-----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, OlQ/oNClxWCE4Y+6llIr0HOqeJJGI3Q/K+zECb/P9Mpxarjk09qSPU1pYzXZjQW7 HEbtDAp+5JFuyiomcuqxmA== 0000893220-98-001433.txt : 19980901 0000893220-98-001433.hdr.sgml : 19980901 ACCESSION NUMBER: 0000893220-98-001433 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980831 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: 98701301 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 May 31, 1998 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 of incorporation or organization) (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 Stock None
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, 1998, the estimated aggregate market value of Class B Voting Common Stock held by non-affiliates of the Registrant was $342,380. As of August 10, 1998, the estimated aggregate market value of Class A Nonvoting Common Stock held by non-affiliates of the Registrant was $12,761,287. (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 426,766 shares of Class B Voting Common Stock outstanding as of August 10, 1998. There were 290,860 shares of Class A Nonvoting Common Stock outstanding as of August 10, 1998. 1 2 PART I ITEM 1. BUSINESS FORWARD LOOKING STATEMENTS When used in this Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "projected," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to quarterly fluctuations in operating results, competition, state and federal regulation, environmental considerations, foreign operations and risks associated with the Year 2000 Issue. Such factors, which are discussed in the Annual Report, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. 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 L. K. Bowman Co. 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, canned and frozen mushrooms, 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, approximately 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 approximately 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." 2 3 The Corporation enjoys its strongest retail sales in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, canned pasta, a frozen soft pretzel, refrigerated food, canned and frozen mushroom 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 six (6) plants in Pennsylvania, one (1) plant in Delaware, one plant in New Jersey, and two (2) plants in Guatemala. The Board of Directors approved construction of a Tomato Paste Plant to be located in California. Construction cost will be approximately 5 million dollars. The costs are to be funded from operations. 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), SPRING GLEN FRESH FOODS, SUNNYSIDE FOODS, AND NOTTINGHAM. 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, and canned and frozen mushrooms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year Ended May 31, 1998 Results of Operations Compared to Year Ended June 1, 1997" in the 1998 Annual Report attached hereto as Exhibit 13 (Annual Report). 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 42% of the Company's net sales for the fiscal year ended May 31, 1998 and 27% of accounts receivable as of May 31, 1998. No single customer accounted for more than approximately 10% of net sales for the fiscal years ended May 31, 1998, June 1, 1997, and March 31, 1996. 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 3 4 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. The Corporation competes with national processors such as Curtis Burns and Campbell and area processors such as Bush. 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 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 in the Annual Report. 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 - Regulation" and "Legal Proceedings." 4 5 ENVIRONMENTAL CONSIDERATIONS The Corporation continually makes investments to comply with all federal, state and local laws, environmental rules and regulations. To date, 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. No supplier provides more than 10% of the raw materials or packaging materials purchased by the Corporation. EMPLOYEES The Corporation, its divisions and subsidiaries currently employ approximately 1,645 employees on a full-time and a seasonal basis. Approximately 1,318 employees are employed in the United States and 327 are employed in Guatemala. A total of 577 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 3,000 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 5 6 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" in the Annual Report. 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" in the Annual Report. RISK FACTORS Industry Conditions and Price and Volume Fluctuations The Corporation's financial performance and growth are related to conditions in the food 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 6 7 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", in the Annual Report. 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. 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 7 8 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 that country. Some of these are more pronounced in third world countries such as Guatemala. At May 31, 1998, the total assets of the Corporation's foreign operations were approximately $9.3 million. Year 2000 Many existing computer programs, including those utilized by the Company, use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, any computer applications could fail or create erroneous results by or at the Year 2000 (the "Year 2000 Issue"). The Company has retained an outside consultant to manage the Company's efforts to bring its computer system into Year 2000 compliance. The Company has contacted its customers, key suppliers and its equipment manufacturers in an attempt to ensure third party compliance. The Company has estimated the costs associated with addressing the Year 2000 Issue to be approximately $350,000. The Company has performed a review of its non-information technology and believes that all such technology is Year 2000 compliant. Currently the Company does not have a contingency plan in the event that correction has not been timely made. 8 9 ITEM 2. PROPERTIES The following is a list of the Corporation's manufacturing, processing and warehousing properties. The Corporation owns each of the properties, except as noted. 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. Nottingham, PA - Canned mushrooms, dry storage. Ephrata, PA - Refrigerated, fresh foods and soups manufacture. Dry, refrigerated and frozen storage. Millville, NJ - Refrigerated, fresh foods and soups manufacture. Dry, refrigerated and frozen storage. The building and land is leased from Purity Group, Inc. which lease expires January 15, 2000. All equipment is owned by the company. 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. 9 10 ITEM 3. LEGAL PROCEEDINGS On February 1, 1995, Michael A. Warehime, J. William Warehime and Elizabeth W. Stick, three Class B shareholders of the Company, filed a complaint in the Court of Common Pleas of York County, Pennsylvania against the Company and John A. Warehime (Chairman of the Corporation), in his capacity as voting trustee of two voting trusts entitling him to vote approximately 52% of the Class B common stock. The Court has dismissed various claims and parties in the lawsuit and the only remaining parties are Michael A. Warehime as plaintiff and John A. Warehime as defendant. The only remaining claims are (i) a claim for breach of fiduciary duty based on exercise of powers beyond those granted by certain voting trust agreements; (ii) a claim for breach of fiduciary duty for use of the voting trusts in a manner harmful to their beneficiaries, (iii) a count requesting removal of John A. Warehime as the voting trustee of the voting trusts. On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Company's directors and the estate of a former director in the Court of Common Pleas of York County, Pennsylvania (the complaint). The suit also names the Company 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.) In addition, the plaintiffs sought costs and fees incident to bringing suit. On November 4, 1996, the complaint was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed the amended complaint for failure to make a prior demand. An appeal has been filed from the Court's June 24, 1997 Order. On May 12, 1997, a written demand was received by the Company from the attorney for those Class A common stockholders containing similar allegations and the allegations raised by the Class A common stockholders were investigated by a special independent committee of the Board of Directors and found to be without merit. On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain Class A shareholders filed motions for a preliminary injunction against the Company, John A. Warehime, in his capacity as voting trustee, and all certain directors of the Company in the Court of Common Pleas of York County, Pennsylvania against a proposal of the Board of Directors to amend and restate the Company's Articles of Incorporation in the manner hereafter described. On February 13, 1997, the Board of Directors proposed an amendment and restatement of the Company's Articles of Incorporation (the "Amended and Restated Articles") which provides that if all of the following Class B shareholders (or their Estates upon the death of such stockholders), Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and Elizabeth W. Stick (all members of the Warehime family), do not agree in writing to the composition of the Board of Directors or other important matters specified below on or after the 1998 annual shareholders meeting, the trustees of the Company's 401(k) Savings Plan (or a similar employee benefit plan), acting as fiduciaries for the employees who participate in the Plan, and the Class A shareholders may become entitled to vote in the manner described in the document. 10 11 The Amended and Restated Articles create a Series C Convertible Preferred Stock and also classified the terms of the Board of Directors commencing with the election at the 1997 annual shareholders meeting and permit directors to be elected for four year terms as permitted by Pennsylvania law. The motions for a preliminary injunction were dismissed by the Court on June 24, 1997. The Class B shareholders on June 25, 1997 approved the Amended and Restated Articles (John A. Warehime being the sole Class B shareholder voting affirmatively in his capacity as voting trustee) and the Amended and Restated Articles became effective June 25, 1997. Appeals have been filed from the denial of the plaintiffs' motion for a preliminary injunction. In August 1997, the Board of Directors proposed a further amendment (the "Amendment") to the Amended and Restated Articles to expand the definition of "disinterested directors" in the manner described below, and to approve certain performance based compensation for John A. Warehime solely for the purpose of making the Corporation eligible for a federal income tax deduction pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. A special meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity as voting trustee from voting on these proposals. This motion was denied on August 11, 1997. Michael A. Warehime has filed an appeal. The Amendment and the proposal under Section 162(m) were approved by Class B Shareholders (John A. Warehime was the sole Class B shareholder to vote affirmatively, in his capacity as voting trustee) on August 14, 1997 and the Amendment became effective on August 14, 1997. Under the Amendment, the definition of "disinterested directors" means the person who, in the opinion of counsel for the Company, 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. On December 12, 1996, the Occupational Safety and Health Administration (OSHA) cited the Company with two violations of OSHA regulations arising out of accidents which occurred at its Clayton, Delaware plant. The proposed penalty for each violation was $70,000. On December 18, 1996, the Company filed its Notice of Contest, contesting both alleged violations and the proposed penalties. On September 22, 1997, pursuant to a final order of the U.S. Occupational Safety and Health Review Commission, the two violations were settled between the parties without admission of liability for $4,750 and $35,000, respectively. 11 12 On March 24, 1997, OSHA cited the Company 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 was $498,000. On April 11, 1997, the Company filed its Notice of Contest, contesting all of the alleged violations and the proposed penalties. On September 22, 1997, pursuant to a final order of the U.S. Occupational Safety and Health review Commission, three of the twenty-two violations were settled between the parties without admission of liability for a total of $65,000. In January 1998, the Company and OSHA settled the remaining citations, by which the Company paid, without admission of liability, the sum of $95,000. The settlement was approved by OSHA on February 20, 1998. The Company 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information contained under the caption "Market for the Registrant's Common Stock and Related Stockholder Matter" on page 34 of the Company's Annual Report to Shareholders for the year ended May 31, 1998 is incorporated herein by reference in response to this item. ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Financial Highlights Five Year" on page 7 of the Company's Annual Report to Shareholders for the year ended May 31, 1998 is incorporated herein by reference in response to this item. 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Incorporated by reference from the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operation in the Company's Annual Report to Shareholders for the year ended May 31, 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements for Hanover Foods Corporation and Subsidiaries are contained on pages 9 through 33 of the Company's Annual Report to Shareholders for the year ended May 31, 1998, and quarterly financial data is contained on page 34 of the Company's annual report to shareholders for the year ended May 31, 1998 and are incorporated herein by reference in response to this item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Incorporated by reference from the Company's 1998 Proxy Statement which was previously filed with SEC on August 10, 1998. 13 14 (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; Executive Vice President & Secretary Vice President - Administration - 1989-1995; 1995-Present Counsel-1987-Present; Secretary-1987- Age: 49 Present. Mr. Knisely also acts as Chief Financial Officer of the Corporation (January 1996 - Present). PEITRO D. GIRAFFA, JR. Vice President-Controller-1996-Present; Vice President-Controller Controller-1984-1996. Mr. Giraffa also 1984-Present Chief Accounting Officer of the Corporation Age: 52 (1996-Present). ALAN T. YOUNG Vice President-Transportation-1996-Present; Vice President-Purchasing & Vice President-Operations-1991-1996; Transportation Director of Corporate Logistics-1990-1991; Age: 55 Manager of Corporate Systems-1986-1990. EDWARD L. BOECKEL, JR. Treasurer-July 1997-Present; Banking & Treasurer Insurance Manager-1995-1997; Vice 1997-Present President CoreStates Bank-1992-1995. Age: 47
14 15 (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 the Corporation Class A 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 May 31, 1998, all filing requirements applicable to its directors and officers were complied with in a timely fashion. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's 1998 Proxy Statement which was previously filed with SEC on August 10, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN SECURITY HOLDERS Incorporated by reference from the Corporation's 1998 Proxy Statement which was previously filed with SEC on August 10, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Corporation's 1998 Proxy Statement which was previously filed with SEC on August 10, 1998. 15 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Hanover Foods Corporation and Subsidiaries (See Exhibit 13) 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. 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 July 24, 1998 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).
