ITEM 1. BUSINESS
OVERVIEW
Hanover Foods Corporation (as used herein the term "Corporation" refers to Hanover Foods Corporation and its consolidated subsidiaries) was incorporated on December 12, 1924 in Harrisburg, Pennsylvania. The Corporation consists of two (2) operating divisions: Hanover and Myers.
In addition, the Corporation has five (5) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers Packing Company, d/b/a Hanover Foods - Lancaster Division, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, Ltd., and Nittany Corporation. Tri-Co. Foods Corp. in turn has two (2) wholly-owned subsidiaries, Alimentos Congelados Monte Bello, S.A., and Sunwise Corporation.
Originally, the Corporation was established to provide seasonal packing of locally grown peas, beans and other vegetables. From this beginning, the Corporation has grown to become one of the leading independent processors of canned vegetables, frozen vegetables, frozen meat products, frozen entrees, frozen soft pretzels and fresh foods in the eastern United States. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or a few suppliers. This growth has resulted from the Corporation's extended scope of operations, new product development and acquisitions. Currently, 52% of the Corporation's sales volume, primarily frozen sales, is transacted during the third and fourth quarters of the Corporation's fiscal year and 48% of the Corporation's sales volume, primarily canned sales, is transacted during the first and second quarters of the Corporation's fiscal year. See "Risk Factors - Industry Conditions and Price and Volume Fluctuations."
The Corporation is a vertically integrated processor of vegetable products in one industry segment. It is involved in the growing, processing, canning, freezing, freeze-drying, packaging, marketing and distribution of its products under its own trademarks, as well as other branded, customer and private labels. "See Risk Factors - General Risks of the Food Industry."
The Corporation enjoys its strongest retail sales in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, canned pasta and frozen soft pretzel products has enabled the Corporation to increase and expand its distribution throughout the eastern seaboard. Distribution in the remainder of the United States is limited to food service, military and industrial customers.
OPERATIONS
The Corporation has operations at five (5) plants in Pennsylvania, one (1) plant in Delaware and
two (2) plants in Guatemala.
PRODUCTS
The Corporation markets its products under the brand names HANOVER, HANOVER FARMS, MYERS, PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL'S, DUTCH FARMS, SUNWISE, O&C (jarred onions only), and SPRING GLEN FRESH FOODS.
The products sold by the Corporation under these brand names include canned vegetables, beans and pasta as well as frozen vegetables, frozen meat products, food entrees, refrigerated and fresh foods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year Ended June 1, 1997 Results of Operations Compared to Year Ended June 2, 1996."
DISTRIBUTION
The Corporation's products are marketed under its brand labels and customer private labels to the consumer for home use and also to the food service trade which includes restaurants, fast food chains, hospitals and schools as well as military and other governmental uses. The Company's ten largest customers account for approximately 45% of the Company's net sales and accounts receivable with no single customer accounting for more than 10% of net sales for the fiscal years ended June 1, 1997, March 31, 1996 and April 2, 1995. The Corporation's products are distributed directly to its customers and indirectly via independent distributors. Sales activities are conducted via Corporation employed sales personnel and independent sales brokerage firms. The Corporation also manufactures private label food products for other food companies.
COMPETITION
The Corporation markets its food products to the retail and food service sectors in the northeastern, mid-Atlantic, southeastern and midwestern areas of the United States. See "Risk Factors - Competition."
The principal methods of competition within the food processing industry are: price, promotion, advertising, product quality and service.
TRADEMARKS
The Corporation has various registered and unregistered trademarks, service marks and licenses which are of material importance to the Corporation's business.
BACKLOG OF ORDERS
The Corporation manufactures against customer forecasts and orders. While at any given time
there may be a backlog of orders, such backlog is not material to total sales, nor are the changes from time to time significant.
RESEARCH AND DEVELOPMENT
The Corporation engages in research and development of new products and improvement of existing products as well as the improvement and modernization of its operating plants and equipment. See Note 1 of the Notes to Consolidated Financial Statements.
REGULATION
The Corporation's operations, as is the case of all food companies, are subject to strict regulation by the U.S. Food and Drug Administration (FDA). The Corporation is also subject to inspection by the Food Safety and Quality Service Division (USDA), for its meat and poultry products.
FDA regulates the safety of the food product, the identity of the product, its purity and identification of ingredients therein. USDA establishes grades for products and regulates sanitation. The appropriate state agencies regulate the sanitation of the Corporation's plants and the manufacture of food products utilizing flour in any baking process.
The Corporation is also regulated by many other federal and state governmental agencies such as Occupational Safety and Health Administration (OSHA), Federal Trade Commission and U.S. Environmental Protection Agency. See "Risk Factors - Regulations" and "Legal Proceedings."
ENVIRONMENTAL CONSIDERATIONS
In the past and currently the Corporation is making investments to comply with all federal, state and local laws, rules and regulations. Such expenditures have not been material with respect to the Corporation's capital expenditures, earnings or competitive position, and are not expected to be in the future. See "Risk Factors - Environmental Risks" and "Legal Proceedings."
SOURCES OF SUPPLY
The Corporation maintains an intimate involvement in all phases of agricultural crop production as well as direct procurement of fresh vegetables. The Corporation procures all of its fresh vegetable requirements through direct contracts with farmers who cultivate and harvest the crops according to the Corporation's specifications. In addition, the Corporation directly procures beans, tomato based products, pasta, herbs and other ingredients, as well as containers and packaging materials from outside vendors throughout the world.
EMPLOYEES
The Corporation, its divisions and subsidiaries currently employ approximately 1,512 employees
on a full-time and a seasonal basis. Approximately 1,332 employees are employed in the United States and 180 are employed in Guatemala.
A total of 714 production workers at the Hanover, PA, Centre Hall, PA and Clayton, DE plants are members of the United Food and Commercial Workers Union - - Locals 1776, 72 and 56, respectively. The Hanover and Centre Hall, PA plants each have their own three (3) year contract beginning January 1, 1997 and ending December 31, 1999. The Clayton, DE plant has its own three (3) year contract beginning January 1, 1996 and ending December 31, 1998. There are no union contracts at any other plants or locations of the Corporation. The Corporation has never had any strikes or labor disputes interfering with its operations. Management considers labor relations to be excellent.
FOREIGN OPERATIONS
The Corporation's wholly-owned subsidiary, Tri-Co. Foods Corp., has two (2) wholly-owned subsidiaries, Alimentos Congelados Monte Bello, S.A., San Jose Pinula, Guatemala and Sunwise Corporation, Lakeland, Florida.
Alimentos Congelados Monte Bello, S.A. procures, processes and ships vegetables produced in Guatemala. Alimentos Congelados Monte Bello, S.A. contracts with approximately 2,500 independent farmers in Guatemala for the growing and harvesting of broccoli, cauliflower, okra and Brussels sprouts. The raw vegetable product purchased by the Corporation is frozen at one of two Corporation plants located at San Jose Pinula, Guatemala and Teculutan, Guatemala.
Sunwise Corporation imports and distributes the Guatemalan product to Hanover Foods Corporation.
The business of the Corporation in Guatemala is subject to the laws of Guatemala which may place restrictions and controls on such matters as ownership, imports and exports, prices, product lines and transfer of funds, and is also subject to the fluctuating exchange rate between the Guatemalan quetzal and the U.S. dollar. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Impact of Events and Commitment of Future Operations" and "Risk Factors - Risks Associated With Foreign Operations."
Information with respect to the revenue, cost of sales and identifiable assets for the Corporation's foreign operations is set forth in Note 10 to the Consolidated Financial Statements entitled "Foreign Operations."
RISK FACTORS
Industry Conditions and Price and Volume Fluctuations
The Corporation's financial performance and growth are related to conditions in the food
processing industry. The United States food processing industry is a mature industry. The Corporation's net sales are a function of product availability and market pricing. In the food processing industry, product availability and market prices tend to have an inverse relationship: market prices tend to decrease as more product is available, whereas if less product is available, market prices tend to increase. Product availability is a direct result of plantings, growing conditions, crop yields and inventories, all of which vary from year to year. In addition, price can be affected by the planting, inventory level and individual pricing decisions of the three or four largest processors in the industry. Generally, the market prices in the food processing industry tend to adjust more quickly to variations in product availability than an individual processor can adjust its cost structure; thus, in an over-supply situation, a processor's margins likely will weaken, as suppliers generally are not able to adjust their cost structure as rapidly as market prices adjust for the over-supply. The Corporation typically has experienced lower margins during times of industry over-supply. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Seasonality and Quarterly Fluctuations
The Corporation's operations are affected by the growing cycle of the vegetables it processes. The Corporation's business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an oversupply situation in a given year. This oversupply typically will result in depressed selling prices and reduced profitability to the Corporation on the inventory produced from that year's crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This shortage typically will result in higher selling prices and increased profitability to the Corporation. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather.
Because many of the raw materials processed by the Company are agricultural crops, production of products using these crops is predominantly seasonal. As a result, the Company needs access to working capital financing to meet its production requirements during these periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operation."
Competition
All of the Corporation's products compete with those of other national, major and small regional food processing companies under highly competitive conditions. Many of the Corporation's major competitors in the market are larger and have greater financial and marketing resources than the Corporation. Continued industry consolidation also may increase the market strength of the Corporation's larger competitors.
Regulation
United States and foreign governmental laws, regulations and policies directly affect the agricultural industry and food processing industry. The Corporation is subject to regulation by the FDA, the USDA, the Federal Trade Commission, the Environmental Protection Agency and various state agencies with respect to production, packaging, labeling and distribution of its food products. The application or modification of existing, or the adoption of new, laws, regulations or policies could have an adverse effect on the Corporation's business and results of operations.
General Risks of the Food Industry
Food processors are subject to the risks of adverse changes in general economic conditions; evolving consumer preferences and nutritional and health-related concerns; changes in food distribution channels and increasing buying power of large supermarket chains and other retail outlets that tend to resist price increases; federal, state and local food processing controls; consumer product liability claims; and risks of product tampering.
