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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 1, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number -- 0-17896
HANOVER FOODS CORPORATION
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 23-0670710
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1486 York Road, P.O. Box 334, Hanover, PA 17331
(Address of principal executive offices) (Zip Code)
717-632-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of issuer's classes of common stock as
of the latest practicable date.
Class Outstanding at September 1, 2002
----- --------------------------------
Class A Common Stock, $25 par value 288,284 shares
Class B Common Stock, $25 par value 582,198 shares
1
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the Thirteen Weeks Ended September 1, 2002
Index Page
- ----- ----
Part I -- Financial Information
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets
September 1, 2002 (Unaudited) and June 2, 2002...........................................3
Condensed Consolidated Statements of Operations (Unaudited)
Thirteen Weeks Ended September 1, 2002
and September 2, 2001....................................................................5
Condensed Consolidated Statements of Stockholders'
Equity, (Unaudited) Thirteen Weeks Ended September 1, 2002 ..............................6
Condensed Consolidated Statements of Cash Flows
(Unaudited), Thirteen Weeks Ended September 1, 2002
and September 2, 2001....................................................................7
Notes to Condensed Consolidated Financial Statements
(Unaudited)..............................................................................8
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................17
Part II -- Other Information..................................................................21
Item 1-- Legal Proceedings....................................................................21
Item 2-- Changes in Securities................................................................21
Item 3-- Defaults upon Senior Securities......................................................21
Item 4-- Submission of Matters to a Vote of Security Holders..................................21
Item 5-- Other Information....................................................................21
Item 6-- Exhibits and Reports on Form 8-K.....................................................21
Exhibit 99.1 Certification by John A. Warehime, Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification by Gary T. Knisely, Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 1, 2002 June 2, 2002
----------------- ------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 4,121,000 $ 2,816,000
Accounts and Notes Receivable, Net 27,273,000 26,917,000
Accounts Receivable from Related Parties, Net 181,000 167,000
Inventories
Finished Goods 55,742,000 44,933,000
Raw Materials and Supplies 14,932,000 16,622,000
Prepaid Expenses 1,867,000 2,361,000
Prepaid Income Taxes 235,000 0
Deferred Income Taxes 917,000 276,000
------------ ------------
Total Current Assets 105,268,000 94,092,000
------------ ------------
Property, Plant and Equipment, at Cost:
Land and Buildings 53,298,000 52,966,000
Machinery and Equipment 125,910,000 124,048,000
Leasehold Improvements 544,000 544,000
------------ ------------
179,752,000 177,558,000
Less Accumulated Depreciation and
Amortization 104,111,000 101,749,000
------------ ------------
75,641,000 75,809,000
Construction in Progress 236,000 830,000
------------ ------------
Total Property, Plant and Equipment 75,877,000 76,639,000
------------ ------------
Other Assets:
Intangible Assets, Net 3,480,000 3,549,000
Other Assets 4,874,000 4,736,000
------------ ------------
Total Assets $189,499,000 $179,016,000
------------ ------------
See accompanying notes to condensed consolidated financial statements.
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY September 1, 2002 June 2, 2002
- ------------------------------------ ----------------- -------------
Current Liabilities:
Notes Payable - Banks $ 22,854,000 $ 18,987,000
Accounts Payable 22,415,000 19,890,000
Accrued Expenses 14,511,000 13,189,000
Current Maturities of Long-Term Debt 4,294,000 4,297,000
Income Taxes Payable 1,346,000 1,182,000
------------- -------------
Total Current Liabilities 65,420,000 57,545,000
------------- -------------
Long-Term Debt, Less Current Maturities 29,643,000 29,643,000
Other Liabilities 4,353,000 4,060,000
Deferred Income Taxes 4,702,000 3,777,000
------------- -------------
Total Liabilities 104,118,000 95,025,000
------------- -------------
Stockholders' Equity:
Series A & B 8 1/4% cumulative convertible preferred, $25
Par Value, 120,000 shares authorized;
31,056 shares issued at June 2, 2002 and September 1, 2002;
14,564 shares outstanding at June 2, 2002 and September 1, 2002 776,000 776,000
Series C 4.4% cumulative convertible preferred, $25
Par Value, 10,000 shares authorized, issued and outstanding
At June 2, 2002 and September 1, 2002 250,000 250,000
Common stock, Class A, non-voting, $25 Par Value;
800,000 shares authorized, 349,329 shares issued at June 2, 2002 and
September 1, 2002; 288,284 shares
outstanding at June 2, 2002 and September 1, 2002 8,733,000 8,733,000
Common stock, Class B, voting, $25 Par Value;
880,000 shares authorized, 635,572 shares issued at June 2, 2002 and
649,072 shares issued at September 1, 2002; 430,507 shares outstanding
June 2, 2002 and September 1, 2002 16,227,000 15,889,000
Capital Paid in Excess of Par Value 16,385,000 15,238,000
Retained Earnings 69,093,000 67,560,000
Treasury Stock, at Cost (8,148,000) (8,148,000)
Value of Shares held in Employee Benefit - 138,191 shares
at June 2, 2002 and 151,691 at September 1, 2002 (17,653,000) (16,168,000)
Accumulated Other Comprehensive Loss (282,000) (139,000)
------------- -------------
Total Stockholders' Equity 85,381,000 83,991,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 189,499,000 179,016,000
------------- -------------
See accompanying notes to condensed consolidated financial statements.
