INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Hershey Foods Corporation:
Under date of January 29, 2003,
we reported on the consolidated balance sheet of Hershey Foods Corporation and
subsidiaries as of December 31, 2002, and the related consolidated statements of
income, cash flows and stockholders’ equity for the year then ended, which
are included in Hershey Foods Corporation’s Proxy Statement for its 2003
Annual Meeting of Stockholders incorporated by reference in this Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the schedule listed on page 18 in Item 15(a)(2).
This financial statement schedule is the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on
this financial statement schedule based on our audit.
In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/KPMG LLP
New York, New York
January 29, 2003
REPORT OF PREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP)
The following report is a
copy of a report previously issued by Arthur Andersen LLP and has not been
reissued by Arthur Andersen LLP. This report applies to supplemental Schedule II
– Valuation and Qualifying Accounts for the years ended December 31, 2001
and December 31, 2000.
To Hershey Foods Corporation:
We have audited, in
accordance with auditing standards generally accepted in the United States, the
consolidated financial statements included in Hershey Foods Corporation’s
Proxy Statement for its 2002 Annual Meeting of Stockholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated January
22, 2002. Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. The schedule listed on page 15 in Item
14(a)(2) is the responsibility of the Corporation’s management and is
presented for purposes of complying with the Securities and Exchange
Commission’s rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
New York, New York
January 22, 2002
17
Schedule II
HERSHEY FOODS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands of dollars)
| |
Description |
|
| Balance at
Beginning
of Period |
| Charged to
Costs and
Expenses |
| Charged
to Other
Accounts (a) |
| Deductions
from
Reserves |
| Balance
at End
of Period |
|
|
Year Ended December 31,2002:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts Receivable -
Trade |
$ |
15,958 |
|
$ |
6,414 |
|
$ |
3,023 |
|
$ |
(8,871) |
|
$ |
16,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,2001:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts Receivable -
Trade |
$ |
16,004 |
|
$ |
8,450 |
|
$ |
3,299 |
|
$ |
(11,795) |
|
$ |
15,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,2000:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts Receivable -
Trade |
$ |
16,941 |
|
$ |
8,531 |
|
$ |
1,362 |
|
$ |
(10,830) |
|
$ |
16,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes recoveries of amounts previously written off.
18
EXHIBIT 10.1
EXECUTION COPY
AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT
Dated as of November 26, 2002
HERSHEY FOODS CORPORATION, a Delaware corporation (the
"COMPANY"), the banks, financial institutions and other institutional lenders
(collectively, the "INITIAL LENDERS") party hereto, CITIBANK, N.A., as
administrative agent (together with any successor thereto appointed pursuant to
Article VII of the Existing Credit Agreement referred to below, the "AGENT") for
the Lenders (as defined in the Existing Credit Agreement referred to below),
BANK OF AMERICA, N.A., as syndication agent, and SALOMON SMITH BARNEY INC. and
BANC OF AMERICA SECURITIES LLC, as joint lead arrangers and joint book managers,
hereby agree as follows:
PRELIMINARY STATEMENTS
(1) The Company is party to an Amended and Restated 364-Day
Credit Agreement dated as of November 27, 2001 (as amended, supplemented or
otherwise modified from time to time to (but not including) the date of this
Amendment and Restatement, the "EXISTING CREDIT AGREEMENT") with the banks,
financial institutions and other institutional lenders party thereto and
Citibank, N.A., as Agent for the Lenders and such other lenders. Capitalized
terms not otherwise defined in this Amendment and Restatement shall have the
same meanings as specified in the Existing Credit Agreement.
(2) The parties to this Amendment and Restatement desire to
amend the Existing Credit Agreement as set forth herein and to restate the
Existing Credit Agreement in its entirety to read as set forth in the Existing
Credit Agreement with the following amendments.
(3) The Company has requested that the Lenders agree to extend
credit to it from time to time in an aggregate principal amount of up to
$200,000,000 for general corporate purposes of the Company and its Subsidiaries
not otherwise prohibited under the terms of this Amendment and Restatement. The
Lenders have indicated their willingness to agree to extend credit to the
Company from time to time in such amount on the terms and conditions of this
Amendment and Restatement.
SECTION 1. AMENDMENTS TO THE EXISTING CREDIT AGREEMENT. The
Existing Credit Agreement is, effective as of the date of this Amendment and
Restatement and subject to the satisfaction of the conditions precedent set
forth in Section 2, hereby amended as follows:
(a) Section 1.01 is hereby amended by deleting the definitions
of "Applicable Margin", "Lenders" and "Termination Date" set forth therein and
replacing them, respectively, with the following new definitions thereof:
"APPLICABLE MARGIN" means (a) for Base Rate Advances, 0% per
annum and (b) for Eurodollar Rate Advances, as of any date, a percentage per
annum determined by reference to the Level in effect on such date as set forth
below:
- -------------------- ----------------------------- -----------------------------
Level Applicable Applicable
Margin for Eurodollar Rate Margin for Eurodollar Rate
Advances Prior to the Advances On and After the
Termination Date Termination Date
- -------------------- ----------------------------- -----------------------------
2
Level 1 0.150% 0.400%
- -------------------- ----------------------------- -----------------------------
Level 2 0.190% 0.440%
- -------------------- ----------------------------- -----------------------------
Level 3 0.280% 0.530%
- -------------------- ----------------------------- -----------------------------
Level 4 0.370% 0.620%
- -------------------- ----------------------------- -----------------------------
Level 5 0.445% 0.695%
- -------------------- ----------------------------- -----------------------------
Level 6 0.600% 0.850%
- -------------------- ----------------------------- -----------------------------
"LENDERS" means, collectively, each of the banks, financial
institutions and other institutional lenders listed on Schedule I
hereto, each Assuming Lender that shall become a party hereto pursuant
to Section 2.05(c) and each Eligible Assignee that shall become a party
hereto pursuant to Section 9.07.
"TERMINATION DATE" means the earlier of (a) November 25, 2003
or, if the Termination Date is extended pursuant to Section 2.18(a),
the date to which the Termination Date is extended pursuant to Section
2.18(a), and (b) the date of termination in whole of the Commitments
pursuant to Section 2.05(a), 2.05(b) or 6.01.
(b) Section 2.01(a) is amended by replacing the words "the
signature pages hereof" with the words "Schedule I hereto".
(c) Section 4.01(e) is amended (i) by replacing the date
"December 31, 2000" with the date "December 31, 2001" and (ii) by replacing the
date "July 1, 2001" with the date "June 30, 2002".
(d) Schedule I is deleted in its entirety and replaced with
Schedule I to this Amendment and Restatement.
SECTION 2. CONDITIONS OF EFFECTIVENESS OF THIS AMENDMENT AND
RESTATEMENT. This Amendment and Restatement shall become effective as of the
date first above written (the "RESTATEMENT EFFECTIVE DATE") when and only if:
(a) The Agent shall have received counterparts of this
Amendment and Restatement executed by the Company and all of the
Initial Lenders or, as to any of the Initial Lenders, advice
satisfactory to the Agent that such Initial Lender has executed this
Amendment and Restatement.
(b) On the Restatement Effective Date, the following
statements shall be true and the Agent shall have received for the
account of each Lender a certificate signed by a duly authorized
officer of the Company, dated the Restatement Effective Date, stating
that:
(i) The representations and warranties of the
Company contained in Section 4.01 of the Existing Credit
Agreement, as amended hereby, are correct on and as of the
Restatement Effective Date, and
(ii) No event has occurred and is continuing that
constitutes a Default.
(c) The Agent shall have received on or before the Restatement
Effective Date the following, each dated such date and (unless
otherwise specified below) in form and substance satisfactory to the
Agent and in sufficient copies for each Initial Lender:
3
(i) The Revolving Credit Notes of the Company to the
order of the Lenders, respectively, to the extent requested by
any Lender pursuant to Section 2.19 of the Existing Credit
Agreement.
(ii) Certified copies of the resolutions of the Board
of Directors of the Company approving this Amendment and
Restatement (including the Commitment Increase contemplated by
Section 2.05(c) of the Existing Credit Agreement) and the
Notes of the Company, and of all documents evidencing other
necessary corporate action and governmental approvals, if any,
with respect to this Amendment and Restatement and such Notes.
(iii) A certificate of the Secretary or an Assistant
Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to sign
this Amendment and Restatement and the Notes of the Company
and the other documents to be delivered hereunder.
(iv) A favorable opinion of Burton H. Snyder, Senior
Vice President and General Counsel of the Company,
substantially in the form of Exhibit H to the Existing Credit
Agreement but with such modifications as are required to
address the Existing Credit Agreement, as amended by this
Amendment and Restatement in form and substance reasonably
satisfactory to the Initial Lenders.
(v) A favorable opinion of Shearman & Sterling,
counsel for the Agent, in form and substance satisfactory
to the Agent.
(vi) Such other approvals, opinions or documents as
any Lender, through the Agent, may reasonably request prior to
the Effective Date.
SECTION 3. REFERENCE TO AND EFFECT ON THE EXISTING CREDIT
AGREEMENT AND THE NOTES. (a) On and after the effectiveness of this Amendment
and Restatement, each reference in the Existing Credit Agreement to "this
Agreement", "hereunder", "hereof" or words of like import referring to the
Existing Credit Agreement, and each reference in the Notes to "the Credit
Agreement", "thereunder", "thereof" or words of like import referring to the
Existing Credit Agreement, shall mean and be a reference to the Existing Credit
Agreement, as amended by this Amendment and Restatement.
(b) The Existing Credit Agreement and the Notes, as
specifically amended by this Amendment and Restatement, are and shall continue
to be in full force and effect and are hereby in all respects ratified and
confirmed.
(c) Without limiting any of the other provisions of the
Existing Credit Agreement, as amended by this Amendment and Restatement, any
references in the Existing Credit Agreement to the phrases "on the date hereof",
"on the date of this Agreement" or words of similar import shall mean and be a
reference to the Restatement Effective Date.
SECTION 4. COSTS AND EXPENSES. The Company agrees to pay on
demand all reasonable out-of-pocket costs and expenses of the Agent in
connection with the preparation, execution, delivery and administration,
modification and amendment of this Amendment and Restatement, the Notes and the
other documents to be delivered hereunder (including, without limitation, the
reasonable and documented fees and expenses of counsel for the Agent with
respect hereto and thereto) in accordance with the terms of Section 9.04 of the
Existing Credit Agreement.
4
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment and
Restatement may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement. Delivery of an executed counterpart of a signature page
to this Amendment and Restatement by telecopier shall be effective as delivery
of a manually executed counterpart of this Amendment and Restatement.
SECTION 6. GOVERNING LAW. This Amendment and Restatement
shall be governed by, and construed in accordance with, the laws of the State of
New York.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment and Restatement to be executed by their respective officers thereunto
duly authorized, as of the date first above written.
HERSHEY FOODS CORPORATION
By: /s/ Frank Cerminara
---------------------
Title: Senior Vice President, Chief
Financial Officer
By: /s/ R. Montgomery Garrabrant
--------------------------------
Title: Vice President and Treasurer
CITIBANK, N.A.,
as Administrative Agent
By: /s/ Robert J. Kane
--------------------
Title: Director and Vice President
LENDERS
CITIBANK, N.A.
By: /s/ Robert J. Kane
--------------------
Title: Director and Vice President
BANK OF AMERICA, N.A.
By: /s/ Bill Sweeney
------------------
Title: Managing Director
5
UBS AG, STAMFORD BRANCH
By: /s/ Luke Goldsworthy
--------------------
Title: Associate Director
By: /s/ Wilfred V. Saint
--------------------
Title: Associate Director
MELLON BANK, N.A.
By: /s/ Donald Cassidy
--------------------
Title: Senior Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Robert J. Giannone
-----------------------
Title: Vice President
DEUTSCHE BANK AG NEW YORK BRANCH
By: /s/ William W. McGinty
----------------------
Title: Director
By: /s/ Thomas A. Foley
--------------------
Title: Vice President
CIBC, INC.
By: /s/ Dominic J. Sorresso
-----------------------
Title: Executive Director
WACHOVIA BANK, NATIONAL ASSOCIATION
By: /s/ George M. Scott
--------------------
Title: Vice President
6
BANCO POPULAR DE PUERTO RICO
By: /s/ Hector J. Gonzalez
----------------------
Title: Vice President
SUMITOMO MITSUI BANKING CORPORATION
By: /s/ Leo E. Pagarigan
--------------------
Title: Senior Vice President
7
SCHEDULE I TO THE AMENDMENT AND RESTATEMENT
COMMITMENTS AND APPLICABLE LENDING OFFICES
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
Name of Initial Lender Commitment Domestic Lending Office Eurodollar Lending Office
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
BANCO POPULAR DE PUERTO $10,000,000 7 West 51st - 2nd Floor 7 West 51st - 2nd Floor
RICO, NEW YORK BRANCH New York, NY 10019 New York, NY 10019
Attn: Hector J. Gonzalez Attn: Hector J. Gonzalez
T: (212) 445-1988 T: (212) 445-1988
F: (212) 245-4677 F: (212) 245-4677
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
BANK OF AMERICA, N.A. $40,000,000 901 Main Street, 14th Floor 901 Main Street, 14th Floor
Dallas, TX 75202 Dallas, TX 75202
Attn: Sam Brown Attn: Sam Brown
T: (214) 209-9262 T: (214) 209-9262
F: (214) 290-9519 F: (214) 290-9519
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
CIBC, Inc. $10,000,000 425 Lexington Avenue 11 Madison Avenue
New York, NY 10017 20th Floor
Attn: Dominic Sorresso New York, NY 10017
T: (212) 856-4133 Attn: Judy Dornkowski
F: (212) 856-3991 T: (212) 856-3509
F: (212) 885-4995
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
CITIBANK, N.A. $40,000,000 Two Penns Way Two Penns Way
New Castle, DE 19720 New Castle, DE 19720
Attn: Attn:
T: (302) T: (302)
F: (302) F: (302)
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
DEUTSCHE BANK AG, NEW YORK $10,000,000 90 Hudson Street, Mailstop 90 Hudson Street, Mailstop
BRANCH JCY05-0511 JCY05-0511
Jersey City, NJ 07302 Jersey City, NJ 07302
Attn: Carmen L. Melendez Attn: Carmen L. Melendez
T: (201) 593-2224 T: (201) 593-2224
F: (201)-593-2313/2314 F: (201)-593-2313/2314
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
MELLON BANK, N.A. $25,000,000 3 Mellon Bank Center, 12th Floor 3 Mellon Bank Center, 12th
Pittsburgh, PA 15259 Floor
Attn: Sannford M. Richards Pittsburgh, PA 15259
T: 412-234-8285 Attn: Sannford M. Richards
F: 412-209-6118 T: 412-234-8285
F: 412-209-6118
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
PNC BANK, NATIONAL $10,000,000 1600 Market Street 1600 Market Street
ASSOCIATION MS F2 F07021 5 MS F2 F07021 5
Philadelphia, PA 19103 Philadelphia, PA 19103
Attn: Robert F. Giannone Attn: Robert F. Giannone
T: (215) 585-7630 T: (215) 585-7630
F: (215) 585-6987 F: (215) 585-6987
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
8
- ------------------------ ----------------------- ---------------------------------- -------------------------------
SUMITOMO MITSUI BANKING $10,000,000 277 Park Avenue 277 Park Avenue
CORPORATION New York, NY 10172 New York, NY 10172
Attn: Tracey Watson Attn: Tracey Watson
T: (212) 224-4393 T: (212) 224-4393
F: (212) 224-5197 F: (212) 224-5197
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
UBS AG, STAMFORD BRANCH $35,000,000 677 Washington Blvd. 677 Washington Blvd.
Stamford, CT 06901 Stamford, CT 06901
Attn: Johny Villard Attn: Johny Villard
T: (203) 719-3845 T: (203) 719-3845
F: (203) 719-3888 F: (203) 719-3888
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
WACHOVIA BANK, NATIONAL $10,000,000 301 South College Street, 301 South College Street,
ASSOCIATION CP-17 CP-17
Charlotte, NC 28288-1183 Charlotte, NC 28288-1183
Attn: Dianne Taylor Attn: Dianne Taylor
T: 704-715-1876 T: 704-715-1876
F: 704-383-7999 F: 704-383-7999
- ------------------------------ ----------------------- ---------------------------------- -------------------------------
- -----------
TOTAL OF $200,000,000
COMMITMENTS
Exhibit 10.2
HERSHEY FOODS CORPORATION
DIRECTORS' COMPENSATION PLAN
(Amended and Restated as of December 3, 2002)
1
PURPOSE
The purposes of the Directors' Compensation Plan ("Plan") are to provide
Directors of Hershey Foods Corporation ("Corporation") with payment alternatives
for the retainer and fees payable for services as members of the Board of
Directors ("Board") of the Corporation or as a chair of any committee thereof
(together, "Director Fees"), to provide Directors the opportunity to elect to
receive all or a portion of the retainer in Deferred Stock Units ("DSUs"), each
representing an obligation of the Corporation to issue one share of Common Stock
of the Corporation, $1.00 par value per share ("Common Stock"), and to promote
the identification of interests between such Directors and the stockholders of
the Corporation by paying a portion of each Director's compensation in
Restricted Stock Units ("RSUs"), each RSU representing an obligation of the
Corporation to issue one share of Common Stock.
2
ELIGIBILITY
Any Director of the Corporation who is not an employee of the Corporation
or any of its subsidiaries shall be eligible to participate in the Plan. Except
as the context may otherwise require, references in this Plan to a "Director"
shall mean only those directors of the Company who are participants in the Plan.
3
PAYMENT
(a) DIRECTOR FEES. A Director shall be entitled to Director Fees, in such
amounts as shall be determined by the Board, for services on the Board and as a
chair of any committee of the Board. Directors may elect to have all or any
portion of the cash retainer paid in shares of Common Stock. Fees payable for
services as a chair of any committee of the Board shall be payable currently
only in cash. Any shares of Common Stock payable under this Section 3(a) shall
be paid by the issuance to the Director of a number of shares of Common Stock
equal to the cash amount of the retainer so payable divided by the Fair Market
Value of one share of the Common Stock, as defined in Section 12 hereof. Any
fractional share of Common Stock resulting from such payment shall be rounded to
the nearest whole share. The Corporation shall issue share certificates to the
Director for the shares of Common Stock acquired or, if requested
in writing by the Director and permitted under such plan, the shares acquired
shall be added to the Director's account under the Corporation's Automatic
Dividend Reinvestment Plan. As of the date on which the part or whole of the
retainer is payable in shares of Common Stock, the Director shall be a
stockholder of the Corporation with respect to such shares. Unless otherwise
elected in Section 4, any remaining Director Fees shall be payable in cash.
(b) RESTRICTED STOCK UNITS. A Director shall also be entitled to receive
RSUs, in such amounts as shall be determined by the Board, for services on the
Board. Beginning October 1, 2001 and thereafter, unless otherwise directed by
the Board, RSUs having a value of $10,000 (or such other amount as the Board
shall from time to time determine) shall be awarded to each Director on the
first day of October, January, April, and July. The number of full and
fractional RSUs so awarded shall be determined by dividing $10,000 (or such
other amount) by the average of the per share closing price of the Common Stock
on the New York Stock Exchange as published in THE WALL STREET JOURNAL (or such
other reliable publication as the Board or its delegates may determine) for the
last three trading days of the month preceding the date of the award. Directors
whose membership on the Board commences after October 1, 2001 on a day which is
not the first day of any January, April, July or October, shall be awarded a pro
rata number of RSU's with respect to the quarter during which the Director
joined the Board equal to the number of RSUs awarded to each Director who was a
member of the Board on the first day of the applicable quarter, multiplied by a
fraction, the numerator of which equals the number of days remaining in the
quarter after the first day on which such Director became a member of the Board,
and the denominator being the total number of days in the quarter. A Restricted
Stock Unit Account shall be established on the books of the Corporation in the
name of each Director. During the period of the Director's membership on the
Board, the Director's Restricted Stock Unit Account shall be subject to credits,
adjustment and substitution to reflect any dividend or other distribution on the
outstanding Common Stock or any split or consolidation or other change affecting
the Common Stock. Any such credit, adjustment or substitution shall be made in a
manner similar to that set forth in Section 6(a) and 6(b) with respect to
Deferred Stock Compensation Accounts. RSUs awarded pursuant to the Plan shall
vest upon termination of the Director's membership on the Board by reason of
retirement, death or disability, or such other circumstances as the Board, in
its sole discretion, shall at any time determine (provided that a termination of
a Director's membership on the Board following a Change in Control (as defined
in the Corporation's Executive Benefits Protection Plan (Group 3A), the "EBPP")
shall be considered a retirement for this purpose). RSUs not vested upon or in
connection with the Director's termination of membership on the Board, as
aforesaid, shall be forfeited as of the date of such termination. The balance of
the Director's Restricted Stock Unit Account which becomes vested shall be paid
in a lump sum in accordance with Section 7. If payment hereunder would result in
the issuance of a fractional share of Common Stock, such fractional share shall
not be issued and cash in lieu of such fractional share shall be paid to the
Director based upon the average of the per share closing price of the Common
Stock in the New York Stock Exchange as published in THE WALL STREET JOURNAL (or
such other reliable publication as the Board or its delegates may determine) for
the three trading days immediately preceding the date of payment. The
Corporation shall issue share certificates to the Director, or the Director's
designated beneficiary, for the shares of Common Stock represented by the
Director's vested RSUs, or if requested in writing by the Director and permitted
under such plan, the shares to be distributed shall be added to the Director's
account under the Corporation's Automatic Dividend
2
Reinvestment Plan. As of the date on which the Director is entitled to receive
payment of shares of Common Stock, a Director shall be a stockholder of the
Corporation with respect to such shares.
4
ELECTIONS
(a) DIRECTOR FEE PAYMENT ALTERNATIVES. A Director may elect any one
of the following alternatives with respect to payment of Director Fees:
(1) to receive currently full payment in cash and/or Common
Stock, as set forth in Section 3(a) above, on the date or dates on which
the Director Fees are payable;
(2) to defer payment of all or a portion of the Director Fees
for subsequent payment in cash (a "Cash Deferral Election");
(3) to defer payment of all or a portion of the Director Fees
for subsequent payment in shares of Common Stock (a "Stock Deferral
Election"); or
(4) a combination of (2) and (3).
(b) FILING AND EFFECTIVENESS OF ELECTIONS. The election by a Director to
receive payment of Director Fees other than as set forth in Section 4(a)(1) on
the date on which the Director Fees are otherwise payable is made by filing with
the Secretary of the Corporation a Notice of Election in the form prescribed by
the Corporation (an "Election"). In order to be effective for any calendar year,
an Election must be received by the Secretary of the Corporation on or before
December 31 of the preceding calendar year, except that if a Director files a
Notice of Election on or before 30 days subsequent to the Director's initial
election to the office of Director, the Election shall be effective on the date
of filing with respect to Director Fees payable for any portion of the calendar
year which remains at the date of such filing. An Election may not be modified
or terminated after the beginning of a calendar year for which it is effective.
Unless modified or terminated by filing a new Notice of Election on or before
December 31 immediately preceding the calendar year for which such modification
or termination is effective, an Election shall be effective for and apply to
Director Fees payable for each subsequent calendar year. Director Fees earned at
any time for which an Election is not effective shall be paid as set forth in
Section 4(a)(1) on the date when the Director Fees are otherwise payable. Any
Election shall terminate on the date a Director ceases to be a member of the
Board.
(c) CASH DEFERRAL ELECTIONS. Director Fees deferred pursuant to a
Cash Deferral Election shall be deferred and paid as provided in Sections 5
and 7.
(d) STOCK DEFERRAL ELECTIONS. Director Fees deferred pursuant to a
Stock Deferral Election shall be deferred and paid as provided in Sections 6
and 7.
3
5
DEFERRED CASH COMPENSATION ACCOUNT
(a) GENERAL. The amount of any Director Fees deferred in accordance with
a Cash Deferral Election shall be credited on the date on which such Director
Fees are otherwise payable to a deferred cash compensation account maintained by
the Corporation in the name of the Director (a "Deferred Cash Compensation
Account"). A separate Deferred Cash Compensation Account shall be maintained for
each calendar year for which a Director has elected a different number of
payment installments or as otherwise may be agreed between the Director and the
Corporation.
(b) ADJUSTMENT FOR EARNINGS OR LOSSES. The amount in the Director's
Deferred Cash Compensation Account shall be adjusted to reflect net earnings,
gains or losses in accordance with the provisions of the Hershey Foods
Corporation Deferred Compensation Plan relating to Investment Credits and
Investment Options. The adjustment for earnings, gains or losses shall be equal
to the amount determined under (1) below as follows:
(1) DEEMED INVESTMENT OPTIONS. The total amount determined by
multiplying the rate earned (positive or negative) by each fund available
(taking into account earnings distributed and share appreciation (gains)
or depreciation (losses) on the value of shares of the fund) for the
applicable period by the portion of the balance in the Director's
Deferred Cash Compensation Account as of the end of each such period,
respectively, which is deemed to be invested in such fund pursuant to
paragraph (2) below. Subject to elimination, modification or addition by
the Board, the funds available for the Director's election of deemed
investments pursuant to paragraph (2) below shall be the funds available
(excluding Common Stock) under the Investment Options of the Hershey
Foods Corporation Deferred Compensation Plan.
(2) DEEMED INVESTMENT ELECTIONS.
(A) The Director shall designate, on a form prescribed by
the Corporation, the percentage of the deferred Director Fees
that are to be deemed to be invested in the available funds under
paragraph (1) above. Said designation shall be effective on a
date specified by the Board and remain in effect and apply to all
subsequent deferred Director Fees until changed as provided
below.
(B) A Director may elect to change, on a calendar year
basis (or on such other basis as permitted from time to time by
the Board), the deemed investment election under paragraph (A)
above with respect to future deferred Director Fees among one or
more of the options then available by written notice to the
Secretary of the Corporation, on a form prescribed by the
Corporation (or by voice or other form of notice permitted by the
Corporation), at least 10 days before the first day of the
calendar year for which the change is to be effective, with such
change to be effective for Director Fees credited to the Deferred
Cash Compensation Account on and after
4
the effective date of the change.
(C) A Director may elect to reallocate the balance of his
Deferred Cash Compensation Account, subject to limitations
imposed by the Board, on a calendar year basis, among the deemed
investment options then available. A Director may make such an
election by written notice to the Secretary of the Corporation,
on a form prescribed by the Corporation (or by voice or other
form of notice permitted by the Corporation), at least 10 days
before the first day of the calendar year for which the transfer
election is to be effective, with such transfer to be based on
the value of the Deferred Cash Compensation Account on the last
day of the calendar year preceding the effective date of the
transfer election.
(D) The election of deemed investments among the options
provided above shall be the sole responsibility of each Director.
The Corporation and Board members are not authorized to make any
recommendation to any Director with respect to such election.
Each Director assumes all risk connected with any adjustment to
the value of his Deferred Cash Compensation Account. Neither the
Board nor the Corporation in any way guarantees against loss or
depreciation.
(E) All payments from the Plan shall be made pro-rata from
the portion of the Director's Deferred Cash Compensation Account
which is deemed to be invested in such funds as may be available
from time to time for deemed investment elections under the Plan.
(F) The Corporation shall not be required or obligated to
invest any amounts in the funds provided as deemed investment
options, and such funds shall be used solely to measure
investment performance. Further, the Corporation shall not be
precluded from providing for its liabilities hereunder by
investing in such funds or in any other investments deemed to be
appropriate by the Board.
(c) MANNER OF PAYMENT. The balance of a Director's Deferred Cash
Compensation Account will be paid to the Director or, in the event of the
Director's death, to the Director's designated beneficiary, in accordance with
the Cash Deferral Election. A Director may elect at the time of filing the
Notice of Election for a Cash Deferral Election to receive payment of the
Director Fees in annual installments rather than a lump sum, provided that the
payment period for installment payments shall not exceed ten years following the
Payment Commencement Date, as described in Section 7 hereof. The amount of any
installment shall be determined by multiplying (i) the balance in the Director's
Deferred Cash Compensation Account on the date of such installment by (ii) a
fraction, the numerator of which is one and the denominator of which is the
number of remaining unpaid installments (including the installment payment then
being determined). The balance of the Deferred Cash Compensation Account shall
be appropriately reduced on the date of payment to the Director or the
Director's designated beneficiary to reflect the installment payment made
hereunder. Amounts held pending distribution pursuant to this Section 5(c) shall
continue to be credited with the earnings, gains or losses as described in
Section 5(b) hereof.
5
6
DEFERRED STOCK COMPENSATION ACCOUNT
(a) GENERAL. The amount of any Director Fees deferred in accordance with
a Stock Deferral Election shall be credited to a deferred stock compensation
account maintained by the Corporation in the name of the Director (a "Deferred
Stock Compensation Account"). A separate Deferred Stock Compensation Account
shall be maintained for each calendar year for which a Director has elected a
different number of payment installments or as otherwise determined by the
Board. On each date on which Director Fees are otherwise payable and a Stock
Deferral Election is effective for a Director, the Director's Deferred Stock
Compensation Account for that calendar year shall be credited with a number of
full and fractional Deferred Stock Units ("DSUs") equal to the cash amount of
the Director Fees payable divided by the Fair Market Value of one share of the
Common Stock, as defined in Section 12 hereof, on the date on which such
Director Fees are payable. If a dividend or distribution is paid on the Common
Stock in cash or property other than Common Stock, on the date of payment of the
dividend or distribution to holders of the Common Stock each Deferred Stock
Compensation Account shall be credited with a number of full and fractional DSUs
equal to the number of full and fractional DSUs credited to such Account on the
date fixed for determining the stockholders entitled to receive such dividend or
distribution times the amount of the dividend or distribution paid per share of
Common Stock divided by the Fair Market Value of one share of Common Stock, as
defined in Section 12 hereof, on the date on which the dividend or distribution
is paid. If the dividend or distribution is paid in property, the amount of the
dividend or distribution shall equal the fair market value of the property on
the date on which the dividend or distribution is paid. The Deferred Stock
Compensation Account of a Director shall be charged on the date of distribution
with any distribution of shares of Common Stock made to the Director from such
Account pursuant to Section 6(c) hereof.
(b) ADJUSTMENT AND SUBSTITUTION. The number of DSUs credited to each
Deferred Stock Compensation Account shall be proportionately adjusted to reflect
any dividend or other distribution on the outstanding Common Stock payable in
shares of Common Stock or any split or consolidation of the outstanding shares
of Common Stock. If the outstanding Common Stock shall, in whole or in part, be
changed into or exchangeable for a different class or classes of securities of
the Corporation or securities of another corporation or cash or property other
than Common Stock, whether through reorganization, reclassification,
recapitalization, merger, consolidation or otherwise, the Board shall adopt such
amendments to the Plan as it deems necessary to carry out the purposes of the
Plan, including the continuing deferral of any amount of any Deferred Stock
Compensation Account.
(c) MANNER OF PAYMENT. The balance of a Director's Deferred Stock
Compensation Account will be paid in shares of Common Stock to the Director or,
in the event of the Director's death, to the Director's designated beneficiary,
in accordance with the Stock Deferral Election. A Director may elect at the time
of filing of the Notice of Election for a Stock Deferral Election to receive
payment of the shares of Common Stock credited to the Director's Deferred Stock
Compensation Account in annual installments rather than a lump sum, provided
that the payment period for installment payments shall not exceed ten years
following the Payment Commencement
6
Date as described in Section 7 hereof. The number of shares of Common Stock
distributed in each installment shall be determined by multiplying (i) the
number of DSUs credited to such Director's Deferred Stock Compensation Account
on the date of payment of such installment, by (ii) a fraction, the numerator of
which is one and the denominator of which is the number of remaining unpaid
installments (including the installment payment then being determined) and by
rounding such result down to the nearest whole number of shares. The balance of
the number of DSUs credited to such Director's Deferred Stock Compensation
Account shall be appropriately reduced in accordance with this Section 6(c) to
reflect the installment payments made hereunder. DSUs remaining in a Deferred
Stock Compensation Account pending distribution of shares of Common Stock
pursuant to this Section 6(c) shall continue to be credited with respect to
dividends or distributions paid on the Common Stock pursuant to Section 6(a)
hereof and shall be subject to adjustment pursuant to Section 6(b) hereof. If a
lump sum payment or the final installment payment hereunder would result in the
issuance of a fractional share of Common Stock, such fractional share shall not
be issued and cash in lieu of such fractional share shall be paid to the
Director based on the Fair Market Value of a share of Common Stock, as defined
in Section 12 hereof, on the date immediately preceding the date of such
payment. The Corporation shall issue share certificates to the Director, or the
Director's designated beneficiary, for the shares of Common Stock distributed
hereunder, or if requested in writing by the Director and permitted under such
plan, the shares to be distributed shall be added to the Director's account
under the Corporation's Automatic Dividend Reinvestment Plan. As of the date on
which the Director is entitled to receive payment of shares of Common Stock, a
Director shall be a stockholder of the Corporation with respect to such shares.
7
PAYMENT COMMENCEMENT DATE
Payment of amounts in a Restricted Stock Unit Account (if vested),
Deferred Cash Compensation Account or a Deferred Stock Compensation Account
shall commence on the first business day next succeeding the 89th day following
the day on which the Director ceases to be a member of the Board for any reason,
including death or disability. Pursuant to procedures substantially similar to
those contemplated under section 2.1.3 of the EBPP as in effect on the date
hereof, the Committee on Directors and Corporate Governance of the Board may
provide for the accelerated payment of Deferred Cash Compensation Accounts and
Deferred Stock Compensation Accounts in one lump sum in connection with a Change
in Control notwithstanding any other payment options previously selected by a
Director under his or her Cash Deferral Elections and Stock Deferral Elections.
8
BENEFICIARY DESIGNATION
A Director may designate, in the Beneficiary Designation form prescribed
by the Corporation, any person to whom payments of cash or shares of Common
Stock are to be made if
7
the Director dies before receiving payment of all amounts due hereunder. A
beneficiary designation will be effective only after the signed beneficiary
designation form is filed with the Secretary of the Corporation while the
Director is alive and will cancel all beneficiary designations signed and filed
earlier. If the Director fails to designate a beneficiary, or if all designated
beneficiaries of the Director die before the Director or before complete payment
of all amounts due hereunder, any remaining unpaid amounts shall be paid in one
lump sum to the estate of the last to die of the Director or the Director's
designated beneficiaries, if any.
9
NON-ALIENABILITY OF BENEFITS
Neither the Director nor any beneficiary designated by the Director shall
have the right to, directly or indirectly, alienate, assign, transfer, pledge,
anticipate or encumber (except by reason of death) any amount that is or may be
payable hereunder, nor shall any such amount be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of the Director or the Director's designated
beneficiary or to the debts, contracts, liabilities, engagements, or torts of
any Director or designated beneficiary, or transfer by operation of law in the
event of bankruptcy or insolvency of the Director or any beneficiary, or any
legal process.
10
NATURE OF ACCOUNTS
Any Restricted Stock Unit Account, Deferred Cash Compensation Account or
Deferred Stock Compensation Account shall be established and maintained only on
the books and records of the Corporation, and no assets or funds of the
Corporation or the Plan or shares of Common Stock of the Corporation shall be
removed from the claims of the Corporation's general or judgment creditors or
otherwise made available until such amounts are actually payable to Directors or
their designated beneficiaries as provided herein. The Plan constitutes a mere
promise by the Corporation to make payments in the future. The Directors and
their designated beneficiaries shall have the status of, and their rights to
receive a payment of cash or shares of Common Stock under the Plan shall be no
greater than the rights of, general unsecured creditors of the Corporation. No
person shall be entitled to any voting rights with respect to shares credited to
any RSU or Deferred Stock Compensation Account which is not yet payable to a
Director or the Director's designated beneficiary. The Corporation shall not be
obligated under any circumstance to fund its financial obligations under the
Plan, and the Plan is intended to constitute an unfunded plan for tax purposes.
However, the Corporation may, in its discretion, set aside funds in a trust or
other vehicle, subject to the claims of its creditors, in order to assist it in
meeting its obligations under the Plan, if such arrangement will not cause the
Plan to be considered a funded deferred compensation plan under the Internal
Revenue Code of 1986, as amended.
8
11
ADMINISTRATION OF PLAN; HARDSHIP WITHDRAWAL
Full power and authority to construe, interpret, and administer the Plan
shall be vested in the Board. Decisions of the Board shall be final, conclusive,
and binding upon all parties. Notwithstanding the terms of a Cash Deferral
Election or a Stock Deferral Election made by a Director hereunder, the Board
may, in its sole discretion, permit the withdrawal of amounts credited to a
Deferred Cash Compensation Account or shares credited to a Deferred Stock
Compensation Account with respect to Director Fees previously payable, or permit
the early vesting and payment of RSUs previously awarded, upon the request of a
Director or the Director's representative, or following the death of a Director
upon the request of a Director's beneficiary or such beneficiary's
representative, if the Board determines that the Director or the Director's
beneficiary, as the case may be, is confronted with an unforeseeable emergency.
