HANOVER FOODS CORP /PA/ (HNFSA) - Description of business

Company Description
— Risk Factors — Seasonality and Quarterly Fluctuations.” From this beginning, the Corporation has grown to become one of the leading independent processors of canned vegetables, soups, pasta and stews, frozen vegetables and fruits, frozen meat products, frozen entrees, frozen soft pretzels, canned and frozen mushrooms, fresh foods and snack food products in the eastern United States. The Corporation’s raw materials are readily available, and the Corporation is not dependent on a single supplier or a few suppliers. This growth has resulted from the Corporation’s extended scope of operations, new product development and acquisitions. See “Part I — Item 1. Business — Risk Factors — Industry Conditions and Price and Volume Fluctuations.” The Corporation is a vertically integrated processor of food products in one industry segment. It is involved in the growing, processing, canning, freezing, packaging, marketing and distribution of its products under its own trademarks, as well as other branded, customer and private labels. See “Part I — Item 1. Business — Risk Factors — General Risks of the Food Industry.” The Corporation enjoys the strongest retail sales of its products in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, 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. OPERATIONS The Corporation has operations at eleven (11) plants in Pennsylvania, one (1) plant in Maryland, one (1) plant in Delaware, one (1) plant in New Jersey and two (2) plants in Guatemala. Back to Contents PRODUCTS The Corporation markets its products under the brand names HANOVER, HANOVER FARMS, MYERS, PHILLIPS, GIBBS, SUPERFINE, MARYLAND CHIEF, MITCHELL’S, DUTCH FARMS, SUNWISE, O&C (jarred onions only), SPRING GLEN FRESH FOODS, SUNNYSIDE FOODS, NOTTINGHAM, BICKEL’S, 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended May 30, 2004 Compared to Year Ended June 1, 2003” in the 2004 Annual Report to Shareholders attached hereto as Exhibit 13 (the “Annual Report”). DISTRIBUTION The Corporation’s products are marketed under its brand labels and customer private labels to the consumer for home use and also to the food service trade which includes restaurants, fast food chains, hospitals and schools as well as military and other governmental uses. The Corporation’s ten largest customers accounted for approximately 36% of the Corporation’s net sales for the fiscal year ended May 30, 2004 and 38% of accounts receivable as of May 30, 2004. No single customer accounted for more than 10% of net sales for the fiscal years ended May 30, 2004, June 1, 2003 and June 2, 2002. The Corporation’s products are distributed directly to its customers and indirectly via independent distributors. Sales activities are conducted via Corporation employed sales personnel and independent sales brokerage firms. The Corporation also manufactures private label food products for other food companies. COMPETITION The Corporation markets its food products to the retail and food service sectors in the Northeastern, Mid-Atlantic, Southeastern and Midwestern areas of the United States. See “Part I — Item 1. Business — Risk Factors — Competition.” The principal methods of competition within the food processing industry are: price, promotion, advertising, product quality and service. The Corporation competes with national processors such as Birds Eye Foods and Campbell Foods and regional processors such as Bush, Allen and Morgan Foods. TRADEMARKS The Corporation has various registered and unregistered trademarks, service marks and licenses which are of material importance to the Corporation’s business. The principal trademarks of the Corporation are: Hanover, Myers, Gibbs, Phillips, Spring Glen, L.K. Bowman, Bickel’s, Bon Ton, Cabana, Aunt Kitty’s and Venice Maid. BACKLOG OF ORDERS The Corporation manufactures against customer forecasts and orders. While at any given time there may be a backlog of orders, such backlog is not material to total sales, nor are the changes from time to time significant. RESEARCH AND DEVELOPMENT The Corporation engages in research and development of new products and improvement of existing products as well as the improvement and modernization of its operating plants and equipment. See Note 1 of the Notes to Consolidated Financial Statements in the Annual Report. REGULATION The Corporation’s operations, as is the case of all food companies, are subject to strict regulation by the U.S. Food and Drug Administration (FDA). The Corporation is also subject to inspection by the Food Safety and Quality Service Division (USDA), for its meat and poultry products. FDA regulates the safety of the food product, the identity of the product, its purity and identification of ingredients therein. USDA establishes grades for products and regulates sanitation. The appropriate state agencies regulate the sanitation of the Corporation’s plants and the manufacture of food products utilizing flour in any baking process.The Corporation is also regulated by many other federal and state governmental agencies such as Occupational Safety and Health Administration (OSHA), Federal Trade Commission and U.S. Environmental Protection Agency. See “Part I — Item 1. Business — Risk Factors — Regulation.” Back to Contents ENVIRONMENTAL CONSIDERATIONS The Corporation continually makes investments to comply with all federal, state and local laws, environmental rules and regulations. To date, such expenditures have not been material with respect to the Corporation’s capital expenditures, earnings or competitive position. See “Part I — Item 1. Business — Risk Factors — Environmental Risks.” SOURCES OF SUPPLY The Corporation maintains an intimate involvement in all phases of agricultural crop production as well as direct procurement of fresh vegetables. The Corporation procures all of its fresh vegetable requirements through direct contracts with farmers who cultivate and harvest the crops according to the Corporation’s specifications. In addition, the Corporation directly procures beans, tomato based products, pasta, herbs and other ingredients, as well as containers and packaging materials from outside vendors throughout the world. No supplier provides more than 10% of the raw materials or packaging materials purchased by the Corporation. EMPLOYEES As of August 1, 2004, the Corporation, its divisions and subsidiaries employed 2,205 employees on a full-time and a seasonal basis. 