% 100 108 116 124 95% 96 104 112 120 94% 92 100 108 116 93% 88 96 104 112 92% 84 92 100 108 91% 80 88 96 104 90% 66 74 82 90 - ------------------------------------------------------------------------------------- 0 0 0 0 104% 106% 108% 110% Average Earnings
Average Sales Growth = Hanover Sales Growth (5 year average)/ Industry 5 year average. Average earnings = Hanover 5 year average earnings(%)/ Industry average 5 year earnings(%) Formula to calculate awards on either axis = {[(Actual Hanover/Actual Industry) - - 90%] x 400} + 10 Total value/unit = (Sales Growth Formula Calculation + Earnings Formula Calculation) -135- 7 February 13, 1997 Mr. John A. Warehime, Chairman & CEO Hanover Foods Corporation P.O. Box 334 1486 York Street Hanover, PA 17331 Dear Mr. Warehime: To induce John A. Warehime to execute Amendment No. 1 of even date herewith ("Amendment No. 1") his Employment Agreement dated as of June 12, 1995 with Hanover Foods Corporation, Hanover Foods Corporation agrees to defend, indemnify and hold harmless John A. Warehime and his estate and surviving spouse from any claim, loss, damage, liability or expense (including, but not limited to, investigative costs, court costs and reasonable attorney's fees) arising, directly or indirectly, out of (a) the execution or delivery of such Amendment No. 1, or (b) the Employment Agreement as amended by Amendment No. 1 including, but not limited to, any claims which have been or may in the future be brought against John A. Warehime in his capacity as a voting trustee or as a director, officer or shareholder of Hanover Foods Corporation. Hanover Foods Corporation shall be entitled to designate counsel for John A. Warehime provided such designation is reasonable. HANOVER FOODS CORPORATION BY:/s/ Clayton J. Rohrbach, Jr. -------------------------------- Clayton J. Rohrbach, Jr. /s/ Gary T. Knisely -------------------------------- Gary T. Knisely, Esq. Agreed: /s/ John A. Warehime - -------------------------------- John A. Warehime -136- EX-10.(M) 8 AMENDMENT NO.2 TO JUNE 12,1995 EMPLOYMENT AGRMNT 1 EXHIBIT 10(m) AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT BETWEEN HANOVER FOODS CORPORATION AND JOHN A. WAREHIME This document, dated as of August 1, 1997, shall constitute Amendment No. 2 to an Employment Agreement dated as of June 12, 1995 (the "Employment Agreement") between Hanover Foods Corporation (the "Employer")and John A. Warehime (the "Employee). Background As of June 12, 1995, Employer and Employee entered into the Employment Agreement, which Employment Agreement was amended by Amendment No. 1 dated as of February 13, 1997. The term "amended Employment Agreement" refers to the Employment Agreement dated as of June 12, 1995 and amended by Amendment No. 1 dated February 13, 1997. The parties desire to further amend the Employment Agreement as set forth herein. NOW, THEREFORE, the parties, intending to be legally bound, agree as follows: 1. Change to April 1. Effective as of the first date of Employer's fiscal year which began in 1996 and ended in 1997 and for each of the Employer's fiscal years thereafter, all references in the amended Employment Agreement to "April 1" (including, but not limited to, references to April 1 in Section 3 of the amended Employment Agreement and the definitions of "Contract Period" and "Contract Year" contained in the amended Employment Agreement) shall refer instead to the first day of the Employer's then applicable fiscal year. 2. Amendment to Section 7.1.2. Amend the second sentence of Section 7.1.2 of the amended Employment Agreement to change the parenthetical phrase "(using the five-year average sales growth and operating profits)" to read: "(using the five-year average sales growth percentage and five-year average percentage of operating profits to sales)." 3. Class B Shareholder Approval. To the extent that the bonus payments set forth in Section 7 of the amended Employment Agreement for the fiscal year of the Employer ended in 1997 and for fiscal years thereafter shall cause the "applicable employee remuneration" (as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended) to exceed $1 million for any taxable year of the Employer, such bonus payments shall be subject to, and are contingent upon, approval by a majority vote of the holders of Class B Common Stock of the Employer at a meeting to be held on or before August 15, 1997. 4. Amended Employment Agreement Continues in Full Force and Effect. There are no amendments to the Employment Agreement, as previously amended by Amendment No. 1 dated as of February 13, 1997, except as specified herein. The amended -137- 2 Employment Agreement, as further amended hereby, shall continue in full force and effect and constitutes the entire understanding of the parties with respect to its subject matter. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. ATTEST/WITNESS: HANOVER FOODS CORPORATION /s/ Gary T. Knisely By: /s/ Cyril T. Noel (SEAL) - ---------------------------- ------------------------------------- WITNESS/ATTEST: EMPLOYEE: /s/ Gary T. Knisely /s/ John A. Warehime (SEAL) - ---------------------------- --------------------------------------- -138- EX-10.