UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 29, 2004
OR
 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
___________ to
____________
Commission File Number: 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 Street, 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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at September 30, 2004 | |
| Class A Common Stock | 287,996 shares | |
| Class B Common Stock | 781,648 shares | |
HANOVER FOODS CORPORATION AND SUBSIDIARIES
FORM
10-Q
For the Thirteen
Weeks Ended August 29, 2004
i
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
| August 29, 2004 | May 30, 2004 | |||||
| ASSETS | (Unaudited) | |||||
| Current Assets: | ||||||
| Cash and Cash Equivalents | $ | 2,619,000 | $ | 3,015,000 | ||
| Accounts and Notes Receivable, Net | 32,786,000 | 30,323,000 | ||||
| Accounts Receivable from Related Parties, Net | 455,000 | 275,000 | ||||
| Inventories | ||||||
| Finished Goods | 67,625,000 | 46,779,000 | ||||
| Raw Materials and Supplies | 16,394,000 | 17,027,000 | ||||
| Prepaid Income Taxes | 1,114,000 | 611,000 | ||||
| Prepaid Expenses | 6,627,000 | 6,347,000 | ||||
| Deferred Income Taxes | 917,000 | 917,000 | ||||
| Total Current Assets | 128,537,000 | 105,294,000 | ||||
| Property, Plant and Equipment, at Cost: | ||||||
| Land and Buildings | 61,075,000 | 63,585,000 | ||||
| Machinery and Equipment | 136,421,000 | 135,029,000 | ||||
| Leasehold Improvements | 544,000 | 544,000 | ||||
| 198,040,000 | 199,158,000 | |||||
| Less Accumulated Depreciation and | ||||||
| Amortization | 115,713,000 | 121,028,000 | ||||
| 82,327,000 | 78,130,000 | |||||
| Construction in Progress | 1,080,000 | 5,975,000 | ||||
| Total Property, Plant and Equipment | 83,407,000 | 84,105,000 | ||||
| Other Assets: | ||||||
| Goodwill | 2,070,000 | 2,070,000 | ||||
| Intangible Assets | 2,274,000 | 2,274,000 | ||||
| Other Assets | 5,710,000 | 5,645,000 | ||||
| Total Assets | $ | 221,998,000 | $ | 199,388,000 | ||
See accompanying notes to condensed consolidated financial statements.
1
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS’ EQUITY
| August 29, 2004 | May 30, 2004 | |||||
| Current Liabilities: | ||||||
| Notes Payable – Banks | $ | 36,777,000 | $ | 21,609,000 | ||
| Accounts Payable | 25,267,000 | 23,393,000 | ||||
| Accounts Payable to Related Parties, Net | 9,000 | 32,000 | ||||
| Accrued Expenses | 17,745,000 | 14,011,000 | ||||
| Current Maturities of Long-Term Debt | 4,286,000 | 4,286,000 | ||||
| Income Taxes Payable | 0 | 302,000 | ||||
| Total Current Liabilities | 84,084,000 | 63,633,000 | ||||
| Long-Term Debt, Less Current Maturities | 21,071,000 | 21,071,000 | ||||
| Other Liabilities | 8,027,000 | 7,636,000 | ||||
| Deferred Income Taxes | 2,828,000 | 2,948,000 | ||||
| Total Liabilities | 116,010,000 | 95,288,000 | ||||
| Stockholders’ Equity: | ||||||
| Series A & B 8 1/4% cumulative convertible preferred | 776,000 | 776,000 | ||||
| Series C cumulative convertible preferred | 250,000 | 250,000 | ||||
| Common stock, Class A, non-voting | 8,733,000 | 8,733,000 | ||||
| Common stock, Class B, voting | 21,213,250 | 21,213,250 | ||||
| Capital Paid in Excess of Par Value | 34,913,850 | 34,913,850 | ||||
| Retained Earnings | 89,185,000 | 87,424,000 | ||||
| Treasury Stock, at Cost | (8,379,000 | ) | (8,379,000 | ) | ||
| Employee Stock Trust | (40,403,100 | ) | (40,419,100 | ) | ||
| Accumulated Other Comprehensive Income | (301,000 | ) | (412,000 | ) | ||
| Total Stockholders’ Equity | 105,988,000 | 104,100,000 | ||||
| Total Liabilities and Stockholders’ Equity | $ | 221,998,000 | $ | 199,388,000 | ||
See accompanying notes to condensed consolidated financial statements.
