UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 1997
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-183
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HERSHEY FOODS CORPORATION
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-0691590
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 CRYSTAL A DRIVE
HERSHEY, PENNSYLVANIA 17033
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 534-6799
-------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1 par value - 112,415,239 shares, as of October 31, 1997. Class B
Common Stock, $1 par value - 30,465,908 shares, as of October 31, 1997.
Exhibit Index - Page 14
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
--------------------------
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------ -------------
NET SALES $1,151,610 $1,072,336
---------- ----------
COSTS AND EXPENSES:
Cost of sales 672,604 613,974
Selling, marketing and administrative 292,593 287,526
---------- ----------
Total costs and expenses 965,197 901,500
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 186,413 170,836
Interest expense, net 20,558 13,457
---------- ----------
INCOME BEFORE INCOME TAXES 165,855 157,379
Provision for income taxes 65,182 63,109
---------- ----------
NET INCOME $ 100,673 $ 94,270
========== ==========
NET INCOME PER SHARE $ .68 $ .61
========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .2200 $ .2000
========== ==========
Class B Common Stock $ .2000 $ .1800
========== ==========
AVERAGE SHARES OUTSTANDING 147,118 153,712
========== ==========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------ -------------
NET SALES $3,059,808 $2,800,193
---------- ----------
COSTS AND EXPENSES:
Cost of sales 1,792,204 1,633,520
Selling, marketing and administrative 852,857 805,273
---------- ----------
Total costs and expenses 2,645,061 2,438,793
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 414,747 361,400
Interest expense, net 52,091 36,639
---------- ----------
INCOME BEFORE INCOME TAXES 362,656 324,761
Provision for income taxes 142,525 130,229
---------- ----------
NET INCOME $ 220,131 $ 194,532
========== ==========
NET INCOME PER SHARE $ 1.46 $ 1.26
========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .6200 $ .5600
========== ==========
Class B Common Stock $ .5600 $ .5050
========== ==========
AVERAGE SHARES OUTSTANDING 150,897 154,209
========== ==========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS)
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 70,955 $ 61,422
Accounts receivable - trade 436,990 294,606
Inventories 605,517 474,978
Deferred income taxes 96,075 94,464
Prepaid expenses and other 33,071 60,759
----------- -----------
Total current assets 1,242,608 986,229
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 2,572,034 2,422,702
Less - accumulated depreciation and amortization (924,303) (820,807)
----------- -----------
Net property, plant and equipment 1,647,731 1,601,895
----------- -----------
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 553,595 565,962
OTHER ASSETS 52,940 30,710
----------- -----------
Total assets $ 3,496,874 $ 3,184,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 132,547 $ 134,213
Accrued liabilities 386,988 357,828
Accrued income taxes 16,954 10,254
Short-term debt 521,950 299,469
Current portion of long-term debt 25,082 15,510
----------- -----------
Total current liabilities 1,083,521 817,274
LONG-TERM DEBT 1,029,147 655,289
OTHER LONG-TERM LIABILITIES 340,631 327,209
DEFERRED INCOME TAXES 268,319 224,003
----------- -----------
Total liabilities 2,721,618 2,023,775
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued:
none in 1997 and 1996 --- ---
Common Stock, shares issued:
149,484,964 in 1997 and 149,471,964 in 1996 149,485 149,472
Class B Common Stock, shares issued:
30,465,908 in 1997 and 30,478,908 in 1996 30,465 30,478
Additional paid-in capital 35,814 42,432
Cumulative foreign currency translation adjustments (34,782) (32,875)
Unearned ESOP compensation (29,539) (31,935)
Retained earnings 1,892,557 1,763,144
Treasury-Common Stock shares at cost:
37,050,155 in 1997 and 27,009,316 in 1996 (1,268,744) (759,695)
----------- -----------
Total stockholders' equity 775,256 1,161,021
----------- -----------
Total liabilities and stockholders' equity $ 3,496,874 $ 3,184,796
=========== ===========
The accompanying notes are an integral part of these balance sheets.