(N) 9 AGRMNT BETWEEN HANOVER FOODS & CLEMENT A.CALABRESE 1 EXHIBIT 10(n) SENIOR EXECUTIVE AGREEMENT AGREEMENT dated as of May 21, 1997 between Hanover Foods Corporation (the "Company") and Clement A. Calabrese ("Executive"). BACKGROUND Executive is employed by the Company in the position of Vice President - Sales and Trade Marketing of the Company. In consideration of Executive's past and present services to the Company, Company desires to provide for the payment of termination compensation to Executive upon the occurrence of certain circumstances specified in Section 3 of this Agreement, but not under any other circumstances. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. TERM AND TERMINATION. This Agreement will commence on the date hereof and terminate on the earlier of the following dates (herein called the "Term"): (a) ten years from the date hereof; (b) Executive's removal or resignation from his position with the Company as stated above for any reason whatsoever and whether with or without cause (unless Executive continues to be employed by the Company or an affiliate in an equal or higher position) if such resignation or removal occurs prior to a change of control as defined in Section 2 hereof; (c) the death or permanent disability of Executive, whether during or after his employment by the Company or any affiliate; (d) the Executive's reaching his 65th birthday; or (e) mutual written agreement of Executive and Company. 2. CHANGE OF CONTROL. A change of control of the Company shall be deemed to have occurred if, during the Term, John A. Warehime for any reason ceases to hold the position of Chief Executive Officer of the Company or ceases to have the powers and authority of the Chief Executive Officer of the Company. 3. TRIGGERING EVENTS. (a) If, within twenty-four (24) months after the occurrence of a change of control of the Company, (i) Executive's base salary, responsibilities or duties are reduced and Executive terminates his employment by voluntary resignation during the Term and during continuance of any of the foregoing conditions (provided such resignation gives at least one month written notice of intent to terminate employment), or -139- 2 (ii) Executive's employment is involuntarily terminated during the Term by the Company for reasons other than the Executive's gross misconduct, then Executive shall become entitled to receive the payments and benefits specified in Section 4 of this Agreement. (b) The date on which Executive's employment ceases as specified in Section 3(a) is hereinafter referred to as the "Triggering Event." 4. PAYMENTS AND BENEFITS. (a) Commencing not later than thirty (30) days after the Triggering Event, and subject to Executive's compliance with Section 7 of this Agreement, the Company shall pay to Executive, in installments no less frequently than monthly, during the two year period following the Triggering Event (but not later than the last day of the Term of this Agreement), a monthly amount equal to one-twelfth (1/12) of Executive's total cash compensation received from the Company during calendar year 1997 (including both base annual salary and bonus, if any). The foregoing payments shall be reduced, to the extent necessary, so that the sum of payments made pursuant to this Section 4(a), when added to the total cash compensation to which the Executive is then entitled by virtue of other employment, will not exceed, for any twelve (12) month period, the Executive's total cash compensation received from the Company during calendar year 1997 (including both base annual salary and bonus, if any). (b) During the period that payments are due to Executive pursuant to Section 4(a), and subject to Executive's compliance with Section 7 of this Agreement, Executive shall be entitled to the health, life and disability insurance benefits which are no less, in the aggregate, than the amount of the benefits to which the Executive is entitled on the date of this Agreement. Notwithstanding the foregoing, if the Executive obtains other full-time employment, which employment provides equivalent health, life and disability insurance benefits, the benefits described in this Section 4(b) shall cease. (c) The Company may withhold from any payments or benefits due under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation or ruling. In no event shall the Company be obligated to make any payment or provide any benefits pursuant to Section 4(a) or 4(b) hereof after the last day of the Term of this Agreement. (d) In the event Executive becomes entitled to receive the payments or benefits specified in this Agreement, he will be deemed to have waived the right to receive any severance pay to which he might otherwise be entitled under the present or any future severance benefit policy of the Company or any affiliate. -140- 3 5. SOURCE OF PAYMENT. All payments provided under this Agreement shall be paid in cash from the general funds of the Company and no special or separate fund shall be required to be established. Executive shall have no right, title or interest whatever in or to any investment which the Company may make to aid the Company in meeting its obligations hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and Executive or any other person. 