2
PART I –
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS,
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| Thirteen Weeks Ended | ||||||
| August 29, 2004 | August 31, 2003 | |||||
| Net Sales | $ | 79,681,000 | $ | 66,900,000 | ||
| Cost of Goods Sold | 69,330,000 | 57,261,000 | ||||
| Gross Profit | 10,351,000 | 9,639,000 | ||||
| Selling Expenses | 2,983,000 | 2,906,000 | ||||
| Administrative Expenses | 3,997,000 | 3,732,000 | ||||
| Operating Profit | 3,371,000 | 3,001,000 | ||||
| Interest Expense | 610,000 | 594,000 | ||||
| Other (Income) Loss, Net | (136,000 | ) | (223,000 | ) | ||
| Earnings Before Income Taxes | 2,897,000 | 2,630,000 | ||||
| Income Taxes | 914,000 | 818,000 | ||||
| Net Earnings | 1,983,000 | 1,812,000 | ||||
| Dividends on Preferred Stock | 10,000 | 10,000 | ||||
| Net Earnings Applicable to Common Stock | $ | 1,973,000 | $ | 1,802,000 | ||
| Earnings Per Share: | ||||||
| Net Earnings Per Common Share – Basic | $ | 2.72 | $ | 2.49 | ||
| Net Earnings Per Common Share – Diluted | $ | 2.68 | $ | 2.46 | ||
| Dividends per Share, Common | $ | 0.275 | $ | 0.275 | ||
| Basic Weighted Average Shares | 725,171 | 723,330 | ||||
| Diluted Weighted Average Shares | 738,868 | 736,396 | ||||
See accompanying notes to condensed consolidated financial statements.
3
PART
I –
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION
AND SUBSIDIARIES
Condensed
Consolidated Statements of Stockholders’ Equity
(Unaudited)
| Cumulative | Cumulative | ||||||||||||||||||||||||||||||||
| Convertible | Convertible | Capital | |||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Common | Paid In | Employee | Accumulated | |||||||||||||||||||||||||||
| Total | Stock | Stock | Stock | Stock | Excess | Treasury | Stock | Other | |||||||||||||||||||||||||
| Stockholder’s | Series
A |
Series C | Class A | Class B | Of Par | Retained | Stock | Trust | Comprehensive | ||||||||||||||||||||||||
| Equity | & B Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Value | Earnings | Shares | Amount | Shares | Amount | Income | ||||||||||||||||||
| Balance,
May 30, 2004 |
$104,100,000 | 31,056 | $776,000 | 10,000 | $250,000 | 349,353 | $8,733,000 | 848,522 | $21,213,250 | $34,913,850 | $87,424,000 | 144,723 | ($8,379,000 | ) | 344,672 | ($40,419,100 | ) | ($412,000 | ) | ||||||||||||||
| Purchase of Stock by | |||||||||||||||||||||||||||||||||
| Employee Stock | |||||||||||||||||||||||||||||||||
| Ownership Plan | $16,000 | (133 | ) | ($16,000 | ) | ||||||||||||||||||||||||||||
| Net Earnings for the Period | $1,983,000 | $1,983,000 | |||||||||||||||||||||||||||||||
| Cash Dividends Per Share: | |||||||||||||||||||||||||||||||||
| Preferred – $2.0625 annually | ($10,000 | ) | ($10,000 | ) | |||||||||||||||||||||||||||||
| Common – $1.10 annually | ($212,000 | ) | ($212,000 | ) | |||||||||||||||||||||||||||||
| Other Comprehensive Income | $111,000 | $111,000 | |||||||||||||||||||||||||||||||
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| Balance August 29, 2004 | $105,988,000 | 31,056 | $776,000 | 10,000 | $250,000 | 349,353 | $8,733,000 | 848,522 | $21,213,250 | $34,913,850 | $89,185,000 | 144,723 | ($8,379,000 | ) | 344,539 | ($40,403,100 | ) | ($301,000 | ) | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
PART
I –
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Thirteen Weeks Ended | ||||||
| August 29, 2004 | August 31, 2003 | |||||
| Cash Flows From: | ||||||
| Operating Activities: | ||||||
| Net Earnings | $ | 1,983,000 | $ | 1,812,000 | ||
| Adjustments to Reconcile Net Earnings: | ||||||
| To Net Cash Used In Operating Activities: | ||||||
| Depreciation and Amortization | 2,395,000 | 2,303,000 | ||||
| Deferred Income Taxes | (120,000 | ) | (120,000 | ) | ||
| Gain on Disposal of Property, Plant and Equipment | (301,000 | ) | 0 | |||
| Changes in Assets and Liabilities: | ||||||
