SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[x] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
HERSHEY FOODS CORPORATION
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(Name of Registrant as Specified in its Charter)
HERSHEY FOODS CORPORATION
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(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[x] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(2), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each of securities to which transaction applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:/1/
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(4) Proposed maximum aggregate value of transaction:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- -------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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/1/Set forth the amount on which the filing fee is calculated and state how it
was determined.
Notice of 1996 Annual Meeting
Proxy Statement
Consolidated Financial Statements and Management's Discussion and Analysis
Hershey Foods Corporation Corporate
Headquarters Hershey, Pennsylvania 17033
LOGO
March 18, 1996
To Our Stockholders:
It is my pleasure to invite you to attend the 1996 Annual Meeting of
Stockholders of Hershey Foods Corporation, to be held at 2:00 p.m. on Tuesday,
April 30, 1996. The meeting will be held at the Hershey Theatre, located one-
half block east of Cocoa Avenue on East Caracas Avenue, Hershey, Pennsylvania.
The doors to the Theatre will open at 1:00 p.m.
We also invite you to visit HERSHEY'S CHOCOLATE WORLD Visitors Center from
9:00 a.m. to 6:00 p.m. on the day of the Annual Meeting. We will be offering a
special 30% discount on Hershey's chocolate and non-chocolate items. In
addition, product samples for stockholders will be distributed and
refreshments will be available at CHOCOLATE WORLD between 9:00 a.m. and 2:00
p.m. You will need to show the coupon provided with your proxy card to receive
your discount and free product sample. A map showing directions to CHOCOLATE
WORLD is included on the back of your coupon. PLEASE NOTE THAT THERE WILL BE
NO REFRESHMENTS OR PRODUCT SAMPLE DISTRIBUTION AT THE HERSHEY THEATRE.
Business scheduled to be considered at the meeting includes the election of
eleven directors and the approval of the appointment of Arthur Andersen LLP as
independent public accountants for the Corporation for 1996. Additional
information concerning these matters is included in the Notice of Annual
Meeting and Proxy Statement. Members of management will also review with you
the Corporation's operations during the past year and will be available to
respond to questions during the meeting.
If you plan to attend the meeting, please bring the admission ticket located
on the bottom half of your proxy card with you to the meeting. If your shares
are currently held in the name of your broker, bank or other nominee and you
wish to attend the meeting, you should obtain a letter from your broker, bank
or other nominee indicating that you are the beneficial owner of a stated
number of shares of stock as of the record date, March 1, 1996. This will help
facilitate registration at the meeting. You will need to show the letter from
your broker, bank or nominee at CHOCOLATE WORLD to receive the discount and
product sample.
To assure proper representation of your shares at the meeting, please
carefully mark the enclosed proxy card; then sign, date, and return it at your
earliest convenience. As described in the Proxy Statement, you may elect to
vote your shares in person at the meeting even though you previously have sent
in a proxy.
I look forward to seeing you at the meeting.
Sincerely yours,
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman of the Board and
Chief Executive
Officer
TABLE OF CONTENTS
PAGE
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NOTICE OF ANNUAL MEETING.................................................. 1
PROXY STATEMENT........................................................... 2
Solicitation and Voting Of Proxies...................................... 2
Voting Securities....................................................... 2
Election of Directors................................................... 6
The Board of Directors and its Committees............................... 9
Compensation of Directors............................................... 10
1995 Executive Compensation............................................. 11
Compliance with Section 16(a) of the Securities Exchange Act of 1934.... 22
Certain Transactions and Relationships.................................. 22
Appointment of Auditors................................................. 23
Other Business.......................................................... 23
Stockholder Proposals and Nominations................................... 23
Summary Annual Report and Form 10-K..................................... 24
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALY-
SIS...................................................................... A-1
Management's Discussion and Analysis.................................... A-1
Consolidated Financial Statements....................................... A-9
Notes to Consolidated Financial Statements.............................. A-13
Responsibility for Financial Statements................................. A-27
Report of Independent Public Accountants................................ A-28
Eleven-Year Consolidated Financial Summary.............................. A-29
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NOTE: In order that the Annual Report to Stockholders may provide a more
succinct discussion of the Corporation's businesses and to save costs in
connection with its printing and distribution, the Consolidated
Financial Statements and Management's Discussion and Analysis are no
longer included in the Annual Report to Stockholders but are now
included as an Appendix to the Proxy Statement.
LOGO
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON
APRIL 30, 1996
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The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held
at 2:00 p.m., Tuesday, April 30, 1996 at the Hershey Theatre, East Caracas
Avenue, Hershey, Pennsylvania 17033 for the following purposes:
(1) To elect eleven directors;
(2) To approve the appointment of Arthur Andersen LLP, as the Corporation's
independent public accountants for 1996; and
(3) To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
In accordance with the By-laws and action of the Board of Directors,
stockholders of record at the close of business on March 1, 1996 will be
entitled to notice of, and to vote at, the meeting and any and all
adjournments thereof.
By order of the Board of Directors,
Robert M. Reese
Vice President, General Counsel and
Secretary
March 18, 1996
KINDLY MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON.
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PROXY STATEMENT
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SOLICITATION AND VOTING OF PROXIES
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of HERSHEY FOODS CORPORATION, a Delaware
corporation (the "Corporation" or "Hershey Foods"), for use at the Annual
Meeting of Stockholders which will be held at 2:00 p.m., Tuesday, April 30,
1996 at the Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania 17033,
and at any and all adjournments of that meeting for the purposes set forth in
the accompanying Notice of Annual Meeting of Stockholders. This Proxy
Statement and the enclosed proxy card are being sent to stockholders on or
about March 18, 1996. The Corporation's principal executive offices are
located at 100 Crystal A Drive, Hershey, Pennsylvania 17033.
Shares represented by properly executed proxy cards received by the
Corporation at or prior to the meeting will be voted according to the
instructions indicated on the proxy card. Unless contrary instructions are
given, the persons named on the proxy card intend to vote the shares so
represented FOR the election of the nominees for director named in this Proxy
Statement, and FOR approval of the appointment of Arthur Andersen LLP as the
Corporation's independent public accountants for 1996. As to any other
business which may properly come before the meeting, the persons named on the
proxy card will vote according to their best judgment.
A proxy may be revoked at any time before it is voted at the meeting by
filing with the Secretary of the Corporation an instrument revoking it, by a
duly executed proxy bearing a later date, or by voting by ballot at the
meeting. Shares held for each participant in the Corporation's Automatic
Dividend Reinvestment Service Plan or the Corporation's Employee Savings Stock
Investment and Ownership Plan ("ESSIOP") will be voted by the plan trustee as
directed by the participant's proxy card. If an Automatic Dividend
Reinvestment Service Plan participant does not return a card, the
participant's shares in the plan will not be voted. If an ESSIOP participant
does not return a card, that participant's shares will be voted by the plan
trustee in proportion to the final aggregate vote of the plan participants
actually voting on the matter.
The cost of preparing, assembling, and mailing this proxy soliciting
material and Notice of Annual Meeting of Stockholders will be paid by the
Corporation. The Corporation has retained Chemical Mellon Shareholder Services
to assist in soliciting proxies for a fee of $4,750 plus reimbursement of
reasonable out-of-pocket expenses. Additional solicitation by mail, telephone,
telecopier or by personal solicitation may be done by directors, officers and
regular employees of the Corporation, for which they will receive no
additional compensation. Brokerage houses and other nominees, fiduciaries and
custodians nominally holding shares of the Corporation's stock as of the
record date will be requested to forward proxy soliciting material to the
beneficial owners of such shares, and will be reimbursed by the Corporation
for their reasonable expenses.
VOTING SECURITIES
The Corporation has shares of two classes of stock outstanding, Common Stock
("Common Stock") and Class B Common Stock ("Class B Stock"), each with one
dollar par value. The Common Stock is entitled to cash dividends 10% higher
than those declared on the Class B Stock. The Class B Stock carries ten votes
per share, while the Common Stock carries one vote per share.
2
At the close of business on March 1, 1996, the record date for the Annual
Meeting, there were outstanding 62,093,226 shares of the Common Stock, and
15,241,454 shares of the Class B Stock, all of which are entitled to vote.
Holders of record of the Corporation's Common Stock on March 1, 1996 will be
entitled to one vote for each share held, and holders of record of the Class B
Stock on March 1, 1996 will be entitled to ten votes for each share held.
According to the Corporation's By-laws, the presence in person or by proxy of
the holders of a majority of the votes entitled to be cast of the outstanding
Common Stock and Class B Stock, respectively, shall constitute quorums for
matters to be voted on separately by the Common Stock as a class and the Class
B Stock as a class. The presence in person or by proxy of the holders of a
majority of the votes entitled to be cast by the combined outstanding shares
of the Common Stock and the Class B Stock shall constitute a quorum for
matters to be voted on without regard to class.
The vote required for approval of any matter which may be the subject of a
vote of the stockholders is provided for in the Corporation's Restated
Certificate of Incorporation, as amended (the "Certificate"), and By-laws. The
specific vote requirements for the proposals being submitted to a stockholder
vote at this year's Annual Meeting are set forth under the description of each
proposal in this Proxy Statement.
Abstentions and broker non-votes are counted for the purpose of determining
whether a quorum is present at the Annual Meeting. For the purpose of
determining whether a proposal (except for the election of directors) has
received a majority vote, abstentions will be included in the vote totals with
the result that an abstention will have the same effect as a negative vote. In
instances where brokers are prohibited from exercising discretionary authority
for beneficial owners who have not returned a proxy (the broker non-votes),
those shares will not be included in the vote totals and, therefore, will have
no effect on the vote.
As of March 4, 1996 stockholders noted in the following table owned
beneficially the indicated number of shares of the Corporation's Common Stock
and Class B Stock. The individuals listed below have voting and disposition
power over the shares indicated. The voting and disposition power of the
shares held by the Milton Hershey School and School Trust and the Hershey
Trust Company are as indicated in the footnotes.