Environmental Risks
The disposal of solid and liquid waste material resulting from the preparation and processing of foods are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have had an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities.
The Corporation cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by the Corporation, some of which could be material.
Risks Associated with Foreign Operations
Foreign operations generally involve greater risks than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States' economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country's currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in
that country. Some of these are more pronounced in third world countries such as Guatemala. At June 1, 1997, the Corporation had $10.0 million in assets invested in its foreign operations.
ITEM 2.
ITEM 2. PROPERTIES
The following is a list of the Corporation's manufacturing, processing and warehousing properties. The Corporation owns each of the properties.
UNITED STATES
Hanover, PA - Canned and jarred products processing, repackaging of frozen vegetables, frozen soft pretzels manufacture, dry and frozen storage. Corporate research, new product development and quality assurance laboratory (corporate headquarters).
Centre Hall, PA - Frozen vegetable processing. Dry and frozen storage.
Lancaster, PA - Frozen mushrooms, peppers, onions and celery, freeze-dried food and ice manufacture. Dry and frozen storage.
Plumsteadville, PA - Frozen food entrees, meat pies and soups manufacture. Dry and frozen storage.
Ephrata, PA - Refrigerated, fresh foods and soups manufacture. Dry, refrigerated and frozen storage.
Clayton, DE - Frozen vegetables, meat products, frozen food entrees and meat pies manufacture. Dry and frozen storage.
GUATEMALA
San Jose Pinula - Frozen vegetable processing, dry and frozen storage, research and quality assurance laboratory.
Teculutan - Frozen vegetable processing, dry and frozen storage.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
1995 Warehime Family Litigation
On February 1, 1995, Michael A. Warehime, J. William Warehime and Elizabeth W. Stick, three Class B shareholders of the Corporation, filed a complaint in the Court of Common Pleas of York County, Pennsylvania against the Corporation and John A. Warehime (Chairman of the Corporation), in his capacity as voting trustee of two voting trusts entitling him to vote approximately 52% of the Class B common stock. The Court has dismissed various claims and parties in the lawsuit and the only remaining parties are Michael A. Warehime as plaintiff and John A. Warehime as defendant. The only remaining claims are (i) a claim for breach of fiduciary duty based on exercise of powers beyond those granted by certain voting trust agreements; (ii) a claim for breach of fiduciary duty for use of the voting trusts in a manner harmful to their beneficiaries, (iii) and a court requesting removal of John A. Warehime as the voting trustee of the voting trusts.
Derivative Action
On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Corporation's directors and the estate of a former director in the Court of Common Pleas of York County, Pennsylvania. The suit also named the Corporation as a nominal defendant. The suit sought various forms of relief including, but not limited to, rescission of the board's April 28, 1995 approval of John A. Warehime's 1995 Employment Agreement and the board's February 10, 1995 adjustment of directors' fees. (Since the filing of this lawsuit, John A. Warehime's 1995 Employment Agreement was amended. See Note 6 to Consolidated Financial Statements.) In addition, the plaintiffs sought costs and fees incident to bringing suit. On November 4, 1996, the complaint was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed the amended complaint for failure to make a prior demand. On May 12, 1997, a written demand was received by the Corporation from the attorney for these Class A common stockholders containing similar allegations and these allegations are currently being investigated by a special committee of the Board of Directors.
1997 Warehime Family Litigation
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and certain Class A shareholders filed motions for a preliminary injunction against the Corporation and John A. Warehime, in his capacity as voting trustee, in the Court of Common Pleas of York County, Pennsylvania against a proposal of the Board of Directors to amend and restate the Corporation's Articles of Incorporation in the manner hereafter described.
On February 13, 1997, the Board of Directors proposed an amendment and restatement of the Corporation's Articles of Incorporation (the "Amended and Restated Articles") which provides that if all of the following Class B shareholders (or their Estates upon the death of such
stockholders) do not agree in writing to the composition of the Board of Directors or other important matters specified below on or after the 1998 annual shareholders meeting, the trustees of the Corporation's 401(k) Savings Plan (or a similar employee benefit plan), acting as fiduciaries for the employees who participate in the Plan, and the Class A shareholder may become entitled to vote in the manner described below: Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William Warehime and Elizabeth W. Stick.
The Amended and Restated Articles create a Series C Convertible Preferred Stock and authorize the Board of Directors to issue up to 10,000 shares of such stock to the trustees of the Corporation's 401(k) Savings Plan (or a similar employee benefit plan). At least a majority of the trustees of the Corporation's 401(k) Savings Plan (or similar employee benefit plan), who are appointed by the Board of Directors, must be "disinterested directors" of the Corporation. If the Class B shareholders named above cannot unanimously agree in writing on the composition of the Board of Directors or on other important matters specified below, the Amended and Restated Articles permit each of the 10,000 shares of Series C Convertible Preferred Stock the right to cast 35 votes in the election of directors, and each share of Class A Common Stock would have one-tenth (1/10) of a vote per share, thereby enabling them to influence the ultimate result of the election by the Cass B shares. The Amended and Restated Articles also permit the trustees and the Class A shareholders to similarly vote on proposals to remove directors, and in connection with any proposal (not previously approved by the Board of Directors) to further amend the Articles of Incorporation or By-laws or to effectuate a merger, consolidation, division, or sale of substantially all of the assets of the Corporation. The voting power of the Series C Convertible Preferred Stock would cease five (5) years after its issuance. Under the Amended and Restated Articles, each of the shares of Series C Convertible Preferred Stock is convertible into one share of Class A Common Stock and is not entitled to vote except in the event that members of the Warehime family previously named cannot agree in writing on the composition of the Board of Directors or on other important matters specified above.
The Amended and Restated Articles also classified the terms of the Board of Directors commencing with the election at the 1997 annual shareholders meeting and permit directors to be elected for four year terms as permitted by Pennsylvania law.
The motions for a preliminary injunction were dismissed by the Court on June 24, 1997. The Class B shareholders on June 25, 1997 approved the Amended and Restated Articles (John A. Warehime being the sole Class B shareholder voting affirmatively) and the Amended and Restated Articles became effective June 25, 1997. Appeals have been filed from the denial of the plaintiffs' motion for a preliminary injunction.
In August 1997, the Board of Directors proposed a further amendment (the "Amendment") to the Amended and Restated Articles to expand the definition of "disinterested directors" in the manner described below, and to approve certain performance based compensation for John A. Warehime solely for the purpose of making the Corporation eligible for a federal income tax deduction pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. A
special meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity as voting trustee from voting on these proposals. This motion was denied on August 11, 1997. The Amendment and the proposal under Section 162(m) were approved by Class B Shareholders (John A. Warehime was the sole Class B shareholder to vote affirmatively) on August 14, 1997 and the Amendment became effective on August 14, 1997.
Under the Amendment, the definition of "disinterested directors" means the person who, in the opinion of counsel for the Corporation, meet any of the following criteria: (i) disinterested directors as defined in Section 1715(e) of the Pennsylvania Business Corporation Law of 1988, as amended; (ii) persons who are not "interested" directors as defined in Section 1.23 of The American Law Institute "Principles of Corporate Governance: Analysis and Recommendations" (1994); or (iii) persons who qualify as members of the Audit Committee pursuant to Section 303.00 of the New York Stock Exchange's Listed Company Manual.
Other Litigation
On April 29, 1996 the Corporation settled out of court with federal and Delaware environmental authorities regarding investigations of alleged violations of environmental laws at its Clayton, Delaware facility. As a result of the settlement, the Company paid $60,000 in civil penalties and agreed to undertake certain tasks within eighteen months including upgrading its refrigeration system and providing refrigeration training to its personnel. The approximate cost for training and capital expenditure is $400,000. The Company has made substantially all of the required capital expenditures to upgrade the refrigeration system and has performed the required refrigeration training at its Delaware facility. The Corporation's actions taken as a result of this settlement are subject to the review of the environmental authorities.
On December 12, 1996, OSHA cited the Corporation with two violations of OSHA regulations arising out of accidents which occurred at its Clayton, Delaware plant. The proposed penalty for each violation is $70,000. On December 18, 1996, the Corporation filed its Notice of Contest, contesting both alleged violations and the proposed penalties.
On March 24, 1997, OSHA cited the Corporation with twenty-two violations of OSHA regulations arising out of plant inspections which occurred at its Clayton, Delaware plant. The proposed penalty for said violations is $498,000. On April 11, 1997, the Corporation filed its Notice of Contest, contesting all of the alleged violations and the proposed penalties.
The Corporation is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE CORPORATION'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of the Corporation's capital stock. No class of capital stock is listed or traded on any stock exchange or with NASDAQ. Since March 1989 there has been limited trading in the outstanding shares of Class A Nonvoting Common Stock through stockbrokers. From March 31, 1996 to August 10, 1997, the Class A Nonvoting Common Stock has traded at prices ranging from $31.00 to $42.00.
Due to the lack of an established public trading market, under certain circumstances the Corporation agreed to repurchase shares of Class A Nonvoting Common Stock purchased or owned by employees prior to April 20, 1988. This repurchase agreement by the Corporation is for an indefinite period of time. As of June 1, 1997, there were 10,557 shares outstanding which would be eligible for repurchase. During the fiscal year ended June 1, 1997, the Corporation purchased 1,251 shares of Class A Common Stock at an aggregate cost of $85,068 or an average of approximately $68.00 per share. The repurchase price of the stock is the most recent independent appraised value. The appraisal was performed by Management Planning, Inc., Princeton, New Jersey, an independent appraisal firm. See Note 9 of the Notes to the Consolidated Financial Statements.
In addition, on July 27, 1995, the Corporation purchased 5,148 shares of the Company's Class B Voting Common Stock from Cyril T. Noel, individually, and Cyril T. Noel and Frances L. Noel, jointly, at $71.40 per share, as per the appraisal of Management Planning, Inc., Princeton, New Jersey.