6. ASSIGNMENT OR OTHER ALIENATION. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by Executive or his legal representatives without the Company's prior written consent. (b) Except as required by law, the right to receive payments under this Agreement shall not be subject to anticipation, sale, encumbrance, charge, levy, or similar process or assignment by operation of law. 7. COVENANTS. All payments to Executive under this Agreement shall be subject to Executive's compliance with the provisions of this Section 7. If Executive fails to comply with such provisions, the right of Executive and all other persons to any future payments under this Agreement shall terminate and the Company's obligations under this Agreement to make such payments and provide such benefits shall cease. (a) Executive shall not, directly or indirectly, at any time, during or after his employment by the Company, disclose, use or knowingly permit the use of any trade secrets, customer lists, or other proprietary information relating to the Company or its affiliates except pursuant to the lawful order of any judicial or administrative agency of government. (b) For a period of two years after the Triggering Event, neither Executive nor any employer or business associate of Executive shall enter into any business arrangement with, or solicit for employment or employ in any capacity, any person who was an employee of the Company or any of its affiliates at any time within six months prior to Executive's Triggering Event, or attempt to enter into any business arrangement with or employ any such person, or induce or attempt to induce any such person to leave his or her employment with the Company for any reason. (c) For a period of two years after the Triggering Event, Executive shall not directly or indirectly own, manage, operate, join, control, or participate in or be connected with (whether as an officer, employee, partner, stockholder, consultant or in any other capacity) any individual proprietorship, partnership, business trust, limited liability company, corporation or other entity or business which is engaged principally or significantly in a business which competes with any significant business of the Company or its affiliates. This provision shall not apply, however, to Executive's acquiring or holding less than 1% of the securities of any entity whose securities are listed on a national securities exchange or traded on NASDAQ. -141- 4 (d) Promptly upon commencing new employment, and thereafter, Executive shall keep the Company advised of the cash compensation to which he is entitled by virtue of such employment. Not later than February 15 of each year after the Triggering Event, Executive shall provide to the Company (Attention: Chief Financial Officer) copies of all W-2 forms relating to income paid to Executive during the prior calendar year. 8. CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with or transferring all or substantially all of its assets to another corporation. In that event, such other corporation shall assume this Agreement and all obligations of the Company hereunder. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect. 9. ACCELERATION. If the Company fails to pay the Executive any of the amounts due to him under Section 4(a) hereof, thirty (30) days after having received written notice from the Executive of such failure to pay, the Executive shall have the right to accelerate future payments of all sums due the Executive under Section 4(a) hereof, without discount. 10. REIMBURSEMENT. If the Company fails to pay the Executive any of the amounts due to him under Section 4(a) hereof or fails to provide the Executive with any of the benefits due to him under Section 4(b) hereof, thirty (30) days after having received written notice from the Executive of such failure, the Executive shall be entitled to full reimbursement from the Company for all costs and expenses (including reasonable attorneys' fees) incurred by the Executive in enforcing his rights under this Agreement, plus interest at the rate of 9% per annum on the improperly withheld amounts or improperly withheld benefits due to the Executive under Section 4(a) hereof or Section 4(b) hereof, respectively. 