TITLE OF AMOUNT AND NATURE OF PERCENT
CLASS NAME OR GROUP(/1/) BENEFICIAL OWNERSHIP OF CLASS
- ----------------------- ------------------------ ------------------------------------ --------
Common Stock, Milton Hershey School
one dollar and School Trust(/2/)
par value Founders Hall 11,878,720 shares held by Hershey 19.1%
Hershey, PA 17033 Trust Company, as Trustee for the
benefit of Milton Hershey School
Hershey Trust
Company(/2/)
100 Mansion Road East
Hershey, PA 17033
Hershey Trust Company(/2/) 254,559 shares held as institutional *
fiduciary for 52 estates and trusts
unrelated to Milton Hershey School;
and 165,000 shares held as
investments of Hershey Trust Company
Class B Stock, one dol- Milton Hershey School 15,153,003 shares held by Hershey 99.4%
lar par value and School Trust(/2/) Trust Company, as Trustee for the
benefit of Milton Hershey School
Hershey Trust
Company(/2/)
3
TITLE OF AMOUNT AND NATURE OF PERCENT
CLASS NAME OR GROUP(/1/) BENEFICIAL OWNERSHIP OF CLASS
- ------------- ------------------------ ------------------------------------ --------
W. H. Alexander, 1,218 shares *
Director
H. O. Beaver, Jr., 3,878 shares *
Director
R. H. Campbell, Director 404 shares *
C. M. Evarts, 100 shares *
Director Nominee
T. C. Graham, Director 3,300 shares *
B. Guiton Hill, Director 403 shares *
J. C. Jamison, Director 5,300 shares *
M. J. McDonald, 100 shares *
Director Nominee
S. C. Mobley, Director 873 shares *
F. I. Neff, Director 500 shares *
J. M. Pietruski, 2,300 shares *
Director
V. A. Sarni, Director 1,804 shares *
Common Stock, J. P. Viviano, Director, 51,259 shares and 96,450 stock *
one dollar President and Chief options which are exercisable
par value Operating Officer
K. L. Wolfe, Director, 66,491 shares and 134,000 stock *
Chairman of the Board options which are exercisable
and Chief Executive
Officer
M. F. Pasquale, 24,425 shares and 58,150 stock *
President, Hershey options which are exercisable
Chocolate North America
W. F. Christ, 13,686 shares and 38,350 stock *
Senior Vice President options which are exercisable
and Chief Financial
Officer
C. M. Skinner, 13,068 shares and 13,100 stock *
President, Hershey options which are exercisable
Pasta Group
All current Directors, 263,229 shares and 598,200 stock 1.3%
Nominees for Director, options which are exercisable
and Executive Officers
as a Group (31 persons)
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* Less than 1%
(/1/) None of the current directors, director nominees or officers of the
Corporation owns more than 1% of the outstanding shares of the Common Stock.
No current director, director nominee or officer of the Corporation owns
beneficially any shares of Class B Stock. Beneficial ownership includes shares
4
held individually and jointly, as well as by spouses and other family members.
Such ownership also includes shares credited to the accounts of officers who
are participants in ESSIOP. All participants are given the opportunity to vote
shares held for their accounts in this plan.
In addition, certain directors and officers of the Corporation are
participants in the Long-Term Incentive Program of the Corporation's Key
Employee Incentive Plan, as amended. These individuals are eligible to receive
incentive awards payable, in whole or in part, in the Corporation's Common
Stock, stock options or in certain circumstances, cash. They are permitted to
defer, in certain instances, receipt of performance share unit ("PSU") awards
until a future date. The following are the amount of deferred PSU awards as of
March 4, 1996 for those officers named in the preceding table: K. L. Wolfe,
5,013 shares; J. P. Viviano, 15,063 shares; M. F. Pasquale, 7,191 shares; W.
F. Christ, 5,111 shares and C. M. Skinner, 3,152 shares. As of March 4, 1996,
receipt of PSU awards equivalent to 98,886 shares had been deferred by all
current executive officers as a group. The preceding beneficial ownership
table does not include deferred PSU awards.
(/2/) Investment decisions with respect to securities held by Hershey Trust
Company, as Trustee for the benefit of Milton Hershey School, are made by the
Board of Directors of Hershey Trust Company, as Trustee, with the approval of
the Board of Managers (governing body) of Milton Hershey School. Milton
Hershey School, a non-profit school for the full-time care and education of
disadvantaged children located in Hershey, Pennsylvania, is the sole
beneficiary of the trust established by Milton S. and Catherine S. Hershey in
1909. Decisions regarding the voting of such securities are made by the Board
of Directors of Hershey Trust Company, as Trustee for the benefit of Milton
Hershey School. Investment decisions and decisions with respect to voting of
securities held by Hershey Trust Company as institutional fiduciary and as
investments are made by the Board of Directors or management of Hershey Trust
Company. As of March 1, 1996, Hershey Trust Company, as Trustee for the
benefit of Milton Hershey School, as fiduciary of the above-noted individual
trusts and estates, and as direct owner of investment shares, will be entitled
to vote 12,298,279 shares of Common Stock and 15,153,003 shares of Class B
Stock at the meeting. Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School ("Milton Hershey School Trust"), will be entitled to
vote 11,878,720 shares of Common Stock and 15,153,003 shares of Class B Stock
at the meeting. The Milton Hershey School Trust will therefore be entitled to
cast 11,878,720 of the 62,093,226 votes, or 19.1%, entitled to be cast on
matters required to be voted on separately by the holders of the Common Stock,
and 163,408,750 of the total 214,507,766 votes, or 76.2%, entitled to be cast
by the holders of the Common Stock and the Class B Stock voting together on
other matters to be voted on without regard to class.
Pursuant to the Corporation's Certificate, all holders of Class B Stock,
including the Milton Hershey School Trust, are entitled to convert any or all
of their Class B Stock shares into shares of Common Stock at any time on a
share-for-share basis. In the event the Milton Hershey School Trust ceases to
hold more than 50% of the outstanding shares of the Class B Stock and at least
15% of the total outstanding shares of both the Common Stock and Class B
Stock, all shares of the Class B Stock will automatically be converted into
shares of the Common Stock on a share-for-share basis. The Corporation's
Certificate requires the approval of the Milton Hershey School Trust prior to
the Corporation issuing shares of Common Stock or undertaking any other action
which would cause the Milton Hershey School Trust to cease having voting
control of the Corporation.
All of the outstanding shares of Hershey Trust Company are owned by the
Milton Hershey School Trust. The members of the Board of Managers of Milton
Hershey School are appointed by and from the Board of Directors of Hershey
Trust Company. There are ten members of the Board of Directors of Hershey
Trust Company and nine members of the Board of Managers of Milton Hershey
School, including William H. Alexander, who is also a member of the Board of
Directors of the Corporation, Dr. C. McCollister Evarts, who is a nominee for
the Board of Directors of the Corporation, and Kenneth L. Wolfe, a director
and Chairman of the Board and Chief Executive Officer of the Corporation.
5
Directors of Hershey Trust Company and members of the Milton Hershey School
Board of Managers individually are not considered to be beneficial owners of
the Corporation's shares of Common Stock or Class B Stock held by the Milton
Hershey School Trust.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
Eleven directors are to be elected at the meeting, each to serve until the
next annual meeting and until his or her successor shall have been elected and
qualified. Except for Dr. C. McCollister Evarts and Mr. Mackey J. McDonald,
each of the nominees named in the following pages is presently a member of the
Board of Directors. Mr. Howard O. Beaver, Dr. Sybil C. Mobley and Mrs.
Francine I. Neff, currently directors, will be retiring from the Board of
Directors as of April 30, 1996, having reached the mandatory retirement age of
70. Pursuant to the Corporation's Certificate and By-Laws, one-sixth of the
directors, which presently equates to two directors, is entitled to be elected
by the Common Stock voting separately as a class. The two nominees receiving
the greatest number of votes of the Common Stock voting separately as a class
will be elected. Messrs. Mackey J. McDonald and Vincent A. Sarni have been
nominated as directors to be so elected by the holders of the Common Stock.
The remaining nine nominees are to be elected by the holders of the Common
Stock and the Class B Stock voting together and such nominees receiving the
greatest number of votes of the Common Stock and Class B Stock voting together
without regard to class shall also be elected. In case any of the nominees
should become unavailable for election for any reason not presently known or
contemplated, the persons named on the proxy card will have discretionary
authority to vote pursuant to the proxy for a substitute.
WILLIAM H. ALEXANDER, age 54, is Managing Director, Snider
Entrepreneurial Center, The Wharton School of the University of
Pennsylvania, Philadelphia, Pennsylvania. He was with H. B.
Alexander Enterprises, Inc. from 1969 until 1993 and held a
number of management positions, including Vice President and
General Manager, President and Chairman. A Hershey Foods
director since 1995, he is a member of the Audit Committee. He
is also a director of Harristown Development Corporation;
Hershey Trust Company; Merchants and Business Men's Mutual
Insurance Company; Penn National Holding Corporation; and
Pennsylvania Blue Shield; and is a member of the Board of
Managers, Milton Hershey School.
(PHOTO)
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ROBERT H. CAMPBELL, age 58, is Chairman of the Board, Chief
Executive Officer and President, Sun Company, Inc.,
Philadelphia, Pennsylvania. He has been Chief Executive Officer
and President since 1991, Chairman of the Board since 1992 and
has been a Director of Sun Company, Inc. since 1988.
Previously, Mr. Campbell had been Executive Vice President
since 1988 and a Group Vice President of Sun Company, Inc.
since 1983. A Hershey Foods director since 1995, he is a member
of the Compensation and Executive Organization Committee. He is
also a director of CIGNA Corporation.
(PHOTO)
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DR. C. MCCOLLISTER EVARTS, age 64, is Chief Executive Officer,
Senior Vice President for Health Affairs, Dean, College of
Medicine, and Professor of Orthopaedics, The Pennsylvania State
University, College of Medicine and University Hospitals, The
Milton S. Hershey Medical Center. He has held these positions
since 1987. Previously, Dr. Evarts was Professor and Chairman
of the Department of Orthopaedics and Vice President for
Development at the University of Rochester School of Medicine
and Dentistry. He is Chairman of the Board of Directors of the
Association of Academic Health Centers, a member of the
Association of American Medical Colleges, Society of Medical
Administrators, and serves on the Board of Directors of Hershey
Trust Company, M. S. Hershey Foundation, Carpenter Technology
Corporation, Capital Region Health Futures Project, the Capital
Region Economic Development Corporation, and the Lehigh Valley
Hospital; and is a member of the Board of Managers, Milton
Hershey School.
(PHOTO)
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THOMAS C. GRAHAM, age 69, is Chairman of the Board of AK Steel
Corporation, formerly Armco Steel Company, LP, in Middletown,
Ohio. From 1992 to 1994 he served as Chief Executive Officer
and President of Armco Steel Company, LP. In 1992, he served as
Chairman and Chief Executive Officer, Washington Steel
Corporation, Washington, Pennsylvania. From 1983 to 1991 he was
with USX Corporation, where he held the positions of Vice
Chairman and Chief Operating Officer-Steel and Related
Resources, and director in 1983; President-USS and an
Executive-Director of USX in 1986 and Vice Chairman in 1990. A
Hershey Foods director since 1989, he is a member of the
Compensation and Executive Organization Committee. He is also a
director of International Paper Company and NM Holdings, Inc.
