-----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, ERiUIA81UBI9GLpTp7GDY0WBaeqEzIoLGY0GJPpZWrB45nCjg8EnXXfSN3zgRmcS 0CbQqh+uUDwVMVhqWxx9hA== 0000893220-99-001018.txt : 19990831 0000893220-99-001018.hdr.sgml : 19990831 ACCESSION NUMBER: 0000893220-99-001018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990530 FILED AS OF DATE: 19990830 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: 99702185 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 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 30, 1999 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. --- As of August 10, 1999, the estimated aggregate market value of Class B Voting Common Stock held by non-affiliates of the Registrant was $582,060. As of August 10, 1999, the estimated aggregate market value of Class A Nonvoting Common Stock held by non-affiliates of the Registrant was $14,296,740. (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 426,474 shares of Class B Voting Common Stock outstanding as of August 10, 1999. There were 289,414 shares of Class A Nonvoting Common Stock outstanding as of August 10, 1999. 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 Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Corporation wishes to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. OVERVIEW 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 three (3) operating divisions: Hanover, L. K. Bowman Co., and Bickel's Potato Chip Co. In addition, the Corporation has five (5) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers Packing Corporation, 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, fresh foods and snack food products in the eastern United States. The Corporation's raw materials are readily available, and the Corporation 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. See "Risk Factors - Industry Conditions and Price and Volume Fluctuations." The Corporation is a vertically integrated processor of vegetable products in one industry segment. It is involved in the growing, processing, canning, freezing, freeze-drying, packaging, marketing and distribution of its products under its own trademarks, as well as other branded, customer and private labels. "See Risk Factors - General Risks of the Food Industry." The Corporation enjoys its strongest retail sales in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, canned pasta, a frozen soft pretzel, refrigerated food, canned, frozen mushrooms and snack food 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 seven (7) plants in Pennsylvania, one (1) plant in Delaware, one (1) plant in New Jersey, two (2) plants in Guatemala and one (1) plant in California. 3 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, NOTTINGHAM, BICKEL'S and DRAPER KING COLE. 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, canned and frozen mushrooms and potato chips. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year Ended May 30, 1999 Results of Operations Compared to Year Ended May 31, 1998" in the 1999 Annual Report attached hereto as Exhibit 13 (the "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 Corporation's ten largest customers account for approximately 35% of the Corporation's net sales for the fiscal year ended May 30, 1999 and 21% of accounts receivable as of May 30, 1999. No single customer accounted for more than approximately 10% of net sales for the fiscal years ended May 30, 1999, May 31, 1998, and June 1, 1997. The Corporation's products are distributed directly to its customers and indirectly via independent distributors. Sales activities are conducted via Corporation employed sales personnel and independent sales brokerage firms. The Corporation also manufactures private label food products for other food companies. COMPETITION The Corporation markets its food products to the retail and food service sectors in the northeastern, mid-Atlantic, southeastern and midwestern areas of the United States. See "Risk Factors - Competition." The principal methods of competition within the food processing industry are: price, promotion, advertising, product quality and service. The Corporation competes with national processors such as Agrilink Foods and Campbell Foods 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. 4 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." 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 1,856 employees on a full-time and a seasonal basis. Approximately 1,475 employees are employed in the United States and 390 are employed in Guatemala. A total of 684 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, 1998 and ending December 31, 2001. 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 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 5 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. 6 Information with respect to the revenue, cost of sales and identifiable assets for the Corporation's foreign operations is set forth in Note 11 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" in the Annual Report. Seasonality and Quarterly Fluctuations The Corporation's operations are affected by the growing cycle of the vegetables it processes. The Corporation's business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an oversupply situation in a given year. This oversupply typically will result in depressed selling prices and reduced profitability to the Corporation on the inventory produced from that year's crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This shortage typically will result in higher selling prices and increased profitability to the Corporation. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather. Because many of the raw materials processed by the Corporation are agricultural crops, production of products using these crops is predominantly seasonal. As a result, the Corporation 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 Operations" 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 7 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. 8 Environmental Risks The disposal of solid and liquid waste material resulting from the preparation and processing of foods are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have had an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities. The Corporation cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by the Corporation, some of which could be material. Risks Associated with Foreign Operations Foreign operations generally involve greater risks than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States' economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country's currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in that country. Some of these are more pronounced in third world countries such as Guatemala. At May 30, 1999, the total assets of the Corporation's foreign operations were approximately $9.0 million. Year 2000 As part of its Year 2000 compliance program, the Corporation is contacting and surveying vendors and customers with whom the Corporation does a material amount of business to determine whether these parties' systems (to the extent they relate to the Corporation's business) are subject to Year 2000 issues. The failure of the Corporation's material vendors or customers to convert their systems on a timely basis may have a material adverse effect on the Corporation's operations. The Corporation is in the process of developing a contingency plan in the event these vendors or customers with which the Corporation does a material amount of business are not Year 2000 compliant on a timely basis. The Corporation has performed a review of its non-information technology and believes that all such technology is Year 2000 compliant. Currently the Corporation does not have a contingency plan in the event that correction has not been timely made. 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.
9 Plumsteadville, PA - Frozen food entrees, meat pies and soups manufacture. Dry and frozen storage. Nottingham, PA - Canned mushrooms, dry storage.
10 Ephrata, PA - Refrigerated, fresh foods and soups manufacture. Dry, refrigerated and frozen storage. Manheim, PA - Potato chip manufacturer, dry 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 corporation. 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.
ITEM 3. LEGAL PROCEEDINGS On February 1, 1995, Michael A. Warehime, J. William Warehime and Elizabeth W. Stick, three Class B shareholders of the Corporation, filed a complaint in the Court of Common Pleas of York County, Pennsylvania against the Corporation and John A. Warehime (Chairman of the Corporation), in his capacity as voting trustee of two voting trusts entitling him to vote approximately 52% of the Class B common stock. The Court has dismissed various claims and parties in the lawsuit and the only remaining parties are Michael A. Warehime as plaintiff and John A. Warehime as defendant. The only remaining claims are (i) a claim for breach of fiduciary duty based on exercise of powers beyond those granted by certain voting trust agreements; (ii) a claim for breach of fiduciary duty for use of the voting trusts in a manner harmful to their beneficiaries, (iii) a count requesting removal of John A. Warehime as the voting trustee of the voting trusts. On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Corporation's directors and the estate of a former director in the Court of Common Pleas of York County, Pennsylvania (the complaint). The suit also names the Corporation as a nominal defendant. The suit sought various forms of relief including, but not limited to, rescission of the board's April 28, 1995 approval of John A. Warehime's 1995 Employment Agreement and the board's February 10, 1995 adjustment of 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 Corporation from the attorney for those Class A common stockholders containing similar allegations and the allegations raised by the Class A common stockholders were investigated by a special independent committee of the Board of Directors and found to be without merit. On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain Class A shareholders filed motions for a preliminary injunction against the Corporation, John A. Warehime, in his capacity as voting trustee, and all certain directors of the Corporation in the Court of Common Pleas of York County, Pennsylvania against a proposal of the Board of Directors to amend and restate the Corporation's Articles of Incorporation in the manner hereafter described. 11 On February 13, 1997, the Board of Directors proposed an amendment and restatement of the Corporation's Articles of Incorporation (the "Amended and Restated Articles") which provides that if all of the following Class B shareholders (or their Estates upon the death of such stockholders), Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime, and Elizabeth W. Stick (all members of the Warehime family), do not agree in writing to the composition of the Company's Board of Directors or other important matters specified below on or after the 1998 annual shareholders meeting, the trustees of the Corporation's 401(k) Savings Plan (or a similar employee benefit plan), acting as fiduciaries for the employees who participate in the Plan, and the Class A shareholders may become entitled to vote in the manner described in the Amended and Restated Articles. The Amended and Restated Articles created a Series C Convertible Preferred Stock, which, in case of a dispute among the abovementioned members of the Warehime family on Board of Directors composition or other important matters, would be entitled to 35 votes per share (a total of 350,000 votes based on 10,000 shares of Series C Convertible Preferred Stock issued to and held by the Trustees of the Company's 401(k) Savings Plan); if the Series C Convertible Preferred Stock were entitled to vote because of such dispute, each share of Class A Common Stock would be entitled to 1/10th of a vote per share. 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 Corporation, meet any of the following criteria: (i) disinterested directors as defined in Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are not "interested" directors as defined in Section 1.23 of The American Law Institute "Principles of Corporate Governance: Analysis and Recommendations" (1994); or (iii) persons who qualify as members of the Audit Committee pursuant to Section 303.00 of the New York Stock Exchange's Listed Corporation Manual. Michael Warehime filed an appeal from the denial of his motion to enjoin the previously Amended and Restated Articles and the Amendment thereto. On December 2, 1998, the Pennsylvania Superior Court, in a two to one decision, held that although John Warehime had acted in good faith and in the best interest of the Corporation in voting for the Amended and Restated Articles as trustee of the Warehime voting trust, Mr. Warehime nevertheless breached his fiduciary duty to the beneficiaries of the Warehime voting trust in so voting. On December 16, 1998, Michael Warehime filed a motion for clarification requesting that the Pennsylvania Superior Court issue an order invalidating the Amended and Restated Articles and that motion was denied in banc. On March 10, 1999, John 12 Warehime and the other directors filed a petition for allowance of appeal with the Pennsylvania Supreme Court and no decision has as yet been rendered. On August 13, 1999, Michael Warehime filed a complaint in equity in the Court of Common Pleas of York County, Pennsylvania, naming as defendants Arthur S. Schaier, Cyril T. Noel, Clayton J. Rohrbaugh, Jr., John A. Warehime, and the Company. The complaint seeks a court order declaring that the September 1999 election for the board of directors of the Company be conducted in accordance with the Articles of Incorporation of the Company as they existed prior to June 25, 1997, an order declaring that the Series C Convertible Preferred Stock cannot be voted, and an order that the following candidates for the board of directors of the Company proposed by Michael Warehime. Sally Yelland, Elizabeth Stick and J. William Warehime be accepted by the Company and listed on the ballot to be distributed at the annual meeting of shareholders of the Company to be held on September 16,1999: Michael Warehime, Daniel Meckley, Michael Stick, Sonny Bowman, and John Denton. The basis for the complaint was the December 2, 1998 decision of the Pennsylvania Superior Court, which is currently on appeal to the Pennsylvania Supreme Court, which held that John A. Warehime had breached his fiduciary duties in voting for the Amended and Restated Articles as trustee of the Warehime voting trust. The complaint also requested that John A. Warehime pay all costs incurred by the Company in response to the suit as well as award Michael Warehime costs and fees and grant such other relief as equity and justice require. The Corporation is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations or liquidity. ITEM 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 Corporation's Annual Report to Shareholders for the year ended May 30, 1999 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 Corporation's Annual Report to Shareholders for the year ended May 30, 1999 is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation's Annual Report to Shareholders for the year ended May 30, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference from the section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations in the Corporation's Annual Report to Shareholders for the year ended May 30, 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13 Financial statements for Hanover Foods Corporation and Subsidiaries are contained on pages 9 through 33 of the Corporation's Annual Report to Shareholders for the year ended May 30, 1999, and quarterly financial data is contained on page 34 of the Corporation's annual report to shareholders for the year ended May 30, 1999 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 Corporation's 1999 Proxy Statement which was previously filed with SEC on August 16, 1999. (b) EXECUTIVE OFFICERS OF THE CORPORATION WHO ARE NOT ALSO DIRECTORS (AS OF AUGUST 10, 1999)
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: 50 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: 53 (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; 1996-Present Manager of Corporate Systems-1986-1990. Age: 56 EDWARD L. BOECKEL, JR. Treasurer-July 1997-Present; Banking & Treasurer Insurance Manager-1995-1997; Vice 1997-Present President CoreStates Bank-1992-1995. Age: 48
(d) FAMILY RELATIONSHIPS OF DIRECTORS AND EXECUTIVE OFFICERS None. (h) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 14 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 30, 1999, all filing requirements applicable to its directors and officers were complied with in a timely fashion. 15 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's 1999 Proxy Statement which was previously filed with SEC on August 16, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN SECURITY HOLDERS Incorporated by reference from the Corporation's 1999 Proxy Statement which was previously filed with SEC on August 16 , 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Corporation's 1999 Proxy Statement which was previously filed with SEC on August 16, 1999. 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 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 June 24, 1998 it is incorporated by reference to the form 10-K filed on September 1, 1998, wherein such Exhibit is designated as 3 (a). 3(b) Registrant's Amended and Restated Articles of Incorporation is incorporated by reference to the form 10-K filed on September 1, 1998, wherein such Exhibit is designated as 3(b). 3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of Incorporation is incorporated by reference to the form 10-K filed on September 1, 1998, wherein such Exhibit is designated as 3(c). Registrants Amended and Restated By-laws enacted January 15,
16
Number Description ------ ----------- 3(d) 1999 is attached as Exhibit 3(d). 4(a) Note Agreement dated as of December 1, 1991, between the Corporation and Allstate Life Insurance Corporation, 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 Corporation (the "Note Agreement") and Waiver of Compliance with Section 5.9 of the Note Agreement is incorporated herein by reference to the Form 10-K filed on July 3, 1995, wherein such Exhibit is designated as 4(b). 4(c) June 24, 1996 waiver to covenants in the December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is incorporated herein by reference to the Form 10-K filed on July 2, 1996, wherein such Exhibit is designated as 4(c). 4(d) July 1, 1996 Second Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is incorporated by reference to the Form 10-K filed on August 27, 1997, wherein such Exhibit is designated as 4(d). 4(e) August 1, 1997 Third Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is attached as Exhibit 4(e). 4(f) March 15, 1999 Fourth Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance 4(g) Corporation (the "Note Agreement") is attached as Exhibit 4(f). July 26, 1999 waiver to covenants in the December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is attached as Exhibit 4(g). 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
17
Number Description ------ ----------- 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 the Form 10-K filed July 3, 1995, wherein such Exhibit is designated as 10(f). 10(g) June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed July 3, 1995, wherein such Exhibit is designated as 10(g). * 10(h) April 4, 1994 Lease Agreement between John A. and Patricia M. Warehime and Hanover Foods Corporation is incorporated herein by reference to the Form 10-K filed July 2, 1996, wherein such Exhibit is designated as 10(h). 10(i) July 27, 1995 Installment Sales Agreement for the purchase of 5,148 shares of Hanover Foods Class B Voting Common Stock
18
Number Description ------ ----------- from Cyril T. Noel, individually, and Cyril T. Noel and Frances L. Noel, jointly, is incorporated herein by reference to the Form 10-K filed July 2, 1996, wherein such Exhibit is designated as 10(i). 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 the Form 10-K filed July 2, 1996, wherein such Exhibit is designated as 10(j). 10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation and Gary T. Knisely is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(k). * 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(l). * 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(m).* 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(n). * 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is incorporated herein by reference to the Form 10-K filed on August 27, 1997, wherein such Exhibit is designated 10(o). * 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is incorporated herein by reference to the Form 10-K filed on August 27, 1997, wherein such Exhibit is designated as 10(p). * 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q). * 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 Corporation's Annual Report to Shareholders for the year ended May 30, 1999.