11. MISCELLANEOUS. (a) This Agreement shall not limit or infringe upon the right of the Company or any affiliate to terminate the employment of Executive at any time for any reason whatsoever, nor upon the right of Executive to terminate his employment by the Company or any affiliate. Nothing contained herein shall confer upon Executive the right to continue as an employee of the Company or any affiliate. (b) This Agreement contains the entire agreement between Executive and Company regarding the subject matter hereof and supersedes any prior oral or written understanding. (c) This Agreement may not be amended or supplemented, nor may any provision be waived, except by an instrument in writing signed by the parties hereto. This Agreement shall be binding upon and inure to the benefit of the Executive and his personal representatives, executors, administrators and heirs; provided, however, no payment shall be due hereunder after the death or permanent disability of Executive. -142- 5 (d) If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provisions not held so invalid. The rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. (e) The headings of the Sections of this Agreement are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (f) This Agreement has been executed and delivered in the Commonwealth of Pennsylvania and its validity, interpretation, performance, and enforcement shall be governed by the internal laws of such Commonwealth, without regard to any conflict of laws principles. The principle of construction that ambiguities are construed against the draftsperson shall not apply to this document. (g) Any dispute or disagreement between Executive and the Company with respect to any portion of this Agreement or its validity, construction, meaning, performance or Executive's rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration Executive will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, Executive and the Company may resolve the dispute by settlement. Executive and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but Executive and the Company shall otherwise be solely responsible for their own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on Executive and the Company. Further, neither Executive nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. HANOVER FOODS CORPORATION /s/ Clement A. Calabrese (SEAL) By: /s/ John A. Warehime - ------------------------------- ---------------------------------- Clement A. Calabrese John A. Warehime, Chairman -143- EX-10.(O) 10 AGREEMENT BETWEEN HANOVER FOODS & ALAN T.YOUNG 1 EXHIBIT 10(o) SENIOR EXECUTIVE AGREEMENT AGREEMENT dated as of May 21, 1997 between Hanover Foods Corporation (the "Company") and Alan T. Young ("Executive"). BACKGROUND Executive is employed by the Company in the position of Vice President - Purchasing and Transportation of the Company. In consideration of Executive's past and present services to the Company, Company desires to provide for the payment of termination compensation to Executive upon the occurrence of certain circumstances specified in Section 3 of this Agreement, but not under any other circumstances. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: 1. TERM AND TERMINATION. This Agreement will commence on the date hereof and terminate on the earlier of the following dates (herein called the "Term"): (a) ten years from the date hereof; (b) Executive's removal or resignation from his position with the Company as stated above for any reason whatsoever and whether with or without cause (unless Executive continues to be employed by the Company or an affiliate in an equal or higher position) if such resignation or removal occurs prior to a change of control as defined in Section 2 hereof; (c) the death or permanent disability of Executive, whether during or after his employment by the Company or any affiliate; (d) the Executive's reaching his 65th birthday; or (e) mutual written agreement of Executive and Company. 2. CHANGE OF CONTROL. A change of control of the Company shall be deemed to have occurred if, during the Term, John A. Warehime for any reason ceases to hold the position of Chief Executive Officer of the Company or ceases to have the powers and authority of the Chief Executive Officer of the Company. 3. TRIGGERING EVENTS. (a) If, within twenty-four (24) months after the occurrence of a change of control of the Company, (i) Executive's base salary, responsibilities or duties are reduced and Executive terminates his employment by voluntary resignation during the Term and during continuance of any of the foregoing conditions (provided such resignation gives at least one month written notice of intent to terminate employment), or -144- 2 (ii) Executive's employment is involuntarily terminated during the Term by the Company for reasons other than the Executive's gross misconduct, then Executive shall become entitled to receive the payments and benefits specified in Section 4 of this Agreement. (b) The date on which Executive's employment ceases as specified in Section 3(a) is hereinafter referred to as the "Triggering Event." 