On April 1, 1996, the Corporation entered into a stock purchase agreement with John R. Miller, Jr. to purchase 1,210 shares of the Corporation's Voting Class B Common Stock and 5,990 shares of the Corporation's Nonvoting Class A Common Stock over a four year period. On April 22, 1997, John R. Miller, Jr. entered into a Voting Agreement with the Corporation's Board of Directors whereby Mr. Miller agrees to vote all shares of the Corporation's stock held by him as directed by the Board of Directors, provided that a majority of Directors Rohrbach, Schaier and Noel vote in favor of the direction. The term of the Voting Agreement is for a period of four years commencing April 1, 1997 and ending on March 31, 2001.
The Corporation currently has no outstanding warrants to purchase shares of any class of its capital stock.
The only securities convertible into common equity of the Corporation are 15,044 outstanding shares of Cumulative Convertible Preferred Stock (Series A and B). Subsequent to the end of fiscal 1997, the Company amended its Articles of Incorporation to authorize Series C Convertible Preferred Stock, which is convertible to Class A Nonvoting Common Stock at the option of the holder. As of the date hereof, no shares of Series C Convertible Preferred Stock have been issued. At any time, the holders of this class of stock have the option to convert their shares to shares of Class A Nonvoting Common Stock based on the book value of the Class A Nonvoting Common Stock at the time of conversion.
As of August 10, 1997, there were 427 holders of record of Class A Nonvoting Common Stock and 41 holders of record of Class B Voting Common Stock.
During the two most recent fiscal years ending June 1, 1997 and March 31, 1996, the Corporation paid cash dividends of $1.10 and $1.10 per share respectively to the Class A and Class B Common stockholders. Dividends of the Corporation are declared at the sole discretion of the Board of Directors and will depend upon, among other things, the Corporation's earnings, capital requirements, financial condition and compliance with Pennsylvania law.
The December 1, 1991 $25,000,000 long-term financing agreement between the Corporation and Allstate Life Insurance Corporation contains certain restrictions on the Corporation's payment of dividends and purchase of its stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
HANOVER FOODS CORPORATION AND SUBSIDIARIES
The consolidated financial information set forth below should be read in conjunction with the more detailed consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Summary of Operations
Note: Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31.
ITEM 6. SELECTED FINANCIAL DATA
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Common Stock Data and Balance Sheet and Financial Data
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "projected," or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to quarterly fluctuations in operating results, competition, state and federal regulation, environmental considerations and foreign operations. Such factors, which are discussed in the Annual Report on Form 10-K, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
OVERVIEW OF FISCAL 1997 RESULTS
The results of operations for fiscal 1997 were impacted by lower operating expenses, increased selling prices and improved inventory management. See "Risk Factors."
The Corporation and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. The Corporation believes that the cost of such purchase and sales are competitive with alternate sources of supply and markets. See Note 5 to the Consolidated Financial Statements.
Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31. Accordingly, the following discussion compares the results of operations for the fiscal year ended June 1, 1997 to the proforma year ended June 2, 1996, the nine weeks ended June 2, 1996 to the nine weeks ended June 4, 1995 and the fiscal year ended March 31, 1996 to the fiscal year ended April 2, 1995.
YEAR ENDED JUNE 1, 1997 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED JUNE 2,
Net Sales
Consolidated net sales were $259.4 million for fiscal 1997 compared to $260.7 million for the proforma year ended June 2, 1996, a decrease of $1.3 million or 0.5%. The 0.5% decrease in consolidated net sales was comprised of the following volume and sales price components:
The decreased volume in frozen sales was principally due to lower sales levels in food service products due to management's decision to improve profit margins by increasing unit sales prices. The decrease in volume was partially offset by an increase in unit sales prices.
Canned sales also showed a slight decrease in fiscal 1997 due to decreased volume in bid business. The decrease in volume was offset by the increase in unit sales price, which increase in sales price was planned by management to improve profit margins.
Prepared foods showed a slight increase.
Cost of Goods Sold
Consolidated cost of goods sold represented 75.2% of consolidated net sales for fiscal 1997 compared to 81.8% for fiscal 1996. The consolidated cost of sales decreased $18.1 million from fiscal 1996 to fiscal 1997 of which 68% was due to decreased volume and 32% was due to lower operating costs and lower outside storage costs.
Selling Expenses
Consolidated selling expenses represented 14.4% of consolidated net sales for fiscal 1997 and 12.8% for fiscal 1996. Promotion expense for fiscal 1997 was $26.8 million as compared to $20.9 million for fiscal 1996. The Corporation spent additional promotion dollars to gain additional market share in both the mid-Atlantic and southern region for its branded business.
In addition to promotion expense, the Corporation spent approximately $2.2 million on advertising, including $1.7 million relating to redeemed coupons, for fiscal 1997, compared to $3.6 million in advertising, including $2.4 million for redeemed coupons, for fiscal 1996.
Management intends to continue to direct promotional dollars to gain additional market share and increased distribution of its brand. Management is constantly reviewing the effectiveness of its retail promotional program in an effort to increase profitable sales.
Administrative Expenses
Consolidated administrative expenses were $12.2 million in fiscal 1997, or 4.7% of consolidated net sales versus $9.3 million, or 3.5% of consolidated net sales in 1996. The increase in consolidated administrative expenses as a percent of net sales was the result of bonuses and outside legal and financial services. Included in administrative expenses for fiscal 1997 were $1.2 million in legal fees paid in connection with the litigation described under "Legal Proceedings" in Note 9 to the Consolidated Financial Statements.
Interest Expense
Consolidated interest expense for fiscal 1997 was $985,000 lower than fiscal 1996. Average seasonal borrowing was lower for an extended period of time to fund lower inventory levels during the pack season and to carry reduced canned and frozen inventory levels. The maximum amount of seasonal borrowing was approximately $35.0 million as compared to the maximum of $45.9 million in fiscal 1996. In addition, approximately $1.8 million in senior unsecured term debt that carried higher interest rates was repaid in fiscal 1997 which contributed to the reduction of the Corporation's interest expense for fiscal 1997.
Other Expense
Consolidated other expenses increased $605,000 for fiscal 1997 as compared to fiscal 1996. Additional value added tax and foreign exchange and translation adjustment losses during fiscal 1997 accounted for 41% of this additional expense. Interest income was reduced during fiscal 1997 which accounted for 25% of the additional charges.
Income Taxes
The provision for corporate federal and state income taxes for fiscal 1997 was $4.3 million or 39% of pretax earnings as compared to a provision of $219,000 or 35% of pretax earnings for fiscal 1996. The higher effective rate was due primarily to proportionately higher domestic pretax income versus non-taxable foreign earnings in fiscal 1997 compared to 1996.
Net Earnings
Consolidated net earnings for fiscal 1997 were $6.7 million, or 2.6% of consolidated net sales. This compared to $413,000, or 0.2% of consolidated net sales for fiscal 1996. Lower operating expenses, interest expenses and increased unit sales prices were the contributing factors to the increased net earnings.
Earnings Per Share
Earnings per share are computed on the weighted average number of shares outstanding after
providing for preferred stock dividends. During fiscal 1997, 2,343 shares of common stock were repurchased by the Corporation compared to 11,465 shares in fiscal 1996. The repurchase of these shares reduced the weighted average number of shares outstanding which is used in the calculation of earnings per share.
NINE WEEKS ENDED JUNE 2, 1996 RESULTS OF OPERATIONS COMPARED TO NINE WEEKS ENDED JUNE 4, 1995
Net Sales
Consolidated net sales were $34.6 million for the nine week period ended June 2, 1996. This represents a decrease of 6.0% over the nine week period ended June 4, 1995 consolidated net sales of $36.8 million. The decrease of $2.2 million was primarily due to decreased canned and frozen retail sales offset by increases in private label sales and was consistent with the Corporation's business plan.
Cost of Goods Sold
Cost of goods sold were $28.8 million, or 83.3% of consolidated net sales in the nine week period ended June 2, 1996 and $29.1 million, or 79.1%, of consolidated net sales for the corresponding period in 1995. The increase in cost of goods sold as a percentage of net sales resulted primarily from a decrease in the average selling prices per case of product in the nine week period ended June 2, 1996 compared to the same period in 1995 due to continued intense competition in retail sales.
Selling Expenses
Selling expenses were $5.5 million or 15.8% of consolidated net sales for the nine week period ended June 2, 1996 as compared to $7.1 million, or 19.3% of consolidated net sales during the corresponding period in 1995. The decrease in selling expenses as a percentage of net sales reflects the lower expenses related to promotional programs, advertising and customer allowances in the nine week period ended June 2, 1996 compared to 1995.
Administrative Expenses
Administrative expenses as a percentage of consolidated net sales were 4.1% for the nine week period ended June 2, 1996 compared to 5.1% for the corresponding period of 1995. This decrease was attributed to reductions in personnel related costs.
Interest Expense
Interest expense was $596,000 for the nine week period ended June 2, 1996 as compared to $584,000 for the same period in 1995. The increase in interest was primarily due to higher
average borrowings during the 1996 period as compared to the prior period.
YEAR ENDED MARCH 31, 1996 RESULTS OF OPERATIONS COMPARED TO YEAR ENDED APRIL 2,
Net Sales
Consolidated net sales were $262.9 million for fiscal 1996 compared to $257.5 million for fiscal 1995, an increase of $5.4 million or 2.1%. The 2.1% increase in consolidated net sales was comprised of the following volume and sales price components:
The increased volume in frozen sales was principally due to higher sales levels in direct retail and food service products. The reduction in unit sales prices was caused by intense competition to lower unit prices.
Canned sales also showed a slight increase for fiscal 1996. Increased volume in food service and private label canned sales more than offset decreased volume in retail sales. The reduction in unit sales price was caused by intense competition to lower prices in the private label and food service sector.
Cost of Goods Sold
Consolidated cost of goods sold was 81.2% of consolidated net sales for fiscal 1996 compared to 77.4% for fiscal 1995. Total consolidated cost of sales increased $14.1 million over fiscal 1995 of which 92% was due to increased volume and 8% was due to increased raw material costs and outside frozen storage costs.
Selling Expenses
Consolidated selling expenses were 13.3% of consolidated net sales for fiscal 1996 and 16.3% for fiscal 1995. The Corporation's frozen products faced intense competition in the mid-Atlantic
region from national branded companies attempting to gain market share. Promotion expense for fiscal 1996 was $23.2 million versus $31.9 million for fiscal 1995.