For this purpose, an unforeseeable emergency is an unanticipated emergency
caused by an event that is beyond the control of the Director or the Director's
beneficiary and that would result in severe financial hardship to the Director
or the Director's beneficiary if an early hardship withdrawal were not
permitted. The Director or the Director's beneficiary shall provide to the Board
such evidence as the Board, in its discretion, may require to demonstrate that
such emergency exists and financial hardship would occur if the withdrawal were
not permitted. The withdrawal shall be limited to the amount or to the number of
shares, as the case may be, necessary to meet the emergency. For purposes of the
Plan, a hardship shall be considered to constitute an immediate and unforeseen
financial hardship if the Director has an unexpected need for cash to pay for
expenses incurred by the Director or a member of the Director's immediate family
(spouse and/or natural or adopted children) such as those arising from illness,
casualty loss, or death. Cash needs arising from foreseeable events, such as the
purchase or building of a house or education expenses, will not be considered to
be the result of an unforeseeable financial emergency. Payment shall be made as
soon as practicable after the Board approves the payment and determines the
amount of the payment or number of shares which shall be withdrawn. In the case
of a hardship withdrawal from the Deferred Cash Compensation Account or Deferred
Stock Compensation Account, payment shall be made in a single lump sum from the
portion of the Deferred Cash Compensation Account or Deferred Stock Compensation
Account, as applicable, with the largest number and in reverse order of
installment payments, in each case in accordance with Section 5(b)(2)(E) if the
distribution is from the Deferred Cash Compensation Account. No Director shall
participate in any decision of the Board regarding such Director's request for a
withdrawal under this Section 11.
12
FAIR MARKET VALUE
Fair Market Value of the Common Stock ("Fair Market Value") shall be the
average of the closing price for all trading dates for the applicable period
covered by a payment. The applicable period for a quarterly payment or credit
shall be the three calendar months immediately preceding
9
the calendar month during which the day on which the payment or credit is being
made. The applicable period for a payment relating to a period other than a
quarter shall be determined under similar principles. The closing price of the
Common Stock for each day within the applicable period shall be as quoted in THE
WALL STREET JOURNAL (or in such other reliable publication as the Board or its
delegate, in its discretion, may determine to rely upon).
13
SECURITIES LAWS; ISSUANCE OF SHARES
The obligation of the Corporation to issue RSUs or issue or credit shares
of Common Stock under the Plan shall be subject to (i) the effectiveness of a
registration statement under the Securities Act of 1933, as amended, with
respect to such shares, if deemed necessary or appropriate by counsel for the
Corporation, (ii) the condition that the shares shall have been listed (or
authorized for listing upon official notice of issuance) upon each stock
exchange, if any, on which the Common Stock shares may then be listed and (iii)
all other applicable laws, regulations, rules and orders which may then be in
effect. If, on the date on which any shares of Common Stock would be issued or
DSUs credited to a Deferred Stock Compensation Account, sufficient shares of
Common Stock are not available under the Plan or the Corporation is not
obligated to issue shares pursuant to this Section 13, then no shares of Common
Stock shall be issued or DSUs credited but rather, in the case of Common Stock
to be issued currently, cash shall be paid in payment of the Director Fees
payable, and in the case of a Deferred Stock Compensation Account, Director Fees
and dividends which would otherwise have been credited in DSUs shall be credited
in cash to a Deferred Cash Compensation Account in the name of the Director. The
Board shall adopt appropriate rules and regulations to carry out the intent of
the immediately preceding sentence if the need for such rules and regulations
arises.
14
GOVERNING LAW
The provisions of this Plan shall be interpreted and construed in
accordance with the laws of the State of Delaware.
15
EFFECTIVE DATE; AMENDMENT AND TERMINATION
The Plan was adopted by the Board on December 4, 1996, and became
effective as of January 1, 1997. The Plan was amended and restated effective
October 2, 2001 and December 3, 2002. The Board may amend or terminate the Plan
at any time, provided that no such amendment or termination shall adversely
affect rights with respect to amounts or shares then credited to any Deferred
Cash Compensation Account or Deferred Stock Compensation Account.
10
16
AUTHORIZED SHARES
An aggregate of 150,000 shares of Common Stock is authorized for
issuance hereunder.
HERSHEY FOODS CORPORATION
By: /s/ Masrcella K. Arline
--------------------------
Marcella K. Arline,
Senior Vice President, Human Resources and
Corporate Affairs
Exhibit 10.3
CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE
This Confidential Separation Agreement and General Release
(the "Agreement") is made as of the 6th day of December, 2002 (the "Effective
Date"), by and between Hershey Foods Corporation, a Delaware corporation (the
"Company"), and Wynn A. Willard ("Employee"), and together with the Company,
(the "Parties").
WHEREAS, effective December 6, 2002, and continuing through
and including December 31, 2002, Employee will be retained as an employee of the
Company on paid leave of absence; and
WHEREAS, effective January 1, 2003, Employee will be retained
as an employee of the Company on unpaid leave of absence until the Separation
Date, as hereinafter defined, whereupon Employee's employment with the Company
shall terminate (the "Separation"); and
WHEREAS, the Company and Employee desire voluntarily to enter
into this Agreement in order to set forth the definitive rights and obligations
of the Parties in connection with the Separation; and
WHEREAS, the Parties enter into this Agreement for their
mutual cooperation and benefit:
NOW, THEREFORE, in consideration of the mutual covenants,
commitments and agreements set forth herein, and for other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. ACKNOWLEDGMENT OF SEPARATION. The Parties acknowledge and agree that the
Separation shall be effective (the "Separation Date") as of the earliest of (i)
Employee's date of death; (ii) in the event Employee breaches any of his
covenants, agreements or obligations hereunder, the date the Company provides
notice of such breach to Employee; and (iii) December 31, 2004.
2. RESIGNATION FROM COMPANY OFFICES. Effective on the Effective Date, Employee
hereby voluntarily resigns from all of his positions and offices with the
Company and its subsidiaries, including, without limitation, Senior Vice
President and Chief Marketing Officer and each office he may occupy of any
subsidiary of the Company.
3. EMPLOYEE'S ACKNOWLEDGMENT OF CONSIDERATION. Employee specifically
acknowledges and agrees that certain of the obligations created and payments
made to him by the Company under this Agreement are promises and payments to
which he is not otherwise entitled under any law, contract, or benefit plan
maintained by the Company.
4. LEAVE OF ABSENCE.
4.1 Employee shall be placed on a paid leave of absence commencing
on the Effective Date and continuing until December 31, 2002.
This period shall be known as the "Paid Leave of Absence
Period". During the Paid Leave of Absence Period, Employee's
employment with the Company, including Employee's right to
receive compensation and benefits, shall continue on the same
basis and under the same terms as existed immediately prior to
the Effective Date, except that Employee shall (i) have no
assigned duties and shall perform no services for the Company,
and (ii) shall be ineligible for coverage under the Company's
short-term and long-term disability programs.
4.2 Employee shall be placed on an unpaid leave of absence
commencing January 1, 2003 and continuing until the Separation
Date. This period shall be known as the "Unpaid Leave of
Absence Period." The following conditions shall apply during
the Unpaid Leave of Absence Period:
4.2.1 On January 10, 2003, the Company shall pay to
Employee in a lump-sum an amount equal to two-times
the sum of Employee's 2002 base salary and 2002
contingent target grant (scored on the basis of 100%
achievement of the Company's objectives and
Employee's personal objectives for 2002 and
calculated on the basis of Employee's 2002 base
salary and target percentage) under the Annual
Incentive Program ("AIP") of the Company's Key
Employee Incentive Plan ("KEIP"). This payment shall
be subject to customary withholding.
4.2.2 Except as provided for below and in Section 4.3,
Employee shall continue to be eligible to receive the
following, and only the following, employment
benefits and participate in or receive benefits under
the following, and only the following, programs and
benefit plans (in accordance with the terms and
conditions of the programs and benefit plans of the
Company, including, without limitation, such terms
and conditions permitting the Company to amend or
terminate such programs and benefit plans) applicable
to Employee immediately prior to the Effective Date:
(a) the Company's medical (including dental and vision)
benefits programs, excluding however the retiree medical
program;
(b) the Company's life insurance program at three-times his base
salary;
(c) the Hershey Foods Corporation Deferred Compensation Plan
("DCP");
(d) the Hershey Foods Corporation Retirement Plan ("HRA"); and
(e) the Hershey Foods Corporation Employee Savings Stock
Investment and Ownership Plan ("ESSIOP").
2
From and after Employee's Separation Date, he shall not be entitled to
any payments or benefits of any kind from the Company under this
Section 4.2, and any vested rights under the DCP, the HRA and the
ESSIOP, shall be determined by the terms and conditions of these plans
respectively.
4.3 Notwithstanding the foregoing, the parties agree:
4.3.1 Employee shall not be eligible to accrue, earn or
participate in salary adjustments after the Effective
Date;
4.3.2 Employee shall not be eligible to receive any
employment benefits or participate in or receive any
payments or benefits under any programs or benefit
plans not listed in Section 4.2 (in particular,
Employee shall not, effective immediately, be
eligible for any benefits under any Company employee
benefit protection program, including its Executive
Benefits Protection Plans, whether Group 2, 3 or 3A,
its Severance Benefits Plan and its Supplemental
Executive Retirement Plan);
4.3.3 Upon the Effective Date, all Employee's coverage
under the Company's short-term and long-term
disability plans shall cease;
4.3.4 Employee shall not be permitted to contribute to a
medical reimbursement account or dependent care
assistance account under the Company's flex benefits
plan for any period after December 31, 2002; and
4.3.5 Employee shall not be eligible to make contributions
to, and the Company shall make no matching
contribution to, the Employee's ESSIOP account from
and after the commencement of the Unpaid Leave of
Absence Period.
4.4 Employee shall not participate in any part of the Long -Term
Incentive Program ("LTIP") of the KEIP during 2003 or any
subsequent year and any outstanding contingent target grants
of Performance Stock Units granted to Employee prior to
December 31, 2002 are hereby cancelled.
4.5 Except as provided in the immediately following sentence,
presentation of a draft of this Agreement to Employee on
December 11, 2002 for his consideration constitutes notice of
termination of employment for purposes of Section 8(a) of the
KEIP. If Employee executes this Agreement on or before
December 20, 2002, presentation on December 11, 2002 of a
draft of this Agreement to Employee for his consideration
shall not constitute a notice of termination of employment for
purposes of Section 8(a) of the KEIP. Whether Employee has
received a notice of termination of employment for purposes of
Section 8(a) the KEIP can be determined only upon the
occurrence or non-occurrence of certain events following the
presentation of this Agreement to Employee for his
consideration. Employee, therefore, shall not be permitted to
exercise any currently outstanding Options granted to him
previously under the KEIP unless and until this Agreement
3
becomes effective and enforceable. If this Agreement becomes
effective and enforceable, then from and after the Effective
Date and through and including his Separation Date, Employee
shall be considered to be an active employee for purposes of
any Options granted to him previously under KEIP during any
years prior to 2003 and may exercise any such Options in
accordance with the provisions of KEIP (and the terms and
conditions applicable to any such Options established at the
time such Options were granted or subsequently) at any time
prior to his Separation Date.
4.6 Provided that a notice of termination under the KEIP is not in
effect pursuant to Section 4.5 above, Employee's rights with
respect to restricted stock units ("RSUs") granted to Employee
prior to 2003 shall continue to vest in accordance with the
KEIP and the terms and conditions applicable to such grants.
Any RSUs that have not vested on or before the Separation Date
shall terminate.
4.7 Employee shall be eligible to receive an award, if any, of his
contingent target grant for 2002 under the AIP of KEIP subject
to the terms and conditions of the KEIP and the contingent
target grant. Employee shall not be entitled to participate in
or receive any benefits under the AIP of KEIP for 2003 or any
subsequent year. Payment of award, if any, will be made on or
before March 15, 2003.
4.8 During the Leave of Absence Period, Employee shall have no
assigned duties and shall perform no services for the Company.
4.9 Except as provided for in Section 6 below, employee shall be
free to seek and accept other employment after the Effective Date.
4.10 In the event Employee commences other employment during the
Leave of Absence Period, Employee shall immediately notify the
Company in writing at 100 Crystal A Drive, Hershey, PA, Attn:
Vice President, Total Compensation, of his new employment and
his benefit coverage shall terminate as of the effective date
of the new employment.
4.11 Employee shall not be subject to the minimum stockholding
requirements for Company executives or KEIP participants.
4.12 The Company will provide for the continuation of comparable
financial advisory services by Regent Atlantic Capital through
December 31, 2002, tax preparation services for the tax year
ending December 31, 2002 and outplacement services pursuant to
a Company-approved executive outplacement program through
Drake Beam Morin, Inc. for twelve (12) months beginning
January 1, 2003.
5. SEPARATION AND COBRA RIGHTS. Effective as of the earlier of the Separation
Date or benefit coverage cessation, as required by the continuation coverage
provisions of Section 4980B of the U. S. Internal Revenue Code of 1986, as
amended ("THE CODE"), Employee shall be offered the opportunity to elect
continuation coverage under the group medical plan of the Company ("COBRA
COVERAGE"). The Company shall provide Employee with the appropriate COBRA
4
coverage notice and election form for this purpose. Employee shall notify the
Company within two weeks of any change in his circumstances that would warrant
discontinuation of his COBRA coverage and benefits (including but not limited to
Employee's receipt of group medical and dental benefits from any other
employer). The existence and duration of Employee's rights and/or the COBRA
rights of any of Employee's eligible dependents shall be determined in
accordance with Section 4980B of the Code.
6. CONFIDENTIAL, PROPRIETARY AND PRIVILEGED INFORMATION; NON-COMPETITION. The
parties agree the terms and conditions of that certain Long-Term Incentive
Program Participation Agreement and Mutual Agreement to Arbitrate Claims by and
between the Company and Employee executed by Employee August 21, 2001
("Participation and Arbitration Agreement"), a copy of which is attached hereto,
are incorporated herein by reference and made a part hereof as if fully set
forth herein. Notwithstanding any provisions to the contrary in the
Participation and Arbitration Agreement, the terms and conditions thereof shall
remain in effect for three years after Employee's Separation Date regardless of
whether Employee is eligible or not to receive benefits under the SERP.
7. GENERAL RELEASE AND WAIVER BY EMPLOYEE.
7.1 Employee, for and on behalf of himself and each of his heirs,
executors, administrators, personal representatives,
successors and assigns, hereby acknowledges full and complete
satisfaction of and fully and forever releases, acquits and
discharges the Company, together with its subsidiaries and
affiliates, and each of its and their past and present direct
and indirect stockholders, directors, members, partners,
officers, employees, agents, inside and outside counsel and
representatives and its and their respective heirs, executors,
administrators, personal representatives, successors and
assigns (collectively, the "Releasees"), from any and all
claims, demands, suits, causes of action, liabilities,
obligations, judgments, orders, debts, liens, contracts,
agreements, covenants and causes of action of every kind and
nature, whether known or unknown, suspected or unsuspected,
concealed or hidden, vested or contingent, in law or equity,
existing by statute, common law, contract or otherwise, which
have existed, may exist or do exist, through and including the
execution and delivery by Employee of this Agreement (but not
including the Parties' performance under this Agreement),
including, without limitation, any of the foregoing arising
out of or in any way related to or based upon:
7.1.1 Employee's application for and employment with the
Company, his being an employee of the Company, or the
Separation;
7.1.2 any and all claims in tort or contract, and any and
all claims alleging breach of an express or implied,
or oral or written, contract, policy manual or
employee handbook;
7.1.3 any alleged misrepresentation, coercion, duress,
defamation, interference with contract, intentional
or negligent infliction of emotional distress, sexual
harassment, negligence or wrongful discharge; or
5
7.1.4 any federal, state or local statute, ordinance or
regulation, including but not limited to the Fair
Labor Standards Act, the Equal Pay Act, Title VII of
the Civil Rights Act of 1964, the Americans With
Disabilities Act, the Family and Medical Leave Act,
and the Pennsylvania Human Relations Act.
7.2 Employee acknowledges and agrees that other than to seek the
Company's performance under this Agreement he is waiving all
rights to sue or obtain equitable, remedial or punitive relief
from any or all Releasees of any kind whatsoever, including,
without limitation, reinstatement, back pay, front pay,
attorneys' fees and any form of injunctive relief. Employee
acknowledges and agrees that this waiver and release is an
essential and material term of this Agreement. Employee
further acknowledges and agrees that he will not assert any
breach of any agreement, plan, or right referred to herein
based on any action or inaction of the Releasees prior to the
date hereof.
7.3 Employee understands and intends that this SECTION 7
constitutes a general release, and that no reference therein
to a specific form of claim, statute or type of relief is
intended to limit the scope of such general release and
waiver; provided, however, notwithstanding any other provision
of this Section 7, the provisions of this Section 7 shall not
apply to any rights Employee may have under the Age
Discrimination in Employment Act of 1967, as amended.
7.4 Employee expressly waives all rights afforded by any statute
which limits the effect of a release with respect to unknown
claims. Employee understands the significance of his release
of unknown claims and his waiver of statutory protection
against a release of unknown claims.
7.5 Employee agrees that he will not be entitled to or accept any
benefit from any claim or proceeding within the scope of this
SECTION 7 general release that is filed or instigated by him
or on his behalf with any agency, court or other government
entity.
8. EMPLOYEE'S REPRESENTATIONS AND COVENANTS REGARDING ACTIONS. Employee
represents, warrants and covenants to each of the Releasees that at no time
prior to or contemporaneous with his execution of this Agreement has he filed or
caused or knowingly permitted the filing or maintenance, in any state, federal
or foreign court, or before any local, state, federal or foreign administrative
agency or other tribunal, any charge, claim or action of any kind, nature and
character whatsoever ("CLAIM"), known or unknown, suspected or unsuspected,
which he may now have or has ever had against the Releasees which is based in
whole or in part on any matter referred to in SECTION 7.1. above, and, to the
maximum extent permitted by law Employee is prohibited from filing or
maintaining, or causing or knowingly permitting the filing or maintaining, of
any such Claim in any such forum. Employee hereby grants the Company his
perpetual and irrevocable limited power of attorney with full right, power and
authority to take all actions necessary to dismiss or discharge any such Claim.
Employee further covenants and agrees that he will not encourage any person or
entity, including but not limited to any current or former employee, officer,
director or stockholder of the Company, to institute any Claim against the
6
Releasees or any of them, and that except as expressly permitted by law or
administrative policy or as required by legally enforceable order he will not
aid or assist any such person or entity in prosecuting such Claim.
9. NO DISPARAGING REMARKS. Employee hereby covenants to each of the Releasees
and agrees that he shall not, directly or indirectly, within or without the
Company, make or solicit or encourage others to make or solicit any disparaging
or negative remarks concerning the Releasees (as defined in SECTION 7 of this
Agreement), or any of their products, services, businesses or activities.
Employee understands that, in addition to the consequences such breach may have
under other provisions of this Agreement, his breach of this SECTION 9 and the
Company's delivery to him of notice of such breach shall result in his
Separation; shall eliminate his entitlement to any subsequent payment or
benefits under this Agreement including, without limitation, to further exercise
any Options under the KEIP; and shall subject him to liability for any damages
arising from such remarks. The Company hereby represents that, as of the date of
its execution of this Agreement as set forth on the signature page hereof,
neither Richard H. Lenny, Chairman, President and Chief Executive Officer, nor
Burton H. Snyder, General Counsel, Secretary and Senior Vice President,
International, had actual knowledge of any violation by Employee of this Section
9.
10. NO CONFLICT OF INTEREST. Employee hereby covenants and agrees that he shall
not, directly or indirectly, incur any obligation or commitment, or enter into
any contract, agreement or understanding, whether express or implied, and
whether written or oral, which would be in conflict with his obligations,
covenants or agreements hereunder or which could cause any of his
representations or warranties made herein to be untrue or inaccurate.
11. CONFIDENTIALITY. The Company and Employee agree that the terms and
conditions of this Agreement are to be strictly confidential, except that
Employee may disclose the terms and conditions to his family, attorneys,
accountants, tax consultants, state and federal tax authorities or as may
otherwise be required by law. The Company may disclose the terms and conditions
of this Agreement and the circumstances of Employee's separation as the Company
deems necessary or appropriate to its or its affiliates' or representatives'
officers, employees, board of directors, insurers, attorneys, accountants, state
and federal tax authorities, or as otherwise allowed or required by law.
Employee represents that except as expressly authorized by this SECTION 11 he
has not discussed, and agrees that except as expressly authorized by this
SECTION 11 or by the Company he will not discuss, this Agreement or the
circumstances of his Separation, and that he will take affirmative steps to
avoid or absent himself from any such discussion even if he is not an active
participant therein. EMPLOYEE ACKNOWLEDGES THE SIGNIFICANCE AND MATERIALITY OF
THIS PROVISION TO THIS AGREEMENT, AND HIS UNDERSTANDING THEREOF.
12. RETURN OF CORPORATE PROPERTY; CONVEYANCE OF INFORMATION. Employee hereby
covenants and agrees to immediately return all documents, keys, ID cards, credit
cards (without further use thereof), laptop computer, and all other items which
are the property of the Company and/or which contain confidential information;
and, in the case of documents, to return any and all materials of any kind and
in whatever medium evidenced, including, without limitation, all hard disk drive
data, diskettes, microfiche, photographs, negatives, blueprints, printed
materials, tape recordings and videotapes.
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13. REMEDIES. In the event that Employee has breached any of his covenants,
agreements or obligations under this Agreement, the Company shall notify
Employee in writing at his home address as shown in the Company's records of the
reason for such determination. The notice shall be sent via hand delivery or
overnight courier. Employee hereby acknowledges and affirms that in the event of
any breach by Employee of any of his covenants, agreements and obligations
hereunder, Employee's Separation shall be effective as of the day the Company
provides notice thereof. Employee further hereby acknowledges and affirms that
in the event of such breach monetary damages would be inadequate to compensate
the Releasees or any of them. Accordingly, in addition to other remedies which
may be available to the Releasees hereunder or otherwise at law or in equity,
any Releasee shall be entitled to specifically enforce such covenants,
obligations and restrictions through injunctive and/or equitable relief, in each
case without the posting of any bond or other security with respect thereto.
Should any provision hereof be adjudged to any extent invalid by any court or
tribunal of competent jurisdiction, each provision shall be deemed modified to
the minimum extent necessary to render it enforceable.
14. ACKNOWLEDGMENT OF VOLUNTARY AGREEMENT. Employee hereby acknowledges and
affirms that he is entering into this Agreement knowingly and voluntarily,
without coercion or duress of any sort, in order to receive the payments and
other consideration from the Company as set forth herein. Employee acknowledges
and affirms that he has been given adequate opportunity to review and consider
this Agreement.
15. COMPLETE AGREEMENT; INCONSISTENCIES. This Agreement and the Participation
and Arbitration Agreement constitute the complete and entire agreement between
Employee and the Company with respect to the subject matter hereof, and
supersede in their entirety any and all prior understandings, commitments,
obligations and/or agreements, whether written or oral, with respect thereto; it
being understood and agreed that this Agreement and those agreements, including
the mutual covenants, agreements, acknowledgments and affirmations contained
herein and therein, are intended to constitute a complete settlement and
resolution of all matters set forth in SECTION 7 hereof.
16. NO STRICT CONSTRUCTION. The language used in this Agreement shall be
deemed to be the language mutually chosen by the Parties to reflect their mutual
intent, and no doctrine of strict construction shall be applied against any
Party.
17. THIRD PARTY BENEFICIARIES. The Releasees are intended third-party
beneficiaries of this Agreement, and this Agreement may be enforced by each of
them in accordance with the terms hereof in respect of the rights granted to
such Releasees hereunder. Except and to the extent set forth in the preceding
sentence, this Agreement is not intended for the benefit of any person other
than the Parties, and no such other person shall be deemed to be a third party
beneficiary hereof. Without limiting the generality of the foregoing, it is not
the intention of the Company to establish any policy, procedure, course of
dealing or plan of general application for the benefit of or otherwise in
respect of any other employee, officer, director or stockholder, irrespective of
any similarity between any contract, agreement, commitment or understanding
between the Company and such other employee, officer, director or stockholder,
on the one hand, and any contract, agreement, commitment or understanding
between the Company and Employee, on the other hand, and irrespective of any
similarity in facts or circumstances involving such other employee,
8
officer, director or stockholder, on the one hand, and the Employee, on the
other hand.
18. TAX WITHHOLDINGS. Notwithstanding any other provision herein, the Company
shall be entitled to withhold from any amounts otherwise payable hereunder to
Employee any amounts required to be withheld in respect of federal, state or
local taxes.
19. GOVERNING LAW. All issues and questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by,
and construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without giving effect to any choice of law or conflict of law rules or
provisions (whether of the Commonwealth of Pennsylvania or any other
jurisdiction) that would cause the application hereto of the laws of any
jurisdiction other than the Commonwealth of Pennsylvania. In furtherance of the
foregoing, the internal law of the Commonwealth of Pennsylvania shall control
the interpretation and construction of this Agreement, even though under any
other jurisdiction's choice of law or conflict of law analysis the substantive
law of some other jurisdiction may ordinarily apply.
20. SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall otherwise remain in full force and
effect.
21. COUNTERPARTS. This Agreement may be executed in separate counterparts,
each of which shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
22. SUCCESSORS AND ASSIGNS. The Parties' obligations hereunder shall be binding
upon their heirs, personal representatives, successors and assigns. The Parties'
rights and the rights of the other Releasees shall inure to the benefit of, and
be enforceable by, any of the Parties' and Releasees' respective heirs, personal
representatives, successors and assigns.
23. AMENDMENTS AND WAIVERS. No amendment or waiver shall be binding upon
any party hereto unless consented to in writing by such party.
24. HEADINGS. The headings of the Sections and subsections hereof are for
purposes of convenience only, and shall not be deemed to amend, modify, expand,
limit or in any way affect the meaning of any of the provisions hereof.
25. WAIVER OF JURY TRIAL. Each of the Parties hereby waives its rights to a
jury trial of any claim or cause of action based upon or arising out of this
Agreement or any dealings between the Parties relating to the subject matter
hereof to the extent the resolution of such matter is not governed by the
Participation and Arbitration Agreement. Each of the Parties also waives any
bond or surety or security upon such bond which might, but for this waiver, be
required of the other party. The scope of this waiver is intended to be
all-encompassing of any and all disputes that may be filed in any court and that
relate to the subject matter of this Agreement, including, without limitation,
contract claims, tort claims, breach of duty claims, and all other common law
and statutory claims. EACH OF THE PARTIES ACKNOWLEDGES THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO THIS AGREEMENT, THAT EACH HAS ALREADY RELIED
ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND
9
THAT EACH WILL CONTINUE TO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS.
Each of the Parties further represents and warrants that he or it knowingly and
voluntarily waives his or its jury trial rights. This waiver may not be modified
orally, but only in writing, and the waiver shall apply to any subsequent
amendments, renewals, supplements or modifications to this agreement. In the
event of litigation, this Agreement may be filed as a written consent to a trial
by the court.
* * * * *
IN WITNESS WHEREOF, the Parties have executed this
Confidential Separation Agreement and General Release effective as of the date
of the first signature affixed below or as otherwise provided in this Agreement.
READ CAREFULLY BEFORE SIGNING
-----------------------------
I have read this Confidential Separation Agreement and General Release. I
understand that by executing this Confidential Separation Agreement and General
Release I will relinquish any right or demand, other than those created by or
otherwise set forth in this Agreement, I may have against the Releasees or any
of them.
DATED: 12/20/02 /s/ Wynn A. Willard
-------------------- --------------------------------------------
Wynn A. Willard
HERSHEY FOODS CORPORATION
DATED: 12/20/02 By: /s/ Burton H. Snyder
-------------------- ---------------------------------------
General Counsel, Secretary
and Senior Vice President,
International
HERSHEY FOODS CORPORATION
Long-Term Incentive Program Participation Agreement
The undersigned is an executive employee of Hershey Foods Corporation
or one of its subsidiaries (hereinafter collectively referred to as "Hershey").
I understand that I have been selected to participate in the Key Employee
Incentive Plan (the "Plan"), including the Long-Term Incentive Program ("LTIP")
under the Plan. I understand, acknowledge and agree that the purpose of this
Agreement is to provide for enhanced confidentiality requirements, an agreement
not to compete with Hershey once I become eligible for supplemental retirement
benefits, and an arbitration program to be the sole and exclusive method for
resolving disputes. I understand and acknowledge that by this Agreement, both I
and Hershey, in order to avoid delay and expense, are mutually waiving the right
of access to a judicial forum for resolving disputes covered by the arbitration
program. I hereby accept the opportunity to participate in the Plan, including
the LTIP, and in consideration of my selection by Hershey to be a participant in
the Plan and being eligible to receive benefits under the Plan, I agree to the
following:
1. PARTICIPATION.
I understand and agree that participating in the LTIP at any time is no
guarantee I will be selected to participate in the LTIP or any other aspect of
the Plan in any future years. I understand and agree that participation in the
Plan and the LTIP is voluntary; specifically, I understand that I am under no
obligation to participate in the LTIP or any other aspect of the Plan, and that
I may retain my job if I decline to so participate. I understand and agree that
if I elect to participate in the Plan and the LTIP, then, depending on my job
performance, the financial performance of Hershey and the achievement of certain
goals and objectives, I will be eligible to receive Annual Incentive Program
Awards, Performance Stock Unit Awards and Stock Options, in accordance with the
terms of the Plan, as it may be amended from time to time.
2. CONFIDENTIALITY.
I acknowledge that due to the nature of my employment and the position
of trust that I hold with Hershey, I will have special access to, learn, be
provided with, and in some cases will prepare and create for Hershey, trade
secrets and other confidential and proprietary information relating to Hershey's
business, including, but not limited to, information about Hershey's
manufacturing processes; manuals, recipes and ingredient percentages;
engineering drawings; product and process research and development; new product
information; cost information; supplier data; strategic business information;
marketing, financial and business development information, plans, forecasts,
reports and budgets; customer information; new product strategies, plans and
project activities; and acquisition and divestiture strategies, plans and
project activities. I acknowledge and agree that such information, whether or
not in written form, is the exclusive property of Hershey, that it has been and
will continue to be of critical importance to the business of Hershey, and that
the disclosure of it to, or use by, competitors or others will cause Hershey
substantial and irreparable harm. Accordingly, I will not, either during my
employment or at
1
any time after the termination (whether voluntary or involuntary) of my
employment with Hershey, use, reproduce or disclose any trade secrets or other
confidential information relating to the business of Hershey which is not
generally available to the public, except as may be specially authorized and
necessary in discharging my assigned duties as an employee of Hershey. I
understand and agree that my obligations under this Agreement shall be in
addition to, rather than in lieu of, any obligations I may already have under
any Confidentiality Agreement or other agreement with Hershey relating to
confidential information or under any applicable statute or at common law.
3. UNFAIR COMPETITION.
I understand and acknowledge that Hershey is engaged in the business of
developing, producing, marketing, selling and distributing confectionery
products and chocolate-related grocery products. I acknowledge that the scope of
Hershey's business and operations is world-wide. I acknowledge that due to the
nature of my employment with Hershey, I have special access to, contact with,
and information about, Hershey's business activities as described above and to
its customers, suppliers, agents, licensees and licensors. I acknowledge that
Hershey has incurred considerable expense and invested considerable time and
resources in developing relationships with customers, suppliers, agents,
licensees and licensors, and that those relationships are critical to the
success of Hershey's business.
Accordingly, both (a) during the term of my employment with Hershey,
and (b) for a period of three (3) years following the termination of my
employment for any reason, provided at the time of such termination I am
eligible to receive benefits under Hershey's Supplemental Executive Retirement
Plan, I shall not, without the prior written consent of Hershey, directly or
indirectly serve or act as an officer, director, employee, consultant, adviser,
agent or representative for the domestic or worldwide confectionery or
chocolate-related grocery businesses of any entity or individual that is in
competition with Hershey's confectionery or chocolate-related grocery
businesses.
4. SURVIVAL OF OBLIGATIONS.
Both I and Hershey understand and agree that our respective rights and
obligations under, and the terms and conditions of, this Agreement (and the
Mutual Agreement to Arbitrate Claims appended hereto) shall apply and continue
during, and survive the termination (for any reason) of, my employment with
Hershey.
5. ARBITRATION AND MEDIATION.
Both I and Hershey promise to arbitrate any claim covered by the Mutual
Agreement to Arbitrate Claims which is attached hereto and incorporated in full
herein by reference.
Both I and Hershey further agree, before seeking arbitration of any
claim, to engage in good faith efforts to resolve the dispute through nonbinding
mediation. Mediation shall be
2
conducted by, and in accordance with procedures for the mediation of employment
disputes of, one of the American Arbitration Association, the Judicial
Arbitration + Mediation Services, Inc. (JAMS/Endispute) or the Center for Public
Resources (CPR) as Hershey and I may agree (and if such agreement is not
possible, then the mediation procedures of CPR shall apply), together with any
other procedures as may be agreed upon by me and Hershey.
6. SAVINGS CLAUSE AND SEVERABILITY.
a. All provisions of this Agreement (and of the Mutual Agreement to
Arbitrate Claims appended hereto) are severable, and if any of them is
determined to be invalid or unenforceable for any reason, the remaining
provisions and portions shall be unaffected thereby and shall remain in full
force to the fullest extent permitted by law.
b. Without limiting the foregoing, I specifically agree that each of
the covenants set forth in Paragraph 3 of this Agreement is severable; that if
any of them is held invalid or unenforceable by reason of length of time, area
covered or activity covered, or any combination thereof, or for any other
reason, the court or arbitrator shall adjust, reduce or otherwise reform any
such covenant to the extent necessary to cure any invalidity and to protect the
interests of Hershey to the fullest extent of the law; that the area, time
period and scope of activity restricted shall be the maximum area, time period
and scope of activity the court or arbitrator deems valid and enforceable; and
that, as reformed, such covenant shall then be enforced.
c. Without limiting the foregoing, I also specifically agree that if
any part of the Mutual Agreement to Arbitrate Claims is determined to be invalid
or unenforceable for any reason, then the invalid or unenforceable portion shall
be severed and the agreement to submit any claim to binding arbitration shall be
interpreted and enforced as if the invalid or unenforceable portion did not
appear.
7. MISCELLANEOUS.
a. Any notice to Hershey shall be in writing and shall be sent by
certified mail to Hershey Foods Corporation, 100 Crystal A Drive, Hershey, PA
17033-0810, Attention: Vice President, Human Resources. Any notice to me shall
be in writing and shall be sent to me by certified mail at the latest address
listed for me in Hershey's employment records, unless I specifically notify
Hershey in writing that notice shall be delivered to me at a different address.
Notice shall be deemed delivered when personally delivered or a properly
addressed notice is deposited with the U.S. Postal Service for delivery by
certified mail.
b. I understand and agree that neither this Agreement nor the Mutual
Agreement to Arbitrate Claims shall be construed in any way as an agreement or
guarantee of employment for any period of time and that I remain an
employee-at-will for all purposes.
c. The rights and obligations under this Agreement and the
Mutual Agreement to Arbitrate Claims shall inure to the benefit of, shall be
binding upon, and may be enforced by and
3
for the benefit of, Hershey Foods Corporation, any subsidiary or affiliate of
Hershey Foods Corporation, and their successors and assigns.
d. Any waiver by either Hershey or me of any breach, or the failure to
enforce any of the terms or conditions, of this Agreement or the Mutual
Agreement to Arbitrate Claims, shall not in any way affect, limit, or waive any
rights thereafter to enforce, and compel strict compliance with, every term and
condition of this Agreement and the Mutual Agreement to Arbitrate Claims.
e. This Agreement and the Mutual Agreement to Arbitrate Claims
constitute the entire agreement between Hershey and me with respect to the
matters addressed herein and therein, there being no representations,
warranties, commitments, or other agreements, except as set forth herein and
therein. This Agreement and the Mutual Agreement to Arbitrate Claims may be
amended only by an instrument in writing executed by me and an authorized
officer of Hershey.
f. The substantive law governing this Agreement shall be the law of the
Commonwealth of Pennsylvania. The law of arbitrability shall be that set forth
in the Federal Arbitration Act. If for any reason the Federal Arbitration Act is
inapplicable, then the law of arbitrability shall be that of the Commonwealth of
Pennsylvania.
4
Long-Term Incentive Program Participation Agreement
Mutual Agreement To Arbitrate Claims
I recognize that differences may arise between Hershey Foods
Corporation (the "Company") and me during or following my employment with the
Company, and that those differences may or may not be related to my employment.
I understand and agree that by entering into this Mutual Agreement to Arbitrate
Claims ("Arbitration Agreement"), I anticipate gaining the benefits of a speedy,
impartial dispute-resolution procedure.
I understand that any reference in this Arbitration Agreement to the
Company will be a reference also to all subsidiary and affiliated entities, all
benefit plans, the benefit plans' sponsors, fiduciaries, administrators,
affiliates and agents, and all successors and assigns of any of them.
