10-Q 1 tenq.txt 10-Q 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 December 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 December 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 Twenty-Six Weeks Ended December 1, 2002

Index Page ~~----- ----~~ Part I -- Financial Information Item 1 -- Financial Statements: Condensed Consolidated Balance Sheets ~~September~~December 1, 2002 (Unaudited) and June 2, 2002............................................3 Condensed Consolidated Statements of Operations (Unaudited) Twenty-Six Weeks Ended and Thirteen Weeks Ended ~~September~~December 1, 2002 and ~~September~~December 2, 2001.....................................................................5 Condensed Consolidated Statements of Stockholders' Equity, (Unaudited) ~~Thirteen~~Twenty-Six Weeks Ended ~~September~~December 1, 2002 ..............................6 Condensed Consolidated Statements of Cash Flows (Unaudited), ~~Thirteen~~Twenty-Six Weeks Ended ~~September~~December 1, 2002 and ~~September~~December 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....................................................1719 ~~Part~~Item II3 -- ~~Other~~Quantitative ~~Information~~and Qualitative Disclosure About Market Risk............................23 Item 4 - Controls and Procedures......................................21........................24 ~~Item~~Part 1II -- ~~Legal~~Other ~~Proceedings~~Information...................................................................~~.21~~25 Item 21-- ~~Changes~~Legal ~~in Securities~~Proceedings................................................................21....25 Item 2-- Changes in Securities and Use of Proceeds............................................25 Item 3-- Defaults upon Senior Securities......................................................2125 Item 4-- Submission of Matters to a Vote of Security Holders..................................2125 Item 5-- Other Information....................................................................2125 Item 6-- Exhibits and Reports on Form 8-K.....................................................2125 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~~---------------------------------------------------------------------------------------------------------- December 1, 2002 June 2, 2002 ASSETS ----------------- ----------------------------------------------------------------------------------------- ~~ASSETS~~ Current Assets: Cash and Cash Equivalents $ 43,~~121~~280,000 $ 2,816,000 Accounts and Notes Receivable, Net 2728,~~273~~884,000 26,917,000 Accounts Receivable from Related Parties, Net ~~181,000~~0 167,000 Inventories Finished Goods 5553,~~742~~324,000 44,933,000 Raw Materials and Supplies 1417,~~932~~636,000 16,622,000 Prepaid Expenses 1960,~~867,~~000 2,361,000 Prepaid Income Taxes ~~235~~330,000 0 Deferred Income Taxes 917,000 276,000 ------------ ---------------------------------------------------------------------------------------------- Total Current Assets 105,~~268~~331,000 94,092,000 ------------ ---------------------------------------------------------------------------------------------- Property, Plant and Equipment, at Cost: Land and Buildings 53,~~298~~661,000 52,966,000 Machinery and Equipment ~~125~~126,~~910~~812,000 124,048,000 Leasehold Improvements 544,000 544,000 ------------ ---------------------------------------------------------------------------------------------- ~~179~~181,~~752~~017,000 177,558,000 Less Accumulated Depreciation and Amortization ~~104~~106,~~111~~527,000 101,749,000 ------------ ---------------------------------------------------------------------------------------------- 7574,~~641~~490,000 75,809,000 Construction in Progress ~~236~~696,000 830,000 ------------ ---------------------------------------------------------------------------------------------- Total Property, Plant and Equipment 75,~~877~~186,000 76,639,000 ------------ ---------------------------------------------------------------------------------------------- Other Assets: Intangible Assets, Net 3,~~480~~429,000 3,549,000 Other Assets 45,~~874~~020,000 4,736,000 ------------ --------------------------------------------------------------------------------------------- Total Assets $~~189~~188,~~499~~966,000 $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~~December 1, 2002 June 2, 2002 ------------------------------------ ----------------- --------------------------------------------------------- Current Liabilities: Notes Payable - Banks $ 2221,~~854~~184,000 $ 18,987,000 Accounts Payable 2221,~~415~~083,000 19,890,000 Accounts Payable to Related Parties - Net 339,000 0 Accrued Expenses 1415,~~511~~204,000 13,189,000 Current Maturities of Long-Term Debt 4,~~294~~286,000 4,297,000 Income Taxes Payable 