(PHOTO)
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BONNIE GUITON HILL, age 54, is Dean, McIntire School of
Commerce, University of Virginia, a position she has held since
1992. She was a member of the California Governor's cabinet,
serving as Secretary of the State and Consumer Services Agency
from 1991 to 1992. From 1990 to 1991, she was President and
Chief Executive Officer, Earth Conservation Corps, Washington
D.C. and from 1989 to 1990, she served as Special Advisor to
the President for Consumer Affairs. A Hershey Foods director
since 1993, she is a member of the Audit Committee. She is also
a director of AK Steel Corporation; Crestar Financial Services
Corporation; Louisiana-Pacific Corporation; Niagara Mohawk
Power Corporation; and The National Environmental Education and
Training Foundation.
(PHOTO)
----------------
JOHN C. JAMISON, age 61, is Chairman, Mallardee Associates, a
privately-held corporate financial services business,
Williamsburg, Virginia. From 1990 to 1992 he was President and
Chief Executive Officer of The Mariners Museum, Newport News,
Virginia. From 1983 to 1990 he was Dean of the Graduate School
of Business Administration, The College of William & Mary,
Williamsburg, Virginia. He was a General Partner with Goldman
Sachs & Co. until 1982, when he became a Limited Partner. A
Hershey Foods director since 1974, he chairs the Committee on
Directors and Corporate Governance and is a member of the Audit
Committee. He is also a director of Best Products Co., Inc.;
Richfood Holdings, Inc.; Riverside Health System, Inc.; and
Williamsburg Winery, Ltd.; and a trustee of The Mariners
Museum.
(PHOTO)
7
MACKEY J. MCDONALD, age 49, is President and Chief Executive
Officer of VF Corporation, Wyomissing, Pennsylvania. He assumed
his role as Chief Executive Officer of VF Corporation in 1996,
was named President and Chief Operating Officer in 1993 and was
a Group Vice President of VF Corporation since 1990. He is also
a director of First Union National Bank of North Carolina,
Textile/Clothing Technology Corporation, American Apparel
Manufacturers Association, Fashion Association and Berks County
Chamber of Commerce. He is to be elected by the Common Stock as
a class.
(PHOTO)
----------------
JOHN M. PIETRUSKI, age 63, is Chairman of the Board of Texas
Biotechnology Corp., Houston, Texas, and President of Dansara
Company, a privately-held management consulting firm, New York,
New York. He is also retired Chairman of the Board and Chief
Executive Officer of Sterling Drug Inc. With Sterling Drug Inc.
from 1977 to his retirement in 1988, he also held the positions
of Executive Vice President, and President and Chief Operating
Officer. A Hershey Foods director since 1987, he chairs the
Compensation and Executive Organization Committee. Mr.
Pietruski is also a director of General Public Utilities
Corporation; Lincoln National Corporation; and McKesson
Corporation; and a regent of Concordia College.
(PHOTO)
----------------
VINCENT A. SARNI, age 67, is retired Chairman of the Board and
Chief Executive Officer, PPG Industries Inc., Pittsburgh,
Pennsylvania, positions he held from 1984 until his retirement
in 1993. Mr. Sarni joined PPG Industries Inc. in 1968 and held
a number of senior management positions, including Senior Vice
President and Vice Chairman. A Hershey Foods director since
1991, Mr. Sarni serves as a member of the Compensation and
Executive Organization Committee and the Committee on Directors
and Corporate Governance. He is also a director of Amtrol Inc.;
PNC Financial Corp.; PPG Industries Inc.; and The LTV Corp. He
is to be elected by the Common Stock as a class.
(PHOTO)
----------------
JOSEPH P. VIVIANO, age 57, is President and Chief Operating
Officer, Hershey Foods Corporation. He was President, Hershey
Chocolate U.S.A., a division of the Corporation, from 1985 to
1993. From 1975 through 1978, he served as President of San
Giorgio, and then as President of San Giorgio-Skinner Company
(presently the Hershey Pasta Group) through 1983. In 1984, he
was elected Senior Vice President of the Corporation. A
director of the Corporation since 1986, he serves as a member
of the Executive Committee. He is also a director of Chesapeake
Corporation and a board member of Xavier University.
(PHOTO)
8
KENNETH L. WOLFE, age 57, is Chairman of the Board and Chief
Executive Officer, Hershey Foods Corporation. He was elected
President and Chief Operating Officer in 1985, positions he
held through 1993. He was elected Vice President, Finance and
Chief Financial Officer of the Corporation in 1981, and Senior
Vice President and Chief Financial Officer in 1984. A director
of the Corporation since 1984, he chairs the Executive
Committee and serves as a member of the Committee on Directors
and Corporate Governance. He is also a director of Bausch &
Lomb Inc.; Carpenter Technology Corporation; and Hershey Trust
Company and is a member of the Board of Managers, Milton
Hershey School.
(PHOTO)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES LISTED
ABOVE, AND SIGNED PROXIES WHICH ARE RETURNED WILL BE SO VOTED UNLESS OTHERWISE
INSTRUCTED ON THE PROXY CARD.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
There were nine regular meetings of the Board of Directors during 1995 and
one special telephone conference meeting. No director attended less than 84%
of the sum of the total number of meetings of the Board of Directors and the
total number of meetings held by all committees of the Board of Directors on
which he or she served during 1995. Average attendance for all of these
meetings equalled 97%.
The Board of Directors has four standing committees. These are the Audit
Committee, the Committee on Directors and Corporate Governance, the
Compensation and Executive Organization Committee, and the Executive
Committee. The Employee Benefits Committee held one meeting during early 1995
and was subsequently discontinued. In addition to the four standing
committees, from time to time the Board establishes committees of limited
duration for special purposes.
The AUDIT COMMITTEE, which held three meetings during 1995, consists of
Messrs. Beaver (Chair), Jamison, and Alexander and Ms. Guiton Hill and Mrs.
Neff. The Committee's responsibilities include recommending to the full Board
the selection of the Corporation's independent public accountants; discussing
the arrangements for, the proposed scope, and the results of the annual audit
with management and the independent public accountants; reviewing the scope of
non-audit professional services provided by the independent public
accountants; obtaining from both management and the independent public
accountants their observations on the Corporation's system of internal
accounting controls; reviewing compliance by the Corporation and its employees
with laws and regulations applicable to the Corporation's business and with
the Corporation's Code of Ethical Business Conduct; and reviewing the overall
activities and recommendations of the Corporation's internal auditors.
The COMMITTEE ON DIRECTORS AND CORPORATE GOVERNANCE, which held eight
meetings during 1995, consists of Messrs. Jamison (Chair), Beaver, Sarni, and
Wolfe and Dr. Mobley. The Committee's responsibilities include reviewing the
size and composition of the Board and its committees, evaluating and
recommending candidates for election to the Board, administering the
Directors' Charitable Award Program, and reviewing and advising the full Board
on issues of corporate governance. The Committee will consider nominees
recommended by stockholders. Such recommendations should be sent in writing to
the Secretary of the Corporation, 100 Crystal A Drive, Hershey, Pennsylvania
17033-0810, and should include the proposed nominee's name, address and
biographical information.
9
The COMPENSATION AND EXECUTIVE ORGANIZATION COMMITTEE, which held five
meetings during 1995, consists of Messrs. Pietruski (Chair), Campbell, Graham
and Sarni, and Mrs. Neff. The Committee recommends to the full Board the
salaries of the Corporation's elected officers and other key management and
executive employees; administers the Corporation's Key Employee Incentive
Plan, Employee Benefits Protection Plan, and the Supplemental Executive
Retirement Plan; monitors compensation arrangements for management employees
for consistency with corporate objectives and stockholders' interests; reviews
the executive organization of the Corporation; and monitors the development of
personnel available to fill key management positions.
The EXECUTIVE COMMITTEE, which held nine meetings during 1995, consists of
Messrs. Wolfe (Chair) and Viviano. The Committee reviews and approves major
capital projects and expenditures. The Committee, subject to specific
restrictions involving matters of a major nature, may exercise all the power
and authority of the Board of Directors in the management of the business
affairs of the Corporation when the full Board is not in session.
COMPENSATION OF DIRECTORS
Directors who are employees of the Corporation receive no additional
remuneration for their services as directors. Non-employee directors--those
directors not entitled to receive any salary or employee benefits from the
Corporation or its subsidiaries--receive an annual retainer of $20,000; a fee
of $1,000 for each Board meeting attended; a fee of $900 for each Board
committee meeting attended; and a fee of $100 for each Board or Board
committee meeting held by telephone conference call. Board committee chairs
receive an annual retainer of $2,000 in addition to meeting fees. Under the
Directors' Fees Deferral Plan, directors may elect to defer receipt of part or
all of each year's fees for such period as they may select, to be paid
beginning no later than retirement from the Board. To further enhance the
alignment of the directors' interests with the stockholders' interests, from
time to time increases in directors' fees may be made in the Corporation's
stock. In 1995, to ensure the directors' compensation package remained
competitive, non-employee directors were granted 100 shares of Common Stock in
lieu of an increase in their annual retainer.
All directors are reimbursed for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance at meetings of the Board and
its committees and for minor incidental expenses incurred in connection with
performance of directors' services. In addition, directors are provided with
travel accident insurance while traveling on the Corporation's business;
receive the same discounts as employees on the purchase of the Corporation's
products; and are eligible to participate in the Corporation's Higher
Education Gift Matching Program.
The Corporation maintains a retirement plan for non-employee directors to
assist in attracting and retaining individuals of outstanding competence to
serve on the Board. Any such director who has served as a director for at
least ten years, or retires at age 70 with at least five years of service on
the Board, or retires because of disability regardless of length of service,
is entitled to receive for ten years, unless he or she should die sooner, 100%
of the annual retainer in effect at the time the director retires or is
disabled. The annual retainer may include a value assigned to stock granted in
lieu of an increase in the cash annual retainer. Directors who receive
benefits under this plan are expected to remain available to advise and
consult with the members of the Board as needed.
The Corporation maintains a Directors' Charitable Award Program, which is
designed to acknowledge the service of directors, recognize the mutual
interest of the Corporation and its directors in support of worthy nonprofit
institutions and provide an indirect enhancement to the overall
competitiveness of the directors' benefit program. The Corporation is funding
this program primarily through life insurance policies on its directors. The
program is designed so that when the Corporation
10
receives life insurance proceeds as a result of the deaths of specified
directors, it would then donate a specific amount per director in the name of
the director to designated tax qualified institution(s). The charitable
donations by the Corporation will be directed primarily to educational
institutions as designated by the directors. The amount of the donation varies
according to the director's length of service as a director, up to a maximum
donation of $1,000,000 after five years of service. Individual directors
derive no financial benefit from the program since all insurance proceeds and
charitable tax deductible donations accrue solely to the Corporation. All
current directors, except Mr. Alexander, and five retired directors
participate in the program. The amount of the charitable donation per current
participating director is $1,000,000, except for Mr. Sarni, for whom the
current amount is $800,000, Ms. Guiton Hill, for whom the current amount is
$400,000, and Mr. Campbell for whom the current amount is $200,000, because of
their shorter length of service as directors.