4
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations - Unaudited
THIRTEEN WEEKS ENDED
-----------------------------------------
September 1, 2002 September 2, 2001
----------------- -----------------
Net Sales $63,514,000 $60,977,000
Cost of Goods Sold 51,082,000 49,353,000
----------- -----------
Gross Profit 12,432,000 11,624,000
Selling Expenses 5,019,000 5,467,000
Administrative Expenses 3,731,000 3,101,000
----------- -----------
Operating Profit 3,682,000 3,056,000
Interest Expense 744,000 869,000
Other Expenses, Net 178,000 203,000
----------- -----------
Earnings Before Income Taxes 2,760,000 1,984,000
Income Taxes 978,000 543,000
----------- -----------
Net Earnings 1,782,000 1,441,000
Dividends on Preferred Stock 10,000 10,000
----------- -----------
Net Earnings Applicable to
Common Stock $ 1,772,000 $ 1,431,000
Earnings Per Share:
Net Earnings Per Common
Share - Basic 2.47 2.00
Net Earnings Per Common
Share - Diluted 2.43 1.98
Dividends per Share, Common 0.275 0.275
Basic Weighted Average Shares 718,791 714,496
Diluted Weighted Average Shares 731,857 727,919
----------- -----------
See accompanying notes to condensed consolidated financial statements.
5
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Cumulative Cumulative
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
Total Series A & B Series C Class A
Stockholders' --------------------------- ------------------------ -------------------------
Equity Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ---------- ------------ ---------- ------------
Balance, June 2, 2002 $ 83,991,000 31,056 $ 776,000 10,000 $ 250,000 349,329 $ 8,733,000
Net Earnings for the Period 1,782,000
Cash Dividends Per Share:
Preferred - $2.0625 annually (10,000)
Common - $1.10 annually (239,000)
Issuance of Common stock to
Employee Stock Trust
Class B 13,500 Shares
Other Comprehensive Loss (143,000)
------------ ------------ ------------ ---------- ------------ ---------- ------------
Balance, September 1, 2002 $ 85,381,000 31,056 $ 776,000 10,000 $ 250,000 349,329 $ 8,733,000
------------ ------------ ------------ ---------- ------------ ---------- ------------
Capital
Common Stock Paid In
Class B Excess Treasury Stock
------------------------- Of Par Retained -------------------------
Shares Amount Value Earnings Shares Amount
----------- ------------ ------------ ------------ ------------ ------------
Balance, June 2, 2002 635,572 $ 15,889,000 $ 15,238,000 $ 67,560,000 144,411 ($ 8,148,000)
Net Earnings for the Period 1,782,000
Cash Dividends Per Share:
Preferred - $2.0625 annually (10,000)
Common - $1.10 annually (239,000)
Issuance of Common stock to
Employee Stock Trust 13,500 338,000 1,147,000
Class B 13,500 Shares
Other Comprehensive Loss
----------- ------------ ------------ ------------ ------------ ------------
Balance, September 1, 2002 649,072 $ 16,227,000 $ 16,385,000 $ 69,093,000 144,411 ($ 8,148,000)
----------- ------------ ------------ ------------ ------------ ------------
Accumulated
Employee Stock Trust Other
-------------------------------- Comprehensive
Shares Amount Loss
------------ ------------ ------------
Balance, June 2, 2002 138,191 ($16,168,000) ($ 139,000)
Net Earnings for the Period
Cash Dividends Per Share:
Preferred - $2.0625 annually
Common - $1.10 annually
Issuance of Common stock to
Employee Stock Trust 13,500 (1,485,000)
Class B 13,500 Shares
Other Comprehensive Loss ($ 143,000)
------------ ------------ ------------
Balance, September 1, 2002 151,691 ($17,653,000) ($ 282,000)
------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
6
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Thirteen Weeks Ended
---------------------------------
Sept. 1, 2002 Sept. 2, 2001
------------- -------------
Cash Flows From:
Operating Activities:
Net Earnings $ 1,782,000 $ 1,441,000
Adjustments to Reconcile Net Earnings:
To Net Cash Used In Operating Activities:
Depreciation and Amortization 2,431,000 2,234,000
Deferred Income Taxes 284,000 (100,000)
Changes in Assets and Liabilities:
Accounts Receivable (370,000) 1,391,000
Inventories (9,119,000) (13,279,000)
Prepaid Expenses 259,000 (77,000)
Accounts Payable and Accrued Expenses 3,847,000 4,296,000
Income Taxes Payable 164,000 192,000
Other Liabilities 293,000 184,000
------------ ------------
Net Cash Used in Operating Activities (429,000) (3,718,000)
