<PAGE>   1
                                   EXHIBIT 13

   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 and foreign operations. Such
factors, which are discussed in the Annual Report, could affect the Company's
financial performance and could cause the Company's actual result for future
periods to differ materially from any opinion or statements expressed herein
with respect to future periods. As a result, the Company wishes to caution
readers not to place undue reliance on any such forward looking statements,
which speak only as of the date made.

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 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 note 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 May 28, 2000 to the year ended May 30,
1999, and the fiscal year ended May 30, 1999 to the year ended May 31, 1998.

YEAR ENDED MAY 28, 2000 RESULTS OF OPERATIONS
COMPARED TO YEAR ENDED MAY 30, 1999

NET SALES

Consolidated net sales were $300.3 million for fiscal 2000 compared to $287.2
million for fiscal 1999, an increase of $13.1 million, or 4.6%. The increase in
consolidated net sales was comprised of the following volume and sales price
components:

<TABLE>
<CAPTION>
                            Volume   Sales Price   Combined
<S>                         <C>      <C>           <C>
Frozen Foods                 2.2%       (2.2)%        --
Canned Foods                 2.2%       (1.5)%        .7%
Prepared/Snack Foods         6.5%       (2.6)%       3.9%
                            ----        ----         ---
                            10.9%       (6.3)%       4.6%
</TABLE>




                                      -26-
<PAGE>   2
The increased volume in frozen sales was principally due to higher sales levels
in the Branded Retail Frozen due to the concentration on selling our premium
frozen brands. The increase in volume was partially offset by a decrease in
industrial sales. The decreased sales prices in frozen sales were principally
due to lower prices on Food Service and Private Label commodity frozen products
due to competitive market conditions.

The increased volume in canned sales was principally due to higher private label
sales levels. The increase in volume was partially offset by a decrease in
government bid sales. The decreased sales prices in canned sales was principally
due to lower prices on Food Service and Private Label tomato products due to
competitive market conditions.

Prepared foods and snacks showed an increase in sales attributable to sales of
Bickel's Potato Chip Co., (Bickel's) acquired in October 1998 and sales from
York Foods, Inc., York Snacks, Inc., and Bon Ton Foods, Inc. acquired in January
2000. The increased volume was partially offset by a decrease in other prepared
foods due to the reduction in sales to a major restaurant chain. The decreased
sales prices in prepared foods and snacks were principally due to a change in
the mix of goods sold.

COST OF GOODS SOLD

Consolidated cost of goods sold represents 75.0% of consolidated net sales for
fiscal 2000 compared to 74.8% for fiscal 1999. The consolidated cost of sales
increased $10.4 million to $225.3 million in fiscal 2000 as compared to $214.9
million in fiscal 1999. The addition of York Foods, Inc., York Snacks Inc., and
Bon Ton Foods, Inc. in January 2000 accounted for the dollar increase. The
increase in cost of goods sold as a percentage of net sales for the current
fiscal year resulted primarily due to the impact of the planned reduction in
frozen commodity production to balance inventories and start up costs on a new
industrial frozen account.

SELLING EXPENSES

Consolidated selling expenses represented 14.8% of consolidated net sales for
fiscal 2000 and 14.7% for fiscal 1999. Promotion expenses increased $1.1 million
to $30.4 million for fiscal year 2000 as compared to $29.3 million for fiscal
1999 as the corporation spent additional promotion dollars to increase market
share in its premium frozen brands this fiscal year.

In addition to promotion expense, the Corporation spent $703,000 on advertising,
including $52,000 relating to coupons for fiscal 2000, compared to $1.9 million
in advertising, including $1.2 million for coupons for fiscal 1999.

Management intends to continue to direct promotional dollars to gain additional
market share and increased distribution of its brands. Management is constantly
reviewing the effectiveness of its retail promotional programs in an effort to
increase profitable sales.

ADMINISTRATIVE EXPENSES

Consolidated administrative expenses were $13.2 million to fiscal 2000 or 4.4%
of consolidated net sales, as compared to $12.6 million, or 4.4% of consolidated
net sales in 1999. The increase in dollars was primarily attributed to
discretionary bonuses granted in December 1999 and additional expenses due to
the acquisition of York Foods, Inc., York Snacks, Inc., and Bon Ton Foods, Inc.
in January 2000.

INTEREST EXPENSE

Consolidated interest expenses for fiscal 2000 increased $1.0 million to $4.0
million compared to $3.0 million in fiscal 1999. The increase is due to
additional borrowings during the period to cover inventory increases and
acquisitions, as well as higher average borrowing rates for the current fiscal
year.


                                      -27-
<PAGE>   3
OTHER INCOME (EXPENSE)

Consolidated other income decreased $459,000 to $385,000 for fiscal 2000 as
compared to other income of $844,000 for fiscal 1999. Increased foreign exchange
loss accounted for $328,000 of the decrease, with reduced gains on the sales of
fixed assets accounted for $187,000 of this decrease.

INCOME TAXES

The provision for corporate federal and state income tax for fiscal year 2000
was $5.0 million or 36.8% of pretax earnings, as compared to $5.9 million or
38.2% of pretax earnings for 1999. The decrease in the effective rate was
primarily due to increased earnings, that were not subject to income taxes, in
foreign jurisdictions during the current fiscal year as compared to the prior
fiscal year.

NET EARNINGS

Consolidated net earnings for fiscal year 2000 were $8.6 million, or 2.9% of
consolidated net sales as compared to $9.5 million or 3.3% of consolidated net
sales for fiscal 1999 as a result of the factors discussed above.

YEAR ENDED MAY 30, 1999 RESULTS OF OPERATIONS
COMPARED TO YEAR ENDED MAY 31, 1998

NET SALES

Consolidated net sales were $287.2 million for fiscal 1999 compared to $260.6
million for fiscal 1998, an increase of $26.6 million, or 10.2%. The increase in
consolidated net sales was comprised of the following volume and sales price
components:

YEAR ENDED MAY 30, 1999
INCREASE (DECREASE)

<TABLE>
<CAPTION>
                           VOLUME   SALES PRICE   COMBINED
<S>                        <C>      <C>           <C>
Frozen Foods                (.5)%      (1.1)%      (1.6)%
Canned Foods                5.3%        2.7%        8.0%
Prepared/Snack Foods        4.6%        (.8)%       3.8%
                            ---         ---        ----
                            9.4%         .8%       10.2%
</TABLE>

The decreased volume in frozen sales was principally due to lower industrial
sales levels due to the loss of a major meat customer in October 1998. This
decrease in volume was partially offset by an increase in the food service
product sales.

Canned sales showed an increase in fiscal 1999 due to increased volume and
average selling price, resulting from L.K. Bowman, a new acquisition in May
1998, and increased canned sales in Food Service Sales. These two areas
accounted for 80% of the increase in canned sales.

Prepared foods and snacks showed an increase in sales due to the acquisition of
Sunnyside Fresh Foods in January 1998 and the acquisition of Bickel's Potato
Chip Co. in October 1998. These two acquisitions accounted for principally all
of the increase.


                                      -28-
<PAGE>   4
COST OF GOODS SOLD

Consolidated cost of goods sold represented 74.8% of consolidated net sales for
fiscal 1999 compared to 74.2% for fiscal 1998. The consolidated cost of sales
increased $21.5 million to $214.9 million in fiscal 1999 as compared to $193.4
million in fiscal 1998. The additions of our new acquisitions, L. K. Bowman,
Sunnyside Fresh Foods, and Bickel's Potato Chip Co., accounted for 100% of the
dollar increase. The increase in cost of goods sold as a percentage of net sales
for the current fiscal year resulted primarily from the increase in the cost of
frozen operation, due to the reduction in industrial volume, partially off-set
by the reduction in the cost of operations in canning and prepared foods, as
well as the loss of an industrial meat customer, whose sales were at higher than
average cost.

SELLING EXPENSES

Consolidated selling expenses represented 14.7% of consolidated net sales for
fiscal 1999 and 14.8% for fiscal 1998. Promotion expense increased $1.3 million
to $29.3 million for fiscal 1999 as compared to $28.0 million for fiscal 1998 as
the Company spent additional promotion dollars to maintain market share in the
mid-Atlantic region and to increase market share in the south for its branded
business.

In addition to promotion expense, the Company spent $1,897,000 on advertising,
including $1,235,000 relating to coupons, for fiscal 1999, compared to $659,000
in advertising, including $228,000 for coupons for fiscal 1998.

ADMINISTRATIVE EXPENSES

Consolidated administrative expenses were $12.6 million in fiscal 1999, or 4.4%
of consolidated net sales, as compared to $12.3 million, or 4.7% of consolidated
net sales in 1998. The increase in dollars was attributed to increased
expenditures in outside consulting services for the Company's year 2000
remediation efforts and administrative expenses as a result of the acquisitions
of L. K. Bowman, Sunnyside Fresh Foods and Bickel's Potato Chip Co. These
increased expenses were partially offset by the reduction in pension plan
expense due to the termination of the defined benefit pension plans in fiscal
1998.