1995 EXECUTIVE COMPENSATION
COMPENSATION AND EXECUTIVE ORGANIZATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation and Executive Organization Committee of the Board of
Directors ("Committee") is composed entirely of non-employee directors, and is
responsible for the establishment and oversight of the Corporation's executive
compensation program.
EXECUTIVE COMPENSATION PHILOSOPHY
The Corporation's executive compensation program is designed to meet the
following objectives:
. To connect the interests of the executive officers with corporate
performance and the interests of stockholders;
. To attract, retain and motivate executive talent;
. To assure a significant portion of the executive officers' total
compensation is dependent upon the appreciation of the Corporation's
Common Stock; and
. To provide a balanced total compensation package that recognizes the
individual contributions of the executive officers and the overall
business results of the Corporation.
Each year the Committee conducts a full review of the Corporation's
executive compensation program. The annual compensation review permits an
ongoing evaluation of the link between the Corporation's performance and its
executive compensation in the context of the compensation programs of other
companies. This review is performed periodically with the assistance of an
independent outside consultant whose services are retained by the Corporation.
The Committee reserves the right to select and/or meet independently with any
consultant at its discretion. This annual review includes analyzing survey
data comparing the competitiveness of the Corporation's executive
compensation, corporate performance, stock price appreciation and total return
to stockholders with a peer group of companies representing the Corporation's
most direct food industry competitors for executive talent. The Committee also
considers compensation data compiled from surveys of a broader group of
general industry companies, some of which are from the food industry. In the
performance graph on page 20, the Corporation's performance is compared to the
Standard and Poor's Food Group Index. The peer group considered relevant for
the Corporation's compensation comparison purposes does not include all of the
companies in the Food Group Index as compensation data on all such companies
is not readily available. Also, the peer group includes some companies that
11
are not in this index because the Corporation selects those companies it
believes to be the most relevant and direct competitors for executive talent.
The Committee reviews which peer companies are selected for compensation
analysis.
In the review of survey data, a statistical process involving regression
analysis is used to determine competitive compensation levels. This approach
adjusts compensation levels for factors such as net sales, return on equity,
and time in position within the organization in determining predicted values
or "going rates" within the marketplace for each element of compensation. The
Corporation targets total compensation "at or above" such "going rates."
The Committee believes the holding of significant equity interests in the
Corporation by management aligns the interests of stockholders and management.
Through the programs described in this report, a very significant portion of
each executive officer's total compensation is linked directly to individual
and corporate performance and stock price appreciation.
The key elements of the Corporation's executive compensation program consist
of base salary, an annual cash incentive program, and a long-term incentive
program consisting of performance share units and stock options. Incentives
play an important role in motivating executive performance and in aligning
executive pay practices with the interests of the stockholders. The
Corporation's executive compensation program is intended to reward achievement
of both short-term and long-term business goals. To ensure proper balance in
the achievement of these business objectives, the incentive program places
greater dollars at risk in long-term incentives compared to short-term
incentives. The long-term incentive program is especially designed to assure
that the Corporation's executive officers have a significant portion of their
total compensation tied to factors which affect the performance of the
Corporation's stock.
In the past, executives were compensated for unused vacation days greater
than four weeks. The Committee decided to discontinue these payments beginning
in 1995 to encourage full utilization of vacation entitlements.
The Committee determined the total compensation of Kenneth L. Wolfe,
Chairman of the Board and Chief Executive Officer, and it reviewed and
approved the total compensation of the most highly compensated executive
officers, including the individuals whose compensation is detailed in this
Proxy Statement. This is designed to ensure consistency throughout the
executive compensation program.
The Committee's policies with respect to each of the elements of the
executive compensation program, including the basis for the compensation
awarded to Mr. Wolfe, are discussed below. While the elements of compensation
are described separately below, the Committee considers the total compensation
package afforded by the Corporation when determining each component of the
executive officer's compensation, including pension benefits, supplemental
retirement benefits, insurance and other benefits.
BASE SALARIES
Base salaries for new executive officers are initially determined by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the salaries paid in the competitive
marketplace for executive talent, including a comparison of base salaries for
comparable positions at other companies.
Salary reviews are conducted annually and salary adjustments are made based
upon the performance of the Corporation and of each executive officer and
their position in the applicable salary
12
grade. The Committee considers both financial and, where appropriate, non-
financial performance measures in making salary adjustments. Base salaries for
executive officers and all other salaried employees are set within salary
ranges established for the position as determined through the annual
competitive salary surveys described above. In the case of executive officers
with responsibility for a particular business unit, such unit's financial
results are also considered.
With respect to the base salary granted to Mr. Wolfe in 1995, the Committee
made a favorable assessment of the Corporation's actual business results
versus plan goals and the results achieved by Mr. Wolfe on various leadership
objectives the Committee established in 1994. Based on this assessment, the
Committee increased Mr. Wolfe's salary by $20,000, a 3.6% increase.
ANNUAL CASH INCENTIVE PROGRAM
The Corporation's executive officers, as well as other key management and
professional employees, are eligible for an annual cash incentive award under
the Corporation's Key Employee Incentive Plan, as amended ("Incentive Plan"),
a plan which is administered by the Committee. Participating executive
officers are eligible to earn individual awards expressed as a percentage of
base salary. The final award is the product of the executive officer's base
salary, the applicable target percentage, the corporate or business unit
performance score and the individual performance score. Individual and short-
term (annual) corporate and business unit performance objectives are
established at the beginning of each year by the Committee. For executive
officers on corporate staff, the performance objectives for these incentive
award payments for 1995 were based on financial measures including earnings
per share, return on net assets, and control of certain corporate
administrative costs. For executive officers at the business unit level, the
performance objectives for 1995 were varying combinations of operating income,
sales growth, return on business unit net assets, quality and cost controls,
and market share. Adjustments are made to the performance results, if
necessary, to take into account extraordinary or unusual items occurring
during the performance year. Since the final award is the product of the
factors described above, the corporate or business unit performance and
individual performance scores are given equal weight in the formula. With
respect to corporate staff in 1995, the relative weights of performance
objectives were 45% each for earnings per share and return on net assets and
10% for administrative cost control. Performance scores in excess of the
objectives for financial measures and/or individual performance expectations
may result in the individual executive officer receiving more than his/her
target percentage. However, each of the relative weights contain maximums on
the components used to calculate the annual incentive award. Beginning in
1995, the maximum performance score was established for all plan participants
at 175%. During 1995 the Committee also established guidelines which in
certain instances limit the personal performance factor in relationship to the
business unit scores. The range of the target percentages of base salary used
in 1995 for annual cash incentive awards for executive officers was 25% to
60%, with the highest rate of 60% applicable only to Mr. Wolfe.
No annual cash incentive awards are granted unless a corporate "performance
hurdle" is achieved. This hurdle is defined as the minimum rate of return
which average total invested capital must earn before any awards are paid.
This is designed with the stockholders' interest in mind by assuring the
Corporation achieves certain profitability levels before any executive is
granted an annual incentive award.
In 1995, corporate staff participants (which included Mr. Wolfe) partially
achieved the corporate performance objective set for return on net assets and
exceeded the performance objective for earnings per share and control of
certain corporate administrative costs. In addition, the Committee
13
took into account Mr. Wolfe's performance against his personal objectives,
which Mr. Wolfe exceeded. Based on these results, Mr. Wolfe was awarded a 1995
annual cash incentive award of $508,246.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE SHARE UNITS
Performance share units (PSUs) were contingently granted in 1995 under the
Incentive Plan to members of the Corporation's senior executive group most in
a position to affect the Corporation's long-term results (a combined total of
21 individuals in 1995). PSU grants are based upon a percent of the
executive's annual salary. PSUs are generally granted every year and are
earned based on the Corporation's performance over a three-year cycle. Each
year begins a new three-year cycle. Provided the Corporation has achieved the
established performance objectives at the end of the three-year cycle, a
payment is made, either in stock, cash or a combination of both, based on the
market value of the shares at the end of the cycle. In determining whether
performance objectives have been achieved, specified adjustments, previously
established by the Committee, can be made to the corporate performance to take
into account extraordinary or unusual items occurring during the performance
cycle. Payment may be deferred to a later date at the election of the
executive. The value of each of the PSUs is tied to corporate performance (in
determining what percentage of shares are earned) and stock price
appreciation. The established performance measures are earnings per share and
return on net assets and beginning with the 1995-1997 cycle, cumulative free
cash flow. The performance scores can range from 0% to 100% for the 1993-1995
cycle, 0% to 120% for the 1994-1996 cycle and 0% to 150% for the 1995-1997
cycle.
The Corporation has minimum stockholding guidelines for its executive
officers and certain other key managerial and professional employees of the
Corporation which require these individuals to accumulate gradually over time,
shares of Common Stock and/or deferred PSUs. The value equivalent of the
shares which must be acquired and held are equal to a multiple of the
individual's base salary. During 1995 the applicable minimum stockholding
requirements were revised from two to eight times base salary to three to five
times base salary. If the minimum has not been met, the executive officer is
required to take the PSUs award in Common Stock (net of withholding taxes) or
deferred PSUs. For Mr. Wolfe, the applicable multiple in 1995 was five times
his base salary.
In 1994, the Committee reviewed the performance objectives set for the 1992-
94 PSU cycle and the 1993-95 PSU cycle. The Committee adjusted the targets to
assure the incentives were fair and motivational to the executives, with
higher targets being set for the 1992-94 cycle and reduced targets being set
for the 1993-95 cycle.
In January 1993, each eligible member of the senior executive group was
granted PSUs having a value at the time of grant equal to a percentage of
their annual salary. This percentage was determined by the Committee based on
the recommendation of senior management and competitive survey information.
The Corporation exceeded the objective established for earnings per share and
partially achieved the objective for return on net assets, each measure having
equal weight of 50%, for the year ended December 31, 1995. Accordingly, 96% of
the contingent PSUs granted in January 1993 were earned, and the holders
thereof received payment based on the value of the shares averaged over a
period of 20 business days in December 1995. Mr. Wolfe's award was valued at
$469,483 based on the December 1995 averaged value of the PSUs from the 1993
grant.