------------ ------------
Investing Activities:
Increase in Other Assets (281,000) (475,000)
Acquisitions of Property, Plant and Equipment (1,600,000) (1,832,000)
------------ ------------
Net Cash Used In Investing Activities (1,881,000) (2,307,000)
------------ ------------
Financing Activities:
Increase in Notes Payable 3,867,000 7,193,000
Payments on Long-Term Debt (3,000) (3,000)
Payment of Dividends (249,000) (246,000)
------------ ------------
Net Cash Provided by Financing Activities 3,615,000 6,944,000
------------ ------------
Net Increase in Cash and Cash Equivalents 1,305,000 919,000
Cash and Cash Equivalents, Beginning of Period 2,816,000 1,824,000
------------ ------------
Cash and Cash Equivalents, End of Period $ 4,121,000 $ 2,743,000
------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 1, 2002
(Unaudited)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements of the Registrant included
herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Although certain
information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been omitted,
the Registrant believes that the disclosures are adequate to make the
information presented not misleading.
The Corporation's fiscal year ends at the close of operations on the
Sunday nearest to May 31st. Accordingly, these financial statements
reflect activity for the thirteen week periods ended September 1, 2002 and
September 2, 2001.
It is suggested that these consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in Form 10-K for the Corporation's fiscal year ended June
2, 2002.
The condensed consolidated financial statements included herein reflect
all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary to present a fair statement of
the results of the interim period.
The results for the interim periods are not necessarily indicative of
trends or results to be expected for a full fiscal year.
In November 2001, the Emerging Issues Task Force ("EITF") finalized Issue
No. 01-9 "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," which codified the
matters discussed in Issue No. 00-14, "Accounting for Certain Sales
Incentives" and Issue No. 00-25, "Vendor Income Statement Characterization
of Consideration from a Vendor to a Retailer." Issue No. 01-9 provides
guidance on accounting for certain promotional activities, as well as the
accounting for certain consideration from a vendor to an entity that
resells the vendor's products. The Company implemented the requirements of
this pronouncement in the fourth quarter of the fiscal year ended June 2,
2002. In accordance with the provisions of this pronouncement, certain
amounts previously reported as selling expenses were reclassified and
reported as a reduction to net sales.
8
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 1, 2002
(Unaudited)
Upon further review during the quarter ended September 1, 2002, the
Company determined that certain modifications should be made to the
reclassifications of net sales and selling expenses for the quarterly
amounts reported during the fourth quarter of the fiscal year ended June
2, 2002 upon the initial adoption of EITF 01-9. As a result, the amounts
reported for net sales and gross profit for the quarterly financial data
for the fiscal year ended June 2, 2002 should be modified. The changes to
the quarterly financial data do not affect reported results for the year,
quarterly operating income or quarterly net income for the fiscal year
ended June 2, 2002. The effect of these reclassifications was to increase
net sales and gross profit by $857,000 and $1,027,000 for the first and
second quarters of fiscal 2002, respectively and decrease net sales and
gross profit by $1,197,000 and $867,000 for the third and fourth quarters
of fiscal 2002, respectively. Revised amounts for net sales and gross
profit for the quarterly financial data for the year ended June 2, 2002
are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net Sales $60,977 $83,644 $71,706 $73,776
Gross Profit 11,624 17,865 11,995 12,352
(2) SHORT-TERM BORROWINGS
The Corporation and its subsidiaries maintain short-term unsecured lines
of credit with various banks providing credit availability amounting to
$50,000,000 of which $22,854,000 was borrowed at September 1, 2002. The
average cost of funds during thirteen week period ended September 1, 2002
was 2.55%.