INTEREST EXPENSE

Consolidated interest expense for fiscal 1999 increased $1,000 to $3,021,000 in
fiscal 1999 compared to $3,020,000 in fiscal 1998. Seasonal borrowings increased
in the current fiscal year but the impact on interest expense was totally offset
by the lower borrowing rates, and the reduction of $1.5 million in long-term
debt. Seasonal borrowing rate reductions reduced interest expense by $117,000,
and interest paid on long-term debt decreased $154,000 during the current fiscal
year.

OTHER INCOME (EXPENSE)

Consolidated other income increased $282,000 to $844,000 for fiscal 1999 as
compared to other income of $562,000 for fiscal 1998. Higher gain on the sales
of fixed assets accounted for $273,000 of this increase. Gain on the sale of
securities during fiscal 1999 increased $183,000. Offsetting the positive income
items was increased foreign exchange loss of $50,000 during fiscal 1999.

INCOME TAXES

The provision for corporate federal and state income taxes for fiscal 1999 was
$5.9 million or 38.2% of pretax earnings, as compared to $5.4 million or 38.9%
of pretax earnings for 1998. The decrease in the effective rate was primarily
due to increased earnings, that were not subject to income taxes, in foreign
jurisdictions during the current fiscal year as compared to the prior fiscal
year.


                                      -29-
<PAGE>   5
NET EARNINGS

Consolidated net earnings for fiscal 1999 were $9.5 million, or 3.3% of
consolidated net sales as compared to $8.4 million or 3.2% of consolidated net
sales for fiscal 1998. Positive profit performance of the new acquisitions, L.
K. Bowman, Sunnyside Fresh Foods and Bickel's Potato Chip Co., as well as the
Company's food service products were the major contributing factors to the
increased net earnings.

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 $7.6 million at May 28, 2000 and $10.8 million at May
30, 1999. The current ratio was 1.09 and 1.15 on May 28, 2000 and May 30, 1999
respectively.

Net cash provided by operations for the fiscal year ended May 28, 2000 was $11.6
million, compared to $5.3 million for the fiscal year ended May 30, 1999.
Sources of net cash provided by operations consisted principally of net earnings
of $8.6 million and non-cash depreciation and amortization expense of $7.7
million. The use of net cash for operations consisted primarily of increased
inventory of $4.3 million.

Net cash provided by operations for the fiscal year ended May 30, 1999 was $5.3
million, compared to $22.5 million for the fiscal year ended May 31, 1998.
Sources of net cash provided by operations consisted principally of net earnings
of $9.5 million and non-cash depreciation and amortization expense of $6.4
million. The use of net cash for operations consisted primarily of increased
inventory of $8.8 million and decreased accounts payable and accrued expenses of
$1.5 million.

Net cash used by investing activities for the fiscal year ended May 28, 2000 was
$16.8 million as compared to $22.3 million for the fiscal year ended May 30,
1999. The principal use of funds was the upgrade and acquisition of property,
plant and equipment and the purchase of businesses. During the year ended May
28, 2000, $14.2 million was spent on development and modernization of equipment
as compared to $14.7 million in the fiscal year ended May 30, 1999. During the
year ended May 28, 2000, $4.5 million was spent for the acquisition of other
businesses. These projects were funded by internally generated funds and short
term debt. The Corporation also uses operating leases to meet other equipment
needs. The lease expense for the fiscal year ended May 28, 2000 was $2.7
million, a decrease of $848,000 from the fiscal year ended May 30, 1999.

Net cash used by investing activities for the fiscal year ended May 30, 1999 was
$22.3 million as compared to $13.8 million for the fiscal year ended May 31,
1998. The principal use of funds was the upgrade and acquisition of property,
plant and equipment and the purchase of businesses. During the period ended May
30, 1999, $14.7 million was spent on development and modernization of equipment
as compared to $8.1 million in the fiscal year ended May 31, 1998. During the
year ended May 30, 1999, $7.8 million was spent for the acquisition of other
businesses. These projects were funded by internally generated funds and short
term debt. The Corporation also uses operating leases to meet other equipment
needs. The lease expense for the fiscal year ended May 30, 1999 was $3.6
million, up $300,000 from the fiscal year ended May 31, 1998.

Net cash from financing activities was $9.9 million for the fiscal year ended
May 28, 2000, compared to $16.9 million for the fiscal year ended May 30, 1999.
Seasonal borrowing amounting to $321.4 million was used throughout the fiscal
year to fund operating needs. Seasonal borrowing increased by $12.8 million as
of May 28, 2000 compared to May 30, 1999. Payments on long-term debt were $1.9
million. The weighted average cost of seasonal borrowing was 7.02% for the
fiscal year ended May 28, 2000 compared to 5.35% for the fiscal year ended May
30, 1999.


                                      -30-
<PAGE>   6
Net cash from financing activities was $16.9 million for the fiscal year ended
May 30, 1999, compared to cash used for financing activities of $9.6 million for
the fiscal year ended May 31, 1998. Seasonal borrowing amounting to $249.3
million was used throughout the fiscal year to fund operational needs. Seasonal
borrowing, plus the cash overdraft, increased by $19.8 million at May 30, 1999
compared to May 31, 1998. Payments on long-term debt were $1.9 million. The
weighted average cost of seasonal borrowings was 5.35% for the fiscal year ended
May 30, 1999 compared to 6.1% for the fiscal year ended May 31, 1998.

At May 28, 2000 the Company has commitments from financial institutions to
provide seasonal lines of credit in the amount of $85 million. Additional
borrowing is permitted within prescribed parameters in existing debt agreements
which contain certain performance covenants. At May 28, 2000, the Company was in
compliance with all the provisions of its debt agreements as amended or waived.

The Company paid dividends of $908,000 during fiscal 2000 compared to $951,000
in fiscal 1999. In addition, the Company repurchased 1,290 shares of Class A and
Class B Common Stock at a cost of $58,000 during the year ended May 28, 2000 and
repurchased 1,738 shares of Class A and Class B Common Stock at a cost of
$83,000 during the year ended May 30, 1999.

The Company believes that it has sufficient working capital and availability
from seasonal lines of credit to meet its cash flow needs.

MARKET RISKS

The Company is subject to market risk associated with changes in interest rates.
To manage the risk of fluctuations in interest rates, the Company's borrowings
are a mix of fixed and floating rate obligations. This includes the $12.5
million of unsecured senior notes payable that bear interest at an 8.74% fixed
rate and are due in 2007. The Company also maintains short-term unsecured lines
of credit that bear interest at floating rates.

The following table presents the expected maturity and effective interest rates
of the Company's debt obligations (dollars in thousands):


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                            2001       2002       2003       2004       2005     Thereafter
<S>                       <C>        <C>        <C>        <C>        <C>        <C>

FIXED RATE
Unsecured senior notes    $ 1,786    $ 1,786    $ 1,786    $ 1,786    $ 1,786     $ 3,570
Effective interest rate      8.74%      8.74%      8.74%      8.74%      8.74%       8.74%
VARIABLE RATE
Lines of Credit           $52,380         --         --         --         --          --
Effective Interest Rate      7.02%        --         --         --         --          --
</TABLE>


IMPACT OF EVENTS AND COMMITMENTS OF FUTURE OPERATIONS

COMPETITION IN THE MARKETPLACE

The Company faced stiff competition from national and regional branded companies
during the entire fiscal year 2000 in all of its market areas and management
anticipates this competitive environment to continue throughout fiscal year
2001.


                                      -31-
<PAGE>   7
NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities and in June 2000 issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
which amended SFAF No. 133. These Statement establish comprehensive accounting
and reporting standards for derivative instruments and hedging activities that
require a company to record the derivative instruments at fair value in the
balance sheet. Furthermore, the derivative instrument must meet specific
criteria or the change in its fair value is to be recognized in earnings in the
period of change. To achieve hedge accounting treatment the derivative
instrument needs to be part of a well-documented hedging strategy that describes
the exposure to be hedged, the objective of the hedge and a measurable
definition of its effectiveness in hedging the exposure. These Statements are
effective as of the beginning of the first quarter of the fiscal year beginning
after June 15, 2000. Adoption of these Statements is not expected to have a
material effect on the Company's financial statements, as the Company currently
does not enter into any derivative instrument or hedging activities.

During May 2000, the Emerging Issues Task Force (EITF) of the FASB released EITF
Issue No. 00-14, Accounting for Certain Sales Incentives, which specifies
accounting requirements for certain sales incentives a company provides to
customers. The Company has not determined the impact of this Issue on the
Company's financial statements.

IMPACT OF INFLATION AND CHANGING PRICES

The changes in cost and prices within the Company'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.