In January 1995, eligible members of the senior executive group were granted
new contingent PSUs. While the grants were generally consistent with past
practices, an additional objective relating to cumulative free cash flow was
established and the maximum award was increased from 120% of the established
target award to 150% of the target. The "Long-Term Incentive Program
Performance Share Unit Awards in Year Ended December 31, 1995" table in this
Proxy Statement provides additional information regarding these grants for the
five most highly compensated executive officers.
14
LONG-TERM INCENTIVE PROGRAM--STOCK OPTIONS
Under the Incentive Plan, stock options are periodically granted to the
Corporation's senior executive group as well as to other key management and
professional employees. Stock options entitle the holder to purchase during a
specified time period a fixed number of shares of Common Stock at a set price.
The Committee sets guidelines for the number of stock options to be granted
based on competitive compensation data gathered from survey information
discussed above. The number of stock options granted is a function of the
employee's base pay, stock option multiples for the employee's grade level and
the imputed value of the option. The Committee also takes into account
management's recommendations regarding the number of options to be awarded to
specific employees as well as competitive pay practices within the food
industry and the amounts of options outstanding or previously granted. While
stock options have been granted annually to members of the senior executive
group, the Committee can elect not to grant stock options in a given year.
Stock option recipients other than the senior executive group (over 350 key
employees) generally receive stock option grants every two years.
During 1995 the Committee made minimum stockholding requirements applicable
to stock options granted after 1995. If the minimums are not satisfied, an
individual can receive only one-half of the after-tax profit from the option
exercise in cash. The remaining one-half of the profit must be retained in
Hershey Foods stock.
Stock options are designed to align the interests of executives with those
of the stockholders. Stock options are granted with a ten-year term and an
exercise price equal to the closing market price of the Common Stock on the
day preceding the date of grant, and they vest immediately for the senior
executive group. This approach is designed as an incentive for future
performance by the creation of stockholder value over the long-term since the
benefit of the stock options cannot be realized unless stock price
appreciation occurs.
In 1995, Mr. Wolfe received options to purchase 25,100 shares of Common
Stock with an exercise price of $48.375 per share, the closing market price on
the day preceding the grant.
POLICY REGARDING TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) to the Internal Revenue Code of 1986 (the "Code") provides
that publicly-held companies may be limited in deducting certain compensation
in excess of $1 million paid to the chief executive officer and the four other
most highly compensated officers. The Committee has considered the effect of
Section 162(m) of the Code on the Corporation's executive compensation program
to develop its policy with respect to the deductibility of the Corporation's
executive compensation. It is the Committee's position that in administering
the "performance based" portion of the Corporation's executive compensation
program, it will attempt to comply with the requirements of Section 162(m).
However, the Committee believes it needs to retain the flexibility to exercise
its judgment in assessing an executive's performance and the total
compensation system for executive officers should be managed in accordance
with the objectives outlined in the "Executive Compensation Philosophy"
section of this report and in the best overall interest of the Corporation's
stockholders. Should compliance with Section 162(m) conflict with the
"Executive Compensation Philosophy" or with what the Committee believes to be
in the best interest of the stockholders, the Committee will act in accordance
with the Philosophy and in the best interest of the stockholders,
notwithstanding the effect of such action on deductibility. However, to assure
that the Corporation does not lose deductions for compensation paid, the
Committee has adopted a deferral policy requiring the executive to defer
15
receipt of any compensation in excess of $1 million that is not deductible in
any given year to the year in which such compensation would be deductible by
the Corporation.
CONCLUSION
In 1995, as in previous years, a substantial portion of the Corporation's
executive compensation consisted of performance-based variable elements. In
the case of Mr. Wolfe, approximately 63% of his 1995 total compensation
consisted of performance-based variable elements, without including stock
options in the computation. The Committee intends to continue the policy of
linking executive compensation to corporate performance and returns to
stockholders.
SUBMITTED BY THE COMPENSATION AND EXECUTIVE ORGANIZATION
COMMITTEE OF THE CORPORATION'S BOARD OF DIRECTORS:
John M. Pietruski, Chairman Robert H. Campbell Thomas C. Graham
Francine I. Neff Vincent A. Sarni
16
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows for the fiscal years ending December 31, 1993,
1994 and 1995, the cash compensation paid by the Corporation, as well as
certain other compensation paid or accrued for those years, to each of the
five most highly-compensated executive officers of the Corporation in the
capacities in which they served in 1995.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ------------------
NAME AND NUMBER
PRINCIPAL OF STOCK ALL OTHER(/4/)
POSITION OPTION LTIP(/3/) COMPENSA-
AS OF 12/31/95 YEAR SALARY(/1/) BONUS(/2/) AWARDS PAYOUTS TION
- --------------- ---- ----------- ---------- -------- --------- --------------
K. L. Wolfe 1995 $570,000 $508,246 25,100 $469,483 $ 3,750
Chairman and
Chief 1994 550,000 346,500 33,150 345,777 14,711
Executive Offi-
cer 1993 456,500 308,709 16,000 440,942 14,992
J. P. Viviano 1995 460,000 375,983 17,150 312,988 3,750
President and
Chief 1994 430,000 248,325 25,300 247,319 17,903
Operating Offi-
cer 1993 347,500 216,588 12,000 316,382 17,281
M. F. Pasquale 1995 304,000 171,188 10,750 181,534 3,750
President,
Hershey 1994 295,000 170,378 15,000 146,560 3,750
Chocolate North
America 1993 254,250 142,016 6,300 219,226 5,896
W. F. Christ 1995 248,500 188,005 7,100 156,494 3,750
Senior Vice
President 1994 240,000 126,000 9,050 100,760 4,706
and Chief Finan-
cial Officer 1993 200,000 141,750 5,000 144,490 8,077
C. M. Skinner 1995 240,000 91,020 6,050 156,494 3,750
President, 1994 235,000 38,969 5,650 100,760 3,750
Hershey Pasta
Group 1993 208,750 145,838 5,000 149,472 5,219
- --------
(/1/) This column includes amounts deferred pursuant to Section 401(k) of
the Internal Revenue Code that were contributed by the executive officer to
ESSIOP.
(/2/) This column represents annual cash incentive awards (paid out or
deferred) attributable to services rendered for that year. Mr. Wolfe deferred
receipt of his entire 1995 annual cash incentive award.
(/3/) This column reports the cash value earned in PSU payouts during each
of the last three fiscal years at the end of the following three performance
cycles: 1993-95, 1992-94 and 1991-93 under the Key Employee Incentive Plan
which were paid or deferred in the fiscal year immediately following the last
year of the respective three-year cycle. Mr. Wolfe received a portion,
$339,984, of his 1995 PSU payout in cash and the balance, $129,499, was
deferred.
(/4/) This column includes the Corporation's matching contributions to the
individual's ESSIOP account for 1995, and for years 1994 and 1993 also
includes payments for unused vacation days. Payment for unused vacation days
was discontinued in 1995.
17
LONG-TERM INCENTIVE PROGRAM--STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Key Employee Incentive Plan to the five most highly
compensated executive officers of the Corporation as of the end of the last
fiscal year:
STOCK OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1995
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS STOCK OPTION TERM
--------------------------------------------------- -----------------------------
% OF TOTAL
NUMBER STOCK
OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO OR
OPTIONS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(/1/) IN 1995(/2/) PER SHARE(/3/) DATE 5%(/4/) 10%(/4/)
- ---- ------------ ------------ -------------- ---------- -------------- --------------
K. L. Wolfe 25,100 21.1% $48.375 1/03/05 $763,612 $1,935,142
J. P. Viviano 17,150 14.4% 48.375 1/03/05 521,751 1,322,219
M. F. Pasquale 10,750 9.1% 48.375 1/03/05 327,045 828,796
W. F. Christ 7,100 6.0% 48.375 1/03/05 216,002 547,391
C. M. Skinner 6,050 5.1% 48.375 1/03/05 184,058 466,439
- --------------------------------------------------------------------------------------------------------
All Stockholders(/5/) N/A N/A N/A N/A $2,638,725,606 $6,687,048,767
- --------
(/1/) All stock options listed in this column are exercisable and have a
ten-year term. The stock options having a $48.375 exercise price were granted
on January 3, 1995 and were granted at a price not less than 100% of the fair
market value of the shares of Common Stock on the date of grant determined as
the closing price on the business date immediately preceding the date the
stock options were granted. All stock options expire at the end of the stock
option holder's employment, except in the case of a stock option held by an
employee whose employment ends due to retirement, total disability or death,
in which instance the employee or his estate may exercise the stock option
within three years of the date of retirement, total disability or death.
(/2/) In 1995, 20 employees were granted a total of 118,700 stock options.
(/3/) The exercise price may be paid in cash, shares of Common Stock valued
at the fair market value on the date of exercise, or pursuant to a cashless
exercise procedure under which the stock option holder provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit to
the Corporation, out of the sales proceeds, an amount equal to the exercise
price plus all applicable withholding taxes.
(/4/) The dollar amounts under these columns for all the individuals are the
result of calculations at the 5% and 10% annual appreciation rates for the
term of the options (10 years) as required by the Securities and Exchange
Commission, and, therefore, are not intended to forecast possible future
appreciation, if any, of the stock price of the Corporation.
(/5/) For "All Stockholders," the potential realizable value on 86,735,197
shares, the number of outstanding shares of Common Stock and Class B Stock on
January 3, 1995, is based on a $48.375 per share price (the exercise price of
the 1995 options). The value of the Common Stock and Class B Stock at $48.375
per share was $4,195,815,155. The amounts listed under these columns for "All
Stockholders" are the result of calculations at the 5% and 10% annual
appreciation rates for a period of ten years from January 3, 1995 through
January 2, 2005. These amounts are not intended to forecast possible future
appreciation, if any, of the stock price of the Corporation.
18
The following table sets forth information with respect to the named
executives concerning the exercise of stock options during the last fiscal
year and unexercised stock options held as of the end of the fiscal year:
AGGREGATED STOCK OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1995
AND YEAR-END STOCK OPTION VALUES
NUMBER
VALUE OF
REALIZED SECURITIES
NUMBER (MARKET UNDERLYING VALUE OF
OF PRICE AT UNEXERCISED UNEXERCISED
SHARES EXERCISE STOCK IN-THE-MONEY
ACQUIRED LESS OPTIONS STOCK OPTIONS
ON EXERCISE EXERCISABLE AT EXERCISABLE AT
NAME EXERCISE PRICE) 12/31/95(/1/) 12/31/95(/1/)
- ---- -------- -------- -------------- --------------
K. L. Wolfe 16,350 $437,250 103,500 $1,937,113
J. P. Viviano 9,050 254,581 75,700 1,414,150
M. F. Pasquale 4,250 132,600 48,300 969,900
W. F. Christ 1,800 47,306 31,600 631,006
C. M. Skinner 10,250 172,275 16,700 280,981
- --------
(/1/) All of the stock options were granted under the Key Employee Incentive
Plan and are exercisable. The fair market value of the Common Stock on
December 29, 1995, the last trading day of the Corporation's fiscal year, was
$65.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE SHARE UNITS
The following table provides information concerning performance share unit
grants made to the five most highly-compensated executive officers of the
Corporation during the last fiscal year under the long-term incentive program
portion of the Key Employee Incentive Plan. Payments made under the program
for the three-year performance cycle ending December 31, 1995, are reported in
the Summary Compensation Table.