| Accounts Receivable | (2,643,000 | ) | (1,374,000 | ) | ||
| Inventories | (20,213,000 | ) | (8,518,000 | ) | ||
| Prepaid Expenses and Other Assets | (234,000 | ) | 37,000 | |||
| Accounts Payable and Accrued Expenses | 5,585,000 | 696,000 | ||||
| Income Taxes Payable | (805,000 | ) | (1,211,000 | ) | ||
| Other Liabilities | 391,000 | 345,000 | ||||
| Net Cash (Used In) Operating Activities | (13,962,000 | ) | (6,030,000 | ) | ||
| Investing Activities: | ||||||
| Decrease (Increase) in Other Assets | – | (1,000,000 | ) | |||
| Acquisitions of Property, Plant and Equipment | (2,590,000 | ) | (2,318,000 | ) | ||
| Proceeds on Disposal of Property, Plant and Equipment | 1,194,000 | – | ||||
| Net Cash (Used In) Investing Activities | (1,396,000 | ) | (3,318,000 | ) | ||
| Financing Activities: | ||||||
| Increase in Notes Payable | 15,168,000 | 8,527,000 | ||||
| Payment of Dividends | (222,000 | ) | (207,000 | ) | ||
| Issuance of Common Stock | 16,000 | – | ||||
| Net Cash Provided by Financing Activities | 14,962,000 | 8,320,000 | ||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (396,000 | ) | (1,027,000 | ) | ||
| Cash and Cash Equivalents, Beginning of Period | 3,015,000 | 4,128,000 | ||||
| Cash and Cash Equivalents, End of Period | $ | 2,619,000 | $ | 3,101,000 | ||
See accompanying notes to condensed consolidated financial statements.
5
PART
I –
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
| (1) | BASIS OF PRESENTATION |
| The condensed consolidated financial statements of Hanover Foods Corporation (the “Corporation”) 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 annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been omitted, the Corporation 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 August 29, 2004 and August 31, 2003. | |
| 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/A for the Corporation’s fiscal year ended May 30, 2004. | |
| 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. | |
| Certain amounts in prior periods have been reclassified to conform with classifications made in the current period. |
6
PART
I –
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
HANOVER FOODS
CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
| (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 $36,777,000 and $21,609,000 were outstanding at August 29, 2004 and May 30, 2004, respectively. The average cost of funds during the thirteen week period ended August 29, 2004 was 2.18% compared to 1.91% for the thirteen week period ended August 31, 2003. | |
| (3) | LONG-TERM DEBT |
| The long-term debt of the Corporation and its subsidiaries consists of: | |
| August 29, 2004 | May 30, 2004 | ||||||
| 8.74% unsecured senior notes payable to an insurance company, due through 2007 | $ | 5,357,000 | $ | 5,357,000 | |||
| 7.01% unsecured senior notes payable to an insurance company, due through 2011 | 20,000,000 | 20,000,000 | |||||
| Total Long-Term Debt | 25,357,000 | 25,357,000 | |||||
| Less current maturities | 4,286,000 | 4,286,000 | |||||
| Net Long-Term Debt | $ | 21,071,000 | $ | 21,071,000 | |||
| 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, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios and change in control. Based on the requirements of the agreements at August 29, 2004, $45,289,000 of retained earnings are restricted from distribution. | |
| The Corporation was in compliance with the restrictive provisions in the agreements as of August 29, 2004. |
7
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 | ||||||
| August 29, 2004 | August 31, 2003 | |||||
| Revenues: | ||||||
Park
100 Foods, Inc.
|
$ | 752,000 | $ | 338,000 | ||
| Expenditures: | ||||||
Park
100 Foods, Corp.
|
8,000 | 11,000 | ||||
Warehime
Enterprises, Inc.
|
1,000 | 1,000 | ||||
John
A. & Patricia M. Warehime
|
16,000 | 9,000 | ||||
Lippy
Brothers, Inc.