  FINANCIAL HIGHLIGHTS FIVE YEAR (IN THOUSANDS EXCEPT SHARE AND PRE-SHARE DATA)


<TABLE>
<CAPTION>
                                           MAY 28,      MAY 30,      MAY 31,      JUNE 1,      MAR 31,
                                              2000         1999         1998         1997         1996
<S>                                       <C>          <C>          <C>          <C>          <C>
Net Sales                                 $300,265     $287,237     $260,621     $259,439     $262,920
Earnings before income taxes              $ 13,648     $ 15,443     $ 13,804     $ 10,987     $    633
Net Earnings                              $  8,619     $  9,539     $  8,437     $  6,706     $    420
Net Earnings per common share-basic
                                          $  11.99     $  13.24     $  11.69     $   9.26     $    .53
Net Earnings per common share-diluted
                                          $  11.82     $  13.03     $  11.62     $   9.22     $    .53
Basic Weighted-average shares
                                           715,249      716,974      718,712      720,811      729,608
Diluted weighted-average shares
                                           729,389      731,895      726,101      727,415      729,608
Common shares outstanding-year end
                                           714,670      715,888      717,626      719,731      723,108
Preferred shares outstanding-year end
                                            24,764       25,044       25,044       15,044       15,044
Working Capital                           $  7,566     $ 10,841     $ 16,799     $ 17,122     $ 15,044
Property, plant and equipment-net
                                          $ 73,484     $ 65,992     $ 54,280     $ 49,722     $ 49,205
Long-term debt                            $ 10,741     $ 12,500     $ 14,359     $ 16,219     $ 18,453
Stockholders' equity                      $ 72,312     $ 64,454     $ 55,470     $ 47,157     $ 42,509
Total assets                              $179,512     $157,241     $131,007     $124,031     $128,368
Dividend per common share                 $   1.21     $  1.265     $   1.10     $   1.10     $   1.10
</TABLE>



                                      -32-
<PAGE>   8
                          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 May 28, 2000 and May 30, 1999, 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
May 28, 2000. 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 May 28, 2000 and May 30, 1999 and the results
of their operations and their cash flows for each of the years in the three-year
period ended May 28, 2000, in conformity with accounting principles generally
accepted in the United States of America.




/s/KPMG LLP
Harrisburg, Pennsylvania
July 7, 2000



                                      -33-
<PAGE>   9
                                             Consolidated Statements of Earnings

                        Years ended May 28, 2000, May 30, 1999, and May 31, 1998


<TABLE>
<CAPTION>
                                               YEAR               YEAR               YEAR
                                               ENDED              ENDED              ENDED
                                              MAY 28,            MAY 30,            MAY 31,
                                               2000               1999               1998
<S>                                       <C>                  <C>                <C>

Net sales                                 $ 300,265,000        287,237,000        260,621,000
Cost of goods sold                          225,294,000        214,943,000        193,357,000
                                          -------------      -------------      -------------

          Gross profit                       74,971,000         72,294,000         67,264,000

Selling expenses                             44,438,000         42,091,000         38,656,000
Administrative expenses                      13,232,000         12,583,000         12,346,000
                                          -------------      -------------      -------------

         Operating profit                    17,301,000         17,620,000         16,262,000

Interest expense                              4,038,000          3,021,000          3,020,000
Other (income) expenses - net                  (385,000)          (844,000)          (562,000)
                                          -------------      -------------      -------------

         Earnings before income taxes        13,648,000         15,443,000         13,804,000
Income taxes                                  5,029,000          5,904,000          5,367,000
                                          -------------      -------------      -------------

         Net earnings                         8,619,000          9,539,000          8,437,000
Dividends on preferred stock                     43,000             44,000             37,000
                                          -------------      -------------      -------------

          Net earnings applicable to
             common stock                 $   8,576,000          9,495,000          8,400,000
                                          =============      =============      =============

Basic earnings per common share           $       11.99              13.24              11.69
                                          =============      =============      =============

Diluted earnings per common share         $       11.82              13.03              11.62
                                          =============      =============      =============
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -34-
<PAGE>   10
Consolidated Balance Sheets

May 28, 2000, May 30, 1999


<TABLE>
<CAPTION>
                                                             MAY 28,          MAY 30,
  ASSETS                                                      2000             1999
<S>                                                       <C>             <C>

Current assets:
  Cash and cash equivalents                               $  6,978,000       2,214,000
  Accounts and notes receivable - net                       28,382,000      25,863,000
  Accounts receivable from related parties - net               129,000         242,000
  Inventories:
    Finished goods                                          44,777,000      39,199,000
    Raw materials and supplies                              14,415,000      14,510,000
  Prepaid expenses                                           1,563,000       1,733,000
  Deferred income taxes                                        812,000         917,000
                                                          ------------    ------------

         Total current assets                               97,056,000      84,678,000
                                                          ------------    ------------

Property, plant, and equipment - at cost:
  Land and buildings                                        47,438,000      44,006,000
  Machinery and equipment                                  106,691,000      93,585,000
  Leasehold improvements                                       531,000         383,000
                                                          ------------    ------------

                                                           154,660,000     137,974,000

Less accumulated depreciation and amortization              84,697,000      78,573,000
                                                          ------------    ------------

                                                            69,963,000      59,401,000

Construction in progress                                     3,521,000       6,591,000
                                                          ------------    ------------

                                                            73,484,000      65,992,000
                                                          ------------    ------------

Other assets:
  Intangible assets - less accumulated amortization of
   $2,609,000 and $2,348,000                                 4,013,000       2,293,000
  Other assets                                               4,959,000       4,278,000
                                                          ------------    ------------

Total assets                                              $179,512,000     157,241,000
                                                          ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -35-
<PAGE>   11
                                         Consolidated Balance Sheets - continued

                                                   May 28, 2000 and May 30, 1999



<TABLE>
<CAPTION>
                                                                      MAY 28,           MAY 30,
           LIABILITIES AND STOCKHOLDERS' EQUITY                        2000              1999
<S>                                                               <C>               <C>

Current liabilities:
  Accounts payable                                                $  26,533,000        22,813,000
  Notes payable - banks                                              52,380,000        39,629,000
  Accrued expenses                                                    7,696,000         7,433,000
  Current maturities of long-term debt                                1,821,000         1,859,000
  Income taxes payable                                                1,060,000         2,103,000
                                                                  -------------     -------------

                                 Total current liabilities           89,490,000        73,837,000
                                                                  -------------     -------------

Long-term debt, less current maturities                              10,741,000        12,500,000
Deferred income taxes                                                 4,170,000         4,331,000
Other  liabilities                                                    2,799,000         2,119,000
                                                                  -------------     -------------

                                 Total liabilities                  107,200,000        92,787,000
                                                                  -------------     -------------

Stockholders' equity:
  Series A and B 8-1/4% cumulative convertible preferred stock          781,000           788,000
  Series C Cumulative Convertible Preferred Stock                       250,000           250,000
  Common stock, Class A - non-voting                                  8,731,000         8,729,000
  Common stock, Class B - voting                                     12,328,000        12,328,000
  Capital paid in excess of par value                                 2,148,000         2,143,000
  Retained earnings                                                  55,478,000        47,767,000
  Treasury stock, at cost                                            (8,134,000)       (8,076,000)
  Accumulated other comprehensive income                                730,000           525,000
                                                                  -------------     -------------

    Total stockholders' equity                                       72,312,000        64,454,000
                                                                  -------------     -------------

Total liabilities and stockholders' equity                        $ 179,512,000       157,241,000
                                                                  =============     =============
</TABLE>


                                      -36-
<PAGE>   12
Consolidated Statements of Comprehensive Income

Years ended May 28, 2000, May 30, 1999, and May 31, 1998



<TABLE>
<CAPTION>
                                                     YEAR          YEAR          YEAR
                                                     ENDED         ENDED         ENDED
                                                    MAY 28,       MAY 30,       MAY 31,
                                                     2000          1999          1998
<S>                                               <C>           <C>           <C>

Net earnings                                      $8,619,000     9,539,000     8,437,000
                                                  ----------    ----------    ----------
Other comprehensive income
  Unrealized gain (loss) on securities, net of
    reclassification adjustments                     205,000       479,000      (118,000)
  Minimum pension liability adjustment (net of
    taxes of $0, $0, and $106,000)                        --            --       158,000
                                                  ----------    ----------    ----------

        Other comprehensive income                   205,000       479,000        40,000
                                                  ----------    ----------    ----------

Comprehensive income                              $8,824,000    10,018,000     8,477,000
                                                  ==========    ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -37-
<PAGE>   13
                                           Consolidated Statements of Cash Flows

                        Years ended May 28, 2000, May 30, 1999, and May 31, 1998

<TABLE>
<CAPTION>
                                                                    YEAR ENDED        YEAR ENDED        YEAR ENDED
                                                                      MAY 28,           MAY 30,           MAY 31,
                                                                       2000              1999              1998
<S>                                                               <C>               <C>               <C>
Cash flows from operating activities:
  Net earnings                                                    $   8,619,000         9,539,000         8,437,000
  Adjustments to reconcile net earnings to net cash
    provided by operating activities:
     Depreciation and amortization                                    7,677,000         6,366,000         5,939,000
     Gain on sale of property, plant, and equipment                     (92,000)         (279,000)           (6,000)
     Gain on sale of investments                                       (142,000)         (418,000)         (235,000)
     Deferred income taxes                                              (56,000)         (907,000)         (120,000)
     Change in assets and liabilities:
       Accounts and notes receivable                                   (910,000)         (668,000)        1,856,000
       Inventories                                                   (4,336,000)       (8,763,000)        2,774,000
       Prepaid expenses and other assets                                123,000           736,000          (113,000)
       Accounts payable and accrued expenses                          1,128,000        (1,450,000)        2,467,000
       Income taxes payable                                          (1,043,000)          605,000         1,140,000
       Other liabilities                                                680,000           554,000           339,000
                                                                  -------------     -------------     -------------

