EX-13 3 ex13.txt EXHIBIT 13 [LOGO] 2003 Annual Report to Shareholders GENERAL OVERVIEW Hanover Foods Corporation (as used herein the term "Corporation" refers to Hanover Foods Corporation and its consolidated subsidiaries) was incorporated on December 12, 1924 in Harrisburg, Pennsylvania. The Corporation has six (6) wholly-owned subsidiaries, Tri-Co. Foods Corp., Consumers Packing Corporation, d/b/a Hanover Foods - Lancaster Division, Spring Glen Fresh Foods, Inc., Hanover Insurance Corporation, Ltd., Nittany Corporation and Bickel's Snack Foods, Inc. Tri-Co. Foods Corp. has three (3) wholly-owned subsidiaries: Alimentos Congelados Monte Bello, S.A., Sunwise Corporation and Mayapac, S.A. The Corporation enjoys its strongest retail sales in the mid-Atlantic states and Florida. Introduction of frozen ethnic blends, specialty vegetables, 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 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 and DRAPER KING COLE. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, foreign operations, and a change of control as a result of the pending Warehime family litigation. Such factors, which are discussed in the Annual Report, could affect the Corporation's financial performance and could cause the Corporation's actual results for future periods to differ materially from any opinion or statements expressed herein with respect to future periods. As a result, the Corporation wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. Description of Business The Corporation is a vertically integrated processor of food products in one industry segment. 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 ten plants in Pennsylvania, one plant in Maryland, one plant in Delaware, 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. See Note 6 of the notes to the Consolidated Financial Statements. The Corporation's fiscal year ends at the close of operations on the Sunday nearest to May 31. Accordingly, the following discussion compares the results of operations for the fiscal year ended June 1, 2003 to the year ended June 2, 2002, and the fiscal year ended June 2, 2002 to the year ended June 3, 2001. The fiscal year ended June 3, 2001 was comprised of 53 weeks. The fiscal years ended June 1, 2003 and June 2, 2002, were comprised of 52 weeks. 1 RESULTS OF OPERATIONS Year Ended June 1, 2003 Compared to Year Ended June 2, 2002 Net Sales Consolidated net sales were $290.3 million for fiscal 2003 compared to $290.2 million for fiscal 2002. The consolidated net sales comprised of the following volume and sales price components: Volume Sales Price Combined ------ ----------- -------- Frozen Foods..................... 1.0% (.7)% .3% Canned Foods..................... (1.3)% .6% (.7)% Prepared/Snack Foods............. .1% .3% .4% ------ ----- ----- (.2)% .2% 0% ====== ===== ===== The increased volume in frozen food sales was principally due to an increase in retail brand sales and private label sales. These increases were partially offset by decreases in food service and industrial sales. Frozen food prices have remained relatively consistent with last fiscal year, however the increase in price sensitive promotions did decrease price, and the increase in private label sales were made at a lower price per unit that offset the increased price in branded retail sales. The decreased volume in canned food sales was principally due to a decrease in industrial and private label sales. Canned food prices have remained relatively consistent with last fiscal in all major sales areas. Prepared and snack foods volume was consistent with last fiscal with increases in prepared foods and offset by decreases in snack food sales. The prices for both prepared and snack foods remained relatively consistent with last fiscal year. Cost of Goods Sold Consolidated cost of goods sold represent 84.2% of consolidated net sales for fiscal year 2003 compared to 84.6% for fiscal 2002. The consolidated cost of sales decreased $1.4 million to $244.3 million in fiscal 2003 compared to $245.7 million for fiscal 2002. The cost of sales decreased $0.9 million primarily due to a reduction in ingredient costs and to a lesser extent due to the volume reduction which decreased cost of goods by $0.5 million for fiscal 2003. Selling Expenses Consolidated selling expenses represented 4.2% of consolidated net sales for fiscal 2003 and 4.9% for fiscal 2002. The decrease in the amount of selling expenses reflect lower media advertising, customer advertising, free goods marketing program, accounts receivable write-off and the elimination of the amoritization of trademarks. Administration Expenses Consolidated administration expenses were $15.8 million for fiscal year 2003, or 5.4% of consolidated net sales, as compared to $14.6 million, or 5.0% of consolidated net sales in 2002. The increase in administration expenses reflects increases in outside professional fees and services, the provision for the supplemental pension benefits, the provision for post-retirement benefits as well as increase in the 401(k) contribution and the ESOP contribution. 2 Interest Expense Consolidated interest expense for fiscal 2003 decreased $0.8 million to $2.8 million compared to $3.6 million in fiscal 2002. The decrease reflected lower average borrowings as well as lower average borrowing rates for the fiscal year compared to last fiscal year. Other Income (Expense) Consolidated other income decreased $101,000 to $270,000 for fiscal 2003 as compared to other income of $371,000 for fiscal 2002. The decrease was due to lower return of sale of investments and a lower gain on the sales of fixed assets. Income Taxes The provision for corporate federal and state income tax for the fiscal year 2003 was $5.7 million or 36.4% of pretax earnings, as compared to $5.1 million or 41.3% of pretax earning for 2002. The decrease in the effective rate was primarily due to the elimination of the income taxes in our Guatemala subsidiary. Alcosa lost its income tax exoneration on March 31, 2001, and the government granted an income tax exoneration to Mayapac, S.A. beginning January 2002 and ending January 2012. Net Earnings Consolidated net earnings for fiscal year 2003 were $9.9 million, or 3.4% of consolidated net sales, as compared to $7.3 million, or 2.5% of consolidated net sales, for fiscal 2002 as a result of the factors discussed above. RESULTS OF OPERATIONS Year Ended June 2, 2002 Compared To Year Ended June 3, 2001 Net Sales Net sales and gross profit for fiscal years 2002 and 2001 have been adjusted by certain amount previously recorded as selling and marketing expense in accordance with EITF 01-9, and cost of sales have been adjusted by certain freight costs previously recorded as net sales in accordance with EITF 00-10. Consolidated net sales were $290.2 million for fiscal 2002 compared to $293.0 million for fiscal 2001, a decrease of $2.8 million, or 1.0%. The decrease in consolidated net sales was comprised of the following volume and sales price components: Volume Sales Price Combined ------ ----------- -------- Frozen Foods..................... (.8)% 0% (.8)% Canned Foods..................... (1.1)% 2.0% .9% Prepared/Snack Foods............. (.5)% (.6)% (1.1)% ------ ----- ------ (2.4)% 1.4% (1.0)% ====== ===== ====== The decreased volume in frozen sales was principally due to a decrease in retail brand sales due to a planned decrease in price sensitive promotions. This decrease was partially offset by increases in food service and private label sales. Frozen food prices remained relatively consistent with last fiscal year, however the reduced price sensitive promotions did increase prices, but the increase in foods services and private label sales were made at a lower price per unit that offset the increased price in branded retail sales. 3 The decreased volume in canned sales was principally due to a decrease in retail branded sales due to a planned decrease in price sensitive promotions. This decrease was partially offset by increases in food service sales. Canned prices increased due to a reduction in price sensitive promotion and an overall increase in dry bean and potato prices during the current fiscal year. Prepared and snack foods showed a decrease in sales volume due to the elimination of non-profitable snack accounts which was planned. The decreased sales prices in prepared and snack foods were principally due to a change in the mix of product sold towards private label versus branded products. Cost of Goods Sold Consolidated costs of goods sold represents 84.6% of consolidated net sales for fiscal 2002 compared to 86.4% for fiscal 2001. The consolidated cost of sales decreased $7.5 million to $245.7 million in fiscal 2002 compared to $253.2 million for fiscal 2001. The cost of sales decreased $.6 million primarily due to reduced energy costs and increased plant productivity, and to a larger extent, due to a volume reduction of 2.4% or $6.9 million for fiscal 2002. Selling Expenses Consolidated selling expenses represented 4.9% of consolidated net sales for fiscal 2002 and 4.8% for fiscal 2001. Free goods marketing program expense increased to $.7 million for fiscal year 2002 as compared to $0 dollars for fiscal 2001 as the Corporation spent more dollars to increase brand awareness. The Corporation spent $.7 million on advertising for fiscal 2002, compared to $.7 million in advertising for fiscal 2001. Administrative Expenses Consolidated administrative expenses were $14.6 million for fiscal year 2002, or 5.0% of consolidated net sales, as compared to $13.3 million, or 4.5% of consolidated net sales in 2001. Increased corporate bonus provision and a charge to earnings for the contribution to the Corporation's Employee Stock Ownership Plan accounted for the increase in administration expense for the fiscal year ended June 2, 2002. Interest Expense Consolidated interest expenses for fiscal 2002 decreased $1.0 million to $3.6 million compared to $4.6 million in fiscal 2001. The decrease reflects lower average borrowings as well as lower average borrowing rates for the fiscal year compared to last fiscal year. Other Income (Expense) Consolidated other income decreased $763,000 to $371,000 for fiscal 2002 as compared to other income of $1,134,000 for fiscal 2001. Increased foreign exchange losses accounted for $118,000 of the decrease and decreased gains on the sales of investments accounted for $511,000 of the decrease. Income Taxes The provision for corporate federal, foreign and state income tax for fiscal year 2002 was $5.1 million or 41.3% of pretax earnings, as compared to $2.5 million or 27.3% of pretax earnings for 2001. The increase in the effective rate was primarily due to income earned in Guatemala that was subject to income taxes in the current year resulting from the expiration of an export tax exemption and related adjustment of tax accruals for these taxes. Prior to March 31, 2001, the Corporation's Guatemalan subsidiary Alimentos Congelados Monte Bello S.A. was generally not subject to income taxes. 4 Net Earnings Consolidated net earnings for fiscal year 2002 were $7.3 million, or 2.5% of consolidated net sales as compared to $6.7 million or 2.3% of consolidated net sales for fiscal 2001 as a result of the factors discussed above. RELATED PARTY TRANSACTIONS During fiscal 2003, the Corporation and its subsidiaries, in the normal course of business, purchase and sell goods and services to related companies. These transactions are summarized below. During fiscal 2003, the Corporation rented equipment from Park 100 Foods, Inc. The rental payments pursuant to such lease agreements totaled $12,000 during fiscal 2003. As of June 1, 2003, the Corporation had an accounts receivable of $163,000 from Park 100 Foods, Inc. for food products sold and shipped to Park 100 Foods, Inc. During fiscal 2003, the Corporation sold approximately $1.9 million of frozen food products to Park 100 Foods, Inc., Tipton, Indiana. James A. Washburn, a director of the Corporation, owns approximately 80% of the outstanding stock of Park 100 Foods, Inc. During fiscal 2003, the Corporation leased a two story farm house, adjoining one story guest house and adjoining ground located on Trolley Road, R.D. #3, Hanover, Heidelberg Township, Pennsylvania, for customer housing and temporary new employee housing from John A. and Patricia M. Warehime for a total of $36,000. During fiscal 2003, the Corporation leased a barn for seed storage, located in Heidelberg Township, Pennsylvania for $4,000 from Warehime Enterprises, Inc. J. William Warehime, a shareholder of the Corporation, and John A. Warehime, Chairman of the Corporation, own 44.4% and 14.8% of the outstanding stock of Warehime Enterprises, Inc., respectively. During fiscal 2003, the Corporation purchased $1.1 million of contracted vegetables from Lippy Brothers, Inc. T. Edward Lippy, a director of the Corporation, owns approximately 37% of the outstanding stock of Lippy Brothers, Inc. During fiscal 2003, the Corporation's subsidiary, Alimentos Congelados Monte Bello S.A. sold its condominium real estate located in Naples, Florida to John A. & Patricia M. Warehime for $127,500, which approximates fair value. During fiscal 2003, the adult children of the Corporation's Chairman, John Warehime, were employed by the Corporation, including Jennifer Carter, Director, who is employed as Assistant to the Chairman, Jeffrey Warehime, who is employed as Director - Fresh Produce, and Andrew Warehime, who is employed as Special Sales Manager. Jennifer Carter, Jeffrey Warehime and Andrew Warehime are employed by the Corporation at annual salaries of $92,314, $97,919, $62,129, respectively. Ms. Carter also receives director compensation customary for the Corporation's directors. On June 20, 2002, each of Jennifer Carter, Jeffrey Warehime, and Andrew Warehime were granted an option to purchase 500 shares of Class B common stock. Andrea Kint, the daughter of Pietro Giraffa, Vice President and Controller of the Corporation, is employed as Assistant Production Manager - Hanover, PA Frozen Operations at an annual salary of $46,350. 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. Net working capital was $47.0 million at June 1, 2003 and $36.5 million at June 2, 2002. The current ratio was 2.07 on June 1, 2003 and 1.64 on June 2, 2002. 5 Net cash provided by operations for the fiscal year ended June 1, 2003 was $22.7 million, compared to $19.0 million, for the fiscal year ended June 2, 2002. Sources of net cash provided by operations consisted principally of net earnings of $9.9 million and non-cash depreciation and amortization expense of $9.6 million and decreases in inventory and accounts receivable of $5.1 million. The use of net cash for operations consisted primarily of decreased accounts payable and accrued expenses of $2.4 million and deferred income taxes of $1.3 million. Net cash provided by operations for the fiscal year ended June 2, 2002 was $19.0 million, compared to $10.8 million for the fiscal year ended June 2, 2001. Sources of net cash provided by operations consisted principally of net earnings of $7.3 million and non-cash depreciation and amortization expense of $9.4 million and increases in accounts payable and accrued expenses of $1.2 million. The use of net cash for operations consisted primarily of increased inventory of $.3 million and increased prepaid expenses of $.6 million. Net cash used by investing activities for the fiscal year ended June 1, 2003 was $5.0 million as compared to $6.9 million for fiscal year ended June 2, 2002. The principal use of funds was the upgrade of property, plants and equipment. During the year ended June 1, 2003, $5.6 million was spent on development and modernization of equipment as compared to $6.8 million in fiscal year ended June 2, 2002. These projects were funded by internally generated funds Net cash used by investing activities for the fiscal year ended June 2, 2002 was $6.9 million as compared to $13.2 million for fiscal year ended June 3, 2001. The principal use of funds was the upgrade of property, plant and equipment. During the year ended June 2, 2002, $6.8 million was spent on development and modernization of equipment as compared to $13.6 million in the fiscal year ended June 3, 2001. These projects were funded by internally generated funds. Net cash used by financing activities was $16.4 million for the fiscal year ended June 1, 2003, compared to cash used by financing activities of $11.1 million for the fiscal year ended June 2, 2002. Seasonal borrowings amounting to $145.3 million were used throughout the fiscal year to fund operating needs. Seasonal borrowing decreased $11.4 million as of June 1, 2003 compared to June 2, 2002. Payments on long-term debt were $4.3 million. The weighted average cost of seasonal borrowing was 2.28% for the fiscal year ended June 1, 2003 compared to 4.02% for the fiscal year ended June 2, 2002. Net cash used by financing activities was $11.1 million for the fiscal year ended June 2, 2002, compared to cash used by financing activities of $2.8 million for the fiscal year ended June 3, 2001. Seasonal borrowing decreased $33.3 million as of June 2, 2002 compared to June 3, 2001. 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. The Note Purchase Agreement contains certain limitations on the Corporation's ability to enter into merger agreements, incur debt, 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. Payments on long-term debt were $1.8 million. The weighted average cost of seasonal borrowing was 4.02% for the fiscal year ended June 2, 2002 compared to 6.53% for the fiscal year ended June 3, 2001. A change in control of the Corporation would trigger a repayment obligation with respect to $22.5 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 this report. 6 At June 1, 2003, the Corporation has commitments from financial institutions to provide seasonal lines of credit in the amount of $50.0 million. Borrowing is permitted within prescribed parameters in existing debt agreements, which contain certain performance covenants. The term loan agreements with the Lenders and 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. Based on the requirements of the agreements at June 1, 2003, $38,576,000 of retained earnings are restricted from distribution. The Corporation is in compliance with the restrictive provisions in the agreements as of June 1, 2003. The Corporation paid dividends of $688,000 during fiscal 2003 compared to $984,000 in fiscal 2002. The Corporation 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 June 1, 2003:

Currently, the Corporation 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 Corporation's sources of liquidity are primarily funds from operation and available amounts under seasonal lines of credit expiring (two on October 31, 2004 and one on January 28, 2004), which are expected to be renewed in the ordinary course of business. APPLICATION OF CRITICAL ACCOUNTING POLICIES Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Many of the estimates and assumptions require significant judgment. Future actual results could differ from those estimates and assumptions and could have a significant impact on our consolidated results of operations, financial position and cash flows. The following accounting policies, estimates and assumptions are particularly sensitive because of their significance on the preparation of the Corporation's consolidated financial statements: o The allowance for potentially uncollectible receivables and pending deductions requires management to make significant judgments in estimating future amounts to be received. Our judgments are based upon historical experience and current market conditions. Changes in estimates could be impacted as a result of events, such as a deterioration of the credit status of customers or material reductions in product and sales volumes. 7 o Determination of liabilities for pension and post-retirement benefits includes significant assumptions and estimates relating to compensation and health care cost trends, discount rates and rate of return on plan assets. The assumptions are based upon current market and health care trends. o Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows estimated to be generated by such assets. If such assets are considered to be impaired, the impairment to be recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets. However, determining fair value is subject to estimates of both cash flows and interest rates and different estimates could yield different results. There are no events or changes in circumstances of which management is aware indicating that the carrying value of the Corporation's long-lived assets may not be recoverable. o Effective June 1, 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. As required by SFAS 142, management performed transitional impairment testing during the third quarter and annual impairment testing of goodwill and indefinite-lived intangible assets during the fourth quarter of fiscal year 2003. These tests confirmed that the fair value of the Corporation's reporting units exceeds their carrying values, and that no impairment loss needed to be recognized for goodwill upon the adoption of SFAS 142. The annual evaluation of goodwill and other indefinite-lived intangible assets requires the use of estimates about future operating results for each reporting unit to determine their estimated fair value. Changes in forecasted operations can materially affect these estimates. Additionally, other changes in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive the valuation techniques employed to estimate the fair value of goodwill and other indefinite-lived intangible assets could change and, therefore, impact the assessments of impairment in the future. The footnotes to the consolidated financial statements provide additional information on accounting policies and assumptions used by the Corporation. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation is subject to market risk associated with changes in interest rates. To manage the risk of fluctuations in interest rates, the Corporation's borrowings are a mix of fixed and floating rate obligations. This includes the $29.6 million of unsecured senior notes payable, $7.1 million bears interest at an 8.74% fixed rate and is due in 2007, $22.5 million bears interest at a 7.01% fixed rate and is due in 2013. The Corporation also maintains short-term unsecured lines of credit that bear interest at floating rates. 8 The following table presents the expected maturity and effective interest rates of the Corporation's debt obligations (dollars in thousands):

IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS Competition in the Marketplace The Corporation faced stiff competition from national and regional branded companies during the entire fiscal year 2002 in all of its market areas and management anticipates this competitive environment to continue throughout fiscal year 2003. Impact of Inflation and Changing Prices The changes in cost and prices within the Corporation's business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by the moderate inflation. New Accounting Standards In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measure certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer to classify a financial instrument within its scope as a liability (or an asset in some circumstances). The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The statement is not expected to have a material impact on our consolidated financial statements. 9 FINANCIAL HIGHLIGHTS FIVE YEARS (in thousands except share and per-share data) The consolidated financial information set forth below should be read in conjunction with the more detailed consolidated financial statements, including related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" including elsewhere in this Annual Report.

10 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 Independent Auditors' Report Board of Directors and Stockholders Hanover Foods Corporation: We have audited the accompanying consolidated balance sheets of Hanover Foods Corporation and subsidiaries as of June 1, 2003 and June 2, 2002, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders' equity for each of the years in the three-year period ended June 1, 2003. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hanover Foods Corporation and subsidiaries as of June 1, 2003 and June 2, 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended June 1, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP Harrisburg, Pennsylvania July 23, 2003 F-2 HANOVER FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 1, 2003 AND JUNE 2, 2002

See accompanying notes to consolidated financial statements. F-3 HANOVER FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 1, 2003 AND JUNE 2, 2002

See accompanying notes to consolidated financial statements. F-4 HANOVER FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001

See accompanying notes to consolidated financial statements. F-5 HANOVER FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001

See accompanying notes to consolidated financial statements. F-6 HANOVER FOODS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 1, 2003, JUNE 2, 2002, AND JUNE 3, 2001

See accompanying notes to consolidated financial statements. F-7 HANOVER FOODS CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 1, 2003, June 2, 2002, and June 3, 2001