|
220,000 | 155,000 | ||||
8
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
The respective August 29, 2004 and May 30, 2004 account balances with related parties are as follows:
| August 29, 2004 | May 30, 2004 | |||||
| Accounts Receivable: | ||||||
Park
100 Foods, Inc. |
$ | 455,000 | $ | 275,000 | ||
| Accounts Payable: | ||||||
Lippy
Brothers, Inc. |
9,000 | 32,000 | ||||
9
PART I – FINANCIAL
INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
| (5) | COMPREHENSIVE INCOME |
Comprehensive income is determined as follows:
13
Weeks Ended |
||||||
| August 29, 2004 | August 31, 2003 | |||||
| Net Income | $ | 1,983,000 | $ | 1,812,000 | ||
| Other Comprehensive Income Unrealized Gain on Investments | 111,000 | 34,000 | ||||
| Comprehensive Income | $ | 2,094,000 | $ | 1,846,000 | ||
| (6) | RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE |
| 13 Weeks Ended | ||||||
| August 29, 2004 | August 31, 2003 | |||||
| Numerator for basic earnings per share: | ||||||
| Net earnings applicable to common stock | $ | 1,973,000 | $ | 1,802,000 | ||
| Preferred stock dividends | 10,000 | 10,000 | ||||
| Net earnings assuming dilution | $ | 1,983,000 | $ | 1,812,000 | ||
| Denominator: | ||||||
| Basic weighted average shares | 725,171 | 723,330 | ||||
| Effect of dilutive securities | 13,697 | 13,066 | ||||
| Diluted weighted average shares | 738,868 | 736,396 | ||||
10
PART I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
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 and on October 17, 2003, adopted the Hanover Foods Corporation 2003 Stock Option Plan. 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.
Had compensation expense for all stock and employee stock purchase plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended, our net income and earnings per share would have been adjusted to the pro forma amounts as follows:
In thousands, except (per share date)
| Thirteen Weeks Ended | ||||||
| August 29, 2004 | August 31, 2003 | |||||
| Net Income – as reported | $ | 1,983,000 | $ | 1,812,000 | ||
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects |
20,000 | 20,000 | ||||
| Pro forma net income | 1,963,000 | 1,792,000 | ||||
| Earnings per share: | ||||||
| Basic – as reported | $ | 2.72 | $ | 2.49 | ||
| Basic – pro forma | $ | 2.70 | $ | 2.48 | ||
| Diluted – as reported | $ | 2.68 | $ | 2.46 | ||
| Diluted – pro forma | $ | 2.66 | $ | 2.43 | ||
Since the determination of fair value of all stock options granted includes variable factors, including volatility, and additional stock option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effect on reported net income and earnings per share for future years.
11
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
| (8) | 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, recission 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.
On January 29, 2003, Albert Blakey, Esquire, counsel for certain derivative plaintiffs filed a Motion for Reconsideration of the Court’s December 31, 2002 denial of the Petition for Fees. A Response in Opposition to the Motion for Reconsideration of Plaintiffs’ Petition for Fees was filed with the Court on February 12, 2003.
12
PART I – FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
HANOVER
FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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), who qualify as disinterested directors 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.
The Amended and Restated Articles created a Series C Convertible Preferred Stock, which, in case of a dispute among the above mentioned members of the Warehime family on Board of Directors composition or other important matters, would be entitled to 35 votes per shares (a total of 350,000 votes based on 10,000 shares of Series C Convertible Preferred Stock issued to and held by the trustees of the Corporation’s 401(k) Savings Plan); if Series C Convertible Preferred Stock were entitled to vote because of such dispute, each share of Class A Common Stock would be entitled to 1/10th of a vote per share.
The Amended and Restated Articles 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 term as permitted by Pennsylvania law. Pursuant to the Corporation’s Bylaws, as then in effect, 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.
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 described herein.
13
PART I – FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 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.
14
PART I – FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
HANOVER FOODS
CORPORATION AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
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 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. 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 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 September 17, 2002, the Supreme Court of Pennsylvania granted defendant’s petition for Allowance of Appeal.
15
PART I – FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER FOODS CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
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 the petition for allocatur and oral argument was heard in the matter on May 13, 2003.
On December 12, 2002, Michael Warehime filed an Emergency Application for Expedited Relief with the Pennsylvania Supreme Court in the Warehime v. Warehime appeal concerning the election of directors noticed for December 23, 2002. The Pennsylvania Supreme Court denied Michael Warehime’s emergency application on December 20, 2002.