       Net cash provided by operating activities                     11,648,000         5,315,000        22,478,000
                                                                  -------------     -------------     -------------

Cash flows from investing activities:
  Purchases of business, net of cash acquired                        (4,524,000)       (7,833,000)       (5,578,000)
  Purchase of investments                                            (1,002,000)       (2,201,000)       (1,970,000)
  Sale of investments                                                   810,000         1,877,000         1,827,000
  Acquisitions of property, plant, and equipment                    (14,202,000)      (14,697,000)       (8,133,000)
  Proceeds from dispositions of property, plant, and equipment        2,123,000           554,000            15,000
                                                                  -------------     -------------     -------------

       Net cash used in investing activities                        (16,795,000)      (22,300,000)      (13,839,000)
                                                                  -------------     -------------     -------------

Cash flows from financing activities:
  Proceeds from notes payable                                       321,358,000       144,289,000
                                                                                                        249,269,000
  Payment on notes payable                                         (308,607,000)     (229,514,000)     (148,529,000)
  Payment on long-term debt                                          (1,874,000)       (1,859,000)       (5,210,000)
  Payment of dividends                                                 (908,000)         (951,000)         (828,000)
  Common stock redemptions                                              (58,000)          (83,000)         (106,000)
  Preferred stock issuance                                                   --                --           770,000
                                                                  -------------     -------------     -------------

       Net cash provided by (used in) financing activities            9,911,000        16,862,000        (9,614,000)
                                                                  -------------     -------------     -------------

Net increase (decrease) in cash and cash equivalents                  4,764,000          (123,000)         (975,000)

Cash and cash equivalents, beginning of year                          2,214,000         2,337,000
                                                                                                          3,312,000
                                                                  -------------     -------------     -------------

Cash and cash equivalents, end of year                            $   6,978,000         2,214,000         2,337,000
                                                                  =============     =============     =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      -38-
<PAGE>   14
                   HANOVER FOODS CORPORATION AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
              Years ended May 28, 2000, May 30, 1999, May 31, 1998

<TABLE>
<CAPTION>
                                                    CUMULATIVE
                                                    CONVERTIBLE               CUMULATIVE
                                                     PREFERRED                CONVERTIBLE
                                                       STOCK                   PREFERRED
                                       TOTAL          SERIES A                   STOCK
                                    STOCKHOLDERS'      AND B                    SERIES C
                                       EQUITY         SHARES        AMOUNT       SHARES       AMOUNT
<S>                                 <C>             <C>           <C>         <C>           <C>

Balance, June 1, 1997               $ 47,157,000       31,536     $ 788,000          --     $      --

Net earnings                           8,437,000           --            --          --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (37,000)          --            --          --            --
    Common - $1.10 annually             (791,000)          --            --          --            --
Issuance of common stock                 770,000                                 10,000       250,000
Redemption of common stock -
    Class A 1,882 shares,                     --           --            --          --            --
    Class B 365 shares                  (106,000)          --            --          --            --
Other comprehensive income                40,000           --            --          --            --
                                    -------------------------------------------------------------------

Balance, May 31, 1998               $ 55,470,000       31,536     $ 788,000      10,000     $ 250,000

Net earnings                           9,539,000           --            --          --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (44,000)          --            --          --            --
    Common - $1.2650 annually           (907,000)          --            --          --            --

Redemption of common stock                    --
    Class A 1,446 shares,                     --           --            --          --            --
    Class B 292 shares                   (83,000)          --            --          --            --
Other comprehensive income               479,000           --            --          --            --
                                    -------------------------------------------------------------------

Balance, May 30, 1999               $ 64,454,000       31,536     $ 788,000      10,000     $ 250,000

Net earnings                           8,619,000           --            --          --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (43,000)          --            --          --            --
    Common - $1.21 annually             (865,000)          --            --          --            --
Redemption of common stock                    --           --            --          --            --
    Class A 1,066 shares, and
    Class B 224 shares                   (58,000)          --            --          --            --
     Stock Conversion                         --         (280)       (7,000)         --            --
Other comprehensive income               205,000           --            --          --            --
Balance, May 28, 2000               $ 72,312,000       31,256     $ 781,000      10,000     $ 250,000
=======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                      COMMON                 COMMON                  CAPITAL PAID
                                       STOCK                  STOCK                    IN EXCESS
                                     CLASS A                 CLASS B                      OF
                                      SHARES      AMOUNT      SHARES     AMOUNT        PAR VALUE

<S>                                 <C>         <C>          <C>       <C>           <C>
Balance, June 1, 1997                349,2100   $8,729,000   493,123   $12,328,000     1,623,000

Net earnings                               --           --        --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually           --           --        --            --            --
    Common - $1.10 annually                --           --        --            --            --
Issuance of common stock                   --           --        --            --       520,000
Redemption of common stock -
    Class A 1,882 shares,                  --           --        --            --            --
    Class B 365 shares                     --           --        --            --            --
Other comprehensive income                 --           --        --            --            --
                                    ----------------------------------------------------------------

Balance, May 31, 1998                 349,210   $8,729,000   493,123   $12,328,000     2,143,000

Net earnings                               --           --        --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually           --           --        --            --            --
    Common - $1.2650 annually              --           --        --            --            --

Redemption of common stock
    Class A 1,446 shares,                  --           --        --            --            --
    Class B 292 shares                     --           --        --            --            --
Other comprehensive income                 --           --        --            --            --
                                    ----------------------------------------------------------------

Balance, May 30, 1999                 349,210   $8,729,000   493,123   $12,328,000     2,143,000

Net earnings                               --           --        --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually           --           --        --            --            --
    Common - $1.21 annually                --           --        --            --            --
Redemption of common stock                 --           --        --            --            --
    Class A 1,066 shares, and
    Class B 224 shares                     --           --        --            --            --
     Stock Conversion                      72        2,000        --            --         5,000
Other comprehensive income                 --           --        --            --            --
Balance, May 28, 2000                 349,282   $8,731,000   493,123   $12,328,000     2,148,000
====================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                               ACCUMULATED
                                                   TREASURY                       OTHER
                                      RETAINED      STOCK                     COMPREHENSIVE
                                      EARNINGS      SHARES       AMOUNT          INCOME

<S>                                 <C>             <C>       <C>             <C>
Balance, June 1, 1997               $ 31,570,000    138,952   $(7,887,000)        6,000

Net earnings                           8,437,000         --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (37,000)        --            --            --
    Common - $1.10 annually             (791,000)        --            --            --
Issuance of common stock                      --         --            --            --
Redemption of common stock -
    Class A 1,882 shares,                     --         --            --            --
    Class B 365 shares                        --      2,247      (106,000)           --
Other comprehensive income                    --         --            --        40,000
                                    ---------------------------------------------------

Balance, May 31, 1998               $ 39,179,000    141,199   $(7,993,000)       46,000

Net earnings                           9,539,000         --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (44,000)        --            --            --
    Common - $1.2650 annually           (907,000)        --            --            --

Redemption of common stock
    Class A 1,446 shares,                     --         --            --            --
    Class B 292 shares                        --      1,738       (83,000)           --
Other comprehensive income                    --         --            --       479,000
                                    ---------------------------------------------------

Balance, May 30, 1999                 47,767,000    142,937   $(8,076,000)      525,000

Net earnings                           8,619,000         --            --            --
Cash dividends per share:
    Preferred - $2.0625 annually         (43,000)        --            --            --
    Common - $1.21 annually             (865,000)        --            --            --
Redemption of common stock
    Class A 1,066 shares, and
    Class B 224 shares                        --      1,290       (58,000)           --
     Stock Conversion                         --         --
Other comprehensive income                    --         --            --       205,000
Balance, May 28, 2000               $ 55,478,000    144,227   $(8,134,000)      730,000
=======================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -39-
<PAGE>   15
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MAY 28, 2000 AND MAY 30, 1999

(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, 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
            products are shipped.

      (b)   PRINCIPLES OF CONSOLIDATION

            The accompanying consolidated financial statement 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) and Sunwise Corporation all of which are
            wholly-owned. During the year ended May 28, 2000, the Company
            purchased certain assets and assumed certain liabilities of York
            Foods, Inc., and its wholly owned subsidiaries, York Snacks, Inc.,
            and Bon Ton Foods, Inc. which are included as part of Bickel's Snack
            Foods, Inc. During the year ended May 31, 1999, the Company
            purchased L.K. Bowman, Inc. and L.K. Bowman Pacific, Inc., which are
            included as part of Hanover Foods, and purchased certain assets of
            Sunnyside Foods, which are included in Spring Glen Fresh Foods, Inc.
            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 limited due to the large number of wholesalers
            and retailers and their geographic dispersion, however, the
            Company's ten largest customers accounted for approximately 28%, 35%
            and 42% of the Company's net sales for the years ended May 28, 2000,
            May 30, 1999, and May 31, 1998, respectively. The Company's ten
            largest customers account for approximately 22% and 21% of the
            Company's accounts receivable as of May 28, 2000, May 30, 1999,
            respectively. No single customer accounted for more than 10% of net
            sales for the years ended May 28, 2000, May 30, 1999, and May 31,
            1998.