In addition to promotion expense, the Corporation spent approximately $3.6 million on advertising, including $2.4 million relating to redeemed coupons, for fiscal 1996, compared to $3.1 million in advertising, including $2.0 million to redeemed coupons, for fiscal 1995.
Administrative Expenses
Consolidated administrative expenses were $9.7 million in fiscal 1996, or 3.7% of consolidated net sales versus $9.7 million, or 3.8% of consolidated net sales in 1995. The slight decrease in consolidated administrative expenses as a percent of net sales was the net result of reductions in personnel costs offset by increases in other expenses. Included in administrative expenses for fiscal 1996 are $300,000 in legal fees paid in connection with the litigation described in Item 3 above and Notes 5 and 9 to the Consolidated Financial Statements.
Interest Expense
Consolidated interest expense increased for fiscal 1996 $895,000 as compared to fiscal 1995. Average seasonal borrowing was higher for an extended period of time to fund inventory levels during the fresh pack season and to carry the increased frozen inventory. The maximum amount of seasonal borrowing was approximately $45.9 million as compared to the maximum of $31.2 million in 1995.
The additional expense due to increased average borrowing was partially offset by reduced cost of funds for short-term borrowings. Approximately $1.8 million in senior unsecured term debt that carried higher interest rates was repaid in 1996.
Income Taxes
The provision for corporate federal and state income taxes for fiscal 1996 was $213,000, or 34% of pretax earnings, as compared to a provision of $798,000, or 30% of pretax earnings for fiscal 1995. The higher effective rate was due primarily to proportionately lower non-taxable foreign source earnings in fiscal 1996 offset by a reduction of deferred tax liabilities due to a change in state income tax rates.
Net Earnings
Consolidated net earnings for fiscal 1996 were $420,000 or 0.2% of consolidated net sales as compared to $1.9 million or 0.7% of consolidated net sales for fiscal 1995. The reduced unit sales prices and higher interest expense described above were the contributing factors to the reduced net earnings.
Earnings Per Share
Earnings per share are computed on the weighted average number of shares outstanding after providing for preferred stock dividends. During fiscal 1996, 10,937 shares of common stock were repurchased by the Corporation compared to 2,152 shares in fiscal 1995. The repurchase of these shares reduces the weighted average number of shares outstanding which is used in the calculation of earnings per share.
LIQUIDITY AND FINANCIAL RESOURCES
The discussion and analysis of the Corporation's liquidity and financial resources should be read in conjunction with the Consolidated Statements of Cash Flows.
Net cash provided by operations for the fiscal year ended June 1, 1997 was $12.3 million, compared to $4.8 million for the proforma year ended June 2, 1996. Sources of funds totaled $19.1 million consisting of net earnings of $6.7 million, decreased inventory of $5.6 million, decreased prepaid items of $0.3 million, decreased deferred income taxes of $0.2 million, an increase in tax and other liabilities of $0.7 million and depreciation and amortization of $5.6 million. The funds generated from these sources were applied towards the increase in accounts receivable of $6.6 million and the reduction in accounts payable and accrued expenses of $0.2 million.
Net cash provided by operations for the fiscal year ended March 31, 1996 was $1.4 million, compared to $10,000 for the fiscal year ended April 2, 1995. Sources of funds totaled $11.6 million consisting of net earnings of $0.4 million, decreased accounts receivable of $0.4 million, decreased inventory of $2.8 million, decreased prepaid items of $1.9 million, an increase in other liabilities of $0.4 million and depreciation and amortization of $5.6 million. The funds generated from these sources were applied towards the reduction in accounts payable and accrued expenses of $9.7 million.
Net cash used by investing activities for the fiscal year ended June 1, 1997 was $6.5 million as compared to $4.8 million for the fiscal year ended June 2, 1996. The principal use of funds was the upgrade and acquisition of property, plant and equipment. During the period ended June 1, 1997, $6.6 million was spent on development and modernization of equipment as compared to $4.7 million in the fiscal year ended June 2, 1996. These projects were funded by internally generated funds. The Corporation also uses operating leases to meet other equipment needs. The lease expense for the fiscal year ended June 1, 1997 was $3.6 million, down $0.4 million from the fiscal year ended June 2, 1996.
Net cash used by investing activities for the fiscal year ended March 31, 1996 was $6.1 million as compared to $5.6 million for the fiscal year ended April 2, 1995. The principal use of funds was the upgrade and acquisition of property, plant and equipment. During fiscal 1996, $5.5 million was spent on development and modernization of equipment as compared to $6.2 million
in fiscal 1995. These projects were funded by internally generated funds and external borrowing. The Corporation also uses operating leases to meet other equipment needs. The lease expense for fiscal 1996 was $4.0 million, up $0.4 million from fiscal 1995. During the first quarter for fiscal 1996, the Corporation purchased a facility located in Teculutan, Guatemala for $250,000 from ARWCO Corporation, a related party, and purchased a tract of land near the Corporation's Centre Hall, Pennsylvania plant for $250,00 from Centre Foods Enterprises, Inc., a related party. See "Transactions With Management and Others" and Note 5 of the Notes to the Consolidated Financial Statements.
Net cash used for financing activities was $3.6 million for the fiscal year ended June 1, 1997, compared to cash provided by financing activities of $154,000 for the fiscal year ended June 2, 1996. Seasonal borrowing amounting to $220.7 million was used throughout the fiscal year to fund operational needs. Seasonal borrowing, plus the cash overdraft, did not increase during the fiscal year, while term debt and other obligations had been reduced by $2.7 million. Management continues to monitor and evaluate the most cost effective means to finance its operations. The weighted average cost of seasonal borrowings was 6.1% for the fiscal year ended June 1, 1997 compared to 6.2% for the fiscal year ended June 2, 1996.
Net cash provided by financing activities was $5.0 million for the fiscal year ended March 31, 1996 compared to $4.0 million for the fiscal year ended April 2, 1995. Seasonal borrowing was used throughout the period to fund operational needs. Seasonal borrowing, plus the cash overdraft, was $9.5 million higher at year end, while term debt and other obligations had been reduced by $3.3 million. The weighted average cost of seasonal borrowing was 6.2% for the fiscal year ended March 31, 1996 compared to 7.5% for the fiscal year ended April 2, 1995. See Notes 2 and 3 of the Notes to Consolidated Financial Statements.
At June 1, 1997 the Corporation has commitments from financial institutions to provide seasonal lines of credit in the amount of $80 million. Additional borrowing is permitted within prescribed parameters in existing debt agreements which contain certain performance covenants. At June 1, 1997 the Corporation was in compliance with all the provisions of its debt agreements.
The Corporation paid dividends of $824,000 during fiscal 1997 compared to $831,000 in fiscal 1996. In addition, the Corporation repurchased 2,343 shares of Common Stock at a cost of $132,000 during the year ended June 1, 1997.
IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS
Competition in the Marketplace
The Corporation faced stiff competition from national and regional branded companies during the entire fiscal 1997 in all of its market areas, and management anticipates this competitive environment to continue throughout fiscal year 1998. See "Risk Factors - Competition."
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which establishes standards for computing and presenting earnings per share and will be effective for periods ending after December 15, 1997. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" and establishes standards for disclosing information about a company's capital structure, including pertinent rights and privileges of various securities outstanding and will be effective for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements establish standards for reporting and display of comprehensive income and its components and for reporting information about business segments and products in financial statements and are effective for years beginning after December 15, 1997.
Adoption of the above standards is not expected to have a material effect on the Corporation's financial statements.
Impact of Inflation and Changing Prices
The changes in cost and prices within the Company's business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by the moderate inflation.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Pages -----
Financial Statements
Reports of Independent Certified Public Accountants 26
Consolidated Balance Sheets as of June 1, 1997, June 2, 1996 and March 31, 1996 28
Consolidated Statements of Earnings for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996, Years Ended March 31, 1996 and April 2, 1995 and Proforma Year Ended June 2, 1996 (unaudited) 29
Consolidated Statements of Stockholders' Equity for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996 and the Years Ended March 31, 1996 and April 2, 1995 30
Consolidated Statements of Cash Flows for Year Ended June 1, 1997, Nine Weeks Ended June 2, 1996, Years Ended March 31, 1996 and April 2, 1995 and Proforma Year Ended June 2, 1996 (unaudited) 32
Notes to Consolidated Financial Statements 34
Quarterly Financial Data (Unaudited) 57
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Hanover Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hanover Foods Corporation and subsidiaries as of June 1, 1997, June 2, 1996, and March 31, 1996 and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year ended June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanover Foods Corporation and subsidiaries as of June 1, 1997, June 2, 1996, and March 31, 1996 and the results of their operations and their cash flows for the year ended June 1, 1997, the nine-week period ended June 2, 1996, and the year ended March 31, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP - -------------------------------
Harrisburg, Pennsylvania July 24, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Hanover Foods Corporation
We have audited the consolidated statements of earnings, stockholders' equity and cash flows of Hanover Foods Corporation and subsidiaries for the year ended April 2, 1995. These financial statements are the responsibiity of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all material respects, the consolidated results of operations of Hanover Foods Corporation and subsidiaries and their consolidated cash flows for the year ended April 2, 1995, in conformity with generally accepted accounting principles.
Harry Ness & Company
York, Pennsylvania May 26, 1995
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 1, 1997, June 2, 1996, and March 31, 1996
See accompanying notes to consolidated financial statements.
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
See accompanying notes to consolidated financial statements.
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
See accompanying notes to consolidated financial statements.
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the nine weeks ended June 2, 1996
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
See accompanying notes to consolidated financial statements.