On December 12, 2002, Michael Warehime filed a Motion for Relief under the Warehime v. Schaier caption in the York County Court of Common Pleas. Michael Warehime’s motion requested, inter alia, that Hanover Foods Corporation’s December 23, 2002 election be conducted according to the Articles of Incorporation as they existed prior to June 25, 1997. Following a hearing on December 20, 2002, the York County Court of Common Pleas denied Michael Warehime’s Motion for Relief. On January 17, 2003 Michael Warehime appealed the Court’s denial of his Motion for Relief to the Superior Court of Pennsylvania. Oral argument was heard in this matter before the Superior Court of Pennsylvania on January 13, 2004. On April 22, 2004, the Superior Court of Pennsylvania issued a memorandum reversing the December 22, 2002 decision by the York County Court of Common Pleas and remanding for further proceedings.
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.
16
PART 1 – FINANCIAL
INFORMATION
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report, the words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “projected”, or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, but not limited to, quarterly fluctuations in operating results, competition, state and federal regulation, environmental considerations, foreign operations and a change of control as a result of the pending Warehime family litigation. Such factors, which are discussed in the Form 10-Q, could affect the financial performance of Hanover Foods Corporation (as used herein the term “Corporation” or “Company” refers to Hanover Foods Corporation and its consolidated subsidiaries) and could cause the Company’s actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made.
GENERAL OVERVIEW
The Corporation is a vertically integrated processor of food products which operates through seven (7) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers Packing Company, Spring Glen Fresh Foods, Inc., Hanover Insurance Company, Ltd., Nittany Corporation, Bickel’s Snack Foods, Inc. and Aunt Kitty’s Foods, Inc. Tri-Co. Foods Corp. has two (2) wholly-owned subsidiaries: Sunwise Corporation and Mayapac, S.A.
The Corporation is involved in the growing, processing, canning, freezing, freeze-drying, packaging, marketing and distribution of its products under its own trademarks as well as other branded, customer and private labels. The Corporation has operations in eleven plants in Pennsylvania, one plant in Maryland, one plant in Delaware, one plant in New Jersey and two plants in Guatemala. The Corporation and its subsidiaries, in the normal course of business, purchase and sell goods and services to related parties.
The Corporation enjoys the strongest retail sales of its products in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables and fruits, canned pasta, frozen soft pretzels, refrigerated food, canned and frozen mushrooms and snack food products has enabled the Corporation to increase and expand its distribution throughout the eastern seaboard. Distribution in the remainder of the United States is limited to food service, military and industrial customers.
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
17
PART 1 – FINANCIAL
INFORMATION
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
produce high crop yields and an over-supply situation in a given year. This over-supply typically will result in depressed selling prices and reduced profitability to the Corporation on the inventory produced from that year’s crops. Excessive rain or drought conditions can produce low crop yields and a shortage situation. This shortage typically will result in higher selling prices and increased profitability to the Corporation. While the national supply situation controls the pricing, the supply can differ regionally because of variations in weather. Because many of the raw materials processed by the Corporation are agricultural crops, production of products using these crops is predominantly seasonal. As a result, the Corporation needs access to working capital financing to meet its production requirements during these periods.
The Corporation markets its products under the brand names HANOVER, HANOVER FARMS, MYERS, PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL’S, DUTCH FARMS, SUNWISE, O&C (jarred onions only), SPRING GLEN FRESH FOODS, SUNNYSIDE FOODS, NOTTINGHAM, BICKEL’S, BON TON, YORK SNACKS, CABANA, DRAPER KING COLE, VENICE MAID, AUNT KITTY’S and HARVEST CHOICE. The products sold by the Corporation under these brand names include canned vegetables, beans and pasta as well as frozen vegetables, frozen meat products, food entrees, refrigerated and fresh foods, canned and frozen mushrooms and potato chips.
Intense competition and continued consolidation in the food processing industry also impact the Corporation’s results of operations. Large nationally recognized competitors with greater resources than the Corporation can reduce profit margins for the Corporation’s products. Consolidation resulting from acquisitions by these large competitors has made it more difficult for the Corporation to increase its market share.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Form 10-K (Amendment No. 1) for the fiscal year ended May 30, 2004 for a description of the Company’s critical accounting policies and related party transactions.