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------ ---------------
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net Income $ 220,131 $ 194,532
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 114,173 99,173
Deferred income taxes 13,419 17,701
Changes in assets and liabilities, net of effects
from business acquisitions and divestitures:
Accounts receivable - trade (144,638) (58,221)
Inventories (133,530) (94,191)
Accounts payable (1,418) 1,295
Other assets and liabilities 68,350 28,496
Other, net 2,293 963
---------- ----------
Net Cash Flows Provided from Operating Activities 138,780 189,748
---------- ----------
CASH FLOWS PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Capital additions (133,821) (108,493)
Proceeds from divestitures --- 27,499
Other, net 12,785 7,476
---------- ----------
Net Cash Flows (Used by) Investing Activities (121,036) (73,518)
---------- ----------
CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Net (decrease) increase in short-term debt 72,481 51,930
Long-term borrowings 550,000 ---
Repayment of long-term debt (15,540) (1,984)
Cash dividends paid (90,718) (84,698)
Exercise of stock options 10,614 17,733
Incentive plan transactions (27,394) (35,850)
Repurchase of Common Stock (507,654) (35,743)
---------- ----------
Net Cash Flows (Used by) Financing Activities (8,211) (88,612)
---------- ----------
Increase in Cash and Cash Equivalents 9,533 27,618
Cash and Cash Equivalents, beginning of period 61,422 32,346
---------- ----------
Cash and Cash Equivalents, end of period $ 70,955 $ 59,964
========== ==========
Interest Paid $ 45,183 $ 36,261
========== ==========
Income Taxes Paid $ 114,089 $ 94,351
========== ==========
The accompanying notes are an integral part of these statements.
- - 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation and its subsidiaries after elimination of
intercompany accounts and transactions. These statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and year-to-date
period ended September 28, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. For
more information, refer to the consolidated financial statements and
footnotes included in the Corporation's 1996 Annual Report on Form 10-K.
2. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
------------------ -------------------
(IN THOUSANDS OF DOLLARS)
Interest expense $ 55,809 $ 41,073
Interest income (2,262) (2,944)
Capitalized interest (1,456) (1,490)
-------- --------
Interest expense, net $ 52,091 $ 36,639
======== ========
3. NET INCOME PER SHARE
Income per share has been computed based on the weighted average number
of shares of the Common Stock and the Class B Common Stock outstanding
during each period. The lower average shares outstanding for the three
months and nine months ended September 28, 1997 primarily reflected the
Corporation's purchase of 9,900,990 shares of its Common Stock from the
Hershey Trust Company, as Trustee for the benefit of Milton Hershey
School (Milton Hershey School Trust) in August 1997. A total of
37,050,155 shares were held as Treasury Stock as of September 28, 1997.
4. INVENTORIES
The majority of inventories are valued under the last-in, first-out
(LIFO) method. The remaining inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. Inventories were as follows:
SEPTEMBER 28, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS OF DOLLARS)
Raw materials $ 262,414 $ 204,419
Goods in process 40,656 31,444
Finished goods 404,370 316,726
--------- ---------
Inventories at FIFO 707,440 552,589
Adjustment to LIFO (101,923) (77,611)
--------- ---------
Total inventories $ 605,517 $ 474,978
========= =========
5. ACQUISITIONS AND DIVESTITURES
In January 1996, the Corporation completed the sale of the assets of
Hershey Canada Inc.'s PLANTERS nut and LIFE SAVERS and BREATH SAVERS
hard candy, and BEECH-NUT cough drops businesses to Johnvince Foods
group and Beta Brands Inc., respectively.
In December 1996, the Corporation acquired from an affiliate of
Huhtamaki Oy (Huhtamaki), Huhtamaki's Leaf North America (Leaf)
confectionery operations and sold to Huhtamaki the outstanding shares of
Gubor Holding GmbH (Gubor) and Sperlari S.r.l. (Sperlari). For further
information, refer to the Corporation's 1996 Annual Report on Form 10-K.
6. LONG-TERM DEBT
In March 1997, the Corporation issued $150 million of 6.95% Notes due
2007 (6.95% Notes) under the November 1993 Form S-3 Registration
Statement. Proceeds from the debt issuance were used to repay a portion
of the commercial paper borrowings associated with the Leaf acquisition.