9
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(3) LONG-TERM DEBT
The long-term debt of the Corporation and its subsidiaries consist of:
September 1, 2002 June 2, 2002
----------------- ------------
8.74% unsecured senior notes payable
to an insurance company, due
through 2007 $ 8,929,000 $ 8,929,000
7.01% unsecured senior notes payable
to an insurance company, due through 2011 25,000,000 25,000,000
Other 8,000 11,000
----------- -----------
Total Long-Term Debt 33,937,000 33,940,000
Less current maturities 4,294,000 4,297,000
----------- -----------
Net Long-Term Debt $29,643,000 $29,643,000
----------- -----------
On September 1, 2001, the Company entered into a note agreement for the
issuance $25,000,000 of Senior Notes which bear interest of 7.01% (payable
quarterly) and are repayable in annual installments beginning September
15, 2002.
The senior note agreements and the agreements for seasonal borrowing with
financial institutions contain various restrictive provisions including
those relating to mergers and acquisitions, additional borrowing,
guarantees of obligations, lease commitments, limitations on declaration
and payment of dividends, repurchase of the Corporation's stock, and the
maintenance of working capital and certain financial ratios.
The Corporation is in compliance with the restrictive provisions in the
agreements as of September 1, 2002.
10
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(4) RELATED PARTY TRANSACTIONS
The Corporation and its subsidiaries, in the normal course of business,
purchase and sell goods and services to related parties. Transactions with
related parties are summarized below:
Thirteen Weeks Ended
---------------------------------------
September 1, 2002 September 2, 2001
----------------- -----------------
REVENUES:
Park 100 Foods, Inc. $513,000 $292,000
EXPENDITURES:
Park 100 Foods, Corp. 3,000 3,000
Warehime Enterprises, Inc. 1,000 1,000
John A. & Patricia M. Warehime 17,000 14,000
Lippy Brothers, Inc. 242,000 314,000
Schaier Travel, Inc. 3,000 2,000
11
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The respective September 1, 2002 and June 2, 2002 account balances with related
parties are as follows:
September 1, 2002 June 2, 2002
----------------- ------------
ACCOUNTS RECEIVABLE:
Park 100 Foods, Inc. $189,000 $164,000
Lippy Brothers, Inc. 0 3,000
ACCOUNTS PAYABLE:
Lippy Brothers, Inc. 3,000 0
James Sturgill 1,000 0
John & Patricia Warehime 4,000 0
12
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(5) COMPREHENSIVE INCOME
Comprehensive income is determined as follows:
13 Weeks Ended
-------------------------------------------
September 1, 2002 September 2, 2001
----------------- -----------------
Net Income $ 1,782,000 $ 1,441,000
Other Comprehensive Loss-
Unrealized Loss on Investments (143,000) (215,000)
----------- -----------
Comprehensive Income $ 1,639,000 $ 1,226,000
----------- -----------
(6) RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS
PER SHARE
13 Weeks Ended
-----------------------------------------
September 1, 2002 September 2, 2001
----------------- -----------------
Numerator for basic earnings per share:
Net earnings applicable to
common stock $1,772,000 $1,431,000
Preferred stock dividends 10,000 10,000
---------- ----------
Net earnings assuming dilution $1,782,000 $1,441,000
---------- ----------
Denominator:
Basic weighted average shares 718,791 714,496
Effect of dilutive securities 13,066 13,423
---------- ----------
Diluted weighted average shares 731,857 727,919
13
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) STOCK OPTION PLAN
On June 20, 2002, the Corporation's Board of Directors adopted the Hanover Foods
Corporation 2002 Stock Option Plan (the "Stock Option Plan"). All officers and
key employees of the Corporation and of any present or future parent or
subsidiary of the Corporation are eligible to receive options under the Stock
Option Plan, excluding John A. Warehime. No individual may receive options under
the Stock Option Plan for more than 15% of the total number of shares of the
Corporation's Class B common stock authorized for issuance under the Stock
Option Plan. 34,600 shares of the Corporation's Class B common stock, par value
$25.00 per share, are authorized for issuance under the Stock Option Plan, and
options to purchase 13,500 shares were granted on June 20, 2002. Under the Plan,
the exercise price of stock options is equal to the fair market value of the
common stock on the grant date. The maximum term of stock options is 10 years.