19
Number Description ------ ----------- Independent Auditors' Report Consolidated Statements of Earnings for the Years Ended May 30, 1999, May 31, 1998, and June 1, 1997. Consolidated Balance Sheets for the Years Ended May 30, 1999 and May 31, 1998. Consolidated Statements of Comprehensive Income for the Years Ended May 30, 1999, May 31, 1998, and June 1, 1997. Consolidated Statements of Cash Flows for the Years Ended May 30, 1999, May 31, 1998, and June 1, 1997. Consolidated Statements of Stockholders' Equity for the Years Ended May 30, 1999, May 31, 1998, and June 1, 1997. Notes to Consolidated Financial Statements for the Years Ended May 30, 1999 and May 31, 1998. 21 A list setting forth subsidiaries of the Registrant is attached as Exhibit 21. 27 The Financial Data Schedule is attached as Exhibit 27.
* Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K None. 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 30, 1999. HANOVER FOODS CORPORATION By: /s/ John A. Warehime ----------------------- JOHN A. WAREHIME Chairman, President and Chief Executive Officer 20 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 30, 1999 By: /s/ John A. Warehime By: /s/ Clayton J. Rohrbach, Jr. ------------------------------- ---------------------------- John A. Warehime Clayton J. Rohrbach, Jr. Chairman, President, Director Chief Executive Officer and Director By: /s/ Gary T. Knisely By: /s/ James G. Sturgill ------------------------------- ---------------------------- Gary T. Knisely James G. Sturgill Executive Vice President Director (Chief Financial Officer) By: /s/ Pietro D. Giraffa, Jr. By: /s/ James A. Washburn ------------------------------- ---------------------------- Pietro D. Giraffa, Jr. James A. Washburn Vice President - Controller Director (Chief Accounting Officer) By: /s/ Arthur S. Schaier By: /s/ Cyril T. Noel ------------------------------- ---------------------------- Arthur S. Schaier Cyril T. Noel Director Director By: /s/ T. Edward Lippy ------------------------------- T. Edward Lippy Director 21 HANOVER FOODS CORPORATION EXHIBIT INDEX
Number Description - ------ ----------- 3(a) Registrant's Amended and Restated By-laws enacted July 24, 1998 are incorporated by reference to the Form 10-K filed September 1, 1998, wherein such Exhibit is designated 3(a). 3(b) Registrant's Amended and Restated Articles of Incorporation are incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 3(b). 3(c) Amendment No. 1 to Registrant's Amended and Restated Articles of Incorporation is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 3(c). 3(d) Registrant's Amended and Restated By-laws enacted January 15, 1999 are attached as Exhibit 3(d). 4(a) Note Agreement dated as of December 1, 1991, between the Corporation and Allstate Life Insurance Corporation, 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 the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 4(a). 4(b) June 20, 1995 First Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") and Waiver of Compliance with Section 5.9 of the Note Agreement is incorporated herein by reference to the Form 10-K filed July 3, 1995, wherein such Exhibit is designated 4(b). 4(c) June 24, 1996 waiver to covenants in the December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is incorporated herein by reference to the Form 10-K filed July 2, 1996, wherein such Exhibit is designated 4(c). 4(d) July 1, 1996 Second Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is incorporated herein by reference to the Form 10-K filed August 27, 1998, wherein such Exhibit designated 4(d). 4(e) August 1, 1997 Third Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is attached as Exhibit 4(e).
-22- 22
Number Description - ------ ----------- 4(f) March 15, 1999 Fourth Amendment to December 1, 1991 Note Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is attached as Exhibit 4(f). July 26, 1999 waiver to covenants in the December 1, 1991 Note 4(g) Agreement between the Corporation and Allstate Life Insurance Corporation (the "Note Agreement") is attached as Exhibit 4(g). 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). 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 the Form 10-K filed July 3, 1995, wherein such Exhibit is designated 10(f).
-23- 23 10(g) June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed July 3, 1995, wherein such Exhibit is designated 10(g). * 10(h) April 4, 1994 Lease Agreement between John A. and Patricia M. Warehime and Hanover Foods Corporation is incorporated herein by reference to the Form 10-K filed July 2, 1996, wherein such Exhibit is designated 10(t). 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 the Form 10-K filed July 2, 1996, wherein such Exhibit is designated 10(u). 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 the Form 10-K filed July 2, 1996, wherein such Exhibit is designated 10(v). 10(k) January 23, 1997 Employment Agreement between Hanover Foods Corporation and Gary T. Knisely is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(k). * 10(l) February 13, 1997 Amendment No. 1 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(l). * 10(m) August 1, 1997 Amendment No. 2 to June 12, 1995 Employment Agreement between Hanover Foods Corporation and John A. Warehime is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(m). * 10(n) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Clement A. Calabrese is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(n). * 10(o) May 21, 1997 Senior Executive Agreement between Hanover Foods Corporation and Alan T. Young is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(o). * 10(p) April 22, 1997 John R. Miller, Jr. Voting Agreement is incorporated herein by reference to the Form 10-K filed August 27, 1997, wherein such Exhibit is designated 10(p). * 10(q) Annual Top Management Cash Bonus Program is attached as Exhibit 10(q). *
-24- 24 -25- 25 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 Corporation's Annual Report to Shareholders for the year ended May 30, 1999 Independent Auditors' Report Consolidated Statements of Earnings for the Years Ended May 30, 1999, May 31, 1998 and June 1, 1997. Consolidated Balance Sheets for the Years Ended May 30, 1999, May 31, 1998 and June 1, 1997. Consolidated Statements of Comprehensive Income for the Years Ended May 30, 1999, May 31, 1998 and June 1, 1997. Consolidated Statements of Cash Flows for the Years Ended May 30, 1999, May 31, 1998 and June 1, 1997. Consolidated Statements of Stockholders' Equity for the Years Ended May 30, 1999, May 31, 1998 and June 1, 1997. Notes to Consolidated Financial Statements for the Years Ended May 30, 1999, 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.