16 17
Number Description ------ ----------- 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 incorporated by reference to Exhibit 4(d) of the Form 10-K filed on August 27, 1997. 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). 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).
17 18
Number Description ------ ----------- 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.
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Number Description ------ ----------- 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. 10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation and Gary T. Knisely is incorporated herein by reference to Exhibit 10(k) of the Form 10-K filed on August 27, 1997. 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(l) of the Form 10-K filed on August 27, 1997. 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(m)of the Form 10-K filed on August 27, 1997.
19 20
Number Description ------ ----------- 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is incorporated herein by reference to Exhibit 10(n) of the Form 10-K filed on August 27, 1997. 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is incorporated herein by reference to Exhibit 10(o) of the Form 10-K filed on August 27, 1997. 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is incorporated herein by reference to Exhibit 10(p) of the Form 10-K filed on August 27, 1997. 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q). 11 Computation of Earnings Per Share is incorporated by reference from Note 11 entitled Reconciliation of Numerator and Denominator for Basic and Diluted Earnings per Share in the Company's Annual Report to Shareholders for the year ended May 31, 1998.
20 21
Number Description ------ ----------- 13 Management's Discussion and Analysis of Financial Condition and Results of Operations. The following financial statements of Hanover Foods Corporation and Subsidiaries are incorporated herein by reference to the Company's Annual Report to Shareholders for the year ended May 31, 1998. Independent Auditors' Report Consolidated Statements of Earnings for the Years Ended May 31, 1998, June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Consolidated Balance Sheets for the Years Ended May 31, 1998 and June 1, 1997 Consolidated Statements of Stockholders' Equity for the Years Ended May 31, 1998, June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Consolidated Statements of Cash Flows for the Years Ended May 31, 1998, June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Notes to Consolidated Financial Statements for the Years Ended May 31, 1998 and June 1, 1997 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. 21 22 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 28, 1998 HANOVER FOODS CORPORATION By: /s/ John A. Warehime ------------------------------------ JOHN A. WAREHIME Chairman, President and Chief Executive Officer 22 23 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 28, 1998 By: /s/ John A. Warehime ---------------------------------------- John A. Warehime Chairman, President, Chief Executive Officer and Director By: /s/ Gary T. Knisely ---------------------------------------- Gary T. Knisely Executive Vice President (Chief Financial Officer) By: /s/ Pietro D. Giraffa, Jr. ---------------------------------------- Pietro D. Giraffa, Jr. Vice President - Controller (Chief Accounting Officer) By: /s/ Arthur S. Schaier ---------------------------------------- Arthur S. Schaier Director By: /s/ Cyril T. Noel ---------------------------------------- Cyril T. Noel Director By: /s/ T. Edward Lippy ---------------------------------------- T. Edward Lippy Director By: /s/ Clayton J. Rohrbach, Jr. ---------------------------------------- Clayton J. Rohrbach, Jr. Director By: /s/ James G. Sturgill ---------------------------------------- James G. Sturgill Director By: /s/ James A. Washburn ---------------------------------------- James A. Washburn Director 23 24 HANOVER FOODS CORPORATION EXHIBIT INDEX
Number Description - ------ ----------- 3(a) Registrant's Amended and Restated By-laws enacted July 24, 1998 are attached as Exhibit 3(a). 3(b) Registrant's Amended and Restated Articles of Incorporation are incorporated herein by reference to Exhibit 3(b) of the Form 10-K filed on August 27, 1997. 3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of Incorporation is incorporated herein by reference to Exhibit 3(c) of the Form 10-K filed on August 27, 1997. 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 incorporated herein by reference to Exhibit 4(a) of the Form 10-K filed on August 27, 1997. 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 incorporated herein by reference to Exhibit 4(d) of the Form 10-K filed on August 27, 1998. 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).
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Number Description - ------ ----------- 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). 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 incorporated herein by reference to Exhibit 10(k) of the Form 10-Kfiled on August 27, 1997. 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(l) of the Form 10-K filed on August 27, 1997. 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to Exhibit 10(m) of the Form 10-K filed on August 27, 1997. 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is incorporated herein by reference to Exhibit 10(n) of the Form 10-K filed on August 27, 1997. 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is incorporated herein by reference to as Exhibit 10(o) of the Form 10-K filed on August 27, 1997. 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is incorporated herein by reference to as Exhibit 10(p) of the Form 10-K filed on August 27, 1997. 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q).
26 27
Number Description - ------ ----------- 11 Computation of Earnings Per Share is incorporated by reference from Note 11 entitled Reconciliation of Numerator and Denominator for Basic and Diluted Earnings per Share in the Company's Annual Report to Shareholders for the year ended May 31, 1998 13 Management's Discussion and Analysis of Financial Condition and Results of Operations The following financial statements of Hanover Foods Corporation and Subsidiaries are incorporated herein by reference to the Company's Annual Report to Shareholders for the year ended May 31, 1998 Independent Auditors' Report Consolidated Statements of Earnings for the Years Ended May 31, 1998 and June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Consolidated Balance Sheets for the Years Ended May 31, 1998 and June 1, 1997 Consolidated Statements of Stockholders' Equity for the Years Ended May 31, 1998 and June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Consolidated Statements of Cash Flows for the Years Ended May 31, 1998 and June 1, 1997, nine weeks ended June 2, 1996 and year ended March 31, 1996 Notes to Consolidated Financial Statements for the Years Ended May 31, 1998 and June 1, 1997 21 A list setting forth subsidiaries of the Registrant is attached as Exhibit 21. 27 The Financial Data Schedule is attached as Exhibit 27.