RESULTS OF OPERATIONS
Three Months Ended August 29, 2004 Compared to Three Months Ended August 31, 2004
Net Sales
Consolidated net sales were $79.7 million for the thirteen week period ended August 29, 2004. This represents an increase of 19.1% over the thirteen week period ended August 31, 2003. The increase of $12.8 million was primarily due to increased sales of food service, industrial frozen, and core snacks partially offset by decreases in branded retail, core refrigerated foods and core private label sales. The acquisitions of Venice Maid Foods, Sunsprout of Lancaster and Wege Pretzel Company during the third and fourth quarters of fiscal 2004 accounted for 67% of the net sales increase for the period.
18
PART
1 – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of Goods Sold
Selling Expenses
Administrative Expenses
Interest Expense
Income Taxes
Net Earnings
19
PART
1 – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities for the thirteen week period ended August 29, 2004 was $14.0 million as compared to cash used in operating activities of $6.0 million during the same period of 2003. The uses of cash during the thirteen week period consisted primarily of an increase in finished goods inventory to cover increased sales and an increase in accounts receivable partially offset by sources of cash attributed to earnings and an increase in accounts payable and accrued expenses.
Investing Activities
Financing Activities
The Corporation has available seasonal lines of credit from financial institutions in the amount of $50.0 million, of which $36.8 million was utilized as of August 29, 2004. Additional borrowing is permitted within prescribed parameters in existing debt agreements, which contain certain performance covenants. For a discussion of the terms of the lines of credit, including covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” contained in the Form 10-K (Amendment No. 1) for the fiscal year ended May 30, 2004.
20
PART
1 – FINANCIAL INFORMATION
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the Corporation’s contractual obligations and other commitments as of August 29, 2004:
| Payment Due by Period | |||||||||||||||
| |
|||||||||||||||
| Less than | More than | ||||||||||||||
| Contractual Obligation | Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||
| |
|||||||||||||||
| Short-Term Notes Payable | $ | 36,777,000 | $ | 36,777,000 | $ | 0 | $ | 0 | $ | 0 | |||||
| Long-Term Debt | 25,357,000 | 4,286,000 | 8,572,000 | 5,000,000 | 7,499,000 | ||||||||||
| Operating Leases | 1,716,000 | 808,000 | 825,000 | 83,000 | 0 | ||||||||||
| Total contractual obligations | $ | 63,850,000 | $ | 41,871,000 | $ | 9,397,000 | $ | 5,083,000 | $ | 7,499,000 | |||||
| |
|
|
|
||||||||||||
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 current market price of tomato paste is 28¢/lb. FOB California.
21
PART
I – FINANCIAL INFORMATION
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
There are no material changes to the disclosures on this matter provided in the Company’s Form 10-K (Amendment No. 1) for the fiscal year ended May 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.
There were no changes to internal control over financial reporting (“Internal Control”) which occurred during the quarter ended August 29, 2004 that materially affected or which are reasonably likely to materially affect Internal Control.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Corporation conducts periodic evaluations to enhance, where necessary its procedures and controls.
22
See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding the 1995 Warehime Family Litigation and the Derivative Action, which is incorporated into this Item 1 by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS – None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES – None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS – None
On August 25, 2004, the Corporation adopted procedures by which its shareholders may recommend nominees to the Corporation’s board of directors as required by Item 7(d)(2)(ii)(G) of Schedule 14A under the Exchange Act. Information regarding these procedures was previously disclosed in the Corporation’s Form 10-K (Amendment No. 1) for the fiscal year ended May 30, 2004.
The following exhibits are filed herewith:
| Exhibit | Description | |
| Exhibit 11 | Computation of Earnings per Share, incorporated by reference to Note 6 of the Notes to Consolidated Financial Statements | |
| Exhibit 31.1 | Section 302 Certification – Chief Executive Officer | |
| Exhibit 31.2 | Section 302 Certification – Chief Financial Officer | |
| Exhibit 32.1 | Section 906 Certification | |
23
SIGNATURES
Pursuant to the requirements of the Securities 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 13, 2004 | 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 | ||
| (Principal Financial Officer) | ||
24
| EXHIBIT INDEX | ||
| Exhibit | Description | |
| Exhibit 11 | Computation of Earnings per Share, incorporated by reference to Note 6 of the Notes to Consolidated Financial Statements | |
| Exhibit 31.1 | Section 302 Certification – Chief Executive Officer | |
| Exhibit 31.2 | Section 302 Certification – Chief Financial Officer | |
| Exhibit 32.1 | Section 906 Certification | |
25