* Management contract or compensatory plan or arrangement. -26- EX-3.(D) 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3(d) HANOVER FOODS CORPORATION Amended and Restated Bylaws These Bylaws are supplemental to the Pennsylvania Business Corporation Law of 1988, as the same shall from time to time be in effect. ARTICLE I. GENERAL Section 1 Office The principal office of Hanover Foods Corporation (the "Corporation") shall be in Penn Township, York County, Pennsylvania. Section 2 Seal The Corporation 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 Corporation shall end with the close of business on Sunday nearest May 3lst. ARTICLE II. SHAREHOLDERS Section 1 Place of Shareholders' Meetings. All meetings of the shareholders shall be held at such place or places, inside or outside the Commonwealth of Pennsylvania, as determined by the Board of Directors from time to time. Section 2 Annual Shareholders' Meeting. The annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before such meeting shall be held at such time and place as determined by the Board of Directors. Any business which is a proper subject for shareholder action may be transacted at the annual meeting, irrespective of whether the notice of said meeting contains any reference thereto, except as otherwise provided by applicable law. -27- 2 Section 3 Special Meetings of Shareholders. Special meetings of the shareholders may be called at any time by the Board of Directors or the Chairman or the Chief Executive Officer or as provided by applicable law. Section 4 Conduct of Shareholders' Meetings. The Chairman shall preside at all shareholders' meetings. In the absence of the Chairman, the Chief Executive Officer shall preside, or in his absence, the Secretary shall preside or, in his absence, any officer designated by the Board of Directors shall preside. The officer presiding over the shareholders' meeting may establish such rules and regulations for the conduct of the meeting as he or she may deem to be reasonably necessary or desirable for the orderly and expeditious conduct of the meeting. Unless the officer presiding over the shareholders' meeting otherwise requires, shareholders need not vote by ballot on any questions. Section 5 Proposals by Shareholders. Any proposal by a shareholder which is to be submitted for consideration by shareholders at such meeting must be submitted by June 1 of the year in which the annual shareholders meeting is to be held All late proposals shall be disregarded by the Chairman of the meeting. Notwithstanding the foregoing, even if a shareholder proposal is submitted before the June 1 deadline, the Chairman of the annual meeting shall not be required to submit the proposal to the shareholders if the Chairman is advised by legal counsel that such proposal is not required to be submitted to shareholders under the Pennsylvania Business Corporation Law of 1988 (which, as amended from time to time, is hereafter called the "BCL"). ARTICLE III. DIRECTORS Section 1 Management by Board of Directors. The business and affairs of the Corporation shall be managed by its Board of Directors who need not be residents of the Commonwealth of Pennsylvania or shareholders of the Corporation. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, regulation, the Amended and Restated Articles of Incorporation (the "Articles") or these Amended and Restated Bylaws (the "Bylaws") directed or required to be exercised or done by the shareholders. -28- 3 Section 2 Nomination for Directors. 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 in writing not later than June I 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: (1) The name and address of each proposed nominee; (2) The qualifications of each proposed nominee; (3) All other information required by Schedule 14A adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934; and (4) Written confirmation executed by the proposed nominee that such proposed nominee has agreed to serve if elected. 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 3 Number and Classification of Directors. The Board of Directors shall consist of not less than seven (7) and not more than fifteen (15) directors. The Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles or by these Bylaws directed or required to be exercised or done by the shareholders. The Board of Directors shall be divided into four (4) classes, as described in the Articles. Section 4 Resignations of Directors. Any director may resign at any time. Such resignation shall be in writing, but the acceptance thereof shall not be necessary to make it effective. Section 5 Compensation of Directors. No director shall be entitled to any salary, as such, but the Board of Directors may fix, from time to time, a reasonable annual fee for acting, as a director and a reasonable fee to be paid each director for his or her services in attending meetings of the Board or committees thereof. -29- 4 Section 6 Regular Meetings. Regular meetings of the Board of Directors shall be held on such day, at such hour, and at such place, consistent with applicable law, as the Board shall from time to time designate or as may be designated in any notice from the Secretary calling the meeting. The Board of Directors shall meet for reorganization at the first regular meeting following the annual meetings of shareholders at which the directors are elected. Notice need not be given of regular meetings of the Board of Directors which are held at the time and place designated by the Board of Directors. If a regular meeting is not to be held at the time and place designated by the Board of Directors, notice of such meeting, which need not specify the business to be transacted thereat and which may be either oral or written, shall be given by the Secretary to each member of the Board at least twenty-four hours before the time of the meeting. Section 7 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman and shall be called whenever a majority of the members of the Board so request in writing. A special meeting of the Board of Directors shall be deemed to be any meeting other than the regular meeting of the Board of Directors. Notice of the time and place of every special meeting, which need not specify the business to be transacted thereat and which may be either oral or written, shall be given by the Secretary to each member of the Board at least twenty-four hours before the time of such meeting. Section 8 Committees. The following committees of the Board of Directors may be established by the Board of Directors in addition to any other committee the Board of Directors may in its discretion establish: (a) Audit Committee; and (b) Compensation Committee. Section 9 Audit Committee. The Audit Committee shall consist of at least two (2) directors, a majority of which shall be independent. Meetings of the Audit Committee may be called at any time by the Chairman of the Audit Committee and shall be called whenever two or more members of the Committee so request in writing. The Audit Committee shall have the following authority, powers and responsibilities: (a) To recommend each year to the Board the independent accountants to audit the annual financial statements of the Corporation and its consolidated subsidiaries and to review the fees charged for such audits or for special engagements given to such accountants; -30- 5 (b) To meet with the independent accountants, Chairman, Chief Executive Officer, Chief Financial Officer and any other Corporation executives as the Audit Committee deems appropriate at such times as the Audit Committee shall determine to review: (i) the scope of the audit plan; (ii) the Corporation's financial statements; (iii) the results of external and internal audits; (iv) the effectiveness of the Corporation's system of internal controls; (v) any limitations imposed by Corporation personnel on the independent public accountants; and (vi) such other matters as the Audit Committee shall deem appropriate; (c) To report to the entire Board at such time as the Audit Committee shall determine; and (d) To take such other action as the Audit Committee shall deem necessary or appropriate to assure that the interests of the Corporation are adequately protected. Section 10 Compensation Committee. The Compensation Committee shall consist of at least two (2) directors. Meetings of the Committee may be called at any time by the Chairman of the Committee and shall be called whenever two or more members of the Committee so request in- writing. The Committee shall review compensation of executive officers and make recommendations to the Board of Directors regarding executive compensation and shall have such other duties as the Board of Directors prescribes. Section 11 Appointment of Committee Members. The Board of Directors shall appoint or shall establish a method of appointing the members of the Audit and Compensation Committees and of any other committee established by the Board of Directors, and the Chairman of each such committee, to serve until the next annual meeting of shareholders. Section 12 Absentee Participation in Meetings. A director may participate in a meeting of the Board of Directors or a meeting of a committee established by the Board of Directors by use of a conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other. -31- 6 ARTICLE III. OFFICERS Section 1 Officers. The officers of the Corporation shall be a Chairman, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers and assistant officers as the Board of Directors may from time to time deem advisable. Except for the Chairman, Chief Executive Officer, President, Secretary and Treasurer, the Board may refrain from filling any of the said offices at any time and from time to time. The same individual may hold any two or more offices. The following officers shall be elected by the Board of Directors at the time, in the manner and for such terms as the Board of Directors from time to time shall determine: Chairman, Chief Executive Officer, President, Secretary, and Treasurer. The Chairman may appoint such other officers and assistant officers as he may deem advisable provided such officers or assistant officers have a title no higher than Vice President, who shall hold office for such periods as the Chairman shall determine. Any officer may be removed at any time, with or without cause, and regardless of the term for which such officer was elected. Section 2 Chairman. The Chairman shall be a member of the Board of Directors and shall preside at the meetings of the Board and shareholders and perform such other duties as may be prescribed by the Board of Directors. Section 3 Chief Executive Officer. The Chief Executive Officer shall have general supervision of all of the departments and business of the Corporation; he or she shall prescribe the duties of the other officers and employees and see to the proper performance thereof. The Chief Executive Officer shall be responsible for having all orders and resolutions of the Board of Directors carried into effect. The Chief Executive Officer shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other officer or agent of the Corporation by the Board of Directors or by the Chief Executive Officer. The Chief Executive Officer shall be a member of the Board of Directors. In the absence or disability of the Chairman or his or her refusal to act, the Chief Executive Officer shall preside at meetings of the Board. In general, the Chief Executive Officer shall perform all the duties and exercise all the powers and authorities incident to his or her office or as prescribed by the Board of Directors. Section 4 President. The President shall perform such duties as are incident to his or her office or prescribed by the Board of Directors or the Chief Executive Officer. In the event of the absence or disability of the Chief Executive Officer or his or her refusal to act, the President shall perform the duties and have the powers and authorities of the Chief Executive Officer. The President shall execute on behalf of the Corporation and may affix or cause to be affixed a seal to all authorized documents and instruments requiring such execution, except to the extent that signing and execution thereof shall have been delegated to some other officer or agent of the Corporation by the Board of Directors or the President. Section 5 Vice Presidents. The Vice Presidents shall perform such duties, do such acts and be subject to such supervision as may be prescribed by the Board of Directors, the Chief Executive Officer and President. In the event of the absence or disability of the Chief Executive Officer and the President or their refusal to act, the Vice Presidents, in the order of their rank, and within the same rank in the order of their seniority, shall perform the duties and have the powers and authorities of the Chief Executive Officer and President, except to the extent inconsistent with applicable law. -32- 7 Section 6 Secretary. The Secretary shall act under the supervision of the Chief Executive Officer and President or such other officer as the Chief Executive Officer and President may designate. Unless a designation to the contrary is made at a meeting, the Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all of the proceedings of such meetings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required by these Bylaws or otherwise. The Secretary shall keep a seal of the Corporation, and, when authorized by the Board of Directors, Chief Executive Officer and President, cause the seal to be affixed to any documents and instruments requiring it. The Secretary shall perform such other duties as may be prescribed by the Board of Directors, Chief Executive Officer and President or such other supervising officer as the Chief Executive Officer and President may designate. Section 7 Treasurer. The Treasurer shall act under the supervision of the Chief Executive Officer and President or such other officer as the Chief Executive Officer and President may designate. The Treasurer shall have custody of the Corporation's funds and such other duties as may be prescribed by the Board of Directors, Chief Executive Officer and President or such other supervising officer as the Chief Executive Officer and President may designate. Section 8 Assistant Officers. Unless otherwise provided by the Board of Directors, each assistant officer shall perform such duties as shall be prescribed by the Board of Directors, Chief Executive Officer and President or the officer to whom he or she is an assistant. In the event of the absence or disability of an officer or his or her refusal to act, his or her assistant officers shall, in the order of their rank, and within the same rank in the order of their seniority, have the powers and authorities of such officer. Section 9 General Powers. The officers are authorized to do and perform such corporate acts as are necessary in the