27 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 within 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. 28 2 Section 3. Special Meetings Special meetings of the shareholders may be called at any time by the Chairman, or at the request of either a majority of the directors, or shareholders representing twenty percent (201;) 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 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. 29 3 Section 7. Adjournment of Meeting If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting to any time 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 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 unnerved 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 shareholders, or to receive payment of any dividend or to make a determination of shareholders for any other proper 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. 30 4 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 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 meetings of the shareholders shall be called to order and presided over by the Chairman, or in his absence, by the President, Vice President (in order of seniority) or Secretary, or if none of them is present, by a chairman elected by the shareholders. The officer presiding over a shareholders, meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meetings at which he presides, including, without limitation, the establishment of the procedures for the maintenance of order, safety, limitations on the time allotted to questions or comments on the affairs of the Company, restrictions on entry to any such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. The revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Company. 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). 31 5 Section 2. Election and Term 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 two (2) directors, 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 directors 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 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 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. 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 Secretary not later than June 1 of the calendar year in which the meeting to elect the director or directors is to be held. A nomination, other than those made by or on behalf of the Board of Directors, shall contain or be accompanied by the following: (a) The name and address of each proposed nominee; (b) The qualifications of each proposed nominee; (c) All other information required by Schedule 14A adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934; and (d) Written confirmation executed by the proposed nominee that such proposed nominee has agreed to serve if elected. 32 6 Nominations not made in accordance with this Section shall be disregarded by the Chairman of the meeting and the judge or judges of election shall 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. 33 7 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 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. 34 8 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. 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 if 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. 35 9 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 the 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. 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 any 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. 36 10 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 by 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. The Chairman shall be a member of the Board of Directors. He shall have the duties and authority incident to the office of chief executive officer. The Chairman shall also be the President of the Company unless another person has been elected as president. Section 4. President The President shall perform such duties and have such authority as are prescribed by the Chairman or the Board of Directors. In the event of the incapacity of the Chairman to act, his duties shall be performed by the President. The President need not be a member of 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 of 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. 37 11 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 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. 38 12 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 incorporated 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, 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: July 24, 1998 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 39 EX-10.(Q) 3 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. 40 EX-13 4 MANAGEMENT'S DISCUSSION & ANALYSIS OF FIN. COND. 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Incorporated by reference from the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operation in the Company's Annual Report to Shareholders for the year ended May 31, 1998. FORWARD LOOKING STATEMENTS When used in this Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "projected," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to quarterly fluctuations in operating results, competition, state and federal regulation, environmental considerations, foreign operations and risks associated with the Year 2000 Issue. Such factors, which are discussed in the Annual Report, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Company wishes to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. DESCRIPTION OF BUSINESS The Company is a vertically integrated processor of vegetable products in one industry segment. The Company, through its direct and indirect subsidiaries, 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. The Company has operations in five plants in Pennsylvania, one plant in Delaware, one plant in New Jersey and two plants in Guatemala. YEAR ENDED MAY 31, 1998 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED JUNE 1, 1997 The results of operations for fiscal 1998 were impacted by lower operating expenses, lower interest expense and lower outside legal costs. The Company and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. The Company believes that the cost of such purchases and sales are competitive with alternate sources of supply and markets. See Note 6 to the Consolidated Financial Statements. 41 2 Effective April 1, 1996, the Company's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Company'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 May 31, 1998 to the year ended June 1, 1997, the fiscal year ended June 1, 1997 to the proforma year ended June 2, 1996 and the nine weeks ended June 2, 1996 to the nine weeks ended June 4, 1995. OVERVIEW OF FISCAL 1998 RESULTS NET SALES Consolidated net sales were $260.6 million for fiscal 1998 compared to $259.4 million for fiscal 1997, an increase of $1.2 million, or 0.5%. The increase in consolidated net sales was comprised of the following volume and sales price components: YEAR ENDED MAY 31, 1998 INCREASE (DECREASE)
VOLUME SALES PRICE COMBINED ------ ----------- -------- FROZEN SALES (2.1)% (0.2)% (2.3)% CANNED SALES 2.1% (0.7)% 1.4% PREPARED FOODS 1.7% (0.3)% 1.4% ------ ------ ------ 1.7% (1.2)% 0.5%
The decreased volume in frozen sales was principally due to lower sales levels in retail branded products due to competition from national and regional branded companies. This decrease in volume was partially offset by increases in food service product sales. Canned sales also showed an increase in fiscal 1998 due to increased volume in government bid business. This increase in volume was partially offset by the decrease in retail branded products. Prepared foods showed an increase in sales due to the acquisition of SunnySide Foods in January 1998 which accounted for 97% of the increase. COST OF GOODS SOLD Consolidated cost of goods sold represented 74.2% of consolidated net sales for fiscal 1998 compared to 75.2% for fiscal 1997. The consolidated cost of sales decreased $1.7 million to $193.4 million in fiscal 1998 as compared to $195.1 million in fiscal 1997 which was due to lower operating costs, principally related to raw material, overhead and packaging. 42 3 SELLING EXPENSES Consolidated selling expenses represented 14.8% of consolidated net sales for fiscal 1998 and 14.4% for fiscal 1997. Promotion expense increased $1.5 million to $28.3 million for fiscal 1998 as compared to $26.8 million for fiscal 1997, as the Company spent additional promotion dollars to maintain market share in both the mid-Atlantic and southern region for its branded business. In addition to promotion expense, the Company spent approximately $659,000 on advertising, including $228,000 relating to redeemed coupons, for fiscal 1998, compared to $2.2 million in advertising, including $1.7 million for redeemed coupons, for fiscal 1997. 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. ADMINISTRATIVE EXPENSES Consolidated administrative expenses were $12.3 million in fiscal 1998, or 4.7% of consolidated net sales, as compared to, $12.2 million, or 4.7% of consolidated net sales in 1997. The increase in consolidated administrative expenses was the result of increased pension plan expense partially offset by decreases in outside legal services. Included in administrative expenses for fiscal 1998 were $296,000 million in legal fees paid in connection with the litigation described under "Legal Matters" in Note 9 to the Consolidated Financial Statements. INTEREST EXPENSE Consolidated interest expense for fiscal 1998 decreased $646,000 to $3,020,000 in fiscal 1998 compared to $3,666,000 in fiscal 1997. The decrease resulted from average seasonal borrowing being lower for an extended period of time to fund lower inventory levels during the pack season. The maximum amount of seasonal borrowing was approximately $28.0 million as compared to the maximum of $35.0 million in fiscal 1997. In addition, approximately $1.8 million in senior unsecured term debt that carried higher interest rates was repaid in fiscal 1998 which contributed to the reduction of the Corporation's interest expense for fiscal 1998. OTHER INCOME (EXPENSE) Consolidated other income increased $634,000 to $545,000 for fiscal 1998 as compared to expense of $89,000 for fiscal 1997. Foreign exchange and translation adjustment gains during fiscal 1998 accounted for 24% of this additional income. Gain on the sale of securities during fiscal 1998 accounted for 36% of the additional income. Reduced value added tax accounted for 14% of the change. 43 4 INCOME TAXES The provision for corporate federal and state income taxes for fiscal 1998 was $5.4 million, or 38.9% of pretax earnings, as compared to a provision of $4.3 million, or 39.0% of pretax earnings for fiscal 1997. NET EARNINGS Consolidated net earnings for fiscal 1998 were $8.4 million, or 3.2% of consolidated net sales as compared to $6.7 million, or 2.6% of consolidated net sales, for fiscal 1997. Lower operating expenses, interest expenses and decreased outside legal fees were the contributing factors to the increased net earnings. 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: 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 level 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 the increase in unit sales price. 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. 44 5 SELLING EXPENSES Consolidated selling 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 Company 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 Company 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. 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 Matters" 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 Company'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 changes. 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. 45 6 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. 