A. CLAIMS COVERED BY THE ARBITRATION AGREEMENT.
The Company and I mutually consent to the resolution by arbitration of
all claims or controversies ("claims"), past, present, or future, whether or not
arising out of my employment (or its termination), that the Company may have
against me or that I may have against the Company or against its officers,
directors, employees or agents in their capacity as such. The only claims that
are arbitrable are those that, in the absence of this Arbitration Agreement,
would have been justiciable under applicable state or federal law. The claims
covered by this Arbitration Agreement include, but are not limited to, claims
arising out of, connected with or relating to the Long-Term Incentive Program
Participation Agreement and this Arbitration Agreement; claims for wages or
other compensation due; claims for breach of any contract or covenant (express
or implied); tort claims; claims for discrimination (including, but not limited
to, race, sex, sexual orientation, religion, national origin, age, marital
status, or medical condition, handicap or disability); claims for benefits
(except claims under an employee benefit or pension plan that either specifies
that its claims procedure shall culminate in an arbitration procedure different
from this one or is underwritten by a commercial insurer which decides claims);
and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except as otherwise provided in this
Arbitration Agreement.
B. CLAIMS NOT COVERED BY THE ARBITRATION AGREEMENT.
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief, including but not limited to those for unfair competition
and/or the use and/or unauthorized disclosure of trade secrets or confidential
information, as to which I understand and agree that the Company may seek and
obtain relief from a court of competent jurisdiction. In such an
5
injunctive/equitable proceeding, I understand and agree that the court is
entitled to and will award to the prevailing party costs and actual attorneys'
fees incurred.
C. REQUIRED NOTICE OF ALL CLAIMS.
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party. Written notice to the Company, or its
officers, directors, employees or agents, shall be sent pursuant to the notice
provision of the Agreement to which this Arbitration Agreement is appended.
The written notice shall identify and describe the nature of all claims asserted
and the facts upon which such claims are based.
D. REPRESENTATION.
Any party may be represented by an attorney or other representative
selected by the party.
E. DISCOVERY.
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to make requests for production of documents to any party.
The subpoena right specified below shall be applicable to discovery pursuant to
this paragraph. Additional discovery may be had only where the arbitrator
selected pursuant to this Arbitration Agreement so orders, upon a showing of
substantial need.
F. DESIGNATION OF WITNESSES.
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
G. SUBPOENAS.
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
H. ARBITRATION PROCEDURES.
The arbitration will be held under the auspices of one of the American
Arbitration Association, Judicial Arbitration + Mediation Services, Inc. or
Center for Public Resources, with the designation of such sponsoring
organization to be made by the party that did not initiate the claim.
6
The arbitration shall be confidential and closed to the public. Any
evidence proffered in the arbitration shall be held in strict confidence and not
disclosed to any third party.
The Company and I agree that, except as provided in this Agreement, the
arbitration shall be in accordance with the then-current dispute arbitration
procedures of the sponsoring organization for the type of claim involved. The
arbitration shall take place in or near the location in which I am or was last
employed by the Company.
The Arbitrator shall be selected as follows. The sponsoring
organization shall give each party a list of 7 arbitrators. Each party may
strike all names on the list it deems unacceptable. If only one common name
remains on the lists of all parties, that individual shall be designated as the
Arbitrator. If more than one common name remains on the lists of all parties,
the parties shall strike names alternately from the list of common names until
only one remains. The party who did not initiate the claim shall strike first.
If no common name exists on the lists of all parties, the sponsoring
organization shall furnish an additional list and the process shall be repeated.
If no arbitrator has been selected after two lists have been distributed, then
the parties shall strike alternately from a third list, with the party
initiating the claim striking first, until only one name remains. That person
shall be designated as the Arbitrator.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the Commonwealth of Pennsylvania or federal law, or
both, as applicable to the claim(s) asserted. The Arbitrator is without
jurisdiction to apply any different substantive law, or law of remedies. The
Federal Rules of Evidence shall apply. The Arbitrator, and not any federal,
state, or local court or agency, shall have exclusive authority to resolve any
dispute relating to the interpretation, applicability, enforceability or
formation of this Arbitration Agreement, including but not limited to any claim
that all or any part of this Arbitration Agreement is void or voidable. The
arbitration shall be final and binding upon the parties, except as provided in
this Arbitration Agreement.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person, as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render a proposed award and opinion in the form
typically rendered in labor arbitrations.
Either party shall have the right, within 20 days of issuance of the
Arbitrator's proposed award and opinion, to file with the Arbitrator a motion to
reconsider (accompanied by a
7
supporting brief), and the other party shall have 20 days from the date of the
motion to respond. The Arbitrator thereupon shall reconsider the issues raised
by the motion and, promptly, either confirm or change the decision, which
(except as provided by this Arbitration Agreement) shall then be final and
conclusive upon the parties. The costs of such a motion for reconsideration and
written opinion of the Arbitrator shall be borne by the party prevailing on the
motion, unless the Arbitrator orders otherwise.
I. ARBITRATION FEES AND COSTS.
The Company and I shall equally share the fees and costs of the
Arbitrator; provided, however, that my maximum contribution will be no more than
20% of the amount at issue. Each party will deposit funds or post other
appropriate security for its share of the Arbitrator's fee, in an amount and
manner determined by the Arbitrator, 10 days before the first day of hearing.
Each party shall pay for its own costs and attorneys' fees, if any. However, if
any party prevails on a statutory claim which affords the prevailing party
attorneys' fees, or if there is a written agreement providing for fees, the
Arbitrator may award fees to the prevailing party as provided by statute or
agreement.
J. EXCLUSIVITY, WAIVER AND BINDING EFFECT.
The procedure set out in this Arbitration Agreement is the exclusive
procedure for resolving claims covered hereunder. The resolution of any claim
covered by this Arbitration Agreement pursuant to the procedure set out herein
shall be final and binding on the parties to the fullest extent permitted by
law. Both I and the Company expressly waive any right to resolve any claim
covered by this Arbitration Agreement through any other means, including by
filing a lawsuit in court for trial by the court or before a jury. Both I and
the Company are precluded from bringing or raising in court or before another
forum any claim which could have been brought or raised hereunder, unless the
right to pursue a statutory claim or remedy is expressly preserved by law.
Neither I nor the Company shall seek to enjoin any proceeding hereunder on the
basis that any award resulting therefrom would not be enforceable.
K. INTERSTATE COMMERCE.
I understand and agree that the Company is engaged in transactions
involving interstate commerce.
L. CONSIDERATION.
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other. In addition, my participation in this Long-Term Incentive Program
provides further consideration for this Arbitration Agreement.
8
IN WITNESS WHEREOF, by signing my name below, I am acknowledging that I
am entering into this Long-Term Incentive Program Participation Agreement and
Mutual Agreement to Arbitrate Claims voluntarily and with a full understanding
of all of their terms and conditions, and, intending to be legally bound, I am
agreeing to such terms and conditions.
Long-Term Incentive Program Participant
/s/ Wynn A. Willard
----------------------------------------------
(Signature)
Wynn A. Willard
----------------------------------------------
Name (Print)
Date: August 21, 2001
----------------------------------------
IN WITNESS WHEREOF, Hershey Foods Corporation and/or its employing
subsidiary, intending to be legally bound, has or have caused this Agreement to
be signed by its or their authorized officer.
/s/ Robert M. Reese
----------------------------------------------
Robert M. Reese
Senior Vice President, General Counsel
and Secretary
Date: July 24, 2001
-----------------------------------------
9
Exhibit 10.4
HERSHEY FOODS CORPORATION
Broad Based Stock Option Plan
(Amended and Restated as of August 19, 2002)
1. ESTABLISHMENT AND PURPOSE
The purpose of the Broad Based Stock Option Plan (the "Plan") is to
provide to participating employees of Hershey Foods Corporation (the
"Corporation") and its subsidiaries (as defined below), upon whose efforts the
Corporation is dependent for the successful conduct of its business, an
incentive to continue and increase their efforts as employees and to remain in
the employ of the Corporation and its subsidiaries. To accomplish this purpose,
the Corporation's Board of Directors ("Board") has authorized the Compensation
and Executive Organization Committee of the Board (the "Committee") to grant,
from time to time in its sole discretion and in accordance with the Plan,
options ("Options") to purchase shares of the Corporation's Common Stock, $1.00
par value (the "Common Stock").
2. STOCK SUBJECT TO THE PLAN
The aggregate number of shares of Common Stock for which Options may be
granted pursuant to this Plan is two million (2,000,000), subject to adjustment
in accordance with Paragraph 11 below. The shares of Common Stock issued upon
exercise of Options granted under this Plan may be either authorized but
unissued shares, treasury shares held by the Corporation or any direct or
indirect subsidiary thereof, or shares acquired by the Corporation through open
market purchases (whether made before or after the exercise of the Options) or
otherwise. In addition to the shares of Common Stock actually issued or
distributed upon exercise of Options granted under the Plan, there shall be
deemed to have been issued a number of shares equal to the number of shares of
Common Stock in respect of which optionees utilize the manner of exercise of,
and payment for, Options as provided in Paragraph 5(e)(iii) of the Plan. If, for
any reason, any Option granted under the Plan expires or terminates or is
forfeited or surrendered, the number of shares of Common Stock for which such
Option was granted shall be disregarded in determining whether the aggregate
number of shares of Common Stock for which Options may be granted has been
reached.
3. ADMINISTRATION
The Plan shall be administered by the Committee or any successor
committee appointed by the Board. The Committee may adopt such rules and
regulations as it deems useful in governing its affairs. Any action of the
Committee with respect to the administration of the Plan shall be taken by
majority vote at a Committee meeting or written consent of all Committee
members.
Subject to the terms and conditions of the Plan, the Committee shall
have authority: (i) to construe and interpret Plan provisions; (ii) to define
the terms used in the Plan; (iii) to prescribe, amend and rescind rules and
regulations relating to the Plan; (iv) to determine the terms,
conditions, form and amount of grants, including conditions upon and provisions
for vesting, exercise and acceleration of any grants; and (v) to make all other
determinations necessary or advisable for the administration and operation of
the Plan. The Committee shall have the right to impose varying terms and
conditions with respect to each grant or award. All determinations and
interpretations made by the Committee shall be final, binding and conclusive on
all Participants and on their legal representatives and beneficiaries.
Any dispute or disagreement which shall arise under, as a result of, or
in any way relate to the interpretation, construction or administration of the
Plan or the Options granted hereunder shall be determined in all cases by the
procedures established by the Plan, as amended or supplemented by the Committee.
All disputes or disagreements shall be initially submitted to the Vice President
of Human Resources of the Corporation for resolution. The Participant or his
legal representative or beneficiary will submit to the Vice President of Human
Resources a summary of the dispute and all materials supporting his or her
position on the matter. The Corporation will also submit materials to support
its position on the matter. The Vice President of Human Resources shall render a
decision in writing within thirty (30) days of the receipt of the submissions by
both parties. Participant or the Corporation may appeal the decision of the Vice
President of Human Resources to the Committee, but such appeal must be submitted
to the Committee within fifteen (15) calendar days of the decision by the Vice
President of Human Resources. The Committee will review the material submitted
by the parties to the Vice President of Human Resources and any additional
material the parties may wish to submit to support their position. The Committee
will render its decision in writing by the later of forty-five (45) calendar
days of its receipt of the submissions by both parties or the next regularly
scheduled meeting of the Committee following the receipt of the submissions. The
decision by the Committee shall be final, binding and conclusive for all
purposes.
4. ELIGIBILITY AND PARTICIPATION
With regard to the initial grant of Options under the Plan to be made
by the Committee at its January 7, 1997 meeting (the "Initial Grant"), the
following employees are eligible to participate in the Plan: (i) employees of
the Corporation; (ii) employees of any U.S., Canadian, or Mexican wholly-owned
subsidiary, and employees of Hershey Japan Company, Ltd, a subsidiary of Hershey
International Ltd., Hershey Corporation ZAO, a subsidiary of Hershey Holding
Corporation, and employees of the Corporation's representative offices in Russia
and China (each called a "Subsidiary Corporation" and collectively called the
"Subsidiary Corporations"), provided they were full-time employees of the
Corporation or a Subsidiary Corporation on December 3, 1996. Full-time employees
who were on paid or unpaid leave of absence, layoff, or disability on December
3, 1996 are eligible to participate in the Initial Grant provided they performed
at least one hour of work for the Corporation during 1996. In addition to the
employees described in the first two sentences of this Paragraph 4, an employee
of the Corporation on December 3, 1996 shall be eligible for participation in
the Initial Grant if such individual performed at least one hour of work for the
Corporation, or any Subsidiary Corporation, as an employee in 1996 and in five
(5) of the six (6) years 1990 through 1995. Notwithstanding any other provision
of this Paragraph 4, no individual who (i) as of December 3, 1996 was a
temporary employee (as defined in the Corporation's Human Resources Policy
Manual) of the Corporation; (ii) as of December 3, 1996 was a leased employee
(as hereinafter defined); or (iii) on January 7, 1997 is eligible to receive a
stock option grant under
2
the Corporation's Key Employee Incentive Plan ("KEIP") shall be eligible for
participation in the Initial Grant. For purposes of the Initial Grant, a "leased
employee" shall be defined as an employee of an entity other than the
Corporation, or any Subsidiary Corporation, who performs services for the
Corporation, or any Subsidiary Corporation, on a short- or long-term basis and
who, in the performance of such services, may (but need not) be under the
primary direction or control of the Corporation, or any Subsidiary Corporation.
Persons who would otherwise be classified as "leased employees" under Section
414(n) of the Internal Revenue Code of 1986, or any successor provision, shall,
without limitation of the immediately preceding sentence and for purposes of the
Initial Grant, be deemed "leased employees."
In the event that the Committee elects, in its sole discretion, to
grant Options at any time following the Initial Grant, it shall prescribe
eligibility criteria for each such grant at the time of the grant, provided
however, that in each such case, temporary employees, leased employees, and
employees who on the date of the grant are eligible to receive stock options
under the Corporation's KEIP shall not be eligible to participate in the grant.
Any employee meeting the eligibility criteria established pursuant to
this Paragraph 4 for the Initial Grant or any subsequent grant, or the estate of
such employee if deceased, shall, for the purposes of such grant, be hereinafter
referred to as a "Participant."
5. TERMS OF GRANT
The Initial Grant and any other option grants which may be made by the
Committee shall be subject to the following terms and conditions, as well as
such additional consistent terms and conditions as the Committee may establish
at the time of such grant:
(a) The exercise price per share with respect to each Option shall
be determined by the Committee in its sole discretion, but shall not be less
than 100% of the Fair Market Value of the Common Stock as of the date of the
grant of the Option. As used in the Plan (unless a different method of
calculation is required by applicable law, and except as otherwise specifically
provided in any Plan provision), "Fair Market Value" on or as of any date shall
mean (i) the closing price of the Common Stock as reported in the New York Stock
Exchange Composite Transactions Report (or any other consolidated transactions
reporting system which subsequently may replace such Composite Transactions
Report) for the New York Stock Exchange trading day immediately preceding such
date, or if there are no sales on such date, on the next preceding day on which
there were sales, or (ii) in the event that the Common Stock is no longer listed
for trading on the New York Stock Exchange, an amount determined in accordance
with standards adopted by the Committee.
(b) Options granted under the Plan shall be exercisable for such
periods as shall be provided by the Committee at the time of granting, but in no
event shall any Option granted extend for a period in excess of ten (10) years
from the date of grant.
(c) Unless otherwise provided by the Committee, no Option granted
hereunder may be exercised during the first five (5) years after the date of
grant by the Committee.
3
(d) Exercise of an Option shall be accomplished in the form
and manner established by the Committee.
(e) The purchase price upon exercise of any Option shall be paid in
full by the Participant to the Corporation by making payment either (i) in cash,
or (ii) in a simultaneous exercise of the Option and sale of the shares thereby
acquired pursuant to a brokerage arrangement approved in advance by the
Committee to assure its conformity with the terms and conditions of the Plan, or
(iii) by a combination of (i) and (ii).
6. VESTING
(a) All Options granted under this Plan shall have a five (5) year
vesting requirement and shall be subject to such other vesting terms and
conditions as the Committee shall prescribe in the grant. With regard to the
Initial Grant a Participant must (i) perform at least one hour of work for the
Corporation or a Subsidiary Corporation during each of the years 1997 through
2001 and (ii) be a full-time or part-time employee of the Corporation or a
Subsidiary Corporation or a Chocolate World Flex Force Employee (as defined in
the Human Resources Policy Manual) on January 6, 2002 in order to satisfy this
vesting requirement. Participants who retire under a retirement plan of the
Corporation or terminate employment after attaining age 55 ("retire" or
"retirement"), die or become disabled on or after December 4, 1996, but before
the close of business on January 6, 2002, shall not forfeit their Options under
the Initial Grant, but shall maintain such rights in the Options to the extent
set forth in Paragraph 7(b) below.
(b) Notwithstanding any other provision of the Plan or of the terms
and conditions of any grant of Options hereunder, upon the occurrence of a
Change in Control, each outstanding and unexpired Option held by a Participant
who is an employee of the Corporation or any Subsidiary Corporation or who
retired, died or became disabled while employed by the Corporation or any
Subsidiary Corporation shall become fully vested and exercisable notwithstanding
any vesting schedule or installment schedule relating to the exercisability of
such Option established at the time of the grant of the Option.
(c) For purposes of this Plan, a "Change in Control" means:
(1) Individuals who, on December 3, 1996, constitute the Board
(the "Incumbent Directors") cease for any reason to constitute at
least a majority of the Board, provided that any person becoming a
director subsequent to December 3, 1996, whose election or nomination
for election was approved by a vote of at least two-thirds of the
Incumbent Directors then on the Board (either by specific vote or by
approval of the proxy statement of the Corporation in which such
person is named as nominee for director, without written objection to
such nomination) shall be an Incumbent Director; provided, however,
that no individual initially elected or nominated as a director of the
Corporation as a result of an actual or threatened election contest
(as described in Rule 14a-11 under the Exchange Act) ("Election
Contest") or other actual or threatened solicitation of proxies or
consents by or on behalf of any person (as such term is defined in
Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3)
and 14(d)(2) of the Exchange Act) ("Person") other than the Board
("Proxy Contest"), including by
4
reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest, shall be deemed an Incumbent Director; and
provided further, however, that a director who has been approved by
the Hershey Trust while it beneficially owns more than 50% of the
combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors
(the "Outstanding Corporation Voting Power") shall be deemed to be an
Incumbent Director; or
(2) The acquisition or holding by any Person of beneficial
ownership (within the meaning of Section 13(d) under the Exchange Act
and the rules and regulations promulgated thereunder) of shares of the
Common Stock and/or the Class B Common Stock of the Corporation
representing 25% or more of either (i) the total number of then
outstanding shares of both Common Stock and Class B Common Stock of
the Corporation (the "Outstanding Corporation Stock") or (ii) the
Outstanding Corporation Voting Power; provided that, at the time of
such acquisition or holding of beneficial ownership of any such
shares, the Hershey Trust does not beneficially own more than 50% of
the Outstanding Corporation Voting Power; and provided, further, that
any such acquisition or holding of beneficial ownership of shares of
either Common Stock or Class B Common Stock of the Corporation by any
of the following entities shall not by itself constitute such a Change
in Control hereunder: (i) the Hershey Trust; (ii) any trust
established by the Corporation or by any Subsidiary Corporation for
the benefit of the Corporation and/or its employees or those of a
Subsidiary Corporation or by any Subsidiary Corporation for the
benefit of the Corporation and/or its employees or those of a
Subsidiary Corporation; (iii) any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any Subsidiary
Corporation; (iv) the Corporation or any Subsidiary Corporation; or
(v) any underwriter temporarily holding securities pursuant to an
offering of such securities; or
(3) The approval by the stockholders of the Corporation of any
merger, reorganization, recapitalization, consolidation or other form
of business combination (a "Business Combination") if, following
consummation of such Business Combination, the Hershey Trust does not
beneficially own more than 50% of the total voting power of all
outstanding voting securities of (x) the surviving entity or entities
(the "Surviving Corporation") or (y) if applicable, the ultimate
parent corporation that directly or indirectly has beneficial
ownership of more than 50% of the combined voting power of the then
outstanding voting securities eligible to elect directors of the
Surviving Corporation; or
(4) The approval by the stockholders of the Corporation of (i)
any sale or other disposition of all or substantially all of the
assets of the Corporation, other than to a corporation (the "Acquiring
Corporation") if, following consummation of such sale or other
disposition, the Hershey Trust beneficially owns more than 50% of the
total voting power of all outstanding voting securities eligible to
elect directors (x) of the Acquiring Corporation or (y) if applicable,
the ultimate parent corporation that directly or indirectly has
beneficial ownership of more than 50% of the combined voting power of
the then outstanding voting securities eligible to elect directors of
the Acquiring Corporation, or (ii) a liquidation or dissolution of the
Company.
5
For purposes of this Plan, "Hershey Trust" means either or both of (a)
the Hershey Trust Company, a Pennsylvania corporation, as Trustee for the Milton
Hershey School, or any successor to the Hershey Trust Company as such trustee,
and (b) the Milton Hershey School, a Pennsylvania not-for-profit corporation.
(d) For purposes of this Plan, a "Potential Change in Control"
means:
(1) The Hershey Trust by action of any of the Board of
Directors of Hershey Trust Company; the Board of Managers of Milton
Hershey School; the Investment Committee of the Hershey Trust; and/or
any of the officers of Hershey Trust Company or Milton Hershey School
(acting with authority) undertakes consideration of any action the
taking of which would lead to a Change in Control as defined herein,
including, but not limited to consideration of (i) an offer made to
the Hershey Trust to purchase any number of its shares in the
Corporation such that if the Hershey Trust accepted such offer and
sold such number of shares in the Corporation the Hershey Trust would
no longer have more than 50% of the Outstanding Corporation Voting
Power, (ii) an offering by the Hershey Trust of any number of its
shares in the Corporation for sale such that if such sale were
consummated the Hershey Trust would no longer have more than 50% of
the Outstanding Corporation Voting Power, or (iii) entering into any
agreement or understanding with a person or entity that would lead to
a Change in Control; or
(2) The Board approves a transaction described in subsection
(2), (3) or (4) of the definition of a Change in Control contained in
subparagraph (c) of Paragraph 6 hereof.
(e) In the event that a transaction which would constitute a Change
in Control if approved by the stockholders of the Corporation is to be submitted
to such stockholders for their approval, each Participant who is an employee and
who holds an Option granted under the Plan at the time scheduled for the taking
of such vote, whether or not then exercisable, shall have the right to receive a
notice at least ten (10) business days prior to the date on which such vote is
to be taken. Such notice shall set forth the date on which such vote of
stockholders is to be taken, a description of the transaction being proposed to
stockholders for such approval, a description of the provisions of subparagraph
(b) of Paragraph 6 of the Plan and a description of the impact thereof on such
Participant in the event that such stockholder approval is obtained. Such notice
shall also set forth the manner in which and price at which all Options then
held by each such Participant could be exercised upon the obtaining of such
stockholder approval.
7. TERMINATION OF EMPLOYMENT
Upon termination of the employment with the Corporation of any
Participant, such Participant's rights with respect to any Options granted under
this Plan shall be as follows:
(a) In the event that the participant is terminated or discharged
by the Corporation for any reason, except as to and the extent provided
otherwise by the Committee in writing and except as provided below after the
occurrence of a Change in Control, the
6
participant's rights and interests under the Plan shall immediately terminate
upon notice of termination of employment.
Upon the occurrence of a Potential Change in Control and for a period
of one (1) year thereafter, the following special provision and notice
requirement shall be applicable in the event of the termination of the
employment of any participant holding an Option under the Plan: (i) in no event
may a notice of termination of employment be issued to such a participant unless
at least ten (10) business days prior to the effective date of such termination,
the participant is provided with a written notice of intent to terminate the
participant's employment which sets forth in reasonable detail the reason for
such intent to terminate, the date on which such termination is to be effective,
and a description of the participant's rights under this Plan and under the
agreements granting such Option or Options, including the fact that no such
Option may be exercised after such termination has become effective and the
manner, extent and price at which all Options then held by such participant may
be exercised; and (ii) such notice of intent to terminate a participant's
employment shall not be considered a "notice of termination of employment" for
purposes of the first sentence of this Paragraph 7(a). This Paragraph 7(a) is
intended only to provide for a requirement of notice to terminate upon the
occurrence of the events set forth herein and shall not be construed to create
an obligation of continued employment or a contract of employment in any manner
or to otherwise affect or limit the Corporation's ability to terminate the
employment of any participant holding an Option under the Plan.
Upon the occurrence of a Change in Control and for a period of two (2)
years thereafter, in the event of the termination of a participant's employment
by the Corporation for any reason other than for Cause (as defined below) or by
the participant for Good Reason (as defined below), such participant shall have
one (1) year from the date of termination of employment to exercise such Option
or until the date of expiration of the Option, if earlier. In addition, all
restrictions and limitations on the exercise of such Option or the sale of
shares of Common Stock purchased pursuant to exercise of an Option relating to
minimum stockholding requirements shall immediately terminate upon the
occurrence of a Change in Control.
For purposes of this Plan, "Cause" means, with respect to a participant
who is covered under the Hershey Foods Corporation Employee Benefits Protection
Plan (Group 2), the Hershey Foods Corporation Executive Benefits Protection Plan
(Group 3), or the Hershey Foods Corporation Executive Benefits Protection Plan
(Group 3A), "cause" as defined in the plan applicable to such participant, and
with respect to all other participants, means (a) the willful and continued
failure of an employee to substantially perform the employee's duties with the
Corporation (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the employee by the employee's supervisor which specifically
identifies the manner in which the employee's supervisor believes that the
employee has not substantially performed the employee's duties; or (b) the
willful engaging by the employee in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Corporation. For purposes of the
preceding clauses (a) and (b), no act or failure to act, on the part of the
employee, shall be considered "willful" unless it is done, or omitted to be
done, by the employee in bad faith or without reasonable belief that the
employee's action or omission was in the best interests of the Corporation. Any
act, or failure to act, based upon the instructions or with the approval of a
senior officer of the Corporation or the employee's superior or based upon the
advice
7
of counsel for the Corporation shall be conclusively presumed to be done, or
omitted to be done, by the employee in good faith and in the best interests of
the Corporation.
For purposes of this Plan, "Good Reason" means, with respect to a
participant who is covered under the Hershey Foods Corporation Employee Benefits
Protection Plan (Group 2), the Hershey Foods Corporation Executive Benefits
Protection Plan (Group 3), or the Hershey Foods Corporation Executive Benefits
Protection Plan (Group 3A), "good reason" as defined therein, and with respect
to all other participants, means "good reason" as defined in the Hershey Foods
Corporation Amended and Restated Severance Benefits Plan as in effect
immediately prior to the Change in Control.
(b) If a Participant's employment with the Corporation terminates
as a result of his or her becoming disabled (in which event termination will be
deemed to occur on the date of such determination), or as a result of retirement
or death, Participant or his or her estate shall continue to be a Participant in
the Plan and may, for a period of up to five (5) years from the date of
disability, death or retirement, exercise such Options pursuant to the terms of
this Plan. With regard to the Initial Grant, any Participant whose employment
with the Corporation terminates in a manner described in this Paragraph 7(b)
during the period beginning December 4, 1996, and ending with the close of
business on January 31, 1997, shall have the right to exercise Options which
have vested under the Plan until the close of trading on the New York Stock
Exchange on January 31, 2002. Any provision of this Paragraph 7(b) to the
contrary notwithstanding, no Option granted pursuant to this Plan shall be
capable of being exercised prior to its becoming vested, or following its
expiration date.
(c) In the event that a Participant resigns from employment with
the Corporation, the Participant's rights and interests under the Plan shall
immediately terminate upon such resignation; provided, however, that the
Committee shall have the absolute discretion to review the reasons and
circumstances of the resignation and to determine whether, alternatively, and to
what extent, if any, the Participant may continue to hold any rights or
interests under the Plan.
(d) A transfer of a Participant's employment without an intervening
period from the Corporation to a Subsidiary Corporation or vice versa, or from
one Subsidiary Corporation to another, shall not be deemed a termination of
employment. A Participant's transfer to a non-participating Subsidiary
Corporation shall also not be deemed a termination of employment for purposes of
this section. The sale of a participating or non-participating Subsidiary
Corporation shall, unless the Committee determines otherwise, be deemed a
termination of the Participant's employment under paragraph 7(c) above and
employees of such subsidiary shall no longer be deemed eligible to participate
in the Plan and must exercise their Options (if vested) prior to the sale.
Options which are not vested at the time of sale will be terminated. Any
provision of this Paragraph 7(d) to the contrary notwithstanding, with respect
to the Initial Grant, any Participant who, on the date of the sale of a
participating or non-participating Subsidiary Corporation, has attained the age
of 55, died or become disabled while employed by the Corporation, shall be
deemed to have terminated their employment pursuant to Paragraph 7(b), and shall
continue to be Participants under the Plan in accordance with that paragraph.
8
(e) The Committee shall be authorized to make all determinations
and calculations required by this Paragraph 7, including any determinations
necessary to establish the reason for terminations of employment for purposes of
the Plan, which determinations and calculations shall be conclusive and binding
on any affected Participants and estates.
8. Additional Requirements
No Options granted pursuant to the Plan shall be exercisable or
realized in whole or in part, and the Corporation shall not be obligated to
sell, distribute or issue any shares subject to any such Option, if such
exercise and/or sale would, in the opinion of counsel for the Corporation,
violate the Securities Act of 1933, as amended (or other federal or state
statutes, or foreign statutes having similar requirements), or exceed daily
volume limitations imposed by the Corporation from time to time on sales of
Common Stock. Each Option shall be subject to the further requirement that, if
at any time the Committee shall determine in its discretion that the listing or
qualification of the shares relating or subject to such Option under any
securities exchange requirements or under any applicable law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such Option or the
distribution or the issue of shares thereunder, such Option may not be exercised
in whole or in part unless such listing, qualification, consent or approval
shall have been effected or obtained free of any condition not acceptable to the
Board.
A Participant's interest in Options granted under this Plan may be
subject to restrictions or other special rules as to grant, exercise, resale or
other disposition and to such other provisions as may be appropriate to comply
with federal, state and/or foreign securities and other applicable laws and
stock exchange requirements, and the grant or exercise of any Option or
entitlement to payment thereunder may be contingent upon receipt from the
Participant (or any other person permitted by this Plan to exercise any Option
or receive any distribution hereunder) of a representation that at the time of
such exercise it is his or her then present intention to acquire the shares
being distributed for investment and not for resale.
9. NONTRANSFERABILITY
Options granted under this Plan to a Participant shall be nonassignable
and shall not be transferable by him or her otherwise than by will or the laws
of descent and distribution, and shall be exercisable, during the employee's
lifetime, only by the employee or the employee's guardian or legal
representative.
10. DISCLAIMER OF RIGHTS
No provision in the Plan or any Options granted pursuant to the Plan
shall be construed to confer upon the Participant any right to be employed by
the Corporation or by any Subsidiary Corporation, or to interfere in any way
with the right and authority of the Corporation or any Subsidiary Corporation
either to increase or decrease the compensation of the Participant at any time,
or to terminate any relationship of employment between the Participant and the
Corporation or any of its Subsidiary Corporations.
9
Participants under the Plan shall have none of the rights of a
stockholder of the Corporation with respect to shares subject to Options, unless
and until such shares have been issued to him or her.
11. STOCK ADJUSTMENTS
In the event that the shares of Common Stock, as presently constituted,
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Corporation or of another corporation (whether
by reason of merger, consolidation, recapitalization, reclassification, stock
split, combination of shares or otherwise), or if the number of such shares of
Common Stock shall be increased through the payment of a stock dividend, or a
dividend on the shares of Common Stock of rights or warrants to purchase
securities of the Corporation shall be made, then there shall be substituted for
or added to each share available under and subject to the Plan as provided in
Paragraph 2 hereof, and each share theretofore appropriated or thereafter
subject or which may become subject to Options, under the Plan, the number and
kind of shares of stock or other securities into which each outstanding share of
Common Stock shall be so changed or for which each such share shall be exchanged
or to which each such share shall be entitled, as the case may be. Outstanding
options also shall be appropriately amended as to price and other terms as may
be necessary to reflect the foregoing events. In the event there shall be any
other change in the number or kind of the outstanding shares of Common Stock, or
of any stock or other securities into which the Common Stock shall have been
changed or for which it shall have been exchanged, then if the Board shall, in
its sole discretion, determine that such change equitably requires an adjustment
in the shares available under and subject to the Plan, or in any Options granted
under the Plan, such adjustments shall be made in accordance with such
determination.
No fractional shares of Common Stock or units of other securities shall
be issued pursuant to any such adjustment, and any fractions resulting from any
such adjustment shall be eliminated in each case by rounding downward to the
nearest whole share or unit.
12. TAXES
The Corporation shall be entitled to withhold the amount of any tax
attributable to any amounts payable or shares of Common Stock deliverable under
the Plan. The person entitled to any such delivery upon the exercise of an
Option may, by notice to the Corporation, elect to have such withholding
satisfied by a reduction of the number of shares otherwise so deliverable, or by
delivery of shares of stock already owned by the Participant, with the amount of
shares subject to such reduction or delivery to be calculated based on the Fair
Market Value of such shares on the date of such taxable event.
13. EFFECTIVE DATE AND TERMINATION OF PLAN
The Plan shall become effective upon adoption by the Board. The Board
at any time may terminate the Plan, but such termination shall not alter or
impair any of the rights or obligations under any grant of Options theretofore
made under the Plan unless the affected Participant shall so consent.
10
14. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of capital stock
pursuant to Options will be used for general corporate purposes.
15. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the
Participant to exercise such Option.
16. AMENDMENT
The Board, by majority vote at any time and from time to time, may
amend the Plan in such respects as it shall deem advisable, to conform to any
change in any applicable law or in any other respect.
IN WITNESS WHEREOF, the Corporation has caused this Broad Based Stock
Option Plan to be amended and restated as of the 19th day of August, 2002.
HERSHEY FOODS CORPORATION
By: /s/ Marcella K. Arline
----------------------
Marcella K. Arline,
Vice President, Human Resources
11
EXHIBIT 12
HERSHEY FOODS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31, 2002, 2001, 2000, 1999 and 1998
(in thousands of dollars except for ratios)
(Unaudited)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Earnings:
Income from continuing operations before
income taxes............................. $637,565(a) $343,541(b) $546,639 $727,874(c) $557,006
Add (Deduct):
Interest on indebtedness.................. 64,398 71,470 80,956 77,300 88,648
Portion of rents representative of the
interest factor (d).................... 15,467 15,451 13,585 15,162 13,197
Amortization of debt expense.............. 457 464 489 486 462
Amortization of capitalized interest...... 4,018 4,228 325 3,884 3,856
-------- -------- -------- -------- --------
Earnings as adjusted.................... $721,905 $435,154 $641,994 $824,706 $663,169
======== ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness.................... $ 64,398 $ 71,470 $ 80,956 $ 77,300 $ 88,648
Portion of rents representative of the
interest factor (d)...................... 15,467 15,451 13,585 15,162 13,197
Amortization of debt expense................ 457 464 489 486 462
Capitalized interest........................ 1,144 1,498 145 1,214 2,547
--------- -------- -------- -------- --------
Total fixed charges..................... $ 81,466 $ 88,883 $ 95,175 $ 94,162 $104,854
========= ======== ======== ======== ========
Ratio of earnings to fixed charges............. 8.86 4.90 6.75 8.76 6.32
========= ======== ======== ======== ========
NOTES:
(a) Includes total charges
for business realignment initiatives of $34.0 million before tax and costs
related to the potential sale of the Corporation of $17.2 million before tax.
(b) Includes total charges
for business realignment initiatives of $278.4 million before tax.
(c) Includes a gain on the sale
of the Corporation's pasta business of $243.8 million.
(d) Portion of rents
representative of the interest factor consists of all rental expense pertaining
to off - balance sheet operating lease arrangements and one - third of rental
expense for other operating leases.
Hershey Foods Corporation Exhibit 13
Appendix A
Annual Report to Stockholders
|
| HERSHEY
FOODS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS
Hershey Foods Corporation and its subsidiaries (the “Corporation”) are engaged in the manufacture, distribution and sale of confectionery and grocery products. The Corporation was organized under the laws of the State of Delaware on October 24, 1927, as a successor to a business founded in 1894 by Milton S. Hershey.
RESULTS OF OPERATIONS
Net Sales
Net sales decreased
$16.9 million from 2001 to 2002, primarily as a result of increased promotion
costs and returns, discounts, and allowances, the divestiture of the Heide
brands in 2002 and the Luden’s throat drop business in 2001,
and the timing of sales related to the gum and mint business acquired
from Nabisco Inc. (“Nabisco”), which resulted in incremental
sales in 2001 compared with 2002. A sluggish retail environment, characterized
by the bankruptcies and store closings of certain customers, also contributed
to the lower sales. Sales were also lower in several international markets,
particularly Canada and Brazil. These sales decreases were partially offset
by volume increases of key confectionery brands, including new products
and line extensions, and selected confectionery selling price increases,
as well as incremental sales from the Visagis acquisition, the Brazilian
chocolate and confectionery business acquired in July, 2001.