      (D)   CASH AND CASH EQUIVALENTS

            Cash equivalents of $361,000 and $449,000 at May 28, 2000 and May
            30, 1999, 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.


                                      -40-
<PAGE>   16
      (e)   INVESTMENTS

            Investments of $4,207,000 and $3,668,000, at May 28, 2000 and May
            30, 1999, 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 until realized. Net
            unrealized gains were $730,000, $525,000, and $46,000 at May 28,
            2000 and May 30, 1999, and May 31, 1998, respectively.

            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:


<TABLE>
<CAPTION>
                                                  2000             1999             1998
                                               ---------        ---------        ---------
<S>                                            <C>              <C>              <C>
Unrealized holding gains arising during
    period                                     $ 347,000          897,000          117,000
Reclassification adjustments for gains
    included in net income                      (142,000)        (418,000)        (235,000)
                                               ---------        ---------        ---------

Net unrealized gain (loss) on securities       $ 205,000          479,000         (118,000)
                                               =========        =========        =========
</TABLE>


      (f)   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.

      (g)   INVENTORIES

            Inventories are stated at the lower of cost (determined by average
            cost which approximates the first-in, first-out method) or market.

      (h)   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 straight-line over the shorter of the
            lease term or estimated useful life of the asset.


                                      -41-
<PAGE>   17
      (i)   INTANGIBLE ASSETS

            The Company amortizes intangible assets, primarily covenants not to
            compete, purchased trademarks and goodwill, over periods ranging
            from 3 to 40 years. The Company assesses the recoverability of
            intangible assets by determining whether the balances can be
            recovered through undiscounted future operating cash flows. The
            amount of impairment, if any, is measured based on projected
            discounted future operating cash flows using a discount rate
            reflecting the Company's average cost of funds. The assessment of
            the recoverability will be impacted if estimated future operating
            cash flows are not achieved.

      (j)   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.

      (k)   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.

      (l)   RESEARCH AND DEVELOPMENT

            Research and development costs are expensed as incurred. Research
            and development costs amounted to $631,000, $612,000, and $588,000,
            for the years ended May 28, 2000, May 30, 1999, and May 31, 1998,
            respectively.

      (m)   PROMOTIONAL COSTS

            Promotional costs are expensed as incurred. Accounts and notes
            receivable are presented net of allowances for bad debts and
            promotional programs.

      (n)   ADVERTISING COSTS

            Advertising costs are expensed as incurred. Advertising expenses
            amounted to $703,000, $1,897,000, and $659,000 for the years ended
            May 28, 2000, May 30, 1999, and May 31, 1998, respectively
            (including manufacturer coupon expense of $52,000, $1,235,000, and
            $228,000, respectively).


                                      -42-
<PAGE>   18
      (o)   EARNINGS PER SHARE

            The Company adopted the provisions of SFAS No. 128, Earnings per
            Share, during the year ended May 31, 1998. SFAS No. 128 requires
            dual presentation of basic and diluted earnings per share on the
            face of the income statement for all entities with complex capital
            structures and requires a reconciliation of the numerator and
            denominator of the basic earnings per share computation to the
            numerator and denominator of the diluted earnings per share
            computation.

            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

      (p)   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 May 28, 2000, May
            30, 1999, and May 31, 1998, were comprised of 52 weeks.

      (q)   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.

      (r)   RECLASSIFICATIONS

            Certain prior amounts have been reclassified to conform to
            classifications adopted in the current year.

(2)   NOTES PAYABLE - BANKS

      The Company maintains short-term unsecured lines of credit with various
      banks providing credit availability amounting to $85,000,000, of which
      $52,380,000 was borrowed (including an overdraft of $1,671,000) at May 28,
      2000 and $39,629,000 was borrowed (including an overdraft of $2,640,000)
      at May 30, 1999. 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 fifty to
      seventy-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 May 28,
      2000 and May 30, 1999, was 7.02% and 5.35%, respectively. The maximum
      amount of borrowings outstanding under short-term lines of credit at any
      one time during the years ended May 28, 2000 and May 30, 1999 and May 31,
      1998 was approximately $52,380,000, $39,629,000, and $27,999,000.


                                      -43-
<PAGE>   19
(3)   LONG-TERM DEBT

      The long-term debt of the Company and its subsidiaries consists of:


<TABLE>
<CAPTION>
                                                     MAY 28,           MAY 30,
                                                      2000              1999
                                                   -----------       -----------
<S>                                                <C>                <C>
8.74% unsecured senior notes payable to
    an insurance company, due through 2007         $12,500,000        14,285,000


    Other                                               62,000            74,000
                                                   -----------       -----------

Total long-term debt                                12,562,000        14,359,000
Less current maturities                              1,821,000         1,859,000
                                                   -----------       -----------

Long-term debt, excluding current maturities       $10,741,000        12,500,000
                                                   ===========       ===========
</TABLE>

      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 May 28, 2000, $39,975,000 of retained
      earnings are restricted from distribution. The Company is in compliance
      with the restrictive provisions in the agreements as waived at May 28,
      2000.

      The aggregate long-term debt maturities follow:

      FOR THE FISCAL YEAR ENDING:

         FOR THE FISCAL YEAR ENDING:

<TABLE>
<S>                                                <C>
            2001                                   $  1,821,000
            2002                                      1,812,000
            2003                                      1,786,000
            2004                                      1,786,000
            2005                                      1,786,000
            Thereafter                                3,571,000
                                                   ------------

         Total                                     $ 12,562,000
                                                   ============
</TABLE>

(4)   LEASES

      The Company has several noncancelable operating leases, primarily for
      equipment, that expire over the next three 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
      May 28, 2000, May 30, 1999, and May 31, 1998, amounted to $2,743,000,
      $3,591,000, and $3,330,000, respectively.

      Future minimum lease payments under noncancelable operating leases (with
      initial or remaining lease terms in excess of one year) as of May 28, 2000
      are:


                                      -44-
<PAGE>   20
<TABLE>
<CAPTION>
                                   OPERATING
FOR THE FISCAL YEAR ENDING:          LEASES
                                   ----------
<S>                                <C>
  2001                             $  800,000
  2002                                593,000
  2003                                324,000
  2004                                207,000
  Thereafter                           54,000
                                   ----------

Total minimum lease payments       $1,978,000
                                   ==========
</TABLE>


(5)   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 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 the 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 By-Laws 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 ceases five (5)
      years after its issuance in 1998. 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 the Class B shareholders cannot agree in writing on the
      composition of the Board of Directors or on other important matters
      specified above.


                                      -45-
<PAGE>   21
      The following summarizes the Corporation's capital stock at May 28, 2000
      and May 30, 1999:


<TABLE>
<CAPTION>
                                                           MAY 28, 2000                  MAY 30, 1999
                                                    --------------------------      -------------------------

                                                    ISSUED         OUTSTANDING      ISSUED        OUTSTANDING
                                                    ------         -----------      ------        -----------
<S>                                                 <C>            <C>              <C>           <C>
Series A  8 1/4% cumulative
   convertible preferred stock - $25
   Par value, 60,000 shares authorized               14,988            6,268         15,268           6,548

Series B  8 1/4% cumulative
   convertible preferred stock - $25
   Par value, 60,000 shares authorized               16,268            8,496         16,268           8,496

Series C cumulative convertible
   preferred stock - $25 par value,
   10,000 shares authorized                          10,000           10,000         10,000          10,000

Class A nonvoting common stock  -
   $25 par value, 800,000 shares
   authorized                                        49,282          288,420        349,210         289,414

Class B voting common stock  -
   $25 par value, 880,000 shares
   authorized                                       493,123          426,250        493,123         426,474
</TABLE>


      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 May 28, 2000, the outstanding
      Series A and B Preferred Stock could be converted into 3,679 shares of
      Class A Common Stock.