Stock options are accounted for under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for stock option grants.
Concurrent with the stock option grant on June 20, 2002, the Corporation
contributed an additional 13,500 shares of Hanover Class B common stock to the
Employee Stock Trust for the purpose of funding obligations under the Stock
Option Plan.
(8) NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 required
that the purchase method of accounting be used for all business combinations
completed after June 30, 2001 and specifies criteria for the recognition and
reporting of intangible assets apart from goodwill. Statement 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also required that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment. The Corporation adopted this statement in the first quarter of
fiscal 2003. Adoption of this statement did not have a material effect on the
Corporation's financial statements.
14
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements, Continued
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(9) LEGAL MATTERS
DERIVATIVE ACTION
On September 13, 1996, certain Class A shareholders filed a complaint in
equity against six of the Corporation's directors and the estate of a former
director in the Court of Common Pleas of York County, Pennsylvania (the
complaint). The suit also names the Corporation as a nominal defendant. The
suit sought various forms of relief including, but not limited to,
rescission of the board's April 28, 1995 approval of John A. Warehime's 1995
Employment Agreement and the board's February 10, 1995 adjustment of
director's fees. (Since the filing of this lawsuit, John A. Warehime's 1995
Employment Agreement was amended.) In addition, the plaintiffs sought costs
and fees incident to bringing suit. On November 4, 1996, the complaint was
amended to add additional plaintiffs. On June 24, 1997, the Court dismissed
the amended complaint for failure to make a prior demand. An appeal was
filed on the Court's June 24, 1997 Order. On December 2, 1998, the Superior
Court of Pennsylvania held that the derivative plaintiffs had made adequate
demand.
On May 12, 1997, a written demand was received by the Corporation from the
attorney for those Class A shareholders containing similar allegations and
the allegations raised by the Class A common stockholders were investigated
by a special independent committee of the Board of Directors and found to be
without merit.
The director defendants filed an Answer and New Matter to the amended
complaint on March 17, 1999. On September 5, 2001, director defendants filed
a Motion to Dismiss the Derivative Action. On September 20, 2001, plaintiffs
filed an answer to director defendants' Motion to Dismiss. On May 17, 2002,
the court entered an order denying defendants' Motion to Dismiss.
On May 14, 2002, Albert Blakey, Esquire, counsel for certain of the
derivative plaintiffs filed a Petition for Fees seeking an award of
$1,585,716 in attorney's fees. Defendants filed a response in opposition to
the request for fees.
WAREHIME FAMILY LITIGATION
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 shareholders),
(Michael A. Warehime, John A. Warehime, Sally W. Yelland, J. William
Warehime, and Elizabeth W. Stick (all members of the Warehime family)), do
15
not agree in writing to the composition of the Board of Directors or other
important matters specified below on or after the 1998 annual shareholders
meeting, the trustees of the Corporation's 401(k) Savings Plan (or a similar
employee benefit plan), acting as fiduciaries for the employees who
participate in the Plan, and the Class A shareholders may become entitled to
vote in the manner described in the document. Pursuant to the Corporation's
Bylaws, nominations for directors must be submitted to the Corporation in
the manner prescribed by the Bylaws no later than June 1 of the year in
which the meeting is to occur.
The Amended and Restated Articles created a Series C Convertible Preferred
Stock and also classified the terms of the Board of Directors commencing
with the election at the 1997 annual shareholders' meeting and permitted
directors to be elected for four-year terms as permitted by Pennsylvania
law.
On February 21, 1997, Michael A. Warehime, a Class B shareholder, and
certain Class A shareholders filed motions for a preliminary injunction
against the Corporation, John A. Warehime, in his capacity as voting
trustee, and certain directors of the Corporation in the Court of Common
Pleas of York County, Pennsylvania against a Proposal of the Board of
Directors to amend and restate the Corporation's Articles of Incorporation
in the manner hereafter described.
The motions for a preliminary injunction were dismissed by the Court on June
24, 1997. The Class B shareholders on June 25, 1997 approved the Amended and
Restated Articles (John A. Warehime, being the sole Class B shareholder
voting affirmatively in his capacity as voting trustee) and the Amended and
Restated Articles became effective June 25, 1997.
In August 1997, the Board of Directors proposed a further amendment (the
"Amendment") to the Amended and Restated Articles to expand the definition
of "disinterested directors" in the manner described below, and to approve
certain performance based compensation for John A. Warehime solely for the
purpose of making the Corporation eligible for a federal income tax
deduction pursuant to Section 162(m) of the Internal Revenue Code of 1986,
as amended. A special meeting was scheduled for August 14, 1997 (the
"Special Meeting") to vote on these proposals. On August 8, 1997, Michael A.