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 (Notes) and
$250 million of 7.2% Debentures due 2027 (Debentures) under the November
1993 and August 1997 Registration Statements. Proceeds from the debt
issuance were used to repay short-term borrowings associated with the
purchase of Common Stock from the Milton Hershey School Trust. As of
September 28, 1997, $250 million of debt securities remained available
for issuance under the August 1997 Registration Statement. As of
September 28, 1997, and December 31, 1996, $150.0 million and $300.0
million, respectively, of commercial paper borrowings were reclassified
as long-term debt in accordance with the Corporation's intent and
ability to refinance such obligations on a long-term basis.
7. 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 September 28, 1997, because of the
relatively short maturity of these instruments. The carrying value of
long-term debt, including the current portion, also approximated fair
value as of September 28, 1997, based upon quoted market prices, as of
those dates, for the same or similar debt issues.
As of September 28, 1997, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $26.4 million in foreign
currency, primarily British sterling and Swiss francs, and to sell $21.5
million in foreign currency, primarily Japanese yen and Canadian
dollars, 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 September 28, 1997, the fair
value of foreign exchange forward contracts approximated carrying value.
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 to effectively convert a portion of its floating rate
debt to fixed rate debt. As of September 28, 1997 and September 29,
1996, the Corporation had agreements outstanding with an aggregate
notional amount of $250.0 million and $200.0 million with maturities
through 1999 and 1997, respectively. As of September 28, 1997 and
September 29, 1996, interest rates payable were at weighted average
fixed rates of 6.1% and 5.6%, respectively, and interest rates
receivable were floating based on 30-day commercial paper composite
rates. Any interest rate differential on interest rate swaps is
recognized as an adjustment to interest expense during the period. The
Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at current market rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS - THIRD QUARTER 1997 VS. THIRD QUARTER 1996
- -----------------------------------------------------------------
Consolidated net sales for the third quarter rose from $1,072.3 million in 1996
to $1,151.6 million in 1997, an increase of 7% from the prior year. The higher
sales primarily reflected incremental sales from the Leaf acquisition, increased
sales of existing domestic confectionery brands and the introduction of new
confectionery products. These increases were offset somewhat by lower sales
resulting from the divestitures of the Gubor and Sperlari businesses in December
1996 and a decline in sales of pasta and grocery products.
The consolidated gross margin decreased from 42.7% in 1996 to 41.6% in 1997. The
decrease reflected the lower margin associated with the Leaf business, higher
costs associated with certain new products and seasonal confectionery items, and
lower profitability resulting from the mix of items sold in 1997 compared to the
prior year, partially offset by lower costs for milk and flour raw materials.
Selling, marketing and administrative expenses increased by 2%, as a result of
incremental expenses associated with the acquired Leaf operations and increased
marketing expenses associated with the introduction of new products. These
higher expenses were offset considerably by decreases related to the divestiture
of Gubor and Sperlari.
Net interest expense in the third quarter of 1997 was $7.1 million above the
comparable period of 1996 primarily as a result of increased borrowings
associated with the Leaf acquisition and the purchase of Common Stock from the
Milton Hershey School Trust.
The third quarter effective income tax rate decreased from 40.1% in 1996 to
39.3% in 1997 primarily due to changes in the geographic mix of the
Corporation's income.
RESULTS OF OPERATIONS - FIRST NINE MONTHS 1997 VS. FIRST NINE MONTHS 1996
- -------------------------------------------------------------------------
Consolidated net sales for the first nine months of 1997 increased by $259.6
million or 9% primarily as a result of the incremental sales from the Leaf
acquisition, the introduction of new confectionery products and increased sales
of core confectionery items. These increases were offset somewhat by lower sales
resulting from the divestiture of the Gubor and Sperlari businesses and a
decline in sales of pasta and grocery products.
The consolidated gross margin decreased from 41.7% in 1996 to 41.4% in 1997. The
decrease was primarily the result of the lower margin associated with the Leaf
business and higher costs associated with certain new products and seasonal
items, partially offset by lower costs for certain major raw materials,
primarily milk and flour, compared to the prior year. Flour costs, however,
remained well above historical levels. Selling, marketing and administrative
expenses increased by 6%, as a result of incremental expenses associated with
the Leaf business and increased marketing expenses related to the introduction
of new products, partially offset by decreases resulting from the Gubor and
Sperlari divestitures and reduced marketing spending for existing brands,
particularly related to pasta and grocery products.
Net interest expense was $15.5 million above prior year, primarily as a result
of increased borrowings associated with the Leaf acquisition and the purchase of
Common Stock from the Milton Hershey School Trust.