In December 2002, the Corporation announced an increase of 11% in the price of standard-size candy bars effective January 1, 2003, representing an average increase of approximately 3% over the entire domestic product line. A buy-in prior to the January 1, 2003 price increase resulted in an approximate 1% to 2% increase in fourth quarter, 2002 sales.
Net sales rose $316.8 million, or 8%, from 2000 to 2001. The increase in 2001 was primarily due to incremental sales from the mint and gum business acquired from Nabisco in December 2000 and increases in sales of base confectionery and grocery products, primarily resulting from the introduction of new confectionery products, selected confectionery selling price increases in the United States, and increased international exports. These increases were partially offset by lower sales resulting from higher promotional allowances, the divestiture of the Luden’s throat drops business and the impact of unfavorable foreign currency exchange rates.
Cost of Sales
Cost of sales decreased $107.5 million, or 4%, from 2001 to 2002. Cost of sales in 2002 included $6.4 million of costs primarily related to the relocation of equipment associated with the Corporation’s business realignment initiatives. Cost of sales in 2001 included $50.1 million associated with business realignment initiatives recorded in the fourth quarter of that year. Excluding costs related to the business realignment initiatives in both years, cost of sales decreased $63.8 million from 2001 to 2002, primarily as a result of lower costs for certain major raw materials, primarily cocoa, milk and packaging materials and reduced supply chain costs, particularly related to shipping and distribution.
Gross margin increased from 35.5% in 2001 to 37.8% in 2002. Gross margin in 2001 was negatively impacted 1.2 percentage points from the inclusion in cost of sales of a charge of $50.1 million associated with business realignment initiatives recorded during the fourth quarter of that year. Gross margin in 2002 was reduced by .2 percentage points from business realignment charges of $6.4 million recorded in cost of sales during the year. Excluding the impact of the business realignment initiatives in both years, the increase in gross margin from 36.7% in 2001 to 38.0% in 2002 primarily reflected decreased costs for certain major raw materials, higher profitability resulting from the mix of confectionery items sold in 2002 compared with sales in 2001 and the impact of supply chain efficiencies. These increases in gross margin were partially offset by higher promotion |
|
costs and returns, discounts, and allowances, which were higher as a percent of sales compared to the prior year. Gross margin was also unfavorably impacted in 2002 by poor profitability in the Corporation’s Canadian and Brazilian businesses.
Cost of sales increased $197.4 million, or 8%, from 2000 to 2001. Cost of sales in 2001 included a charge of $50.1 million associated with business realignment initiatives recorded during the fourth quarter. The $50.1 million charge to cost of sales resulted from the reduction of raw material inventories, principally cocoa beans and cocoa butter, no longer required to support operations as a result of outsourcing the manufacturing of certain ingredients. Excluding the impact of the business realignment initiatives, cost of sales increased $147.3 million, primarily reflecting higher costs associated with increased sales volume, partially offset by lower costs for freight, distribution and warehousing, as well as improved supply chain efficiencies including decreased costs for the disposal of aged finished goods inventory and obsolete packaging.
Gross margin increased from 35.3% in 2000 to 35.5% in 2001. Gross margin in 2001 was negatively impacted 1.2 percentage points from the inclusion in cost of sales of a charge of $50.1 million associated with business realignment initiatives recorded during the fourth quarter. Excluding the impact of the business realignment initiatives, the increase in gross margin to 36.7% in 2001 resulted from lower costs for freight, distribution and warehousing, as well as improved supply chain efficiencies, including decreased costs for the disposal of aged finished goods inventory and obsolete packaging. Selected confectionery selling price increases and the profitability of the mint and gum business acquired from Nabisco also contributed to the higher gross margin in 2001. The impact of these items was partially offset by higher manufacturing costs, primarily related to higher labor rates and employee benefits costs, as well as start-up costs
associated
with the installation of new manufacturing equipment.
Selling, Marketing and Administrative
Selling, marketing and administrative expenses decreased by $13.6 million, or 1.6% in 2002, primarily as a result of savings from the business realignment initiatives and the elimination of goodwill amortization in 2002, offset by $17.2 million of expenses incurred to explore the possible sale of the Corporation, as discussed below. Excluding incremental expenses incurred to explore the Corporation’s sale in 2002 and the impact of the amortization of intangibles in 2001, selling, marketing, and administrative expenses decreased $16.0 million, or 2%, from 2001 to 2002. The decrease in 2002 primarily reflected lower advertising, depreciation and administrative expenses, partially offset by higher expenses associated with increased consumer marketing programs and selling activities.
On July 25, 2002, the Corporation confirmed that the Hershey Trust Company, as Trustee for the Benefit of Milton Hershey School (the “Milton Hershey School Trust”) which controls 77.6% of the combined voting power of the Corporation’s Common Stock and Class B Common Stock, had informed the Corporation that it had decided to diversify its holdings and in this regard wanted Hershey Foods to explore a sale of the entire Corporation. On September 17, 2002, the Milton Hershey School Trust informed the Corporation that it had elected not to sell its controlling interest and requested that the process to explore a sale be terminated.
Selling, marketing and administrative expenses increased $120.4 million, or 17%, from 2000 to 2001, primarily reflecting selling, marketing and administrative expenditures for the newly acquired mint and gum business, increased administrative expenses primarily resulting from higher staffing levels to support sales activity in North America and international businesses, increased marketing expenses and higher incentive compensation expense. Selling, marketing and administrative costs in 2000 included a one-time gain of $7.3 million arising from the sale of certain corporate aircraft.
Business Realignment Initiatives
In late October 2001, the Corporation’s Board of Directors approved a plan to improve the efficiency and profitability of the Corporation’s operations. The plan included asset management improvements, |
|
product line rationalization, supply chain efficiency improvements and a voluntary work force reduction program (collectively, “the business realignment initiatives”). Total costs for the business realignment initiatives were $312.4 million compared to the $310.0 million announced in January 2002. The increased costs related primarily to higher pension settlement costs associated with the voluntary work force reduction program (“VWRP”) which were recorded as incurred, and more than offset the impact of the greater than expected proceeds from the sale of certain assets.
During 2002, charges to cost of sales and business realignment and asset impairments were recorded totaling $34.0 million before tax. The total included a charge to cost of sales of $6.4 million associated with the relocation of manufacturing equipment and a net business realignment and asset impairments charge of $27.6 million. Components of the net $27.6 million pre-tax charge included a $28.8 million charge for pension settlement losses resulting from the VWRP, a $3.0 million charge for pension curtailment losses and special termination benefits resulting from manufacturing plant closures, a $.1 million charge relating to involuntary termination benefits and a $.1 million charge relating to the realignment of the domestic sales organization, partially offset by a $4.4 million favorable adjustment reflecting higher than estimated proceeds from the sale of certain assets.
During the fourth quarter of 2001, charges to cost of sales and business realignment and asset impairments were recorded totaling $278.4 million before tax. The total included a charge to cost of sales of $50.1 million associated with raw material inventory reductions and a business realignment and asset impairments charge of $228.3 million. Components of the $228.3 million pre-tax charge included $175.2 million for business realignment charges and $53.1 million for asset impairment charges. The $175.2 million for business realignment charges included $139.8 million for enhanced pension and other post-retirement benefits associated with the VWRP and $35.4 million for other costs associated with the business realignment initiatives. The $53.1 million for asset impairment charges included $45.3 million for fixed asset impairments and $7.8 million for goodwill impairment.
These initiatives are expected to generate $75 million to $80 million of annual savings when fully implemented and contributed savings of approximately $38.0 million in 2002. As of December 31, 2002, there have been no significant changes to the estimated savings for the business realignment initiatives. The major components of these initiatives were completed as of December 31, 2002. Remaining transactions primarily pertain to the sale of certain real estate associated with the closure of facilities, as discussed below, and possible pension settlement costs related to employee retirement decisions.
Asset management improvements included the decision to outsource the manufacture of certain ingredients and the related removal and disposal of machinery and equipment related to the manufacture of these ingredients. As a result of this outsourcing, the Corporation was able to significantly reduce raw material inventories, primarily cocoa beans and cocoa butter, in the fourth quarter of 2001. The remaining portion of the project was substantially completed during the first quarter of 2002.
Product line
rationalization plans included the sale or exit of certain businesses,
the discontinuance of certain non-chocolate confectionery products and
the realignment of the Corporation’s sales organizations. Costs associated
with the realignment of the sales organizations related primarily to sales
office closings and terminating the use of certain sales brokers. During
2002, sales offices were closed as planned and the use of certain sales
brokers was discontinued which resulted in an additional charge of $.1
million. During the second quarter, the sale of a group of the Corporation’s
non-chocolate confectionery candy brands to Farley’s & Sathers
Candy Company, Inc. (the “sale of certain confectionery brands to
Farley’s & Sathers”) was completed. Included in the transaction
were the Heide, Jujyfruits, Wunderbeans and Amazin’ Fruit
trademarked confectionery brands, as well as the rights to sell Chuckles
branded products, under license. Proceeds of $12.0 million associated
with the sale of certain confectionery brands to Farley’s & Sathers
exceeded the 2001 estimates which resulted in a $4.4 million favorable
adjustment. Also during the second quarter, the Corporation discontinued
and subsequently licensed the sale of its aseptically packaged drink products
in the United States. Net sales for these brands were $11.6 million, $34.2
million and $38.3 million in 2002, |
|
2001 and 2000, respectively. The sale of certain confectionery brands to Farley’s & Sathers resulted in the closure of a manufacturing facility in New Brunswick, New Jersey which was being held for sale as of December 31, 2002. An additional charge of $.7 million relating to pension curtailment losses and special termination benefits associated with the closure of the facility was recorded in 2002.
To improve supply
chain efficiency and profitability, three manufacturing facilities, a
distribution center and certain other facilities were planned to be closed.
These included manufacturing facilities in Denver, Colorado; Pennsburg,
Pennsylvania; and Palmyra, Pennsylvania and a distribution center and
certain minor facilities located in Oakdale, California. During the first
quarter of 2002, the manufacturing facility in Palmyra, Pennsylvania was
closed and additional costs of $.1 million were recorded, as incurred,
relating to retention payments. During the second quarter, operations
utilizing the distribution center in Oakdale, California ceased. The manufacturing
facilities in Denver, Colorado and Pennsburg, Pennsylvania were closed
in the fourth quarter of 2002. An additional charge of $2.3 million relating
to pension curtailment losses and special termination benefits associated
with the facility closures was recorded in 2002. The Denver, Colorado
facility was being held for sale and the Pennsburg, Pennsylvania facility
was idle and being held for possible future use as of December 31, 2002.
In October 2001, the Corporation offered the VWRP to certain eligible employees in the United States, Canada and Puerto Rico in order to reduce staffing levels and improve profitability. The VWRP consisted of an early retirement program which provided enhanced pension, post-retirement and certain supplemental benefits and an enhanced mutual separation program which provided increased severance and temporary medical benefits. A reduction of approximately 500 employees occurred during 2002 as a result of the VWRP. Additional pension settlement costs of $28.8 million were recorded in 2002, principally associated with lump sum payments of pension benefits.
The following table summarizes the charges for certain business realignment initiatives recorded in the fourth quarter of 2001 and the related activities completed during 2002:
|
Accrued
Liabilities
|
Balance
12/31/01
|
|
2002
Utilization
|
|
New
charges
during
2002
|
|
Balance
12/31/02
|
|
In
thousands of dollars
|
Asset
management improvements |
$ |
2,700 |
|
$ |
(2,700 |
) |
$ |
— |
|
$ |
— |
|
Product
line rationalization |
|
15,529 |
|
|
(15,644 |
) |
|
115 |
|
|
— |
|
Supply
chain efficiency improvements |
|
8,300 |
|
|
(8,400 |
) |
|
100 |
|
|
— |
|
Voluntary
work force reduction program |
|
8,860 |
|
|
(8,860 |
) |
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
Total |
$ |
35,389 |
|
$ |
(35,604 |
) |
$ |
215 |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
New charges during 2002 related to realignment of the Corporation’s sales organizations and termination benefits. Utilization recorded against the liability in 2002 reflected cash payments totaling $25.7 million and non-cash write-offs of $9.9 million associated primarily with exiting certain businesses. The cash payments related primarily to severance payments associated with the enhanced mutual separation program and plant closures, outsourcing the manufacture of certain ingredients, VWRP administrative expenses, the realignment of the Corporation’s sales organizations and other expenses associated with exiting certain businesses and maintaining properties prior to sale.
Gain on Sale of Business
In September 2001, the Corporation completed the sale of the Luden’s throat drops business to Pharmacia Consumer Healthcare, a unit of Pharmacia Corporation. Included in the sale were the trademarks and manufacturing equipment for the throat drops business. In the third quarter of 2001, the Corporation received cash proceeds of $59.9 million and recorded a gain of $19.2 million before tax, $1.1 million after tax, as a result of the transaction. A higher gain for tax purposes reflected the low tax basis of the intangible assets included in the sale, resulting in taxes on the gain of |
|
$18.1 million. Net sales for the Luden’s throat drops business were $8.9 million and $20.7 million in 2001 and 2000, respectively.
Interest Expense, Net
Net interest expense for 2002 was $8.4 million below the prior year, primarily as a result of a decrease in short-term interest expense due to reduced average short-term borrowings. Net interest expense for 2001 was $6.9 million below 2000 reflecting a decrease in short-term interest expense due to a decrease in average short-term borrowing rates and reduced average short-term borrowings.
Income Taxes
The Corporation’s effective income tax rate was 36.7% in 2002, 39.7% in 2001, and 38.8% in 2000. Excluding the income tax benefit associated with charges pertaining to the business realignment initiatives and the income tax provision associated with the gain on the sale of the Luden’s throat drops business, the effective income tax rate was 37.3% in 2001. The decrease in the effective income tax rate of .6 percentage points in 2002 primarily reflected the impact of the elimination of the amortization of intangibles effective January 1, 2002. The decrease of 1.5 percentage points from 2000 to 2001 was primarily due to the lower tax rate on the mint and gum business acquired in December 2000.
Net Income
Net income increased $196.4 million from 2001 to 2002. Excluding the after-tax effect of the business realignment initiatives in 2002 and 2001, the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2002 and the after-tax gain on the sale of the Luden’s throat drops business in 2001, net income increased $44.5 million or 11%.
Net income decreased $127.4 million, or 38%, from 2000 to 2001. Excluding the after-tax gain on the sale of the Luden’s throat drops business and the after-tax effect of the business realignment initiatives recorded in 2001, as well as the after-tax gain on sale of corporate aircraft in 2000, net income increased $47.8 million, or 14%, from 2000 to 2001. Net income reflecting the elimination of the amortization of intangibles would have been higher by $13.6 million and $13.5 million in 2001 and 2000, respectively.
Comparable net income reflecting the elimination of the amortization of intangibles as a percent of net sales was: 10.6% in 2002, excluding the after-tax effect of the business realignment initiatives and incremental expenses to explore the possible sale of the Corporation; 9.5% in 2001, excluding the after-tax gain on the sale of the Luden’s throat drops business and the after-tax effect of the business realignment initiatives; and 9.0% in 2000, excluding the after-tax gain on the sale of corporate aircraft.
FINANCIAL CONDITION
The Corporation’s financial condition remained strong during 2002. The capitalization ratio (total short-term and long-term debt as a percent of stockholders’ equity, short-term and long-term debt) was 39% as of December 31, 2002, and 44% as of December 31, 2001. The ratio of current assets to current liabilities was 2.3:1 as of December 31, 2002, and 1.9:1 as of December 31, 2001.
In June 2002, the Corporation completed the sale of certain confectionery brands to Farley’s & Sathers for $12.0 million in cash as part of its business realignment initiatives. Included in the transaction were the Heide, Jujyfruits, Wunderbeans and Amazin’ Fruit trademarked confectionery brands, as well as the rights to sell Chuckles branded products, under license.
In September 2001, the Corporation completed the sale of the Luden’s throat drops business to Pharmacia Consumer Healthcare, a unit of Pharmacia Corporation. Included in the sale were the trademarks and manufacturing equipment for the throat drops business. Under a supply agreement with Pharmacia, the Corporation agreed to manufacture Luden’s throat drops for up to 19 months |
|
after the date of sale. Under a separate services agreement, the Corporation agreed to continue to sell, warehouse and distribute Luden’s throat drops through March 2002. In the third quarter of 2001, the Corporation received cash proceeds of $59.9 million and recorded a gain of $19.2 million before tax, $1.1 million or $.01 per share-diluted after tax, as a result of the transaction.
In July 2001, the Corporation’s Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis for $17.1 million. This business had sales of approximately $20 million in 2000. Included in the acquisition were the IO-IO brand of hazelnut creme items and the chocolate and confectionery products sold under the Visconti brand. Also included in the purchase were a manufacturing plant and confectionery equipment in Sao Roque, Brazil. Had the results of the acquisition been included in the consolidated results for the full year of 2001 and for 2000, the effect would not have been material.
In December 2000, the Corporation completed the purchase of the intense and breath freshener mints and gum business of Nabisco. The Corporation paid $135.0 million to acquire the business, including Ice Breakers and Breath Savers Cool Blasts intense mints, Breath Savers mints, and Ice Breakers, Carefree, Stick*Free, Bubble Yum and Fruit Stripe gums. Also included in the purchase were manufacturing machinery and equipment and a gum-manufacturing plant in Las Piedras, Puerto Rico. The Corporation’s results of operations for 2000 did not include results of the acquisition, as the transaction was completed very late in the year. Had the results of the acquired business been included in the consolidated results for 2000, the effect would not have been material.
Assets
Total assets increased $233.1 million, or 7%, as of December 31, 2002, primarily as a result of higher cash and cash equivalents, prepaid expenses and other current assets, and other non-current assets, partially offset by lower deferred income taxes, inventories, property, plant, and equipment, and goodwill.
Current assets increased by $96.1 million, or 8%, principally reflecting increased cash and cash equivalents, prepaid expenses and other current assets, substantially offset by a decrease in deferred income taxes. The increase in cash and cash equivalents reflected strong cash flows from operations during the year, offset by contributions of $308.1 million to the Corporation’s pension plans. Prepaid expenses and other current assets reflected higher prepaid pension expense associated with the funding of pension plans during the year and increased original margin balances for commodity futures. The elimination of current deferred income taxes resulted primarily from the significant liability related to the tax effect on other comprehensive income associated with the gains on commodity futures contracts during the year.
Property, plant and equipment was lower than the prior year primarily due to depreciation expense of $155.4 million and the retirement of property, plant and equipment of $19.0 million, partially offset by capital additions of $132.7 million. The decrease in goodwill primarily reflected the impact of the sale of certain confectionery brands to Farley’s & Sathers and foreign currency translation. The increase in other non-current assets primarily resulted from the pension plan funding during the year.
Liabilities
Total liabilities increased by $8.6 million, as of December 31, 2002, primarily reflecting a reduction in accrued liabilities, partially offset by an increase in deferred income taxes. The decrease in accrued liabilities was principally the result of lower pension liabilities resulting from the funding in 2002 and a decrease in enhanced employee benefits and other liabilities associated with business realignment initiatives recorded in the fourth quarter of 2001. The increase in total current and non-current deferred income taxes was primarily associated with the impact of the tax effect on other comprehensive income and the pension funding, respectively. |
|
Capital Structure
The Corporation has two classes of stock outstanding, Common Stock and Class B Common Stock (“Class B Stock”). Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors, with the Common Stock having one vote per share and the Class B Stock having ten votes per share. However, the Common Stock, voting separately as a class, is entitled to elect one-sixth of the Board of Directors. With respect to dividend rights, the Common Stock is entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
In December 2000, the Corporation’s Board of Directors unanimously adopted a Stockholder Protection Rights Agreement (“Rights Agreement”). The Rights Agreement was supported by the Corporation’s largest stockholder, the Milton Hershey School Trust. This action was not in response to any specific effort to acquire control of the Corporation. Under the Rights Agreement, the Corporation’s Board of Directors declared a dividend of one right (“Right”) for each outstanding share of Common Stock and Class B Stock payable to stockholders of record at the close of business on December 26, 2000. The Rights will at no time have voting power or receive dividends. The issuance of the Rights has no dilutive effect, will not affect reported earnings per share, is not taxable and will not change the manner in which the Corporation’s Common Stock is traded. The Rights Agreement is discussed further in Note 15 to
the
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Corporation’s major source of financing has been cash generated from operations. The Corporation’s income and, consequently, cash provided from operations during the year are affected by seasonal sales patterns, the timing of new product introductions, business acquisitions and divestitures, and price changes. Sales have typically been highest during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. Generally, seasonal working capital needs peak during the summer months and have been met by issuing commercial paper.
Over the past three years, cash provided from operating activities exceeded cash requirements for dividend payments, capital expenditures and capitalized software additions, share repurchases, incentive plan transactions and business acquisitions by $177.1 million. Also during the period, the Corporation made contributions to its pension plans of $490.7 million. Total debt decreased during the period by $209.9 million, reflecting reduced short-term borrowings and the repayment of long-term debt. Cash and cash equivalents increased by $179.7 million during the period.
The Corporation anticipates that capital expenditures and capitalized software additions will be in the range of $150 million to $200 million per annum during the next several years as a result of continued efficiency improvements in existing facilities and capacity expansion to support sales growth and new products, along with continued improvement and enhancements of computer software. As of December 31, 2002, the Corporation’s principal capital commitments included manufacturing capacity expansion to support sales growth and new products, modernization and efficiency improvements and selected enhancements of computer software.
Contributions totaling $308.1 million were made to the pension plans during 2002 primarily to improve the funded status as a result of negative returns on pension plan assets during the year. In order to improve the funded status of the Corporation’s domestic pension plans, a contribution of $75.0 million was made in February 2001. An additional contribution of $95.0 million was made in December 2001 to fund payments related to the early retirement program implemented in the fourth quarter of that year.
Under share repurchase programs which began in 1993, a total of 19,600,982 shares of Common Stock have been repurchased for approximately $830.0 million, including purchases from the Milton Hershey School Trust of 4,000,000 shares for $103.1 million in 1993 and 1,579,779 shares for $100.0 million in 1999. Of the shares repurchased, 528,000 shares were retired and 7,571,170 shares were reissued to satisfy stock options obligations, Supplemental Retirement Contributions and |
|
employee stock
ownership trust (“ESOP”) obligations. Of the shares reissued,
6,228,387 shares were repurchased in the open market to replace the reissued
shares. Additionally, the Corporation has purchased a total of 28,000,536
shares of its Common Stock to be held as Treasury Stock from the Milton
Hershey School Trust for $1.0 billion in privately negotiated transactions.
As of December 31, 2002, a total of 45,730,735 shares were held as Treasury
Stock. The share repurchase program approved by the Corporation’s
Board of Directors in October 1999 for $200 million was completed in December
2002. Also in December 2002, the Corporation’s Board of Directors
approved an authorization to acquire, from time to time in open market
or through privately negotiated transactions, up to $500 million of its
Common Stock. This authorization is expected to be completed within approximately
12 months, subject to trading liquidity, and will be funded by cash provided
from operations and short-term borrowings.
In March 1997,
the Corporation issued $150 million of 6.95% Notes under a November 1993
Form S-3 Registration Statement. In August 1997, the Corporation filed
another Form S-3 Registration Statement under which it could offer, on
a delayed or continuous basis, up to $500 million of additional debt securities.
Also in August 1997, the Corporation issued $150 million of 6.95% Notes
due 2012 and $250 million of 7.2% Debentures due 2027 under the November
1993 and August 1997 Registration Statements. Proceeds from the debt issuance
were used to repay a portion of the short-term borrowings associated with
the purchase of Common Stock from the Milton Hershey School Trust. As
of December 31, 2001, $250 million of debt securities remained available
for issuance under the August 1997 Registration Statement. Proceeds from
any offering of the $250 million of debt securities available under the
shelf registration may be used for general corporate requirements, which
include reducing existing commercial paper borrowings, financing capital
additions and share repurchases, and funding future business acquisitions
and working capital requirements.
As of December 31, 2002, the Corporation maintained short-term and long-term committed credit facilities with a syndicate of banks in the amount of $400 million which could be borrowed directly or used to support the issuance of commercial paper. The Corporation may increase the credit facilities to $1.0 billion with the concurrence of the banks. In November 2002, the short-term credit facility agreement was renewed with a credit limit of $200 million expiring in November 2003. The long-term committed credit facility agreement with a $200 million credit limit will expire in November 2006. The credit facilities may be used to fund general corporate requirements, to support commercial paper borrowings and, in certain instances, to finance future business acquisitions. The Corporation also had lines of credit with domestic and international commercial banks of $21.0 million and $21.7 million as of December 31, 2002 and 2001,
respectively.
The Corporation negotiated a settlement with the Internal Revenue Service (“IRS”) of its Corporate Owned Life Insurance (“COLI”) program effective October 1, 2001. The resulting Closing Agreement with the IRS limited the COLI interest expense deductions for all applicable tax years and resulted in the surrender of all insurance policies, thereby ending the COLI program. The settlement was a complete resolution of all federal and state tax aspects of this program.
Cash Flow Activities
Over the past three years, cash from operating activities provided approximately $1.8 billion. Over this period, cash used by or provided from accounts receivable and inventories has tended to fluctuate as a result of sales during December and inventory management practices. Cash provided from inventories was principally associated with a reduction of raw material inventories in December 2001 as part of the Corporation’s business realignment initiatives. The change in cash required for or provided from other assets and liabilities between the years was primarily related to hedging transactions, the timing of payments for accrued liabilities, including income taxes, and variations in the funded status of pension plans.
Investing activities included capital additions, capitalized software additions, business acquisitions and divestitures. Capital additions during the past three years included the purchase of manufacturing equipment, and expansion and modernization of existing facilities. Capitalized |
|
software additions over the past three years were associated primarily with the ongoing enhancement of information systems.
In June 2002, the Corporation completed the sale of certain confectionery brands to Farley’s & Sathers for $12.0 million in cash as part of its business realignment initiatives.
In July 2001, the Corporation’s Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis for $17.1 million. In September 2001, the Luden’s throat drops business was sold for $59.9 million in cash. The acquisition of Nabisco’s mint and gum business for $135.0 million was completed in 2000.
Financing activities included debt borrowings and repayments, payments of dividends, the exercise of stock options, incentive plan transactions, and the repurchase of Common Stock. During the past three years, short-term borrowings in the form of commercial paper or bank borrowings were used to purchase Nabisco’s mint and gum business, fund seasonal working capital requirements, and finance share repurchase programs. During the past three years, a total of 4,261,484 shares of Common Stock have been repurchased for $224.4 million. Cash used for incentive plan transactions of $274.7 million during the past three years was partially offset by cash received from the exercise of stock options of $141.1 million. Cash used by incentive plan transactions reflected purchases of the Corporation’s Common Stock in the open market to replace treasury stock issued for stock options exercises.
Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments
The following
table summarizes the Corporation’s contractual cash obligations by
year:
|
|
Payments
Due by Year
|
|
|
(In
thousands of dollars) |
|
Contractual
Obligations
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Thereafter
|
|
Total
|
|
Unconditional
Purchase Obligations |
$806,300 |
|
$ |
481,900 |
|
$ |
134,600 |
|
$ |
6,000 |
|
$ |
6,000 |
|
$ |
8,200 |
|
$ |
1,443,000 |
|
Non-cancelable
Operating Leases |
17,617 |
|
|
17,331 |
|
|
17,157 |
|
|
14,562 |
|
|
10,750 |
|
|
18,361 |
|
|
95,778 |
|
Long-term
Debt |
16,989 |
|
|
636 |
|
|
201,639 |
|
|
142 |
|
|
150,144 |
|
|
499,239 |
|
|
868,789 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Obligations |
$840,906 |
|
$ |
499,867 |
|
$ |
353,396 |
|
$ |
20,704 |
|
$ |
166,894 |
|
$ |
525,800 |
|
$ |
2,407,567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In entering into these contractual obligations, the Corporation has assumed the risk which might arise from the possible inability of counterparties to meet the terms of their contracts. The Corporation’s risk is limited to replacing the contracts at prevailing market rates. The Corporation does not expect any significant losses as a result of counterparty defaults.
The Corporation
has entered into certain obligations for the purchase of raw materials.
Purchase obligations primarily reflect forward contracts for the purchase
of raw materials from third-party brokers and dealers to minimize the
effect of future price fluctuations. Total obligations for each year are
comprised of fixed price contracts for the purchase of commodities and
unpriced contracts which have been valued using market prices as of December
31, 2002. The cost of commodities associated with the unpriced contracts
is variable as market prices change over future periods. However, the
variability of such costs is mitigated to the extent of the Corporation’s
futures price cover for those periods. Accordingly, increases or decreases
in market prices will be offset by gains or losses on commodity futures
contracts to the extent that the unpriced contracts are hedged as of December
31, 2002 and in future periods. These obligations are satisfied by taking
delivery of the specific commodities for use in the manufacture of finished
goods. For each of the three years in the period ended December 31, 2002,
such obligations were fully satisfied by taking delivery of and making
payment for the specific commodities. |
|
The Corporation
has entered into three off-balance sheet arrangements for the leasing
of certain warehouse and distribution facilities. These off-balance sheet
arrangements enabled the Corporation to lease these facilities under more
favorable terms than other leasing alternatives. The operating lease arrangements
are with special purpose trusts (“SPTs”) whereby the Corporation
leases warehouse and distribution facilities in Redlands, California;
Atlanta, Georgia; and Hershey, Pennsylvania, as discussed below. The SPTs
were formed to facilitate the acquisition and subsequent leasing of the
facilities to the Corporation. The SPTs financed the acquisition of the
facilities by issuing notes and equity certificates to independent third-party
financial institutions. The independent third-party financial institution
which holds the equity certificates is the owner of the SPTs. The owner
of the SPTs has made substantive residual equity capital investments in
excess of 3% which will be at risk during the entire term of each lease.
Accordingly, the Corporation is not permitted to consolidate the SPTs
because all of the conditions for consolidation have not been met. Aside
from the residual guarantees and instrument guarantees associated with
the individual leasing arrangements, as discussed below, the Corporation
has provided no other guarantees or capitalization of these entities.
The obligations in connection with these leases have not been collateralized
by the Corporation. The Corporation has no obligations with respect to
refinancing of the lessor’s debt, would incur no significant penalties
which would result in the reasonable assurance of continuation of the
leases and has no significant guarantees in addition to the residual and
instrument guarantees discussed below. There are no other material commitments
or contingent liabilities associated with the leasing arrangements. The
Corporation’s transactions with the SPTs are limited to the operating
lease agreements and the associated rent expense is included in cost of
sales in the Consolidated Statements of Income. The Corporation does not
anticipate entering into any other arrangements involving special purpose
entities.
The leases include substantial residual guarantees by the Corporation for a significant amount of the financing and options to purchase the facilities at original cost. Pursuant to instrument guarantees, in the event of a default under the lease agreements, the Corporation guaranteed to the note holders and certificate holders payment in an amount equal to all sums then due under the leases.
In December 2000, the Corporation entered into an operating lease agreement with the owner of the warehouse and distribution facility in Redlands, California. The lease term was approximately ten years, with occupancy to begin upon completion of the facility. The lease agreement contained an option for the Corporation to purchase the facility. In January 2002, the Corporation assigned its right to purchase the facility to an SPT that in turn purchased the completed facility and leased it to the Corporation under a new operating lease agreement. The lease term is five years, with up to four renewal periods of five years each with the consent of the lessor. The cost incurred by the SPT to acquire the facility, including land, was $40.1 million.
In October 2000, the Corporation entered into an operating lease agreement with an SPT for the leasing of a warehouse and distribution facility near Atlanta, Georgia. The lease term is five years, with up to four renewal periods of five years each with the consent of the lessor. The cost incurred by the SPT to acquire the facility, including land, was $18.2 million.
In July 1999, the Corporation entered into an operating lease agreement with an SPT for the construction and leasing of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor paid construction costs totaling $61.7 million. The lease term is six years, including the one-year construction period, with up to four renewal periods of five years each with the consent of the lessor.
There are no penalties or other disincentives under the lease agreements if the Corporation decides not to renew any of the three leases. The terms for each renewal period under each of the three lease arrangements are identical to the initial terms and do not represent bargain lease terms.
If the Corporation were to exercise its options to purchase the three facilities at original cost at the end of the respective initial lease terms, the Corporation could purchase the facilities for a total of approximately $120.0 million, $79.9 million for the Pennsylvania and Georgia facilities in 2005, and $40.1 million for the California facility in 2007. If the Corporation chooses not to renew the leases |
|
or purchase
the assets at the end of the lease terms, the Corporation is obligated
under the residual guarantees for approximately $103.2 million in total
for the three leases. Additionally, the Corporation is obligated to re-market
each property on the lessor’s behalf and, upon sale, distribute a
portion of the proceeds to the note holders and certificate holders up
to an amount equal to the remaining debt and equity certificates and to
pay closing costs. If the Corporation chooses not to renew or purchase
the assets at the end of the lease terms, the Corporation does not anticipate
a material disruption to operations, since such facilities are not unique,
facilities with similar racking and storage capabilities are available
in each of the areas where the facilities are located, there are no significant
leasehold improvements that would be impaired, there would be no adverse
tax consequences, the financing of replacement facilities would not be
material to the Corporation’s cash flows and costs related to relocation
would not be significant to income.
The facility located near Hershey, Pennsylvania was constructed on land owned by the Corporation. The Corporation entered into a ground lease with the lessor, an SPT. The initial term of the ground lease extends to the date that is the later of (i) the date the facility lease is no longer in effect, or (ii) the date when the Corporation satisifies the residual guarantee associated with the lease. An additional term for the ground lease begins upon the end of the initial ground lease term and ends upon the later of the date all sums required to be
paid under the lease agreement are paid in full and the 75th anniversary of the ground lease commencement date. If the Corporation chooses not to renew the building lease or purchase the building, it must re-market the building on the lessor’s behalf subject to the ground lease, which will continue in force until the earlier of the date all sums required to be paid under the lease
agreement are paid in full and the 75th anniversary of the ground lease inception date. The lease of the warehouse and distribution facility does not include any provisions which would require the Corporation to sell the land to
the SPT.
In January 2003, the Financial Accounting Standards
Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of
ARB No. 51.” This Interpretation addresses consolidation by business enterprises of special-purpose entities (SPEs) to
which the usual condition for consolidation described in Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” does not apply because the SPEs have no voting interests or otherwise are not subject to control through ownership of voting interests.
The Interpretation is effective for calendar year companies beginning in the third quarter of 2003 and it is reasonably possible that the Interpretation will require the consolidation of the Corporation’s three off-balance sheet arrangements with SPTs for the leasing of certain warehouse and distribution facilities as described in Note 4, Commitments. The consolidation of these entities will result in an increase to property, plant and equipment of approximately $120.0 million, with a corresponding increase to long-term debt and minority interest. The consolidation of these entities will also result in an increase to depreciation expense of approximately $5.0 million on an annual basis.
ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
The Corporation
utilizes certain derivative instruments, from time to time, including
interest rate swaps, foreign currency forward exchange contracts and commodities
futures contracts, to manage interest rate, currency exchange rate and
commodity market price risk exposures. Interest rate swaps and foreign
currency contracts are entered into for periods consistent with related
underlying exposures and do not constitute positions independent of those
exposures. Commodities futures contracts are entered into for varying
periods and are intended to be and are effective as hedges of market price
risks associated with anticipated raw material purchases, energy requirements
and transportation costs. The Corporation does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments
with leverage or prepayment features. In entering into these contracts,
the Corporation has assumed the risk that might arise from the possible
inability of counterparties to meet the terms of their contracts. The
Corporation does not expect any significant losses as a result of counterparty
defaults. |
|
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Subsequently, the FASB issued Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133” and Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as amended, requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting
criteria are
met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133, as amended, provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. All derivative instruments currently utilized by the Corporation, including interest rate swaps, foreign exchange contracts and commodities futures contracts, are designated and accounted for as cash flow hedges. The Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. Additional information with regard to accounting policies associated with derivative instruments is contained in Note 6 to the Consolidated Financial Statements, Derivative Instruments and Hedging Activities.
The information below summarizes the Corporation’s market risks associated with long-term debt and derivative instruments outstanding as of December 31, 2002. This information should be read in conjunction with Note 1, Note 6 and Note 8 to the Consolidated Financial Statements.
Long-Term Debt
The table below
presents the principal cash flows and related interest rates by maturity
date for long-term debt, including the current portion, as of December
31, 2002. The fair value of long-term debt was determined based upon quoted
market prices for the same or similar debt issues.
|
|
Maturity
Date
|
|
(In
thousands of dollars except for rates) |
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Thereafter
|
|
Total
|
|
Fair
Value
|
| Long-term
Debt |
$16,989 |
|
$ |
636 |
|
$ |
201,639 |
|
$ |
142 |
|
$ |
150,144 |
|
$ |
499,239 |
|
$ |
868,789 |
|
$ |
1,005,943 |
| Fixed
Rate |
2.0 |
% |
|
5.8 |
% |
|
6.7 |
% |
|
2.0 |
% |
|
6.9 |
% |
|
7.4 |
% |
|
7.1 |
% |
|
The fair value of long-term debt increased $48.2 million from the prior year as a result of a decrease in interest rates for the same or similar debt instruments as of December 31, 2002.