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 Company'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 46 7 for the same period in 1995. The increase in interest was primarily due to higher average borrowings during the 1996 period as compared to the prior period. LIQUIDITY AND CAPITAL RESOURCES The discussion and analysis of the Company's liquidity and capital resources should be read in conjunction with the Consolidated Statements of Cash Flows, contained elsewhere herein. Net working capital was $16.8 million at May 31, 1998 and $17.1 million at June 1, 1997. The current ratios were 1.31 and 1.32 on May 31, 1998 and June 1, 1997, respectively. Net cash provided by operations for the fiscal year ended May 31, 1998 was $22.7 million, compared to $12.3 million for the fiscal year ended June 1, 1997. Sources of net cash provided by operations consisted principally of net earnings of $8.4 million, net of non-cash depreciation and amoritization expense of $5.9 million, decreased inventory of $2.8 million, increased accounts payable and accrued expenses of $2.5 million, increased income taxes payable and other liabilities of $1.5 million, and decreased accounts receivable of $1.9 million. 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 $300,000, decreased deferred income taxes of $200,000, an increase in tax and other liabilities of $700,000 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 $200,000. Net cash used by investing activities for the fiscal year ended May 31, 1998 was $14.0 million as compared to $6.5 million for the fiscal year ended June 1, 1997. The principal use of funds was the upgrade and acquisition of property, plant, equipment and the purchase of businesses. During the period ended May 31, 1998, $8.1 million was spent on development and modernization of equipment as compared to $6.6 million in the fiscal year ended June 1, 1997. During the period ended May 31, 1998, $ 5.6 million was spent for the acquisition of other businesses. These projects were funded by internally generated funds. The Company also uses operating leases to meet other equipment needs. The lease expense for the fiscal year ended May 31, 1998 was $3.3 million, down $0.3 million from the fiscal year ended June 1, 1997. 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 Company also uses operating leases to meet other equipment needs. The lease expense for fiscal year ended June 1, 1997 was $3.6 million, down $0.4 million from the fiscal year ended June 2, 1996. 47 8 Net cash used for financing activities was $9.6 million for the fiscal year ended May 31, 1998, compared to cash used for financing activities of $3.6 million for the fiscal year ended June 1, 1997. Seasonal borrowing amounting to $144.3 million was used throughout the fiscal year to fund operational needs. Seasonal borrowing, plus the cash overdraft, decreased by $4.2 million at May 31, 1998 compared to June 1, 1997. Payments on long-term debt were $5.2 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 May 31, 1998 compared to 6.1% for the fiscal year ended June 1, 1997. 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. The weighted average cost of seasonal borrowings was 6.1% for the fiscal year ended May 31, 1998 compared to 6.1% for the fiscal year ended June 1, 1997. At May 31, 1998 the Company has commitments from financial institutions to provide seasonal lines of credit in the amount of $90 million. Additional borrowing is permitted within prescribed parameters in existing debt agreements which contain certain performance covenants. At May 31, 1998 the Company was in compliance with all the provisions of its debt agreements. The Company paid dividends of $828,000 during fiscal 1998 compared to $824,000 in fiscal 1997. In addition, the Company repurchased 2,247 shares of Class A Common Stock at a cost of $106,000 during the year ended May 31, 1998. The Company believes that it has sufficient working capital and availability from seasonal lines of credit to meet its cash flow needs. IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS COMPETITION IN THE MARKETPLACE The Company faced stiff competition from national and regional branded companies during the entire fiscal 1998 in all of its market areas and management anticipates this competitive environment to continue throughout fiscal year 1999. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements establish standards for reporting and display of comprehensive income and its components and for 48 9 reporting information about business segments and products in financial statements and are effective for years beginning after December 15, 1997. In January 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement establishes new disclosure requirements relating to pension and other postretirement benefits and is effective for fiscal years beginning after December 15, 1997. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes new accounting and reporting standards for derivative instruments and for hedging activities and is effective for fiscal years beginning after June 15, 1999. Adoption of the aforestated standards is not expected to have a material effect on the Company's financial statements. YEAR 2000 Many existing computer programs, including those utilized by the Company, use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, any computer applications could fail or create erroneous results by or at the Year 2000 (the "Year 2000 Issue"). The Company has retained an outside consultant to manage the Company's efforts to bring its computer system into Year 2000 compliance. The Company has contacted its customers, key suppliers and its equipment manufacturers in an attempt to ensure third party compliance. The Company has estimated the costs associated with addressing the Year 2000 Issue to be approximately $350,000 and anticipates that such costs will not materially affect the Company's future financial results. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the Company's financial statements, the notes thereto, and the independent auditors report included in the Company's Annual Report to Shareholders for the year ended May 31, 1998. 49 10 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 May 31, 1998 and June 1, 1997, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the years ended May 31, 1998 and 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 May 31, 1998 and June 1, 1997 and the results of their operations and their cash flows for the years ended May 31, 1998 and 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 10, 1998 50 11 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS Fiscal years ended May 31, 1998, June 1, 1997, March 31, 1996, and the nine weeks ended June 2, 1996
(Unaudited) Nine weeks Pro forma Year ended Year ended ended Year ended year ended May 31, June 1, June 2, March 31, June 2, 1998 1997 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net sales $260,621,000 259,439,000 34,569,000 262,920,000 260,694,000 Cost of goods sold 193,357,000 195,086,000 28,805,000 213,515,000 213,234,000 - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit 67,264,000 64,353,000 5,764,000 49,405,000 47,460,000 Selling expenses 38,656,000 37,453,000 5,465,000 35,067,000 33,443,000 Administrative expenses 12,329,000 12,158,000 1,433,000 9,706,000 9,250,000 - ---------------------------------------------------------------------------------------------------------------------------------- Operating profit (loss) 16,279,000 14,742,000 (1,134,000) 4,632,000 4,767,000 Interest expense 3,020,000 3,666,000 596,000 4,639,000 4,651,000 Other (income) expenses - net (545,000) 89,000 (66,000) (640,000) (516,000) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 13,804,000 10,987,000 (1,664,000) 633,000 632,000 Income taxes 5,367,000 4,281,000 (533,000) 213,000 219,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) 8,437,000 6,706,000 (1,131,000) 420,000 413,000 Dividends on preferred stock 37,000 31,000 8,000 31,000 39,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) applicable to common stock $ 8,400,000 6,675,000 (1,139,000) 389,000 374,000 ================================================================================================================================== Basic earnings (loss) per common share $ 11.69 9.26 (1.58) 0.53 0.51 ================================================================================================================================== Diluted earnings (loss) per common share $ 11.62 9.22 (1.58) 0.53 0.51 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 51 12 HANOVER FOODS CORPORATION CONSOLIDATED BALANCE SHEETS May 31, 1998 and June 1, 1997
May 31, June 1, ASSETS 1998 1997 - --------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 2,337,000 3,312,000 Accounts and notes receivable - net 23,429,000 22,954,000 Accounts receivable from related parties - net 389,000 890,000 Inventories: Finished goods 31,185,000 27,446,000 Raw materials and supplies 11,777,000 13,978,000 Prepaid expenses 2,244,000 2,064,000 Deferred income taxes 365,000 733,000 - --------------------------------------------------------------------------------------------------------- Total current assets 71,726,000 71,377,000 - --------------------------------------------------------------------------------------------------------- Property, plant, and equipment - at cost: Land and buildings 35,171,000 33,398,000 Machinery and equipment 86,965,000 82,037,000 Leasehold improvements 374,000 349,000 - --------------------------------------------------------------------------------------------------------- 122,510,000 115,784,000 Less accumulated depreciation and amortization 72,641,000 66,822,000 - --------------------------------------------------------------------------------------------------------- 49,869,000 48,962,000 Construction in progress 4,411,000 760,000 - --------------------------------------------------------------------------------------------------------- 54,280,000 49,722,000 - --------------------------------------------------------------------------------------------------------- Other assets: Intangible assets - less accumulated amortization of $2,054,000 and $2,019,000 2,323,000 441,000 Other assets 2,678,000 2,491,000 - --------------------------------------------------------------------------------------------------------- Total assets $131,007,000 124,031,000 =========================================================================================================
See accompanying notes to consolidated financial statements. 52 13 HANOVER FOODS CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED)
May 31, June 1, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 23,979,000 21,038,000 Notes payable - banks 19,874,000 24,114,000 Accrued expenses 7,717,000 6,511,000 Current maturities of long-term debt 1,859,000 2,234,000 Income taxes payable 1,498,000 358,000 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 54,927,000 54,255,000 Long-term debt, less current maturities 14,359,000 16,219,000 Deferred income taxes 4,686,000 5,174,000 Other liabilities 1,565,000 1,226,000 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 75,537,000 76,874,000 - ------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Series A and B 8-1/4% cumulative convertible preferred stock 788,000 788,000 Series C 4.4% cumulative convertible preferred stock 250,000 - Common stock, Class A - non-voting 8,729,000 8,729,000 Common stock, Class B - voting 12,328,000 12,328,000 Capital paid in excess of par value 2,143,000 1,623,000 Retained earnings 39,179,000 31,570,000 Treasury stock, at cost (7,993,000) (7,887,000) Other 46,000 6,000 - ------------------------------------------------------------------------------------------------------------------- 55,470,000 47,157,000 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $131,007,000 124,031,000 ===================================================================================================================
53 14 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED MAY 31, 1998, JUNE 1, 1997, MARCH 31, 1996, AND THE NINE WEEKS ENDED JUNE 2, 1996