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 1, 1997, June 2, 1996 and March 31, 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
DESCRIPTION OF BUSINESS
Hanover Foods Corporation is a processing, manufacturing, and distribution concern. The Company's principal line of business is the processing and sales of canned and frozen vegetables, frozen entrees, and prepared foods primarily in the Eastern United States. The Company's primary customers include regional grocery and other wholesale and retail food outlets and other food processors and distributors. The Company's ten largest customers account for approximately 45% of the Company's net sales and accounts receivable with no single customer accounting for more than 10% of net sales for the fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or a few suppliers. Revenue is recognized from sales when products are shipped.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Hanover Foods Corporation and its subsidiaries, which are Consumers Packing Company (T/A Hanover Foods - Lancaster Division), Spring Glen Fresh Foods, Inc., Hanover Insurance Company, Ltd., The Nittany Corporation, and Tri-Co. Foods Corp. and its subsidiaries - Alimentos Congelados Monte Bellos, S.A. (ALCOSA) and Sunwise Corporation, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Corporation to credit risk consist of trade receivables. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is not required. The risk associated with the concentration is limited due to the large number of wholesalers and retailers and their geographic dispersion.
CASH AND CASH EQUIVALENTS
Cash equivalents of $1,028,000, $392,000, and $796,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively, consist of short-term interest-bearing investments with maturities of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
INVESTMENTS
Investments of $2,187,000, $1,255,000, and $1,195,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively, classified as available-for-sale securities, are included in other noncurrent assets and measured at fair value. Net unrealized gains and losses are reported as a separate component of stockholders' equity until realized, and amount to gains of $164,000, $76,000, and $74,000 at June 1, 1997, June 2, 1996, and March 31, 1996, respectively.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(1) CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable and notes payable approximates fair values due to the short-term maturities of these instruments.
The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The amount reported in the consolidated balance sheet for long-term debt approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method of accounting) or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Plant and equipment under capital leases are stated at the present value of minimum lease payments. Expenditures for maintenance and repairs are charged to expense as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations.
Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from approximately 3 years to 12 years for equipment and up to 40 years for buildings. Accelerated methods are used for tax reporting purposes. Plant and equipment held under capital leases are amortized straight-line over the shorter of the lease term or estimated useful life of the asset.
INTANGIBLE ASSETS
It is the Corporation's policy to amortize intangible assets, primarily covenants not to compete, purchased trademarks and goodwill, over periods not in excess of 40 years. The Company assesses the recoverability of intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability will be impacted if estimated future operating cash flows are not achieved.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(1) CONTINUED
INSURANCE
The Company, through its wholly-owned insurance subsidiary, is self-insured with respect to certain general liability and workers' compensation claims. Excess insurance coverage is maintained for general liability and workers' compensation claims. Accrued expenses include provision for unpaid claims reported and claims incurred but not reported.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and development costs amounted to $728,000, $134,000, $725,000, $691,000, and $716,000 (unaudited) for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, April 2, 1995, and the pro forma year ended June 2, 1996, respectively.
PROMOTIONAL COSTS
Promotional costs are expensed as incurred. Accounts and notes receivable are presented net of allowances for bad debts and promotional programs.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Manufacturer coupons are expensed when payable by the Company (note 9). Advertising expenses amounted to $2,181,000, $842,000, $3,565,000, $3,122,000, and $3,580,000 (unaudited) for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, April 2, 1995, and the pro forma year ended June 2, 1996, respectively (including manufacturer coupon expense of $1,655,000, $542,000, $2,407,000, $2,026,000, and $2,358,000 (unaudited), respectively).
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) CONTINUED
EARNINGS PER SHARE
Earnings per common share are computed on the weighted average number of common shares outstanding during each period after providing for preferred stock dividend requirements. The dilutive effect on earnings per share for conversion of preferred stock is not presented because it results in either dilution of less than 3% or anti-dilution.
FISCAL YEAR END
Effective June 1, 1996 the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31.
The Corporation's past fiscal years ended at the close of operations on the Sunday nearest to March 31. The fiscal years ended June 1, 1997, March 31, 1996, and April 2, 1995 and the proforma unaudited results for the year ended June 2, 1996 were comprised of 52 weeks.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior amounts have been reclassified to conform to classifications adopted in the current year.
(2) NOTES PAYABLE - BANKS
The Corporation maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $80,000,000, of which $24,114,000 was borrowed (including an overdraft of $1,413,000) at June 1, 1997 $24,097,000 was borrowed at June 2, 1996, and $29,421,000 was borrowed (including an overdraft of $5,164,000) at March 31, 1996. The Corporation borrows funds under these lines of credit under two methods of cost of funds. The first method used to price the cost of short-term borrowings is based upon LIBOR plus fifty to seventy-five basis points. The second method is based upon the financial institution's "calculated cost of funds" plus an earnings modification. The weighted-average interest rate on short-term borrowings at June 1, 1997, June 2, 1996, and March 31, 1996 was 6.2%, 6.1%, and 6.2%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended June 1, 1997 and March 31, 1996 was approximately $35,024,000 and $45,900,000, respectively, and $29,400,000 for the nine-week period ended June 2, 1996.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(3) LONG-TERM DEBT
The long-term debt of the Corporation and its subsidiaries consists of:
The term loan agreements with the insurance company and seasonal borrowing with financial institutions (note 2), contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios. Based on the requirements of the agreements, at June 1, 1997, $23,499,000 of retained earnings are restricted from distribution. The Corporation is in compliance with the restrictive provisions in the agreements.
Property, plant, and equipment at cost of approximately $2,500,000 was pledged to secure $375,000 of the long-term obligations at June 1, 1997.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(3) CONTINUED
The aggregate long-term debt maturities follow:
(4) LEASES
The Company was obligated under a noncancelable capital lease for machinery and equipment that expired in 1997. At June 2, 1996 and March 31, 1996, the gross amount of plant and equipment and related accumulated amortization recorded under the capital lease were as follows:
Amortization of assets held under capital leases is included with depreciation expense.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) CONTINUED
The Company has several noncancelable operating leases, primarily for equipment, that expire over the next three years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995 consisted of the following:
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 1, 1997 are:
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(5) RELATED PARTY TRANSACTIONS
The Corporation and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties. The Corporation believes that the cost of such purchases and sales are competitive with alternative sources of supply and markets. Transactions with related parties are summarized below:
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(5) CONTINUED
The Corporation purchased the Teculutan, Guatemala plant property from ARWCO Corporation on April 5, 1995 for $250,000. On June 20, 1995, the Corporation purchased real estate near the Centre Hall facility from Centre Foods Enterprises, Inc. for $250,000.
In 1994, the Corporation entered into a one year lease with Food Service East, Inc. to lease 20,931 square feet of dry warehouse and production, refrigerated and frozen storage space. Pursuant to the lease, the Corporation has two unilateral options to extend the term of the lease for two successive one year terms or until May 31, 1997 and an option to purchase based on an independent appraisal. On October 1, 1994 the Corporation increased the rental space to 28,501 square feet for a total annual rent of $96,703. On June 1, 1996, the Corporation exercised its unilateral option to purchase for $904,000 approximately 10.3 acres of land improved by an office/warehouse facility free and clear of all liens, encumbrances and security interests.
In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 9), pursuant to applicable state law, the Corporation has agreed to pay directly all expenses (including attorney's fees) and costs in advance of the final disposition of the litigation or any substantially similar or related action, suit, or proceeding. The Corporation has received an undertaking from John A. Warehime to repay all costs and expenses if it is ultimately determined that he is not entitled to be indemnified by the Corporation. The amount paid and expensed by the Corporation under this arrangement for the years ended June 1, 1997 and March 31, 1996 was approximately $303,000 and $300,000, respectively.
On April 1, 1996, the Corporation entered into a stock purchase agreement with John R. Miller, Jr. to purchase 1,210 shares of the Company's Voting Class B Common Stock and 5,990 shares of the Company's Nonvoting Class A Common Stock over a four year period. The agreement provides that John R. Miller, Jr. give a proxy to John A. Warehime, Chairman, to vote all shares of both classes of common stock beginning April 1, 1996 and ending March 31, 2001. At June 1, 1997, the Corporation has purchased 328 shares of the Company's Voting Class B Common Stock for $25,000 and 1,720 shares of the Company's Nonvoting Class A Common Stock for $72,000.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(5) CONTINUED
A portion of rental expense included in note 4 was paid to ARWCO Corporation, Warehime Enterprises, Inc., Centre Foods Enterprises, Inc., and Food Service East, Inc., all of which are related companies through common control. The amounts were $307,000, $340,000, and $654,000 for the years ended June 1, 1997, March 31, 1996, and April 2, 1995, respectively. The portion of rental commitments included in note 4 due these companies is summarized as follows:
(6) BENEFIT PLANS
FROZEN DEFINED BENEFIT RETIREMENT PLANS
The Corporation previously amended its noncontributory, defined benefit plans to freeze benefit accruals effective August 31, 1992 and also took action to terminate the plans effective August 31, 1992. On November 12, 1993, the Board of Directors rescinded its previous action to terminate the plans and has placed the plans in a frozen status.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheet as of:
Net periodic pension cost (income) included the following components:
The plans' assets include mutual funds, bonds, cash, and cash equivalents. The Corporation funding policy is to contribute annually those amounts necessary to meet ERISA funding requirements.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
Assumptions used in accounting for the pension plans as of June 1, 1997, June 2, 1996, and March 31, 1996 were:
The assumed rates used above have a significant effect on the amounts reported. For example, decreasing the assumed discount rates by one percentage point at June 1, 1997 would increase the projected benefit obligation by approximately $1,113,000.
DEFINED CONTRIBUTION PLAN
The Corporation offers a 401(k) plan covering certain of its employees. The Corporation contributes an amount equal to 100% of each employee's deferral up to 5%. The Corporation's contribution to the 401(k) plan for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995 was $557,000, $90,000, $539,000, and $506,000, respectively.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain employees receive postretirement benefits other than pensions. This plan is currently not funded. The Company accounts for these costs by accruing for them over the employee service period. The status of the plan, based on the most recent measurement dates, is as follows:
A discount rate of 7.50%, 7.50%, and 7.25% for June 1, 1997, June 2, 1996, and March 31, 1996, respectively, was used in determining the actuarial present value of the accumulated postretirement benefit obligation.