carrying on of the business of the Corporation, subject always to the directions of the Board of Directors. ARTICLE IV. PERSONAL LIABILITY AND INDEMNIFICATION Section 1 Personal Liability of Directors. (a) A director of this Corporation shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his office under Chapter 17, Subchapter B of the BCL; and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness (b) This Section I of Article IV shall not apply to a director's liability for monetary damages to the extent prohibited by Section 1713(b) of the BCL. -33- 8 Section 2 Mandatory Indemnification. The Corporation shall, to the fullest extent permitted by applicable law, indemnify its directors and officers who were or are a party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (whether or not such action, suit or proceeding arises or arose by or in the right of the Corporation or other entity) by reason of the fact that such director or officer is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, general partner, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), against expenses (including, but not limited to, reasonable attorneys' and investigation fees and costs), judgments, fines (including excise taxes assessed on a person with respect to any employee benefit plan) and amounts paid in settlement actually and reasonably incurred by such director or officer in connection with such action, suit or proceeding, except as otherwise provided in Section 4 of Article IV hereof. Persons who were directors or officers of the Corporation prior to the date this Section is approved by members of the Corporation, but who do not hold such office on or after such date, shall not be covered by this Section 2 of Article IV. A director or officer of the Corporation entitled to indemnification under this Section 2 of Article IV is hereafter called a "person covered by Section 2 of Article IV hereof'. Section 3 Expenses. Expenses incurred by a person covered by Section 2 of Article IV hereof in defending a threatened, pending or completed civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation, except as otherwise provided in Section 4 of Article IV. Section 4 Exceptions. No indemnification under Section 2 of Article IV or advancement or reimbursement of expenses under Section 3 of Article IV shall be provided to a person covered by Section 2 of Article IV hereof: (a) with respect to expenses or the payment of profits arising from the purchase or sale of securities of the Corporation in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended; (b) if a final unappealable judgment or award establishes that such director or officer engaged in intentional misconduct or a transaction from which the director or officer derived an improper personal benefit; (c) 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, such person by an insurance carrier under a policy of officers' and directors' liability insurance whose premiums are paid for by the Corporation or by an individual or entity other than such director or officer; and (d) for amounts paid in settlement of any threatened, pending or completed action, suit or proceeding without the written consent of the Corporation, which written consent shall not be unreasonably withheld. The Board of Directors of the Corporation is hereby authorized, at any time by resolution, to add to the above list of exceptions from the right of indemnification under Section 2 of Article IV or advancement or reimbursement of expenses under Section 3 of Article IV, but any such additional exception shall not apply with respect to any event, act or omission which occurred prior to the date that the Board of Directors in fact adopts such resolution. Any such additional exception may, at any time after its adoption, be amended, supplemented, waived or terminated by further resolution of the Board of Directors of the Corporation. Section 5 Continuation of Rights. The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Article IV shall continue as to a person who has ceased to be a member, director or officer of the Corporation, and shall inure to the benefit of the heirs, executors and administrators of such person. -34- 9 Section 6 General Provisions. (a) The term "to the fullest extent permitted by applicable law", as used in this Article IV shall mean the maximum extent permitted by public policy, common law or statute. Any person covered by Section 2 of Article IV hereof may, to the fullest extent permitted by applicable law, elect to have the right to indemnification or to advancement or reimbursement of expenses, interpreted, at such person's option; (i) on the basis of the applicable law on the date this Section was approved by the shareholders; or (ii) on the basis of the applicable law in effect at the time of the occurrence of the event, act or omission giving rise to the action, suit or proceeding, or (iii) on the basis of the applicable law in effect at the time indemnification is sought. (b) The right of a person covered by Section 2 of Article IV hereof to be indemnified or to receive an advancement or reimbursement of expenses pursuant to Section 3 of Article IV; (i) may be enforced as a contract right pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the Corporation and such person; (ii) to the fullest extent permitted by applicable law, is intended to be retroactive and shall be available with respect to events, acts or omissions occurring prior to the adoption hereof; and (iii) shall continue to exist after the rescission or restrictive modification (as determined by such person) of any provision of this Article IV with respect to events, acts and omissions occurring before such rescission or restrictive modification is adopted. (c) If a request for indemnification or for the advancement or reimbursement of expenses pursuant hereto is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation together with all supporting information reasonably requested by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim (plus interest at the prime rate announced from time to time by the Corporation's primary lending bank) and, if successful in whole or in part, the claimant shall be entitled also to be paid the expenses (including, but not limited to, attorneys' and investigation fees and costs) of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or the advancement or reimbursement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the claimant is not so entitled. (d) The indemnification and advancement or reimbursement of expenses provided by, or granted pursuant to, this Article IV shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement or reimbursement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. (e) Nothing contained in this Article IV shall be construed to limit the rights and powers the Corporation possesses under Chapter 17, Subchapter D of the BCL, 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. (f) The provisions of this Article IV may, at any time (and whether before or after there is any basis for a claim for indemnification or for the advancement or reimbursement of expenses pursuant hereto), be amended, supplemented, waived, or terminated, in whole or in part, with respect to any person covered by Section 2 of Article IV hereof by a written agreement signed by the Corporation and such person. (g) The Corporation shall have the right to appoint the attorney for a person covered by Section 2 of Article IV hereof, provided such appointment is not unreasonable under the circumstances. -35- 10 Section 7 Optional Indemnification. The Corporation may, to the fullest extent permitted by applicable law, indemnify, and advance or reimburse expenses for, persons in all situations other than that covered by Section 2 of Article IV. ARTICLE V. SHARES OF CAPITAL STOCK Section 1 Authority to Sign Share Certificate. Every share certificate of the Corporation shall be signed by the Chairman, Chief Executive Officer or the President and by the Secretary or one of the Assistant Secretaries. If the certificate is signed by a transfer agent or registrar, the signature of any officer of the Corporation on the certificate may be facsimile, engraved or printed. Section 2 Lost or Destroyed Certificates. Any person claiming a share certificate to be lost, destroyed or wrongfully taken shall receive a replacement certificate if such shareholder: (a) requests such replacement certificate before the Corporation has notice that the shares have been acquired by a bona fide purchaser; and (b) satisfies any other reasonable requirements as may be fixed by the Board of Directors. ARTICLE VI. GENERAL Section 1 Record Date. The Board of Directors may fix any time prior to the date of any meeting of shareholders as a record date for the determination of shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety (90) days prior to the date of the meeting of shareholders. The Board of Directors may (without limiting the right of the Board of Directors to establish a record date for other purposes) fix any time whatsoever (whether or not the same is more than ninety (90) days) prior to the date for the payment of any dividend, or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. Section 2 Emergency Bylaws. In the event of any emergency resulting from an attack on the United States, a nuclear disaster or another catastrophe as a result of which a quorum cannot be readily assembled and during the continuance of such emergency, the following Bylaw provisions shall be in effect, notwithstanding any other provisions of these Bylaws. (a) A meeting of the Board of Directors or of any committee thereof may be called by any officer or director upon one hour's notice to all persons entitled to notice whom, in the sole judgment of the notifier, it is feasible to notify; (b) The director or directors in attendance at the meeting of the Board of Directors or of any committee thereof shall constitute a quorum; and -36- 11 (c) These Bylaws may be amended or repealed, in whole or in part, by a majority vote of the directors attending any meeting of the Board of Directors, provided such amendment or repeal shall only be effective for the duration of such emergency. Section 3 Severability. If any provision of these Bylaws is illegal or unenforceable as such, such illegality or unenforceability shall not affect any other provision of these Bylaws and such other provisions shall continue in full force and effect. ARTICLE VII. AMENDMENTS Section 1 Amendments. These Bylaws may be amended or repealed, in whole or In part, by the affirmative vote of a majority of the members of the Board of Directors at any regular or special meeting; subject, however, to the power of the shareholders to amend or repeal the bylaws at any annual or special meeting duly convened after notice of that purpose. Section 2 Recording Amendments. The text of all amendments to these Bylaws shall be attached hereto, and a notation of the date of its adoption and a notation of whether it was adopted by the directors or the shareholders shall be made in Section 2 of Article VIH hereof. ARTICLE VIII. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS THERETO Section 1 Adoption and Effective Date. These Bylaws have been adopted and approved by the Board of Directors of the Corporation on January 15, 1999. These Bylaws shall be effective as of January 15, 1999. Section 2 Amendments to Bylaws. Section Amended Date Amended Adopted B -37- EX-4.(E) 3 THIRD AMENDMENT TO NOTE AGREEMENT 1 Exhibit 4(e) HANOVER FOODS CORPORATION THIRD AMENDMENT Dated as of August 1, 1997 To NOTE AGREEMENT Dated as of December 1, 1991 Re: $25,000,000 8.74% Senior Notes, Due March 15, 2007 -38- 2 THIRD AMENDMENT TO NOTE AGREEMENT THIS THIRD AMENDMENT to Note Agreement dated as of August 1, 1997 (the or this Third Amendment"), is entered into between Hanover Foods Corporation, a Pennsylvania corporation (the "Corporation"), and Allstate Life Insurance Company (the "Purchaser"). RECITALS: A. The Corporation and the Purchaser have heretofore entered into the Note Agreement dated as of December 1, 1991 (the "Original Note Agreement"), the First Amendment to the Note Agreement dated as of June 20, 1995 (the "First Amendment" and the Second Amendment dated as of July 1, 1996 (the "Second Amendment") (the Original Note Agreement, as amended by the First Amendment and the Second Amendment, is hereinafter referred to as the "Note Agreement"). B. The Corporation and the Purchaser now desire to amend certain of the terms of the Note Agreement in order to reduce the rate of interest that the Corporation must pay on the Notes. C. Capitalized terms used herein shall have the respective meanings ascribed thereto in the Note Agreement unless herein defined or the context shall otherwise require. D. All requirements of law have been fully complied with and all other acts and things necessary to make this Third Amendment a valid, legal and binding instrument according to its terms for the purposes herein expressed have been done or performed. NOW, THEREFORE, the Corporation and the Purchaser, in consideration of good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, do hereby agree as follows: SECTION 1 AMENDMENT. Section 1.1 From and after January 1, 1996 through and including March 15, 1997 interest on the Notes shall accrue at a rate per annum equal to the rate set forth in the Notes and the Note Agreement plus 0.50%. From and after March 16, 1997 interest on the Notes shall accrue at a rate per annum equal to the rate set forth in the Notes and the Note Agreement. SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. Section 2.1 To induce the Purchaser to execute and deliver this Third Amendment, the Corporation represents and warrants to the Purchaser (which representations shall survive the execution and deliver of this Third Amendment) that: (a) this Third Amendment has been duly authorized, executed and delivered by it and this Third Amendment constitutes the legal, valid and binding obligation, contract and agreement of the Corporation enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Note Agreement, as amended by this Third Amendment, constitutes the legal, valid and binding obligation, contract and agreement of the Corporation enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; -39- 3 (c) the execution, delivery and performance by the Corporation of this Third Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, or (B) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 2.1(c); and (d) as of the date hereof and after giving effect to this Third Amendment, no Default or Event of Default has occurred which is continuing. SECTION 3 CONDITIONS TO EFFECTIVENESS OF THIRD AMENDMENT. Section 3.1 This Third Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Third Amendment, duly executed by the Corporation and the Purchaser, shall have been delivered to the Purchaser; and (b) the representations and warranties of the Corporation set forth in Section 2 hereof shall be true and correct on and with respect to the date hereof. Upon receipt of all of the foregoing, this Third Amendment shall become effective. SECTION 4 PAYMENT OF PURCHASER'S COUNSEL FEES AND EXPENSES. Section 4.1 The Corporation agrees to pay upon demand, the reasonable fees and expenses of Chapman and Cutler, counsel to the Purchaser, in connection with the negotiation, preparation, approval, execution and delivery of this Third Amendment. SECTION 5 MISCELLANEOUS. Section 5.1 Except as modified and expressly amended by this Third Amendment, the Note Agreement is in all respects ratified, confirmed and approved and all of the terms, provisions, and conditions thereof, shall be and remain in full force and effect. Section 5.2 Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Third Amendment may refer to the Note Agreement without making specific reference to this Third Amendment but nevertheless all such references shall include this Third Amendment unless the context otherwise requires. Section 5.3 This Third Amendment shall be governed by and construed in accordance with the laws of the State of Pennsylvania. Section 5.4 This Third Amendment may be executed and delivered in any number of counterparts, each of such counterparts constituting an original, but all together only one Third Amendment. -40- 4 IN WITNESS WHEREOF, the Corporation and the Purchaser have caused this instrument to be executed, all as of the day and year first above written. HANOVER FOODS CORPORATION By /s/ Illegible ------------------------------------ Executive Vice President Accepted and Agreed to: ALLSTATE LIFE INSURANCE COMPANY By /s/ Illegible ------------------------------------ By /s/ Illegible ------------------------------------ Authorized Signatories -41- EX-4.