(Unaudited) Nine weeks Pro forma Year ended Year ended ended Year ended year ended May 31, June 1, June 2, March 31, June 2, 1998 1997 1996 1996 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $ 8,437,000 6,706,000 (1,131,000) 420,000 413,000 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 5,939,000 5,595,000 1,013,000 5,582,000 5,666,000 Gain on sale of property, plant, and equipment (6,000) (21,000) - (25,000) (25,000) Deferred income taxes (120,000) 156,000 (519,000) (369,000) (319,000) Change in assets and liabilities: Accounts and notes receivable 1,856,000 (6,534,000) 7,924,000 388,000 2,335,000 Inventories 2,774,000 5,643,000 90,000 2,795,000 3,414,000 Prepaid expenses (139,000) 313,000 (542,000) 1,947,000 3,737,000 Accounts payable and accrued expenses 2,467,000 (226,000) (790,000) (9,736,000) (10,838,000) Income taxes payable 1,140,000 248,000 17,000 (24,000) (23,000) Other liabilities 339,000 421,000 69,000 444,000 479,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 22,687,000 12,301,000 6,131,000 1,422,000 4,839,000 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of businesses, net of cash acquired (5,578,000) - - - - Decrease in other current assets - - - 263,000 263,000 Decrease (increase) in other assets, net (352,000) 19,000 275,000 (884,000) (373,000) Acquisitions of property, plant, and equipment (8,133,000) (6,565,000) (572,000) (5,527,000) (4,683,000) Proceeds from dispositions of property, plant, and equipment 15,000 35,000 - 31,000 31,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (14,048,000) (6,511,000) (297,000) (6,117,000) (4,762,000) - ----------------------------------------------------------------------------------------------------------------------------------
54 15 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited) Nine weeks Pro forma Year ended Year ended ended Year ended year ended May 31, June 1, June 2, March 31, June 2, 1998 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable $ 144,289,000 220,739,000 - 131,244,000 126,545,000 Payment on notes payable (148,529,000) (220,722,000) (5,324,000) (121,749,000) (121,749,000) Payment on long-term debt (5,210,000) (2,499,000) - (2,989,000) (2,989,000) Payment on long-term capital lease obligations - (152,000) (58,000) (323,000) (202,000) Payment of dividends (828,000) (824,000) (207,000) (831,000) (1,038,000) Common stock redemptions (106,000) (132,000) (47,000) (392,000) (413,000) Preferred stock issuance 770,000 - - - - - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (9,614,000) (3,590,000) (5,636,000) 4,960,000 154,000 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (975,000) 2,200,000 198,000 265,000 231,000 Cash and cash equivalents, beginning of period 3,312,000 1,112,000 914,000 649,000 881,000 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,337,000 3,312,000 1,112,000 914,000 1,112,000 ================================================================================================================================ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,979,000 3,653,000 310,000 4,660,000 4,386,000 Income taxes 4,594,000 3,134,000 16,000 462,000 416,000 ================================================================================================================================
See accompanying notes to consolidated financial statements. 55 16 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FISCAL YEARS ENDED MAY 31, 1998, JUNE 1, 1997, MARCH 31, 1996, AND THE NINE WEEKS ENDED JUNE 2, 1996
Cumulative Cumulative convertible Convertible preferred stock preferred stock Common stock Total Series A and Series B Series C Class A stockholders' -------------------- ----------------- ------------------ equity Shares Amount Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------- Balance, April 2, 1995 $43,920,000 31,816 795,000 - - 349,000 $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 - - 349,120 8,729,000 - -------------------------------------------------------------------------------------------------------------------------------
56 17 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
Common stock Class B Capital paid Treasury stock ------------------------- in excess of Retained ------------------ Shares Amount par value earnings Shares Amount Other - ---------------------------------------------------------------------------------------------------------------------------------- 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) - ----------------------------------------------------------------------------------------------------------------------------------
57 18 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
Cumulative Cumulative convertible Convertible preferred stock preferred stock Common stock Total Series A and Series B Series C Class A stockholders' --------------------- ------------------- -------------------- equity Shares Amount Shares Amount Shares Amount - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 $ 42,509,000 31,536 $788,000 - $ - 349,210 $8,729,000 - --------------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------------- Net earnings 8,437,000 - - - - - - Cash dividends per share: Preferred - $2.0625 annually (37,000) - - - - - - Common - $1.10 annually (791,000) - - - - - - Issuance of preferred stock 770,000 - - 10,000 250,000 - - Redemption of common stock - Class A 1,882 shares, Class B 365 shares (106,000) - - - - - - Minimum pension liability adjustment (net of taxes of $106,000) 158,000 - - - - - - Unrealized (loss) on investments (118,000) - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1998 $ 55,470,000 31,536 $788,000 10,000 $250,000 349,210 $8,729,000 =================================================================================================================================
See accompanying notes to consolidated financial statements. 58 19 HANOVER FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
Common stock Capital paid Class B in excess of Retained Treasury stock Shares Amount par value earnings Shares Amount Other - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1996 493,123 $12,328,000 $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 493,123 12,328,000 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 493,123 12,328,000 1,623,000 31,570,000 138,952 (7,887,000) 6,000 - --------------------------------------------------------------------------------------------------------------------------------- Net earnings - - - 8,437,000 - - - Cash dividends per share: Preferred - $2.0625 annually - - - (37,000) - - - Common - $1.10 annually - - - (791,000) - - - Issuance of preferred stock - - 520,000 - - - - Redemption of common stock Class A 1,882 shares, Class B 365 shares - - - - 2,247 (106,000) - Minimum pension liability adjustment (net of taxes of $106,000) - - - - - - 158,000 Unrealized (loss) on investments - - - - - - (118,000) - --------------------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1998 493,123 $12,328,000 $2,143,000 $ 39,179,000 141,199 $(7,993,000) $ 46,000 =================================================================================================================================
See accompanying notes to consolidated financial statements. 59 20 HANOVER FOODS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1998 AND JUNE 1, 1997 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Hanover Foods Corporation (the Company) is a vertically integrated processor of vegetable products in one industry segment. The Company, through its direct and indirect subsidiaries, 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. The Company has operations in five plants in Pennsylvania, one plant in Delaware, one plant in New Jersey, and two plants in Guatemala. The Company's ten largest customers accounted for approximately 42%, 45%, and 45% of the Company's net sales for the fiscal years ended May 31, 1998, June 1, 1997, and March 31, 1996, respectively. The Company's ten largest customers account for approximately 27% and 45% of the Company's accounts receivable as of May 31, 1998 and June 1, 1997, respectively. No single customer accounted for more than 10% of net sales for the fiscal years ended May 31, 1998, June 1, 1997, and March 31, 1996. 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. During the year ended May 31, 1998, the Company purchased L. K. Bowman, Inc. and L. K. Bowman Pacific, Inc., which are included as part of Hanover Foods, and purchased certain assets of Sunnyside Foods, which are included in Spring Glen Fresh Foods, Inc. These purchases were not material to the Company's results of operations for the year ended May 31, 1998. All significant intercompany balances and transactions have been eliminated. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company 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. 60 21 NOTE 1: CONTINUED CASH AND CASH EQUIVALENTS Cash equivalents of $707,000 and $743,000 at May 31, 1998 and June 1, 1997, 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 $2,447,000 and $2,187,000, at May 31, 1998 and June 1, 1997, 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 $46,000, $164,000, and $76,000 at May 31, 1998, June 1, 1997, and June 2, 1996, respectively. 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) 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. 61 22 NOTE 1: CONTINUED 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 The Company amortizes intangible assets, primarily covenants not to compete, purchased trademarks and goodwill, over periods ranging from 3 to 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. 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 $588,000, $622,000, $134,000, $725,000, and $716,000 (unaudited) for the periods ended May 31, 1998, June 1, 1997, June 2, 1996, March 31, 1996, and the pro forma year ended June 2, 1996, respectively. 62 23 NOTE 1: CONTINUED 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. Advertising expenses amounted to $659,000, $2,184,000, $842,000, $3,565,000, and $3,580,000 (unaudited) for the periods ended May 31, 1998, June 1, 1997, June 2, 1996, March 31, 1996, and the pro forma year ended June 2, 1996, respectively (including manufacturer coupon expense of $228,000, $1,655,000, $542,000, $2,407,000, and $2,358,000 (unaudited), respectively). EARNINGS PER SHARE The Company adopted the provisions of SFAS No. 128, Earnings per Share, during the year ended May 31, 1998. SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS No. 128 requires restatement of all prior-period earnings per share data presented FISCAL YEAR END Effective April 1, 1996, the Company's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Company's past fiscal years ended at the close of operations on the Sunday nearest to March 31. The fiscal years ended May 31, 1998, June 1, 1997, March 31, 1996, and the pro forma 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. 63 24 NOTE 2: NOTES PAYABLE - BANKS RECLASSIFICATIONS Certain prior amounts have been reclassified to conform to classifications adopted in the current year. The Company maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $90,000,000, of which $19,874,000 was borrowed (including an overdraft of $2,108,000) at May 31, 1998 and $24,114,000 was borrowed (including an overdraft of $1,413,000) at June 1, 1997. The Company 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 May 31, 1998 and June 1, 1997, was 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 May 31, 1998 and June 1, 1997 and March 31, 1996 was approximately $27,999,000, $35,024,000, and $45,900,000, respectively, and $29,400,000 for the nine-week period ended June 2, 1996. 64 25 NOTE 3: LONG-TERM DEBT The long-term debt of the Company and its subsidiaries consists of:
May 31, 1998 June 1, 1997 - -------------------------------------------------------------------------------------------- 8.74% - 9.24% unsecured senior notes payable to an insurance company, due fiscal years ending 1997-2007 $16,071,000 17,857,000 Installment obligation payable to a related party, due in equal annual installments in fiscal years ending 1996-2000; interest at prime rate (8.5% at May 31, 1998) 147,000 221,000 6.33% installment obligation payable to a related party, due fiscal years ending 1997-1998 -- 375,000 - -------------------------------------------------------------------------------------------- Total long-term debt 16,218,000 18,453,000 Less current maturities 1,859,000 2,234,000 - -------------------------------------------------------------------------------------------- Long-term debt, excluding current maturities $14,359,000 16,219,000 ============================================================================================
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 May 31, 1998, $30,591,000 of retained earnings are restricted from distribution. The Company is in compliance with the restrictive provisions in the agreements. The aggregate long-term debt maturities follow: For the fiscal year ending: 1999 $ 1,859,000 2000 1,859,000 2001 1,786,000 2002 1,786,000 2003 1,786,000 Thereafter 7,142,000 ------------------------------------------------------ Total $ 16,218,000 ======================================================
NOTE 4: LEASES 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 May 31, 1998, June 1, 1997, June 2, 1996, and March 31, 1996 amounted to $3,330,000, $3,586,000, $653,000, and $3,964,000, respectively. 65 26 NOTE 4: CONTINUED Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of May 31, 1998 are:
Operating leases ---------------------------------------------- For the fiscal year ending: 1999 $ 965,000 2000 685,000 2001 383,000 2002 233,000 2003 48,000 Thereafter - ---------------------------------------------- Total minimum lease payments $ 2,314,000 ==============================================
NOTE 5: CAPITAL STOCK The Company's capital stock consists of Class A Nonvoting Common Stock, Class B Voting Common Stock, 8 1/4% Series A and B Cumulative Convertible Preferred Stock, and 4.4% Series C Convertible Preferred Stock. Holders of Class B Common Stock have one vote per share. No other classes of stock have voting rights except as discussed below. The Company's Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 10,000 shares of Series C Convertible Preferred Stock to the trustees of the Company's 401(k) Savings Plan (or a similar employee benefit plan). At least a majority of the trustees of the Company's 401(k) Savings Plan (or similar employee benefit plan), who are appointed by the Board of Directors, must be "disinterested directors" of the Company. If the Class B shareholders 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 Class B shareholders. 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 Company. The voting power of the Series C Convertible Preferred Stock ceases five (5) years after its issuance. Under the Amended and Restated Articles, each of the shares of Series C Convertible Preferred Stock is convertible into one share of Class A Common Stock and is not entitled to vote except in the event that the Class B shareholders cannot agree in writing on the composition of the Board of Directors or on other important matters specified above. 66 27 NOTE 5: CONTINUED The following summarizes the Company's capital stock at May 31, 1998 and June 1, 1997:
May 31, 1998 June 1, 1997 Issued Outstanding Issued Outstanding - ------------------------------------------------------------------------------------------------ Series A 8 1/4% cumulative convertible preferred stock - $25 par value, 60,000 shares authorized 15,268 6,548 15,268 6,548 Series B 8 1/4% cumulative convertible preferred stock - $25 par value, 60,000 shares authorized 16,268 8,496 16,268 8,496 Series C 4.4% cumulative convertible preferred stock - $25 par value, 10,000 shares authorized 10,000 10,000 -- -- Class A nonvoting common stock - $25 par value, 800,000 shares authorized 349,210 290,860 349,210 292,600 Class B voting common stock - $25 par value, 880,000 shares authorized 493,123 426,766 493,123 427,131 - -----------------------------------------------------------------------------------------------
At any time, the holders of the Cumulative Convertible Preferred 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. At May 31, 1998, the outstanding Preferred Stock could be converted into 8,193 shares of Class A Common Stock. 67 28 NOTE 6: RELATED PARTY TRANSACTIONS The Company and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. The Company 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 Pro forma Year ended Year ended ended Year ended year ended May 31, June 1, June 2, March 31, June 2, 1998 1997 1996 1996 1996 - --------------------------------------------------------------------------------------------------------- Revenues: Park 100 Foods, Inc. $4,365,000 3,155,000 118,000 -- 118,000 Corporate charges: Warehime Enterprises, Inc. -- -- -- 2,000 2,000 Snyder's of Hanover, Inc. 181,000 175,000 29,000 175,000 148,000 Expenditures: The Cannery Press, Inc. -- 14,000 14,000 346,000 296,000 Patti & John's, Inc. -- 10,000 4,000 29,000 28,000 Lippy Brothers, Inc. 304,000 1,044,000 -- 752,000 749,000 James G. Sturgill 68,000 135,000 15,000 65,000 80,000 ARWCO Corporation 33,000 29,000 24,000 43,000 34,000 Warehime Enterprises, Inc. 125,000 177,000 1,000 227,000 192,000 John A. and Patricia M Warehime 56,000 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. 209,000 283,000 -- -- -- Accounts receivable: Snyder's of Hanover, Inc. 48,000 15,000 11,000 24,000 -- Patti & John's, Inc. -- -- 4,000 3,000 -- Warehime Enterprises 3,000 -- -- -- -- Park 100 Foods, Inc. 346,000 906,000 56,000 -- -- Accounts payable: Warehime Enterprises, Inc. -- 1,000 -- 5,000 -- The Cannery Press, Inc. -- -- 4,000 4,000 -- Pattie & John's, Inc. -- -- 6,000 -- -- Park 100 Foods, Inc. -- 30,000 -- -- -- James G. Sturgill 7,000 -- -- -- -- ARWCO Corporation 1,000 -- -- -- -- Notes payable: Warehime Enterprises, Inc. -- 375,000 875,000 875,000 -- Cyril T. Noel 147,000 221,000 294,000 294,000 -- - ---------------------------------------------------------------------------------------------------------
68 29 NOTE 6: CONTINUED The Company purchased the Teculutan, Guatemala plant property from ARWCO Corporation on April 5, 1995 for $250,000. On June 20, 1995, the Company purchased real estate near the Centre Hall facility from Centre Foods Enterprises, Inc. for $250,000. In 1994 the Company 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 Company 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 Company increased the rental space to 28,501 square feet for a total annual rent of $96,703. On June 1, 1996, the Company 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 Company 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 Company 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 Company. The amount paid and expensed by the Company under this arrangement for the years ended May 31, 1998, June 1, 1997, and March 31, 1996 was approximately $37,000, $303,000, and $300,000, respectively. On April 1, 1996, the Company 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 April 22, 1997 Voting Agreement provides that John R. Miller, Jr. will vote all shares of the Company Common Stock, which he is entitled to vote as directed by the Board of Directors, provided Clayton J. Rohrbach, Jr., Arthur S. Schaier, and Cyril T. Noel, or a majority of them, vote in favor of the matter to vote all shares of both classes of common stock beginning April 1, 1996 and ending March 31, 2001. At May 31, 1998, the Company has purchased 693 shares of the Company's Voting Class B Common Stock for $52,000 and 3,500 shares of the Company's Nonvoting Class A Common Stock for $147,000. 69 30 NOTE 6: 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 $149,000, $307,000, and $340,000 for the years ended May 31, 1998, June 1, 1997, and March 31, 1996, respectively. The portion of rental commitments included in note 4 due these companies is summarized as follows: For the fiscal years ending: 1999 $ 88,000 2000 15,000 2001 15,000 ------------------------------------
NOTE 7: BENEFIT PLANS FROZEN DEFINED BENEFIT RETIREMENT PLANS The Company 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. During September 1997 the Company terminated the plans and distributed certain net assets to the participants. The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheet as of: 70 31
May 31, 1998 June 1, 1997 ----------------- -------------------------- Fully Under Fully Under funded funded funded funded plan plan plan plan - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $-- -- (7,168,000) (655,000) =============================================================================== Projected benefit obligation for service rendered to date $-- -- (7,168,000) (655,000) Plan assets at fair value -- -- 7,750,000 598,000 - ------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation -- -- 582,000 (57,000) Unrecognized (gains) losses -- -- 140,000 262,000 Adjustment to recognize required minimum liability -- -- -- (264,000) - ------------------------------------------------------------------------------- Prepaid (accrued) pension cost $-- -- 722,000 (59,000) ===============================================================================
Net periodic pension cost (income) included the following components:
Nine-week Year ended Year ended period ended Year ended May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - --------------------------------------------------------------------------------------------------------------- Interest cost $ 555,000 520,000 205,000 496,000 Actual return on plan assets (gain) loss (362,000) (1,330,000) (156,000) (464,000) Amortization of unrecognized loss 5,000 11,000 1,000 6,000 Deferral of asset gain (loss) and other costs 736,000 823,000 (42,000) (15,000) - --------------------------------------------------------------------------------------------------------------- Net pension cost $ 934,000 24,000 8,000 23,000 ===============================================================================================================
Net pension cost for the year ended May 31, 1998 includes loss on termination of the Plans and adjustment of prior year additional minimum pension liability. Assumptions used in accounting for the pension plans include discount rates ranging from 7.09% to 7.25% and an expected long-term rate of return on assets of 7.0%. DEFINED CONTRIBUTION PLAN The Company offers a 401(k) plan covering certain of its employees. The Company contributes an amount equal to 100% of each employee's deferral up to 5%. Effective July 25, 1997, the plan was amended to permit matching contributions to be made in cash and/or securities of the Company (see note 5). The Company's contribution to the 401(k) plan for the periods ended May 31, 1998, June 1, 1997, June 2, 1996, and March 31, 1996 was $583,000, $557,000, $90,000, and $539,000, respectively. 71 32 NOTE 7: 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:
May 31, June 1, 1998 1997 - ----------------------------------------------------------------------------- Actuarial present value of accumulated postretirement benefit obligation: Actives eligible to retire $ (159,000) (129,000) Other actives (282,000) (271,000) - ----------------------------------------------------------------------------- Total actives (441,000) (400,000) Current retirees and disableds (2,150,000) (1,174,000) - ----------------------------------------------------------------------------- Total obligation (2,591,000) (1,574,000) Plan assets at fair value -- -- - ----------------------------------------------------------------------------- Funded status (2,591,000) (1,574,000) Unrecognized net (gain) loss 745,000 (222,000) Unrecognized transition liability, amortized over 20 years 1,153,000 1,226,000 - ----------------------------------------------------------------------------- Accrued postretirement benefit cost $ (693,000) (570,000) ==============================================================================