LONG-TERM INCENTIVE PROGRAM
PERFORMANCE SHARE UNIT AWARDS IN YEAR ENDED DECEMBER 31, 1995
PERFORMANCE
NUMBER OF OR OTHER
SHARES, PERIOD UNTIL ESTIMATED FUTURE PAYOUTS
UNITS OR MATURATION --------------------------------
OTHER OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS(/1/) PAYOUT (#)(/2/) (#)(/3/) (#)(/4/)
- ---- ----------- ------------ --------- -------- --------
K. L. Wolfe 9,650 3 years 804 9,650 14,475
J. P. Viviano 6,600 3 years 550 6,600 9,900
M. F. Pasquale 4,150 3 years 346 4,150 6,225
W. F. Christ 2,700 3 years 225 2,700 4,050
C. M. Skinner 2,300 3 years 192 2,300 3,450
- --------
(/1/) The performance share units (PSUs) reported in this table were granted
on January 3, 1995 for the cycle commencing January 1, 1995 and ending
December 31, 1997.
For purposes of determining the number of grants, the value of each PSU is
based on the average of the daily closing prices of Hershey Foods' Common
Stock on the New York Stock Exchange as reported in The Wall Street Journal
for the December preceding the new three-year performance cycle.
19
The final value of the award is determined based upon three factors. The
first involves the number of PSUs awarded at the commencement of the three-year
cycle. The second factor relates to a performance score as measured against
predetermined earnings per share, return on net assets and cumulative free cash
flow objectives for the 1995-97 three-year cycle. The performance scoring can
range from a minimum of 0% to a maximum of 150% achievement. The third factor
involves the value per unit which is determined at the conclusion of the three-
year cycle. The final award is limited to a value of two times the grant price
over the term of the three-year cycle. In the case of the 1995-97 cycle, this
limit is $95.92 share.
(/2/) This column lists the number of shares of Common Stock, the value of
which would be payable to the named executives at the threshold achievement
level of 8 1/3%. If the achievement level at the end of the three-year cycle is
less than this threshold, no payments are made.
(/3/) This column lists the number of shares of Common Stock the value of
which would be payable to the named executives at the target, or 100%
achievement level.
(/4/) This column lists the number of shares of Common Stock the value of
which would be payable to the named executives at the 150% or more achievement
level.
PERFORMANCE GRAPH
The following line graph compares the Corporation's cumulative total
stockholder return (Common Stock price appreciation plus dividends, on a
reinvested basis) over the last five fiscal years with the Standard and Poor's
500 Index and the Standard and Poor's Food Group Index.
- --------------------------------------------------------------------------------
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
HERSHEY FOODS CORPORATION, S&P 500 INDEX & S&P FOOD GROUP INDEX
---------------------------------------------------------------
[GRAPH APPEARS HERE]
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------
HERSHEY $100 $121 $131 $140 $142 $196
S&P 500 $100 $130 $140 $155 $157 $215
S&P FOOD $100 $146 $145 $134 $149 $190
- --------------------------------------------------------------------------------
*Total return assumes reinvestment of dividends.
Assumes $100 invested on 12/31/90 in Hershey Common Stock, S&P 500 Index and
S&P Food Group Index.
20
BENEFIT PROTECTION ARRANGEMENTS
In August 1994, the Corporation entered into severance agreements (the
"Severance Agreements") with the five executive officers named in the Summary
Compensation Table and other key management personnel. The terms of these
Severance Agreements are consistent with the practices followed by other major
public corporations in the U.S. and provide that in the event the executive's
employment with the Corporation is terminated without "cause" within two years
after a "change in control" of the Corporation, the executive is entitled to
certain severance payments and benefits. A "change in control" is defined to
include an event in which the Milton Hershey School Trust no longer holds
voting control of the Corporation and another party acquires twenty-five (25)
percent or more of the combined voting power or common equity of the
Corporation. Under the terms of the Severance Agreements, upon the executive's
termination after a change in control as described above, and in order to
assist the executive in transitioning to new employment, the executive would
be generally entitled to receive in a lump sum three times the executive's
base salary and annual incentive bonus. The executive would also be entitled
to continuation of health benefits for such period and reimbursement for
federal excise taxes payable (but not for income taxes payable). The executive
would also become vested in benefits under existing compensation and benefit
programs (including those described in this Executive Compensation section)
and would generally be paid such benefits at the time of any such change in
control.
The Milton Hershey School Trust has indicated to the Corporation that it
intends to maintain voting control of the Corporation and therefore it is
unlikely that the Severance Agreements would be utilized. The Milton Hershey
School Trust has also indicated that it, however, accepts the position of the
Corporation's Board of Directors that such arrangements are part of the usual
and ordinary compensation packages at major public companies and are important
to the Corporation's ability to attract and retain key employees.
PENSION PLANS
The following table shows the estimated pension benefits payable to a
covered participant at age 60 or later under the Corporation's qualified
benefit pension plan ("Pension Plan"), as well as the nonqualified
supplemental executive retirement plan that provides benefits in excess of
those that may be provided under plans (such as the Pension Plan) that are
subject to limitations under the Internal Revenue Code:
PENSION PLAN TABLE
YEARS OF SERVICE
---------------------------------------------------------------
REMUNERATION 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- --------
$ 200,000 $110,000 $110,000 $110,000 $110,000 $110,000 $110,000
300,000 165,000 165,000 165,000 165,000 165,000 165,000
400,000 220,000 220,000 220,000 220,000 220,000 220,000
500,000 275,000 275,000 275,000 275,000 275,000 275,000
600,000 330,000 330,000 330,000 330,000 330,000 330,000
700,000 385,000 385,000 385,000 385,000 385,000 385,000
800,000 440,000 440,000 440,000 440,000 440,000 440,000
900,000 495,000 495,000 495,000 495,000 495,000 495,000
1,000,000 550,000 550,000 550,000 550,000 550,000 550,000
1,100,000 605,000 605,000 605,000 605,000 605,000 605,000
1,200,000 660,000 660,000 660,000 660,000 660,000 660,000
21
The remuneration (compensation) used to determine the amount of pension
payable is based on three years' average of base salary and five years'
average annual cash incentive award. The final average compensation and the
estimated credited years of service as of December 31, 1995, respectively, for
each of the named executive officers are: K. L. Wolfe, $864,736, 26.8 years;
J. P. Viviano, $670,981, 27.7 years; M. F. Pasquale, $430,948, 16.4 years; W.
F. Christ, $375,848, 25.2 years; and C. M. Skinner, $345,924 , 37.1 years. The
benefits shown in the above table are calculated using the life annuity form
of payout from the Pension Plan. In addition, the amounts shown in the table
would be reduced by any applicable Social Security benefits and for a
specified percentage for each month that the retirement occurs before age 60.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Corporation's executive officers, directors and 10% stockholders are
required under the Securities and Exchange Act of 1934 to file with the
Securities and Exchange Commission and the New York Stock Exchange reports of
ownership and changes in ownership in their holdings of the Corporation's
stock. Copies of these reports must also be furnished to the Corporation.
Based on an examination of these reports and on written representations
provided to the Corporation, all such reports have been timely filed except
that the Milton Hershey School Trust and the Milton Hershey School failed to
timely file a report in connection with one sale of the Corporation's Common
Stock made during 1995.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1995 the Corporation and its subsidiaries had a number of
transactions with Milton Hershey School; with Milton Hershey School Trust; and
with companies owned by the Milton Hershey School Trust, involving the
purchase or sale of goods and services. These latter transactions were
primarily with HERCO Inc., an entertainment and resort company based in Derry
Township (Hershey), Pennsylvania, and wholly-owned by the Milton Hershey
School Trust.
The aggregate value of sales made during 1995 by the Corporation and its
subsidiaries to the Milton Hershey School, the Milton Hershey School Trust,
and companies owned by the Milton Hershey School Trust, amounted to
approximately $700,000. During the year, the Corporation purchased goods and
services from these entities in the amount of approximately $850,000. These
transactions were on terms that the Corporation believes to be no less
favorable to the Corporation than those which could have been obtained from
other purchasers or vendors.
On August 4, 1995, the Corporation purchased 9,049,773 shares of its Common
Stock from the Milton Hershey School Trust. The Corporation paid $500 million
for the shares. The price per share of $55.25 was determined based on the then
current market price of $57.50, less a discount based on the avoidance of
certain transaction costs.
Pursuant to the Corporation's Directors' Charitable Award Program, as
described in the section "The Board of Directors and its Committees" in this
Proxy Statement, two former directors of the Corporation designated the Milton
Hershey School Trust as beneficiary of $1.1 million in charitable donations by
the Corporation. These individuals retain the discretion to change beneficiary
designees.
22
PROPOSAL NO. 2--APPOINTMENT OF AUDITORS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed Arthur Andersen LLP as independent public accountants of the
Corporation for the year ending December 31, 1996. Although not required to do
so, the Board of Directors is submitting the appointment of that firm for
approval at the Annual Meeting. Arthur Andersen LLP has audited the
Corporation's financial statements since 1927 and is considered to be well
qualified. If the appointment is not approved, the Board of Directors will
reconsider its appointment. Representatives of Arthur Andersen LLP will be
present at the meeting with the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
The affirmative vote of a majority of the votes represented at the meeting
in person or by proxy of the Common Stock and Class B Stock voting together
without regard to class is required for approval of the appointment of
auditors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2, AND SIGNED
PROXIES WHICH ARE RETURNED WILL BE SO VOTED UNLESS A CONTRARY VOTE IS
DESIGNATED ON THE PROXY CARD.
OTHER BUSINESS
It is not expected that any business other than that set forth in the Notice
of Annual Meeting of Stockholders and more specifically described in this
Proxy Statement will be brought before the meeting. However, if any other
business should properly come before the meeting, it is the intention of the
persons named on the enclosed proxy card to vote the signed proxies received
by them in accordance with their best judgment on such business and any
matters dealing with the conduct of the meeting.