The effective income tax rate decreased from 40.1% in 1996 to 39.3% in 1997
primarily due to changes in the geographic mix of the Corporation's income.
FINANCIAL CONDITION
- -------------------
Historically, the Corporation's major source of financing has been cash
generated from operations. Domestic seasonal working capital needs, which
typically peak during the summer, generally have been met by issuing commercial
paper. During the first nine months of 1997, the Corporation's cash and cash
equivalents increased by $9.5 million. Cash provided from operations and from
long-term and short-term borrowings was sufficient to repurchase $507.7 million
of the Corporation's Common Stock, finance capital additions of $133.8 million
and pay cash dividends of $90.7 million. Cash flows from operating activities
were lower during the first nine months of 1997, principally as a result of
increases in accounts receivable reflecting the higher sales volume and higher
inventory levels. The increased cash generated from other assets
and liabilities was primarily related to commodities transactions and the timing
of payments for accrued expenses.
The ratio of current assets to current liabilities was 1.1:1 as of September 28,
1997 and 1.2:1 as of December 31, 1996. The Corporation's capitalization ratio
(total short-term and long-term debt as a percent of stockholders' equity,
short-term and long-term debt) was 67% as of September 28, 1997, and 46% as of
December 31, 1996. The increase in the capitalization ratio primarily reflected
the additional borrowings to finance the purchase of Common Stock and the
related decrease in stockholder's equity as a result of the additional treasury
stock.
As of September 28, 1997, the Corporation maintained committed credit facility
agreements with a syndicate of banks in the amount of $600 million which could
be borrowed directly or used to support the issuance of commercial paper. The
Corporation has options to increase the credit facility by $1.0 billion with the
concurrence of the banks. As of September 28, 1997, and September 29, 1996, the
Corporation also had lines of credit with domestic and international commercial
banks in the amount of approximately $170 million and $100 million,
respectively.
In March 1997, the Corporation issued $150 million of 6.95% Notes under a
November 1993 Registration Statement. In August 1997, the Corporation issued
$400 million of Notes and Debentures under the November 1993 and August 1997
Registration Statements. As of September 28, 1997, $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 including, reducing existing commercial paper borrowings, financing
capital additions, and funding future business acquisitions and working capital
requirements.
As of September 28, 1997, the Corporation's principal capital commitments
included manufacturing capacity expansion and modernization. The Corporation
anticipates that capital expenditures will be in the range of $175 million to
$225 million per annum during the next several years as a result of continued
modernization of existing facilities and capacity expansion to support new
products and line extensions.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
- -----------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 128, Earnings Per share (FAS 128). FAS 128
specifies the computation, presentation, and disclosure requirements for
earnings per share and is effective for periods ending after December 15, 1997.
Adoption of this accounting standard is not expected to have a material effect
on the earnings per share computations of the Corporation.
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 which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The included forward-looking
statements address management's expectations about the use of proceeds from any
future offering of the remaining $250 million of debt securities available under
the August 1997 Registration Statement, the impact of recent accounting
pronouncements and anticipated capital expenditures during the next several
years. Factors which could cause results to differ include, but are not limited
to: changes in the confectionery and pasta business environment, including
actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
PART II
Items 1 through 5 have been omitted as not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) EXHIBITS
---------
The following items are attached and incorporated herein by reference:
Exhibit 10 - Copy of the Hershey Foods Corporation Directors'
Compensation Plan.
Exhibit 12 - Statement showing computation of ratio of earnings to fixed
charges for the nine months ended September 28, 1997 and September 29,
1996.
Exhibit 27 - Financial Data Schedule for the period ended September 28,
1997 (required for electronic filing only).
b) REPORTS ON FORM 8-K
-------------------
A report on Form 8-K was filed August 12, 1997 announcing that the
Corporation had purchased 9,900,990 shares of its Common Stock from
Hershey Trust Company, as Trustee under the deed of trust with Milton S.
Hershey and Catherine S. Hershey for the benefit of Milton Hershey
School.
A report on Form 8-K was filed August 14, 1997 announcing that the
Corporation had filed a Form S-3 Registration Statement with the SEC
registering $500,000,000 of debt securities.