Interest Rate Swaps
In order to
minimize its financing costs and to manage interest rate exposure, the
Corporation, from time to time, enters into interest rate swap agreements.
In February 2001, the Corporation entered into interest rate swap agreements
that effectively converted variable-interest-rate rental payments on certain
operating leases from a variable to a fixed rate of 6.1%. The fair value
of interest rate swaps is defined as the difference in the present values
of cash flows calculated at the contracted interest rates and at current
market interest rates at the end of the period. The fair value of the
swap agreements is calculated quarterly based upon the quoted market price
for the same or similar financial instruments. The fair value of the interest
rate swap agreements was a liability of $7.1 million and $2.7 million
as of December 31, 2002 and 2001, respectively. The potential loss in
fair value of interest rate swaps resulting from a hypothetical near-term
adverse change in market |
|
rates of ten percent was $.7 million and $.3 million as of December 31, 2002 and 2001, respectively. The Corporation’s risk related to the interest rate swap agreements is limited to the cost of replacing the agreements at prevailing market rates.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward contracts to hedge transactions primarily related to firm commitments to purchase equipment, certain raw materials and finished goods denominated in foreign currencies and to hedge payment of intercompany transactions with its non-domestic subsidiaries. These contracts reduce currency risk from exchange rate movements. Foreign currency price risks are hedged generally for periods from 3 to 24 months.
Foreign exchange forward contracts are intended to be and are effective as hedges of firm, identifiable, foreign currency commitments. Prior to January 1, 2001, the Corporation accounted for foreign exchange forward contracts in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” and accordingly, gains and losses were deferred and accounted for as part of the underlying transactions.
As of January 1, 2001, the Corporation accounted for foreign exchange forward contracts under SFAS No. 133, as amended. Foreign exchange forward contracts are designated as cash flow hedging derivatives and the fair value of such contracts is recorded on the Consolidated Balance Sheets as either an asset or liability. Gains and losses on these contracts are recorded as a component of other comprehensive income and are reclassified into earnings in the same period during which the hedged transaction affects earnings.
As of December 31, 2002, the Corporation had foreign exchange forward contracts maturing primarily in 2003 and 2004 to purchase $45.1 million in foreign currency, primarily British sterling and euros, and to sell $17.2 million in foreign currency, primarily Japanese yen, at contracted forward rates.
As of December 31, 2001, the Corporation had foreign exchange forward contracts maturing primarily in 2002 and 2003 to purchase $24.3 million in foreign currency, primarily British sterling and euros, and to sell $12.2 million in foreign currency, primarily Japanese yen, at contracted forward rates.
The fair value
of foreign exchange contracts is defined as the amount of the difference
between contracted and current market foreign currency exchange rates
as of the end of the period. On a quarterly basis, the fair value of foreign
exchange contracts is estimated by obtaining market quotes for future
contracts with similar terms, adjusted where necessary for maturity differences.
As of December 31, 2002, the fair value of foreign exchange forward contracts
was an asset of $3.1 million. As of December 31, 2001, the fair value
of foreign exchange forward contracts was a liability of $.3 million.
The potential loss in fair value of foreign exchange contracts resulting
from a hypothetical near-term adverse change in market rates of ten percent
was $.3 million and less than $.1 million as of December 31, 2002 and
2001, respectively. The Corporation’s risk related to the foreign
exchange contracts is limited to the cost of replacing the contracts at
prevailing market rates.
Commodity Price Risk Management
The Corporation’s
most significant raw material requirements include cocoa, sugar, milk,
peanuts and almonds. The Corporation attempts to minimize the effect of
future price fluctuations related to the purchase of these raw materials
primarily through forward purchasing to cover future manufacturing requirements,
generally for periods from 3 to 24 months. With regard to cocoa, sugar,
corn sweeteners, natural gas, fuel oil and certain dairy products, price
risks are also managed by entering into futures contracts. At the present
time, active futures contracts are not available for use in pricing the
Corporation’s other major raw material requirements. Futures contracts
are used in combination with forward purchasing of cocoa, sugar, corn
sweetener, natural gas and certain dairy product requirements principally
to take advantage of market fluctuations which provide more favorable
pricing opportunities and flexibility in sourcing these raw materials
and energy requirements. Fuel oil futures contracts are used to minimize
price fluctuations associated with the Corporation’s transportation
costs. The Corporation’s commodity procurement practices are intended |
|
to reduce the risk of future price increases, but also may potentially limit the ability to benefit from possible price decreases.
The cost of cocoa beans and the prices for the related commodity futures contracts historically have been subject to wide fluctuations attributable to a variety of factors, including the effect of weather on crop yield, other imbalances between supply and demand, currency exchange rates, political unrest in producing countries and speculative influences. Cocoa prices in 2002 rose sharply following a rebellion in the world’s largest cocoa producing country, the Ivory Coast. Continued civil unrest could result in further price increases in 2003. The Corporation’s costs during 2003 will not necessarily reflect market price fluctuations because of its forward purchasing practices, premiums and discounts reflective of relative values, varying delivery times, and supply and demand for specific varieties and grades of cocoa beans.
Commodities Futures Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products for anticipated manufacturing requirements and to hedge transportation costs, the Corporation enters into commodities futures contracts as deemed appropriate to reduce the effect of price fluctuations. Prior to January 1, 2001, accounting for commodities futures contracts was in accordance with Statement of Financial Accounting Standards No. 80, “Accounting for Futures Contracts.” Futures contracts met the hedge criteria and were accounted for as hedges. Accordingly, gains and losses were deferred and recognized in cost of sales as part of the product cost.
Exchange traded futures contracts are used to fix the price of physical forward purchase contracts. Cash transfers reflecting changes in the value of futures contracts (unrealized gains and losses) are made on a daily basis and prior to January 1, 2001, were included in prepaid expenses and other current assets or accrued liabilities on the Consolidated Balance Sheets. As of January 1, 2001, the Corporation accounted for commodities futures contracts under SFAS No. 133, as amended, and accordingly, cash transfers are reported as a component of other comprehensive income. Such cash transfers will be offset by higher or lower cash requirements for payment of invoice prices of raw materials, energy requirements and transportation costs in the future. Futures being held in excess of the amount required to fix the price of unpriced physical forward contracts are effective as hedges of anticipated purchases.
The following
sensitivity analysis reflects the market risk of the Corporation to a
hypothetical adverse market price movement of ten percent, based on the
Corporation’s net commodity positions at four dates spaced equally
throughout the year. The Corporation’s net commodity positions consist
of the excess of futures contracts held over unpriced physical forward
contracts for the same commodities, relating to cocoa, sugar, corn sweeteners,
natural gas, fuel oil and certain dairy products. Inventories, priced
forward contracts and estimated anticipated purchases not yet contracted
for were not included in the sensitivity analysis calculations. A loss
is defined, for purposes of determining market risk, as the potential
decrease in fair value or the opportunity cost resulting from the hypothetical
adverse price movement. The fair values of net commodity positions were
based upon quoted market prices or estimated future prices including estimated
carrying costs corresponding with the future delivery period.
|
For
the years ended December 31,
|
2002
|
2001
|
In
millions of dollars
|
Fair
Value
|
|
Market
Risk
(Hypothetical
10% Change)
|
|
Fair
Value
|
|
Market
Risk
(Hypothetical
10% Change)
|
|
Highest
long position |
$ |
72.3 |
|
$ |
7.2 |
|
|
$ |
(15.1 |
) |
$ |
1.5 |
|
|
Lowest
long position |
|
(30.1 |
) |
|
3.0 |
|
|
|
(96.9 |
) |
|
9.7 |
|
|
Average
position (long) |
|
23.8 |
|
|
2.4 |
|
|
|
(46.7 |
) |
|
4.7 |
|
|
The increase in fair values from 2001 to 2002 primarily reflected an increase in net commodity positions in 2002. The negative positions primarily resulted as unpriced physical forward contract futures requirements exceeded the amount of commodities futures being held at certain points in time during the years. |
|
Sensitivity analysis disclosures represent forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected. The important factors that could affect the sensitivity analysis disclosures include significant increases or decreases in market prices reflecting fluctuations attributable to the effect of weather on crop yield, other imbalances between supply and demand, currency exchange rates, political unrest in producing countries and speculative influences in addition to changes in the Corporation’s hedging strategies.
USE OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Corporation, including the use of estimates, are presented in the Notes to Consolidated Financial Statements.
Critical accounting estimates involved in applying the Corporation’s accounting policies are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate was made and those for which different estimates reasonably could have been used for the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, and would have a material impact on the presentation of the Corporation’s financial condition, changes in financial condition or results of operations. The Corporation’s most critical accounting estimates, discussed below, pertain to accounting policies for accounts receivable—trade, accrued liabilities and pension and other post-retirement benefit plans.
Accounts Receivable—Trade
In the normal
course of business, the Corporation extends credit to customers that satisfy
pre-defined credit criteria. The Corporation believes that it has little
concentration of credit risk due to the diversity of its customer base.
Accounts Receivable—Trade, as shown on the Consolidated Balance Sheets,
were net of allowances and anticipated discounts. An allowance for doubtful
accounts is determined through analysis of the aging of accounts receivable
at the date of the financial statements, assessments of collectibility
based on historical trends and an evaluation of the impact of current
and projected economic conditions. The Corporation monitors the collectibility
of its accounts receivable on an ongoing basis by analyzing the aging
of its accounts receivable, assessing the credit worthiness of its customers
and evaluating the impact of reasonably likely changes in economic conditions
that may impact credit risks. Estimates with regard to the collectibility
of accounts receivable are reasonably likely to change in the future. Over the three
year period ended December 31, 2002, the Corporation recorded expense
averaging approximately $2.4 million per year for potential uncollectible
accounts. Write-offs of uncollectible accounts, net of recoveries, averaged
approximately $3.0 million over the same period. The provision for uncollectible
accounts is recognized as selling, marketing and administrative expense
on the Consolidated Statements of Income. Over the past three years, the
allowance for doubtful accounts has ranged from 2% to 3% of gross accounts
receivable. If reasonably possible near-term changes in the most material
assumptions were made with regard to the collectibility of accounts receivable,
the amounts by which the annual provision would have changed would range
from a reduction in expense of approximately $2.6 million to an increase
in expense of approximately $1.5 million. Changes in estimates for future
uncollectible accounts receivable would not have a material impact on
the Corporation’s liquidity or capital resources.
Accrued Liabilities
Accrued liabilities requiring the most difficult or subjective judgments include liabilities associated with marketing promotion programs and potentially unsaleable products. The Corporation utilizes numerous trade promotions and consumer coupon programs. The costs of such programs are recognized as a reduction to net sales with the recording of a corresponding accrued liability based |
|
on estimates
at the time of product shipment or coupon release. The accrued liability
for marketing promotions is determined through analysis of programs offered,
historical trends, expectations regarding customer and consumer participation,
sales and payment trends, and experience with payment patterns associated
with similar programs that had been previously offered. The estimated
costs of these programs are reasonably likely to change in the future
as a result of changes in trends with regard to customer and consumer
participation, particularly for new programs and for programs related
to the introduction of new products. Promotional costs were $461.6 million,
$423.0 million and $400.6 million in 2002, 2001 and 2000, respectively.
Reasonably possible near-term changes in the most material assumptions
regarding the cost of promotional programs would have resulted in changes
ranging from a reduction in such costs of approximately $13.7 million
to an increase in costs of approximately $12.0 million, with an increase
or decrease to net sales and operating income within that range. Over
the last three years, actual promotion costs have not deviated from the
estimated amounts by more than 4%. Changes in estimates related to the
cost of promotion programs would not have a material impact on the Corporation’s
liquidity or capital resources.
At the time
of sale, the Corporation estimates a cost for the possibility that products
will become aged or unsaleable in the future. The estimated cost is included
as a reduction to net sales. A related accrued liability is determined
using statistical analysis that incorporates historical sales trends,
seasonal timing and sales patterns, and product movement at retail. Changes
in estimates for costs associated with unsaleable products may change
as a result of inventory levels in the distribution channel, current economic
trends, changes in consumer demand, the introduction of new products and
changes in trends of seasonal sales in response to promotion programs.
Over the three-year period ended December 31, 2002, costs associated with
aged or unsaleable products have amounted to approximately 2% of gross
sales. Reasonably possible near-term changes in the most material assumptions
regarding the estimates of such costs would have increased or decreased
net sales and operating income in a range from $.5 million to $1.0 million.
In each of the years in the three-year period ended December 31, 2002,
actual costs have not deviated from the Corporation’s estimates by
more than 2%. Reasonably possible near-term changes in the estimates of
costs associated with unsaleable products would not have a material impact
on the Corporation’s liquidity or capital resources.
Pension and Other Post-Retirement Benefit Plans
The Corporation’s
policy is to fund domestic pension liabilities in accordance with the
minimum and maximum limits imposed by the Employee Retirement Income Security
Act of 1974 and federal income tax laws, respectively. Non-domestic pension
liabilities are funded in accordance with applicable local laws and regulations.
Plan assets are invested in a broadly diversified portfolio consisting
primarily of domestic and international common stocks and fixed income
securities. Short-term and long-term liabilities associated with benefit
plans are primarily determined based on actuarial calculations. These
calculations are made considering payroll and employee data, including
age and years of service, along with actuarial assumptions at the date
of the financial statements. The Corporation takes into consideration
long-term projections with regard to economic conditions, including interest
rates, return on assets and the rate of increase in compensation levels.
With regard to liabilities associated with other post-retirement benefit
plans that provide health care and life insurance, the Corporation takes
into consideration the long-term annual rate of increase in the per capita
cost of the covered benefits. In compliance with the provisions of Statement
of Financial Accounting Standards No. 87, “Employers’ Accounting
for Pensions,” and Statement of Financial Accounting Standards
No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” the discount rate assumption is reviewed
and may be revised annually. The expected long-term rate of return on
assets assumption (“asset return assumption”) for funded plans
is by its nature of a longer duration and would be revised only when long-term
asset return projections demonstrate that need.
Net periodic pension benefits costs for the Corporate sponsored plans were $29.8 million, $20.4 million and $14.4 million, respectively, in 2002, 2001 and 2000. For 2003, net periodic pension benefits cost is expected to increase primarily due to higher recognized net actuarial losses. Actuarial gains and losses may arise when actual experience differs from assumed experience or when the actuarial assumptions used to value the plan’s obligations are revised from time to time. The |
|
Corporation’s
policy is to amortize only unrecognized net actuarial gains/losses in
excess of 10% of the respective plan’s projected benefit obligation,
or fair market value of assets, if greater. The estimated recognized net
actuarial loss component of net periodic pension benefits cost for 2003
is $15.0 million based on the December 31, 2002 unrecognized net actuarial
loss presented in Note 13, Pension and Other Post-Retirement Benefits
Plans, of $305.5 million and an amortization period of primarily fifteen
years, the average remaining service period of active employees expected
to receive benefits under the plans (“average remaining service period”).
Changes to the assumed rates of participant termination, disability and
retirement would impact the average remaining service period. An increase
in these rates would decrease the average remaining service period and
a decrease in these rates would have the opposite effect. However, changes
to these assumed rates are not anticipated at this time. The 2002 recognized
net actuarial loss component of net periodic pension benefits cost was
$4.4 million. Projections beyond 2003 are dependent on a variety of factors
such as changes to the discount rate and the actual return on pension
plan assets.
For 2002, the Corporation used a discount rate assumption of 7.0% in the calculation of net periodic pension benefits cost for all plans, except for a domestic plan which used 6.5% after August 31, 2002 due to the calculation of a settlement loss on that date. The settlement also required plan assets and obligations to be valued with updated assumptions as of that date for the calculation of net periodic pension benefits cost for the period from August 31, 2002 through December 31, 2002. For 2001 and 2000, a discount rate assumption of 7.5% was used in the calculation of net periodic pension benefits cost. The use of a different discount rate assumption can significantly impact net periodic pension benefits cost. A one percentage point decrease in the discount rate assumption would have increased 2002 net periodic pension benefits cost by $6.9 million and a one percentage point increase in the discount rate assumption would have
decreased 2002
net periodic pension benefits cost by $4.4 million. The Corporation’s discount rate represents the estimated rate at which pension benefits could be effectively settled. In order to estimate this rate, the Corporation considers the yields of several high-quality fixed income investments including 30 year AA and A Corporate bonds as well as the yield of the Merrill Lynch index for 10+ year high quality Corporate bonds.
The Corporation reduced its discount rate assumption to 6.3% for valuing obligations as of December 31, 2002 from 7.0% as of December 31, 2001, due to the declining interest rate environment. A one percentage point decrease in the discount rate assumption would have increased the December 31, 2002 pension benefits obligations by $89.6 million and a one percentage point increase in the discount rate assumption would have decreased the December 31, 2002 pension benefits obligations by $75.4 million.
For 2002, 2001 and 2000, an asset return assumption of 9.5% was used in the calculation of net periodic pension benefits cost and the expected return on plan assets component of net periodic pension benefits cost was based on the fair market value of pension plan assets. The use of a different asset return assumption can significantly impact net periodic pension benefits cost. A one percentage point decrease in the asset return assumption would have increased 2002 net periodic pension benefits cost by $6.2 million and a one percentage point increase in the asset return assumption would have decreased 2002 net periodic pension benefits cost by $6.2 million.
The Corporation’s
pension asset investment policies specify ranges of pension asset allocation
percentages for each asset class. The ranges for the domestic pension
plans were as follows: large-capitalization domestic equities, 40%–55%;
small/mid-capitalization domestic equities, 10%–20%; international
equities, 5%–15%; fixed income investments, 15%–35%; and cash,
0%–5%. As of December 31, 2002, the actual allocations were within
the ranges, except for fixed income investments which were slightly below
the minimum point of the range and cash which was approximately 18% of
plan assets. During December 2002, $150 million was contributed to the
domestic pension plans which was not yet invested into one of the asset
classes as of December 31, 2002. The level of volatility in pension plan
asset returns is expected to be in line with the overall volatility of
the markets and weightings within the asset classes disclosed. |
|
The Corporation will be reducing the asset return assumption for 2003 to 8.5% based on an assessment of expected average asset returns for each asset class over the next 10 years utilizing outside investment manager projections. The geometric average asset return assumptions for the asset classes were as follows: large-capitalization domestic equities, 8.9%; small/mid-capitalization domestic equities, 9.9%; international equities, 9.4%; and fixed income investments, 6.5%. The historical geometric average return over the 15 years prior to December 31, 2002 was approximately 8.9%. Actual asset losses during 2002 and 2001 were approximately (13.1)% and (5.8)%, respectively.
For 2002 and 2001, the Corporation had no minimum funding requirements for the domestic plans and minimum funding requirements for the non-domestic plans were not material. However, the Corporation made contributions of $308.1 million in 2002 and $172.3 million in 2001 to improve the funded status. These contributions were fully tax deductible. A one percentage point change in the discount rate or asset return assumptions would not have changed the 2002 minimum funding requirements for the domestic plans. For 2003, there will be no minimum funding requirements for the domestic plans and minimum funding requirements for the non-domestic plans will not be material. However, the Corporation may choose to make contributions in 2003 to improve the funded status.
Other post-retirement benefits costs relate primarily to health care and life insurance benefits. Net periodic other post-retirement benefits costs for the Corporate sponsored plans were $23.7 million, $21.8 million and $15.0 million in 2002, 2001 and 2000, respectively. For the calculation of net periodic other post-retirement benefits cost, discount rate assumptions of 7.0%, 7.5% and 7.5% were used for 2002, 2001 and 2000, respectively. The use of a different discount rate assumption can significantly impact net periodic other post-retirement benefits costs. A one percentage point decrease in the discount rate assumption would have increased 2002 net periodic other post-retirement benefits costs by $2.6 million and a one percentage point increase in the discount rate assumption would have decreased 2002 net periodic other post-retirement benefits costs by $2.1 million.
The Corporation used discount rate assumptions of 6.3% and 7.0% to value the other post-retirement benefits obligations as of December 31, 2002 and 2001, respectively. A one percentage point decrease in the discount rate assumption would have increased the December 31, 2002 other post-retirement benefits obligations by $36.9 million and a one percentage point increase in the discount rate assumption would have decreased the December 31, 2002 other post-retirement benefits obligations by $30.9 million.
Other critical accounting policies employed by the Corporation include the following:
Goodwill and Other Intangible Assets
The Corporation
adopted Statement of Financial Accounting Standards No. 141, “Business
Combinations” (“SFAS No. 141”) as of July 1, 2001,
and Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”) as of
January 1, 2002. Through December 31, 2001, goodwill resulting from business
acquisitions was amortized over 40 years. The reassessment of the useful
lives of intangible assets acquired on or before June 30, 2001 was completed
during the first quarter of 2002. Amortization of goodwill resulting from
business acquisitions of $388.7 million was discontinued as of January
1, 2002. Other intangible assets totaling $40.4 million as of January
1, 2002 primarily consisted of trademarks and patents obtained through
business acquisitions. The useful lives of trademarks were determined
to be indefinite and, therefore, amortization of these assets was discontinued
as of January 1, 2002. Patents valued at a total of $9.0 million are being
amortized over their remaining legal lives of approximately eighteen years.
The impairment evaluation for goodwill is conducted annually using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in |
|
a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.
The evaluation of the carrying amount of other intangible assets with indefinite lives is made annually by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the other intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows.
The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and other intangible assets and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.
Goodwill was assigned to reporting units and transitional impairment tests were performed for goodwill and other intangible assets during the first quarter of 2002 and the annual impairment tests were performed in the fourth quarter of 2002. No impairment of assets was determined as a result of these tests.
Commodities Futures Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products for anticipated manufacturing requirements and to hedge transportation costs, the Corporation enters into commodities futures contracts as deemed appropriate to reduce the effect of price fluctuations. Prior to January 1, 2001, accounting for commodities futures contracts was in accordance with Statement of Financial Accounting Standards No. 80, “Accounting for Futures Contracts.” Futures contracts met the hedge criteria and were accounted for as hedges. Accordingly, gains and losses were deferred and recognized in cost of sales as part of the product cost.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Subsequently, the FASB issued Statement No. 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133” and Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as amended, requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting
criteria are
met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
The Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. SFAS No. 133, as amended, provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. All derivative instruments currently utilized by the Corporation, including commodities futures contracts, are designated and accounted for as cash flow hedges. Additional information with regard to accounting policies associated with derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.
Net after-tax gains on cash flow hedging derivatives reflected in comprehensive income were $106.7 million for 2002. Net after-tax losses on cash flow hedging derivatives reflected in comprehensive income were $7.8 million for 2001. Net gains and losses on cash flow hedging derivatives were primarily associated with commodities futures contracts. Reclassification adjustments from accumulated other comprehensive income (loss) to income, for gains or losses on cash flow hedging derivatives, were reflected |
|
in cost of sales. Reclassification of gains of $17.9 million for 2002 and losses of $19.3 million for 2001 were associated with commodities futures contracts. Gains on commodities futures contracts recognized in cost of sales as a result of hedge ineffectiveness were approximately $1.5 million and $1.7 million before tax for the years ended December 31, 2002 and 2001, respectively. No gains or losses on cash flow hedging derivatives were reclassified from accumulated other comprehensive income (loss) into income as a result of the discontinuance of a hedge because it became probable that a hedged forecasted transaction would not occur. There were no components of gains or losses on cash flow hedging derivatives that were recognized in income because such components were excluded from the assessment of hedge effectiveness. The amount of net gains on cash flow hedging derivatives, including foreign exchange forward contracts, interest
rate swap
agreements and commodities futures contracts, expected to be reclassified into earnings in the next twelve months was approximately $54.5 million and $6.2 million after tax as of December 31, 2002 and 2001, respectively, which were principally associated with commodities futures contracts.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation’s Common Stock and Class B Stock were $167.8 million in 2002 and $154.8 million in 2001. The annual dividend rate on the Common Stock in 2002 was $1.31 per share, an increase of 8% over the 2001 rate of $1.21 per share. The 2002 dividend increase represented the 28th consecutive year of Common Stock dividend increases.
On February 12, 2003, the Corporation’s Board of Directors declared a quarterly dividend of $.3275 per share of Common Stock payable on March 14, 2003, to stockholders of record as of February 25, 2003. It is the Corporation’s 293rd consecutive Common Stock dividend. A quarterly dividend of $.295 per share of Class B Stock also was declared.
Hershey Foods Corporation’s Common Stock is listed and traded principally on the New York Stock Exchange (“NYSE”) under the ticker symbol “HSY.” Approximately 211.2 million shares of the Corporation’s Common Stock were traded during 2002. The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 2002, was $67.44. There were 38,754 stockholders of record of the Common Stock and the Class B Stock as of December 31, 2002.
The following table shows the dividends paid per share of Common Stock and Class B Stock and the price range of the Common Stock for each quarter of the past two years: |
|
Dividends
Paid
Per Share
|
|
Common
Stock
Price Range*
|
|
|
Common
Stock
|
|
Class
B
Stock
|
|
High
|
|
Low
|
|
2002 |
1st
Quarter |
$ |
.3025 |
|
$ |
.2725 |
|
$ |
72.49 |
|
$ |
65.92 |
|
2nd
Quarter |
|
.3025 |
|
|
.2725 |
|
|
72.14 |
|
|
62.13 |
|
3rd
Quarter |
|
.3275 |
|
|
.2950 |
|
|
79.49 |
|
|
56.45 |
|
4th
Quarter |
|
.3275 |
|
|
.2950 |
|
|
67.99 |
|
|
61.22 |
|
| |
|
|
|
|
|
|
|
|
Total |
$ |
1.2600 |
|
$ |
1.1350 |
|
| |
|
|
|
|
|
|
|
|
2001 |
1st
Quarter |
$ |
.2800 |
|
$ |
.2525 |
|
$ |
70.15 |
|
$ |
55.13 |
|
2nd
Quarter |
|
.2800 |
|
|
.2525 |
|
|
69.58 |
|
|
58.55 |
|
3rd
Quarter |
|
.3025 |
|
|
.2725 |
|
|
66.45 |
|
|
58.70 |
|
4th
Quarter |
|
.3025 |
|
|
.2725 |
|
|
68.62 |
|
|
60.40 |
|
| |
|
|
|
|
|
|
|
|
Total |
$ |
1.1650 |
|
$ |
1.0500 |
|
| |
|
|
|
|
* NYSE-Composite Quotations for Common Stock by calendar quarter. |
|
RETURN MEASURES
Operating Return on Average Stockholders’ Equity
The Corporation’s operating return on average stockholders’ equity was 34.6% in 2002. Over the most recent six-year period, the return has ranged from 28.9% in 1999 to 37.6% in 1998. For the purpose of calculating operating return on average stockholders’ equity, earnings is defined as net income adjusted to reflect the impact of the elimination of the amortization of intangibles for all years and excluding the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2002, the after-tax effect of the business realignment initiatives in 2002 and 2001, and the after-tax gains on the sale of the Luden’s throat drops business in 2001, the sale of corporate aircraft in 2000, and the sale of the pasta business in 1999.
Operating Return on Average Invested Capital
The Corporation’s
operating return on average invested capital was 19.7% in 2002. Over the
most recent six-year period, the return has ranged from 15.4% in 1999
to 19.7% in 2002. Average invested capital consists of the annual average
of beginning and ending balances of long-term debt, deferred income taxes
and stockholders’ equity. For the purpose of calculating operating
return on average invested capital, earnings is defined as net income
adjusted to reflect the impact of the elimination of the amortization
of intangibles for all years and excluding the after-tax effect of incremental
expenses to explore the possible sale of the Corporation in 2002, the
after-tax effect of the business realignment initiatives in 2002 and 2001,
the after-tax gains on the sale of the Luden’s throat drops
business in 2001, the sale of corporate aircraft in 2000, and the sale
of the pasta business in 1999, and the after-tax effect of interest on
long-term debt.
OUTLOOK
The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.
Going forward, the Corporation has set balanced long-term goals, including: three to four percent revenue growth; continued gross margin expansion; nine to eleven percent growth in earnings per share; improvement in returns on invested capital and continued market share gains. In December 2002, the Corporation announced an increase of approximately 11% in the price of standard-size candy bars effective January 1, 2003, representing an average increase of 3% over the entire domestic product line. Sales volume growth in 2003 is expected to be somewhat lower than the Corporation’s long-term goal as a result of the price increase and sales growth in the first quarter of 2003 will be lower as a result of the buy-in in the fourth quarter of 2002.
The Corporation intends to make further gains in market share and to increase spending on brand building and selling capabilities in 2003. Results in 2003 will also benefit from cost savings generated from the business realignment initiatives and continued control of administrative costs.
The Corporation expects to expand margins in 2003, as the Corporation continues to increase sales in more profitable product lines and improve operating efficiencies throughout the supply chain. In addition, commodity costs are anticipated to be relatively stable in 2003 as a result of the Corporation’s forward purchasing and hedging practices. The Corporation plans to achieve earnings per share growth of nine to eleven percent in 2003 from its operating performance and execution of its share repurchase program, as discussed below.
Profitability in future periods is affected by various factors, including sales volume, selling prices, raw material and logistics costs, manufacturing efficiencies and the mix of products sold in any period. Cocoa market prices rose sharply during 2002 and this increase accelerated following a rebellion in the world’s largest cocoa producing country, the Ivory Coast. Continued civil unrest in the Ivory Coast could result in further cocoa price increases. The Corporation’s costs during 2003 and beyond will not necessarily reflect market price fluctuations because of its forward purchasing practices, premiums and discounts reflective of relative values, varying delivery times, and supply |
|
and demand for specific varieties and grades of cocoa beans. The Corporation’s costs for cocoa will increase substantially in 2004; however, the Corporation expects to achieve its long-term goals for growth and profitability by a combination of price increases and/or product weight changes, improved sales mix, supply chain cost reductions and strict control of other costs to offset potential cost increases and respond to changes in the competitive environment.
The Corporation expects strong cash flows from operating activities in 2003. Net cash provided from operating activities is expected to exceed cash requirements for capital additions, capitalized software additions and anticipated dividend payments. The Corporation will continue to monitor the funded status of pension plans based on market performance and make future contributions as appropriate. The Corporation announced on December 12, 2002, that it is authorized to acquire up to $500 million of the Corporation’s Common Stock in open market or through privately negotiated transactions. This authorization is expected to be completed within approximately 12 months, subject to trading liquidity, and will be funded by cash provided from operations and short-term borrowings.
Safe Harbor Statement
The nature of
the Corporation’s operations and the environment in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In connection with the “safe
harbor” provisions of the Private Securities Litigation Reform Act
of 1995, the Corporation notes the following factors that, among others,
could cause future results to differ materially from the forward-looking
statements, expectations and assumptions expressed or implied herein.
Many of the forward-looking statements contained in this document may
be identified by the use of forward-looking words such as “intend,”
“believe,” “expect,” “anticipate,” “should,”
“planned,” “estimated” and “potential,”
among others. Factors which could cause results to differ include, but
are not limited to: changes in the confectionery and grocery business
environment, including actions of competitors and changes in consumer
preferences; customer and consumer response to selling price increases;
changes in governmental laws and regulations, including taxes; market
demand for new and existing products; changes in raw material and other
costs; pension cost factors, such as actuarial assumptions and employee
retirement decisions; and the Corporation’s ability to implement
improvements to and reduce costs associated with the Corporation’s
supply chain. |
| HERSHEY
FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars except per share amounts
|
Net
Sales |
$ |
4,120,317 |
|
$ |
4,137,217 |
|
$ |
3,820,416 |
|
| |
|
|
|
|
|
|
Costs
and Expenses: |
|
|
|
|
|
|
|
|
|
Cost
of sales |
|
2,561,052 |
|
|
2,668,530 |
|
|
2,471,151 |
|
Selling,
marketing and administrative |
|
833,426 |
|
|
846,976 |
|
|
726,615 |
|
Business
realignment and asset impairments |
|
27,552 |
|
|
228,314 |
|
|
— |
|
Gain
on sale of business |
|
— |
|
|
(19,237 |
) |
|
— |
|
| |
|
|
|
|
|
|
Total
costs and expenses |
|
3,422,030 |
|
|
3,724,583 |
|
|
3,197,766 |
|
| |
|
|
|
|
|
|
Income
before Interest and Income Taxes |
|
698,287 |
|
|
412,634 |
|
|
622,650 |
|
Interest
expense, net |
|
60,722 |
|
|
69,093 |
|
|
76,011 |
|
| |
|
|
|
|
|
|
Income
before Income Taxes |
|
637,565 |
|
|
343,541 |
|
|
546,639 |
|
Provision
for income taxes |
|
233,987 |
|
|
136,385 |
|
|
212,096 |
|
| |
|
|
|
|
|
|
Net
Income |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
|
| |
|
|
|
|
|
|
Net
Income Per Share—Basic |
$ |
2.96 |
|
$ |
1.52 |
|
$ |
2.44 |
|
| |
|
|
|
|
|
|
Net
Income Per Share—Diluted |
$ |
2.93 |
|
$ |
1.50 |
|
$ |
2.42 |
|
| |
|
|
|
|
|
|
Cash
Dividends Paid Per Share: |
|
|
|
|
|
|
|
|
|
Common
Stock |
$ |
1.260 |
|
$ |
1.165 |
|
$ |
1.080 |
|
Class
B Common Stock |
|
1.135 |
|
|
1.050 |
|
|
.975 |
|
|
The notes to consolidated financial statements are an integral part
of these statements.
A-23
|
| HERSHEY
FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| December
31, |
2002
|
|
2001
|
|
|
In
thousands of dollars
|
ASSETS |
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
$ |
297,743 |
|
$ |
134,147 |
|
Accounts
receivable—trade |
|
370,976 |
|
|
361,726 |
|
Inventories |
|
503,291 |
|
|
512,134 |
|
Deferred
income taxes |
|
— |
|
|
96,939 |
|
Prepaid
expenses and other |
|
91,608 |
|
|
62,595 |
|
| |
|
|
|
|
Total
current assets |
|
1,263,618 |
|
|
1,167,541 |
|
Property,
Plant and Equipment, Net |
|
1,486,055 |
|
|
1,534,901 |
|
Goodwill |
|
378,453 |
|
|
388,702 |
|
Other
Intangibles |
|
39,898 |
|
|
40,426 |
|
Other
Assets |
|
312,527 |
|
|
115,860 |
|
| |
|
|
|
|
Total
assets |
$ |
3,480,551 |
|
$ |
3,247,430 |
|
| |
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
Current
Liabilities: |
Accounts
payable |
$ |
124,507 |
|
$ |
133,049 |
|
Accrued
liabilities |
|
356,716 |
|
|
462,901 |
|
Accrued
income taxes |
|
12,731 |
|
|
2,568 |
|
Deferred
income taxes |
|
24,768 |
|
|
— |
|
Short-term
debt |
|
11,135 |
|
|
7,005 |
|
Current
portion of long-term debt |
|
16,989 |
|
|
921 |
|
| |
|
|
|
|
Total
current liabilities |
|
546,846 |
|
|
606,444 |
|
Long-term
Debt |
|
851,800 |
|
|
876,972 |
|
Other
Long-term Liabilities |
|
362,162 |
|
|
361,041 |
|
Deferred
Income Taxes |
|
348,040 |
|
|
255,769 |
|
| |
|
|
|
|
Total
liabilities |
|
2,108,848 |
|
|
2,100,226 |
|
| |
|
|
|
|
Stockholders’
Equity: |
|
|
|
|
|
|
Preferred
Stock, shares issued: none in 2002 and 2001 |
|
— |
|
|
— |
|
Common
Stock, shares issued: 149,528,564 in 2002 and 149,517,064 in 2001 |
|
149,528 |
|
|
149,516 |
|
Class
B Common Stock, shares issued: 30,422,308 in 2002 and 30,433,808 in 2001 |
|
30,422 |
|
|
30,434 |
|
Additional
paid-in capital |
|
593 |
|
|
3,263 |
|
Unearned
ESOP compensation |
|
(12,774 |
) |
|
(15,967 |
) |
Retained
earnings |
|
2,991,090 |
|
|
2,755,333 |
|
Treasury—Common
Stock shares, at cost: 45,730,735 in 2002 and 44,311,870 in 2001 |
|
(1,808,227 |
) |
|
(1,689,243 |
) |
Accumulated
other comprehensive income (loss) |
|
21,071 |
|
|
(86,132 |
) |
| |
|
|
|
|
Total
stockholders’ equity |
|
1,371,703 |
|
|
1,147,204 |
|
| |
|
|
|
|
Total
liabilities and stockholders’ equity |
$ |
3,480,551 |
|
$ |
3,247,430 |
|
| |
|
|
|
|
|
The notes to consolidated financial statements are an integral part
of these balance sheets.