(F) 4 FOURTH AMENDMENT RE: NOTE AGREEMENT 1 Exhibit 4(f) HANOVER FOODS CORPORATION FOURTH AMENDMENT RE: NOTE AGREEMENT DATED AS OF DECEMBER 1, 1991 Dated as of March 15, 1999 Allstate Life Insurance Company 3075 Sanders Road, Suite G5A Northbrook, Illinois 60062 Attention: Private Placement Department Ladies and Gentlemen: Reference is made to the Note Agreement, dated as of December 1, 1991 (the "Note Agreement"), pursuant to which Hanover Foods Corporation, a Pennsylvania corporation (the "Corporation"), issued $25,000,000 principal amount of its Senior Notes due March 15, 2007. Capitalized terms used herein and not otherwise defined shall have the meanings given thereto in the Note Agreement. The Corporation requests that you amend certain provisions of the Note Agreement to read as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Corporation agrees with you as follows: SECTION 1 AMENDMENT OF SECTION 5.19 OF THE NOTE AGREEMENT Section 5.19 of the Note Agreement is hereby amended to read as follows: "Section 5.19. Maintenance of bank Facilities. The Corporation will, at all times, keep and maintain committed credit facilities from one or more financial institutions aggregating at any one time not less than $30,000,000, each in form and substance reasonably satisfactory to the holders of the Notes." -42- 2 SECTION 2 REPRESENTATIONS AND WARRANTIES The Corporation hereby represents and warrants that no Default or Event of Default has occurred and is continuing. SECTION 3 MISCELLANEOUS 3.1. Headings. The headings of the sections of this Fourth Amendment are for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof 3.2. Governing Law. This Fourth Amendment shall be governed by and construed in accordance with the laws of the State of Pennsylvania. 3.3. References to Note Agreement. Any and all notices, requests, certificates, and other instruments executed concurrently with or after the execution of the Fourth Amendment may refer to the Note Agreement without making specific reference to this Fourth Amendment, but nevertheless all such references shall be deemed to include this Fourth Amendment unless the context shall otherwise require. 5.4. Ratification. Except to the extent expressly hereby modified or amended, the Note Agreement is in all respects hereby ratified, confirmed, and approved by the parties hereto. 5.5. Effective Date of Fourth Amendment. This Fourth Amendment shall be effective when signed and delivered by the parties hereto. Please signify your consent to this amendment of the Note Agreement between you and the Corporation by signing and returning this Fourth Amendment. HANOVER FOODS CORPORATION By _____________________________________ Its Executive Vice President Accepted as of the date first above written. ALLSTATE LIFE INSURANCE COMPANY By______________________________________ By______________________________________ Authorized Signature -43- EX-4.(G) 5 WAIVER RE: AGREEMENT 1 Exhibit 4(g) HANOVER FOODS CORPORATION WAIVER RE: NOTE AGREEMENT DATED AS OF DECEMBER 1, 1991 Dated as of July 26, 1999 Allstate Life Insurance Company 3075 Sanders Road, Suite G3B Northbrook, Illinois 60062 Attention: Private Placement Department Ladies and Gentlemen: Reference is made to the Note Agreement, dated as of December 1, 1991, as amended (the "Note Agreement"), pursuant to which Hanover Foods Corporation, a Pennsylvania corporation (the "Corporation"), issued $25,000,000 principal amount of its Senior Notes due March 15, 2007. Capitalized terms used herein and not otherwise defined shall have the meanings given thereto in the Note Agreement. The Corporation requests that you waive compliance with a certain provision of the Note Agreement. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Corporation agrees with you as follows: SECTION 1 WAIVER OF COMPLIANCE WITH SECTION 5.6(a) OF THE NOTE AGREEMENT The Corporation is currently in noncompliance with Section 5.6(a) of the Note Agreement that requires the Corporation, at the end of each fiscal year, keep and maintain the ratio of Consolidated Current Assets to Consolidated Current Liabilities at not less than 1.25 to 1.00. As of May 31, 1999, the ratio of Consolidated Current Assets to Consolidated Current Liabilities was 1.15 to 1.00. The Corporation hereby requests that you waive such noncompliance for the fiscal year ending May 31, 1999 and you hereby consent to such waiver. SECTION 2 REPRESENTATIONS AND WARRANTIES The Corporation hereby represents and warrants that, other than the Event of Default specifically waived herein, no Default or Event of Default has occurred and is continuing SECTION 3 MISCELLANEOUS 3.1 Headings. The headings of the sections of this Waiver are for purposes of convenience only and shall not be construed to affect the meaning or construction of any of the provisions hereof. 3.2 Governing Law. This Waiver shall be governed by and construed in accordance with the laws of the State of Pennsylvania. -44- 2 3.3 Ratification. Except to the extent expressly hereby modified or amended, the Note Agreement is in all respects hereby ratified, confirmed, and approved by the parties hereto. 3.4 Effective Date of Waiver. This Waiver shall be effective when signed and delivered by the parties hereto. Please signify your consent to this Waiver of the Note Agreement between you and the Corporation by signing and returning this Waiver. HANOVER FOODS CORPORATION By /s/ Illegible ------------------------------- Executive Vice President Accepted as of the date first above written. ALLSTATE, LIFE INSURANCE COMPANY By /s/ Illegible ------------------------------- By /s/ Illegible ------------------------------- Authorized Signatories -45- EX-10.(Q) 6 ANNUAL TOP MANAGEMENT CASH BONUS PROGRAM 1 EXHIBIT 10(q) ANNUAL TOP MANAGEMENT CASH BONUS PROGRAM The Corporation maintains a cash bonus plan whereby the executive officers 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 Corporation. 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. -46- EX-13 7 MANAGEMENT'S D&A OF FINANCIAL CONDITION 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Corporation's financial performance and could cause the Corporation's actual result for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Corporation 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 Corporation is a vertically integrated processor of vegetable products in one industry segment. The Corporation 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 Corporation has operations in seven plants in Pennsylvania, one plant in Delaware, one plant in New Jersey and two plants in Guatemala. The Corporation and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. The Corporation believes that the cost of such purchases and sales are competitive with alternate sources of supply and markets. See Note 6 to the Consolidated Financial Statements. The Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. Accordingly, the following discussion compares the results of operations for the fiscal year ended May 30, 1999 to the year ended May 31, 1998, and the fiscal year ended May 31, 1998 to the year ended June 1, 1997. Year Ended May 30, 1999 Results Of Operations Compared To Year Ended May 31, 1998 Net Sales Consolidated net sales were $287.2 million for fiscal 1999 compared to $260.6 million for fiscal 1998, an increase of $26.6 million, or 10.2%. The increase in consolidated net sales was comprised of the following volume and sales price components: Year Ended May 30, 1999 Increase (Decrease)
Volume Sales Price Combined Frozen Sales (.5)% (1.1)% (1.6)% Canned Sales 5.3% 2.7% 8.0% Prepared/Snack Foods 4.6% (.8)% 3.8% ---- ---- ---- 9.4% .8% 10.2% ==== ==== ====
The decreased volume in frozen sales was principally due to lower sales levels in the industrial division due to the loss of a major meat customer in October 1998. This decrease in volume was partially offset by an increase in the food service product sales. -47- 2 Canned sales showed an increase in fiscal 1999 due to increased volume and average selling price, resulting from L.K. Bowman, a new acquisition in May 1998, and increased canned sales in Food Service Sales. These two areas accounted for 80% of the increase in canned sales. Prepared foods and snacks showed an increase in sales due to the acquisition of Sunnyside Fresh Foods in January 1998 and the acquisition of Bickel's Potato Chip Co. in October 1998. These two acquisitions accounted for principally all of the increase. Cost of Goods Sold Consolidated cost of goods sold represented 74.8% of consolidated net sales for fiscal 1999 compared to 74.2% for fiscal 1998. The consolidated cost of sales increased $21.5 million to $214.9 million in fiscal 1999 as compared to $193.4 million in fiscal 1998. The additions of our new acquisitions, L. K. Bowman, Sunnyside Fresh Foods, and Bickel's Potato Chip Co., accounted for 100% of the dollar increase. The increase in cost of goods sold as a percentage of net sales for the current fiscal year resulted primarily from the increase in the cost of frozen operations, due to the reduction in industrial volume, partially off-set by the reduction in the cost of operations in canning and prepared foods, as well as the loss of an industrial meat customer, whose sales were at higher than average cost. Selling Expenses Consolidated selling expenses represented 14.7% of consolidated net sales for fiscal 1999 and 14.8% for fiscal 1998. Promotion expense increased $1.3 million to $29.3 million for fiscal 1999 as compared to $28.0 million for fiscal 1998 as the Corporation spent additional promotion dollars to maintain market share in the mid-Atlantic region and to increase market share in the south for its branded business. In addition to promotion expense, the Corporation spent $1,897,000 on advertising, including $1,235,000 relating to coupons, for fiscal 1999, compared to $659,000 in advertising, including $228,000 for coupons for fiscal 1998. 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 Expense Consolidated administrative expenses were $12.6 million in fiscal 1999, or 4.4% of consolidated net sales, as compared to $12.3 million, or 4.7% of consolidated net sales in 1998. The increase in dollars was attributed to increased expenditures in outside consulting services for the Corporation's year 2000 remediation efforts and administrative expenses as a result of the acquisitions of L. K. Bowman, Sunnyside Fresh Foods and Bickel's Potato Chip Co. These increased expenses were partially offset by the reduction in pension plan expense due to the termination of the defined benefit pension plans in fiscal 1998. Interest Expense Consolidated interest expense for fiscal 1999 increased $1,000 to $3,021,000 in fiscal 1999 compared to $3,020,000 in fiscal 1998. Seasonal borrowings increased in the current fiscal year but the impact on interest expense was totally offset by the lower borrowing rates, and the reduction of $1.5 million in long-term debt. Seasonal borrowing rate reductions reduced interest expense by $117,000, and interest paid on long-term debt decreased $154,000 during the current fiscal year. -48- 3 Other Income (Expense) Consolidated other income increased $282,000 to $844,000 for fiscal 1999 as compared to other income of $562,000 for fiscal 1998. Higher gain on the sales of fixed assets accounted for $273,000 of this increase. Gain on the sale of securities during fiscal 1999 increased $183,000. Offsetting the positive income items was increased foreign exchange loss of $50,000 during fiscal 1999. Income Taxes The provision for corporate federal and state income taxes for fiscal 1999 was $5.9 million or 38.2% of pretax earnings, as compared to $5.4 million or 38.9% of pretax earnings for 1998. The decrease in the effective rate was due to increased earnings in foreign jurisdictions with lower tax rates during the current fiscal year as compared to the prior fiscal year. Net Earnings Consolidated net earnings for fiscal 1999 were $9.5 million, or 3.3% of consolidated net sales as compared to $8.4 million or 3.2% of consolidated net sales for fiscal 1998. Positive profit performance of the new acquisitions, L. K. Bowman, Sunnyside Fresh Foods and Bickel's Potato Chip Co., as well as the Corporation's food service products were the major contributing factors to the increased net earnings. Year Ended May 31, 1998 Results Of Operations Compared To Year Ended June 1, 1997 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. -49- 4 Selling Expense 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 Corporation 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 Corporation spent approximately $659,000 on advertising, including $228,000 relating to coupons, for fiscal 1998, compared to $2.2 million in advertising, including $1.7 million for coupons, for fiscal 1997. 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 in legal fees paid in connection with the litigation described under "Legal Matters" in Note 10 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 $646,000 to $562,000 for fiscal 1998 as compared to expense of $84,000 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. 