                                      -46-
<PAGE>   22
(6)   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:


<TABLE>
<CAPTION>
                                          YEAR ENDED         YEAR ENDED      YEAR ENDED
                                            MAY 28,            MAY 30,          MAY 31,
                                             2000               1999             1998
                                           ----------        ---------        ---------
<S>                                       <C>               <C>              <C>
Revenues:
    Park 100 Foods, Inc.                   $2,391,000        2,627,000        4,365,000

Corporate charges:
    Snyder's of Hanover, Inc.              $  151,000          188,000          181,000

Expenditures:
    Lippy Brothers, Inc.                   $  675,000          956,000          304,000
    James G. Sturgill                      $   26,000           48,000           68,000
    ARWCO Corporation                      $   13,000           15,000           33,000
    Warehime Enterprises, Inc.             $    4,000           78,000          125,000
    John A. and Patricia M. Warehime       $   65,000           58,000           56,000
    Park 100 Foods, Inc.                   $   54,000           85,000          209,000
    Schaier Travel                         $    7,000               --               --

Accounts receivable:
    Snyder's of Hanover, Inc.              $   26,000           32,000           48,000
    Warehime Enterprises, Inc.             $       --               --            3,000
    Park 100 Foods, Inc.                   $   96,000          210,000          346,000
    Lippy Brothers, Inc.                   $    7,000               --               --

Accounts payable:
    James G. Sturgill                      $       --               --            7,000
    ARWCO Corporation                      $       --               --            1,000

Notes Payable:
       Cyril T. Noel                       $       --           74,000          147,000
</TABLE>


      Included in other assets is a related party receivable of $571,000 in 2000
      and $418,000 in 1999 related to two split interest life insurance
      contracts on life of Patricia M. Warehime.


                                      -47-
<PAGE>   23
      In connection with the amended complaint filed by Michael A. Warehime
      versus John A. Warehime (note 10), 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 May 28, 2000, May 30,
      1999, and May 31, 1998 was approximately $57,000, $72,000, and $37,000,
      respectively.

      On April 1, 1996, the Company entered into a stock purchase agreement with
      John R. Miller, Jr. to purchase 1,210 shares of the Company's Voting Class
      B Common Stock and 5,990 shares of the Company's Non-voting Class A Common
      Stock over a four-year period. The April 22, 1997 Voting Agreement
      provides that John R. Miller, Jr. will vote all shares of the Company
      Common Stock, which he is entitled to vote as directed by the Board of
      Directors, provided Clayton J. Rohrbach, Jr., Arthur S. Schaier, and Cyril
      T. Noel, or a majority of them, vote in favor of the matter to vote all
      shares of both classes of common stock beginning April 1, 1996 and ending
      March 31, 2001. At May 28, 2000, the Company has purchased 1,210 shares of
      the Company's Voting Class B Common Stock for approximately $88,000 and
      5,990 shares of the Company's Non-voting Class A Common Stock for
      approximately $252,000.

      A portion of rental expense included in note 4 was paid to ARWCO
      Corporation; Park 100 Foods, Inc.and Warehime Enterprises all of which are
      related companies. The amounts were $100,000, $169,000, and $149,000 for
      the years ended May 28, 2000, May 30, 1999, and May 31, 1998,
      respectively. The portion of rental commitments included in note 4 due
      these companies is $15,000 for the fiscal year ending 2001.


(7)   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
            contribution up to 5% of salary. 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 periods ended May 28, 2000,
            May 30, 1999, and May 31, 1998, was $588,000, $576,000, and
            $583,000, respectively.

      (b)   FROZEN DEFINED BENEFIT RETIREMENT PLANS

            The Company previously amended its noncontributory, defined benefit
            plans to freeze benefit accruals effective August 31, 1992, and also
            took action to terminate the plans effective August 31, 1992. On
            November 12, 1993, the Board of Directors rescinded its previous
            action to terminate the plans and has placed the plans in a frozen
            status. During September 1997, the Company terminated the plans and
            distributed substantially all net assets to the participants. Net
            pension cost for the year ended May 31, 1998 amounted to $934,000
            and includes loss on termination of the Plans and adjustments of
            prior year additional minimum pension liability. Assumptions used in
            accounting for the pension plans included discount rates ranging
            from 7.09% to 7.25% and an expected long-term rate of return on
            assets of 7.0%.

      (c)   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:


                                      -48-
<PAGE>   24
<TABLE>
<CAPTION>
                                                                     MAY 28,            MAY 30,
                                                                       2000               1999
                                                                    -----------        -----------
<S>                                                                <C>                 <C>
Change in benefit obligation
   Benefit obligation at beginning of year                          $(3,648,000)        (2,591,000)
   Service cost                                                        (102,000)          (117,000)
   Interest cost                                                       (225,000)          (243,000)
   Amortization of transition obligation                                (73,000)           (73,000)
   Plan assumptions                                                     215,000            129,000
   Change in plan                                                       545,000           (977,000)
   Benefits paid                                                        138,000            127,000
   Other                                                                     --             97,000
                                                                    -----------        -----------

           Benefit obligation at end of year                         (3,150,000)        (3,648,000)
                                                                    -----------        -----------

Change in plan assets
   Fair value of plan assets at beginning of year                            --                 --
   Contributions                                                        138,000            127,000
   Benefits paid                                                       (138,000)           127,000
                                                                    -----------        -----------

           Fair value of plan assets at end of year                          --                 --
                                                                    -----------        -----------

Funded status:
   Unrecognized net (gain) loss                                        (114,000)           574,000
   Unrecognized prior service cost                                      855,000            916,000
   Unrecognized transition liability, amortized over 20 years         1,007,000          1,080,000
                                                                    -----------        -----------

   Accrued postretirement benefit cost                              $(1,402,000)        (1,078,000)
                                                                    ===========        ===========
</TABLE>

      A discount rate of 7.75% and 7.25% for May 28, 2000 and May 30, 1999,
      respectively, was used in determining the actuarial present value of the
      accumulated postretirement benefit obligation.

      The cost of postretirement benefits other than pensions consisted of the
      following components:

<TABLE>
<CAPTION>
                                           YEAR ENDED     YEAR ENDED    YEAR ENDED
                                             MAY 28,        MAY 30,        MAY 31,
                                              2000           1999           1998
                                            --------       --------       --------
<S>                                       <C>             <C>             <C>
Service cost                                $102,000        117,000         16,000
Interest cost                                225,000        243,000        177,000
Amortization of transition obligation         73,000         73,000         73,000
Other amortization and deferral               61,000         79,000         20,000
                                            --------       --------       --------
                                            $461,000        512,000        286,000
                                            ========       ========       ========
</TABLE>


                                      -49-
<PAGE>   25
            The assumed postretirement health care cost trend rate used in
            measuring the accumulated postretirement benefit obligation was 8.0%
            for fiscal year May 28, 2000, decreasing each year to an ultimate
            rate of 5.0% in 2005 and thereafter. 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 May 28, 2000 by $567,000 and
            the aggregate of the service and interest cost components of net
            periodic postretirement benefit cost for the year ended May 28, 2000
            by $80,000.

      (d)   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 (the
            "Amended Employment Agreement") to, among other things, reduce the
            annual base salary payable under the agreement to $498,866, which
            modification was applied retroactively to April 1, 1994 (the
            effective date of the 1995 Employment Agreement) and modified the
            method of calculating bonuses payable to the employee under such
            agreement. As a result of these retroactive changes, Mr. Warehime is
            required to reimburse the Company for $83,024 in excess compensation
            previously paid to him through the deduction of such amount from
            annual base salary increases provided for under the terms of the
            Amended Employment Agreement and to waive accrued bonuses payable
            for fiscal 1997 under the 1995 Employment Agreement which would have
            equaled $2,250,000. 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 2000 and 1999 was $636,000 and $606,000, 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 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 May 28, 2000, May 30, 1999, and May 31, 1998, the
            bonus accrued under this agreement was $364,000, $394,000, and
            $422,000, 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


                                      -50-
<PAGE>   26
            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 May 28,
            2000, May 30, 1999, and May 31, 1998, the long-term performance
            bonus accrued under this agreement was $114,000, $108,000, and
            $162,000, 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 $428,000, $624,000, and $411,000, for the years ended
            May 28, 2000, May 30, 1999, and May 31, 1998, respectively. The
            accrued benefit obligation was approximately $2,174,000 and
            $1,747,000 at May 28, 2000 and May 30, 1999, 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.

            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 May 28, 2000, the
            aggregate liability of the Company under this agreement for the next
            five years is estimated to be $1,218,000, 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 $45,000,
            $81,000, and $60,000 for the years ended May 28, 2000, May 30, 1999,
            and May 31, 1998, respectively. The accrued benefit obligation was
            approximately $233,000 and $188,000 at May 28, 2000 and May 30,
            1999, respectively.

            The Company also entered into a change in control severance
            agreement with Alan T. Young, which provides for termination
            compensation if Mr. Young's employment is terminated: (i)
            involuntarily or (ii) involuntarily, 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 officer's total cash compensation
            (salary and bonus) received from the Company during fiscal 1997.


                                      -51-
<PAGE>   27
            All payments made pursuant to this agreement are subject to the
            further conditions that: (i) the officer 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
            officer or his employer or business associate shall 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 officer 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 Mr. Young
            was terminated on May 28, 2000 under circumstances entitling him to
            severance payments pursuant to this agreement, the aggregate amount
            due to Mr. Young under this agreement would have $237,000.

            The Company is also committed to another employee, Patricia H.
            Townsend, under a previous employment contract, which ends in Mary
            2004 and provides for minimum salary levels, annual adjustments, as
            well as incentive bonuses. 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 May 28, 2000 was
            approximately $272,000.