The cost of postretirement benefits other than pensions consisted of the following components:
The assumed postretirement health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.3% for fiscal year June 1, 1997, decreasing each year to an ultimate rate of 5% in 2002 and thereafter.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of June 1, 1997 by $61,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended June 1, 1997 by $4,000.
EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENTS
On June 12, 1995, the Corporation entered into a five year employment agreement with its Chief Executive Officer, John A Warehime, at an annual base salary of $650,000 with such compensation payable retroactively from April 1, 1994 (the "1995 Employment Agreement"). The 1995 Employment Agreement was amended on February 13, 1997 (the "Amended Employment Agreement") to, among other things, reduce the annual base salary payable under the agreement to $498,866, which modification was applied retroactively to April 1, 1994 (the effective date of the 1995 Employment Agreement) and modified the method of calculating bonuses payable to the employee under such agreement. As a result of these retroactive changes, Mr. Warehime is required to reimburse the Corporation for $83,024 in excess compensation previously paid to him through the deduction of such amount from annual base salary increases provided for under the terms of the Amended Employment Agreement and to waive accrued bonuses payable for fiscal 1997 under the 1995 Employment Agreement which would have equaled $2,250,000. The principal terms of Mr. Warehime's employment arrangements with the Corporation as amended by the Amended Employment Agreement are set forth below.
The Amended Employment Agreement provides for annual increases (but not decreases) in the employee's annual salary equal to the greater of 5% of the prior year's salary or the annual percentage increase in the Consumer Price Index (CPI). Mr. Warehime's annual base salary for fiscal 1997 was $550,000. Unless terminated by either party, the Amended Employment Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Amended Employment Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Amended Employment Agreement provides for the same payment to the employee (or in the event of the death of the employee, his spouse, or descendants) for one year and thereafter the payment of supplemental pension benefits as described below. In addition, the Amended Employment Agreement provides for the reimbursement by the Corporation of the employee's legal and accounting fees up to $75,000 per year and reasonable business expenses incurred by the employee in connection with the business of the Corporation. The Amended Employment Agreement also provides the employee with various other benefits including the use of an automobile, disability and life insurance, and a club membership.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
The annual bonus payable to the employee under the Amended Employment Agreement is equal to $100,000 plus 10% of the Corporation's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Corporation are less than $5.0 million. The Amended Employment Agreement limits salary and the annual bonus payment described above to an aggregate of not more than $1.0 million annually. Annual bonuses can be paid in cash or Class A Common (nonvoting) stock at the option of the employee. For the periods ended June 1, 1997, March 31, 1996, and April 2, 1995, the bonus accrued under this agreement was $450,000, $0, and $659,000, respectively.
The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Corporation's performance over the prior five year period as measured by its average sales growth and average increase in operating profits as compared to an industry peer group over the same period. The bonus payable is calculated based upon a formula matrix set forth in the Amended Employment Agreement, with such calculations performed by an independent management consulting firm retained by the Corporation. For the period ended June 1, 1997, the long-term performance bonus accrued under this agreement was $175,000.
The Amended Employment Agreement provides for annual supplemental pension benefits, commencing upon the earlier of (a) five years after termination of the employee (or one year following his death or disability) or (b) the date of retirement, payable during the life of the employee and upon his death for the life of his spouse. Such annual supplemental pension benefits are equal to 60% of average total compensation (including bonuses) over the latest three year period prior to retirement, assuming retirement at age 65 or later. Supplemental pension benefits are reduced based upon an established formula to the extent the employee retires prior to age 65. The net present value of the cost of providing this future benefit is recognized by the Corporation over the remaining expected years of service. The expense recognized under this agreement was approximately $350,000 and $295,000 for the years ended May 31, 1997 and March 31, 1996, respectively, and $67,000 for the nine-week period ended May 31, 1996. Based on the estimated present value of the deferred compensation, the estimated present value at retirement (assuming retirement at age seventy) is approximately $9,800,000.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(6) CONTINUED
On January 23, 1997, the Corporation entered into a five year employment agreement with Gary T. Knisely, Executive Vice President, Secretary, and Counsel of the Corporation, at an annual salary of $175,000 with such compensation payable retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by either party, the Knisely Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. The Knisely Agreement provides for annual salary increases (but not decreases) equal to the greater of 5% of the prior year's salary or the annual percentage increase in the CPI, as well as incentive bonuses and various other benefits. As of June 1, 1997, the aggregate liability of the Corporation under this agreement for the next five years is estimated to be $1,000,000, excluding annual performance bonuses. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Knisely Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Knisely Agreement provides for the payment of salary and bonus (including all other benefits) to the employee (or his spouse or other descendants in the event of the employee's death) for the later of one year from the date of such termination or the death of the employee.
The agreement also provides for annual supplemental pension benefits equal to 60% of the employee's average annual compensation (including bonuses but excluding other benefits) over the three most recent fiscal years prior to the employee's termination if the employee is no longer employed by the Corporation and the employee has attained the age of 55. Such annual supplemental pension benefits are payable for the remainder of the lifetime of the employee. The net present value of the cost of providing this future pension benefit is recognized by the Corporation over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $47,000 for the year ended June 1, 1997. Based on the estimated present value of the supplemental pension benefit, the estimated present value at retirement (assuming retirement at age sixty-five) could amount to approximately $3,100,000.
The Corporation also entered into change in control severance agreements with Clement A. Calabrese and Alan T. Young, which provide termination compensation to the employees upon the occurrence of certain events.
The Corporation is also committed to another employee, Patricia H. Townsend, under a previous employment contract, which provides for minimum salary levels, annual adjustments, as well as incentive bonuses and for a term which ends in March 2004. Provisions contained in the agreement provide for continuation of the remuneration for the remainder of the term of the agreement in the event of termination, incapacity, death, or disability. The estimated commitment for future salaries through the duration of the agreement as of June 1, 1997 was approximately $480,000.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(7) INCOME TAXES
Total income taxes (benefit) for the year ended June 1, 1997, the nine-week period ended June 2, 1996, the year ended March 31, 1996 and April 2, 1995, were attributable to the following:
Income tax expense (benefit) attributable to income from operations consists of:
There is no income tax attributable to the income from foreign subsidiaries since the foreign entities were not subject to taxes on income in 1997, 1996, and 1995.
The significant components of deferred income tax expense attributable to income (loss) from operations for the year ended June 1, 1997, the nine-week period ended June 2, 1996, the years ended March 31, 1996 and April 2, 1995 are as follows:
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(7) (CONTINUED)
A reconciliation of the Corporation's effective tax rate to the amount computed by applying the federal income tax rate of 34% to income (loss) before taxes expressed in percentages, follows:
The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995, are as follows:
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(7) (CONTINUED)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The Company has not recognized a deferred tax liability for the undistributed earnings and tax basis differences of its investment in foreign subsidiaries since the earnings and investment are considered to be permanently invested in the businesses and, under the tax laws, are not subject to such taxes until distributed. The accumulated amount of such undistributed earnings was approximately $2,840,000 at June 1, 1997.
(8) CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has outstanding 15,044 shares of cumulative convertible preferred stock. Cumulative dividends of $.515625 per share are payable quarterly. Each share of preferred stock may be converted at the option of the holder into Class A common stock based on the book value of the common stock at the time of the conversion. At June 1, 1997, the outstanding preferred stock could be converted into 5,786 shares of common stock.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(9) COMMITMENTS AND CONTINGENCIES
LETTER OF CREDIT
As of June 1, 1997, the Corporation's wholly-owned reinsurance company had outstanding two letters of credit in the amount of $1,150,000 and $728,000 as security for the reimbursement of losses arising from the reinsurance assumed by the company.
LEGAL MATTERS
On February 1, 1995, Michael A. Warehime, J. William Warehime, and Elizabeth W. Stick, three shareholders of the Corporation, filed a Complaint against the Corporation and its Chairman in the Court of Common Pleas of York County, Pennsylvania. The suit, when filed, sought various forms of relief including, but not limited to, an order that the court invalidate the Corporation's October 18, 1994 election of directors and reinstate the Board of Directors that existed prior to that date. In addition, the plaintiffs sought all costs and fees incident to bringing suit. On August 16, 1995, the court dismissed J. William Warehime and Elizabeth W. Stick as plaintiffs and the Corporation as a defendant in this case.
On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Corporation's directors and the estate of a former director in the Court of Common Pleas of York County, Pennsylvania (the complaint). This suit also names the Corporation as a nominal defendant. The suit seeks various forms of relief including, but not limited to, rescission of the board's April 28, 1995 approval of John A. Warehime's 1995 Employment Agreement and the board's February 10, 1995 adjustment of directors' fees. (Since the filing of this lawsuit, John A. Warehime's 1995 Employment Agreement was amended. See note 6). In addition, the plaintiffs seek costs and fees incident to bringing suit. On November 4, 1996, the complaint was amended to add additional plaintiffs. On June 24, 1997, the Court dismissed the Complaint as amended for failure to make a prior demand. However, on May 12, 1997, a written demand was received by the Corporation from the attorney for these Class A common stockholders containing similar allegations and these allegations are currently being investigated by a committee of the Board of Directors.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(9) CONTINUED
On February 21, 1997, certain holders of the Corporation's common stock filed motions for a preliminary injunction in the Court of Common Pleas of York County, Pennsylvania against a proposal of the Board of Directors to amend and restate the Corporation's Articles of Incorporation to, among other things, establish a procedure for electing the Corporation's Board of Directors on or after the 1998 annual meeting in the event designated members of the Warehime family who are Class B common stockholders do not agree on the Board's composition (the "Proposed Amendments"). The motions were dismissed by the Court on June 24, 1997 and the Proposed Amendments became effective June 25, 1997. Appeals have been filed from the denial of the plaintiff's motion for a preliminary injunction.
On April 29, 1996 the Corporation settled out of court with federal and Delaware environmental authorities regarding investigations of alleged violations of environmental laws at its Clayton, Delaware facility. As a result of the settlement the Corporation paid $60,000 in civil penalties and agreed to undertake certain tasks within eighteen months including upgrading its refrigeration system and providing refrigeration training to its personnel. The approximate cost for training and capital expenditure is $400,000. The Corporation has made substantially all of the required capital expenditures to upgrade the refrigeration system and has performed the required refrigeration training at its Delaware facility. The Corporation's actions taken as a result of this settlement are subject to the review of the environmental authorities.