A-24
|
| HERSHEY
FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars
|
Cash
Flows Provided from (Used by)
Operating Activities |
|
|
|
|
|
|
|
|
|
Net
income |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
|
Adjustments
to reconcile net income to net cash provided from
operations: |
Depreciation
and amortization |
|
177,908 |
|
|
190,494 |
|
|
175,964 |
|
Deferred
income taxes |
|
137,817 |
|
|
(49,342 |
) |
|
(16,400 |
) |
Gain
on sale of business, net of tax of $18,134 |
|
— |
|
|
(1,103 |
) |
|
— |
|
Business
realignment initiatives |
|
21,509 |
|
|
171,852 |
|
|
— |
|
Asset
impairment write-downs |
|
— |
|
|
53,100 |
|
|
— |
|
Changes
in assets and liabilities, net of effects from business
acquisitions and divestitures: |
Accounts
receivable—trade |
|
(9,250 |
) |
|
17,954 |
|
|
(26,930 |
) |
Inventories |
|
8,843 |
|
|
94,405 |
|
|
28,029 |
|
Accounts
payable |
|
(8,542 |
) |
|
(16,183 |
) |
|
7,280 |
|
Other
assets and liabilities |
|
(106,520 |
) |
|
38,072 |
|
|
(90,277 |
) |
| |
|
|
|
|
|
|
Net
Cash Provided from Operating Activities |
|
625,343 |
|
|
706,405 |
|
|
412,209 |
|
| |
|
|
|
|
|
|
Cash
Flows Provided from (Used by)
Investing Activities |
|
|
|
|
|
|
|
|
|
Capital
additions |
|
(132,736 |
) |
|
(160,105 |
) |
|
(138,333 |
) |
Capitalized
software additions |
|
(11,836 |
) |
|
(9,845 |
) |
|
(4,686 |
) |
Business
acquisitions |
|
— |
|
|
(17,079 |
) |
|
(135,000 |
) |
Proceeds
from divestitures |
|
12,000 |
|
|
59,900 |
|
|
— |
|
Other,
net |
|
— |
|
|
3,142 |
|
|
6,206 |
|
| |
|
|
|
|
|
|
Net
Cash (Used by) Investing Activities |
|
(132,572 |
) |
|
(123,987 |
) |
|
(271,813 |
) |
| |
|
|
|
|
|
|
Cash
Flows Provided from (Used by)
Financing Activities |
|
|
|
|
|
|
|
|
|
Net
change in short-term borrowings |
|
4,130 |
|
|
(250,589 |
) |
|
48,428 |
|
Long-term
borrowings |
|
304 |
|
|
379 |
|
|
187 |
|
Repayment
of long-term debt |
|
(9,578 |
) |
|
(826 |
) |
|
(2,815 |
) |
Cash
dividends paid |
|
(167,821 |
) |
|
(154,750 |
) |
|
(144,891 |
) |
Exercise
of stock options |
|
86,491 |
|
|
30,210 |
|
|
24,376 |
|
Incentive
plan transactions |
|
(158,507 |
) |
|
(64,342 |
) |
|
(51,859 |
) |
Repurchase
of Common Stock |
|
(84,194 |
) |
|
(40,322 |
) |
|
(99,931 |
) |
| |
|
|
|
|
|
|
Net
Cash (Used by) Financing Activities |
|
(329,175 |
) |
|
(480,240 |
) |
|
(226,505 |
) |
| |
|
|
|
|
|
|
Increase
(Decrease) in Cash and Cash Equivalents |
|
163,596 |
|
|
102,178 |
|
|
(86,109 |
) |
Cash
and Cash Equivalents as of January 1 |
|
134,147 |
|
|
31,969 |
|
|
118,078 |
|
| |
|
|
|
|
|
|
Cash
and Cash Equivalents as of December 31 |
$ |
297,743 |
|
$ |
134,147 |
|
$ |
31,969 |
|
| |
|
|
|
|
|
|
Interest
Paid |
$ |
64,343 |
|
$ |
72,043 |
|
$ |
81,465 |
|
Income
Taxes Paid |
|
57,495 |
|
|
171,362 |
|
|
299,104 |
|
|
The
notes to consolidated financial statements are an integral part of these
statements.
A-25
|
|
HERSHEY
FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| |
Preferred
Stock |
|
Common
Stock |
|
Class
B
Common
Stock |
|
Additional
Paid-in
Capital |
|
Unearned
ESOP
Compensation |
|
Retained
Earnings |
|
Treasury
Common
Stock |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Total
Stockholders’
Equity |
|
|
| In
thousands of dollars |
| Balance
as of January 1, 2000 |
$ |
— |
|
$ |
149,507 |
|
$ |
30,443 |
|
$ |
30,079 |
|
$ |
(22,354 |
) |
$ |
2,513,275 |
|
$ |
(1,552,708 |
) |
$ |
(49,615 |
) |
$ |
1,098,627 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334,543 |
|
|
|
|
|
|
|
|
334,543 |
|
Other
comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,101 |
) |
|
(7,101 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,442 |
|
Dividends: |
Common
Stock, $1.08 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,209 |
) |
|
|
|
|
|
|
|
(115,209 |
) |
Class
B Common Stock, $.975 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,682 |
) |
|
|
|
|
|
|
|
(29,682 |
) |
Conversion
of Class B Common Stock into Common Stock |
|
|
|
|
1 |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Incentive
plan transactions |
|
|
|
|
|
|
|
|
|
|
(426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(426 |
) |
Exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
(16,728 |
) |
|
|
|
|
|
|
|
7,551 |
|
|
|
|
|
(9,177 |
) |
Employee
stock ownership trust/benefits transactions |
|
|
|
|
|
|
|
|
|
|
199 |
|
|
3,193 |
|
|
|
|
|
|
|
|
|
|
|
3,392 |
|
Repurchase
of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,931 |
) |
|
|
|
|
(99,931 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2000 |
|
— |
|
|
149,508 |
|
|
30,442 |
|
|
13,124 |
|
|
(19,161 |
) |
|
2,702,927 |
|
|
(1,645,088 |
) |
|
(56,716 |
) |
|
1,175,036 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,156 |
|
|
|
|
|
|
|
|
207,156 |
|
Other
comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,416 |
) |
|
(29,416 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,740 |
|
Dividends: |
Common
Stock, $1.165 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,790 |
) |
|
|
|
|
|
|
|
(122,790 |
) |
Class
B Common Stock, $1.05 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,960 |
) |
|
|
|
|
|
|
|
(31,960 |
) |
Conversion
of Class B Common Stock into Common Stock |
|
|
|
|
8 |
|
|
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Incentive
plan transactions |
|
|
|
|
|
|
|
|
|
|
1,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,062 |
|
Exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
(11,863 |
) |
|
|
|
|
|
|
|
(3,833 |
) |
|
|
|
|
(15,696 |
) |
Employee
stock ownership trust/benefits transactions |
|
|
|
|
|
|
|
|
|
|
940 |
|
|
3,194 |
|
|
|
|
|
|
|
|
|
|
|
4,134 |
|
Repurchase
of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,322 |
) |
|
|
|
|
(40,322 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2001 |
|
— |
|
|
149,516 |
|
|
30,434 |
|
|
3,263 |
|
|
(15,967 |
) |
|
2,755,333 |
|
|
(1,689,243 |
) |
|
(86,132 |
) |
|
1,147,204 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,578 |
|
|
|
|
|
|
|
|
403,578 |
|
Other
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,203 |
|
|
107,203 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510,781 |
|
Dividends: |
Common
Stock, $1.26 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,285 |
) |
|
|
|
|
|
|
|
(133,285 |
) |
Class
B Common Stock, $1.135 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,536 |
) |
|
|
|
|
|
|
|
(34,536 |
) |
Conversion
of Class B Common Stock into Common Stock |
|
|
|
|
12 |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Incentive
plan transactions |
|
|
|
|
|
|
|
|
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(298 |
) |
Exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
(3,517 |
) |
|
|
|
|
|
|
|
(34,790 |
) |
|
|
|
|
(38,307 |
) |
Employee
stock ownership trust/benefits transactions |
|
|
|
|
|
|
|
|
|
|
1,145 |
|
|
3,193 |
|
|
|
|
|
|
|
|
|
|
|
4,338 |
|
Repurchase
of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,194 |
) |
|
|
|
|
(84,194 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2002 |
$ |
— |
|
$ |
149,528 |
|
$ |
30,422 |
|
$ |
593 |
|
$ |
(12,774 |
) |
$ |
2,991,090 |
|
$ |
(1,808,227 |
) |
$ |
21,071 |
|
$ |
1,371,703 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
notes to consolidated financial statements are an integral part of these
statements. |
| HERSHEY
FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies employed by the Corporation are discussed below and in other notes to the consolidated financial statements.
Items Affecting Comparability
Certain reclassifications
have been made to prior year amounts to conform to the 2002 presentation.
During 2000 and 2001, the Financial Accounting Standards Board’s
Emerging Issues Task Force (“EITF”) addressed various issues
related to the income statement classification of certain promotional
payments, including consideration from a vendor to a reseller or another
party that purchases the vendor’s products. EITF No. 01-9, “Accounting
for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s
Products,” was issued in November 2001 and codified earlier pronouncements.
In accordance with EITF No. 01-9, certain consumer and trade promotion
expenses, such as consumer coupon redemption expense, off-invoice allowances
and various marketing performance funds previously reported in selling,
marketing and administrative expense were reclassified as a reduction
of net sales. Reclassifications for 2001 and 2000 were $423.0 million
and $400.6 million, respectively. In addition, certain freight billings
totaling $3.0 million for 2001, previously reported in cost of sales,
were reclassified as an increase to net sales.
The consolidated financial statements include the impact of the Corporation’s business realignment initiatives as described in Note 3. Cost of sales included charges resulting from the business realignment initiatives of $6.4 million and $50.1 million for the years ended December 31, 2002 and 2001, respectively. Additionally, selling, marketing and administrative expenses for the year ended December 31, 2002, included expenses of $17.2 million associated with the exploration of the potential sale of the Corporation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries after elimination of intercompany accounts and transactions.
Use of Estimates
The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and revenues and expenses during
the period. Critical accounting estimates involved in applying the Corporation’s
accounting policies are those that require management to make assumptions
about matters that are highly uncertain at the time the accounting estimate
was made and those for which different estimates reasonably could have
been used for the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, and would have
a material impact on the presentation of the Corporation’s financial
condition, changes in financial condition or results of operations. The
Corporation’s most critical accounting estimates pertain to accounting
policies for accounts receivable—trade, accrued liabilities and pension
and other post-retirement benefit plans.
Revenue Recognition
The Corporation records sales when all of the following criteria have been met: a valid customer order with a fixed price has been received; a delivery appointment with the customer has been made; the product has been shipped in accordance with the delivery appointment within the required lead time; there is no further significant obligation to assist in the resale of the product; and collectibility is reasonably assured. |
|
Cash Equivalents
Cash equivalents consist of highly liquid debt instruments, time deposits and money market funds with original maturities of three months or less. The fair value of cash and cash equivalents approximates the carrying amount.
Commodities Futures Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products for anticipated manufacturing requirements and to hedge transportation costs, the Corporation enters into commodities futures contracts as deemed appropriate to reduce the effect of price fluctuations. Prior to January 1, 2001, accounting for commodities futures contracts was in accordance with Statement of Financial Accounting Standards No. 80, “Accounting for Futures Contracts.” Futures contracts met the hedge criteria and were accounted for as hedges. Accordingly, gains and losses were deferred and recognized in cost of sales as part of the product cost.
In June 1998,
the Financial Accounting Standards Board (“FASB”) issued Statement
of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”).
Subsequently, the FASB issued Statement No. 137, “Accounting for
Derivative Instruments and Hedging Activities—Deferral of the Effective
Date of FASB Statement No. 133, an amendment of FASB Statement No. 133”
and Statement No. 138, “Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133.”
SFAS No. 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded on the balance
sheet as either an asset or liability measured at its fair value. SFAS
No. 133, as amended, requires that changes in the derivative’s fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative’s
gains and losses to offset related results on the hedged item in the income
statement, to the extent effective, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
The Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. SFAS No. 133, as amended, provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. All derivative instruments currently utilized by the Corporation, including commodities futures contracts, are designated and accounted for as cash flow hedges. Additional information with regard to accounting policies associated with derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 3 to 15 years for machinery and equipment; and 25 to 40 years for buildings and related improvements. Maintenance and repair expenditures are charged to expense as incurred. Applicable interest charges incurred during the construction of new facilities and production lines are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives.
The Corporation reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. |
|
Goodwill and Other Intangible Assets
The Corporation
adopted Statement of Financial Accounting Standards No. 141, “Business
Combinations” (“SFAS No. 141”) as of July 1, 2001,
and Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”) as of
January 1, 2002. Through December 31, 2001, goodwill resulting from business
acquisitions was amortized over 40 years. The reassessment of the useful
lives of intangible assets acquired on or before June 30, 2001 was completed
during the first quarter of 2002. Amortization of goodwill resulting from
business acquisitions of $388.7 million was discontinued as of January
1, 2002. Other intangible assets totaling $40.4 million as of January
1, 2002 primarily consisted of trademarks and patents obtained through
business acquisitions. The useful lives of trademarks were determined
to be indefinite and, therefore, amortization of these assets was discontinued
as of January 1, 2002. Patents valued at a total of $9.0 million are being
amortized over their remaining legal lives of approximately eighteen years.
The impairment
evaluation for goodwill is conducted annually using a two-step process.
In the first step, the fair value of each reporting unit is compared with
the carrying amount of the reporting unit, including goodwill. The estimated
fair value of the reporting unit is generally determined on the basis
of discounted future cash flows. If the estimated fair value of the reporting
unit is less than the carrying amount of the reporting unit, then a second
step must be completed in order to determine the amount of the goodwill
impairment that should be recorded. In the second step, the implied fair
value of the reporting unit’s goodwill is determined by allocating
the reporting unit’s fair value to all of its assets and liabilities
other than goodwill (including any unrecognized intangible assets) in
a manner similar to a purchase price allocation. The resulting implied
fair value of the goodwill that results from the application of this second
step is then compared to the carrying amount of the goodwill and an impairment
charge is recorded for the difference.
The evaluation of the carrying amount of other intangible assets with indefinite lives is made annually by comparing the carrying amount of these assets to their estimated fair value. If the estimated fair value is less than the carrying amount of the other intangible assets with indefinite lives, then an impairment charge is recorded to reduce the asset to its estimated fair value. The estimated fair value is generally determined on the basis of discounted future cash flows.
The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and other intangible assets and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.
Goodwill was assigned to reporting units and transitional impairment tests were performed for goodwill and other intangible assets during the first quarter of 2002 and the annual impairment tests were performed in the fourth quarter of 2002. No impairment of assets was determined as a result of these tests.
Comprehensive Income
Comprehensive income (loss) is reported on the Consolidated Statements of Stockholders’ Equity and accumulated other comprehensive income (loss) is reported on the Consolidated Balance Sheets. Additional information regarding comprehensive income is contained in Note 7, Comprehensive Income.
Results of operations for foreign entities are translated using the average exchange rates during the period. For foreign entities, assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date. Resulting translation adjustments are recorded as a component of other comprehensive income (loss), “Foreign Currency Translation Adjustments.”
A minimum pension liability adjustment is required when the actuarial present value of accumulated pension plan benefits exceeds plan assets and accrued pension liabilities, less allowable intangible assets. Minimum pension liability adjustments, net of income taxes, are recorded as a component of other comprehensive income (loss), “Minimum Pension Liability Adjustments.” |
|
The Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. Accordingly, gains and losses on cash flow hedging derivatives, to the extent effective, are included in other comprehensive income (loss) and reclassification adjustments are recorded as such gains and losses are ratably recorded in income in the same period as the hedged items affect earnings. Additional information with regard to accounting policies associated with derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward contracts to hedge transactions primarily related to firm commitments to purchase equipment, certain raw materials and finished goods denominated in foreign currencies, and to hedge payment of intercompany transactions with its subsidiaries outside the United States. These contracts reduce currency risk from exchange rate movements.
Foreign exchange
forward contracts are intended to be and are effective as hedges of firm,
identifiable, foreign currency commitments. Prior to January 1, 2001,
the Corporation accounted for foreign exchange forward contracts in accordance
with Statement of Financial Accounting Standards No. 52, “Foreign
Currency Translation,” and accordingly, gains and losses were
deferred and accounted for as part of the underlying transactions. The
Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. Foreign
exchange forward contracts are designated as cash flow hedging derivatives
and the fair value of such contracts is recorded on the Consolidated Balance
Sheets as either an asset or liability. Gains and losses on these contracts
are recorded as a component of other comprehensive income and are reclassified
into earnings in the same period during which the hedged transaction affects
earnings. Additional information with regard to accounting policies for
derivative instruments, including foreign exchange forward contracts,
is contained in Note 6, Derivative Instruments and Hedging Activities.
License Agreements
The Corporation has entered into license agreements under which it has access to certain trademarks and proprietary technology, and manufactures and/or markets and distributes certain products. The rights under these agreements are extendible on a long-term basis at the Corporation’s option subject to certain conditions, including minimum sales levels, which the Corporation has met. License fees and royalties, payable under the terms of the agreements, are expensed as incurred and included in selling, marketing and administrative expenses.
Research and Development
The Corporation expenses research and development costs as incurred. Research and development expense was $23.4 million, $26.5 million and $25.4 million in 2002, 2001 and 2000, respectively.
Advertising
The Corporation expenses advertising costs as incurred. Advertising expense was $162.9 million, $187.2 million and $156.3 million in 2002, 2001 and 2000, respectively. Prepaid advertising as of December 31, 2002 and 2001, was $1.3 million and $4.0 million, respectively.
Computer Software
The Corporation capitalizes costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and it is probable that computer software being developed will be completed and placed in service. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project, and (3) interest costs incurred, when material, while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. |
|
The unamortized amount of capitalized software as of December 31, 2002 and 2001, was $41.3 million and $51.6 million, respectively. Software costs are amortized using the straight-line method over the shorter of five years or the expected life of the software. Accumulated amortization of capitalized software was $78.4 million and $56.9 million as of December 31, 2002 and 2001, respectively.
The Corporation reviews the carrying value of software and development costs for impairment in accordance with its policy pertaining to the impairment of long-lived assets. Generally, measurement of impairment occurs when internal use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use computer software significantly exceed the amount originally expected to develop or modify the software.
Employee Stock Options
As of December 31, 2002, the Corporation had two stock-based employee compensation plans, which are described more fully in Note 16, Stock Compensation Plans. The Corporation applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income as all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars except per share amounts
|
Net
income, as reported |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
|
Deduct:
Total stock-based employee compensation expense determined under fair
value method, net of related tax effects |
|
(12,421 |
) |
|
(7,398 |
) |
|
(6,387 |
) |
| |
|
|
|
|
|
|
Pro
forma net income |
$ |
391,157 |
|
$ |
199,758 |
|
$ |
328,156 |
|
| |
|
|
|
|
|
|
Earnings
per share: |
Basic—as
reported |
$ |
2.96 |
|
$ |
1.52 |
|
$ |
2.44 |
|
| |
|
|
|
|
|
|
Basic—pro
forma |
$ |
2.86 |
|
$ |
1.47 |
|
$ |
2.39 |
|
| |
|
|
|
|
|
|
Diluted—as
reported |
$ |
2.93 |
|
$ |
1.50 |
|
$ |
2.42 |
|
| |
|
|
|
|
|
|
Diluted—pro
forma |
$ |
2.84 |
|
$ |
1.45 |
|
$ |
2.37 |
|
| |
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000, respectively: dividend yields of 1.9%, 2.2% and 1.8%; expected volatility of 28%, 28% and 27%; risk-free interest rates of 4.7%, 5.0% and 6.7%; and expected lives of 6.4 years, 6.4 years and 6.5 years.
New and Proposed Accounting Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material effect on the Corporation’s consolidated financial statements for 2002. |
|
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Corporation has no significant guarantees which would need to be recognized and measured under the Interpretation and no significant guarantees which meet the disclosure requirements as of December 31, 2002.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. Enhanced disclosures related to the accounting for stock-based employee compensation are provided in this Note 1 to the Consolidated Financial
Statements
under the heading Employee Stock Options.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” This Interpretation addresses consolidation by business enterprises of special-purpose entities (SPEs) to which the usual condition for consolidation described in Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” does not apply because the SPEs have no voting interests or otherwise are not subject to control through ownership of voting interests.
The Interpretation is effective for calendar year companies beginning in the third quarter of 2003 and it is reasonably possible that the Interpretation will require the consolidation of the Corporation’s three off-balance sheet arrangements with SPTs for the leasing of certain warehouse and distribution facilities as described in Note 4, Commitments. The consolidation of these entities will result in an increase to property, plant and equipment of approximately $120.0 million, with a corresponding increase to long-term debt and minority interest. The consolidation of these entities will also result in an increase to depreciation expense of approximately $5.0 million on an annual basis.
2. ACQUISITIONS AND DIVESTITURES
In June 2002, the Corporation completed the sale of a group of the Corporation’s non-chocolate confectionery candy brands to Farley’s & Sathers Candy Company, Inc. (the “sale of certain confectionery brands to Farley’s & Sathers”) for $12.0 million in cash as part of its business realignment initiatives. Included in the transaction were the Heide, Jujyfruits, Wunderbeans and Amazin’ Fruit trademarked confectionery brands, as well as the rights to sell Chuckles branded products, under license.
In July 2001, the Corporation’s Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis for $17.1 million. This business had sales of approximately $20.0 million in 2000. Included in the acquisition were the IO-IO brand of hazelnut creme items and the chocolate and confectionery products sold under the Visconti brand. Also included in the purchase were a manufacturing plant and confectionery equipment in Sao Roque, Brazil.
In December 2000, the Corporation completed the purchase of the intense and breath freshener mints and gum business of Nabisco, Inc. (“Nabisco”). The Corporation paid $135.0 million to acquire the business, including Ice Breakers and Breath Savers Cool Blasts intense mints, Breath Savers mints, |
|
and Ice Breakers, Carefree, Stick*Free, Bubble Yum and Fruit Stripe gums. Also included in the purchase were manufacturing machinery and equipment and a gum-manufacturing plant in Las Piedras, Puerto Rico.
In accordance with the purchase method of accounting, the purchase prices of the acquisitions were allocated to the underlying assets and liabilities at the dates of acquisition based on their estimated respective fair values. Total liabilities assumed were $31.0 million. Results subsequent to the dates of acquisition were included in the consolidated financial statements. Had the results of the acquisitions been included in the consolidated results for the periods prior to the acquisition dates, the effect would not have been material.
In September
2001, the Corporation completed the sale of the Luden’s throat
drops business to Pharmacia Consumer Healthcare, a unit of Pharmacia Corporation.
Included in the sale were the trademarks and manufacturing equipment for
the throat drops business. Under a supply agreement with Pharmacia, the
Corporation agreed to manufacture Luden’s throat drops for
up to 19 months after the date of sale. Under a separate services agreement,
the Corporation agreed to continue to sell, warehouse and distribute Luden’s
throat drops through March 2002. In the third quarter of 2001, the Corporation
received cash proceeds of $59.9 million and recorded a gain of $19.2 million
before tax, $1.1 million after tax, as a result of the transaction. A
higher gain for tax purposes reflected the low tax basis of the intangible
assets included in the sale, resulting in taxes on the gain of $18.1 million.
Net sales for the Luden’s throat drops business were $8.9
million and $20.7 million in 2001 and 2000, respectively.
3. BUSINESS REALIGNMENT INITIATIVES
In late October 2001, the Corporation’s Board of Directors approved a plan to improve the efficiency and profitability of the Corporation’s operations. The plan included asset management improvements, product line rationalization, supply chain efficiency improvements and a voluntary work force reduction program (collectively, “the business realignment initiatives”). The major components of the plan were completed during 2002. Remaining transactions primarily pertain to the sale of certain real estate associated with the closure of facilities, as discussed below, and possible pension settlement costs related to employee retirement decisions. The voluntary work force reduction program is also discussed in more detail below.
During 2002, charges to cost of sales and business realignment and asset impairments were recorded totaling $34.0 million before tax. The total included a charge to cost of sales of $6.4 million associated with the relocation of manufacturing equipment and a net business realignment and asset impairments charge of $27.6 million. Components of the net $27.6 million pre-tax charge included a $28.8 million charge for pension settlement losses resulting from the voluntary work force reduction program (“VWRP”), a $3.0 million charge for pension curtailment losses and special termination benefits resulting from manufacturing plant closures, a $.1 million charge relating to involuntary termination benefits and a $.1 million charge relating to the realignment of the domestic sales organization, partially offset by a $4.4 million favorable adjustment reflecting higher than estimated proceeds from the sale of certain assets.
During the fourth
quarter of 2001, charges to cost of sales and business realignment and
asset impairments were recorded totaling $278.4 million before tax. The
total included a charge to cost of sales of $50.1 million associated with
raw material inventory reductions and a business realignment and asset
impairments charge of $228.3 million. Components of the $228.3 million
pre-tax charge included $175.2 million for business realignment charges
and $53.1 million for asset impairment charges. The $175.2 million for
business realignment charges included $139.8 million for enhanced pension
and other post-retirement benefits associated with the VWRP and $35.4
million which consisted of $5.0 million for involuntary termination benefits,
$8.9 million for VWRP related voluntary separation benefits and administrative
expenses, and $21.5 million for other costs associated with the business
realignment initiatives described in more detail below. A liability for
business realignment initiatives of $35.4 million was included in accrued
liabilities as of December 31, 2001. The $53.1 million for asset impairment
charges included $45.3 million for fixed |
|
asset impairments and $7.8 million for goodwill impairment. The fixed asset impairments included $.3 million for land, $9.1 million for buildings and $35.9 million for machinery and equipment. In determining the fixed asset and goodwill impairment losses, fair value was estimated based on the expected sales proceeds.
These initiatives are expected to generate $75 million to $80 million of annual savings when fully implemented and contributed savings of approximately $38.0 million in 2002. As of December 31, 2002, there have been no significant changes to the estimated savings for the business realignment initiatives. Total costs associated with the business realignment initiatives were $312.4 million compared to the $310.0 million announced in January 2002. The increased costs related primarily to higher pension settlement losses resulting from the VWRP which reflected differences in actuarial assumptions, returns on pension plan assets and employee retirement decisions.
Asset Management Improvements
There were no additional 2002 business realignment and asset impairments charges recorded relating to asset management improvements. During 2002, cash payments totaling $2.7 million for equipment removal relating to outsourcing the manufacture of certain ingredients were recorded against the liability for business realignment initiatives. The 2001 charge to cost of sales of $50.1 million was a result of decisions to outsource the manufacture of certain ingredients and to significantly reduce the inventory levels of certain raw materials, primarily cocoa beans and cocoa butter. Also included in the charge was the impact of a decision to reduce raw material inventory levels for almonds and peanuts. The Corporation sold raw material inventories and delayed raw material deliveries during the fourth quarter of 2001. The 2001 pre-tax charge of $5.3 million, which was a component of the business realignment and asset impairments charge,
included $2.7
million for equipment removal and $2.6 million relating to asset impairments.
Product Line Rationalization
During 2002,
a pre-tax charge of $.1 million was recorded, as incurred, resulting in
an increase to the liability for business realignment initiatives relating
to the realignment of the Corporation’s sales organizations. In addition,
a pre-tax charge of $.7 million relating to pension curtailment losses
and special termination benefits resulting from the closure of a manufacturing
plant, as described below, was credited to pension benefit liabilities.
Also during 2002, cash payments totaling $6.4 million, primarily for maintenance
of properties prior to sale, severance and broker termination fees associated
with exiting certain businesses were recorded against the liability for
business realignment initiatives. Employee terminations were primarily
related to the sale of certain confectionery brands to Farley’s &
Sathers that resulted in the closure of a manufacturing facility in New
Brunswick, New Jersey which was being held for sale as of December 31,
2002. During 2002, 142 employees were terminated and involuntary employee
termination benefits paid were approximately $1.3 million. In addition,
non-cash write-offs of $8.5 million associated with exiting the Corporation’s
aseptically packaged drink business and $.7 million for inventory were
also recorded against the liability for business realignment initiatives.
Proceeds of $12.0 million for the sale of certain confectionery brands
to Farley’s & Sathers exceeded the 2001 estimates which resulted
in a $4.4 million favorable adjustment to the 2001 asset impairments charge
for goodwill. Net sales associated with businesses sold or exited as part
of the business realignment initiatives were approximately $11.6 million,
$34.2 million and $38.3 million during 2002, 2001 and 2000 respectively.
The 2001 pre-tax charge of $28.3 million, which was a component of the business realignment and asset impairments charge, included $15.5 million relating to the sale or exit of certain businesses, the discontinuance of certain non-chocolate confectionery products and the realignment of the Corporation’s domestic and international sales organizations, $7.8 million relating to goodwill impairment and $5.0 million relating to fixed asset impairments. |
|
Supply Chain Efficiency Improvements
During 2002, the manufacturing plant and facility closures occurred as planned. The manufacturing facility in Denver, Colorado was closed and the manufacturing equipment and machinery were sold or relocated for production at a contract manufacturer or other manufacturing plants. The Denver, Colorado plant had principally manufactured Jolly Rancher hard candy. The manufacturing facility in Pennsburg, Pennsylvania was closed and the production of Pot of Gold chocolates was moved to another manufacturing plant. A small manufacturing and packaging facility located in Palmyra, Pennsylvania, as well as a distribution center and certain minor facilities located in Oakdale, California were also closed. The Denver, Colorado facility is being held for sale and the Pennsburg, Pennsylvania facility is idle and is being held for possible future use.
During 2002, a pre-tax charge of $.1 million was credited to the liability for business realignment initiatives and a pre-tax charge of $2.3 million relating to pension curtailment losses and special termination benefits was credited to pension benefit liabilities. These charges resulted from the plant closures described above. Also during 2002, cash payments totaling $7.7 million relating to the plant and facility closures and non-cash write-offs of $.7 million for spare parts and supplies were recorded against the liability for business realignment initiatives. The cash payments included $3.8 million for the payment of involuntary employee termination benefits to 614 terminated employees associated with the plant and facility closures.
The 2001 pre-tax charge of $46.0 million, which was a component of the business realignment and asset impairments charge, included $8.3 million relating to the closure of the facilities described above and $37.7 million for fixed asset impairments.
Voluntary Work Force Reduction Program
During 2002, a net pre-tax charge of $28.8 million was credited to pension benefit liabilities relating to pension settlement costs associated with departing employees electing a lump sum payment of their pension benefit under the early retirement program of the VWRP. Also during 2002, cash payments totaling $8.9 million relating to the enhanced mutual separation program of the VWRP and administrative expenses were recorded against the liability for business realignment initiatives. Payments of pension and certain supplemental benefits were made from the assets of the Corporation’s pension plan which includes primarily salaried employees. During 2002, a reduction of approximately 500 employees resulted from the VWRP.
The VWRP was
offered to certain eligible employees in the United States, Canada and
Puerto Rico in October 2001 in order to reduce staffing levels and improve
profitability. The VWRP consisted of an early retirement program and an
enhanced mutual separation program. The early retirement program was offered
to approximately 1,200 eligible salaried employees who were born prior
to January 1, 1954, and were employed by the Corporation prior to January
1, 1999. The early retirement program provided enhanced pension, post-retirement
and certain supplemental benefits. The enhanced mutual separation program
provided increased severance and temporary medical benefits. The 2001
pre-tax charge of $148.7 million, which was a component of the business
realignment and asset impairments charge, consisted of $139.8 million
for pension and other post-retirement special termination benefits and
curtailment losses associated with the early retirement program and $8.9
million associated with the VWRP enhanced mutual separation program and
administrative expenses. |
|
The following table summarizes the charges for certain business realignment initiatives in the fourth quarter of 2001 and the related activities completed through December 31, 2002:
|
| Accrued
Liabilities |
Balance
12/31/01 |
|
2002
Utilization |
|
New
charges
during
2002 |
|
Balance
12/31/02 |
|
|
|
|
|
|
|
|
In
thousands of dollars
|
|
Asset
management improvements |
$ |
2,700 |
|
$ |
(2,700 |
) |
|
$ |
— |
|
|
|
$ |
— |
|
|
Product
line rationalization |
|
15,529 |
|
|
(15,644 |
) |
|
|
115 |
|
|
|
|
— |
|
|
Supply
chain efficiency improvements |
|
8,300 |
|
|
(8,400 |
) |
|
|
100 |
|
|
|
|
— |
|
|
Voluntary
work force reduction program |
|
8,860 |
|
|
(8,860 |
) |
|
|
— |
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
35,389 |
|
$ |
(35,604 |
) |
|
$ |
215 |
|
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
New charges during 2002 related to realignment of the Corporation’s sales organizations and termination benefits. Utilization recorded against the liability in 2002 reflected cash payments totaling $25.7 million and non-cash write-offs of $9.9 million associated primarily with exiting certain businesses. The cash payments related primarily to severance payments associated with the enhanced mutual separation program and plant closures, outsourcing the manufacture of certain ingredients, VWRP administrative expenses, the realignment of the Corporation’s sales organizations and other expenses associated with exiting certain businesses and maintaining properties prior to sale.
4. COMMITMENTS
Rent expense was $34.6 million, $37.3 million and $40.8 million for 2002, 2001 and 2000, respectively. Rent expense pertains to all operating leases, which were principally related to certain administrative buildings, warehouse and distribution facilities and transportation equipment.
The Corporation
has entered into certain obligations for the purchase of raw materials.
Purchase obligations primarily reflect forward contracts for the purchase
of raw materials from third-party brokers and dealers to minimize the
effect of future price fluctuations. Total obligations for each year are
comprised of fixed price contracts for the purchase of commodities and
unpriced contracts which have been valued using market prices as of December
31, 2002. The cost of commodities associated with the unpriced contracts
is variable as market prices change over future periods. However, the
variability of such costs is mitigated to the extent of the Corporation’s
futures price cover for those periods. Accordingly, increases or decreases
in market prices will be offset by gains or losses on commodity futures
contracts to the extent that the unpriced contracts are hedged as of December
31, 2002 and in future periods. These obligations are satisfied by taking
delivery of the specific commodities for use in the manufacture of finished
goods. For each of the three years in the period ended December 31, 2002,
such obligations were fully satisfied by taking delivery of and making
payment for the specific commodities.
The Corporation
has entered into three off-balance sheet arrangements for the leasing
of certain warehouse and distribution facilities. These off-balance sheet
arrangements enabled the Corporation to lease these facilities under more
favorable terms than other leasing alternatives. The operating lease arrangements
are with special purpose trusts (“SPTs”) whereby the Corporation
leases warehouse and distribution facilities in Redlands, California;
Atlanta, Georgia; and Hershey, Pennsylvania, as discussed below. The SPTs
were formed to facilitate the acquisition and subsequent leasing of the
facilities to the Corporation. The SPTs financed the acquisition of the
facilities by issuing notes and equity certificates to independent third-party
financial institutions. The independent third-party financial institution
which holds the equity certificates is the owner of the SPTs. The owner
of the SPTs has made substantive residual equity capital investments in
excess of 3% which will be at risk during the entire term of each lease.
Accordingly, the Corporation is not permitted to consolidate the SPTs
because all of the conditions for consolidation have not been met. Aside
from the residual guarantees and instrument guarantees associated with
the individual leasing arrangements, as discussed below, the Corporation
has provided no other guarantees or capitalization of these entities.
The obligations in connection with these leases have not been |
|
collateralized by the Corporation. The Corporation has no obligations with respect to refinancing of the lessor’s debt, would incur no significant penalties which would result in the reasonable assurance of continuation of the leases and has no significant guarantees in addition to the residual and instrument guarantees, discussed below. There are no other material commitments or contingent liabilities associated with the leasing arrangements. The Corporation’s transactions with the SPTs are limited to the operating lease agreements and the associated rent expense is included in cost of sales in the Consolidated Statements of Income.
The leases include substantial residual guarantees by the Corporation for a significant amount of the financing and options to purchase the facilities at original cost. Pursuant to instrument guarantees, in the event of a default under the lease agreements, the Corporation guaranteed to the note holders and certificate holders payment in an amount equal to all sums then due under the leases.
In December 2000, the Corporation entered into an operating lease agreement with the owner of the warehouse and distribution facility in Redlands, California. The lease term was approximately ten years, with occupancy to begin upon completion of the facility. The lease agreement contained an option for the Corporation to purchase the facility. In January 2002, the Corporation assigned its right to purchase the facility to an SPT that in turn purchased the completed facility and leased it to the Corporation under a new operating lease agreement. The lease term is five years, with up to four renewal periods of five years each with the consent of the lessor. The cost incurred by the SPT to acquire the facility, including land, was $40.1 million.
In October 2000, the Corporation entered into an operating lease agreement with an SPT for the leasing of a warehouse and distribution facility near Atlanta, Georgia. The lease term is five years, with up to four renewal periods of five years each with the consent of the lessor. The cost incurred by the SPT to acquire the facility, including land, was $18.2 million.
In July 1999, the Corporation entered into an operating lease agreement with an SPT for the construction and leasing of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor paid construction costs totaling $61.7 million. The lease term is six years, including the one-year construction period, with up to four renewal periods of five years each with the consent of the lessor.
There are no penalties or other disincentives under the lease agreements if the Corporation decides not to renew any of the three leases. The terms for each renewal period under each of the three lease arrangements are identical to the initial terms and do not represent bargain lease terms.