STOCKHOLDER PROPOSALS AND NOMINATIONS
In accordance with the Corporation's By-Laws, stockholders (other than those
holding 25% of the outstanding votes entitled to be cast) who do not submit
proposals for inclusion in the Proxy Statement but who intend to present a
proposal, nomination for director or other business for consideration at any
meeting of stockholders, including any Annual Meeting, are required to notify
the Secretary of the Corporation of their proposal or nomination and provide
other information in advance of such meeting. Stockholders interested in
making proposals at the 1996 Annual Meeting should submit their name and
address, their shareholdings, a brief description of the proposal, and any
financial or other interest they have in such proposal to the Corporation no
later than April 2, 1996.
To be eligible for inclusion in the Corporation's Proxy Statement for the
1997 Annual Meeting of Stockholders, stockholder proposals must be received by
the Corporation by November 18, 1996.
In accordance with the Corporation's By-Laws, if a stockholder wishes to
make a nomination for director at the 1997 Annual Meeting but does not submit
the nomination for inclusion in the Proxy Statement for such meeting, the
stockholder must submit the following information to the Corporation no later
than March 1, 1997: name and address, a representation that the stockholder is
a holder of record and intends to attend such meeting, a description of any
arrangement between the stockholder and the individual planned to be
nominated, the nominee's name, address and biographical information, and the
consent of the nominee.
23
All notices for stockholder proposals and director nominations should be
sent to the attention of the Secretary of the Corporation at 100 Crystal A
Drive, Hershey, Pennsylvania 17033-0810.
SUMMARY ANNUAL REPORT AND FORM 10-K
The Corporation will provide without charge to each beneficial owner of its
Common Stock and Class B Common Stock, upon such stockholder's request, a copy
(without exhibits) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995 filed with the Securities and Exchange
Commission. Requests for copies should be addressed to Hershey Foods
Corporation, Investor Relations Department, 100 Crystal A Drive, Hershey, PA
17033-0810.
A copy of the Corporation's Summary Annual Report to Stockholders for the
year ended December 31, 1995 accompanies this Proxy Statement. The Appendix to
this Proxy Statement containing the Consolidated Financial Statements and
Management's Discussion and Analysis comprises a portion of that report. The
Summary Annual Report, the Appendix and the Annual Report on Form 10-K are not
part of the Corporation's proxy solicitation materials.
By order of the Board of Directors,
Robert M. Reese
Vice President, General
Counsel and Secretary
March 18, 1996
STOCKHOLDERS WHO DESIRE TO HAVE THEIR STOCK VOTED AT THE MEETING ARE
REQUESTED TO MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. STOCKHOLDERS MAY REVOKE THEIR
PROXIES AT ANY TIME PRIOR TO THE MEETING AND STOCKHOLDERS WHO ARE PRESENT AT
THE MEETING MAY REVOKE THEIR PROXIES AND VOTE, IF THEY SO DESIRE, IN PERSON.
24
APPENDIX
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
PAGE
----
Management's Discussion and Analysis....................................... A-1
Consolidated Financial Statements.......................................... A-9
Notes to Consolidated Financial Statements................................. A-13
Responsibility for Financial Statements.................................... A-27
Report of Independent Public Accountants................................... A-28
Eleven-Year Consolidated Financial Summary................................. A-29
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved increased sales in 1995 and 1994. Net sales during
this two-year period increased at a compound annual rate of 3%, primarily
reflecting volume growth from the introduction of new confectionery and
grocery products and from foreign acquisitions, and price increases
principally in the Corporation's pasta and foreign businesses. These increases
were partially offset by lower sales resulting from the divestiture of
Overspecht B.V. (OZF Jamin) in the second quarter of 1995 and, in 1994,
reduced demand for existing domestic confectionery brands and the
discontinuance of the Corporation's refrigerated pudding line.
Hershey Chocolate U.S.A. increased the wholesale price of its standard bar
line and king size bars by approximately eleven percent in December 1995.
These products represented approximately 25% of the Corporation's 1995 sales.
Price increases were intended to offset higher costs for raw materials and
packaging, together with the cumulative impact of inflation on other costs
since the last standard bar price increase nearly five years ago. Hershey
Pasta Group implemented selected price increases in late 1993, early 1994 and
late 1995 in an effort to recover substantial increases in semolina costs. The
price increases have not been sufficient to recover the full impact of the
higher semolina costs, partly due to competition from subsidized pasta imports
into the United States.
Income, excluding the net after-tax effect of restructuring activities
recorded in 1995 and the 1993 net cumulative effect of accounting changes and
the after-tax Freia Marabou a.s (Freia) gain, increased at a compound annual
rate of 4% during the two-year period. This increase was a result of the
growth in sales, partially offset by a lower gross profit margin and higher
selling, marketing and administrative expenses.
The following acquisitions and divestitures occurred during the period:
. December 1995--The acquisition of Henry Heide, Incorporated (Henry
Heide), a confectionery company which manufactures a variety of non-
chocolate confectionery products including JUJYFRUITS candies and
WUNDERBEANS jellybeans.
. December 1995--The Corporation entered into definitive agreements to sell
the assets of Hershey Canada, Inc.'s PLANTERS nut (Planters) and LIFE
SAVERS and BREATH SAVERS hard candy, and BEECH-NUT cough drop (Life
Savers) businesses to Johnvince Foods Group and Beta Brands Inc.,
respectively. Both transactions were completed in January 1996 as part of
a restructuring program announced by the Corporation in late 1994.
. June 1995--The sale of the outstanding shares of OZF Jamin to a
management buyout group at OZF Jamin as part of the restructuring
program. OZF Jamin was purchased by the Corporation in October 1993.
. September 1993--The acquisition of the Italian confectionery business of
Heinz Italia S.p.A. (Sperlari). Sperlari is a leader in the Italian non-
chocolate confectionery market and manufactures and distributes a wide
range of confectionery products, including nougat and sugar candies.
Products are marketed primarily under the SPERLARI, DONDI and
SCARAMELLINI brands.
. March 1993--The acquisition of certain assets of the Ideal Macaroni and
Weiss Noodle companies (Ideal/Mrs. Weiss) in Cleveland, Ohio.
The Corporation's net sales, net income and cash flows are affected by the
timing of business acquisitions, new product introductions, promotional
activities, price increases and a seasonal sales bias toward the second half
of the year. These factors, from time to time, cause fluctuations in net sales
and net income versus the comparable quarterly periods of prior years.
A-1
NET SALES
Net sales rose $84.4 million or 2% in 1995 and $118.0 million or 3% in 1994.
The increase in 1995 was due to incremental sales from new confectionery and
grocery products, volume growth from existing domestic and foreign
confectionery brands and pasta products, and selected selling price increases,
principally in the Corporation's foreign businesses. These increases were
partially offset by lower sales resulting from the divestiture of OZF Jamin in
the second quarter of 1995 and the discontinuance of the Corporation's
refrigerated pudding line in late 1994. The increase in 1994 was due to volume
growth from new products and businesses acquired in late 1993, offset
substantially by lower sales caused by reduced demand for existing
confectionery and grocery brands. Sales of the Corporation's Canadian and
Mexican businesses were lower in 1994 due to volume declines resulting from
adverse economic conditions and the impact of currency exchange rates.
COSTS AND EXPENSES
Cost of sales as a percent of net sales increased from 57.2% in 1993 to
58.2% in 1994, but declined to 57.6% in 1995. The increase in gross margin in
1995 was primarily the result of manufacturing efficiency improvements,
selling price increases in the Corporation's foreign businesses and the
favorable impact of the OZF Jamin divestiture. These increases were partially
offset by higher costs for certain major raw materials and packaging, along
with inflation in labor and overhead costs. The decrease in gross margin in
1994 was primarily the result of higher costs for certain major raw materials,
particularly semolina, higher expenses for depreciation, and lower margins
associated with the foreign businesses, partially offset by lower costs
resulting from manufacturing efficiency improvements, and pasta selling price
increases.
Selling, marketing and administrative costs increased by 2% in 1995
primarily due to increased advertising for existing confectionery brands and
the introduction of new products, partially offset by reduced promotion and
administrative expenses. Selling, marketing and administrative costs decreased
slightly in 1994 primarily due to reduced levels of promotion and advertising
expenses for existing confectionery brands, largely offset by increased
promotion and advertising expenses related to the introduction of new products
and higher selling and administrative expenses associated with the 1993
business acquisitions.
RESTRUCTURING ACTIVITIES
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million ($80.2 million after tax or $.92 per
share) following a comprehensive review of domestic and foreign operations
designed to enhance performance of operating assets by lowering operating and
administrative costs, eliminating underperforming assets and streamlining the
overall decision-making process.
As of December 31, 1995, $81.8 million of restructuring reserves had been
utilized and $16.7 million had been reversed to reflect revisions and changes
in estimates to the original restructuring program. The remaining $7.6 million
of accrued restructuring reserves will be utilized in early 1996 as the final
aspects of the restructuring program are completed, and annual savings of
approximately $18.0 million are expected to be realized thereafter.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program
announced by the Corporation in August 1995. The charge was primarily related
to the funding of retirement benefits for eligible employees who elected early
retirement. This cash charge will be funded from operating cash flows. The
impact of this charge was more than offset by the partial reversal of 1994
accrued restructuring reserves, resulting in an
A-2
increase to income before income taxes of $.2 million and an increase to net
income of $2.0 million as the tax benefit associated with the 1995 charge more
than offset the tax provision associated with the reversal of 1994
restructuring reserves.
GAIN ON SALE OF INVESTMENT INTEREST
In March 1993, the Corporation recorded a pre-tax gain of $80.6 million on
the sale of its 18.6% investment interest in Freia which had the effect of
increasing net income by $40.6 million.
INTEREST EXPENSE, NET
Net interest expense increased $9.5 million in 1995 primarily as a result of
higher short-term interest expense. Short-term interest expense increased due
to higher borrowing rates and increased borrowings associated with the
purchase of approximately 9.0 million shares of the Corporation's Common Stock
from the Hershey Trust Company, as Trustee for the benefit of Milton Hershey
School (Milton Hershey School Trust).
Net interest expense increased $8.4 million in 1994 as higher short-term
interest expense, reduced capitalized interest and lower interest income were
only partially offset by lower fixed interest expense. Short-term interest
expense was above prior year as a result of higher borrowing levels related to
a share repurchase program and the 1993 acquisitions, and increased short-term
borrowing rates. Fixed interest expense was less than prior year due to the
retirement of long-term debt in 1993.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate was 39.5%, 44.7%, and 41.8% in
1995, 1994 and 1993, respectively. The lower rate in 1995 compared to 1994 was
primarily due to the impact of restructuring activities. The increase in 1994
compared to 1993 was principally a result of the relatively low foreign income
tax benefit associated with the restructuring charge.