1,~~346~~614,000 1,182,000 ------------- ------------------------------------------------------------------------------------------------- Total Current Liabilities 6563,~~420~~710,000 57,545,000 ------------- ------------------------------------------------------------------------------------------------- Long-Term Debt, Less Current Maturities 2927,~~643~~149,000 29,643,000 Other Liabilities 4,~~353~~645,000 4,060,000 Deferred Income Taxes 4,~~702~~582,000 3,777,000 ------------- ------------------------------------------------------------------------------------------------- Total Liabilities ~~104~~100,~~118~~086,000 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~~December 21, 2002 and ~~September~~June 12, 2002; 14,564 shares outstanding at ~~June~~December 21, 2002 and ~~September~~June 12, 2002 776,000 776,000 Series C 4.4% cumulative convertible preferred, $25 Par Value, 10,000 shares authorized, issued and outstanding At ~~June~~December 21, 2002 and ~~September~~June 12, 2002 250,000 250,000 Common stock, Class A, non-voting, $25 Par Value; 800,000 shares authorized, 349,329 shares issued at ~~June~~December 21, 2002 and ~~September~~June 12, 2002; 288,284 shares outstanding at ~~June~~December 21, 2002 and ~~September~~June 12, 2002 8,733,000 8,733,000 Common stock, Class B, voting, $25 Par Value; 880,000 shares authorized, ~~635~~649,~~572~~072 shares issued at ~~June~~December 21, 2002 and ~~649~~635,072 shares issued at ~~September~~June 12, 2002; 430,507 shares outstanding ~~June~~December 21, 2002 and ~~September~~June 12, 2002 16,227,000 15,889,000 Capital Paid in Excess of Par Value 16,385,000 15,238,000 Retained Earnings 6972,~~093~~536,000 67,560,000 Treasury Stock, at Cost (8,148,000) (8,148,000) Value of Shares held in Employee Benefit Trust - 138,191 shares at June 2, 2002 and 151,691 at ~~September~~December 1, 2002 (17,653,000) (16,168,000) Accumulated Other Comprehensive Loss (~~282~~226,000) (139,000) ------------- ------------------------------------------------------------------------------------------------- Total Stockholders' Equity 8588,~~381~~880,000 83,991,000 ------------- ------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ ~~189~~188,~~499~~966,000 $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~~Twenty-Six Weeks Ended Thirteen Weeks Ended December 1, 2002 ~~September~~December 2, 2001 December 1, 2002 December 2, 2001 ----------------- ------------------------------------------------------------------------------------------------------------------ Net Sales $63 $146,~~514~~470,000 $60 $144,~~977~~621,000 $ $82,956,000 $ $83,644,000 Cost of Goods Sold 51116,~~082~~092,000 49114,~~353~~872,000 65,010,000 65,519,000 ----------- ------------------------------------------------------------------------------------------------------------------------ Gross Profit 1230,~~432~~378,000 1129,~~624~~749,000 17,946,000 18,125,000 Selling Expenses 513,~~019~~395,000 513,~~467~~719,000 8,376,000 8,252,000 Administrative Expenses 36,~~731~~912,000 6,207,000 3,~~101~~181,000 2,908,000 ----------- ------------------------------------------------------------------------------------------------------------------------ Operating Profit 310,~~682~~071,000 39,~~056~~823,000 6,389,000 6,965,000 Interest Expense ~~744~~1,510,000 ~~869~~1,874,000 766,000 1,005,000 Other (Income) Expenses, Net ~~178~~155,000 ~~203~~119,000 (23,000) 114,000 ----------- ------------------------------------------------------------------------------------------------------------------------ Earnings Before Income Taxes 28,~~760~~406,000 17,~~984~~830,000 5,646,000 5,846,000 Income Taxes ~~978~~2,931,000 ~~543~~2,531,000 1,953,000 1,988,000 ----------- ------------------------------------------------------------------------------------------------------------------------ Net Earnings 15,~~782~~475,000 15,~~441~~299,000 3,693,000 3,858,000 Dividends on Preferred Stock 1021,000 1021,000 11,000 11,000 ----------- ------------------------------------------------------------------------------------------------------------------------ Net Earnings Applicable to Common Stock $5,454,000 1$5,~~772~~278,000 $3,682,000 1$3,~~431~~847,000 ----------------------------------------------------------------------------------------------------------------------------------- Earnings Per Share: Net Earnings Per Common Share - Basic 2$7.4759 2$7.0039 $5.12 $5.38 Net Earnings Per Common Share - Diluted 2$7.4348 1$7.9828 $5.05 $5.30 Dividends per Share, Common $0.550 $0.550 $0.275 $0.275 Basic Weighted Average Shares 718,791 714,496 718,791 714,496 Diluted Weighted Average Shares 731,857 727,919 731,857 727,919 ----------- ------------------------------------------------------------------------------------------------------------------------