A report on Form 8-K was filed August 22, 1997 announcing that the
Corporation entered into an Underwriting Agreement with Goldman, Sachs &
Co., with respect to the issuance of certain debt securities. The
Corporation also entered into a Pricing Agreement concerning the
issuance and sale of $150 million of 6.95% Notes and $250 million of
7.2% Debentures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHEY FOODS CORPORATION
(Registrant)
Date NOVEMBER 5, 1997 /S/ WILLIAM F. CHRIST
---------------- -----------------------------
William F. Christ
Senior Vice President,
Chief Financial Officer
and Treasurer
Date NOVEMBER 5, 1997 /S/ DAVID W. TACKA
---------------- ----------------------------
David W. Tacka
Corporate Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit 10 - Hershey Foods Corporation Directors' Compensation Plan
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule for the period
ended September 28, 1997 (required for electronic
filing only)
EXHIBIT 12
HERSHEY FOODS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS EXCEPT FOR RATIOS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 28, SEPTEMBER 29,
1997 1996
------------ ------------
EARNINGS:
Income before income taxes $ 362,656 $ 324,761
Add (deduct):
Interest on indebtedness 54,353 39,583
Portion of rents representative of the
interest factor (f1) 8,733 6,454
Amortization of debt expense 257 175
Amortization of capitalized interest 2,618 2,491
---------- ----------
Earnings as adjusted $ 428,617 $ 373,464
========== ==========
FIXED CHARGES:
Interest on indebtedness $ 54,353 $ 39,583
Portion of rents representative of the
interest factor (f1) 8,733 6,454
Amortization of debt expense 257 175
Capitalized interest 1,456 1,490
---------- ----------
Total fixed charges $ 64,799 $ 47,702
========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 6.61 7.83
========== ==========
[FN]
NOTE:
(f1) Portion of rents representative of the interest factor consists of
one-third of rental expense for operating leases.
5
1,000
9-MOS
DEC-31-1997
SEP-28-1997
70,955
0
436,990
0
605,517
1,242,608
2,572,034
924,303
3,496,874
1,083,521
1,029,147
0
0
179,950
595,306
3,496,874
3,059,808
3,059,808
1,792,204
2,645,061
0
0
52,091
362,656
142,525
220,131
0
0
0
220,131
1.46
0
BALANCE IS NET OF RESERVES FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS.
HERSHEY FOODS CORPORATION
DIRECTORS' COMPENSATION PLAN
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 a member of the Board of
Directors (Board) of the Corporation or as a member or chair of any committee
thereof (together, Director Fees) and to promote the identification of interests
between such Directors and the stockholders of the Corporation by paying a
portion of the retainer in shares of Common Stock, par value $1.00 per share, of
the Corporation (Common Stock) and providing Directors the opportunity to elect
to receive a greater portion of the retainer in 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.
3
PAYMENT
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 member or chair of
any committee of the Board. Except as modified by the Board, at least one-third
of the portion of the Director Fees payable as the annual retainer shall be
payable in shares of Common Stock. Directors may elect to have all or any
portion of such retainer in excess of the one-third minimum to be paid in shares
of Common Stock. Fees payable for services as a member or chair of any committee
of the Board shall be payable currently only in cash. Any shares of Common Stock
payable under this Section 3 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.
4
ELECTIONS
(a) DIRECTOR FEE PAYMENT ALTERNATIVES. A Director may
elect any one of the following alternatives for the payment of
Director Fees:
(1) to receive currently full payment in cash and Common Stock, as set
forth in Section 3 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 payable
in cash for subsequent payment in cash (a "Cash Deferral Election"); or
(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").
(b) FILING AND EFFECTIVENESS OF ELECTIONS. The election by a Director to
receive payment of Director Fees other than as set forth in Section 3 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 3 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.
The Director may elect to defer payment of the Common Stock portion or cash
portion, as determined under Section 3, of the Director Fees separately, and any
deferral of the portion of the Director Fees payable in Common Stock shall be
deemed to be a Stock Deferral Election subject to the provisions of Section
4(d). If only a portion of the Director Fees otherwise payable in cash for a
calendar year is deferred pursuant to a Cash Deferral Election, the Director
Fees deferred shall be on a pro-rata basis with the Director Fees earned and not
deferred (excluding one-third of the annual retainer) during such year after the
Cash Deferral Election becomes effective up to the amount of the Director Fees
subject to such Cash Deferral Election.