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 expense and decreased outside legal fees were the contribution factors to the increased net earnings. Liquidity And Capital Resources The discussion and analysis of the Corporation's liquidity and capital resources should be read in conjunction with the Consolidated Statements of Cash Flows, contained elsewhere herein. -50- 5 Net working capital was $11.3 million at May 30, 1999 and $16.8 million at May 31, 1998. The current ratios were 1.15 and 1.31 on May 30, 1999 and May 31, 1998 respectively. Net cash provided by operations for the fiscal year ended May 30, 1999 was $5.3 million, compared to $22.5 million for the fiscal year ended May 31, 1998. Sources of net cash provided by operations consisted principally of net earnings of $9.5 million and non-cash depreciation and amortization expense of $6.4 million The use of net cash for operations consisted primarily of increased inventory of $8.8 million and decreased accounts payable and accrued expenses of $1.5 million. Net cash provided by operations for the fiscal year ended May 31, 1998 was $22.5 million, compared to $13.1 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, non-cash depreciation and amortization 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 used by investing activities for the fiscal year ended May 30, 1999 was $22.3 million as compared to $13.8 million for the fiscal year ended May 31, 1998. The principal use of funds was the upgrade and acquisition of property, plant, equipment and the purchase of businesses. During the period ended May 30, 1999, $14.7 million was spent on development and modernization of equipment as compared to $8.1 million in the fiscal year ended May 31, 1998. During the year ended May 30, 1999, $7.8 million was spent for the acquisition of other businesses. These projects were funded by internally generated funds and short term debt. The Corporation also uses operating leases to meet other equipment needs. The lease expense for the fiscal year ended May 30, 1998 was $3.6 million, up $300,000 from the fiscal year ended May 31, 1998. Net cash used by investing activities for the fiscal year ended May 31, 1998 was $13.8 million as compared to $7.3 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 year ended May 31, 1998, $5.6 million was spent for the acquisition of other businesses. These projects were funded by internally generated funds. The Corporation also uses operating leases to meet other equipment needs. The lease expense for the fiscal year ended May 31, 1998 was $3.3 million, down $300,000 from the fiscal year ended June 1, 1997. Net cash from financing activities was $16.9 million for the fiscal year ended May 30, 1999, compared to cash used for financing activities of $9.6 million for the fiscal year ended May 31, 1998. Seasonal borrowing amounting to $249.3 million was used throughout the fiscal year to fund operational needs. Seasonal borrowing, plus the cash overdraft, increased by $19.8 million at May 30, 1999 compared to May 31, 1998. Payments on long-term debt were $1.9 million. Management continues to monitor and evaluate the most cost effective means to finance its operations. The weighted average cost of seasonal borrowings was 5.35% for the fiscal year ended May 30, 1999 compared to 6.1% for the fiscal year ended May 31, 1998. 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. The weighted average cost of seasonal borrowing was 6.1% for the fiscal year ended May 31, 1998 and the fiscal year ended June 1, 1997. -51- 6 At May 30, 1999 the Corporation has commitments from financial institutions to provide seasonal lines of credit in the amount of $65 million. Additional borrowing is permitted within prescribed parameters in existing debt agreements which contain certain performance covenants. At May 30, 1999, the Corporation was in compliance with all the provisions of its debt agreements as amended or waived. The Corporation paid dividends of $951,000 during fiscal 1999 compared to $828,000 in fiscal 1998. In addition, the Corporation repurchased 1,738 shares of Class A and Class B Common Stock at a cost of $83,000 during the year ended May 30, 1999. The Corporation believes that it has sufficient working capital and availability from seasonal lines of credit to meet its cash flow needs. Market Risks The Corporation is subject to market risk associated with changes in interest rates. To manage the risk of fluctuations in interest rates, the Corporation's borrowings are a mix of fixed and floating rate obligations. This includes the $14.3 million of unsecured senior notes payable that bear interest at an 8.74% fixed rate and are due in 2007. The Corporation also maintains short-term unsecured lines of credit that bear interest at floating rates. The following table presents the expected maturity and effective interest rates of the Corporation's debt obligations (dollars in thousands):
2000 2001 2002 2003 2004 Thereafter Fixed Rate Unsecured senior notes $ 1,786 $1,786 $1,786 $1,786 $1,786 $5,356 Effective interest rates 8.74% 8.74% 8.74% 8.74% 8.74% 8.74% Variable Rate Lines of Credit $39,629 -- -- -- -- -- Effective Interest Rate 5.35% -- -- -- -- --
Impact Of Events And Commitments Of Future Operations Competition in the Marketplace The Corporation faced stiff competition from national and regional branded companies during the entire fiscal year 1999 in all of its market areas and management anticipates this competitive environment to continue throughout fiscal year 2000. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities that require a corporation to record the derivative instruments at fair value in the balance sheet. Furthermore, the derivative instrument must meet specific criteria or the change in its fair value is to be recognized in earnings in the period of change. To achieve hedge accounting treatment the derivative instrument needs to be part of a well-documented hedging strategy that describes the exposure to be hedged, the objective of the hedge and a measurable definition of its effectiveness in hedging the exposure. This Statement is effective as of the beginning of the first quarter of the fiscal year beginning after June 15, 2000. Adoption of this Statement is not expected to have a material effect on the Corporation's financial statements, as the Corporation currently does not enter into any derivative instrument or hedging activities. -52- 7 Impact of Inflation and Changing Prices The changes in cost and prices within the Corporation'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. Year 2000 Many existing computer programs, including those utilized by the Corporation, 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 Corporation has retained an outside consultant to manage the Corporation's efforts to bring its computer system into Year 2000 compliance. The Corporation has contacted its customers, key suppliers and its equipment manufacturers in an attempt to ensure third party compliance. In 1997, the Corporation established a management team to assess the Corporation's Year 2000 issues and to implement the Corporation's Year 2000 compliance program. The management team includes members of the Corporation's Management Information, Accounting and Finance Departments and certain officers of the Corporation. The Corporation has completed the majority of its implementation and testing program and currently anticipates having all of its information technology systems as well as non-information technology systems (which include the Corporation's telecommunications systems and food processing equipment) Year 2000 compliant by the end of the first quarter of Fiscal Year 2000. The Corporation is also in the process of developing a contingency plan in the event its systems are not Year 2000 compliant on a timely basis. The Corporation currently estimates the total costs associated with addressing the Year 2000 Issue to be approximately $490,000 with $98,000 remaining to be incurred subsequent to May 30, 1999 and anticipates that such costs will not materially affect the Corporation's future financial results. As part of its Year 2000 compliance program, the Corporation is contacting and surveying vendors and customers with whom the Corporation does a material amount of business to determine whether these parties' systems (to the extent they relate to the Corporation's business) are subject to Year 2000 issues. The failure of the Corporation's material vendors or customers to convert their systems on a timely basis may have a material adverse effect on the Corporation's operations. The Corporation is in the process of developing a contingency plan in the event these vendors or customers with which the Corporation does a material amount of business are not Year 2000 compliant on a timely basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the Corporation's financial statements, the notes thereto, and the independent auditors report included in the Corporation's Annual Report to Shareholders for the year ended May 31, 1999. -53- 8 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 30, 1999 and May 31, 1998, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders' equity for each of the years in the three-year period ended May 30, 1999. 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 30, 1999 and May 31, 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended May 30, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Harrisburg, Pennsylvania July 9, 1999 -54- 9 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years ended May 30, 1999, May 31, 1998, and June 1, 1997
YEAR YEAR YEAR ENDED ENDED ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 Net sales $ 287,237,000 260,621,000 259,439,000 Cost of goods sold 214,943,000 193,357,000 195,086,000 ------------- ------------ ----------- Gross profit 72,294,000 67,264,000 64,353,000 Selling expenses 42,091,000 38,656,000 37,453,000 Administrative expenses 12,583,000 12,346,000 12,163,000 ------------- ------------ ----------- Operating profit 17,620,000 16,262,000 14,737,000 Interest expense 3,021,000 3,020,000 3,666,000 Other (income) expenses - net (844,000) (562,000) 84,000 ------------- ------------ ----------- Earnings before income taxes 15,443,000 13,804,000 10,987,000 Income taxes 5,904,000 5,367,000 4,281,000 ------------- ------------ ----------- Net earnings 9,539,000 8,437,000 6,706,000 Dividends on preferred stock 44,000 37,000 31,000 ------------- ------------ ----------- Net earnings applicable to Common stock $ 9,495,000 8,400,000 6,675,000 ============= ============ =========== Basic earnings per common share $ 13.24 11.69 9.26 ============= ============ =========== Diluted earnings per common share $ 13.03 11.62 9.22 ============= ============ ===========
See accompanying notes to consolidated financial statements. -55- 10 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets May 30, 1999 and May 31, 1998
MAY 30, MAY 31, ASSETS 1999 1998 Current assets: Cash and cash equivalents $ 2,214,000 2,337,000 Accounts and notes receivable - net 26,281,000 23,429,000 Accounts receivable from related parties - net 242,000 389,000 Inventories: Finished goods 39,199,000 31,185,000 Raw materials and supplies 14,510,000 11,777,000 Prepaid expenses 1,733,000 2,244,000 Deferred income taxes 917,000 365,000 ------------ ----------- Total current assets 85,096,000 71,726,000 ------------ ----------- Property, plant, and equipment - at cost: Land and buildings 44,006,000 35,171,000 Machinery and equipment 93,585,000 86,965,000 Leasehold improvements 383,000 374,000 ------------ ----------- 137,974,000 122,510,000 Less accumulated depreciation and amortization 78,573,000 72,641,000 ------------ ----------- 59,401,000 49,869,000 Construction in progress 6,591,000 4,411,000 ------------ ----------- 65,992,000 54,280,000 ------------ ----------- Other assets: Intangible assets - less accumulated amortization of $2,348,000 and $2,054,000 2,293,000 2,323,000 Other assets 3,860,000 2,678,000 ------------ ----------- Total assets $157,241,000 131,007,000 ============ ===========
See accompanying notes to consolidated financial statements. -56- 11 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets - continued May 30, 1999 and May 31, 1998
MAY 30, MAY 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 Current liabilities: Accounts payable $ 22,813,000 23,979,000 Notes payable - banks 39,629,000 19,874,000 Accrued expenses 7,433,000 7,717,000 Current maturities of long-term debt 1,859,000 1,859,000 Income taxes payable 2,103,000 1,498,000 ------------- ------------ Total current liabilities 73,837,000 54,927,000 ------------- ------------ Long-term debt, less current maturities 12,500,000 14,359,000 Deferred income taxes 4,331,000 4,686,000 Other liabilities 2,119,000 1,565,000 ------------- ------------ Total liabilities 92,787,000 75,537,000 ------------- ------------ Stockholders' equity: Series A and B 8-1/4% cumulative convertible preferred stock 788,000 788,000 Series C cumulative convertible preferred stock 250,000 250,000 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 2,143,000 Retained earnings 47,767,000 39,179,000 Treasury stock, at cost (8,076,000) (7,993,000) Accumulated other comprehensive income 525,000 46,000 ------------- ------------ 64,454,000 55,470,000 ------------- ------------ Total liabilities and stockholders' equity $ 157,241,000 131,007,000 ============= ============
-57- 12 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended May 30, 1999, May 31, 1998, and June 1, 1997
YEAR YEAR YEAR ENDED ENDED ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 Net earnings $ 9,539,000 8,437,000 6,706,000 ----------- ---------- --------- Other comprehensive income Unrealized gain (loss) on securities, net of Reclassification adjustments 479,000 (118,000) 88,000 Minimum pension liability adjustment (net of taxes of $0, $106,000, and $129,000) -- 158,000 193,000 ----------- ---------- --------- ----------- ---------- --------- Other comprehensive income 479,000 40,000 281,000 ----------- ---------- --------- Comprehensive income $10,018,000 8,477,000 6,987,000 =========== ========== =========
See accompanying notes to consolidated financial statements. -58- 13 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended May 30, 1999, May 31, 1998, and June 1, 1997