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 Twenty-Six Weeks Ended December 1, 2002 (Unaudited)

~~Cumulative Cumulative Convertible Convertible Preferred Stock Preferred Stock Common Stock Total Series A & B Series C Class A Stockholders'~~ --------------------------- ------------------------ -------------------------------------------------------------------------------- Cumulative Cumulative Convertible Convertible Total Preferred Stock Preferred Stock Common Stock Common Stock Stockholders' Series A & B Series C Class A Class B Equity Shares Amount Shares Amount Shares Amount Shares Amount ------------ ------------ ------------ ---------- ------------ ---------- --------------------------------------------------------------- Balance, June 2, 2002 $ 83,991,000 31,056 $ 776,000 10,000 $ 250,000 349,329 $ 8,733,000 635,572 $15,889,000 Net Earnings for the Period 15,~~782~~475,000 Cash Dividends Per Share: Preferred - $21.~~0625~~03125 ~~annually~~for 26 weeks (1021,000) Common - $1.1055 ~~annually~~for 26 weeks (~~239~~478,000) Issuance of Common stock to Employee Stock Trust 13,500 338,000 Class B 13,500 Shares 0 Other Comprehensive Loss (~~143~~87,000) ------------ ------------ ------------ ---------- ------------ ---------- --------------------------------------------------------------- Balance, ~~September~~December 1, 2002 $ 8588,~~381~~880,000 31,056 $ 776,000 10,000 $ 250,000 349,329 $ 8,733,000 649,072 $16,227,000 ------------ ------------ ------------ ---------- ------------ ---------- ---------------------------------------------------------------

[RESTUBBED TABLE]

------------------------------------------------------------------------------------------------------------------------ Capital ~~Common Stock~~ Paid In ~~Class~~Accumulated B Excess Treasury Stock Employee Stock Trust Other Of Par Retained Comprehensive Value Earnings Shares Amount Shares Amount Loss ------------------------- ~~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) 138,191 ($16,168,000) ($139,000) Net Earnings for the Period 15,~~782~~475,000 Cash Dividends Per Share: Preferred - $21.~~0625~~03125 ~~annually~~for 26 weeks (1021,000) Common - $1.1055 ~~annually~~for 26 weeks (~~239~~478,000) Issuance of Common stock to Employee Stock Trust 131,~~500 338~~147,000 13,500 (1,~~147~~485,000) Class B 13,500 Shares Other Comprehensive Loss (87,000) ----------- ------------ ------------ ------------ ------------ --------------------------------------------------------------- Balance, ~~September~~December 1, 2002 ~~649,072~~ $ 16,~~227,000 $ 16,~~385,000 $ 6972,~~093~~536,000 144,411 ($ 8,148,000) 151,691 ($17,653,000) ($226,000) ----------- ------------ ------------ ------------ ------------ ---------------------------------------------------------------