(8)   INCOME TAXES

      Total income taxes for the years ended May 28, 2000, May 30, 1999, and May
      31, 1998 were attributable to the following:

<TABLE>
<CAPTION>
                                  MAY 28,          MAY 30,          MAY 31,
                                   2000             1999             1998
                                ----------       ----------       ----------
<S>                             <C>               <C>              <C>
Income from operations          $5,029,000        5,904,000        5,367,000
Minimum pension liability
  adjustment                            --               --          106,000
                                ----------       ----------       ----------

                                $5,029,000        5,904,000        5,473,000
                                ==========       ==========       ==========
</TABLE>

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

<TABLE>
<CAPTION>
                          YEAR ENDED                           YEAR ENDED                           YEAR ENDED
                        MAY 28, 2000                          MAY 30, 1999                         MAY 31, 1998
               ------------------------------        ------------------------------        ------------------------------
                 FEDERAL             STATE              FEDERAL            STATE             FEDERAL              STATE
               -----------        -----------        -----------        -----------        -----------        -----------
<S>            <C>                 <C>                <C>               <C>                <C>                  <C>
Current        $ 4,690,000            804,000          5,602,000            986,000          4,866,000            905,000
Deferred          (362,000)          (103,000)          (532,000)          (152,000)          (311,000)           (93,000)
               -----------        -----------        -----------        -----------        -----------        -----------

               $ 4,328,000            701,000          5,070,000            834,000          4,555,000            812,000
               ===========        ===========        ===========        ===========        ===========        ===========
</TABLE>

      There is no income tax attributable to the income from foreign
      subsidiaries since the foreign entities were not subject to taxes on
      income in 2000, 1999, and 1998.

      A reconciliation of the Corporation's effective tax rate to the amount
      computed by applying the federal income tax rate of 35% to income before
      taxes expressed in percentages, follows:


                                      -52-
<PAGE>   28
<TABLE>
<CAPTION>
                                               YEAR          YEAR          YEAR
                                              ENDED         ENDED         ENDED
                                             MAY 28,       MAY 30,       MAY 31,
                                              2000          1999          1998
                                             ------        ------        ------
<S>                                         <C>           <C>           <C>
Federal income tax rate                      35.0 %        35.0 %        35.0 %
Increase (decrease) in taxes:
  State taxes - net of federal tax              3.3           3.4           3.9
  Income in foreign subsidiary with no
  current tax                                  (4.6)         (1.3)         (0.3)
  Other items - net                             3.1           1.1           0.3
                                             ------        ------        ------
Effective income tax rate                    36.8 %        38.2 %        38.9 %
                                             ======        ======        ======
</TABLE>

      The tax effects of temporary differences that give rise to significant
      portions of deferred tax liabilities and deferred tax assets at May 28,
      2000 and May 30, 1999, follow:

<TABLE>
<CAPTION>
                                                          MAY 28,            MAY 30,
                                                           2000               1999
                                                      -----------        -----------
<S>                                                   <C>                <C>
Deferred tax liabilities:
   Property, plant and equipment                      $(5,539.000)        (5,539,000)
   Other                                                 (635,000)          (149,000)
                                                      -----------        -----------

           Total gross deferred tax liabilities        (6,174,000)        (5,688,000)
                                                      -----------        -----------

Deferred tax assets:
   Inventory costs                                        193,000            195,000
   Accrued expenses and other liabilities               1,512,000          1,298,000
   Pension and postretirement benefits                    520,000            380,000
   Net operating loss carryforwards                       203,000            287,000
   Other                                                  388,000            114,000
                                                      -----------        -----------

           Total gross deferred tax assets              2,816,000          2,274,000
                                                      -----------        -----------

Net deferred tax liability                            $(3,358,000)        (3,414,000)
                                                      ===========        ===========
</TABLE>

      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 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 during the carryforward period are reduced.


                                      -53-
<PAGE>   29
      The Corporation 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 $5,266,000 at May 28, 2000.


(9)   ACQUISITIONS

      During the year ended May 28, 2000, the Company via its wholly owned
      subsidiary, Bickel's Snack Foods, Inc. purchased certain assets and
      assumed certain liabilities of York Foods, Inc., and its wholly owned
      subsidiaries, Bon Ton Foods, Inc., and York Snacks, Inc. During the year
      ended May 30, 1999, the Company purchased certain assets of Bickel's
      Potato Chip Co. Inc. (Bickel's) and Draper-King Cole, Inc. and Draper
      Canning Company (collectively "Draper"). During the year ended May 31,
      1998, the Company purchased assets and assumed certain liabilities L.K.
      Bowman, Inc. and L.K. Bowman Pacific, Inc. (collectively "Bowman") and
      purchased certain assets of Sunnyside Foods. All of these acquisitions
      were accounted for under the purchase method and were not considered to be
      material to the Company's results of operations for the years ended May
      28, 2000, May 30, 1999, and May 31, 1998 respectively. The allocation of
      purchase price is as follows:

      (a)   Acquisitions made during the year ended May 28, 2000:

<TABLE>
<S>                                 <C>
Accounts receivable                 $ 1,496,000
Inventory                             1,147,000
Other current assets                     82,000
Property, plant and equipment         2,737,000
Goodwill                              1,981,000
Other Assets                             13,000
Accounts Payable                     (2,855,000)
Debt                                    (77,000)
                                    -----------

Total purchase price                $ 4,524,000
                                    ===========
</TABLE>

      (b)   Acquisitions made during the year ended May 30,1999:

<TABLE>
<S>                                       <C>
      Accounts receivable                 $2,032,000
      Inventory                            1,984,000
      Other current assets                    13,000
      Property, plant and equipment        3,704,000
      Goodwill                               100,000
                                          ----------

      Total purchase price                $7,833,000
                                          ==========
</TABLE>


(10)  COMMITMENTS AND CONTINGENCIES


                                      -54-
<PAGE>   30
      (a)   LETTER OF CREDIT

            As of May 28, 2000, the Company's wholly-owned reinsurance company
            had outstanding two letters of credit in the amount of $350,000 and
            $1,571,000 as security for the reimbursement of losses arising from
            the reinsurance assumed by the Company.

      (b)   LEGAL MATTERS

            On February 1, 1995, Michael A. Warehime, J. William Warehime, and
            Elizabeth W. Stick, three Class B shareholders of the Company, filed
            a Complaint in the Court of Common Pleas of York County,
            Pennsylvania against the Company and John A. Warehime (Chairman of
            the Company), in his capacity as voting trustee of two voting trusts
            entitling him to vote approximately 52% of the Class B common stock.
            The Court has dismissed various claims and parties in the lawsuit
            and the only remaining parties are Michael A. Warehime as plaintiff
            and John A Warehime as defendant. The only remaining claims are (i)
            a claim for breach of fiduciary duty based on exercise of powers
            beyond those granted by certain voting trust agreements; (ii) a
            claim for breach of fiduciary duty for use of the voting trusts in a
            manner harmful to their beneficiaries; and (iii) a count requesting
            removal of John A. Warehime as the voting trustee of the voting
            trusts.

            On September 13, 1996, certain Class A common stockholders filed a
            complaint in equity against six of the Company's directors and the
            estate of a former director in the Court of Common Pleas of York
            County, Pennsylvania (the complaint). This suit also names the
            Company 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 directors'
            fees. (Since the filing of this lawsuit, John A. Warehime's 1995
            Employment Agreement was amended. See note 7.) 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 complaint as
            amended for failure to make a prior demand. An appeal has been filed
            from the Court's June 24, 1997 Order. On May 12, 1997, a written
            demand was received by the Company 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.

            On February 21, 1997, Michael A. Warehime, a Class B shareholder,
            and certain Class A shareholders filed motions for a preliminary
            injunction against the Company, John A Warehime, in his capacity as
            a voting trustee, and all certain directors of the Company in the
            Court of Common Pleas of York County, Pennsylvania against a
            proposal of the Board of Directors to amend and restate the
            Company's Articles of Incorporation in the manner hereafter
            described.

            On February 13, 1997, the Board of Directors proposed an amendment
            and restatement of the Company's Articles of Incorporation (the
            "Amended and Restated Articles") which provides that if all of the
            following Class B shareholders (or their Estates upon 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 composition of the
            Board of Directors or other important matters specified below on or
            after the 1998 annual shareholders' meeting, the trustees of the
            Company'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 note 5.

            The Amended and Restated Articles create a Series C Convertible
            Preferred Stock (see note 5) and also classified the terms of the
            Board of Directors commencing with the election at the 1997 annual


                                      -55-
<PAGE>   31
            shareholders' meeting and permit directors to be elected for four
            year terms as permitted by Pennsylvania law.

            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. Appeals have been filed from the denial of the plaintiffs'
            motion for a preliminary injunction.