Warehime filed a motion in the Court of Common Pleas of York County,
Pennsylvania to prevent John A. Warehime, in his capacity as voting trustee
from voting on these proposals and to enjoin the Amendment. This motion was
denied by the Court on August 11, 1997. The Amendment and the proposal under
Section 162(m) were approved by Class B shareholders (John A. Warehime was
the sole Class B shareholder to vote affirmatively, in his capacity as
voting trustee) on August 14, 1997 and the Amendment became effective on
August 14, 1997.
Under the Amendment, the definition of "disinterested directors" means a
person who, in the opinion of counsel for the Corporation, meets any of the
following criteria: (i) disinterested directors as defined in Section
1715(e) of the Pennsylvania Business Corporations Law of 1988, as amended;
(ii) persons who are not "interested" directors as defined in Section 1.23
of The American Law Institute "Principles of Corporate
16
Governance: Analysis and Recommendations" (1994); or (iii) persons who
qualify as members of the Audit Committee pursuant to Section 303.00 of the
New York Stock Exchange's Listed Company Manual.
Michael A. Warehime filed an appeal from the denial of his motion to enjoin
the previously described Amendment to the Corporation's Amended and Restated
Articles. On December 2, 1998, a majority panel of the Superior Court of
Pennsylvania issued a decision holding that although John A. Warehime had
acted in good faith in voting for the Amendment to the Amended and Restated
Articles as trustee of the Warehime voting trust, he had breached his
fiduciary duty to the beneficiaries of the Warehime voting trust in voting
for the Amendment. On November 29, 1999, the Supreme Court of Pennsylvania
granted a petition for allowance of appeal, filed by John A. Warehime, and
granted a cross-petition for appeal filed by Michael A. Warehime.
On August 13, 1999, Michael A. Warehime filed a complaint in equity in the
Court of Common Pleas of York County, Pennsylvania, naming as defendants
Arthur S. Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr., John A.
Warehime, and the Corporation. The complaint sought a court order declaring
that the September 1999 election for the Board of Directors of the
Corporation be conducted in accordance with the Articles of Incorporation of
the Corporation as they existed prior to June 25, 1997, an order declaring
that the Series C Convertible Preferred Stock cannot be voted, and an order
that the following candidates for the Board of Directors of the Corporation
proposed by Michael A. Warehime, Sally Yelland, Elizabeth Stick and J.
William Warehime be accepted by the Corporation and listed on the ballot to
be distributed at the annual meeting of shareholders of the Corporation to
be held on September 16, 1999: Michael A. Warehime, Daniel Meckley,
Elizabeth Stick, Sonny Bowman, and John Denton. The basis for the complaint
was the December 2, 1998 decision of the Superior Court of Pennsylvania
which held that John A. Warehime breached his fiduciary duties in voting for
the Amended and Restated Articles as trustee of the Warehime voting trust.
The requested relief was denied by the Court of Common Pleas of York County
and Michael Warehime appealed to the Superior Court of Pennsylvania.
On September 12, 2000, the Superior Court of Pennsylvania stated, in a
Memorandum decision, that the June 25, 1997 shareholder vote, which adopted
the Amended and Restated Articles of Incorporation of the Corporation should
be set aside, and remanded the case to the Court of Common Pleas of York
County to determine what further relief would be appropriate. On remand, the
Court of Common Pleas of York County entered an Order on October 10, 2000
declaring that the Amended and Restated Articles of Incorporation were set
aside and that an election should be held without the Amended or Restated
Articles of Incorporation. On October 11, 2000, the Supreme Court of
Pennsylvania entered an Order staying the Order of the Court of Common Pleas
of York County.
On November 27, 2000, the Supreme Court of Pennsylvania reversed and
remanded the Order of the Superior Court issued on December 2, 1998 and, in
effect, the Order of the Superior Court issued September 12, 2000. In
reversing the Superior Court's Order, the Supreme Court of Pennsylvania held
that John A. Warehime, the trustee of the voting
17
trust, did not breach his fiduciary duties in voting the trust shares in
favor of the Amended and Restated Articles of Incorporation. The Supreme
Court remanded the case to the Superior Court of Pennsylvania to consider
other issues raised by Michael A. Warehime.