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)

~~Accumulated~~------------------------------------------------------------------------------------------------------------ ~~Employee~~Twenty-Six ~~Stock~~Weeks ~~Trust~~Ended ~~Other~~Dec. 1, 2002 Dec. 2, 2001 ------------------------------------------------------------------------------------------------------------ ~~Comprehensive~~Cash ~~Shares~~Flows ~~Amount~~From: ~~Loss~~Operating Activities: Net Earnings $ 5,475,000 $ 5,299,000 Adjustments to Reconcile Net Earnings: To Net Cash Provided by (Used In) Operating Activities: Depreciation and Amortization 4,898,000 4,485,000 Deferred Income Taxes 164,000 (200,000) Changes in Assets and Liabilities: Accounts Receivable (1,800,000) (1,269,000) Inventories (14,503,000) (12,375,000) Inventories (9,405,000) (19,520,000) Prepaid Expenses 1,071,000 (221,000) Accounts Payable and Accrued Expenses 3,547,000 9,972,000 Income Taxes Payable 432,000 847,000 Other Liabilities 585,000 368,000 ------------ ------------ ------------------------------------------------------------------------------------ ~~Balance~~Net Cash Provided by (Used In) Operating Activities 4,967,000 ~~June~~(239,000) 2------------------------------------------------------------------------------------------------------------ Investing Activities: Decrease (Increase) in Other Assets (371,000) ~~2002~~(420,000) ~~138~~Acquisitions of Property,~~191~~ Plant and Equipment (~~$16~~3,~~168~~325,000) (~~$ 139~~3,660,000) ------------------------------------------------------------------------------------------------------------ Net ~~Earnings~~Cash ~~for~~Used ~~the~~In ~~Period~~Investing ~~Cash~~Activities ~~Dividends~~(3,696,000) ~~Per~~(4,080,000) ~~Share~~------------------------------------------------------------------------------------------------------------ Financing Activities: ~~Preferred~~Increase -in ~~$2.0625~~Notes ~~annually~~Payable ~~Common~~2,197,000 -(17,508,000) ~~$1.10~~Proceeds ~~annually~~from Issuance of ~~Common~~Long-Term ~~stock~~Debt to0 ~~Employee~~25,000,000 ~~Stock~~Payments ~~Trust~~on ~~13,500~~Long-Term Debt (12,~~485~~505,000) ~~Class~~(8,000) BPayment 13of Dividends (499,~~500~~000) ~~Shares~~(492,000) ~~Other~~------------------------------------------------------------------------------------------------------------ ~~Comprehensive~~Net ~~Loss~~Cash Provided by ($Used ~~143~~In) Financing Activities (807,000) 6,992,000 ------------ ------------ ------------------------------------------------------------------------------------ ~~Balance~~Net Increase in Cash and Cash Equivalents 464,000 ~~September~~2,673,000 Cash and Cash Equivalents, Beginning of Period 2,816,000 1,824,000 ~~2002~~------------------------------------------------------------------------------------------------------------ ~~151~~Cash and Cash Equivalents,~~691~~ (End of Period $17 3,~~653~~280,000) ($ ~~282~~4,497,000) ------------ ------------ ------------------------------------------------------------------------------------

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 December 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 and twenty-six week periods ended December 1, 2002 and December 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. Certain reclassifications were made to the prior period financial statements to be consistent with the current period reporting presentation. (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 $21,184,000 was borrowed at December 1, 2002. The average cost of funds during thirteen and twenty-six week periods ended December 1, 2002 was 2.33%. 8 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:

~~Thirteen~~December ~~Weeks~~1, ~~Ended~~2002 June 2, 2002 --------------------------------- ~~Sept. 1, 2002 Sept. 2, 2001~~ ------------- ----------------------------------------------------- ~~Cash~~8.74% ~~Flows~~unsecured ~~From:~~senior ~~Operating~~notes ~~Activities:~~payable ~~Net~~to ~~Earnings~~an $insurance 1company,~~782,000~~ $due ~~1,441,000~~through ~~Adjustments~~2007 ~~to Reconcile Net Earnings: To Net Cash Used In Operating Activities: Depreciation and Amortization 2~~$8,~~431~~929,000 2$8,~~234~~929,000 ~~Deferred~~7.01% ~~Income~~unsecured ~~Taxes~~senior ~~284,000~~notes ~~(100,000)~~payable ~~Changes~~to inan ~~Assets~~insurance ~~and Liabilities: Accounts Receivable (370~~company,~~000)~~ ~~1,391,000~~due ~~Inventories~~through ~~(9,119,000)~~2011 ~~(13~~22,~~279~~500,000) ~~Prepaid Expenses 259~~25,000 ~~(77~~,000) ~~Accounts Payable and Accrued Expenses 3,847,000 4,296,000 Income Taxes Payable 164,000 192,000~~ Other ~~Liabilities 293~~6,000 ~~184~~11,000 ------------ ------------ ~~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~~Total ~~Activities: Increase in Notes Payable 3,867,000 7,193,000 Payments on~~ Long-Term Debt (331,435,000) (333,940,000) ~~Payment~~Less ofcurrent ~~Dividends~~maturities ~~(249~~4,286,000) ~~(246~~4,297,000) ------------ ------------ ~~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~~Net ~~and~~Long-Term ~~Cash~~Debt ~~Equivalents, End of Period~~ $ 427,~~121~~149,000 $ 229,~~743~~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 December 1, 2002. 9 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:

~~First~~Twenty-Six ~~Second~~Weeks ~~Third~~Ended ~~Fourth~~Thirteen ~~Quarter~~Weeks ~~Quarter~~Ended ~~Quarter~~Dec. ~~Quarter~~1, 2002 Dec. 2, 2001 Dec. 2, 2002 Dec. 2, 2001 ------- ------- ------- ---------------------------------------------------------------------------------------------- ~~Net~~Revenues: ~~Sales~~Park 100 Foods, Inc. $601,~~977~~250,000 $83 793,~~644~~000 $71 737,~~706~~000 $73 501,~~776~~000 ~~Gross~~Expenditures: ~~Profit~~Park 11100 Foods,~~624~~ 17Corp. 10,~~865~~000 118,~~995~~000 7,000 5,000 Warehime Enterprises, Inc. 2,000 79,000 1,000 78,000 John A. & Patricia M. Warehime 33,000 26,000 16,000 12,~~352~~000 Lippy Brothers, Inc. 442,000 1,158,000 200,000 844,000 Schaier Travel, Inc. 3,000 4,000 0 2,000 -------------------------------------------------------------------------------------------------------------------

10 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements, Continued HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) -------------------------------------------------------------------------------- The respective December 1, 2002 and June 2, 2002 account balances with related parties are as follows:

~~September~~December 1, 2002 June 2, 2002 ----------------- -------------------------------------------------------------------------- ~~8.74%~~Accounts ~~unsecured~~Receivable: ~~senior~~Park ~~notes~~100 ~~payable to an insurance company~~Foods, ~~due~~Inc. ~~through 2007~~ $ 8375,~~929,~~000 $ 8164,~~929,~~000 ~~7.01%~~Lippy ~~unsecured senior notes payable to an insurance company~~Brothers, ~~due~~Inc. ~~through~~0 ~~2011 25~~3,000~~,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~~ ----------- ---------------------------------- Accounts Payable: Lippy Brothers, Inc. 709,000 0 James Sturgill 1,000 0 John & Patricia Warehime 4,000 0

11 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:

~~Thirteen~~26 Weeks Ended 13 Weeks Ended Dec. 1, 2002 Dec. 2, 2001 Dec. 1, 2002 Dec.2, 2001 --------------------------------------- ~~September 1, 2002 September 2, 2001~~ ----------------- -------------------------------------------------------------- ~~REVENUES:~~Net ~~Park~~Income ~~100~~$5,475,000 ~~Foods~~$5,299,000 ~~Inc.~~ $~~513~~3,693,000 $~~292~~3,858,000 ~~EXPENDITURES:~~Other ~~Park~~Comprehensive ~~100~~Income ~~Foods,~~(Loss) ~~Corp.~~- 3Unrealized Gain (Loss) on Investments (87,000) 3(40,000) ~~Warehime Enterprises~~56, ~~Inc. 1,~~000 1175,000 ~~John~~---------- A.---------- &---------- ~~Patricia~~---------- M.Comprehensive ~~Warehime~~Income 17$5,388,000 14$5,259,000 ~~Lippy Brothers~~$3, ~~Inc. 242~~749,000 ~~314~~$4,033,000 ~~Schaier~~========== ~~Travel,~~========== ~~Inc.~~========== ~~3,000 2,000~~==========

(6) RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE Numerator for basis earnings per share:

~~September~~26 Weeks Ended 13 Weeks Ended Dec. 1, 2002 ~~June~~Dec. 2, 2001 Dec. 1, 2002 Dec.2, 2001 Net earnings applicable to common stock $5,454,000 $5,278,000 $3,682,000 $3,847,000 Preferred stock dividends 21,000 21,000 11,000 11,000 ---------- ---------- ---------- ---------- ~~ACCOUNTS~~Net ~~RECEIVABLE:~~earnings ~~Park~~assuming ~~100~~dilution ~~Foods~~5,475,000 ~~Inc.~~5,299,000 ~~$189~~3,693,000 ~~$164~~3,858,000 ~~Lippy~~========== ~~Brothers~~========== ========== ========== Denominator: Basic weighted average shares 718,791 ~~Inc.~~714,496 0718,791 3714,~~000~~496 ~~ACCOUNTS~~Effect ~~PAYABLE:~~of ~~Lippy~~dilutive ~~Brothers~~securities 13,066 ~~Inc.~~13,423 313,~~000~~066 013,423 ~~James~~---------- ~~Sturgill~~---------- ~~1,000~~---------- 0---------- ~~John~~Diluted &weighted ~~Patricia~~average ~~Warehime~~shares 4731,~~000~~857 0727,919 731,857 727,919 ========== ========== ========== ==========