4. PAYMENTS AND BENEFITS. (a) Commencing not later than thirty (30) days after the Triggering Event, and subject to Executive's compliance with Section 7 of this Agreement, the Company shall pay to Executive, in installments no less frequently than monthly, during the two year period following the Triggering Event (but not later than the last day of the Term of this Agreement), a monthly amount equal to one-twelfth (1/12) of Executive's total cash compensation received from the Company during calendar year 1997 (including both base annual salary and bonus, if any). The foregoing payments shall be reduced, to the extent necessary, so that the sum of payments made pursuant to this Section 4(a), when added to the total cash compensation to which the Executive is then entitled by virtue of other employment, will not exceed, for any twelve (12) month period, the Executive's total cash compensation received from the Company during calendar year 1997 (including both base annual salary and bonus, if any). (b) During the period that payments are due to Executive pursuant to Section 4(a), and subject to Executive's compliance with Section 7 of this Agreement, Executive shall be entitled to the health, life and disability insurance benefits which are no less, in the aggregate, than the amount of the benefits to which the Executive is entitled on the date of this Agreement. Notwithstanding the foregoing, if the Executive obtains other full-time employment, which employment provides equivalent health, life and disability insurance benefits, the benefits described in this Section 4(b) shall cease. (c) The Company may withhold from any payments or benefits due under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or governmental regulation or ruling. In no event shall the Company be obligated to make any payment or provide any benefits pursuant to Section 4(a) or 4(b) hereof after the last day of the Term of this Agreement. (d) In the event Executive becomes entitled to receive the payments or benefits specified in this Agreement, he will be deemed to have waived the right to receive any severance pay to which he might otherwise be entitled under the present or any future severance benefit policy of the Company or any affiliate. -145- 3 5. SOURCE OF PAYMENT. All payments provided under this Agreement shall be paid in cash from the general funds of the Company and no special or separate fund shall be required to be established. Executive shall have no right, title or interest whatever in or to any investment which the Company may make to aid the Company in meeting its obligations hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and Executive or any other person. 6. ASSIGNMENT OR OTHER ALIENATION. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by Executive or his legal representatives without the Company's prior written consent. (b) Except as required by law, the right to receive payments under this Agreement shall not be subject to anticipation, sale, encumbrance, charge, levy, or similar process or assignment by operation of law. 7. COVENANTS. All payments to Executive under this Agreement shall be subject to Executive's compliance with the provisions of this Section 7. If Executive fails to comply with such provisions, the right of Executive and all other persons to any future payments under this Agreement shall terminate and the Company's obligations under this Agreement to make such payments and provide such benefits shall cease. (a) Executive shall not, directly or indirectly, at any time, during or after his employment by the Company, disclose, use or knowingly permit the use of any trade secrets, customer lists, or other proprietary information relating to the Company or its affiliates except pursuant to the lawful order of any judicial or administrative agency of government. (b) For a period of two years after the Triggering Event, neither Executive nor any employer or business associate of Executive shall enter into any business arrangement with, or solicit for employment or employ in any capacity, any person who was an employee of the Company or any of its affiliates at any time within six months prior to Executive's Triggering Event, or attempt to enter into any business arrangement with or employ any such person, or induce or attempt to induce any such person to leave his or her employment with the Company for any reason. (c) For a period of two years after the Triggering Event, Executive shall not directly or indirectly own, manage, operate, join, control, or participate in or be connected with (whether as an officer, employee, partner, stockholder, consultant or in any other capacity) any individual proprietorship, partnership, business trust, limited liability company, corporation or other entity or business which is engaged principally or significantly in a business which competes with any significant business of the Company or its affiliates. This provision shall not apply, however, to Executive's acquiring or holding less than 1% of the securities of any entity whose securities are listed on a national securities exchange or traded on NASDAQ. -146- 4 (d) Promptly upon commencing new employment, and thereafter, Executive shall keep the Company advised of the cash compensation to which he is entitled by virtue of such employment. Not later than February 15 of each year after the Triggering Event, Executive shall provide to the Company (Attention: Chief Financial Officer) copies of all W-2 forms relating to income paid to Executive during the prior calendar year. 8. CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with or transferring all or substantially all of its assets to another corporation. In that event, such other corporation shall assume this Agreement and all obligations of the Company hereunder. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect. 9. ACCELERATION. If the Company fails to pay the Executive any of the amounts due to him under Section 4(a) hereof, thirty (30) days after having received written notice from the Executive of such failure to pay, the Executive shall have the right to accelerate future payments of all sums due the Executive under Section 4(a) hereof, without discount. 10. REIMBURSEMENT. If the Company fails to pay the Executive any of the amounts due to him under Section 4(a) hereof or fails to provide the Executive with any of the benefits due to him under Section 4(b) hereof, thirty (30) days after having received written notice from the Executive of such failure, the Executive shall be entitled to full reimbursement from the Company for all costs and expenses (including reasonable attorneys' fees) incurred by the Executive in enforcing his rights under this Agreement, plus interest at the rate of 9% per annum on the improperly withheld amounts or improperly withheld benefits due to the Executive under Section 4(a) hereof or Section 4(b) hereof, respectively. 11. MISCELLANEOUS. (a) This Agreement shall not limit or infringe upon the right of the Company or any affiliate to terminate the employment of Executive at any time for any reason whatsoever, nor upon the right of Executive to terminate his employment by the Company or any affiliate. Nothing contained herein shall confer upon Executive the right to continue as an employee of the Company or any affiliate. (b) This Agreement contains the entire agreement between Executive and Company regarding the subject matter hereof and supersedes any prior oral or written understanding. (c) This Agreement may not be amended or supplemented, nor may any provision be waived, except by an instrument in writing signed by the parties hereto. This Agreement shall be binding upon and inure to the benefit of the Executive and his personal representatives, executors, administrators and heirs; provided, however, no payment shall be due hereunder after the death or permanent disability of Executive. -147- 5 (d) If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provisions not held so invalid. The rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. (e) The headings of the Sections of this Agreement are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (f) This Agreement has been executed and delivered in the Commonwealth of Pennsylvania and its validity, interpretation, performance, and enforcement shall be governed by the internal laws of such Commonwealth, without regard to any conflict of laws principles. The principle of construction that ambiguities are construed against the draftsperson shall not apply to this document. (g) Any dispute or disagreement between Executive and the Company with respect to any portion of this Agreement or its validity, construction, meaning, performance or Executive's rights hereunder shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or its successor, as amended from time to time. However, prior to submission to arbitration Executive will attempt to resolve any disputes or disagreements with the Company over this option amicably and informally, in good faith, for a period not to exceed two weeks. Thereafter, the dispute or disagreement will be submitted to arbitration. At any time prior to a decision from the arbitrator(s) being rendered, Executive and the Company may resolve the dispute by settlement. Executive and the Company shall equally share the costs charged by the American Arbitration Association or its successor, but Executive and the Company shall otherwise be solely responsible for their own respective counsel fees and expenses. The decision of the arbitrator(s) shall be made in writing, setting forth the award, the reasons for the decision and award and shall be binding and conclusive on Executive and the Company. Further, neither Executive nor the Company shall appeal any such award. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. HANOVER FOODS CORPORATION /s/ Alan T. Young (SEAL) By: /s/ John A. Warehime - ------------------------------ ----------------------------------- Alan T. Young John A. Warehime, Chairman -148- EX-10.(P) 11 VOTING AGREEMENT 1 EXHIBIT 10(p) HANOVER FOODS CORPORATION VOTING AGREEMENT John R. Miller, Jr. hereby agrees that, for a four (4) year period beginning on April 1, 1997 and ending on March 31, 2001, he will vote all shares of stock (whether Class A, Class B or otherwise) of Hanover Foods Corporation (a Pennsylvania corporation) which he is entitled to vote (whether at shareholders meetings or otherwise) as directed by the Board of Directors of the Hanover Foods Corporation, provided that Clayton J. Rohrbach, Jr., Arthur S. Schaier, Cyril T. Noel, or a majority of them, vote in favor of the direction. John R. Miller, Jr. agrees that this Voting Agreement shall be binding upon him and upon his estate, heirs, executors, administrators and other representatives