A discount rate of 7.00%, and 7.50% for May 31, 1998 and June 1, 1997, 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 Year ended period ended Year ended May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------------------ Service cost $ 16,000 22,000 4,000 16,000 Interest cost 177,000 113,000 19,000 121,000 Amortization of transition obligation 73,000 73,000 12,000 73,000 Other amortization and deferral 20,000 (1,000) -- -- - ------------------------------------------------------------------------------------------------------ $286,000 207,000 35,000 210,000 ======================================================================================================
The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 7.8% for fiscal year May 31, 1998, decreasing each year to an ultimate rate of 5% in 2002 and thereafter. 72 33 NOTE 7: 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 May 31, 1998 by $173,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended May 31, 1998 by $11,000. EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENTS On June 12, 1995, the Company 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 Company 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 Company 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 1998 and 1997 was $578,000 and $550,000, respectively. 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 Company 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 Company. The Amended Employment Agreement 73 34 NOTE 7: CONTINUED 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 Company's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Company 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 years ended May 31, 1998, June 1, 1997, and March 31, 1996, the bonus accrued under this agreement was $422,000, $450,000, and $0, respectively. The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Company'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 formula being recommended by an independent management consulting firm retained by the Company and approved by the Compensation Committee of the Board of Directors. For the years ended May 31, 1998 and June 1, 1997, the long-term performance bonus accrued under this agreement was $162,000 and $175,000, respectively. 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 Company over the remaining expected years of service. The expense recognized under this agreement was approximately $411,000, $350,000, and $295,000 for the years ended May 31, 1998, 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 $10,300,000. 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. 74 35 NOTE 7: CONTINUED On January 23, 1997, the Company entered into a five-year employment agreement with Gary T. Knisely, Executive Vice President, Secretary, and Counsel of the Company, 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 May 31, 1998, the aggregate liability of the Company under this agreement for the next five years is estimated to be $1,117,000, 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 Knisely 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 Company 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 Company over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $60,000 and $47,000 for the years ended May 31, 1998 and June 1, 1997, respectively. 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 $3,700,000. The Company also entered into a change in control severance agreement with Alan T. Young, which provides for termination compensation if Mr. Young's employment is terminated: (i) involuntarily or (ii) involuntarily, following a reduction in base salary, duties, and responsibilities, within 24 months of a change in control. A "change in control" shall be deemed to occur if John A. Warehime ceases to be Chief Executive Officer of the Company or ceases to have the power and authority of the Chief Executive Officer. Pursuant to the terms of this agreement, any payment due thereunder shall be made over a two year period no less frequently than monthly and all payments during any twelve month period shall not in the aggregate exceed the officer's total cash compensation (salary and bonus) received from the Company during fiscal 1997. 75 36 NOTE 7: CONTINUED All payments made pursuant to this agreement are subject to the further conditions that: (i) the officer maintain the confidentiality of the Company's trade secrets, customer lists, and other proprietary information of the Company; (ii) for a period of two years following the termination of the officer, neither the officer or his employer or business associate shall enter into or attempt to enter into any business relationship, solicit for employment or employ any person, employed by the Company or its affiliates at any time within the six months prior to the officer's termination; and (iii) for a period of two years following the termination, the officer shall not directly or indirectly own, manage, operate, join, or participate in any capacity, any entity which is primarily engaged in a business which competes with any significant business of the Company or its affiliates. If Mr. Young was terminated on May 31, 1998 under circumstances entitling him to severance payments pursuant to this agreement, the aggregate amount due to Mr. Young under this agreement was $380,000. The Company 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 May 31, 1998 was approximately $391,000. NOTE 8: INCOME TAXES Total income taxes (benefit) for the year ended May 31, 1998, June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996 were attributable to the following:
May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------------------- Income from operations $5,367,000 4,281,000 (533,000) 213,000 Minimum pension liability adjustment 106,000 129,000 -- (235,000) - ------------------------------------------------------------------------------------------------------- $5,473,000 4,410,000 (533,000) (22,000) =======================================================================================================
Income tax expense (benefit) attributable to income from operations consists of:
Year ended Year ended Nine-weeks ended Year ended May 31, 1998 June 1, 1997 June 2, 1996 March 31, 1996 ----------------------------- ------------------------ ------------------------ ----------------------- Federal State Federal State Federal State Federal State - ---------------------------------------------------------------------------------------------------------------------------------- Current $ 4,866,000 905,000 3,644,000 610,000 (14,000) -- 448,000 134,000 Deferred (311,000) (93,000) 47,000 (20,000) (464,000) (55,000) (205,000) (164,000) - ---------------------------------------------------------------------------------------------------------------------------------- $ 4,555,000 812,000 3,691,000 590,000 (478,000) (55,000) 243,000 (30,000) ==================================================================================================================================
76 37 There is no income tax attributable to the income from foreign subsidiaries since the foreign entities were not subject to taxes on income in 1998, 1997, and 1996. The significant components of deferred income tax expense attributable to income (loss) from operations for the year ended May 31, 1998, June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996 are as follows:
Nine-week Year ended Year ended period ended Year ended May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------------------------------------- Deferred tax expense (exclusive of the effects of other components below) $(404,000) 27,000 (519,000) (248,000) Effect of change in state tax rate on deferred taxes -- -- -- (121,000) - ------------------------------------------------------------------------------------------------------------------------- $(404,000) 27,000 (519,000) (369,000) =========================================================================================================================
A reconciliation of the Company's effective tax rate to the amount computed by applying the federal income tax rate of 35% to income (loss) before taxes expressed in percentages, follows:
Nine-week Year Year period Year ended ended ended ended May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - ---------------------------------------------------------------------------------------------------- Federal income tax rate 35.0% 35.0% (35.0)% 35.0% Increase (decrease) in taxes: State taxes - net of federal tax 3.9 3.5 -- 9.5 Effect of change in state tax rate on deferred taxes -- -- -- (12.6) Loss (income) in foreign subsidiary with no current tax (0.3) (1.7) 2.0 2.8 Other items - net 0.3 2.2 1.0 (1.1) - ---------------------------------------------------------------------------------------------------- Effective income tax rate 38.9% 39.0% (32.0)% 33.6% ====================================================================================================
The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at May 31, 1998 and June 1, 1997, follow: 77 38
May 31, June 1, 1998 1997 - ----------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $(5,445,000) (5,836,000) Employee benefit obligations (217,000) (115,000) Capital lease obligations (430,000) (510,000) Other (208,000) (172,000) - ----------------------------------------------------------------------------- Total gross deferred tax liabilities (6,300,000) (6,633,000) - ----------------------------------------------------------------------------- Deferred tax assets: Inventory costs 172,000 223,000 Other accrued liabilities 1,016,000 1,061,000 Pension and postretirement benefits 298,000 215,000 Net operating loss and credit carryforwards 371,000 539,000 Other 122,000 154,000 - ----------------------------------------------------------------------------- Total gross deferred tax assets 1,979,000 2,192,000 - ----------------------------------------------------------------------------- Net deferred tax liability $(4,321,000) (4,441,000) =============================================================================
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 $2,855,000 at May 31, 1998. NOTE 9: COMMITMENTS AND CONTINGENCIES LETTER OF CREDIT As of May 31, 1998, the Company's wholly-owned reinsurance company had outstanding two letters of credit in the amount of $1,206,000 and $650,000 as security for the reimbursement of losses arising from the reinsurance assumed by the Company. 78 39 NOTE 9: CONTINUED LEGAL MATTERS On February 1, 1995, Michael A. Warehime, J. William Warehime, and Elizabeth W. Stick, three Class B shareholders of the Company, filed a Complaint in the Court of Common Pleas of York County, Pennsylvania against the Company and John A. Warehime (Chairman of the Company), 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; and (iii) a count requesting removal of John A. Warehime as the voting trustee of the voting trusts. On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Company'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 Company 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 7.) 