12 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. 13 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. On December 31, 2002 the Court denied the petition for fees in its entirety. 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 401(k) Savings Plan, and the Class A shareholders may become entitled to vote in the manner described in the document. 14 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 share (a total of 350,000 votes based on 10,000 shares of Series C Convertible Preferred Stock issued to and held by the trustees of the 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 terms 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. 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. 15 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. 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 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. 16 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. 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 "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 defendant's 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. 17 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 $146.5 million for the twenty-six week period ended December 1, 2002. This represents an increase of 1.3% over the twenty-six week period ended December 2, 2001 consolidated net sales of $144.6 million. Consolidated net sales were $83.0 million for the thirteen week period ended December 1, 2002, a .8% decrease from consolidated net sales of 18 PART I -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES $83.6 million for the corresponding period in the prior year. The increase in consolidated net sales for the twenty-six week period was due to increased branded retail, food service, private label, fresh food sales. This increase was partially offset by decreases in canned mushrooms and snack sales. The decrease in consolidated net sales for the thirteen week period was due to decreases in branded, private label, canned mushrooms and snack sales partially offset by increases in food service and fresh food sales. COST OF GOODS SOLD Costs of goods sold were $116.1 million, or 79.3% of consolidated net sales in the twenty-six week period ended December 1, 2002 and $114.9 million, or 79.4% of consolidated net sales for the corresponding period in 2001. Cost of goods sold was $65.0 million, or 78.4% of consolidated net sales for the thirteen week period ended December 1, 2002 as compared to $65.5 million, or 78.3% of consolidated net sales for the corresponding period in 2001. The decrease in cost of goods sold as a percentage of net sales for the twenty-six week period was due to reduced operating expenses at our Lancaster plant and the increase in branded and fresh food sales, which sells at a higher margin as compared to other sales products of the Company. The small increase in cost of goods sold as a percentage of net sales for the thirteen-week period was due to increases in food service and fresh food sales offset by reduced operating expenses at our Lancaster plant and decreases in branded retail sales, which carries sells at a higher margin as compared to other sales products of the Company. SELLING EXPENSES Selling expenses were $13.4 million, or 9.1% of consolidated net sales for the twenty-six week period ended December 1, 2002 as compared to $13.7 million or 9.5% of consolidated net sales for the corresponding period in 2001. Selling expenses were $8.4 million or 10.1% of consolidated net sales for the thirteen week period ended December 1, 2002 compared to $8.3 million, or 9.9% of consolidated net sales during the corresponding period in 2001. The decrease in selling expenses for the twenty-six week period reflects lower coupon redemptions, media advertising, customer incentive programs and customer advertising dollars partially offset by increases in prior year customer promotion audit payouts. The increase in selling expenses for the thirteen week period reflects higher prior year customer promotion audits partially offset by lower coupon redemptions, media advertising, customer incentive programs and customer advertising dollars. ADMINISTRATIVE EXPENSES Administrative expenses were $6.9 million, or 4.7% of consolidated net sales for the twenty-six week period ended December 1, 2002 as compared to $6.2 million, or 4.3% of consolidated net sales for the corresponding period in 2001. Administrative expenses were $3.2 million, or 3.8% of consolidated net sales for the thirteen week period ended December 1, 2002 as compared to 19 PART I -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES $2.9 million, or 3.5% of consolidated net sales for the corresponding period in 2001. The increase in administrative expenses for both the twenty-six week and thirteen week period reflects increases in outside legal and accounting fees and services, the provision for the supplemental pension benefits and general annual wage increases. INTEREST EXPENSE Interest expense was $1.5 million for the twenty-six week period ended December 1, 2002 as compared to $1.9 million for the same period in 2001. Interest expense was $.8 million for the thirteen week period ended December 1, 2002 as compared to $1.0 million for the same period in 2001. The decrease in both periods reflects lower average borrowings as well as lower average borrowing rates for the periods compared to 2001. OTHER (INCOME) EXPENSES Other (income) expenses, net was $155,000 for the twenty-six week period ended December 1, 2002 as compared to $119,000 for the same period in 2001. Other income, net was $23,000 for the thirteen week period ended December 1, 2002 as compared to other expenses, net of $114,000 for the same period in 2001. The increase in other expenses for the twenty-six week period is due to a larger foreign translation adjustment loss. The decrease in other expenses for the thirteen week period reflects higher returns on the sale of investments, and a smaller foreign translation adjustment loss. INCOME TAXES The provision for corporate federal and state income taxes for the twenty-six week period ended December 1, 2002 was $2.9 million, or 34.9% of pretax earnings, as compared to $2.5 million, or 32.3% of pre-tax earnings for the same period in 2001. The provisions for corporate federal and state income taxes for the thirteen week period ended December 1, 2002 was $2.0 million, or 34.6% of pre-tax earnings as compared to $2.0 million, or 34.0% of pre-tax earnings for the same period in 2001. The increase in the effective tax rate for both periods is primarily due to increased earnings in jurisdictions with higher effective tax rates in the current year periods as compared to prior periods. 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. 20 PART I -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES OPERATING ACTIVITIES Net working capital was $41.6 million at December 1, 2002 and $36.5 million at June 2, 2002. The current ratios were 1.65 on December 1, 2002 and 1.64 on June 2, 2002. Cash provided from operating activities for the twenty-six week period ended December 1, 2002 was $5.0 million as compared to cash used in operating activities of $.2 million during the same period of 2001. The combination of increased earnings and lower inventory levels generated more cash flow in the twenty-six week period ended December 1, 2002 compared to the prior year period. INVESTING ACTIVITIES During the twenty-six week period ended December 1, 2002, the Corporation spent approximately $3.3 million for the purchase plant upgrades and expansions. This compares to $3.7 million spent during the same period last year for capital projects. FINANCING ACTIVITIES The increase in notes payable of approximately $2.2 million during the twenty-six week period ended December 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 $21.2 million was utilized as of December 1, 2002. Additional borrowing is permitted within prescribed parameters in existing debt agreements, which contain certain performance covenants. As of September 1, 2001, the Corporation entered in the Note Purchase Agreement with a group of lenders led by John Hancock Insurance Company (the "Lenders") and issued 7.01% Senior Notes (the "Notes") due September 15, 2011 in the aggregate principal amount of $25.0 million to the Lenders. The Corporation is required to make a prepayment of $2.5 million of the principal amount of the Notes on September 15, 2002 and on each September 15 thereafter to and including September 15, 2011. 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 A. 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 position of Executive 21 PART I -- FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES Vice President and Secretary of the Corporation. To the extent a change in 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 these obligations as the Corporation currently does not have the financial resources to repay these obligations. While the Corporation currently believes it would be successful in obtaining additional financing, no assurance can be given as to whether the Corporation would be successful in obtaining additional debt financing or if such financing will be on terms and conditions that are acceptable to the Corporation. The Note Purchase Agreement contains certain limitations on the Corporation's ability to enter into merger agreements, incur debt, and/or sell its assets, other than in the ordinary course of business. The Corporation received $25.0 million on September 1, 2001 from proceeds for the Notes. 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 December 1, 2002:

13Payment ~~Weeks~~Due ~~Ended~~by Period ----------------------------------------------------------------- ~~September~~Contractual 1,Obligation ~~2002~~After ~~September~~Total 1 Year 2,-3 ~~2001~~Years 4-5 Years 5 Years ----------- ----------- ---------- ---------- ~~Net~~----------- ~~Income~~Short-Term Notes Payables $21,184,000 1$21,~~782~~184,000 $-0- 1$-0- $-0- Long-Term Debt 31,~~441~~435,000 ~~Other~~4,286,000 ~~Comprehensive~~8,572,000 ~~Loss-~~8,572,000 ~~Unrealized~~10,005,000 ~~Loss~~Operating onLeases ~~Investments~~978,000 ~~(143~~475,000) ~~(215~~394,000) 109,000 -0- ----------- ----------- ~~Comprehensive Income $ 1,639,000 $ 1,226,000~~ ---------- ---------- ----------- Total contractual obligations $53,597,000 $25,945,000 $8,966,000 $8,681,000 $10,005,000 =========== =========== ========== ========== ===========

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 I - FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES There are no material changes to the disclosures on this matter provided in the Company's Annual Report on Form 10-K for the fiscal year ended June 2, 2002. 23 PART I - FINANCIAL INFORMATION Item 4. Controls and Procedures Financial Condition and Results of Operations HANOVER FOODS CORPORATION AND SUBSIDIARIES Based on the most recent review, which was completed within 90 days of the filing of Form 10-Q, the Company's principal executive officer and principal financial officer concluded as of the evaluation date that the Company's disclosure controls and procedures were effective in timely alerting them to material information required to be disclosed by the Company in the reports that it files with the SEC under the Securities Exchange Act of 1934, as amended, during the period that the report is being prepared. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation. As a result, no corrective actions were taken. 24 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 AND USE OF PROCEEDS -- 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 (a) EXHIBITS 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 (b) REPORTS ON FORM 8-K - None 25 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: January 15, 2003 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 26 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: January 15, 2003 /s/ John A. Warehime ------------------------------------- John A. Warehime Chief Executive Officer 27 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: January 15, 2003 /s/ Gary T. Knisely ------------------------------------ Gary T. Knisely Chief Financial Officer 28

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

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 =========== ========== ========== ========== ==========

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