On December 12, 1996, the Occupational Safety and Health Administration (OSHA) cited the Corporation with two violations of OSHA regulations arising out of accidents which occurred at its Clayton, Delaware plant. The proposed penalty for each violation is $70,000. On December 18, 1996 the Corporation filed its Notice of Content, contesting both alleged violations and the proposed penalties. On March 24, 1997, the Occupational Safety and Health Administration (OSHA) cited the Corporation with twenty-two violations of OSHA regulations arising out of plant inspections which occurred at its Clayton, Delaware plant. The proposed penalty for said violations is $498,000. On April 11, 1997, the Corporation filed its Notice of Contest, contesting all of the alleged violations and the proposed penalties. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations or liquidity.
The Corporation is involved in various other claims and legal actions including environmental matters arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations or liquidity.
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(9) CONTINUED
MANUFACTURER COUPONS
The Corporation is contingently liable for unredeemed manufacturer coupons on various products at June 1, 1997 which will expire during 1997.
STOCK REPURCHASE PLAN
The Corporation has agreed to purchase Hanover Foods Corporation Class A Common Stock purchased or owned by employees prior to April 20, 1988. This guarantee of repurchase by Hanover Foods Corporation is for an indefinite period of time. Shares repurchased under this plan amounted to 1,251; 5,789; and 2,152 during the years ended June 1, 1997, March 31, 1996, and April 2, 1995, respectively. As of June 1, 1997, there are 10,557 shares outstanding which would be eligible for this plan. The maximum commitment, if requested, for all eligible shares would be approximately $718,000, based on the most recent appraised value per share.
(10) FOREIGN OPERATIONS AND EXCHANGE RESTRICTIONS
FOREIGN OPERATIONS
The Corporation's foreign subsidiary, Alimentos Congelados Monte Bello, S.A.. (ALCOSA) produces food products in Guatemala which are sold to Sunwise Corporation in the United States. The revenues generated by the operations in Guatemala and the assets employed in generating those revenues are as follows:
(Continued)
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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(10) CONTINUED
ALCOSA maintains its accounting records in quetzales, although, for financial reporting purposes, the accounting records have been remeasured to be expressed in U.S. dollars. The financial statements of ALCOSA have been translated to their U.S. dollar equivalents prior to being consolidated. Assets and liabilities have been translated to their U.S. dollar equivalents based on rates of exchange prevailing at the end of the period except for inventories, fixed assets, deferred and prepaid expenses, and other assets, which have been translated at historical rates. Revenue and expense accounts have been translated at average exchange rates during the period except for depreciation of fixed assets, which is based on the historical rate. The aggregate exchange gains and losses arising from the translation of foreign assets and liabilities and from foreign currency transactions are included in income under the caption of Other Expenses, Net and amount to a loss of $78,000, a gain of $44,000, a loss of $190,000, and a gain of $9,000 for the periods ended June 1, 1997, June 2, 1996, March 31, 1996, and April 2, 1995, respectively. At June 1, 1997, the prevailing exchange rate was Q6.00 to U.S. $1.00.
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HANOVER FOODS CORPORATION AND SUBSIDIARIES
Quarterly Financial Data
Note: Effective June 1, 1996, the Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CORPORATION
(a) DIRECTORS OF THE CORPORATION (AS OF AUGUST 10, 1997)
(b) EXECUTIVE OFFICERS OF THE CORPORATION WHO ARE NOT ALSO DIRECTORS (AS OF AUGUST 10, 1997)
(d) FAMILY RELATIONSHIPS OF DIRECTORS AND EXECUTIVE OFFICERS
None.
(h) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that directors and certain officers of the Corporation file reports of ownership and changes in ownership with the Securities and Exchange Commission as to the shares of Corporation Common Stock beneficially owned by them.
Based solely on its review of copies of such forms received by it, the Corporation believes that during the Corporation's fiscal year ended June 1, 1997, all filing requirements applicable to its directors and officers were complied with in a timely fashion.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
(b) The following table shows, for the fiscal years ended April 2, 1995, March 31, 1996 and June 1, 1997, the cash compensation paid or accrued, as well as certain other compensation paid or accrued, to the Chief Executive Officer and the next four highly compensated executive officers of the Corporation in all capacities in which they served.
Table 1: Summary Compensation Table
Annual Compensation
FOOTNOTES:
(f) COMPENSATION PURSUANT TO PLANS
(1) RETIREMENT BENEFITS
The Corporation currently provides retirement benefits via a frozen non- contributory defined benefit pension plan ("Pension Plan") and a 401(k) defined contribution benefit plan.
PENSION PLAN
On June 5, 1992, the Corporation amended its Pension Plan to freeze benefit accruals effective August 31, 1992 and also took action to terminate the Pension Plan effective August 31, 1992. On November 12, 1993 the Board of Directors rescinded its previous action to terminate the Pension Plan. The Pension Plan continues to be maintained as a frozen plan with benefits frozen as of August 31, 1992. The frozen Pension Plan provides for the payment of a retirement benefit upon attainment of the normal retirement age of 65 and actual retirement from the Corporation and is not subject to offset by Social Security benefits. The normal form of benefit under the frozen Pension Plan is a qualified joint and survivor annuity for a married participant and a single life annuity for an unmarried participant. Certain optional methods of payment are also available. If a participant dies after having met the service requirements for a vested retirement benefit, a survivor benefit is payable under certain conditions. The executive officers of the Corporation listed in the Summary Compensation Table have the following frozen credited years of service and frozen accrued benefits (single life) under the frozen Pension Plan:
On January 23, 1997, the Board of Directors took action to terminate its Pension Plan, effective April 15, 1997. The frozen accrued benefits of the participants are calculated as of August 31, 1992. On June 26, 1997, Internal Revenue Service
issued a determination letter indicating that the termination of the Pension Plan does not adversely affect its qualification for federal tax purposes. Distribution of the plan assets is anticipated in September 1997.
401(k) PLAN
The 401(k) defined contribution benefit plan, known as the Corporation's Retirement Savings Plan, was instituted on April 2, 1990, and amended June 5, 1992, April 4, 1994, April 28, 1995 and July 25, 1997. Certain full-time domestic employees are eligible to participate after completion of one (1) year of service. Each eligible employee has the option to defer up to sixteen (16%) percent of his or her total annual cash compensation per year. On December 31st of each year, the Corporation makes a one hundred (100%) percent matching contribution in cash and or securities of the Corporation to each contributing employee's account for the first five (5%) percent deferred by each employee. Each employee has various investment options. The Plan does permit loans but does not permit early withdrawals.
(g) DIRECTOR FEES
During fiscal year 1997, the policy of Board compensation was as follows: the directors of the Corporation are paid an annual retainer of $12,000 payable in equal monthly installments of $1,000 and a fee of $1,500 in person or $750 by telephone for each quarterly Board Meeting attended, plus an annual fee of $1,000 per year for service as a committee chairman and a fee of $1,000 in person or $500 by telephone for each Committee Meeting attended.
The directors of the Corporation were paid $195,755 as a group for fiscal year 1997 for attendance at fifteen (15) meetings of the Board and Board Committees, including reimbursement for air travel.
(h) EMPLOYMENT AGREEMENTS
On June 12, 1995, the Corporation entered into a five year employment agreement with its Chief Executive Officer, John A. Warehime, at an annual base salary of $650,000 with such compensation payable retroactively from April 1, 1994 (the "1995 Employment Agreement"). The 1995 Employment Agreement was amended on February 13, 1997 (the "Amended Employment Agreement") to, among other things, reduce the annual base salary payable under the agreement to $498,866, which modification was applied retroactively to April 1, 1994 (the effective date of the 1995 Employment Agreement) and modified the method of calculating bonuses payable to the employee under such agreement. As a result of these retroactive changes, Mr. Warehime is required to reimburse the Corporation
for $83,024 in excess compensation previously paid to him through the deduction of such amount from annual base salary increases provided for under the terms of the Amended Employment Agreement and to waive accrued bonuses payable for fiscal 1997 under the 1995 Employment Agreement which would have equaled $2,250,000. The principal terms of Mr. Warehime's employment arrangements with the Corporation as amended by the Amended Employment Agreement are set forth below.
The Amended Employment Agreement provides for annual increases (but not decreases) in the employee's annual salary equal to the greater of 5% of the prior year's salary or the annual percentage increase in the Consumer Price Index (CPI). Mr. Warehime's annual base salary for fiscal 1997 was $550,000. Unless terminated by either party, the Amended Employment Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation or similar events, the Amended Employment Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Amended Employment Agreement provides for the same payment to the employee (or in the event of the death of the employee, his spouse or descendants) for one year and thereafter the payment of supplemental pension benefits as described below. In addition, the Amended Employment Agreement provides for the reimbursement by the Corporation of the employee's legal and accounting fees up to $75,000 per year and reasonable business expenses incurred by the employee in connection with the business of the Corporation. The Amended Employment Agreement also provides the employee with various other benefits including the use of an automobile, disability and life insurance and a club membership.
The annual bonus payable to the employee under the Amended Employment Agreement is equal to $100,000 plus 10% of the Corporation's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Corporation are less than $5.0 million. The Amended Employment Agreement limits salary and the annual bonus payment described above to an aggregate of not more than $1.0 million annually. Annual bonuses can be paid in cash or Class A Common (nonvoting) stock at the option of the employee. For the periods ended June 1, 1997, March 31, 1996 and April 2, 1995, the bonus accrued under this agreement was $450,000, $0 and $659,000, respectively.
The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Corporation's performance over the prior five year period as measured by its average sales growth and average
increase in operating profits as compared to an industry peer group over the same period. The bonus payable is calculated based upon a formula matrix set forth in the Amended Employment Agreement, with such calculation performed by an independent management consulting firm retained by the Corporation. For the period ended June 1, 1997, the long-term performance bonus accrued under this agreement was $175,000.