If the Corporation
were to exercise its options to purchase the three facilities at original
cost at the end of the respective initial lease terms, the Corporation
could purchase the facilities for a total of approximately $120.0 million,
$79.9 million for the Pennsylvania and Georgia facilities in 2005, and
$40.1 million for the California facility in 2007. If the Corporation
chooses not to renew the leases or purchase the assets at the end of the
lease terms, the Corporation is obligated under the residual guarantees
for approximately $103.2 million in total for the three leases. Additionally,
the Corporation is obligated to re-market each property on the lessor’s
behalf and, upon sale, distribute a portion of the proceeds to the note
holders and certificate holders up to an amount equal to the remaining
debt and equity certificates and to pay closing costs. If the Corporation
chooses not to renew or purchase the assets at the end of the lease terms,
the Corporation does not anticipate a material disruption to operations,
since such facilities are not unique, facilities with similar racking
and storage capabilities are available in each of the areas where the
facilities are located, there are no significant leasehold improvements
that would be impaired, there would be no adverse tax consequences, the
financing of replacement facilities would not be material to the Corporation’s
cash flows and costs related to relocation would not be significant to
income.
The facility located near Hershey, Pennsylvania was constructed on land owned by the Corporation. The Corporation entered into a ground lease with the lessor, an SPT. The initial term of the ground lease extends to the date that is the later of (i) the date the facility lease is no longer in effect, or (ii) the date when the Corporation satisifies the residual guarantee associated with the lease. An |
|
additional term for the ground lease begins upon the end of the initial ground lease term and ends upon the later of the date all sums required to be paid under the lease agreement are paid in full and the 75th anniversary of the ground lease commencement date. If the Corporation chooses not to renew the building lease or purchase the building, it must re-market the building on the lessor’s behalf subject to the ground lease, which will continue in force until the earlier of the date all sums required to be paid under the lease agreement are paid in full and the 75th anniversary of the ground lease inception date. The lease of the warehouse and distribution facility does not include any provisions which would require the Corporation to sell the land to the SPT.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” as discussed in Note 1 under the heading New and Proposed Accounting Pronouncements. The Interpretation is effective for calendar year companies beginning in the third quarter of 2003 and it is reasonably possible that the Interpretation will require the consolidation of the Corporation’s three off-balance sheet arrangements with SPTs for the leasing of certain warehouse and distribution facilities.
Future minimum rental payments under non-cancelable operating leases with a remaining term in excess of one year as of December 31, 2002, totaled $95.8 million (2003—$17.6 million; 2004—$17.3 million; 2005—$17.2 million; 2006—$14.6 million; 2007—$10.7 million; 2008 and beyond—$18.4 million).
As of December 31, 2002, the Corporation had entered into purchase agreements with various suppliers. Subject to the Corporation’s quality standards being met, the purchase obligations covered by these agreements aggregated approximately $806.3 million in 2003, $481.9 million in 2004, $134.6 million in 2005, $6.0 million in 2006, $6.0 million in 2007 and $8.2 million in 2008 and beyond.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
A reconciliation of reported net income to net income adjusted to reflect the impact of the discontinuance of the amortization of goodwill and other intangible assets for the years ended December 31, 2001 and 2000 is as follows:
|
| |
|
|
|
|
|
| For
the years ended December 31, |
2002 |
|
2001 |
|
2000 |
|
In
thousands of dollars except per share amounts
|
Reported
net income: |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
Add
back: Goodwill amortization |
|
|
|
|
11,959 |
|
|
12,242 |
Add
back: Trademark amortization |
|
|
|
|
1,620 |
|
|
1,235 |
| |
|
|
|
|
|
Adjusted
net income |
$ |
403,578 |
|
$ |
220,735 |
|
$ |
348,020 |
| |
|
|
|
|
|
Basic
earnings per share: |
|
|
|
Reported
net income |
$ |
2.96 |
|
$ |
1.52 |
|
$ |
2.44 |
Goodwill
amortization |
|
|
|
|
.09 |
|
|
.09 |
Trademark
amortization |
|
|
|
|
.01 |
|
|
.01 |
| |
|
|
|
|
|
Adjusted
net income |
$ |
2.96 |
|
$ |
1.62 |
|
$ |
2.54 |
| |
|
|
|
|
|
Diluted
earnings per share: |
|
|
|
Reported
net income |
$ |
2.93 |
|
$ |
1.50 |
|
$ |
2.42 |
Goodwill
amortization |
|
|
|
|
.09 |
|
|
.09 |
Trademark
amortization |
|
|
|
|
.01 |
|
|
.01 |
| |
|
|
|
|
|
Adjusted
net income |
$ |
2.93 |
|
$ |
1.60 |
|
$ |
2.52 |
| |
|
|
|
|
|
|
Accumulated amortization of intangible assets resulting from business acquisitions was $129.2 million and $131.0 million as of December 31, 2002 and 2001, respectively.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation adopted SFAS No. 133, as amended, as of January 1, 2001. SFAS No. 133, as amended, provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying |
|
as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. All derivative instruments currently utilized by the Corporation are designated as cash flow hedges.
Objectives, Strategies and Accounting Policies Associated with Derivative Instruments
The Corporation
utilizes certain derivative instruments, from time to time, including
interest rate swaps, foreign currency forward exchange contracts and commodities
futures contracts, to manage variability in cash flows associated with
interest rate, currency exchange rate and commodity market price risk
exposures. The interest rate swaps and foreign currency contracts are
entered into for periods consistent with related underlying exposures
and do not constitute positions independent of those exposures. Commodities
futures contracts are entered into for varying periods and are intended
to be and are effective as hedges of market price risks associated with
anticipated raw material purchases, energy requirements and transportation
costs. If it is probable that hedged forecasted transactions will not
occur either by the end of the originally specified time period or within
an additional two-month period of time, derivative gains and losses reported
in accumulated other comprehensive income (loss) on the Consolidated Balance
Sheets are immediately reclassified into earnings. Gains and losses on
terminated derivatives designated as hedges are accounted for as part
of the originally hedged transaction. Gains and losses on derivatives
designated as hedges of items that mature or are sold or terminated, are
recognized in income in the same period as the originally hedged transaction
was anticipated to affect earnings. The Corporation utilizes derivative
instruments as cash flow hedges and does not hold or issue derivative
instruments for trading purposes. In entering into these contracts, the
Corporation has assumed the risk that might arise from the possible inability
of counterparties to meet the terms of their contracts. The Corporation
does not expect any significant losses as a result of counterparty defaults.
Interest Rate Swaps
In order
to minimize its financing costs and to manage interest rate exposure,
the Corporation, from time to time, enters into interest rate swap agreements.
In February 2001, the Corporation entered into interest rate swap agreements
that effectively converted variable-interest-rate rental payments on certain
operating leases from a variable to a fixed rate. Rental payments on operating
leases associated with the financing of construction of a warehouse and
distribution facility near Hershey, Pennsylvania for $61.7 million and
the financing of the purchase of a warehouse and distribution facility
near Atlanta, Georgia for $18.2 million are variable based on the London
Interbank Offered Rate (“LIBOR”). Such variable operating lease
rental payments are forecasted transactions as defined by SFAS No. 133,
as amended. The interest rate swap agreements effectively converted the
variable-interest-rate rental payments on the operating leases from LIBOR
to a fixed rate of 6.1%. Future changes in LIBOR are offset by changes
in the value of the interest rate swap agreements, resulting in expense
recognized in cost of sales at the fixed rate of 6.1%. The interest rate
swap agreements qualify as cash flow hedges and the notional amounts,
interest rates and terms of the swap agreements are consistent with the
underlying operating lease agreements they are intended to hedge and,
therefore, there is no hedge ineffectiveness. Gains and losses on the
interest rate swap agreements are included in other comprehensive income
and are recognized in cost of sales in the same period as the hedged rental
payments affect earnings.
The fair value of the interest rate swap agreements was a liability of $7.1 million and $2.7 million as of December 31, 2002 and 2001, respectively, and was determined based upon the quoted market price for the same or similar financial instruments. The fair value of interest rate swap agreements was included on the Consolidated Balance Sheets as other long-term liabilities, with the offset reflected in accumulated other comprehensive income (loss), net of income taxes. Cash flows from interest rate swap agreements are classified as net cash provided from operating activities on the Consolidated Statements of Cash Flows. The Corporation’s risk related to the interest rate swap agreements is limited to the cost of replacing the agreements at prevailing market rates. |
|
Foreign Exchange Forward Contracts
The Corporation enters into foreign exchange forward contracts to hedge transactions primarily related to firm commitments to purchase equipment, certain raw materials and finished goods denominated in foreign currencies, and to hedge payment of intercompany transactions with its non-domestic subsidiaries. These contracts reduce currency risk from exchange rate movements. Foreign currency price risks are hedged generally for periods from 3 to 24 months.
Foreign exchange
forward contracts are intended to be and are effective as hedges of firm,
identifiable, foreign currency commitments. Since there is a direct relationship
between the foreign currency derivatives and the foreign currency denomination
of the transactions, foreign currency derivatives are highly effective
in hedging cash flows related to transactions denominated in the corresponding
foreign currencies. These contracts meet the criteria for cash flow hedge
accounting treatment and, accordingly, gains and losses are included in
other comprehensive income and are recognized in cost of sales or selling,
marketing and administrative expense in the same period that the hedged
items affect earnings. In entering into these contracts the Corporation
has assumed the risk which might arise from the possible inability of
counterparties to meet the terms of their contracts. The Corporation does
not expect any significant losses as a result of counterparty defaults.
The fair value of foreign exchange forward contracts was estimated by obtaining quotes for future contracts with similar terms, adjusted where necessary for maturity differences. The fair value of foreign exchange forward contracts was an asset of $3.1 million and a liability of $.3 million as of December 31, 2002 and 2001, respectively, included on the Consolidated Balance Sheets as other current assets and accrued liabilities, respectively, with the offsets reflected in accumulated other comprehensive income (loss), net of income taxes. Cash flows from foreign exchange forward contracts designated as hedges of foreign currency price risks associated with the purchase of equipment are classified as net cash flows (used by) provided from investing activities on the Consolidated Statements of Cash Flows. Cash flows from other foreign exchange forward contracts are classified as net cash provided from operating activities.
Commodities Futures Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products for anticipated manufacturing requirements and to hedge transportation costs, the Corporation enters into commodities futures contracts as deemed appropriate to reduce the effect of price fluctuations. Commodity price risks are hedged generally for periods from 3 to 24 months. Commodities futures contracts meet the hedge criteria and are accounted for as cash flow hedges. Accordingly, gains and losses are included in other comprehensive income and are recognized ratably in cost of sales in the same period that the hedged raw material manufacturing requirements are recorded in cost of sales.
In order to qualify as a hedge of commodity price risk, it must be demonstrated that the changes in fair value of the commodities futures contracts are highly effective in hedging price risks associated with commodity purchases for manufacturing requirements and with transportation costs. The assessment of hedge effectiveness for commodities futures is performed on a quarterly basis by calculating the change in switch values relative to open commodities futures contracts being held and the number of futures contracts needed to price raw material purchases for anticipated manufacturing requirements and to hedge transportation costs. Effectiveness is also monitored by tracking changes in basis differentials as discussed below. The prices of commodities futures contracts reflect delivery to the same locations where the Corporation takes delivery of the physical commodities and, therefore, there is no ineffectiveness resulting from
differences in
location between the derivative and the hedged item. Commodities futures contracts have been deemed to be highly effective in hedging price risks associated with corresponding raw material purchases for manufacturing requirements and transportation costs.
Because of the rollover strategy used for commodities futures contracts, which is required by futures market conditions, some ineffectiveness may result in hedging forecasted manufacturing |
|
requirements as futures contracts are switched from nearby contract positions to contract positions which are required to fix the price of raw material purchases for manufacturing requirements. Hedge ineffectiveness may also result from variability in basis differentials associated with the purchase of raw materials for manufacturing requirements. Hedge ineffectiveness is measured on a quarterly basis and the ineffective portion of gains or losses on commodities futures is recorded currently in cost of sales in accordance with SFAS No. 133, as amended.
Exchange traded
futures contracts are used to fix the price of physical forward purchase
contracts. Cash transfers reflecting changes in the value of futures contracts
(unrealized gains and losses) are made on a daily basis and are included
in accumulated other comprehensive income (loss), net of income taxes,
on the Consolidated Balance Sheets. Such cash transfers will be offset
by higher or lower cash requirements for payment of invoice prices of
raw materials, energy requirements and transportation costs in the future.
Cash flows from commodities futures contracts are classified as net cash
provided from operating activities on the Consolidated Statements of Cash
Flows. Futures contracts being held in excess of the amount required to
fix the price of unpriced physical forward contracts are effective as
hedges of anticipated manufacturing requirements for each commodity. Physical
commodity forward purchase contracts meet the SFAS No. 133 definition
of “normal purchases and sales” and, therefore, are not considered
derivative instruments.
Net after-tax
gains on cash flow hedging derivatives reflected in comprehensive income
were $106.7 million for 2002. Net after-tax losses on cash flow hedging
derivatives reflected in comprehensive income were $7.8 million for 2001.
Net gains and losses on cash flow hedging derivatives were primarily associated
with commodities futures contracts. Reclassification adjustments from
accumulated other comprehensive income (loss) to income, for gains or
losses on cash flow hedging derivatives, were reflected in cost of sales.
Reclassification of gains of $17.9 million for 2002 and losses of $19.3
million for 2001 were associated with commodities futures contracts. Gains
on commodities futures contracts recognized in cost of sales as a result
of hedge ineffectiveness were approximately $1.5 million and $1.7 million
before tax for the years ended December 31, 2002 and 2001, respectively.
No gains or losses on cash flow hedging derivatives were reclassified
from accumulated other comprehensive income (loss) into income as a result
of the discontinuance of a hedge because it became probable that a hedged
forecasted transaction would not occur. There were no components of gains
or losses on cash flow hedging derivatives that were recognized in income
because such components were excluded from the assessment of hedge effectiveness.
The amount of net gains on cash flow hedging derivatives, including foreign
exchange forward contracts, interest rate swap agreements and commodities
futures contracts, expected to be reclassified into earnings in the next
twelve months was approximately $54.5 million and $6.2 million after tax
as of December 31, 2002 and 2001, respectively, which were principally
associated with commodities futures contracts.
7. COMPREHENSIVE INCOME
Comprehensive
income consisted of the following:
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars
|
Net
income |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
|
| |
|
|
|
|
|
|
Other
comprehensive income (loss): |
Foreign
currency translation adjustments |
|
(16,530 |
) |
|
(6,745 |
) |
|
(6,185 |
) |
Minimum
pension liability adjustments, net of tax |
|
34,899 |
|
|
(34,219 |
) |
|
(916 |
) |
Gains
(Losses) on cash flow hedging derivatives, net of tax |
|
106,748 |
|
|
(7,764 |
) |
|
— |
|
Add:
Reclassification adjustments, net of tax |
|
(17,914 |
) |
|
19,312 |
|
|
— |
|
| |
|
|
|
|
|
|
Other
comprehensive income (loss) |
|
107,203 |
|
|
(29,416 |
) |
|
(7,101 |
) |
| |
|
|
|
|
|
|
Comprehensive
income |
$ |
510,781 |
|
$ |
177,740 |
|
$ |
327,442 |
|
| |
|
|
|
|
|
|
| Comprehensive
income is included on the Consolidated Statements of Stockholders’
Equity. The components of accumulated other comprehensive income (loss)
as shown on the Consolidated Balance Sheets are as follows:
|
| |
Foreign
Currency
Translation
Adjustments |
|
Minimum
Pension
Liability
Adjustments |
|
Gains
(Losses)
on
Cash Flow
Hedging
Derivatives |
|
Reclassification
Adjustments |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
|
In
thousands of dollars
|
Balance
as of January 1, 2000 |
$ |
(49,615 |
) |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(49,615 |
) |
Current
period (charge), gross |
|
(6,185 |
) |
|
(1,529 |
) |
|
— |
|
|
— |
|
|
(7,714 |
) |
Income
tax benefit |
|
— |
|
|
613 |
|
|
— |
|
|
— |
|
|
613 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2000 |
|
(55,800 |
) |
|
(916 |
) |
|
— |
|
|
— |
|
|
(56,716 |
) |
Transition
adjustment (loss), net of a tax benefit of $41,756 |
|
— |
|
|
— |
|
|
(70,191 |
) |
|
— |
|
|
(70,191 |
) |
Current
period (charge) credit, gross |
|
(6,745 |
) |
|
(57,127 |
) |
|
99,565 |
|
|
30,800 |
|
|
66,493 |
|
Income
tax benefit (expense) |
|
— |
|
|
22,908 |
|
|
(37,138 |
) |
|
(11,488 |
) |
|
(25,718 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2001 |
|
(62,545 |
) |
|
(35,135 |
) |
|
(7,764 |
) |
|
19,312 |
|
|
(86,132 |
) |
Current
period (charge) credit, gross |
|
(16,530 |
) |
|
58,261 |
|
|
168,463 |
|
|
(28,300 |
) |
|
181,894 |
|
Income
tax (expense) benefit |
|
— |
|
|
(23,362 |
) |
|
(61,715 |
) |
|
10,386 |
|
|
(74,691 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2002 |
$ |
(79,075 |
) |
$ |
(236 |
) |
$ |
98,984 |
|
$ |
1,398 |
|
$ |
21,071 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
8. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of December 31, 2002 and 2001, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, was $868.8 million as of December 31, 2002, compared to a fair value of $1,005.9 million based on quoted market prices for the same or similar debt issues. The carrying value of long-term debt, including the current portion, was $877.9 million as of December 31, 2001, compared to a fair value of $957.8 million.
As of December 31, 2002, the Corporation had foreign exchange forward contracts maturing in 2003 and 2004 to purchase $45.1 million in foreign currency, primarily British sterling and euros, and to sell $17.2 million in foreign currency, primarily Japanese yen, at contracted forward rates.
As of December 31, 2001, the Corporation had foreign exchange forward contracts maturing in 2002 and 2003 to purchase $24.3 million in foreign currency, primarily British sterling and euros, and to sell $12.2 million in foreign currency, primarily Japanese yen, at contracted forward rates.
The fair value of foreign exchange forward contracts is estimated by obtaining quotes for future contracts with similar terms, adjusted where necessary for maturity differences. As of December 31, 2002, the fair value of foreign exchange forward contracts was an asset of $3.1 million. As of December 31, 2001, the fair value of foreign exchange forward contracts was a liability of $.3 million. The Corporation does not hold or issue financial instruments for trading purposes.
In order to minimize its financing costs and to manage interest rate exposure, the Corporation, from time to time, enters into interest rate swap agreements. In February 2001, the Corporation entered into interest rate swap agreements that effectively converted variable-interest-rate rental payments on certain operating leases from a variable to a fixed rate of 6.1%. The fair value of interest rate swap agreements was a liability of $7.1 million and $2.7 million as of December 31, 2002 and 2001, respectively. |
|
9. INTEREST EXPENSE
Interest expense,
net consisted of the following:
|
| For
the years ended December 31, |
2002 |
|
2001 |
|
2000 |
|
|
In
thousands of dollars
|
Long-term
debt and lease obligations |
$ |
65,183 |
|
$ |
65,500 |
|
$ |
64,681 |
|
Short-term
debt |
|
359 |
|
|
7,468 |
|
|
16,420 |
|
Capitalized
interest |
|
(1,144 |
) |
|
(1,498 |
) |
|
(145 |
) |
| |
|
|
|
|
|
|
Interest
expense, gross |
|
64,398 |
|
|
71,470 |
|
|
80,956 |
|
Interest
income |
|
(3,676 |
) |
|
(2,377 |
) |
|
(4,945 |
) |
| |
|
|
|
|
|
|
Interest
expense, net |
$ |
60,722 |
|
$ |
69,093 |
|
$ |
76,011 |
|
| |
|
|
|
|
|
|
|
10. SHORT-TERM DEBT
Generally, the Corporation’s short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. As of December 31, 2002, the Corporation maintained short-term and long-term committed credit facilities with a syndicate of banks in the amount of $400 million which could be borrowed directly or used to support the issuance of commercial paper. The Corporation may increase the credit facilities to $1.0 billion with the concurrence of the banks. In November 2002, the short-term credit facility agreement was renewed with a credit limit of $200 million expiring in November 2003. The long-term committed credit facility agreement with a credit limit of $200 million will expire in November 2006. The credit facilities may be used to fund general corporate requirements, to support commercial paper borrowings and, in certain instances, to finance future business acquisitions.
The Corporation also maintains lines of credit with domestic and international commercial banks, under which it could borrow in various currencies up to approximately $21.0 million and $21.7 million as of December 31, 2002 and 2001, respectively, at the lending banks’ prime commercial interest rates or lower.
The Corporation had short-term foreign bank loans against its credit facilities and lines of credit of $11.1 million and $7.0 million as of December 31, 2002 and 2001, respectively. The amount of the Corporation’s short-term borrowings peaked in December 2002 at $11.1 million. The weighted average interest rates on short-term borrowings outstanding as of December 31, 2002 and 2001, were 0.3% and 0.2%, respectively.
The credit facilities and lines of credit were supported by commitment fee arrangements. The average fee during 2002 was less than .2% per annum of the commitment. The Corporation’s credit facility agreements contain a financial covenant which requires that a specified income to interest ratio be maintained. These agreements are also subject to other representations and covenants which do not materially restrict the Corporation’s activities. The Corporation is in compliance with all covenants included in the credit facility agreements. There were no significant compensating balance agreements which legally restricted these funds.
As a result of maintaining a consolidated cash management system, the Corporation maintains overdraft positions in certain accounts at several banks. The Corporation has the contractual right of offset for the accounts with overdrafts. Such overdrafts, which were reflected as a reduction to cash and cash equivalents, were $24.8 million and $26.5 million as of December 31, 2002 and 2001, respectively. |
|
11. LONG-TERM DEBT
Long-term debt
consisted of the following:
|
| December
31, |
2002 |
|
2001 |
|
|
In
thousands of dollars
|
6.7%
Notes due 2005 |
$ |
200,000 |
|
$ |
200,000 |
|
6.95%
Notes due 2007 |
|
150,000 |
|
|
150,000 |
|
6.95%
Notes due 2012 |
|
150,000 |
|
|
150,000 |
|
8.8%
Debentures due 2021 |
|
100,000 |
|
|
100,000 |
|
7.2%
Debentures due 2027 |
|
250,000 |
|
|
250,000 |
|
Other
obligations, net of unamortized debt discount |
|
18,789 |
|
|
27,893 |
|
| |
|
|
|
|
Total
long-term debt |
|
868,789 |
|
|
877,893 |
|
Less—current
portion |
|
16,989 |
|
|
921 |
|
| |
|
|
|
|
Long-term
portion |
$ |
851,800 |
|
$ |
876,972 |
|
| |
|
|
|
|
|
Aggregate annual maturities during the next five years are: 2003, $17.0 million; 2004, $.6 million; 2005, $201.6 million; 2006, $.1 million; and 2007, $150.1 million. The Corporation’s debt is principally unsecured and of equal priority. None of the debt is convertible into stock of the Corporation. The Corporation is in compliance with all covenants included in the related debt agreements.
12. INCOME TAXES
Income before
income taxes was as follows:
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars
|
Domestic |
$ |
625,385 |
|
$ |
320,065 |
|
$ |
536,002 |
|
Foreign |
|
12,180 |
|
|
23,476 |
|
|
10,637 |
|
| |
|
|
|
|
|
|
Income
before income taxes |
$ |
637,565 |
|
$ |
343,541 |
|
$ |
546,639 |
|
| |
|
|
|
|
|
|
| The
provision for income taxes was as follows:
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars
|
Current: |
Federal |
$ |
84,312 |
|
$ |
160,182 |
|
$ |
212,858 |
|
State |
|
11,801 |
|
|
22,155 |
|
|
12,184 |
|
Foreign |
|
57 |
|
|
3,390 |
|
|
3,454 |
|
| |
|
|
|
|
|
|
Current
provision for income taxes |
|
96,170 |
|
|
185,727 |
|
|
228,496 |
|
| |
|
|
|
|
|
|
Deferred: |
Federal |
|
119,752 |
|
|
(41,293 |
) |
|
(28,108 |
) |
State |
|
14,115 |
|
|
(7,120 |
) |
|
11,986 |
|
Foreign |
|
3,950 |
|
|
(929 |
) |
|
(278 |
) |
| |
|
|
|
|
|
|
Deferred
income tax provision (benefit) |
|
137,817 |
|
|
(49,342 |
) |
|
(16,400 |
) |
| |
|
|
|
|
|
|
Total
provision for income taxes |
$ |
233,987 |
|
$ |
136,385 |
|
$ |
212,096 |
|
| |
|
|
|
|
|
|
|
Deferred taxes reflect temporary differences between tax reporting and financial statement reporting in the recognition of revenue and expense. The tax effects of the significant temporary differences which comprised the deferred tax assets and liabilities were as follows: |
| December
31, |
|
|
2002 |
|
2001 |
|
|
In
thousands of dollars
|
|
|
Deferred
tax assets: |
|
|
Post-retirement
benefit obligations |
|
|
$ |
102,487 |
|
$ |
99,882 |
|
Accrued
expenses and other reserves |
|
|
|
91,586 |
|
|
141,719 |
|
Accrued
trade promotion reserves |
|
|
|
11,377 |
|
|
22,134 |
|
Other |
|
|
|
26,935 |
|
|
18,868 |
|
| |
|
|
|
|
Total
deferred tax assets |
|
|
|
232,385 |
|
|
282,603 |
|
| |
|
|
|
|
Deferred
tax liabilities: |
|
|
Depreciation |
|
|
|
220,694 |
|
|
237,750 |
|
Other
comprehensive income—cash flow hedging derivatives |
|
|
|
59,518 |
|
|
6,870 |
|
Pension |
|
|
|
119,742 |
|
|
17,867 |
|
Inventory |
|
|
|
37,208 |
|
|
31,091 |
|
Other |
|
|
|
168,031 |
|
|
147,855 |
|
| |
|
|
|
|
Total
deferred tax liabilities |
|
|
|
605,193 |
|
|
441,433 |
|
| |
|
|
|
|
Net
deferred tax liabilities |
|
|
$ |
372,808 |
|
$ |
158,830 |
|
| |
|
|
|
|
Included
in: |
|
|
Current
deferred tax liabilities (assets), net |
|
|
$ |
24,768 |
|
$ |
(96,939 |
) |
Non-current
deferred tax liabilities, net |
|
|
|
348,040 |
|
|
255,769 |
|
| |
|
|
|
|
Net
deferred tax liabilities |
|
|
$ |
372,808 |
|
$ |
158,830 |
|
| |
|
|
|
|
|
Additional information on income tax benefits and expenses related to the components of accumulated other comprehensive income (loss) is provided in Note 7, Comprehensive Income.
The following
table reconciles the Federal statutory income tax rate with the Corporation’s
effective income tax rate:
|
| For
the years ended December 31, |
2002 |
|
2001 |
|
2000 |
|
|
Federal
statutory income tax rate |
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
Increase
(reduction) resulting from: |
State
income taxes, net of Federal income tax benefits |
|
2.6 |
|
|
3.4 |
|
|
3.5 |
|
Gain
on sale of Luden’s throat drops business |
|
— |
|
|
1.6 |
|
|
— |
|
Non-deductible
acquisition costs |
|
— |
|
|
.7 |
|
|
.8 |
|
Puerto
Rico operations |
|
(1.0 |
) |
|
(1.2 |
) |
|
— |
|
Other,
net |
|
.1 |
|
|
.2 |
|
|
(.5 |
) |
| |
|
|
|
|
|
|
Effective
income tax rate |
|
36.7 |
% |
|
39.7 |
% |
|
38.8 |
% |
| |
|
|
|
|
|
|
|
Included with the purchase of the Nabisco gum and mint business in December 2000, was a U.S. Internal Revenue Code (“IRC”) Section 936 company with a subsidiary operating in Las Piedras, Puerto Rico. The operating income of this subsidiary is subject to a lower income tax rate in both the United States and Puerto Rico. The U.S. IRC Section 936 incentive is scheduled to expire on December 31, 2005.
The gain on the sale of the Luden’s throat drops business in 2001 primarily reflected the lower tax basis of the intangible assets included in the sale, resulting in a higher effective income tax rate.
Effective October 1, 2001, the Corporation negotiated a settlement with the Internal Revenue Service (“IRS”) of Notices of Proposed Deficiency associated with its Corporate Owned Life Insurance (“COLI”) program. The resulting Closing Agreement with the IRS limited the COLI interest expense deductions for all applicable tax years and resulted in the surrender of all insurance policies, thereby ending the COLI program. The settlement reflected the complete resolution of all federal and state tax aspects of the program. |
|
13. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Corporation’s policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 and Federal income tax laws, respectively. Non-domestic pension liabilities are funded in accordance with applicable local laws and regulations. Plan assets are invested in a broadly diversified portfolio consisting primarily of domestic and international common stocks and fixed income securities. Other benefits include health care and life insurance provided by the Corporation under two post-retirement benefit plans.
A summary of
the changes in benefit obligations and plan assets as of December 31,
2002 and 2001 is presented below:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
| December
31, |
2002
|
|
2001
|
|
2002
|
|
2001
|
|
|
In
thousands of dollars
|
Change
in benefits obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
obligation at beginning of year |
$ |
837,540 |
|
$ |
655,178 |
|
$ |
301,406 |
|
$ |
256,307 |
|
Service
cost |
|
31,890 |
|
|
30,093 |
|
|
3,157 |
|
|
3,434 |
|
Interest
cost |
|
50,372 |
|
|
48,239 |
|
|
19,674 |
|
|
17,829 |
|
Amendments |
|
2,528 |
|
|
48 |
|
|
— |
|
|
— |
|
Actuarial
loss |
|
75,207 |
|
|
44,261 |
|
|
21,551 |
|
|
4,959 |
|
Special
termination benefits |
|
809 |
|
|
106,273 |
|
|
— |
|
|
15,451 |
|
Settlements |
|
(141,546 |
) |
|
— |
|
|
— |
|
|
— |
|
Curtailment
(gain) loss |
|
(1,060 |
) |
|
1,451 |
|
|
62 |
|
|
17,594 |
|
Other |
|
1,665 |
|
|
(2,110 |
) |
|
33 |
|
|
(249 |
) |
Benefits
paid |
|
(41,241 |
) |
|
(45,893 |
) |
|
(16,999 |
) |
|
(13,919 |
) |
| |
|
|
|
|
|
|
|
|
Benefits
obligation at end of year |
|
816,164 |
|
|
837,540 |
|
|
328,884 |
|
|
301,406 |
|
| |
|
|
|
|
|
|
|
|
Change
in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year |
|
687,151 |
|
|
602,871 |
|
|
— |
|
|
— |
|
Actual
return on plan assets |
|
(95,385 |
) |
|
(40,437 |
) |
|
— |
|
|
— |
|
Employer
contribution |
|
308,080 |
|
|
172,327 |
|
|
16,999 |
|
|
13,919 |
|
Settlements
paid |
|
(141,546 |
) |
|
— |
|
|
— |
|
|
— |
|
Other |
|
(171 |
) |
|
(1,717 |
) |
|
— |
|
|
— |
|
Benefits
paid |
|
(41,241 |
) |
|
(45,893 |
) |
|
(16,999 |
) |
|
(13,919 |
) |
| |
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year |
|
716,888 |
|
|
687,151 |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
Funded
status |
|
(99,276 |
) |
|
(150,389 |
) |
|
(328,884 |
) |
|
(301,406 |
) |
Unrecognized
transition asset |
|
270 |
|
|
52 |
|
|
— |
|
|
— |
|
Unrecognized
prior service cost |
|
39,533 |
|
|
43,092 |
|
|
(10,180 |
) |
|
(14,722 |
) |
Unrecognized
net actuarial loss |
|
305,520 |
|
|
108,298 |
|
|
84,231 |
|
|
65,468 |
|
Intangible
asset |
|
(738 |
) |
|
(44,397 |
) |
|
— |
|
|
— |
|
Accumulated
other comprehensive loss |
|
(394 |
) |
|
(57,127 |
) |
|
— |
|
|
— |
|
Prior
service cost recognized due
to curtailment |
|
— |
|
|
— |
|
|
— |
|
|
2,228 |
|
| |
|
|
|
|
|
|
|
|
Prepaid
(Accrued) benefits cost |
$ |
244,915 |
|
$ |
(100,471 |
) |
$ |
(254,833 |
) |
$ |
(248,432 |
) |
| |
|
|
|
|
|
|
|
|
Weighted-average
assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate |
|
6.3 |
% |
|
7.0 |
% |
|
6.3 |
% |
|
7.0 |
% |
Expected
long-term rate of return on assets |
|
9.5 |
|
|
9.5 |
|
|
N/A |
|
|
N/A |
|
Rate
of increase in compensation levels |
|
4.9 |
|
|
4.9 |
|
|
N/A |
|
|
N/A |
|
|
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003 and future years.
Contributions totaling $308.1 million were made to the Corporation’s pension plans during 2002 primarily to improve the funded status as a result of the poor market performance of pension plan |
|
assets during the year. In February 2001, the Corporation made a $75.0 million contribution to its domestic pension plans to improve the funded status. In December 2001, the Corporation made a $95.0 million contribution to one of its domestic pension plans to fund anticipated payments related to the early retirement program.
The unrecognized net actuarial loss for pension benefits in 2002 and 2001 was due primarily to the actual return on plan assets being less than the expected return and reduced discount rate assumptions.
As of December
31, 2002, for pension plans with accumulated benefit obligations in excess
of plan assets, the related projected benefit obligation, accumulated
benefit obligation and the fair value of plan assets were $87.7 million,
$73.2 million and $35.0 million, respectively. As of December 31, 2001,
for pension plans with accumulated benefit obligations in excess of plan
assets, the related projected benefit obligation, accumulated benefit
obligation and the fair value of plan assets were $794.3 million, $750.9
million and $657.3 million, respectively. Included in the projected benefit
obligation and accumulated benefit obligation amounts as of December 31,
2002, were $29.3 million and $27.1 million, respectively, for an unfunded
supplemental executive retirement program, which is a non-qualified plan
that provides certain senior executives defined pension benefits based
on their age, service and total compensation. Included in the projected
benefit obligation and accumulated benefit obligation amounts as of December
31, 2001, were $41.6 million and $40.4 million, respectively, primarily
associated with the supplemental executive retirement program.
A minimum pension liability adjustment is required when the actuarial present value of accumulated plan benefits exceeds plan assets and accrued pension liabilities. In 2002, the reversal of a minimum liability adjustment of $58.3 million, net of deferred tax expense of $23.4 million, was recorded as a component of other comprehensive income (loss) and reported in accumulated other comprehensive income (loss) as a component of stockholders’ equity. In 2001, a minimum liability adjustment of $57.1 million, net of a deferred tax benefit of $22.9 million, was recorded as a component of other comprehensive income (loss) and reported in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
A summary of
the components of net periodic benefits cost for the years ended December
31, 2002, 2001 and 2000 is presented below:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
| For
the years ended December 31, |
2002
|
|
2001
|
|
2000
|
|
2002
|
|
2001
|
|
2000
|
|
|
In
thousands of dollars
|
Components
of net periodic
benefits cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost |
$ |
31,890 |
|
$ |
30,093 |
|
$ |
27,961 |
|
$ |
3,157 |
|
$ |
3,434 |
|
$ |
3,184 |
|
Interest
cost |
|
50,372 |
|
|
48,239 |
|
|
45,710 |
|
|
19,674 |
|
|
17,829 |
|
|
14,056 |
|
Expected
return on plan assets |
|
(60,443 |
) |
|
(61,791 |
) |
|
(60,143 |
) |
|
— |
|
|
— |
|
|
— |
|
Amortization
of prior service cost |
|
3,906 |
|
|
3,891 |
|
|
3,783 |
|
|
(1,858 |
) |
|
(2,168 |
) |
|
(2,165 |
) |
Amortization
of unrecognized transition balance |
|
(326 |
) |
|
(27 |
) |
|
(286 |
) |
|
— |
|
|
— |
|
|
— |
|
Recognized
net actuarial loss (gain) |
|
4,371 |
|
|
— |
|
|
(2,670 |
) |
|
2,774 |
|
|
2,761 |
|
|
— |
|
Other |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(80 |
) |
|
(41 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
sponsored plans |
|
29,770 |
|
|
20,405 |
|
|
14,355 |
|
|
23,747 |
|
|
21,776 |
|
|
15,034 |
|
Multi-employer
plans |
|
483 |
|
|
615 |
|
|
577 |
|
|
— |
|
|
— |
|
|
— |
|
Administrative
expenses |
|
423 |
|
|
297 |
|
|
421 |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefits cost |
|
30,676 |
|
|
21,317 |
|
|
15,353 |
|
|
23,747 |
|
|
21,776 |
|
|
15,034 |
|
Special
termination benefits |
|
809 |
|
|
106,273 |
|
|
— |
|
|
— |
|
|
15,451 |
|
|
— |
|
Curtailment
loss |
|
2,116 |
|
|
2,802 |
|
|
— |
|
|
— |
|
|
15,366 |
|
|
— |
|
Settlement
loss |
|
30,118 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Total
amount reflected in earnings |
$ |
63,719 |
|
$ |
130,392 |
|
$ |
15,353 |
|
$ |
23,747 |
|
$ |
52,593 |
|
$ |
15,034 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation has two post-retirement benefit plans. The health care plan is contributory, with participants’ contributions adjusted annually, and the life insurance plan is non-contributory.