            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 Company
            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. This motion was denied on
            August 11, 1997. Michael A. Warehime has filed an appeal. 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 the person who, in the opinion of counsel for the Company,
            meet any of the following criteria: (i) disinterested directors as
            defined in Section 1715(e) of the Pennsylvania Business Corporation
            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 of 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 Warehime filed an appeal from the denial of his motion to
            enjoin the previously described Amended and Restated Articles and
            the Amendment thereto. On December 2, 1998, the Pennsylvania
            Superior Court, in a two to one decision, held that although John
            Warehime had acted in good faith and in the best interest of the
            Company in voting for the Amended and Restated Articles as trustee
            of the Warehime voting trust, Mr. Warehime nevertheless breached his
            fiduciary duty to the beneficiaries of the Warehime voting trust in
            so voting. On December 16, 1998, Michael Warehime filed a motion for
            clarification requesting that the Pennsylvania Superior Court issue
            an order invalidating the Amended and Restated Articles and that
            motion was denied in banc. On March 10, 1999, John Warehime and the
            other directors filed a petition for allowance of appeal with the
            Pennsylvania Supreme Court.

            On November 24, 1999 the Supreme Court of Pennsylvania granted the
            petition for allowance of appeal and oral argument was held in the
            Pennsylvania Supreme Court on the issues raised in the appeal and
            the cross-appeal on May 2, 2000.

            Michael Warehime also filed another lawsuit against Arthur S.
            Schaier, Cyril T. Noel, Clayton J. Rohrbach, Jr., John Warehime and
            Corporation in August 1999 again requesting that the York County
            Court of Common Pleas enter an order invalidating the Corporation's
            Amendment to the Amended and Restated Articles of Incorporation in
            order to prevent the Series C Preferred Stock from being voted at
            the September 15, 1999 shareholders meeting. Following oral argument
            by the parties on September 7, 1999, the York County Court of Common
            Pleas denied Michael Warehime's request. On September 10, 1999,
            Michael Warehime asked the York County Court of Common Pleas to stay
            the Corporation's annual shareholders' vote to prevent the voting of
            the Class C Preferred Stock. The Court again denied Michael
            Warehime's request. Michael Warehime sought a stay from the Superior
            Court which was


                                      -56-
<PAGE>   32
            denied on September 15, 1999. Michael Warehime then filed an appeal
            with the Superior Court. Oral argument was held before the Superior
            Court on February 15, 2000.

            The Company is involved in various other claims and legal actions
            including environmental matters arising in the ordinary course of
            business. In the opinion of management, the ultimate disposition of
            these matters will not have a material adverse effect on the
            Company'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. No
            shares were repurchased under this plan for the year's ended May 28,
            2000 and May 31, 1998. Shares repurchased under this plan amounted
            to 22 during the year ended May 30, 1999. As of May 28, 2000, there
            are 10,557 shares outstanding that would be eligible for this plan.
            The maximum commitment, if requested, for all eligible shares would
            be approximately $1,151,000, based on the most recent appraised
            value per share as of March 31, 2000.


(11)  FOREIGN OPERATIONS

The Corporation'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:

<TABLE>
<CAPTION>
                                  MAY 28,          MAY 30,          MAY 31,
                                   2000              1999              1998
                               -----------       -----------       -----------
<S>                            <C>                <C>               <C>
      Revenues                 $15,863,000        15,213,000        11,190,000
      Cost of goods sold        13,036,000        13,963,000        10,433,000
      Assets                    10,580,000         8,942,000         9,344,000
</TABLE>


ALCOSA maintains its accounting records in quetzales, although, for financial
reporting purposes, the accounting records have been remeasured to be expressed
in U.S. dollars. 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) expenses - net and amount to a loss of $315,000, a gain of
$13,000, and a gain of $73,000, for the years ended May 28, 2000, May 30, 1999,
and May 31, 1998, respectively. At May 28, 2000, the prevailing exchange rate
was Q 7.72 to U.S. $1.00.


                                      -57-
<PAGE>   33
(12)  RECONCILIATION OF NUMERATOR AND DENOMINATOR FOR BASIC AND DILUTED EARNINGS
      PER SHARE

<TABLE>
<CAPTION>
                                                 YEAR            YEAR             YEAR
                                                 ENDED           ENDED            ENDED
                                                MAY 28,          MAY 30,          MAY 31,
                                                 2000             1999             1998
                                              ----------       ----------       ----------
<S>                                          <C>               <C>              <C>
Numerator for basic earnings per share:
  Net earnings applicable to
    common stock                              $8,576,000        9,495,000        8,400,000
                                              ----------       ----------       ----------
Effect of dilutive securities:
  8 1/4% cumulative convertible
    preferred stock                               31,000           31,000           31,000
  4.40% cumulative convertible
    preferred stock                               12,000           13,000            6,000
                                              ----------       ----------       ----------

Net earnings assuming dilution                $8,619,000        9,539,000        8,437,000
                                              ==========       ==========       ==========

Denominator:
  Basic weighted-average shares                  715,249          716,974          718,712
Effect of dilutive securities:
  8 1/4% cumulative convertible
    preferred stock                                4,140            4,921            5,786
  4.40% cumulative convertible
    preferred stock                               10,000           10,000            1,603
                                              ----------       ----------       ----------

Diluted weighted-
  average shares                                 729,389          731,895          726,101
                                              ==========       ==========       ==========

Basic earnings per share                      $    11.99            13.24            11.69
Diluted earnings per share                         11.82            13.03            11.62
                                              ==========       ==========       ==========
</TABLE>

(13)  STATEMENT OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                               YEAR              YEAR             YEAR
                                                               ENDED             ENDED            ENDED
                                                               MAY 28,           MAY 30,          MAY 31,
                                                                 2000             1999             1998
                                                              ----------       ----------       ----------
<S>                                                          <C>               <C>              <C>
Supplemental disclosure of cash paid for:
   Interest                                                   $4,098,000        3,061,000        2,979,000
   Income taxes                                                5,916,000        5,983,000        4,594,000
                                                              ==========       ==========       ==========
Non-cash investing activities, acquisition of business:
      Fair value of assets acquired                           $7,456,000        7,833,000       10,391,000
      Cash paid                                                4,524,000        7,833,000        5,578,000
                                                              ----------       ----------       ----------

      Liabilities assumed                                     $2,932,000               --        4,813,000
                                                              ==========       ==========       ==========
</TABLE>


                                      -58-
<PAGE>   34
                            QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Dollars in thousands                              First               Second               Third                 Fourth
(except per share)                              quarter               quarter             quarter               quarter
-------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>                  <C>                  <C>
2000

Net sales                                      $    61,621          $    82,539          $    78,926          $    77,179
Gross profit                                   $    15,870          $    21,318          $    19,215          $    18,568
Net earnings                                   $     1,760          $     3,569          $     1,678          $     1,612
Net earnings per common share - Basic          $      2.44          $      4.99          $      2.33          $      2.23
Net earnings per common share -                $      2.41          $      4.91          $      2.30          $      2.20
Diluted
Cash Dividends per  common share               $      .385          $      .275          $      .275          $      .275

-------------------------------------------------------------------------------------------------------------------------
1999

Net sales                                      $    58,538          $    80,705          $    72,946          $    75,048
Gross profit                                   $    14,613          $    20,223          $    18,219               19,239
Net earnings                                   $     1,636          $     3,242          $     1,885                2,776
Net earnings per common share - Basic          $      2.26          $      4.51          $      2.61                 3.86
Net earnings per common share -                $      2.23          $      4.43          $      2.56                 3.81
Diluted
Cash Dividends per  common share               $       .44          $      .275          $      .275                 .275
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Although the Corporation's Class A. Common Stock is currently traded on the
NASDAQ 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.

<TABLE>
<CAPTION>
         Quarter Ended            High     Low       Dividends
         -------------            ----     ---       ---------
<S>                               <C>      <C>       <C>
         August 30, 1998          56.25    56.25      0.440
         November 29, 1998        57.125   57.00      0.275
         February 28, 1999        58.50    58.50      0.275
         May 30, 1999             60.75    59.50      0.275
         August 29, 1999          61.00    60.00      0.385
         November 28, 1999        61.25    61.00      0.275
         February 27, 2000        71.00    61.00      0.275
         May 28, 2000             61.00    61.00      0.275
</TABLE>

As of May 28, 2000, there were 386 record holders and approximately 550
beneficial holders of the Class A Common Stock.


                                      -59-
<PAGE>   35
DIVIDEND POLICY

The Company has maintained a policy of paying a quarterly dividend of $0.275 per
share. In addition, on August 13, 1999, the Company paid a special 10% dividend
or $0.11 per share. On August 15, 1998 the Company paid a special 15% dividend
of $.165/share. The continuing payment by the Company of dividends in the future
is the sole discretion of its Board of Directors and will depend, among other
things, upon the Company's earnings, its capital requirements and financial
condition, as well as other relevant factors.

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at 4:00 p.m., September 14,
2000, at the offices of the Company located at 1486 York Street, Hanover,
Pennsylvania.

ANNUAL AND OTHER REPORTS

The Company is required to file an annual report on Form 10-K for its fiscal
year ended May 28, 2000, with the Securities and Exchange Commission. Copies of
the Form 10-K annual report and the Company's quarterly reports may be obtained
without charge by contacting:

            Gary T. Knisely
            Hanover Foods Corporation
            1486 York Road
            P.O. Box 334
            Hanover, PA  17331
            717-632-6000


                                      -60-