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 complaint as amended for failure to make a prior demand. An appeal has been filed from the Court's June 24, 1997 Order. On May 12, 1997, a written demand was received by the Company from the attorney for those Class A common stockholders containing similar allegations and the allegations raised by the Class A common stockholders were investigated by a special independent committee of the Board of Directors and found to be without merit. On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain Class A shareholders filed motions for a preliminary injunction against the Company, John A Warehime, in his capacity as a voting trustee, and all certain directors of the Company in the Court of Common Pleas of York County, Pennsylvania against a proposal of the Board of Directors to amend and restate the Company's Articles of Incorporation in the manner hereafter described. On February 13, 1997, the Board of Directors proposed an amendment and restatement of the Company's Articles of Incorporation (the "Amended and Restated Articles") which provides that if all of the following Class B shareholders (or their Estates upon death of such stockholders) Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and Elizabeth W. Stick (all members of the Warehime family), do not agree in writing to composition of the Board of Directors or other important matters specified below on or after the 1998 annual shareholders meeting, the trustees of the Company's 401(k) Savings Plan (or a 79 40 NOTE 9: CONTINUED similar employee benefit plan), acting as fiduciaries for the employees who participate in the Plan, and the Class A shareholders may become entitled to vote in the manner described in note 5. The Amended and Restated Articles create a Series C Convertible Preferred Stock (see note 5) and also classified the terms of the Board of Directors commencing with the election at the 1997 annual shareholders meeting and permit directors to be elected for four year terms as permitted by Pennsylvania law. The motions for a preliminary injunction were dismissed by the Court on June 24, 1997. The Class B shareholders on June 25, 1997 approved the Amended and Restated Articles (John A. Warehime being the sole Class B shareholder voting affirmatively, in his capacity as voting trustee) and the Amended and Restated Articles became effective June 25, 1997. Appeals have been filed from the denial of the 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 Company eligible for a federal income tax deduction pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. A special meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity as voting trustee, from voting on these proposals. This motion was denied on August 11, 1997. Michael A. Warehime has filed an appeal. The Amendment and the proposal under Section 162(m) were approved by Class B Shareholders (John A. Warehime was the sole Class B shareholder to vote affirmatively, in his capacity as voting trustee) on August 14, 1997 and the Amendment became effective on August 14, 1997. Under the Amendment, the definition of "disinterested directors" means the person who, in the opinion of counsel for the Company, meet any of the following criteria: (i) disinterested directors as defined in Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are not "interested" directors as defined in Section 1.23 of The American Law Institute "Principles of Corporate Governance: Analysis of Recommendations" (1994); or (iii) persons who qualify as members of the Audit Committee pursuant to Section 303.00 of the New York Stock Exchange's Listed Company Manual. 80 41 NOTE 9: CONTINUED On December 12, 1996, the Occupational Safety and Health Administration (OSHA) cited the Company with two violations of OSHA regulations arising out of accidents which occurred at its Clayton, Delaware plant. The proposed penalty for each violation was $70,000. On December 18, 1996, the Company filed its Notice of Contest, contesting both alleged violations and the proposed penalties. On September 22, 1997, pursuant to a final order of the U.S. Occupational Safety and Health Review Commission, the two violations were settled between the parties without admission of liability for $4,750 and $35,000, respectively. On March 24, 1997, OSHA cited the Company with 22 violations of OSHA regulations arising out of plant inspections which occurred at its Clayton, Delaware plant. The proposed penalty for said violations was $498,000. On April 11, 1997, the Company filed its Notice of Contest, contesting all of the alleged violations and the proposed penalties. On September 22, 1997, pursuant to a final order of the U.S. Occupational Safety and Health Review Commission, three of the twenty-two violations were settled between the parties without admission of liability for a total of $65,000. In January 1998, the Company and OSHA settled the remaining citations, by which the Company paid, without admission of liability, the sum of $95,000. The settlement was approved by OSHA on February 20, 1998. The Company 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 Company's consolidated financial position, results of operations or liquidity. STOCK REPURCHASE PLAN The Company has agreed to purchase the Company's Class A Common Stock purchased or owned by employees prior to April 20, 1988. This guarantee of repurchase by the Company is for an indefinite period of time. No shares were repurchased under this plan for the year ended May 31, 1998. Shares repurchased under this plan amounted to 1,251 and 5,789 during the years ended June 1, 1997, and March 31, 1996, respectively. As of May 31, 1998, there are 10,579 shares outstanding which would be eligible for this plan. The maximum commitment, if requested, for all eligible shares would be approximately $910,000, based on the most recent appraised value per share as of March 31, 1998. NOTE 10: FOREIGN OPERATIONS AND EXCHANGE RESTRICTIONS FOREIGN OPERATIONS The Company'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: 81 42
May 31, June 1, June 2, March 31, 1998 1997 1996 1996 - ------------------------------------------------------------------------------------------- Revenues $11,190,000 13,991,000 1,442,000 18,155,000 Cost of goods sold 10,433,000 12,162,000 1,686,000 17,311,000 Assets 9,344,000 9,968,000 10,734,000 10,756,000 ===========================================================================================
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 (income) expenses - net and amount to a gain of $73,000, a loss of $78,000, a gain of $44,000, and a loss of $190,000 for the periods ended May 31, 1998, June 1, 1997, June 2, 1996, and March 31, 1996, respectively. At May 31, 1998, the prevailing exchange rate was Q6.27 to U.S. $1.00. 82 43 NOTE 11: RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE
(Unaudited) Nine weeks Pro forma Year ended Year ended ended Year ended year ended May 31, June 1, June 2, March 31, June 2, 1998 1997 1996 1996 1996 - ------------------------------------------------------------------------------------------------------------------------- NUMERATOR FOR BASIC EARNINGS PER SHARE: Net earnings (loss) applicable to common stock $8,400,000 6,675,000 (1,139,000) 389,000 374,000 - ------------------------------------------------------------------------------------------------------------------------- EFFECT OF DILUTIVE SECURITIES: 8 1/4% cumulative convertible preferred stock* 31,000 31,000 -- -- -- 4.40% cumulative convertible preferred stock 6,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Net earnings (loss) assuming dilution $8,437,000 6,706,000 (1,139,000) 389,000 374,000 ========================================================================================================================= DENOMINATOR: Basic weighted-average shares 718,712 720,811 722,667 729,608 728,677 EFFECT OF DILUTIVE SECURITIES: 8 1/4% cumulative convertible preferred stock* 5,786 6,604 -- -- -- 4.40% cumulative convertible preferred stock 1,603 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Diluted weighted-average shares 726,101 727,415 722,667 729,608 728,677 ========================================================================================================================= Basic earnings (loss) per share $ 11.69 9.26 (1.58) 0.53 0.51 Diluted earnings (loss) per share 11.62 9.22 (1.58) 0.53 0.51 =========================================================================================================================
* For the period ended June 2, 1996, and the years ended March 31, 1996 and June 2, 1996 (unaudited), the effect of cumulative convertible preferred stock was antidilutive. NOTE 12: STATEMENT OF CASH FLOW INFORMATION The fair value of assets acquired during the year ended May 31, 1998 was $10,391,000. Cash paid for purchase of these assets was $5,578,000. Liabilities assumed were $4,813,000. The Company entered into a note payable agreement to purchase 5,148 shares of Class B common stock for $368,000 from a director of the Company during the year ended March 31, 1996. -83- 44 QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------- Dollars in thousands First Second Third Fourth (except per share) quarter quarter quarter quarter - --------------------------------------------------------------------------------------------------------------------- 1998 Net sales $ 55,892 $ 68,110 $ 67,923 $ 68,696 Gross profit 13,199 16,925 17,388 19,752 Net earnings 1,527 2,512 2,156 2,242 Net earnings per common share - Basic 2.11 3.48 2.98 3.10 Net earnings per common share - Diluted 2.11 3.47 2.96 3.08 Cash Dividends per common share 0.275 0.275 0.275 0.275 - --------------------------------------------------------------------------------------------------------------------- 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 - Basic 1.72 3.21 2.04 2.31 Net earnings per common share - Diluted 1.72 3.19 2.03 2.30 Cash Dividends per common share 0.275 0.275 0.275 0.275 - ---------------------------------------------------------------------------------------------------------------------
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Although the Company's Class A. Common Stock is currently traded on the NASDAQ Bulletin Board under the symbol "HNFSA," trading in the Class A Common Stock is very sporadic. As a result of the limited market for Class A Common Stock, shareholders are cautioned not to place undue reliance on bid prices contained herein as indicators of the true value of the shares of Class A Common Stock. The following table sets forth the high and low bid prices per share of the Class A Common Stock on a quarterly basis of the past two fiscal years as provided by NASDAQ, as well as dividends paid per share. -84- 45
Quarter Ended High Low Dividends ------------- ---- --- --------- September 1, 1996 $ 40.00 $ 40.00 $ 0.275 December 1, 1996 32.00 31.00 0.275 March 2, 1997 35.00 31.00 0.275 June 1, 1997 36.00 34.00 0.275 August 31, 1997 41.50 35.50 0.275 November 30, 1997 44.00 36.75 0.275 March 1, 1998 43.50 43.50 0.275 May 31, 1998 53.00 43.50 0.275
As of May 31, 1998 there were 409 record holders and approximately 550 beneficial holders of the Class A Common Stock. DIVIDEND POLICY The Company has maintained a policy of paying a quarterly dividend of $0.275 per share. The continuing payment by the Company of dividends in the future is the sole discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, its capital requirements and financial condition, as well as other relevant factors. ANNUAL MEETING The Annual Meeting of Shareholders will be held at 4:00 p.m., September 10, 1998, at the offices of the Company located at 1486 York Street, Hanover, Pennsylvania. ANNUAL AND OTHER REPORTS The Company is required to file an annual report on Form 10-K for its fiscal year ended May 31, 1998, with the Securities and Exchange Commission. Copies of the Form 10-K annual report and the Company's quarterly reports may be obtained without charge by contacting: Gary T. Knisely Hanover Foods Corporation 1486 York Road P.O. Box 334 Hanover, PA 17331 717-632-6000 -85- EX-21 5 A LIST SETTING FORTH SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
NAME OF SUBSIDIARY 1 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 Pennsylvania SunnySide Fresh Foods NOTE: Tri-Co. Foods Corporation has two wholly-owned subsidiaries: Alimentos Congelados Monte Bello S.A. Republic of Guatemala Sunwise Corporation Florida
1: 100% owned by Parent -86- EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAY-31-1998 JUN-02-1997 MAY-31-1998 2,337 0 23,429 0 42,962 71,726 122,510 72,641 131,007 54,927 16,218 1,038 0 21,057 33,375 131,007 260,621 260,621 193,357 193,357 50,985 0 3,020 13,804 5,367 8,437 0 0 0 8,437 11.69 11.62
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