(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.
The Director may elect to defer payment of the portion of the Director Fees
payable in Common Stock in accordance with Section 3 and any remaining Director
Fees for later payment in Common Stock pursuant to a Stock Deferral Election. If
only a portion of the Director Fees otherwise payable for a calendar year is
deferred pursuant to a Stock Deferral Election, the Director Fees deferred shall
be on a pro-rata basis with the Director Fees earned and not deferred during
such year and payable after the Stock Deferral Election becomes effective up to
the amount of the Director Fees subject to such Stock Deferral Election.
(e) PREVIOUS DEFERRAL ELECTION. In addition to the amounts otherwise
permitted to be deferred under this Plan, a current Director as of January 1,
1997 who has previously deferred director fees under the Hershey Foods
Corporation's Deferral Plan for Non-Management Directors (Prior Plan) may elect
to credit any portion of their deferral accounts under the Prior Plan to the
Deferred Cash Compensation Account or the Deferred Stock Compensation Account
under this Plan. If a Director elects to credit any portion of his account under
the Prior Plan to the Deferred Stock Compensation Account, the amount of the
credit to such account shall be determined by dividing the account balance under
the Prior Plan by the Fair Market Value of a share of Common Stock and rounding
the balance to the nearest whole share. Credits shall be made to the Plan
pursuant to this Section as soon as practicable after an election form has been
filed with the Secretary of the Corporation. Amounts so credited shall become
part of a Director's account under this Plan and shall be subject to the terms
and conditions of this Plan, except that prior elections as to payment of
deferred amounts shall remain in effect. Once amounts are credited to a
Director's account pursuant to this Section, they may not thereafter be returned
to the Director's deferral accounts under the prior deferral arrangement.
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 Directors 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 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 as of which the
change is to be effective, with such change to be effective for
deferred Director Fees credited to the Deferred Cash Compensation
Account on or after the effective date.
(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 as of 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 preceding year.
(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. 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 payments 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.
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
shares of Common Stock (including fractional shares) 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 shares of Common Stock
(including fractional shares) equal to the number of shares of Common Stock
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 the 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(d) hereof.
(b) Effective January 1, 1997 the Corporation will no longer provide
accruals under the Hershey Foods Corporation Non-Management Directors Pension
Plan ("Pension Plan"). Effective as of that
date, Directors participating in the Pension Plan (other than those who are age
68 or older as of that date who may elect to continue to participate in the
Pension Plan) will have their accrual balances as of that date converted into
equivalent shares of Hershey Foods Common Stock and these shares will be
credited to such Directors Deferred Stock Compensation Account established
pursuant to this Section 6. The conversion rate of the accrual to shares will be
as determined by the Board of Directors and will not necessarily be as provided
for in this Plan.
(c) ADJUSTMENT AND SUBSTITUTION. The number of shares of Common Stock
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.
(d) MANNER OF PAYMENT. The balance of a Director's Deferred Stock
Compensation Account including amounts credited pursuant to Section 6(b) 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 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 shares of Common Stock in the 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, and by rounding such result down to the nearest
whole number of shares. The balance of the number of shares of Common Stock in
the Deferred Stock Compensation Account shall be appropriately reduced in
accordance with Section 6(d) hereof to reflect the installment payments made
hereunder. Shares of Common Stock remaining in a Deferred Stock Compensation
Account pending distribution pursuant to this Section 6(d) 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(c) 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 Deferred Cash Compensation Account or a Deferred
Stock Compensation Account shall commence on March 30 (or if March 30 is not a
business day, on the first preceding business day) of the calendar year
following the calendar year during which the Director ceases to be a member of
the Board for any reason, including death or disability.
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 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 DEFERRED ACCOUNTS
Any 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 a Deferred Stock
Compensation Account and 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.
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, 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 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 shall be the average of the closing
price for all trading dates for the applicable period covered by a payment. The
applicable period for payments or credits being made on May 1 shall be the
average of the closing price for all trading dates during the months of December
through April. The applicable period for payments or credits being made on
December 1 shall be the average of the closing price for all trading dates
during the months of May through November. 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 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 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 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 shares of Common Stock 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 is effective as
of January 1, 1997. 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.