and he intends to be legally bound hereby. John R. Miller Jr. hereby revokes any proxy previously given with respect to the shares of stock of Hanover Foods Corporation. This Voting Agreement may not be amended, supplemented, waived or terminated except by a written instrument executed by John R. Miller, Jr. and Hanover Foods Corporation, acting through its Board of Directors. This Voting Agreement is executed pursuant to Section 1768(b) of the Pennsylvania Business Corporation Law of 1988 as amended and shall be governed by the laws of the Commonwealth of Pennsylvania applicable to contracts made and to performed solely in Pennsylvania. /s/ John R. Miller Jr. (SEAL) -------------------------------- JOHN R. MILLER, JR. DATED: April 22, 1997 -149- EX-10.(Q) 12 ANNUAL TOP MANAGEMENT CASH BONUS PROGRAM 1 EXHIBIT 10(q) ANNUAL TOP MANAGEMENT CASH BONUS PROGRAM The Company maintains a cash bonus plan whereby the executive officers and salaried marketing department personnel are eligible to receive cash bonuses equal to a percentage of the executive officer's base salary if certain corporate pretax profit objectives are achieved. The executive officers selected each year to participate in the cash bonus plan, as well as the performance targets on which the cash bonuses are based and the amount of the cash bonuses are determined each year at the discretion of the Chairman and the Board of Directors. Specifically, the Chairman recommends to the Board of Directors certain executive officers who will participate in the plan each year. Such executive officers who will participate in the plan as evidenced by written notice from the Company. The amount of the actual cash bonus paid to the various executive officers participating in the cash bonus plan is calculated based on the attainment of the corporate pretax profit objectives set at the commencement of each fiscal year. The cash bonuses are normally paid within the sixty (60) days after the end of the fiscal year. -150- EX-11 13 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 HANOVER FOODS CORPORATION AND SUBSIDIARIES Computations of Per Share Earnings
- --------------------------------------------------------------------------------------------------------------------------------- Nine weeks Fiscal years ended ended ------------------ ------- Proforma June 1, June 2, March 31, April 2, June 2, 1997 1996 1996 1995 1996 - --------------------------------------------------------------------------------------------------------------------------------- Primary: Net earnings (loss) $6,706,000 $413,000 $420,000 $1,888,000 ($1,131,000) Preferred stock dividends (31,000) (39,000) (31,000) (33,000) (8,000) - --------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) applicable to 6,675,000 374,000 389,000 1,855,000 (1,139,000) common stock - --------------------------------------------------------------------------------------------------------------------------------- Shares: Weighted average number of shares outstanding 720,811 728,677 729,608 734,252 722,667 - --------------------------------------------------------------------------------------------------------------------------------- Primary earnings (loss) per share $9.26 $0.51 $0.53 $2.53 ($1.58) - --------------------------------------------------------------------------------------------------------------------------------- Fully diluted: Net earnings (loss) $6,706,000 $413,000 $420,000 $1,888,000 ($1,131,000) - --------------------------------------------------------------------------------------------------------------------------------- Shares: Weighted average number of shares outstanding 720,811 728,677 729,608 734,252 722,667 Assuming conversion of preferred stock into common stock 6,604 6,340 6,340 6,458 6,454 - --------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 727,415 735,017 735,948 740,710 729,121 - --------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share assuming $9.22 $0.56 $0.57 $2.55 ($1.55) full dilution - ---------------------------------------------------------------------------------------------------------------------------------
This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3% or in anti-dilution. 151 EX-21 14 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
NAME OF SUBSIDIARY STATE OF INCORPORATION ------------------ ---------------------- Tri-Co. Foods Corp. Pennsylvania Spring Glen Fresh Foods, Inc. Pennsylvania Consumers Packing Company Pennsylvania d/b/a Hanover Foods - Lancaster Division Hanover Insurance Company Ltd. Grand Cayman, B.W.I. Nittany Corporation Delaware NOTE: Tri-Co. Foods Corporation has two wholly-owned subsidiaries: Alimentos Congelados Monte Bello S.A. Republic of Guatemala Sunwise Corporation Florida
-152- EX-27 15 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAY-31-1997 JUN-01-1996 MAY-31-1997 3,312 0 22,954 0 41,424 71,377 115,784 66,822 124,031 54,255 18,453 788 0 21,057 25,312 124,031 259,439 259,439 195,086 195,086 49,700 0 3,666 10,987 4,281 6,706 0 0 0 6,706 9.26 9.26
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