In conjunction with the business realignment initiatives announced on October 24, 2001, the Corporation offered an early retirement program to approximately 10% of its work force in the fourth quarter of 2001. The early retirement program gave eligible salaried employees an opportunity to retire with enhanced benefits related to the Corporation’s pension and other post-retirement benefit plans. In general, eligible employees were born before January 1, 1954, and were hired before January 1, 1999. Pension benefits were enhanced by adding five additional years of age and service to eligible employees’ retirement accounts, along with certain supplemental benefits. Retiree medical benefits were enhanced by adding five additional years to age and service formulas used to determine retiree contributions.
In 2002, pension settlement and curtailment losses and special termination benefits totaled $33.0 million. This amount related primarily to the non-cash costs for pension settlements associated with departing employees electing a lump sum payment of their pension benefit under the early retirement program and for pension curtailments and special termination benefits associated with the closure of three manufacturing facilities as part of the business realignment initiatives.
The total pre-tax charge for the VWRP recorded in the fourth quarter of 2001 was $148.7 million and was accrued based on actual employee acceptances. Improved pension benefits under the early retirement program of $109.1 million will be funded through payments from one of the Corporation’s defined benefit pension plans. Enhanced retiree medical benefits of $30.8 million will be funded from operating cash flows. Additional costs for outplacement services and enhanced severance benefits under a voluntary mutual separation program of $8.8 million were funded from operating cash flows.
Assumed health
care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one percentage point change in assumed health
care cost trend rates would have the following effects:
|
| |
1
Percentage Point
Increase |
|
1
Percentage Point
(Decrease) |
|
|
In
thousands of dollars
|
Effect
on total service and interest cost components |
$ |
837 |
|
$ |
(657 |
) |
Effect
on post-retirement benefit obligation |
|
11,601 |
|
|
(10,192 |
) |
|
14. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation’s employee stock ownership trust (“ESOP”) serves as the primary vehicle for contributions to its existing Employee Savings Stock Investment and Ownership Plan for participating domestic salaried and hourly employees. The ESOP was funded by a 15-year, 7.75% loan of $47.9 million from the Corporation. During 2002 and 2001, the ESOP received a combination of dividends on unallocated shares and contributions from the Corporation equal to the amount required to meet its principal and interest payments under the loan. Simultaneously, the ESOP allocated to participants 159,176 shares of Common Stock each year. As of December 31, 2002, the ESOP held 1,060,575 allocated shares and 636,696 unallocated shares. All ESOP shares are considered outstanding for income per share computations.
The Corporation recognized net compensation expense equal to the shares allocated multiplied by the original cost of $20.06 per share less dividends received by the ESOP on unallocated shares. Compensation expense related to the ESOP for 2002, 2001 and 2000 was $.9 million, $1.6 million and $3.2 million, respectively. Dividends paid on unallocated ESOP shares for 2002, 2001 and 2000 were $.9 million, $1.0 million and $1.1 million, respectively. Dividends paid on all ESOP shares are recorded as a reduction to retained earnings. The unearned ESOP compensation balance in stockholders’ equity represented deferred compensation expense to be recognized by the Corporation in future years as additional shares are allocated to participants. |
|
15. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 2002, the Corporation had 530,000,000 authorized shares of capital stock. Of this total, 450,000,000 shares were designated as Common Stock, 75,000,000 shares as Class B Common Stock (“Class B Stock”), and 5,000,000 shares as Preferred Stock, each class having a par value of one dollar per share. As of December 31, 2002, a combined total of 179,950,872 shares of both classes of common stock had been issued of which 134,220,137 shares were outstanding. No shares of the Preferred Stock were issued or outstanding during the three-year period ended December 31, 2002.
Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors, with the Common Stock having one vote per share and the Class B Stock having ten votes per share. However, the Common Stock, voting separately as a class, is entitled to elect one-sixth of the Board of Directors. With respect to dividend rights, the Common Stock is entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2002, 2001 and 2000, a total of 11,500 shares, 8,050 shares and 2,050 shares, respectively, of Class B Stock were converted into Common Stock.
In December 2000, the Corporation’s Board of Directors unanimously adopted a Stockholder Protection Rights Agreement (“Rights Agreement”) and declared a dividend of one right (“Right”) for each outstanding share of Common Stock and Class B Stock payable to stockholders of record at the close of business on December 26, 2000. The Rights will at no time have voting power or receive dividends. The issuance of the Rights has no dilutive effect, will not affect reported earnings per share, is not taxable and will not change the manner in which the Corporation’s Common Stock is traded.
The Rights become exercisable only upon (i) resolution of the Board of Directors after any person has commenced a tender offer that would result in such person becoming the beneficial owner of 15% or more of the Common Stock, (ii) the Corporation’s announcement that a person or group has acquired 15% or more of the outstanding shares of Common Stock, or (iii) a person or group becoming the beneficial owner of more than 35% of the voting power of all of the outstanding Common Stock and Class B Stock. When exercisable, each Right entitles its registered holder to purchase from the Corporation, at a pre-determined exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, par value $1.00 per share (which would be convertible by holders of Class B Stock into Series B Participating Preferred Stock on the basis of one one-thousandths of a share of Series B Participating Preferred Stock for every share of
Class B Common Stock held at that time). Each one one-thousandth of a share of Series A Participating Preferred Stock would have economic and voting terms similar to those of one share of Common Stock. Similarly, each one one-thousandth of a share of Series B Participating Preferred Stock would have economic and voting terms similar to those of one share of Class B Stock.
Upon the earlier of (a) a public announcement by the Corporation that a person or group has acquired 15% or more of the outstanding shares of Common Stock or (b) such person or group acquiring more than 35% of the voting power of the Common Stock and Class B Stock, each Right (except those owned by the acquiring person or group) will automatically become a right to buy, at the pre-determined exercise price, that number of one one-thousandths of a share of Series A Participating Preferred Stock having a market value of twice the exercise price. In addition, if the Corporation is acquired in a merger or other business combination, each Right will entitle a holder to purchase from the acquiring company, for the pre-determined exercise price, preferred stock of the acquiring company having an aggregate market value equal to twice the exercise price.
Further, at any time after a person or group acquires 15% or more (but less than 50%) of the Corporation’s Common Stock or more than 35% of the voting power of all outstanding Common Stock and Class B Stock, the Corporation’s Board of Directors may, at its option, exchange all (but not less than all) of the outstanding Preferred Stock (other than Rights held by the acquiring person or group) |
|
for shares of Common Stock or Class B Stock, as applicable, at an exchange ratio of one share of Common Stock or Class B Stock for each one one-thousandth of a share of Preferred Stock.
The Corporation, solely at its option, may amend the Rights or redeem the Rights for $.01 per Right at any time before the acquisition by a person or group of beneficial ownership of 15% or more of its Common Stock or more than 35% of the voting power of all of the outstanding Common Stock and Class B Stock. Unless redeemed earlier or extended by the Corporation, the Rights will expire on December 14, 2010.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School (“Milton Hershey School Trust”), as institutional fiduciary for estates and trusts unrelated to Milton Hershey School, and as direct owner of investment shares, held a total of 12,705,697 shares of the Common Stock, and as Trustee for the benefit of Milton Hershey School, held 30,306,006 shares of the Class B Stock as of December 31, 2002, and was entitled to cast approximately 77.3% of the total votes of both classes of the Corporation’s common stock. The Milton Hershey School Trust must approve the issuance of shares of Common Stock or any other action which would result in the Milton Hershey School Trust not continuing to have voting control of the Corporation.
Changes in outstanding
Common Stock for the past three years were:
|
| For
the years ended December 31, |
2002 |
|
2001 |
|
2000 |
|
|
Shares
issued |
|
179,950,872 |
|
|
179,950,872 |
|
|
179,950,872 |
|
| |
|
|
|
|
|
|
Treasury
shares at beginning of year |
|
(44,311,870 |
) |
|
(43,669,284 |
) |
|
(41,491,253 |
) |
Stock
repurchases: |
Repurchase
programs |
|
(1,300,345 |
) |
|
(676,600 |
) |
|
(2,284,539 |
) |
Stock
options and benefits |
|
(2,422,385 |
) |
|
(1,037,455 |
) |
|
(957,261 |
) |
Stock
issuances: |
Stock
options and benefits |
|
2,303,865 |
|
|
1,071,469 |
|
|
1,063,769 |
|
| |
|
|
|
|
|
|
Treasury
shares at end of year |
|
(45,730,735 |
) |
|
(44,311,870 |
) |
|
(43,669,284 |
) |
| |
|
|
|
|
|
|
Net
shares outstanding at end of year |
|
134,220,137 |
|
|
135,639,002 |
|
|
136,281,588 |
|
| |
|
|
|
|
|
|
| Basic
and Diluted Earnings per Share were computed based on the weighted-average
number of shares of the Common Stock and the Class B Stock outstanding
as follows:
|
| For
the years ended December 31, |
2002 |
|
2001 |
|
2000 |
|
|
In
thousands except per share amounts
|
Net
income |
$ |
403,578 |
|
$ |
207,156 |
|
$ |
334,543 |
|
| |
|
|
|
|
|
|
Weighted-average
shares—basic |
|
136,538 |
|
|
136,245 |
|
|
137,326 |
|
Effect
of dilutive securities: |
Employee
stock options |
|
1,067 |
|
|
1,379 |
|
|
1,016 |
|
Performance
and restricted stock units |
|
109 |
|
|
72 |
|
|
23 |
|
| |
|
|
|
|
|
|
Weighted-average
shares—diluted |
|
137,714 |
|
|
137,696 |
|
|
138,365 |
|
| |
|
|
|
|
|
|
Net
income per share—basic |
$ |
2.96 |
|
$ |
1.52 |
|
$ |
2.44 |
|
| |
|
|
|
|
|
|
Net
income per share—diluted |
$ |
2.93 |
|
$ |
1.50 |
|
$ |
2.42 |
|
| |
|
|
|
|
|
|
|
For the years ended December 31, 2002, 2001 and 2000, 1.9 million, 2.0 million and 5.5 million stock options, respectively, were not included in the diluted earnings per share calculation because the exercise price was higher than the average market price of the Common Stock for the year and, therefore, the effect would have been antidilutive. |
|
16. STOCK COMPENSATION PLANS
The long-term portion of the Key Employee Incentive Plan (“Incentive Plan”) provides for grants to senior executives and key employees of stock-based compensation awards of one or more of the following: non-qualified stock options (“fixed stock options”), performance stock units, stock appreciation rights and restricted stock units. The Incentive Plan also provides for the deferral of performance stock unit and restricted stock unit awards by participants. As of December 31, 2002, 19.0 million shares (inclusive of adjustments for stock splits) were authorized and approved by the Corporation’s stockholders for grants under the long-term portion of the Incentive Plan.
In 1996, the Corporation’s Board of Directors approved a world-wide, broad-based employee stock option program, called HSY Growth. HSY Growth provided all eligible employees with a one-time grant of 100 non-qualified stock options. Under HSY Growth, over 1.2 million options were granted on January 7, 1997.
Fixed Stock Options
The exercise price of each option equals the market price of the Corporation’s Common Stock on the date of grant (determined as the closing price of the Common Stock on the New York Stock Exchange on the business day immediately preceding the date the stock options were granted). Each option has a maximum term of ten years. Options granted under the Incentive Plan prior to December 31, 1999, vest at the end of the second year after grant. In 2000, the terms and conditions of the grant were changed to provide for pro-rated vesting over four years for options granted subsequent to December 31, 1999. Options granted under the HSY Growth program have a term of ten years and vested on January 7, 2002.
A summary of
the status of the Corporation’s fixed stock options as of December
31, 2002, 2001 and 2000, and changes during the years ending on those
dates is presented below:
|
|
2002
|
|
2001
|
|
2000
|
|
| Fixed Options |
Shares
|
|
Weighted-
Average
Exercise
Price |
|
Shares
|
|
Weighted-
Average
Exercise
Price |
|
Shares
|
|
Weighted-
Average
Exercise
Price |
|
|
Outstanding
at beginning of year |
|
8,006,561 |
|
$ |
46.39 |
|
|
8,298,665 |
|
$ |
43.10 |
|
|
6,905,924 |
|
$ |
40.23 |
|
Granted |
|
1,356,605 |
|
$ |
69.33 |
|
|
781,900 |
|
$ |
62.43 |
|
|
2,403,400 |
|
$ |
44.99 |
|
Exercised |
|
(2,184,592 |
) |
$ |
39.53 |
|
|
(921,043 |
) |
$ |
30.22 |
|
|
(933,219 |
) |
$ |
26.19 |
|
Forfeited |
|
(214,012 |
) |
$ |
50.30 |
|
|
(152,961 |
) |
$ |
46.84 |
|
|
(77,440 |
) |
$ |
49.81 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at end of year |
|
6,964,562 |
|
$ |
52.97 |
|
|
8,006,561 |
|
$ |
46.39 |
|
|
8,298,665 |
|
$ |
43.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end |
|
3,970,269 |
|
$ |
48.37 |
|
|
4,544,590 |
|
$ |
44.73 |
|
|
4,655,855 |
|
$ |
41.24 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair value
of options granted during
the year (per share) |
$ |
20.96 |
|
|
|
|
$ |
18.58 |
|
|
|
|
$ |
15.58 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| The
following table summarizes information about fixed stock options outstanding
as of December 31, 2002:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise
Prices |
Number
Outstanding as
of 12/31/02 |
|
Weighted-
Average
Remaining
Contractual
Life in Years |
|
Weighted-
Average
Exercise Price |
|
Number
Exercisable as of
12/31/02 |
|
Weighted-
Average
Exercise Price |
|
| $24.1875-37.625 |
1,070,425 |
|
|
2.8 |
|
|
|
$ |
32.01 |
|
|
|
1,070,425 |
|
|
|
$ |
32.01 |
|
| $41.00-49.8125 |
2,333,793 |
|
|
6.6 |
|
|
|
$ |
44.92 |
|
|
|
1,230,702 |
|
|
|
$ |
44.85 |
|
| $55.1875-72.07 |
3,560,344 |
|
|
7.3 |
|
|
|
$ |
64.55 |
|
|
|
1,669,142 |
|
|
|
$ |
61.45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $24.1875-72.07 |
6,964,562 |
|
|
6.3 |
|
|
|
$ |
52.97 |
|
|
|
3,970,269 |
|
|
|
$ |
48.37 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Units and Restricted Stock Units
Under
the long-term portion of the Incentive Plan, each January the Corporation
grants selected executives and other key employees performance stock units
whose vesting is contingent upon the achievement of certain performance
objectives. If at the end of the applicable three-year performance cycle
targets for financial measures are met, the full number of shares are
awarded to the participants. The performance scores can range from 0%
to 275% of the targeted amounts. Restricted stock units were awarded in
2001 and 2002 under the long-term portion of the Incentive Plan to certain
executive officers and were also awarded quarterly to non-employee directors
of the Corporation as part of the Directors’ Compensation Plan. The
compensation amount charged against income for performance and restricted
stock units was $6.4 million, $6.6 million and $1.8 million for 2002,
2001 and 2000, respectively. The compensation cost associated with the
performance stock units is recognized ratably over the three-year term
based on the year-end market value of the stock. The compensation cost
associated with employee restricted stock units is recognized over a specified
restriction period based on the year-end market value of the stock. The
compensation cost associated with non-employee director restricted stock
units is recognized at the grant date and adjusted based on the year-end
market value of the stock. Performance stock units and restricted stock
units granted for potential future distribution were as follows:
|
For
the years ended December 31,
|
2002
|
|
2001
|
|
2000
|
|
Shares
granted |
|
60,615 |
|
|
111,007 |
|
|
58,550 |
|
Weighted-average
fair value at date of grant |
$ |
66.80 |
|
$ |
62.66 |
|
$ |
49.65 |
|
|
Deferred performance stock units, deferred restricted stock units, deferred directors’ fees and accumulated dividend amounts totaled 320,939 shares as of December 31, 2002.
No stock appreciation rights were outstanding as of December 31, 2002.
17. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts Receivable—Trade
In the normal course of business, the Corporation extends credit to customers that satisfy pre-defined credit criteria. The Corporation believes that it has little concentration of credit risk due to the diversity of its customer base. As of December 31, 2002, Wal-Mart Stores, Inc. and subsidiaries accounted for approximately 21% of the Corporation’s total accounts receivable. As of December 31, 2002, no other customer accounted for more than 10% of the Corporation’s total accounts receivable. Receivables, as shown on the Consolidated Balance Sheets, were net of allowances and anticipated discounts of $16.5 million and $16.0 million as of December 31, 2002 and 2001, respectively.
Inventories
The Corporation values the majority of its inventories under the last-in, first-out (“LIFO”) method and the remaining inventories at the lower of first-in, first-out (“FIFO”) cost or market. Inventories |
| include
material, labor and overhead. LIFO cost of inventories valued using the
LIFO method was $334.4 million and $351.1 million as of December 31, 2002
and 2001, respectively, and inventories were stated at amounts that did
not exceed realizable values. Total inventories were as follows:
|
| December
31, |
2002
|
|
2001
|
|
|
In
thousands of dollars
|
Raw
materials |
$ |
154,893 |
|
$ |
160,343 |
|
Goods
in process |
|
53,814 |
|
|
51,184 |
|
Finished
goods |
|
347,677 |
|
|
354,100 |
|
| |
|
|
|
|
Inventories
at FIFO |
|
556,384 |
|
|
565,627 |
|
Adjustment
to LIFO |
|
(53,093 |
) |
|
(53,493 |
) |
| |
|
|
|
|
Total
inventories |
$ |
503,291 |
|
$ |
512,134 |
|
| |
|
|
|
|
|
Property, Plant and Equipment
Property, plant
and equipment balances included construction in progress of $121.4 million
and $101.8 million as of December 31, 2002 and 2001, respectively. Net
write-downs of property, plant and equipment of $45.3 million were recorded
as a result of asset impairments associated with the Corporation’s
business realignment initiatives recorded in the fourth quarter of 2001.
These initiatives included plans to close several manufacturing facilities
to improve supply chain efficiency and to sell certain businesses as part
of product line rationalization programs. Major classes of property, plant
and equipment were as follows:
|
| December
31, |
2002
|
|
2001
|
|
|
In
thousands of dollars
|
Land |
$ |
54,181 |
|
$ |
54,177 |
|
Buildings |
|
537,473 |
|
|
524,531 |
|
Machinery
and equipment |
|
2,311,365 |
|
|
2,276,748 |
|
| |
|
|
|
|
Property,
plant and equipment, gross |
|
2,903,019 |
|
|
2,855,456 |
|
Accumulated
depreciation |
|
(1,416,964 |
) |
|
(1,320,555 |
) |
| |
|
|
|
|
Property,
plant and equipment, net |
$ |
1,486,055 |
|
$ |
1,534,901 |
|
| |
|
|
|
|
|
As of December 31, 2002, certain real estate with a net realizable value of $4.0 million was being held for sale. These assets were associated with the closure of facilities as part of the Corporation’s business realignment initiatives.
Accrued Liabilities
Accrued
liabilities were as follows:
|
| December
31, |
2002 |
|
2001 |
|
|
In
thousands of dollars
|
Payroll,
compensation and benefits |
$ |
119,478 |
|
$ |
188,452 |
|
Advertising
and promotion |
|
143,130 |
|
|
142,768 |
|
Business
realignment initiatives |
|
— |
|
|
35,389 |
|
Other |
|
94,108 |
|
|
96,292 |
|
| |
|
|
|
|
Total
accrued liabilities |
$ |
356,716 |
|
$ |
462,901 |
|
| |
|
|
|
|
|
Accrued liabilities for payroll, compensation and benefits were higher in 2001 than in 2002 primarily as a result of the recording in the fourth quarter of 2001 the enhanced benefits of the VWRP, which was part of the business realignment initiatives. |
|
Other Long-term Liabilities
Other long-term
liabilities were as follows:
|
| December
31, |
2002 |
|
2001 |
|
|
In
thousands of dollars
|
Accrued
post-retirement benefits |
$ |
234,545 |
|
$ |
232,675 |
|
Other |
|
127,617 |
|
|
128,366 |
|
| |
|
|
|
|
Total
other long-term liabilities |
$ |
362,162 |
|
$ |
361,041 |
|
| |
|
|
|
|
|
18. SEGMENT INFORMATION
The Corporation operates as a single reportable segment, encompassing the manufacture, distribution and sale of confectionery and grocery products. The Corporation’s four operating segments are comprised of geographic areas including the United States, Canada and Mexico, and the combination of the Corporation’s other international operations. For purposes of segment reporting, the Corporation’s North American operations, the United States, Canada and Mexico, have been aggregated in accordance with the criteria of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The North American operations were aggregated on the basis of their similar economic characteristics and the similarity of their products and services, production processes, types or classes of customers for their products and services, methods used to distribute products,
and the nature of the regulatory environments. The Corporation’s other international operations were aggregated with its North American operations to form one reportable segment, since the other international operations combined share most of the aggregation criteria and represent less than 10% of consolidated revenues, operating profits and assets. Consolidated net sales represented primarily sales of confectionery products.
The Corporation’s principal operations and markets are located in the United States. The Corporation manufactures, markets, sells and distributes confectionery and grocery products in Canada, Mexico and Brazil, imports and/or markets selected confectionery products in China, the Philippines, Japan and South Korea and markets confectionery products in over 90 countries worldwide. Net sales and long-lived assets of businesses outside of the United States were not significant.
Sales to Wal-Mart Stores, Inc. and subsidiaries exceeded 10% of total net sales and amounted to approximately $857.9 million, $777.7 million and $674.2 million in 2002, 2001 and 2000, respectively. |
|
19. QUARTERLY DATA (Unaudited)
Summary quarterly
results were as follows:
|
| Year
2002 |
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
In
thousands of dollars except per share amounts
|
Net
sales |
$ |
988,506 |
|
$ |
823,462 |
|
$ |
1,152,321 |
|
$ |
1,156,028 |
|
Gross
profit |
|
364,482 |
|
|
313,471 |
|
|
435,124 |
|
|
446,188 |
|
Net
income |
|
87,045 |
|
|
63,148 |
|
|
123,065 |
|
|
130,320 |
|
Net
income per share—Basic |
|
.64 |
|
|
.46 |
|
|
.90 |
|
|
.96 |
|
Net
income per share—Diluted(a) |
|
.63 |
|
|
.46 |
|
|
.89 |
|
|
.96 |
|
| |
| Year
2001 |
First |
|
Second |
|
Third
|
|
Fourth |
|
|
In
thousands of dollars except per share amounts
|
Net
sales |
$ |
988,002 |
|
$ |
817,326 |
|
$ |
1,178,909 |
|
$ |
1,152,980 |
|
Gross
profit |
|
350,048 |
|
|
300,068 |
|
|
425,506 |
|
|
393,065 |
|
Net
income (loss) |
|
78,906 |
|
|
52,439 |
|
|
120,762 |
|
|
(44,951 |
)(b) |
Net
income (loss) per share—Basic |
|
.58 |
|
|
.38 |
|
|
.89 |
|
|
(.33 |
) |
Net
income (loss) per share—Diluted |
|
.57 |
|
|
.38 |
|
|
.88 |
|
|
(.33 |
) |
(a) |
|
Quarterly income per share amounts do not total to the annual amounts due to changes in weighted-average shares outstanding during the year. |
(b) |
|
Net income (loss) for the fourth quarter and year 2001 included a total after-tax charge for the business realignment initiatives of $171.9 million. Net income (loss) per share was similarly impacted. |
| RESPONSIBILITY
FOR FINANCIAL STATEMENTS
Hershey Foods Corporation is responsible for the financial statements and other financial information contained in this report. The Corporation believes that the financial statements have been prepared in conformity with accounting principles generally accepted in the United States appropriate under the circumstances to reflect in all material respects the substance of applicable events and transactions. In preparing the financial statements, it is necessary that management make informed estimates and judgments. The other financial information in this annual report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that the cost of the system must be related to the benefits to be derived. The Corporation believes its system provides an appropriate balance in this regard. The Corporation maintains an Internal Audit Department which reviews the adequacy and tests the application of internal accounting controls.
The 2002 financial statements have been audited by KPMG LLP, independent auditors, whose appointment was approved by the Corporation’s Board of Directors on May 10, 2002, following dismissal on April 30, 2002 of Arthur Andersen LLP, the Corporation’s former independent auditors. KPMG LLP’s report expresses an opinion that the Corporation’s 2002 financial statements are fairly stated in conformity with accounting principles generally accepted in the United States, and their report states that their audit was performed in accordance with auditing standards generally accepted in the United States which are designed to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Audit Committee of the Board of Directors of the Corporation, consisting solely of non-management directors, meets regularly with the independent auditors, internal auditors and management to discuss, among other things, the audit scopes and results. KPMG LLP and the internal auditors both have full and free access to the Audit Committee, with and without the presence of management. |
| INDEPENDENT
AUDITORS’ REPORT
The Board of Directors and Stockholders
Hershey Foods Corporation:
We have audited the accompanying consolidated balance sheet of Hershey Foods Corporation and subsidiaries (the “Corporation”) as of December 31, 2002, and the related consolidated statements of income, cash flows and stockholders’ equity for the year then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The accompanying consolidated balance sheet of Hershey Foods Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of income, cash flows and stockholders’ equity for the years ended December 31, 2001 and 2000, before the revisions described in Notes 1 and 5 to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their
report dated January 22, 2002.
We conducted our audit 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hershey Foods Corporation and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the accompanying consolidated balance sheet of Hershey Foods Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of income, cash flows and stockholders’ equity for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. As described in Notes 1 and 5, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Corporation as of January 1, 2002. As described in Note 1, these financial statements have been revised to reflect reclassifications of certain consumer and trade promotional expenses as required by Emerging Issues Task Force No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products. In our opinion, the
disclosures and reclassifications for 2001 and 2000 as described in Notes 1 and 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Hershey Foods Corporation other than with respect to such disclosures and reclassifications and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.
|
New York,
New York
January 29, 2003
| REPORT
OF PREDECESSOR AUDITOR (ARTHUR ANDERSEN LLP)
The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. As discussed in Note 1, in 2002, the Corporation adopted the provisions of Emerging Issues Task Force Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer” which requires reclassification of certain consumer and trade promotional expenses in the 2001 and 2000 consolidated income statements. Also, in 2002, the Corporation adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Included in Notes 1 and 5 are transitional disclosures for 2001 and 2000 that are required by SFAS No. 142. The Arthur Andersen LLP report does not extend to these changes in the 2001 and 2000 consolidated financial statements. The adjustments to the 2001 and 2000 consolidated financial statements were reported on by
KPMG LLP as stated in their report appearing herein.
To the Stockholders and Board of Directors
of Hershey Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hershey Foods Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2001, appearing on pages A-16 through A-43. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 that our audits provide a reasonable basis for our opinion.
In our opinion,
the financial statements referred to above present fairly, in all material
respects, the financial position of Hershey Foods Corporation and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
New York, New York
January 22, 2002 |
| HERSHEY
FOODS CORPORATION
SIX-YEAR CONSOLIDATED FINANCIAL SUMMARY
All dollar and share amounts in thousands except market price and per
share statistics
|
|
5-Year
Compound
Growth Rate
|
|
2002
|
|
2001
|
|
2000
|
|
1999
|
|
1998
|
|
1997
|
|
Summary
of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales(a) |
|
1.3 |
% |
|
$ |
4,120,317 |
|
|
4,137,217 |
|
|
3,820,416 |
|
|
3,586,183 |
|
|
3,974,832 |
|
|
3,853,344 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales |
|
0.6 |
% |
|
$ |
2,561,052 |
|
|
2,668,530 |
|
|
2,471,151 |
|
|
2,354,724 |
|
|
2,625,057 |
|
|
2,488,896 |
|
Selling,
Marketing and Administrative(a) |
|
2.6 |
% |
|
$ |
833,426 |
|
|
846,976 |
|
|
726,615 |
|
|
673,099 |
|
|
707,112 |
|
|
734,238 |
|
Business
Realignment and Asset Impairments Charge |
|
|
|
|
$ |
27,552 |
|
|
228,314 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Gain
on Sale of Businesses(b) |
|
|
|
|
$ |
— |
|
|
19,237 |
|
|
— |
|
|
243,785 |
|
|
— |
|
|
— |
|
Interest
Expense, Net |
|
(4.5 |
)% |
|
$ |
60,722 |
|
|
69,093 |
|
|
76,011 |
|
|
74,271 |
|
|
85,657 |
|
|
76,255 |
|
Provision
for Income Taxes |
|
1.5 |
% |
|
$ |
233,987 |
|
|
136,385 |
|
|
212,096 |
|
|
267,564 |
|
|
216,118 |
|
|
217,704 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
3.7 |
% |
|
$ |
403,578 |
|
|
207,156 |
|
|
334,543 |
|
|
460,310 |
|
|
340,888 |
|
|
336,251 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic |
|
5.6 |
% |
|
$ |
2.96 |
|
|
1.52 |
|
|
2.44 |
|
|
3.29 |
|
|
2.38 |
|
|
2.25 |
|
—Diluted |
|
5.6 |
% |
|
$ |
2.93 |
|
|
1.50 |
|
|
2.42 |
|
|
3.26 |
|
|
2.34 |
|
|
2.23 |
|
Weighted
Average Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—Basic |
|
|
|
|
|
136,538 |
|
|
136,245 |
|
|
137,326 |
|
|
140,031 |
|
|
143,446 |
|
|
149,174 |
|
—Diluted |
|
|
|
|
|
137,714 |
|
|
137,696 |
|
|
138,365 |
|
|
141,300 |
|
|
145,563 |
|
|
151,016 |
|
Dividends
Paid on Common Stock |
|
6.3 |
% |
|
$ |
133,285 |
|
|
122,790 |
|
|
115,209 |
|
|
109,175 |
|
|
103,616 |
|
|
98,390 |
|
Per
Share |
|
8.4 |
% |
|
$ |
1.26 |
|
|
1.165 |
|
|
1.08 |
|
|
1.00 |
|
|
.92 |
|
|
.84 |
|
Dividends
Paid on Class B Common Stock |
|
8.3 |
% |
|
$ |
34,536 |
|
|
31,960 |
|
|
29,682 |
|
|
27,553 |
|
|
25,428 |
|
|
23,156 |
|
Per
Share |
|
8.4 |
% |
|
$ |
1.135 |
|
|
1.05 |
|
|
.975 |
|
|
.905 |
|
|
.835 |
|
|
.76 |
|
Net
Income as a Percent of Net Sales(a) (c) |
|
|
|
|
|
10.6 |
% |
|
9.5 |
% |
|
9.0 |
% |
|
8.6 |
% |
|
9.0 |
% |
|
9.1 |
% |
Depreciation |
|
2.8 |
% |
|
$ |
155,384 |
|
|
153,493 |
|
|
140,168 |
|
|
135,574 |
|
|
138,489 |
|
|
135,016 |
|
Advertising(a) |
|
(3.8 |
)% |
|
$ |
162,874 |
|
|
187,244 |
|
|
156,319 |
|
|
158,965 |
|
|
182,383 |
|
|
197,801 |
|
Consumer
Promotions(a) |
|
12.2 |
% |
|
$ |
62,893 |
|
|
53,450 |
|
|
46,615 |
|
|
35,380 |
|
|
31,521 |
|
|
35,419 |
|
Payroll |
|
2.5 |
% |
|
$ |
594,372 |
|
|
614,197 |
|
|
557,342 |
|
|
534,854 |
|
|
563,045 |
|
|
524,827 |
|
Year-end
Position and Statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Additions |
|
(5.2 |
)% |
|
$ |
132,736 |
|
|
160,105 |
|
|
138,333 |
|
|
115,448 |
|
|
161,328 |
|
|
172,939 |
|
Capitalized
Software Additions |
|
(16.5 |
)% |
|
$ |
11,836 |
|
|
9,845 |
|
|
4,686 |
|
|
25,394 |
|
|
42,859 |
|
|
29,100 |
|
Total
Assets |
|
1.1 |
% |
|
$ |
3,480,551 |
|
|
3,247,430 |
|
|
3,447,764 |
|
|
3,346,652 |
|
|
3,404,098 |
|
|
3,291,236 |
|
Long-term
Portion of Debt |
|
(3.7 |
)% |
|
$ |
851,800 |
|
|
876,972 |
|
|
877,654 |
|
|
878,213 |
|
|
879,103 |
|
|
1,029,136 |
|
Stockholders’
Equity |
|
10.0 |
% |
|
$ |
1,371,703 |
|
|
1,147,204 |
|
|
1,175,036 |
|
|
1,098,627 |
|
|
1,042,301 |
|
|
852,806 |
|
Operating
Return on Average Stockholders’ Equity(c) |
|
|
|
|
|
34.6 |
% |
|
33.7 |
% |
|
30.2 |
% |
|
28.9 |
% |
|
37.6 |
% |
|
35.0 |
% |
Operating
Return on Average Invested Capital(c) |
|
|
|
|
|
19.7 |
% |
|
18.7 |
% |
|
16.5 |
% |
|
15.4 |
% |
|
18.1 |
% |
|
18.3 |
% |
Full-time
Employees |
|
|
|
|
|
13,700 |
|
|
14,400 |
|
|
14,300 |
|
|
13,900 |
|
|
14,700 |
|
|
14,900 |
|
Stockholders’
Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Shares of Common Stock and Class B
Common Stock at Year-end |
|
|
|
|
|
134,220 |
|
|
135,639 |
|
|
136,282 |
|
|
138,460 |
|
|
143,147 |
|
|
142,932 |
|
Market
Price of Common Stock at Year-end |
|
1.7 |
% |
|
$ |
67.44 |
|
|
67.70 |
|
|
64.38 |
|
|
47.44 |
|
|
62.19 |
|
|
61.94 |
|
Range
During Year |
|
|
|
|
$ |
79.49-56.45 |
|
|
70.15-55.13 |
|
|
66.44-37.75 |
|
|
64.88-45.75 |
|
|
76.38-59.69 |
|
|
63.88-42.13 |
|
(a) |
|
All years have been restated in accordance with final consensuses reached on various EITF issues regarding the reporting of certain sales incentives. |
(b) |
|
Includes the gain on the sale of the Luden’s throat drops business in 2001 and the gain on the sale of the Corporation’s pasta business in 1999. |
(c) |
|
Net Income as a Percent of Sales, Operating Return on Average Stockholders’ Equity and Operating Return on Average Invested Capital have been calculated using Net Income, excluding the after-tax impacts of the elimination of amortization of intangibles for all years, the after-tax effect of the 2001 and 2002 Business Realignment Initiatives, the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2002, the 1999 and 2001 Gain on the Sale of Businesses and the 2000 gain on the sale of certain Corporate aircraft. Net Income as a Percent of Net Sales, as reported above was 9.8% in 2002, 5.0% in 2001, 8.8% in 2000, 12.8% in 1999, 8.6% in 1998 and 8.7% in 1997. |
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a listing of Subsidiaries of the Corporation, their
jurisdictions of incorporation, and the name under which they do business. Each
is wholly owned. Certain subsidiaries are not listed since, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary as of December 31, 2002.
|
|
|
|
Name of Subsidiary |
Jurisdiction of
Incorporation
|
|
Hershey
Chocolate & Confectionery Corporation |
Delaware |
|
Hershey
Chocolate of Virginia, Inc. |
Delaware |
|
Hershey Canada, Inc.
|
Canada |
INDEPENDENT AUDITORS' CONSENT
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Hershey Foods Corporation:
We consent to the incorporation by reference in the registration
statements (File No. 333-25853, File No. 333-33507, File No. 33-45431, File No.
33-45556, and File No. 333-52509) on Forms S-8 and S-3 of Hershey Foods
Corporation of our reports dated January 29, 2003, with respect to the
consolidated balance sheet of Hershey Foods Corporation and subsidiaries as of
December 31, 2002, the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended, and the related financial
statement schedule, which reports appear in the December 31, 2002 Annual Report
on Form 10-K of Hershey Foods Corporation.
Our report refers to our audit of the disclosures added and reclassifications
that were applied to revise the 2001 and 2000 consolidated financial statements,
as more fully described in Notes 1 and 5 to the consolidated financial
statements. However, we were not engaged to audit, review or apply
any procedures to the 2001 and 2000 consolidated financial statements other than
with respect to such disclosures and reclassifications.
/s/KPMG LLP
New York, New York
March 26, 2003
Exhibit 99
Certification
Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned officers of Hershey Foods
Corporation (the “Company”) hereby certify that the
Company’s Annual Report on Form 10-K for the year ended December 31, 2002
(the “Report”) fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
A signed original of this
written statement required by Section 906 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
Dated: March 26, 2003
/s/ Richard H. Lenny
Richard H. Lenny
Chief Executive Officer
Dated: March 26, 2003
/s/ Frank Cerminara
Frank Cerminara
Chief Financial Officer