The Amended Employment Agreement was revised effective as of August 1, 1997 to make certain clarifying changes and to require that bonus payments to Mr. Warehime in any taxable year in excess of $1.0 million would be subject to shareholder approval. At a meeting of the Class B Shareholders held on August 14, 1997, John A. Warehime, in his capacity as voting trustee of approximately 52% of the Class B Common Stock, approved such bonus payments.
The Amended Employment Agreement provides for annual supplemental pension benefits, commencing upon the earlier of (a) five years after termination of the employee (or one year following his death or disability) or (b) the date of retirement, payable during the life of the employee and upon his death, for the life of his spouse. Such annual supplemental pension benefits are equal to 60% of average total compensation (including bonuses) over the latest three year period prior to retirement, assuming retirement at age 65 or later. Supplemental pension benefits are reduced based upon an established formula to the extent the employee retires prior to age 65. The net present value of the cost of providing this future benefit is recognized by the Corporation over the remaining expected years of service. The expense recognized under this agreement was approximately $350,000 and $295,000 for the years ended June 1, 1997 and March 31, 1996, respectively, and $67,000 for the nine-week period ended May 31, 1996. Based on the estimated present value of the deferred compensation, the estimated present value at retirement (assuming retirement at age seventy) is approximately $9,800,000.
On January 23, 1997, the Corporation entered into a five year employment agreement with Gary T. Knisely, Executive Vice President, Secretary and Counsel of the Corporation, at an annual salary of $175,000 with such compensation payable retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by either party, the Knisely Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. The Knisely Agreement provides for annual salary increases (but not decreases) equal to the greater of 5% of the prior year's salary or the annual percentage increase in the CPI, as well as incentive bonuses and various other benefits. As of June 1, 1997, the aggregate liability of the Corporation under this agreement for the next five years is estimated to be $1,000,000, excluding annual performance bonuses. In the event the employee is terminated without cause, or
in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation or similar events, the Knisely Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Knisely Agreement provides for the payment of salary and bonus (including all other benefits) to the employee (or his spouse or other descendants in the event of the employee's death) for the later of one year from the date of such termination or the death of the employee.
The agreement also provides for annual supplemental pension benefits equal to 60% of the employee's average annual compensation (including bonuses but excluding other benefits) over the three most recent fiscal years prior to the employee's termination if the employee is no longer employed by the Corporation and the employee has attained the age of 55. Such annual supplemental pension benefits are payable for the remainder of the lifetime of the employee. The net present value of the cost of providing this future pension benefit is recognized by the Corporation over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $47,000 for the year ended June 1, 1997. Based on the estimated present value of the supplemental pension benefit, the estimated present value at retirement (assuming retirement at age sixty-five) could amount to approximately $3,100,000.
The Corporation also entered into change in control severance agreements with Clement A. Calabrese and Alan T. Young, which provide termination compensation to the employees upon the occurrence of certain events.
The Corporation is also committed to another employee, Patricia H. Townsend, under a previous employment contract, which provides for minimum salary levels, annual adjustments, as well as incentive bonuses and for a term which ends in March 2004. Provisions contained in the agreement provide for continuation of the remuneration for the remainder of the term of the agreement in the event of termination, incapacity, death or disability. The estimated commitment for future salaries through the duration of the agreement as of June 1, 1997 was approximately $480,000.
(j) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James G. Sturgill served as a member of the Compensation Committee until January 1997. During the 1997 fiscal year, the Corporation retained James G. Sturgill as a financial consultant. See "Certain Relationships and Related Transactions - Transactions with Management and Others."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
The following table sets forth information regarding beneficial ownership of all classes of capital stock of the Corporation by the directors, executive officers and owners of five (5%) percent or more of any class of capital stock, as well as any future rights of ownership by such individuals, as of August 10, 1997.
AS OF AUGUST 10, 1997
(a) BENEFICIAL OWNERS
(b) MANAGEMENT
Footnote:
(1) Currently, John A. Warehime owns directly 8,558 shares or 2.0% of the Class B Common Voting Stock. Mr. Warehime is Sole Voting Trustee with regard to the balance of Class B Common Stock shares listed (214,521) (50.2%), pursuant to Voting Trust Agreements dated April 5, 1988 and December 1, 1988, respectively, copies of which are incorporated herein by reference as Exhibits 9(a) and 9(b). Said trusts expire April 5, 1998 and December 1, 1998, respectively. See "Legal Proceedings."
(2) Does not include 809 shares of the Corporation's Class B Voting Common Stock and 4,490 shares of the Corporation's Class A Nonvoting Common Stock held by John R. Miller, Jr. which are subject to the April 22, 1997 Voting Agreement. See "Market for the Corporation's Common Stock and Related Stockholder Matters."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During the fiscal year ended June 1, 1997, the Corporation and its subsidiaries, in the normal course of business sold finished goods, provided administrative and manufacturing services to, and leased buildings, equipment and land, purchased contracted vegetables and received travel
services from related companies. These transactions are as follows:
1. The Corporation received travel services from The Cannery Press, Inc., doing business as New Horizons Travel, in the amount of $14,000 for fiscal year 1997.
2. The Corporation stored raw potatoes at its Centre Hall, Pennsylvania plant for Snyder's of Hanover, Inc., Hanover, Pennsylvania, for a total rental of $175,000.
3. On April 28, 1988, the Corporation entered into an Agreement of Sale with Warehime Enterprises, Inc. to purchase a frozen food facility for the total sum of $2,500,000. Effective March 1, 1993, the Corporation is obligated to make twenty (20) quarterly principal payments in the amount of $125,000. Interest at the greater of the prime rate or the imputed interest of the Internal Revenue Service accrues on the unpaid balance and is paid monthly.
4. During fiscal year 1996-1997, the Corporation rented equipment from two related parties, ARWCO Corporation and Warehime Enterprises, Inc. The rental payments pursuant to such lease agreements totaled $206,000 for fiscal year 1996- 1997.
5. On June 1, 1994, the Corporation entered into a one (1) year lease with Food Service East, Inc., Hanover, PA, for 20,931 square feet of dry warehouse, production, refrigerated and frozen storage space at Smith Station Road and Route 116, Hanover, PA. Pursuant to the lease, the Corporation has two unilateral options to extend the term of the lease for two (2) successive one (1) year terms or until May 31,1997 and an option to purchase based on an independent appraisal. On October 1, 1994 the Corporation increased the rental space to 28,501 square feet for a total annual rent of $96,703. On June 1, 1996, the Corporation exercised its unilateral option to purchase for $904,058 approximately 10.3 acres of land improved by an office/warehouse facility free and clear of all liens, encumbrances and security interests.
6. On April 5, 1995, the Corporation purchased a facility located in Teculutan, Guatemala, for $250,000 from ARWCO Corporation. A deed of transfer dated October 13, 1995 was recorded March 21, 1996.
7. During fiscal year 1997, the Corporation leased a two story farm house, adjoining one story guest house and adjoining ground located on Trolley Road, R.D. #3, Hanover, Heidelberg Township, Pennsylvania, for customer housing and entertainment and temporary new employee housing from John A. and Patricia M. Warehime for a total of $52,000.
8. Pursuant to the March 3, 1989 Agreement of Sale (Exhibit 10(c)), the Corporation
purchased 71.8 acres of real estate located in Penn Township, York County, from Warehime Enterprises, Inc. The total consideration, $460,000, had been paid in full as of April 1, 1993. The Corporation acquired title to the property by deed dated June 13, 1995 and recorded July 7, 1995.
9. During the fiscal year 1997, the Corporation purchased $1,044,000 of contracted vegetables from Lippy Brothers, Inc.
10. During the fiscal year 1997, the Corporation retained director James G. Sturgill as a financial consultant and paid him a total of $135,000 in fees, including reimbursable expenses.
11. The Corporation repurchased 5,148 shares of the Corporation's Class B Common Stock from Cyril T. Noel, individually, and from Cyril T. Noel and Frances L. Noel, jointly, for $367,567. See "Security Ownership of Management and Certain Security Holders."
12. During the fiscal year 1997, the Corporation sold $3,155,000 of frozen food products to Park 100 Foods, Tipton, Indiana.
NOTE: The following executive officers, directors or beneficial owners of more than five (5%) percent of the Corporation's Class B Voting Common Stocks are also beneficial owners of the following related parties with which the Corporation has and currently does business:
(1) Food Service East filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on April 22, 1994. This bankruptcy was subsequently converted to Chapter 7 on October 11, 1994.
For additional information regarding related party transactions, see Note 5 to the Notes to the Consolidated Financial Statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. All Financial Statements
Hanover Foods Corporation and Subsidiaries (See Part II, Item 8, Pages _______)
2. Financial Statement Schedules
None
All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
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.
(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 29, 1997
HANOVER FOODS CORPORATION
By: /s/ John A. Warehime -----------------------------
JOHN A. WAREHIME CHAIRMAN
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Hanover Foods Corporation and in the capacities and on the date indicated.
DATE: AUGUST 29, 1997
By: /s/ John A. Warehime By: /s/ T. Edward Lippy ----------------------------------- ------------------------------- John A. Warehime T. Edward Lippy Chairman, Director Director (Chief Executive Officer)
By: /s/ Gary T. Knisely By: /s/ Clayton J. Rohrbach, Jr. ----------------------------------- ------------------------------- Gary T. Knisely Clayton J. Rohrbach, Jr. Executive Vice President Director (Chief Financial Officer)
By: /s/ Pietro D. Giraffa, Jr. By: /s/ James G. Sturgill ----------------------------------- ------------------------------- Pietro D. Giraffa, Jr. James G. Sturgill Vice President - Controller Director (Chief Accounting Officer)
By: /s/ Arthur S. Schaier By: /s/ James A. Washburn ----------------------------------- ------------------------------- Arthur S. Schaier James A. Washburn Director Director
By: /s/ Cyril T. Noel ----------------------------------- Cyril T. Noel Director
HANOVER FOODS CORPORATION EXHIBIT INDEX