On May 4, 2001, the Superior Court of Pennsylvania, on remand from the
Supreme Court of Pennsylvania to decide several remaining issues, held that
the 1997 amendments to the Corporation's Amended and Restated Articles of
Incorporation "violated principles of corporate democracy" and should be
invalidated even though the Superior Court found the directors acted in good
faith and their actions in approving the amendments did not result in a
breach of their fiduciary duties. A petition for allocatur was filed with
the Supreme Court of Pennsylvania requesting that the Supreme Court of
Pennsylvania review the Superior Court's May 4, 2001 ruling. On September
17, 2002, the Supreme Court of Pennsylvania granted defendants' Petition for
Allowance of Appeal.
The Corporation is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material adverse
effect on the Corporation's consolidated financial position, results of
operations or liquidity.
18
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "projected", or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including but not
limited to quarterly fluctuations in operating results, competition, state and
federal regulation, environmental considerations, and foreign operations. Such
factors, which are discussed in the Form 10-Q, could affect the Company's
financial performance and could cause the Company's actual result for future
periods to differ materially from any opinion or statements expressed herein
with respect to future periods. As a result, the Company wishes to caution
readers not to place undue reliance on any such forward looking statements,
which speak only as of the date made.
The following comments should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the Corporation's Annual Report on Form 10-K for the fiscal year
ended June 2, 2002
GENERAL
Prices for processed food tend to rise with overall inflation and not in line
with prices of raw farm products. Generally, price surges in farm products due
to supply shocks and crop problems are not passed on to consumers dollar for
dollar. Management believes consumers often switch from one food product that
has risen to another which has not changed in price. As a result, food
processors tend to absorb raw farm product price increases to remain
competitive. However, when raw farm product prices drop, food processors try to
retain some of the savings. The Corporation does not expect the overall number
of pounds of product consumed to significantly increase over the next several
years. Generally, the Corporation expects sales growth by processors beyond
expected inflation rates and population growth will come at the expense of and
loss of market share by another processor. Sales growth can increase
internationally and through promotions to increase consumption through the
introduction of new or improved food products.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales were $63.5 million for the thirteen week period ended
September 1, 2002. This represents an increase of 4.2% over the thirteen week
period ended September 2, 2001 consolidated net sales of $61.0 million. The
increase of $2.5 million was primarily due to increased sales in our branded
canned and frozen retail as well as increases in food service and
19
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
private label sales. These increases were partially offset by decreases in
canned mushrooms and snacks.
COST OF GOODS SOLD
Cost of good sold were $51.1 million, or 80.4% of consolidated net sales in the
thirteen week period ended September 1, 2002 and $49.4 million or 80.9% of
consolidated net sales for the corresponding period in 2001. The decrease in
cost of goods sold as a percentage of net sales resulted primarily from the
increase in branded sales, which carries a lower cost of sales percentage as
compared to other sales segments of the company.
SELLING EXPENSES
Selling expenses were $5.0 million, or 7.9% of consolidated net sales for the
thirteen week period ended September 1, 2002 as compared to $5.5 million or 9.0%
of consolidated net sales for the corresponding period in 2001. The decrease in
selling expenses reflects lower coupon redemptions, media advertising, customer
incentive programs and customer advertising dollars.
ADMINISTRATIVE EXPENSES
Administrative expenses were $3.7 million, or 5.9% of consolidated met sales for
the thirteen week period ended September 1, 2002 as compared to $3.1 million, or
5.1% of consolidated net sales for the corresponding period in 2001. The
increase in administrative expenses reflects an increase in outside legal fees
and services, the provision for the supplemental pension benefits and general
annual wage increases.
INTEREST EXPENSE
Interest expense was $.7 million for the thirteen week period ended September 1,
2002 as compared to $.9 million for the same period in 2001. The decrease
reflects lower average borrowings as well as lower average borrowing rates for
the period compared to 2001.
OTHER EXPENSES
Other expenses were $178,000 for the thirteen week period ended September 1,
2002 as compared to $203,000 for the same period in 2001. The decrease in other
expenses is primarily due higher miscellaneous income offset by lower returns on
the sale of investments, and a larger foreign translation adjustment loss.
20
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
INCOME TAXES
The provision for corporate federal and state income taxes for the thirteen week
period ended September 1, 2002 was $978,000, or 35.4% of pretax earnings, as
compared to $543,000, or 27.4% of pre-tax earnings for the same period in 2001.
The increase in the effective tax rate is primarily due to increased earnings in
jurisdictions with higher effective tax rates in the current year period as
compared to the prior period.