1,622 employees are employed in the United States and 583 are employed in Guatemala. A total of 744 production workers at the Hanover, PA; Centre Hall, PA; and Clayton, DE plants are members of the United Food and Commercial Workers Union - Locals 1776, 72 and 56, respectively. The Corporation’s subsidiary, Aunt Kitty’s Foods, Inc., at its Vineland, NJ plant has 99 employees, who are members of United Food and Commercial Workers Union Local #56 and 9 employees, who are members of Teamsters Local #676. The Hanover and Centre Hall, PA plants each have their own three (3) year contract beginning January 1, 2003 and ending December 31, 2005. The Clayton, DE plant has its own three (3) year contract beginning January 1, 2002 and ending December 31, 2004. The Vineland, NJ plant union contracts have terms ending as follows: Teamsters #676 – March 31, 2006 and United Food and Commercial Workers Local #56 – March 31, 2008. The Corporation is currently negotiating a collective bargaining agreement with United Food and Commercial Workers Union Local #56 for 87 production and warehouse employees of the Ridgely, MD plant as a result of an election held on June 30, 2004 and certified by the National Labor Relations Board on July 14, 2004. There are no union contracts at any other plants or locations of the Corporation. The Corporation has never had any strikes or labor disputes interfering with its operations. Management considers labor relations to be excellent. FOREIGN OPERATIONS The Corporation’s wholly-owned subsidiary, Tri-Co. Foods Corp., has two wholly-owned subsidiaries, Mayapac, S.A., of San Jose Pinula, Guatemala; and Sunwise Corporation, Lakeland, Florida. Mayapac S.A. procures, processes and ships vegetables and fruit produced in Guatemala. Mayapac S.A. contracts with approximately 2,000 independent farmers in Guatemala for the growing and harvesting of broccoli, cauliflower, okra , Brussels sprouts, melons, cantelope and papaya. The raw vegetable products purchased by the Corporation are frozen at one of two Corporation plants located in San Jose Pinula, Guatemala; and Teculutan, Guatemala. Sunwise Corporation imports and distributes the Guatemalan products to the Corporation. The business of the Corporation in Guatemala is subject to the laws of Guatemala which may place restrictions and controls on such matters as ownership, imports and exports, prices, product lines and transfer of funds, and is also subject to the fluctuating exchange rate between the Guatemalan quetzal and the U.S. dollar. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Impact of Events and Commitments of Future Operations” in the Annual Report and “Part I — Item 1. Business — Risk Factors — Risks Associated With Foreign Operations. Back to Contents Information with respect to the revenue, cost of sales and identifiable assets for the Corporation’s foreign operations is set forth in Note 11 to the Consolidated Financial Statements entitled "Foreign Operations" in the Annual Report. RISK FACTORS Industry Conditions and Price and Volume Fluctuations The Corporation’s financial performance and growth are related to conditions in the food processing industry. The United States food processing industry is a mature industry. The Corporation’s net sales are a function of product availability and market pricing. In the food processing industry, product availability and market prices tend to have an inverse relationship: market prices tend to decrease as more product is available, whereas if less product is available, market prices tend to increase. Product availability is a direct result of plantings, growing conditions, crop yields and inventories, all of which vary from year to year. In addition, price can be affected by the planting, inventory level and individual pricing decisions of the three or four largest processors in the industry. Generally, the market prices in the food processing industry tend to adjust more quickly to variations in product availability than an individual processor can adjust its cost structure; thus, in an over-supply situation, a processor’s margins likely will weaken, as suppliers generally are not able to adjust their cost structure as rapidly as market prices adjust for the over-supply. The Corporation typically has experienced lower margins during times of industry over-supply. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. Seasonality and Quarterly Fluctuations The Corporation’s operations are affected by the growing cycle of the vegetables it processes. The Corporation’s business can be positively or negatively affected by weather conditions nationally and the resulting impact on crop yields. Favorable weather conditions can produce high crop yields and an 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. Competition All of the Corporation’s products compete with those of other national, major and small regional food processing companies under highly competitive conditions. Many of the Corporation’s major competitors in the market are larger and have greater financial and marketing resources than the Corporation. Continued industry consolidation also may increase the market strength of the Corporation’s larger competitors making it more difficult for the Corporation to increase its market share. Regulation United States and foreign governmental laws, regulations and policies directly affect the agricultural industry and food processing industry. The Corporation is subject to regulation by the FDA, the USDA, the Federal Trade Commission, the Environmental Protection Agency and various state agencies with respect to production, packaging, labeling and distribution of its food products. The application or modification of existing, or the adoption of new laws, regulations or policies could have an adverse effect on the Corporation’s business and results of operations. Back to Contents General Risks of the Food Industry Food processors are subject to the risks of adverse changes in general economic conditions; evolving consumer preferences and nutritional and health-related concerns; changes in food distribution channels and increasing buying power of large supermarket chains and other retail outlets that tend to resist price increases; federal, state and local food processing controls; consumer product liability claims; and risks of product tampering. Environmental Risks The disposal of solid and liquid waste material resulting from the preparation and processing of foods are subject to various federal, state and local laws and regulations relating to the protection of the environment. Such laws and regulations have an important effect on the food processing industry as a whole, requiring substantially all firms in the industry to incur material expenditures for modification of existing processing facilities and for construction of upgraded or new waste treatment facilities. The Corporation cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist. Enactment of more stringent laws or regulations or more strict interpretation of existing laws and regulations may require additional expenditures by the Corporation, some of which could be material. Risks Associated with Foreign Operations Foreign operations generally involve greater risks than doing business in the United States. Foreign economies differ favorably or unfavorably from the United States’ economy in such respects as the level of inflation and debt, which may result in fluctuations in the value of the country’s currency and real property. Further, there may be less government regulation in various countries, and difficulty in enforcing legal rights outside the United States. Additionally, in some foreign countries, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of property or other assets, political or social instability or diplomatic developments which could affect the operations and assets of U.S. companies doing business in that country. Some of these risks are more pronounced in developing countries, such as Guatemala. At May 30, 2004, the total assets of the Corporation’s foreign operations were approximately $12.5 million or .006% of total assets. Litigation Risks The Corporation is involved in litigation with the Warehime family (see “Part I — Item 3. — Legal Proceedings”). As a result of the pending litigation there may be a change of control of the Corporation. A change in control may not be in the best interests of shareholders and could have an adverse effect on the Corporation’s business and results of operations. Impact of a Change in Control on the Corporation’s Senior Debt A change in control of the Corporation would trigger a repayment obligation with respect to $20.0 million in aggregate principal amount of 7.01% Senior Notes due September 15, 2011 of the Corporation (the “Notes”). In the event of any change of control of the Corporation, the Corporation has an obligation to prepay the Notes in the amount equal to 100% of the outstanding principal amount of the Notes and accrued interest thereon, together with a premium equal to the applicable Make-Whole Amount, as defined in the Note Purchase Agreement. A “change in control” as defined in the Note Purchase Agreement means the date on which (i) John Warehime ceases to hold the positions of Chairman, President and Chief Executive Officer of the Corporation or (ii) Gary T. Knisely ceases to hold the positions of Executive Vice President and Secretary of the Corporation. To the extent a change of control were to occur and the Lenders demand repayment of the Notes, the Corporation would be required to obtain an alternative funding source to repay this obligation. While the Corporation currently believes it would be successful in obtaining additional financing, no assurance can be given as to whether the Corporation will be successful in obtaining additional funding sources or if such financing will be on terms and conditions that are acceptable to the Corporation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in the Annual Report. Back to ContentsWHERE YOU CAN FIND MORE INFORMATIONThe Corporation files, annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy our reports or other filings made with the SEC at the SEC’s Public Reference Room, located at 450 Fifth Street, N.W., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our SEC filings are also available on the SEC’s internet website, www.sec.gov . The reference to the SEC’s website, above, is intended to be an inactive textual reference and no documents from the SEC website are intended to be incorporated by reference in this Annual Report on Form 10-K. We will provide, at no cost, copies of our reports and other filings made with the SEC. Requests should be directed to:   Gary T. Knisely   Hanover Foods Corporation   1486 York Street   P.O. Box 334   Hanover, PA 17331   Telephone: (717) 632-6000 Back to Contents