YEAR ENDED YEAR ENDED YEAR ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 Cash flows from operating activities: Net earnings $ 9,539,000 8,437,000 6,706,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,366,000 5,939,000 5,595,000 Gain on sale of property, plant, and equipment (279,000) (6,000) (21,000) Gain on sale of investments (418,000) (235,000) (35,000) Deferred income taxes (907,000) (120,000) 156,000 Change in assets and liabilities: Accounts and notes receivable (668,000) 1,856,000 (6,534,000) Inventories (8,763,000) 2,774,000 5,643,000 Prepaid expenses and other assets 736,000 (113,000) 1,176,000 Accounts payable and accrued expenses (1,450,000) 2,467,000 (226,000) Income taxes payable 605,000 1,140,000 248,000 Other liabilities 554,000 339,000 421,000 ------------- ------------ ------------ Net cash provided by operating activities 5,315,000 22,478,000 13,129,000 ------------- ------------ ------------ Cash flows from investing activities: Purchases of business, net of cash acquired (7,833,000) (5,578,000) -- Purchase of investments (2,201,000) (1,970,000) (1,044,000) Sale of investments 1,877,000 1,827,000 235,000 Acquisitions of property, plant, and equipment (14,697,000) (8,133,000) (6,565,000) Proceeds from dispositions of property, plant, and 554,000 15,000 35,000 equipment ------------- ------------ ------------ Net cash used in investing activities (22,300,000) (13,839,000) (7,339,000) ------------- ------------ ------------ Cash flows from financing activities: Proceeds from notes payable 249,269,000 144,289,000 220,739,000 Payment on notes payable (229,514,000) (148,529,000) (220,722,000) Payment on long-term debt (1,859,000) (5,210,000) (2,499,000) Payment on long-term capital lease obligations -- -- (152,000) Payment of dividends (951,000) (828,000) (824,000) Common stock redemptions (83,000) (106,000) (132,000) Preferred stock issuance -- 770,000 -- ------------- ------------ ------------ Net cash provided by (used in) financing activities 16,862,000 (9,614,000) (3,590,000) ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (123,000) (975,000) 2,200,000 Cash and cash equivalents, beginning of year 2,337,000 3,312,000 1,112,000 ------------- ------------ ------------ Cash and cash equivalents, end of year $ 2,214,000 2,337,000 3,312,000 ============= ============ ============
See accompanying notes to consolidated financial statements. -59- 14 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended May 30, 1999, May 31, 1998, and June 1, 1997
CUMULATIVE CONVERTIBLE CUMULATIVE PREFERRED CONVERTIBLE STOCK PREFERRED COMMON COMMON TOTAL SERIES A STOCK STOCK STOCK STOCKHOLDERS' AND B SERIES C CLASS A CLASS B EQUITY SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES Balance, June 2, 1996 $ 41,126,000 31,536 $788,000 -- $ -- 349,120 $8,729,000 493,123 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) -- -- -- -- -- -- -- Other comprehensive income 281,000 -- -- -- -- -- -- -- ------------ -------- -------- ------- -------- ------- ---------- ------- Balance, June 1, 1997 $ 47,157,000 31,536 $788,000 -- $ -- 349,120 8,729,000 493,123 Net earnings -- -- -- -- -- -- -- -- 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) -- -- -- -- -- -- -- Other comprehensive income 40,000 -- -- -- -- -- -- -- ------------ -------- -------- ------- -------- ------- ---------- ------- Balance, May 31, 1998 $ 55,470,000 31,536 $788,000 10,000 250,000 349,120 8,729,000 493,123 Net earnings 9,539,000 -- -- -- -- -- -- -- Cash dividends per share: Preferred - $2.0625 annually (44,000) -- -- -- -- -- -- -- Common - $1.2650 annually (907,000) -- -- -- -- -- -- -- Redemption of common stock - Class A 1,446 shares, Class B 292 shares (83,000) -- -- -- -- -- -- -- Other comprehensive income 479,000 -- -- -- -- -- -- -- ------------ -------- -------- ------- -------- ------- ---------- ------- Balance, May 30, 1999 $ 64,454,000 31,536 $788,000 10,000 $250,000 349,120 $8,729,000 493,123
ACCUMULATED CAPITAL PAID TREASURY OTHER IN EXCESS OF RETAINED STOCK COMPREHENSIVE AMOUNT PAR VALUE EARNINGS SHARES AMOUNTS INCOME Balance, June 2, 1996 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) -- Other comprehensive income -- -- -- -- -- 281,000 ------------ --------- --------- ------- ----------- -------- Balance, June 1, 1997 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) -- Other comprehensive income -- -- -- -- -- 40,000 ------------ --------- --------- ------- ----------- -------- Balance, May 31, 1998 12,328,000 2,143,000 39,179,000 141,199 $(7,993,000) 46,000 Net earnings -- -- 9,539,000 -- -- -- Cash dividends per share: Preferred - $2.0625 annually -- -- (44,000) -- -- -- Common - $1.2650 annually -- -- (907,000) -- -- -- Redemption of common stock - Class A 1,446 shares, Class B 292 shares -- -- -- 1,738 (83,000) -- Other comprehensive income -- -- -- -- -- 479,000 ------------ --------- --------- ------- ----------- -------- Balance, May 30, 1999 12,328,000 2,143,000 47,767,000 142,937 (8,076,000) 525,000
See accompanying notes to consolidated financial statements. -60- 15 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements May 30, 1999 and May 31, 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Hanover Foods Corporation (the Company) is a vertically integrated processor of vegetable products in one industry segment. The Company is involved in the growing, processing, canning, 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 35%, 42%, and 45% of the Company's net sales for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. The Company's ten largest customers account for approximately 21% and 27% of the Company's accounts receivable as of May 30, 1999 and May 31, 1998, respectively. No single customer accounted for more than 10% of net sales for the years ended May 30, 1999, May 31, 1998, and June 1, 1997. 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. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Hanover Foods Corporation and its subsidiaries, which are Consumers Packing Corporation (T/A Hanover Foods - Lancaster Division), Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, 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 30, 1999, the Company purchased certain assets of Bickel's Potato Chip Co., Inc. and Draper-King Cole, Inc. and Draper Canning Corporation, which are included as part of Hanover Foods. 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. All significant intercompany balances and transactions have been eliminated. (c) 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. (d) Cash and Cash Equivalents Cash equivalents of $449,000 and $707,000 at May 30, 1999 and May 31, 1998, 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. 8 16 (e) Investments Investments of $3,668,000 and $2,447,000, at May 30, 1999 and May 31, 1998, 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 accumulated other comprehensive income until realized. Net unrealized gains were $525,000, $46,000, and $164,000 at May 30, 1999, May 31, 1998, and June 1, 1997, respectively. The reconciliation of the reclassification adjustments related to unrealized gains and losses on securities included in comprehensive income for the respective fiscal year are as follows:
1999 1998 1997 --------- --------- --------- Unrealized holding gains arising during period $ 897,000 117,000 123,000 Reclassification adjustments for gains included in net income (418,000) (235,000) (35,000) --------- --------- --------- Net unrealized gain (loss) on securities $ 479,000 (118,000) 88,000 ========= ========= =========
(f) 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. (g) Inventories Inventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method) or market. (h) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from approximately 3 years to 12 years for equipment and up to 40 years for buildings. Accelerated methods are used for tax reporting purposes. Plant and equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset. -9- 17 (i) 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. (j) 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. Reinsurance premiums assumed are taken to income in the accounting period in which they are reported to the Company by the primary insurer on an earned basis. Outstanding claims include a provision for claims reported as advised to the Company by the primary insurer and a provision for incurred but not reported claims based upon the advice of the primary insurer on the ultimate liability of the Company under the reinsurance assumed or, in the absence of such an evaluation, the provision is based upon the best estimate of the ultimate liability of the Company. (k) 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. (l) Research and Development Research and development costs are expensed as incurred. Research and development costs amounted to $612,000, $588,000, and $622,000, for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. (m) Promotional Costs Promotional costs are expensed as incurred. Accounts and notes receivable are presented net of allowances for bad debts and promotional programs. -10- 18 (n) Advertising Costs Advertising costs are expensed as incurred. Advertising expenses amounted to $1,897,000, $659,000, and $2,184,000 for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively (including manufacturer coupon expense of $1,235,000, $228,000, and $1,655,000, respectively). (o) 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 (p) Fiscal Year End The Company's fiscal year ends at the close of operations on the Sunday nearest to May 31. The fiscal years ended May 30, 1999, May 31, 1998, and June 1, 1997, were comprised of 52 weeks. (q) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues 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. (r) Reclassifications Certain prior amounts have been reclassified to conform to classifications adopted in the current year. -11- 19 (2) NOTES PAYABLE - BANKS The Company maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $65,000,000, of which $39,629,000 was borrowed (including an overdraft of $2,127,000) at May 30, 1999 and $19,874,000 was borrowed (including an overdraft of $2,108,000) at May 31, 1998. 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 30, 1999 and May 31, 1998, was 5.35% and 6.1%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended May 30, 1999 and May 31, 1998 and June 1, 1997 was approximately $39,629,000, $27,999,000, and $35,024,000. (3) LONG-TERM DEBT The long-term debt of the Company and its subsidiaries consists of:
MAY 30, 1999 MAY 31, 1998 ----------- ----------- 8.74% unsecured senior notes payable to an insurance company, due through 2007 $14,285,000 16,071,000 Installment obligation payable to a related party, due in equal annual installments through 2000; interest at prime rate (7.75% at May 30, 1999) 74,000 147,000 ----------- ----------- Total long-term debt 14,359,000 16,218,000 Less current maturities 1,859,000 1,859,000 ----------- ----------- Long-term debt, excluding current maturities $12,500,000 14,359,000 =========== ===========
The term loan agreements with the insurance corporation 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 30, 1999, $35,419,000 of retained earnings are restricted from distribution. The Company is in compliance with the restrictive provisions in the agreements as amended or waived as of May 30, 1999. -12- 20 The aggregate long-term debt maturities follow: FOR THE FISCAL YEAR ENDING: 2000 $ 1,859,000 2001 1,786,000 2002 1,786,000 2003 1,786,000 2004 1,786,000 Thereafter 5,356,000 ------------ Total $14,359,000 ============
(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 30, 1999, May 31, 1998, and June 1, 1997, amounted to $3,591,000, $3,330,000, and $3,586,000, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of May 30, 1999 are:
OPERATING FOR THE FISCAL YEAR ENDING: LEASES ------------ 2000 $ 850,000 2001 710,000 2002 491,000 2003 262,000 Thereafter 65,000 ------------ Total minimum lease payments $ 2,378,000 ============
(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 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. -13- 21 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 in 1998. 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. The following summarizes the Company's capital stock at May 30, 1999 and May 31, 1998:
MAY 30, 1999 MAY 31, 1998 ------------------------------ ------------------------------ 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 cumulative convertible preferred stock - $25 par value, 10,000 shares authorized 10,000 10,000 10,000 10,000 Class A nonvoting common stock- $25 par value, 800,000 shares authorized 349,210 289,414 349,210 290,860 Class B voting common stock- $25 par value, 880,000 shares authorized 493,123 426,474 493,123 426,766
At any time, the holders of the Series A and B 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 30, 1999, the outstanding Series A and B Preferred Stock could be converted into 4,236 shares of Class A Common Stock. -14- 22 (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:
YEAR ENDED YEAR ENDED YEAR ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ------------ ---------- ---------- Revenues: Park 100 Foods, Inc. $2,627,000 4,365,000 3,155,000 Corporate charges: Snyder's of Hanover, Inc. 188,000 181,000 175,000 Expenditures: Lippy Brothers, Inc. 956,000 304,000 1,044,000 James G. Sturgill 48,000 68,000 135,000 ARWCO Corporation 15,000 33,000 29,000 Warehime Enterprises, Inc. 78,000 125,000 177,000 John A. and Patricia M. Warehime 58,000 56,000 52,000 Park 100 Foods, Inc. 85,000 209,000 283,000 The Cannery Press, Inc. -- -- 14,000 Patti & John's, Inc. -- -- 10,000 Accounts receivable: Snyder's of Hanover, Inc. 32,000 48,000 15,000 Warehime Enterprises -- 3,000 -- Park 100 Foods, Inc. 210,000 346,000 906,000 Accounts payable: Warehime Enterprises, Inc. -- -- 1,000 Park 100 Foods, Inc. -- -- 30,000 James G. Sturgill -- 7,000 -- ARWCO Corporation -- 1,000 -- Notes payable: Warehime Enterprises, Inc. -- -- 375,000 Cyril T. Noel 74,000 147,000 221,000
-15- 23 In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 10), 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 30, 1999, May 31, 1998, and June 1, 1997 was approximately $72,000, $37,000, and $303,000, 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 Non-voting 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 30, 1999, the Company has purchased 985 shares of the Company's Voting Class B Common Stock for approximately $72,000 and 4,924 shares of the Company's Non-voting Class A Common Stock for approximately $207,000. A portion of rental expense included in note 4 was paid to ARWCO Corporation; Park 100 Foods, Inc.; Warehime Enterprises, Inc.; Centre Foods Enterprises, Inc.; and Food Service East, Inc., all of which are related companies through common control. The amounts were $169,000, $149,000, and $307,000 for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. The portion of rental commitments included in note 4 due these companies is summarized as follows:
FOR THE FISCAL YEARS ENDING: 2000 $ 15,000 2001 15,000
(7) BENEFIT PLANS (a) 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 30, 1999, May 31, 1998, and June 1, 1997, was $576,000, $583,000, and $557,000, respectively. -16- 24 (b) 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 substantially all net assets to the participants. Net periodic pension cost included the following components:
YEAR YEAR ENDED ENDED MAY 31, JUNE 1, 1998 1997 ----------- ---------- Interest cost $ 555,000 520,000 Actual return on plan assets (gain) loss (362,000) (1,330,000) Amortization of unrecognized loss 5,000 11,000 Deferral of asset gain (loss) and other costs 736,000 823,000 ---------- ---------- Net pension cost $ 934,000 24,000 ========== ==========
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 included discount rates ranging from 7.09% to 7.25% and an expected long-term rate of return on assets of 7.0%. -17- 25 (c) 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 30, MAY 31, 1999 1998 ------------- ------------ Change in benefit obligation Benefit obligation at beginning of year $(2,591,000) (1,574,000) Service cost (117,000) (16,000) Interest cost (243,000) (177,000) Amortization of transition obligation (73,000) (73,000) Plan assumptions 129,000 (894,000) Change in plan (977,000) -- Benefits paid 127,000 163,000 Other 97,000 (20,000) ----------- ----------- Benefit obligation at end of year (3,648,000) (2,591,000) ----------- ----------- Change in plan assets Fair value of plan assets at beginning of year -- -- Contributions 127,000 163,000 Benefits paid (127,000) (163,000) ----------- ----------- Fair value of plan assets at end of year -- -- ----------- ----------- Funded status: Unrecognized net (gain) loss 574,000 745,000 Unrecognized prior service cost 916,000 -- Unrecognized transition liability, amortized over 20 years 1,080,000 1,153,000 ----------- ----------- Accrued postretirement benefit cost $(1,078,000) (693,000) =========== ===========
A discount rate of 7.25%, and 7.00% for May 30, 1999 and May 31, 1998, 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:
YEAR ENDED YEAR ENDED YEAR ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 -------- -------- -------- Service cost $117,000 16,000 22,000 Interest cost 243,000 177,000 113,000 Amortization of transition obligation 73,000 73,000 73,000 Other amortization and deferral 79,000 20,000 (1,000) -------- -------- -------- $512,000 286,000 207,000 ======== ======== ========
-18- 26 The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.5% for fiscal year May 30, 1999, decreasing each year to an ultimate rate of 5.0% in 2004 and thereafter. 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 30, 1999 by $698,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended May 30, 1999 by $92,000. (d) 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 1999 and 1998 was $606,000 and $578,000, 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 also provides the employee with various other benefits including the use of an automobile, disability and life insurance, and a club membership. -19- 27 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 (non-voting) Stock at the option of the employee. For the years ended May 30, 1999, May 31, 1998, and June 1 ,1997, the bonus accrued under this agreement was $394,000, $422,000, and $450,000, 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 30, 1999, May 31, 1998, and June 1, 1997, the long-term performance bonus accrued under this agreement was $108,000, $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 $624,000, $411,000, and $350,000, for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. The projected benefit obligation was approximately $1,747,000 and $1,123,000 at May 30, 1999 and May 31, 1998, respectively. 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. 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, 1999, the aggregate liability of the Company under this agreement for the next five years is estimated to be $1,173,000, 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. -20- 28 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 $81,000, $60,000, and $47,000 for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. The projected benefit obligation was approximately $188,000 and $107,000 at May 30, 1999 and May 31, 1998, respectively. 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. 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 30, 1999 under circumstances entitling him to severance payments pursuant to this agreement, the aggregate amount due to Mr. Young under this agreement was $387,000. 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 30, 1999 was approximately $345,000. (8) INCOME TAXES Total income taxes for the years ended May 30, 1999, May 31, 1998, and June 1, 1997 were attributable to the following:
MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ---------- ---------- ---------- Income from operations $5,904,000 5,367,000 4,281,000 Minimum pension liability adjustment -- 106,000 129,000 ---------- ---------- ---------- $5,904,000 5,473,000 4,410,000 ========== ========== ==========
-21- 29 Income tax expense (benefit) attributable to income from operations consists of:
YEAR ENDED YEAR ENDED YEAR ENDED MAY 30, 1999 MAY 31, 1998 JUNE 1, 1997 ----------------------------- ---------------------------- --------------------------- FEDERAL STATE FEDERAL STATE FEDERAL STATE ----------- ----------- ----------- ----------- ----------- ----------- Current $ 5,602,000 986,000 4,866,000 905,000 3,644,000 610,000 Deferred (532,000) (152,000) (311,000) (93,000) 47,000 (20,000) ----------- ----------- ----------- ----------- ----------- ----------- $ 5,070,000 834,000 4,555,000 812,000 3,691,000 590,000 =========== =========== =========== =========== =========== ===========
There is no income tax attributable to the income from foreign subsidiaries since the foreign entities were not subject to taxes on income in 1999, 1998, and 1997. A reconciliation of the Company's effective tax rate to the amount computed by applying the federal income tax rate of 35% to income before taxes expressed in percentages, follows:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ------ ------ ------- Federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in taxes: State taxes - net of federal tax 3.4 3.9 3.5 Income in foreign subsidiary with no current tax (1.3) (0.3) (1.7) Other items - net 1.1 0.3 2.2 ---- ---- ---- Effective income tax rate 38.2% 38.9% 39.0% ==== ==== ====
-22- 30 The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at May 30, 1999 and May 31, 1998, follow:
MAY 30, MAY 31, 1999 1998 ------------ ------------ Deferred tax liabilities: Property, plant and equipment $(5,539,000) (5,875,000) Employee benefit obligations -- (217,000) Other (149,000) (208,000) ----------- ----------- Total gross deferred tax liabilities (5,688,000) (6,300,000) ----------- ----------- Deferred tax assets: Inventory costs 195,000 172,000 Accrued expenses and other liabilities 1,298,000 1,016,000 Pension and postretirement benefits 380,000 298,000 Net operating loss carryforwards 287,000 371,000 Other 114,000 122,000 ----------- ----------- Total gross deferred tax assets 2,274,000 1,979,000 ----------- ----------- Net deferred tax liability $(3,414,000) (4,321,000) =========== ===========
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 $3,475,000 at May 30, 1999. Acquisitions During the year ended May 30, 1999, the Company purchased certain assets of Bickel's Potato Chip Co. Inc. (Bickel's) and Draper-King Cole, Inc. and Draper Canning Corporation (collectively "Draper"). During the year ended May 31, 1998, the Company purchased assets and assumed certain liabilities of L. K. Bowman, Inc. and L.K. Bowman Pacific, Inc. (collectively "Bowman") and purchased certain assets of Sunnyside Foods. All of these acquisitions were accounted for under the purchase method and were not considered to be material to the Company's results of operations for the years ended May 30, 1999 and May 31, 1998, respectively. The allocation of purchase price is as follows: -23- 31 (a) Acquisitions made during the year ended May 30, 1999 Accounts receivable $2,032,000 Inventory 1,984,000 Other current assets 13,000 Property, plant and equipment 3,704,000 Goodwill 100,000 ---------- Total purchase price $7,833,000 ==========
(b) Acquisitions made during the year ended May 31, 1998 Accounts receivable $ 1,830,000 Inventory 4,312,000 Other current assets 41,000 Property, plant and equipment 2,373,000 Intangible assets 300,000 Goodwill 1,535,000 Accounts payable (1,838,000) Debt (2,975,000) ----------- Total purchase price $ 5,578,000 ===========
(10) COMMITMENTS AND CONTINGENCIES (a) Letter of Credit As of May 30, 1999, the Company's wholly-owned reinsurance corporation had outstanding two letters of credit in the amount of $400,000 and $1,206,000 as security for the reimbursement of losses arising from the reinsurance assumed by the Company. (b) 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. -24- 32 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 Company's 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 Amended and Restated Articles. The Amended and Restated Articles created 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. -25- 33 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. Michael Warehime filed an appeal from the denial of his motion to enjoin the previously described Amended and Restated Articles and the Amendment thereto. On December 2, 1998, the Pennsylvania Superior Court, in a two to one decision, held that although John Warehime had acted in good faith and in the best interest of the Company in voting for the Amended and Restated Articles as trustee of the Warehime voting trust, Mr. Warehime nevertheless breached his fiduciary duty to the beneficiaries of the Warehime voting trust in so voting. On December 16, 1998, Michael Warehime filed a motion for clarification requesting that the Pennsylvania Superior Court issue an order invalidating the Amended and Restated Articles and that motion was denied in banc. On March 10, 1999, John Warehime and the other directors filed a petition for allowance of appeal with the Pennsylvania Supreme Court and no decision has as yet been rendered. 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. (c) 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 22 and 1,251 during the years ended May 30, 1999 and June 1, 1997, respectively. As of May 30, 1999, there are 10,557 shares outstanding that would be eligible for this plan. The maximum commitment, if requested, for all eligible shares would be approximately $1,119,000, based on the most recent appraised value per share as of May 30, 1999. -26- 34 (11) 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:
MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ----------- ---------- ---------- Revenues $15,213,000 11,190,000 13,991,000 Cost of goods sold 13,963,000 10,433,000 12,162,000 Assets 8,942,000 9,344,000 9,968,000
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 $13,000, a gain of $73,000, and a loss of $78,000, for the years ended May 30, 1999, May 31, 1998, and June 1, 1997, respectively. At May 30, 1999, the prevailing exchange rate was Q 6.85 to U.S. $1.00. -27- 35 (12) RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE
YEAR YEAR YEAR ENDED ENDED ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ---------- ---------- ---------- Numerator for basic earnings per share: Net earnings applicable to common stock $9,495,000 8,400,000 6,675,000 ---------- ---------- ---------- Effect of dilutive securities: 8 1/4% cumulative convertible preferred stock 31,000 31,000 31,000 4.40% cumulative convertible preferred stock 13,000 6,000 -- ---------- ---------- ---------- Net earnings assuming dilution $9,539,000 8,437,000 6,706,000 ========== ========== ========== Denominator: Basic weighted-average shares 716,974 718,712 720,811 Effect of dilutive securities: 8 1/4% cumulative convertible preferred stock 4,921 5,786 6,604 4.40% cumulative convertible preferred stock 10,000 1,603 -- ---------- ---------- ---------- Diluted weighted- average shares 731,895 726,101 727,415 ========== ========== ========== Basic earnings per share $ 13.24 11.69 9.26 Diluted earnings per share 13.03 11.62 9.22 ========== ========== ==========
(13) STATEMENT OF CASH FLOW INFORMATION
YEAR YEAR YEAR ENDED ENDED ENDED MAY 30, MAY 31, JUNE 1, 1999 1998 1997 ---------- ---------- ---------- Supplemental disclosure of cash paid for: Interest $3,061,000 2,979,000 3,653,000 Income taxes 5,983,000 4,594,000 3,134,000 ========== ========== ========== Non-cash investing activities, acquisition of business: Fair value of assets acquired $7,833,000 10,391,000 -- Cash paid 7,833,000 5,578,000 -- ---------- ---------- ---------- Liabilities assumed $ -- 4,813,000 -- ========== ========== ==========
-28- 36 QUARTERLY FINANCIAL DATA
Dollars in thousands First Second Third Fourth (except per share) quarter quarter quarter quarter - ------------------------------------------------------------------------------------------------------------- 1999 Net sales $ 58,538 $ 80,705 $ 72,946 $ 75,048 Gross profit 14,613 20,223 18,219 19,239 Net earnings 1,636 3,242 1,885 2,776 Net earnings per common share - Basic 2.26 4.51 2.61 3.86 Net earnings per common share - Diluted 2.23 4.43 2.56 3.81 Cash Dividends per common share 0.44 0.275 0.275 0.275 - ------------------------------------------------------------------------------------------------------------- 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 3.48 2.98 3.10 2.11 Net earnings per common share - Diluted 3.47 2.96 3.08 2.11 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 Corporation'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.
Quarter Ended High Low Dividends ------------- ---- --- --------- 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 August 30, 1998 56.25 56.25 0.440 November 29, 1998 57.125 57.00 0.275 February 28, 1999 58.50 58.50 0.275 May 30, 1999 60.75 59.50 0.275
As of May 30, 1999 there were 395 record holders and approximately 550 beneficial holders of the Class A Common Stock. -29- 37 DIVIDEND POLICY The Company has maintained a policy of paying a quarterly dividend of $0.275 per share. In addition, on August 15, 1998, the Company paid a special 15% dividend or $0.165 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 16, 1999, 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 30, 1999, 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 -30- EX-21 8 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 Corporation Pennsylvania d/b/a Hanover Foods - Lancaster Division Hanover Insurance Corporation Ltd Grand Cayman, B.W.I. Nittany Corporation Delaware Pennsylvania 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
-31- EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR MAY-30-1999 JUN-01-1998 MAY-30-1999 2,214 0 26,523 0 53,709 85,096 137,974 78,573 157,241 73,837 14,359 1,038 0 21,057 42,359 157,241 287,237 287,237 214,943 214,943 54,674 0 3,021 15,443 5,904 9,539 0 0 0 9,539 13.24 13.03
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