LIQUIDITY AND CAPITAL RESOURCES
The discussion and analysis of the Corporation's liquidity and capital resources
should be read in conjunction with the Consolidated Statements of Cash Flows,
contained elsewhere herein.
OPERATING ACTIVITIES
Net working capital was $39.8 million at September 1, 2002 and $36.5 million at
June 2, 2002. The current ratios were 1.61 on September 1, 2002 and 1.64 on June
2, 2002.
Cash used in operating activities for the thirteen week period ended September
1, 2002 was $.4 million as compared to cash used in operating activities of $3.7
million during the same period of 2001. The combination of increased earnings,
increased accounts payable and accrued expenses and lower inventory levels
utilized less cash flow in the thirteen week period ended September 1, 2002
compared to the prior year period.
INVESTING ACTIVITIES
During the thirteen week period ended September 1, 2002, the Corporation spent
approximately $1.6 million for the purchase plant upgrades and expansions. This
compares to $1.8 million spent during the same period last year for capital
projects.
FINANCING ACTIVITIES
The increase in notes payable of approximately $3.9 million during the thirteen
week period ended September 1, 2002 represents borrowings made against available
seasonal lines of credit from financial institutions for use in operations and
plant upgrades and expansions.
The Corporation has available seasonal lines of credit from financial
institutions in the amount of $50.0 million, of which $22.9 million was utilized
as of September 1, 2002. Additional
21
PART I -- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
HANOVER FOODS CORPORATION AND SUBSIDIARIES
borrowing is permitted within prescribed parameters in existing debt agreements,
which contain certain performance covenants.
The Company entered into a note agreement to borrow $25 million of senior notes
on September 1, 2001. The Senior Notes bear interest of 7.01% per year and are
repayable in annual installments beginning September 15, 2002.
The Company believes that it has sufficient working capital and availability
from seasonal lines of credit to meet its cash flow needs.
The following table summarizes the Corporation's contractual obligations and
other commitments as of September 1, 2002:
Payment Due by Period
---------------------------------------------------
Contractual Obligation After
Total 1 Year 2-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
Short-Term Notes Payables $22,854,000 $22,854,000 $-0- $-0- $-0-
Long-Term Debt 33,937,000 4,294,000 8,572,000 8,572,000 12,499,000
Operating Leases 978,000 475,000 394,000 109,000 -0-
----------- ----------- ----------- ----------- -----------
Total contractual obligations $57,769,000 $27,623,000 $ 8,966,000 $ 8,681,000 $12,499,000
=========== ========== ========== ========== ==========
Currently, the Company is obligated to purchase 6,000,000 pounds of tomato
paste from California Tomato Products, Colusa, California in each of the fiscal
years from 2003 through 2006, at a price based on annual cost of production.
The Company's sources of liquidity are primarily funds from operation and
available amounts under seasonal lines of credit. (Two of these lines expire on
October 31, 2003 and one on January 28, 2003). They are expected to be renewed
in the ordinary course of business.
22
PART II - OTHER INFORMATION
HANOVER FOODS CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
See note 9 of the Notes of Condensed Consolidated Financial Statements in this
form 10-Q for information regarding the 1995 Warehime Family Litigation and the
Derivative Action.
ITEM 2. CHANGES IN SECURITIES -- None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- None
ITEM 5. OTHER INFORMATION -- None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - None
EXHIBIT 99.1 CERTIFICATION BY JOHN A. WAREHIME, CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.2 CERTIFICATION BY GARY T. KNISELY, CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
23
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER FOODS CORPORATION
Date: October 16, 2002 By: /s/ Pietro Giraffa
------------------------------------
Pietro Giraffa
Vice President & Controller
Chief Accounting Officer
(Principal Accounting Officer)
By: /s/ Gary T. Knisely
------------------------------------
Gary T. Knisely
Executive Vice President
Chief Financial Officer
24
CERTIFICATION
I, John A. Warehime, Chief Executive Officer of Hanover Foods Corporation,
certify that:
1. I have reviewed the quarterly report on Form 10-Q of Hanover Foods
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 16, 2002 /s/ John A. Warehime
-------------------------
John A. Warehime
Chief Executive Officer
25
CERTIFICATION
I, Gary T. Knisely, Chief Financial Officer of Hanover Foods Corporation,
certify that:
1. I have reviewed the quarterly report on Form 10-Q of Hanover Foods
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 16, 2002 /s/ Gary T. Knisely
-------------------------
Gary T. Knisely
Chief Financial Officer
26