See accompanying notes to consolidated financial statements. F-8 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies (a) Description of Business Hanover Foods Corporation (the "Company") is a vertically integrated processor of food products in one industry segment. The Company is involved in the growing, processing, canning, freeze-drying, packaging, marketing, and distribution of its products under its own trademarks as well as other branded, customer, and private labels. The Company has operations in ten plants in Pennsylvania, one plant in Delaware, one plant in Maryland, and two plants in Guatemala. The Company's raw materials are readily available and the Company is not dependent on a single supplier or a few suppliers. Revenue is recognized when title transfers pursuant to shipping terms. Separately billed shipping and handling is included in net sales. Shipping and handling costs are included in cost of goods sold. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Hanover Foods Corporation and its subsidiaries, which are Consumers Packing Company (T/A Hanover Foods - Lancaster Division), Spring Glen Fresh Foods, Inc., Bickel's Snack Foods, Inc., Hanover Insurance Company, LTD., The Nittany Corporation, Tri-Co Foods Corp. and its subsidiaries - Alimentos Congelados Monte Bellos, S.A. (Alcosa), Sunwise Corporation and Mayapac S.A., all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. (c) Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist of trade receivables. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is not required. The risk associated with the concentration is generally limited due to the large number of wholesalers and retailers and their geographic dispersion, however, the Company's ten largest customers accounted for approximately 38%, 36%, and 33%, of the Company's net sales for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. The Company's ten largest customers account for approximately 30% and 32% of the Company's accounts receivable as of June 1, 2003 and June 2, 2002, respectively. No single customer accounted for more than 10% of net sales for the years ended June 1, 2003, June 2, 2002, and June 3, 2001. F-9 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies (Cont'd) (d) Cash and Cash Equivalents Cash equivalents of $1,219,000 and $618,000 at June 1, 2003 and June 2, 2002, respectively, consist of short-term interest-bearing investments with maturities of less than three months. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (e) Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The company determines the allowance based on historical write-off experience. (f) Investments Investments of $2,243,000 and $3,681,000 at June 1, 2003 and June 2, 2002, respectively, classified as available-for-sale securities, are included in other noncurrent assets and measured at fair value. Net unrealized gains and losses are reported as a separate component of accumulated other comprehensive income (loss) until realized. Net unrealized losses were $106,000 at June 1, 2003 and $85,000 at June 2, 2002 and net unrealized gain was $153,000 at June 3, 2001. The reconciliation of the reclassification adjustments related to unrealized gains and losses on securities included in comprehensive income for the respective fiscal year are as follows:

(g) Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts and notes receivable, accounts payable and notes payable approximates fair values due to the short-term maturities of these instruments. The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The amount reported in the consolidated balance sheet for long-term debt approximates fair value. F-10 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies (Cont'd) (h) Inventories Inventories are stated at the lower of cost (determined by average cost which approximates the first-in, first-out method) or market. (i) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred; additions and betterments that materially increase the lives of the related assets are capitalized. Upon retirement, sale, or other disposition of buildings and equipment, cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives range from approximately 3 years to 12 years for equipment and up to 40 years for buildings. Accelerated methods are used for tax reporting purposes. Plant and equipment held under capital leases are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (j) Goodwill and Intangible Assets On June 3, 2002, the Company adopted the provisions of SFAS 142 "Goodwill and Other Intangible Assets". In connection with this adoption, the Company performed an initial impairment test of the goodwill and discontinued amortization of goodwill. The initial valuation did not indicate any impairment of the goodwill. Additionally, the SFAS requires the Company to perform an annual impairment test of the goodwill. The Company has chosen March 1 as the date to perform the annual impairment test of goodwill. The March 1 impairment test did not indicate any impairment. Intangible assets consist of the Company's trademarks. The trademarks were determined to have an indefinite life and are not amortized. In accordance with SFAS 142, "Goodwill and Other Intangible Assets", the Company will perform an annual review of its trademarks to determine whether impairments exists. As of June 1, 2003, the Company did not recognize any impairment charges related to these trademarks. (k) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, the depreciation ceases. F-11 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies (Cont'd) Goodwill and intangible assets not subject to amortization are tested annually for impairment. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. (l) Insurance The Company, through its wholly-owned insurance subsidiary, is self-insured with respect to certain general liability and workers' compensation claims. Excess insurance coverage is maintained for general liability and workers' compensation claims. Outstanding claims include a provision for claims reported as advised to the Company by the primary insurer and a provision for incurred but not reported claims based upon the advice of the primary insurer on the ultimate liability of the Company under the reinsurance assumed or, in the absence of such an evaluation, the provision is based upon the best estimate of the ultimate liability of the Company. (m) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings of foreign operations are reinvested in the business and no provision for domestic income tax or foreign withholding tax is made on such earnings until distributed. (n) Research and Development Research and development costs are expensed as incurred. Research and development costs amounted to $608,000, $600,000, and $633,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. (o) Promotional Costs Promotional costs are expensed as incurred. Accounts and notes receivable are presented net of allowances for bad debts and promotional programs. (p) Advertising Costs Advertising costs are expensed as incurred. Advertising expenses amounted to $730,000, $724,000, and $783,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. F-12 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies (Cont'd) (q) Earnings per Share Earnings per share are computed in accordance with Statement of Financial Accounting (SFAS) No. 128, Earnings per Share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. (r) Fiscal Year End The Company's fiscal year ends at the close of operations on the Sunday nearest to May 31. The fiscal years ended June 1, 2003 and June 2, 2002, were comprised of 52 weeks. The fiscal year ended June 3, 2001 was comprised of 53 weeks. (s) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (t) Accounting for Stock-Based Compensation The Company applies the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpreciations in accounting for a stock-based compensation plan. Accordingly, no compensation expense has been recognized for the stock-based compensation plan. (u) Reclassifications Certain amounts in prior periods have been reclassified to conform to classification made in the current year. F-13 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 2 Goodwill and Other Intangible Assets Amortization expense related to goodwill and other intangible assets was $115,000 and $115,000 for the years June 2, 2002 and June 3, 2001, respectively. The following table reconciles previously reported net income as if the provisions of SFAS No. 142 were in effect in fiscal years ending June 2, 2002 and June 3, 2001.

Note 3 Notes Payable - Banks The Company maintains short-term unsecured lines of credit with various banks providing credit availability amounting to $50,000,000, of which $7,634,000 was borrowed (including an overdraft of $892,000) at June 1, 2003 and $18,987,000 was borrowed (including an overdraft of $1,054,000) at June 2, 2002. The Company borrows funds under these lines of credit under two methods of cost of funds. The first method used to price the cost of short-term borrowings is based upon LIBOR plus thirty-five to one hundred twenty-five basis points. The second method is based upon the financial institution's "calculated cost of funds" plus an earnings modification. The weighted-average interest rate on short-term borrowings at June 1, 2003 and June 2, 2002, was 2.29% and 4.02%, respectively. The maximum amount of borrowings outstanding under short-term lines of credit at any one time during the years ended June 1, 2003, June 2, 2002, and June 3, 2001, was approximately $26,848,000, $55,513,000, and $53,393,000. The Corporation's sources of liquidity are primarily funds from operation and available amounts under seasonal lines of credit expiring (two on October 31, 2004 and one on January 28, 2004), which are expected to be renewed in the ordinary course of business. F-14 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 4 Long-term Debt The long-term debt of the Company and its subsidiaries consists of:

The term loan agreements with the insurance company and seasonal borrowing with financial institutions (note 2), contain various restrictive provisions including those relating to mergers and acquisitions, additional borrowing, guarantee of obligations, lease commitments, limitations to declare or pay dividends, repurchase stock, and the maintenance of working capital and certain financial ratios. Based on the requirements of the agreements at June 1, 2003, $38,576,000 of retained earnings are restricted from distribution. The Company is in compliance with the restrictive provisions in the agreements as of June 1, 2003. The aggregate long-term debt maturities follow: For the fiscal year ending: 2004 $ 4,286,000 2005 4,286,000 2006 4,286,000 2007 4,285,000 2008 2,500,000 Thereafter 10,000,000 ----------- Total $29,643,000 =========== Note 5 Leases The Company has several noncancelable operating leases, primarily for equipment, that expire over the next five years. These leases generally contain renewal options for periods ranging from three to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) during the periods ended June 1, 2003, June 2, 2002, and June 3, 2001, amounted to $1,918,000, $3,042,000, and $3,303,000 respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 1, 2003 are: F-15 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 5 Leases (Cont'd) Operating For the fiscal year ending: leases ----------- 2004 $ 433,000 2005 270,000 2006 200,000 2007 135,000 2008 83,000 ---------- Total minimum lease payments $ 1,121,000 ========== Note 6 Capital Stock The Company's capital stock consists of Class A Nonvoting Common Stock, Class B Voting Common Stock, 8 1/4% Series A and B Cumulative Convertible Preferred Stock, and Series C Cumulative Convertible Preferred Stock. Holders of Class B Common Stock have one vote per share. No other classes of stock have voting rights except as discussed below. The Company's Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 10,000 shares of Series C Convertible Preferred Stock to the trustees of the Company's 401(k) Savings Plan (or a similar employee benefit plan). At least a majority of the trustees of the Company's 401(k) Savings Plan (or similar employee benefit plan), who are appointed by the Board of Directors, must be "disinterested directors" of the Company. If certain Warehime family Class B shareholders cannot unanimously agree in writing on the composition of the Board of Directors or on other important matters specified below, the Amended and Restated Articles permit each of the 10,000 shares of Series C Convertible Preferred Stock the right to cast 35 votes in the election of directors, and each share of Class A Common Stock would have one-tenth (1/10) of a vote per share, thereby enabling them to influence the ultimate result of the election by the Class B shareholders. The Amended and Restated Articles also permit the trustees and the Class A shareholders to similarly vote on proposals to remove directors, and in connection with any proposal (not previously approved by the Board of Directors) to further amend the Articles of Incorporation or Bylaws or to effectuate a merger, consolidation, division, or sale of substantially all of the assets of the Company. The voting power of the Series C Convertible Preferred Stock ceased in January 2003. Under the Amended and Restated Articles, each of the shares of Series C Convertible Preferred Stock is convertible into one share of Class A Common Stock and is not entitled to vote except in the event that certain Warehime family Class B shareholders cannot agree in writing on the composition of the Board of Directors or on other important matters specified above. During fiscal year 2001, the Corporation established an Employee Stock Trust (the "Trust") to fund future stock related and other obligations of the Corporation's compensation and benefit plans, including a concurrently established Employee Stock Ownership Plan ("ESOP"). For financial reporting purposes, the Trust is consolidated with the Corporation. On March 1, 2001, the Corporation contributed 142,449 shares of Class B Common Stock to the Trust. Upon contribution, these shares were recorded at a fair value of $117/per share based upon the most recent appraised value of Class B Common Stock as determined by an independent valuation. No shares were transferred from the Trust to the ESOP during the fiscal year ended June 3, 2001. During the year ended June 1, 2003 and June 2, 2002, the Company transferred 4,761 and 4,258 shares of Class B F-16 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 6 Capital Stock (Cont'd) Common Stock to the ESOP. The shares had a fair market value of approximately $114 and $112 on the respective transfer dates and accordingly, the Company recorded a charge to earnings of approximately $544,000. The following summarizes the Company's capital stock at June 1, 2003 and June 2, 2002:

At any time, the holders of the Series A and B Cumulative Convertible Preferred Stock have the option to convert their shares to shares of Class A Nonvoting Common Stock based on the book value of the Class A Nonvoting Common Stock at the time of conversion. At June 1, 2003, the outstanding Series A and B Preferred Stock could be converted into 2,844 shares of Class A Common Stock. F-17 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 7 Related Party Transactions The Company 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: Year ended Year ended Year ended June 1, June 2, June 3, 2003 2002 2001 ----------- ----------- ----------- Revenues: Park 100 Foods, Inc. $ 1,877,000 $ 1,555,000 $ 1,800,000 Expenditures: Lippy Brothers, Inc. 1,146,000 1,158,000 1,284,000 James G. Sturgill 0 0 20,000 ARWCO Corporation 0 0 73,000 Warehime Enterprises, Inc. 4,000 81,000 4,000 John A. and Patricia M. Warehime 58,000 49,000 67,000 Park 100 Foods, Inc. 12,000 25,000 9,000 Schaier Travel 3,000 10,000 8,000 Accounts receivable: Park 100 Foods, Inc. 163,000 164,000 121,000 Lippy Brothers, Inc. 0 3,000 0 Accounts payable: Patricia M. Warehime 0 0 5,000 Schaier Travel 0 0 1,000 Park 100 Foods 7,000 0 0 Included in other assets is a related party receivable of $1,030,000 in 2003 and $877,000 in 2002 related to two split interest life insurance contracts on the life of Patricia M. Warehime. During fiscal 2003, the Corporation, via its subsidiary, Alimentos Congelados Monte Bello S.A., sold its condominium real estate, located in Naples, Florida to John A. & Patricia M. Warehime for $127,500, which approximates fair value. In connection with the amended complaint filed by Michael A. Warehime versus John A. Warehime (note 9), pursuant to applicable state law, the Company has agreed to pay directly all expenses (including attorney's fees) and costs in advance of the final disposition of the litigation or any substantially similar or related action, suit, or proceeding. The Company has received an undertaking from John A. Warehime to repay all costs and expenses if it is ultimately determined that he is not entitled to be indemnified by the Company. The amount paid and expensed by the Company under this arrangement for the years ended June 1, 2003, June 2, 2002, and June 3, 2001 was approximately $365, $65,000, and $6,000, respectively. A portion of rental expense included in note 4 was paid to ARWCO Corporation; Park 100 Foods, Inc. and Warehime Enterprises, Inc. all of which are related companies through common control. The amounts were $14,000, $15,000, and $100,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. F-18 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (a) Defined Contribution Plan The Company offers a 401(k) plan covering certain of its employees. The Company contributes an amount equal to 100% of each employee's deferral up to 5%. Effective July 25, 1997, the plan was amended to permit matching contributions to be made in cash and/or securities of the Company (see note 5). The Company's contribution to the 401(k) plan for the years ended June 1, 2003, June 2, 2002, and June 3, 2001 was $694,000, $759,000, and $538,000, respectively. (b) Postretirement Benefits other than Pensions Certain employees receive postretirement benefits other than pensions. This plan is currently not funded. The Company accounts for these costs by accruing for them over the employee service period. The status of the plan, based on the most recent measurement dates, is as follows:

A discount rate of 6.25% for June 1, 2003 and 7.25% for June 2, 2002, was used in determining the actuarial present value of the accumulated postretirement benefit obligation. F-19 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (Cont'd) The cost of postretirement benefits other than pensions consisted of the following components:

The assumed postretirement health care cost trend rates in measuring the accumulated post retirement obligation was as follows: o Medical: 10.0% in 2002, decreasing by 1% per year to an ultimate rate of 5.0% in 2007 and later o Prescription Drugs: 12.0% in 2002, decreasing by 1% per year to an ultimate rate of 5.0% in 2009 and later o Dental: 4.0% in 2002 and later The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of February 28, 2003 by $1,243,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended February 28, 2003 by $85,000. (c) Employment and Deferred Compensation Agreements On June 12, 1995, the Company entered into a five-year employment agreement with its Chief Executive Officer, John A Warehime, at an annual base salary of $650,000 with such compensation payable retroactively from April 1, 1994 (the "1995 Employment Agreement"). The 1995 Employment Agreement was amended on February 13, 1997 (Amended Employment Agreement). The principal terms of Mr. Warehime's employment arrangements with the Company as amended by the Amended Employment Agreement are set forth below. The Amended Employment Agreement provides for annual increases (but not decreases) in the employee's annual salary equal to the greater of 5% of the prior year's salary or the annual percentage increase in the Consumer Price Index (CPI). Mr. Warehime's annual base salary for fiscal 2003, 2002 and 2001 was $737,000, $702,000, and $669,000 respectively. Unless terminated by either party, the Amended Employment Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Amended Employment Agreement F-20 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (Cont'd) provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Amended Employment Agreement provides for the same payment to the employee (or in the event of the death of the employee, his spouse, or descendants) for one year and thereafter the payment of supplemental pension benefits as described below. In addition, the Amended Employment Agreement provides for the reimbursement by the Company of the employee's legal and accounting fees up to $75,000 per year and reasonable business expenses incurred by the employee in connection with the business of the Company. The Amended Employment Agreement also provides the employee with various other benefits including the use of an automobile, disability and life insurance, and a club membership. The annual bonus payable to the employee under the Amended Employment Agreement is equal to $100,000 plus 10% of the Company's pretax earnings over $5.0 million provided that no annual bonus is payable if pretax earnings of the Company are less than $5.0 million. The Amended Employment Agreement limits salary and the annual bonus payment described above to an aggregate of not more than $1.0 million annually. Annual bonuses can be paid in cash or Class A Common (non-voting) Stock at the option of the employee. For the years ended June 1, 2003, June 2, 2002, and June 3, 2001, the bonus accrued under this agreement was $263,000, $298,000, and $331,000, respectively. The Amended Employment Agreement also provides for the annual payment of a long-term performance bonus based upon the Company's performance over the prior five-year period as measured by its average sales growth and average increase in operating profits as compared to an industry peer group over the same period. The bonus payable is calculated based upon a formula matrix set forth in the Amended Employment Agreement, with such formula being recommended by an independent management consulting firm retained by the Company and approved by the Compensation Committee of the Board of Directors. For the years ended June 1, 2003, June 2, 2002, and June 3, 2001, the long-term performance bonus accrued under this agreement was $169,000, $157,000, and $144,000, respectively. The Amended Employment Agreement provides for annual supplemental pension benefits, commencing upon the earlier of (a) five years after termination of the employee (or one year following his death or disability) or (b) the date of retirement, payable during the life of the employee and upon his death for the life of his spouse. Such annual supplemental pension benefits are equal to 60% of average total compensation (including bonuses) over the latest three-year period prior to retirement, assuming retirement at age 65 or later. Supplemental pension benefits are reduced based upon an established formula to the extent the employee retires prior to age 65. The net present value of the cost of providing this future benefit is recognized by the Company over the remaining expected years of service. The expense recognized under this agreement was approximately $863,000, $773,000, and $628,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. The projected benefit obligation was approximately $4,447,000 and $3,584,000, June 1, 2003 and June 2, 2002, respectively. The Amended Employment Agreement was revised effective as of August 1, 1997 to make certain clarifying changes and to require that bonus payments to Mr. Warehime in any taxable year in excess of $1.0 million would be subject to shareholder approval, which shareholder approval was given on August 14, 1997. F-21 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (Cont'd) On January 23, 1997, the Company entered into a five-year employment agreement with Gary T. Knisely, Executive Vice President, Secretary, and Counsel of the Company, at an annual salary of $175,000 with such compensation payable retroactively from June 1, 1996 (the "Knisely Agreement"). Unless terminated by either party, the Knisely Agreement automatically renews annually on each anniversary date so that five years always remain on the term of the agreement. The Knisely Agreement provides for annual salary increases (but not decreases) equal to the greater of 5% of the prior year's salary or the annual percentage increase in the CPI, as well as incentive bonuses and various other benefits. As of June 2, 2002, the aggregate liability of the Company under this agreement for the next five years is estimated to be $1,410,000, excluding annual performance bonuses. In the event the employee is terminated without cause, or in the event the employee terminates his employment after a reduction (without his written consent) of his duties or authority, compensation, or similar events, the Knisely Agreement provides for the payment of the salary and bonus (including all other benefits) over the remaining term of the agreement. In the event of termination due to death or disability, the Knisely Agreement provides for the payment of salary and bonus (including all other benefits) to the employee (or his spouse or other descendants in the event of the employee's death) for the later of one year from the date of such termination or the death of the employee. The Knisely Agreement also provides for annual supplemental pension benefits equal to 60% of the employee's average annual compensation (including bonuses but excluding other benefits) over the three most recent fiscal years prior to the employee's termination if the employee is no longer employed by the Company and the employee has attained the age of 55. Such annual supplemental pension benefits are payable for the remainder of the lifetime of the employee. The net present value of the cost of providing this future pension benefit is recognized by the Company over Mr. Knisely's expected remaining years of service. The expense recognized for supplemental pension benefits under this agreement was approximately $171,000, $81,000, and $108,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. The pension liability was approximately $593,000 and $422,000 at June 1, 2003 and June 2, 2002, respectively. The Company also entered into a change in control severance agreements with several officers and executives which provides for termination compensation if respective individual's employment is terminated: (i) involuntarily within 24 months of a change in control or (ii) voluntarily, following a reduction in base salary, duties, and responsibilities within 24 months of a change in control. A "change in control" shall be deemed to occur if John A. Warehime ceases to be Chief Executive Officer of the Company or ceases to have the power and authority of the Chief Executive Officer. Pursuant to the terms of this agreement, any payment due thereunder shall be made over a two year period no less frequently than monthly and all payments during any twelve month period shall not in the aggregate exceed the individual's total cash compensation (salary and bonus) received from the Company during fiscal 2000. All payments made pursuant to this agreement are subject to the further conditions that: (i) the individual maintain the confidentiality of the Company's trade secrets, customer lists, and other proprietary information of the Company; (ii) for a period of two years following the termination of the officer, neither the individual or his employer or business associate shall F-22 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (Cont'd) enter into or attempt to enter into any business relationship, solicit for employment or employ any person, employed by the Company or its affiliates at any time within the six months prior to the officer's termination; and (iii) for a period of two years following the termination, the individual shall not directly or indirectly own, manage, operate, join, or participate in any capacity, any entity which is primarily engaged in a business which competes with any significant business of the Company or its affiliates. If all officers and executives subject to agreements were terminated on June 1, 2003 under circumstances entitling them to severance payments pursuant to the agreements, the aggregate amount due to them under these agreements would be approximately $1,932,000. The Company is also committed to another employee, Patricia H. Townsend, under a previous employment contract, which provides for minimum salary levels, annual adjustments, as well as incentive bonuses and for a term, which ends in March 2004. Provisions contained in the agreement provide for continuation of the remuneration for the remainder of the term of the agreement in the event of termination, incapacity, death, or disability. The estimated commitment for future salaries through the duration of the agreement as of June 1, 2003 was approximately $78,000. (d) Stock Option Plan On June 20, 2002, the Corporation's Board of Directors adopted 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 during fiscal year 2003 with weighted-average exercise price of $110 per share. Options vest at the rate of 12.50% per year beginning June 20, 2004 and June 20 of each following year up to and including June 20, 2011. 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. The Stock Option Plan will be administered by the Corporation's Board of Directors or by an option committee appointed by the Corporation's Board of Directors. The option committee will consist of a minimum of two and a maximum of five members of the Board of Directors, each of whom will be a "non-employee director" within the meaning of Rule 16b-3(b)(3) under the Exchange Act. Options issued pursuant to the Stock Option plan may be either incentive stock options or non-qualified stock options. An "incentive stock option" is an option that satisfies all of the requirements of Section 422(b) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, and a "non-qualified stock option" is an option that either does not satisfy all of those requirements of the terms of the option provide that it will not be treated as an incentive stock option. The option price for options issued under the Stock Option Plan will be equal at least to the fair market value of the Corporation's Class B Common Stock on the date of the grant of the option. Options will not be granted pursuant to the Stock Option Plan until after the expiration of the ten years from June 20, 2002. The number of shares available for award under the Stock Option Plan is subject to adjustment in the event of any F-23 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefit Plans (Cont'd) change in the outstanding shares of Class B Common Stock as a result of, among other circumstances, a stock dividend, stock split, recapitalization, merger, transfer of assets or reorganization. The Company applies the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for our stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation plans. 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 (loss) income and (loss) earnings per share would have been adjusted to the pro forma amounts as follows:

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. The per share weighted average fair value of stock options granted during 2003 is calculated as $26.23 on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions based on the date of grant are as follows: 2003 Divided yield 1% Votatility 8.6% Risk-free interest rate 3.5% Expected life 9 years F-24 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 Benefits Plans (Cont'd) (e) Employee Stock Ownership Plan The Company has a noncontributory employee stock ownership plan in which substantially all non-union employees are eligible to participate. The Company makes annual contributions to the plan in an amount determined by a resolution of the Board of Directors. Compensation expense is recorded for the amount of the annual contribution to the plan as determined by resolution of the Board of Directors of the Company. Note 9 Income Taxes Total income taxes for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, were attributable to the following:

Income tax expense (benefit) attributable to earnings from operations consists of:

There is no income tax attributable to the earnings from foreign subsidiaries in 2001 since the foreign entities were generally not subject to taxes on earnings during that year. Prior to April 1, 2001, the Company's subsidiary, Alcosa received an income tax exemption on substantially all F-25 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 9 Income Taxes (Cont'd) earnings. The Guatemala government has granted an income tax exemption to the Company's subsidiary Mayapac beginning January 2004 through January 2012. A reconciliation of the Company's effective tax rate to the amount computed by applying the federal income tax rate of 35% to earnings before taxes attributable to earnings from operations expressed in percentages, follows:

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at June 1, 2003 and June 2, 2002 follow:

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during F-26 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 9 Income Taxes (Cont'd) the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. The Company has not recognized a deferred tax liability for the undistributed earnings and tax basis differences of its investment in foreign subsidiaries since the earnings and investment are considered to be permanently invested in the businesses and, under the tax laws, are not subject to such taxes until distributed. The accumulated amount of such undistributed earnings was approximately $8,602,000 at June 1, 2003. At June 1, 2003, the Company has net operating loss carryforwards for state income tax purposes of approximately $949,000, which are available to offset future state taxable income, if any, through 2018. Note 10 Commitments and Contingencies (a) Letter of Credit As of June 1, 2003, the Company's wholly-owned reinsurance company had outstanding four letters of credit in the amount of $1,580,000, $131,000, $476,000 and $624,000 as security for the reimbursement of losses arising from the reinsurance assumed by the Company. (b) Legal Matters Derivative Action On September 13, 1996, certain Class A common stockholders filed a complaint in equity against six of the Corporation's directors and the estate of a former director in the Court of Common Pleas of York County, Pennsylvania (the 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 common stockholders 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. F-27 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 10 Commitments and Contingencies (Cont'd) 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 Plantiff's Petition for Fees was filed with the Court on February 12, 2003. 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 stockholders), (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), acting as fiduciaries for the employees who participate in the Plan, and the Class A shareholders may become entitled to vote in the manner described in the document. Pursuant to the Company's Bylaws, nominations for directors must be submitted to the Company in the manner prescribed by the Bylaws no later than June 1 of the year in which the meeting is to occur. The Amended and Restated Articles created a Series C Convertible Preferred Stock , 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 F-28 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 10 Commitments and Contingencies (Cont'd) Directors to amend and restate the Corporation's Articles of Incorporation in the manner hereafter described. The motions for a preliminary injunction were dismissed by the Court on June 24, 1997. The Class B shareholders on June 25, 1997 approved the Amended and Restated Articles (John A. Warehime, being the sole Class B shareholder voting affirmatively in his capacity as voting trustee) and the Amended and Restated Articles became effective June 25, 1997. In August 1997, the Board of Directors proposed a further amendment (the "Amendment") to the Amended and Restated Articles to expand the definition of "disinterested directors" in the manner described below, and to approve certain performance based compensation for John A. Warehime solely for the purpose of making the Corporation eligible for a federal income tax deduction pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended. A special meeting was scheduled for August 14, 1997 (the "Special Meeting") to vote on these proposals. On August 8, 1997, Michael A. Warehime filed a motion in the Court of Common Pleas of York County, Pennsylvania to prevent John A. Warehime, in his capacity as voting trustee from voting on these proposals and to enjoin the Amendment. This motion was denied by the Court on August 11, 1997. The Amendment and the proposal under Section 162(m) were approved by Class B Shareholders (John A. Warehime was the sole Class B shareholder to vote affirmatively, in his capacity as voting trustee) on August 14, 1997 and the Amendment became effective on August 14, 1997. Under the Amendment, the definition of "disinterested directors" means a person who, in the opinion of counsel for the Corporation, meets any of the following criteria: (i) disinterested directors as defined in Section 1715(e) of the Pennsylvania Business Corporations Law of 1988, as amended; (ii) persons who are not "interested" directors as defined in Section 1.23 of The American Law Institute "Principles of Corporate 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 Company'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 Company. The complaint sought a court order declaring that the September 1999 election for the Board of Directors of the Company be conducted in accordance with the Articles of Incorporation of the Company 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 Company proposed by Michael A. Warehime, Sally Yelland, Elizabeth Stick and J. William Warehime be accepted by the Company and listed on the ballot to be F-29 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 10 Commitments and Contingencies (Cont'd) distributed at the annual meeting of shareholders of the Company to be held on September 16, 1999: Michael A. Warehime, Daniel Meckley, Elizabeth Stick, Sonny Bowman, and John Denton. The basis for the complaint was the December 2, 1998 decision of the Superior Court of Pennsylvania which held that John A. Warehime breached his fiduciary duties in voting for the Amended and Restated Articles as trustee of the Warehime voting trust. The requested relief was denied by the Court of Common Pleas of York County and Michael Warehime appealed to the Superior Court of Pennsylvania. On September 12, 2000, the Superior Court of Pennsylvania stated, in a Memorandum decision, that the June 25, 1997 shareholder vote, which adopted the Amended and Restated Articles of Incorporation of the Corporation should be set aside, and remanded the case to the Court of Common Pleas of York County to determine what further relief would be appropriate. On remand, the Court of Common Pleas of York County entered an Order on October 10, 2000 declaring that the Amended and Restated Articles of Incorporation were set aside and that an election should be held without the Amended or Restated Articles of Incorporation. On October 11, 2000, the Supreme Court of Pennsylvania entered an Order staying the Order of the Court of Common Pleas of York County. On November 27, 2000, the Supreme Court of Pennsylvania reversed and remanded the Order of the Superior Court issued on December 2, 1998 and, in effect, the Order of the Superior Court issued September 12, 2000. In reversing the Superior Court's Order, the Supreme Court of Pennsylvania held that John A. Warehime, the trustee of the voting trust, did not breach his fiduciary duties in voting the trust shares in favor of the Amended and Restated Articles of Incorporation. The Supreme Court remanded the case to the Superior Court of Pennsylvania to consider other issues raised by Michael A. Warehime. On May 4, 2001, the Superior Court of Pennsylvania, on remand from the Supreme Court of Pennsylvania to decide several remaining issues, held that the 1997 amendments to the Corporation's Amended and Restated Articles of Incorporation "violated principles of corporate democracy" and should be invalidated even though the Superior Court found the directors acted in good faith and their actions in approving the amendments did not result in a breach of their fiduciary duties. A petition for allocatur was filed with the Supreme Court of Pennsylvania requesting that the Supreme Court of Pennsylvania review the Superior Court's May 4, 2001 ruling. On September 17, 2002, the Supreme Court of Pennsylvania granted the petition for allocutur and oral argument was heard in the matter on May 13, 2003. 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. 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 director noticed for December 23, 2002. The Pennsylvania Supreme Court denied Michael Warehime's emergency application on December 20, 2002. In addition, the Corporation is involved in various other claims and legal actions arising in the ordinary course of business. F-30 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 10 Commitments and Contingencies (Cont'd) 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. (c) Stock Repurchase Plan The Company has agreed to purchase the Company's Class A Common Stock purchased or owned by employees prior to April 20, 1988 at appraised value. This guarantee of repurchase by the Company is for an indefinite period of time. No shares were repurchased under this plan for the years ended June 1, 2003, June 2, 2002 and June 3, 2001. As of June 1, 2003, there are 9,049 shares outstanding that would be eligible for this plan. The maximum commitment, if requested, for all eligible shares would be approximately $995,000 based on the most recent appraised value per share as of March 31, 2003. (d) Sales and Lease Agreement In February 2001, the Company entered into a renewable Sales and Lease agreement to lease the Colusa plant for six (6) years beginning July 1, 2001 and to purchase 6 million pounds of tomato paste on a cost basis formula from the lessee during the second through sixth year of the agreement. In addition, the Company has the option to purchase an additional 6 million pounds if the cost basis formula is more favorable than market prices. The Company expects to use this annual purchase commitment through normal operations. Note 11 Foreign Operations The Company's foreign subsidiary, Alimentos Congelados Monte Bello, S.A. (ALCOSA) produces food products in Guatemala, which are sold to Sunwise Corporation in the United States. The revenues generated by the operations in Guatemala and the assets employed in generating those revenues are as follows: June 1, June 2, June 3, 2003 2002 2001 ------------ ------------- ------------ Revenues $ 19,072,000 $ 18,699,000 $ 13,152,000 Cost of goods sold 16,911,000 15,075,000 12,294,000 Assets 9,964,000 9,092,000 7,907,000 ALCOSA maintains its accounting records in quetzals. For financial reporting purposes the U.S. dollar is considered the functional currency. The financial statements of ALCOSA have been translated to their U.S. dollar equivalents prior to being consolidated. Assets and liabilities have been translated to their U.S. dollar equivalents based on rates of exchange prevailing at the end of the period except for inventories, fixed assets, deferred and prepaid expenses, and other assets, which have been translated at historical rates. Revenue and expense accounts have been translated at average exchange rates during the period except for depreciation of fixed assets, which is based on the historical rate. The aggregate exchange gains and losses arising from the translation of foreign assets and liabilities and from foreign currency transactions are included in income under the caption of Other income - net, and amount to a loss of $15,000, $178,000, and $60,000, for the years ended June 1, 2003, June 2, 2002, and June 3, 2001, respectively. At June 2, 2002, the prevailing exchange rate was Q 8.0 to U.S. $1.00. F-31 HANOVER FOODS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 12 Reconciliation of Numerator and Denominator for Basic and Diluted Earnings per Share

Stock options of 13,500 shares in 2002 are not included in the earnings per share computation as their effect would have been anti-dilutive. Note 13 Statement of Cash Flow Information

F-32 QUARTERLY FINANCIAL DATA

Net sales and gross profit for the first, second and third quarters of fiscal 2003 and for each quarter of fiscal 2002 have been adjusted by certain amounts previously recorded as selling and marketing expense in accordance with EITF 01-9, and cost of sales have been adjusted by certain freight costs previously recorded as net sales in accordance with EITF 00-10. The offset was to reduce gross profit by $2,092,000, $5,176,000 and $954,000 for the first, second and third quarter of fiscal 2003 respectfully, and to reduce gross profit by $1,494,000, $3,512,000, $1,254,000 and $3,022,000 for the first, second, third and fourth quarter of fiscal 2002. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Although the Corporation's Class A Common Stock is currently traded on the OTC Bulletin Board under the symbol "HNFSA" trading in the Class A Common Stock is very sporadic. As a result of the limited market for Class A Common Stock, shareholders are cautioned not to place undue reliance on bid prices contained herein as indicators of the true value of the shares of Class A Common Stock. The following table sets forth the high and low bid prices per share of the Class A Common Stock on a quarterly basis of the past two fiscal years as provided by NASDAQ, as well as dividends paid per share. Over-the-Counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. F-33 Quarter Ended High Low Dividends ------------- ---- --- --------- September 2, 2002 $51.50 $49.00 $0.275 December 2, 2002 $49.00 $48.00 $0.275 March 3, 2002 $50.00 $48.00 $0.275 June 2, 2002 $51.75 $50.00 $0.275 September 1, 2002 $53.00 $51.75 $0.275 December 1, 2002 $50.75 $49.25 $0.275 March 2, 2003 $52.75 $50.00 $0.275 June 1, 2003 $61.00 $54.00 $0.275 As of August 11, 2003, there were 352 record holders and approximately 210 beneficial holders of the Class A Common Stock. DIVIDEND POLICY The Corporation has maintained a policy of paying a quarterly dividend of $0.275 per share. The continuing payment by the Corporation of dividends in the future is at the sole discretion of its Board of Directors and will depend, among other things, upon the Corporation's earnings, its capital requirements and financial condition, as well as other relevant factors. ANNUAL AND OTHER REPORTS The Corporation is required to file an annual report on Form 10-K for its fiscal year ended June 1, 2003 with the Securities and Exchange Commission. Copies of the Form 10-K annual report and the Corporation's quarterly reports may be obtained without charge by contacting: Gary T. Knisely Hanover Foods Corporation 1486 York Street P.O. Box 334 Hanover, PA 17331 717-632-6000 F-34 OFFICERS AND BOARD OF DIRECTORS ----------------------------------------------------------------------------

HANOVER FOODS CORP /PA/ 10-K/A