NET CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Effective January 1, 1993, the Corporation adopted Statements of Financial
Accounting Standards No. 106 "Employers' Accounting for Post-retirement
Benefits Other Than Pensions" and No. 109 "Accounting for Income Taxes" by
means of catch-up adjustments. The net charge associated with these changes in
accounting had the effect of decreasing net income by approximately $103.9
million, or $1.16 per share.
NET INCOME
Net income increased by 53% in 1995. Excluding the net after-tax effects of
the 1995 and 1994 restructuring activities, income increased $15.5 million or
6%. Net income increased $7.8 million or 3% in 1994, excluding the after-tax
effect of the 1994 restructuring charge, and the 1993 after-tax gain on the
sale of the Freia investment and the catch-up adjustments for accounting
changes. Income as a percent of net sales, after excluding the net after-tax
effects of restructuring activities in 1995 and 1994 and the 1993 net
cumulative effect of accounting changes and the after-tax Freia gain, was 7.6%
in 1995, 7.3% in 1994 and 7.4% in 1993.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1995. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 42% as of December
31, 1995, and 25% as of December 31, 1994. The ratio of current assets to
current liabilities was 1.1:1 as of December 31, 1995, and 1.2:1 as of
December 31, 1994. The decrease
A-3
in the current ratio and the increase in the capitalization ratio resulted
primarily from short-term borrowings and the issuance of long-term debt to
finance the purchase of Common Stock from the Milton Hershey School Trust.
ASSETS
Total assets decreased $60.4 million or 2% as of December 31, 1995,
primarily as a result of decreases in current assets, property, plant and
equipment, and intangibles resulting from business acquisitions, offset
somewhat by an increase in other assets.
Current assets decreased by $26.3 million reflecting lower inventories and
current deferred income taxes, offset somewhat by an increase in other current
assets. The decrease in inventories was primarily related to decreases in raw
material inventories. Current deferred income taxes decreased as a result of
the realization in 1995 of the income tax benefit associated with the
restructuring charge recorded in 1994. The increase in other current assets
related to receivables associated with the sale of the Planters and Life
Savers businesses and commodity transactions.
The $32.4 million net decrease in property, plant and equipment reflected
the divestiture of certain businesses and assets, and depreciation expense of
$119.4 million, partially offset by capital additions of $140.6 million.
The decrease in intangibles resulting from business acquisitions was
primarily associated with the sale of the Planters and Life Savers businesses
and the amortization of intangibles, partially offset by an increase related
to the acquisition of Henry Heide. The increase in other assets was primarily
associated with employee retirement plans.
LIABILITIES
Total liabilities increased by $297.8 million or 21% as of December 31,
1995, primarily due to increases in current liabilities and long-term debt.
Current liabilities increased by $68.1 million principally as a result of
higher short-term debt and accrued liabilities, offset somewhat by a decrease
in accrued restructuring reserves. Short-term debt increased as a result of
borrowings associated with the purchase of Common Stock from the Milton
Hershey School Trust. The increase in accrued liabilities principally
reflected increases in liabilities associated with employee retirement plans
as a result of the voluntary retirement program. The decrease in accrued
restructuring reserves reflected the utilization and partial reversal of
reserves related to the 1994 restructuring program.
The increase in long-term debt reflected the issuance of $200 million of
6.7% Notes due 2005 (Notes) in the fourth quarter of 1995. The proceeds from
issuance of the Notes were used to repay domestic commercial paper borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust.
STOCKHOLDERS' EQUITY
Total stockholders' equity declined by 25% in 1995, primarily due to the
repurchase of Common Stock. Total stockholders' equity has increased at a
compound annual rate of 4% over the past ten years.
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
A-4
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.
LIQUIDITY
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
price increases. Chocolate, confectionery and grocery seasonal and holiday-
related sales have typically been highest during the third and fourth quarters
of the year, representing the principal seasonal effect. Generally, seasonal
working capital needs peak during the summer months and have been met by
issuing commercial paper.
Over the past three years, cash requirements for share repurchases, capital
additions, dividend payments and several business acquisitions exceeded cash
provided from operating activities and the cash from the sale of the
Corporation's investment interest in Freia by $209.0 million. Total debt,
including debt assumed, increased during the period by $233.1 million. Cash
and cash equivalents increased by $8.2 million during the period.
The Corporation anticipates that capital expenditures will be in the range
of $125 million to $175 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. As of December 31,
1995, the Corporation's principal capital commitments included manufacturing
capacity expansion and modernization.
A portion of the $259.7 million gross proceeds from the sale of the
Corporation's Freia investment interest was used for the early repayment of
long-term debt in 1993.
In 1993, the Corporation's Board of Directors approved a share repurchase
program to acquire from time to time, through open market or privately
negotiated transactions, up to $200 million of Common Stock. A total of
3,923,780 shares of Common Stock has been repurchased for approximately $197.7
million under the program, of which 264,000 shares were retired and the
remaining 3,659,780 shares were held as Treasury Stock as of December 31,
1995.
In August 1995, the Corporation purchased an additional 9,049,773 shares of
its Common Stock to be held as Treasury Stock from the Milton Hershey School
Trust for $500.0 million. In connection with the share repurchase program
begun in 1993, a total of 2,000,000 shares were also acquired from the Milton
Hershey School Trust in 1993 for approximately $103.1 million. As of December
31, 1995, a total of 12,709,553 shares were held as Treasury Stock.
In February 1996, the Corporation's Board of Directors approved an
additional share repurchase program to acquire from time to time, through open
market or privately negotiated transactions, up to $200 million of Common
Stock.
In October 1995, the Corporation issued $200 million of Notes under Form S-3
Registration Statements which were declared effective in June 1990 and
November 1993. As of December 31, 1995, $300 million of debt securities
remained available for issuance under the November 1993 Registration
Statement. Proceeds from any offering of the $300 million of debt securities
available under the shelf registration may be used for general corporate
requirements including, reducing existing commercial
A-5
paper borrowings, financing capital additions and funding future business
acquisitions and working capital requirements.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation entered into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1995, the Corporation had agreements outstanding with an
aggregate notional amount of $200.0 million, with maturities through 1997. Any
interest rate differential on interest rate swaps is recognized as an
adjustment to interest expense over the term of the agreement. The
Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at current market rates.
In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million as of December 31, 1995, with options to increase borrowings by $1.0
billion with the concurrence of the banks. Of the total committed credit
facility, $200 million is for a renewable 364-day term and $400 million is
effective for a five-year term. 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. Lines of credit
previously maintained by the Corporation were significantly reduced when the
credit facility agreements became effective.
CASH FLOW ACTIVITIES
Cash provided from operating activities totaled $1.2 billion during the past
three years. Over this period, depreciation and amortization have increased as
a result of continuing investment in capital additions and business
acquisitions. Cash requirements for accounts receivable and inventories have
tended to fluctuate during the three-year period based on sales during
December and inventory management practices. The change in cash required for
or provided from other assets and liabilities between the years was primarily
related to commodities transactions and the timing of payments for accrued
liabilities, including income taxes, and in 1995 and 1994, restructuring
expenses.
Investing activities included capital additions, several business
acquisitions, and the sale of an 18.6% investment interest in Freia in 1993.
The income tax effects associated with the 1995 and 1994 restructuring
activities and income taxes paid in 1993 on the Freia gain were included in
operating activities. Capital additions during the past three years included
the purchase of manufacturing equipment and expansion and modernization of
existing facilities. Businesses acquired during the past three years included
Henry Heide in 1995 and OZF Jamin, Sperlari and Ideal/Mrs. Weiss in 1993. OZF
Jamin was sold in 1995 as part of the Corporation's restructuring program.
Cash used for business acquisitions represented the purchase price paid and
consisted of the current assets, property, plant and equipment, and
intangibles acquired, net of liabilities assumed.
Financing activities included debt borrowings and repayments, payment 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 fund seasonal
working capital requirements, business acquisitions, a share repurchase
program and the purchase of Common Stock from the Milton Hershey School Trust.
A portion of the proceeds received from the sale of the Freia investment was
used to repay long-term debt in 1993. The proceeds from the issuance of $200
million of Notes in October 1995 were used to reduce short-term borrowings.
During the past three years, a total of 12,973,553 shares of Common Stock has
been repurchased for approximately $697.7 million.
COMMODITY PRICE RISK MANAGEMENT
The Corporation's most significant raw materials include cocoa, sugar, milk,
peanuts, flour and almonds. The Corporation attempts to minimize the effect of
price fluctuations related to the purchase
A-6
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 and corn sweeteners, price risks are also managed by
entering into futures and options contracts. At the present time, similar
futures and options contracts are not available for use in pricing the
Corporation's other major raw materials. Futures contracts are used in
combination with forward purchasing of cocoa, sugar and corn sweetener
requirements, principally to take advantage of market fluctuations which
provide more favorable pricing opportunities and to increase diversity or
flexibility in sourcing these raw materials. 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 and speculative
influences. Cocoa prices rose from 1992 to 1994 due to cocoa demand exceeding
production. During 1995, prices for cocoa futures were relatively stable as a
result of good West African crop development and yield. During 1996, any
problems with the development of the West African crop to be harvested
beginning in the fall, could result in demand again exceeding production,
leading to possible cocoa futures price increases. The Corporation's costs
during 1996 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 major raw material used in the manufacture of pasta products is semolina
milled from durum wheat. The Corporation purchases semolina from commercial
mills and is also engaged in a custom milling agreement to obtain sufficient
quantities of semolina. In 1995, the Corporation's semolina costs per pound
remained at historically high levels. The exceptionally high costs resulted
from short supplies of durum wheat caused by a poor harvest of the North
American crop in 1993 and 1994, combined with U.S. Government tariffs on
imports of Canadian wheat. The tariff agreement expired as scheduled in 1995,
but prices remained at historically high levels due to a continued worldwide
shortage of durum wheat.
Generally, the Corporation has been able to offset the effects of increases
in the cost of its major raw materials, particularly cocoa beans, through
selling price increases or reductions in product weights. Conversely, declines
in the cost of major raw materials have served as a source of funds to enhance
consumer value through increases in product weights, respond to competitive
activity, develop new products and markets, and offset rising costs of other
raw materials and expenses.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$110.1 million in 1995 and $107.0 million in 1994. The annual dividend rate on
the Common Stock is $1.44 per share, an increase of 11% over the 1994 rate of
$1.30 per share. The 1995 dividend represented the 21st consecutive year of
Common Stock dividend increases.
On February 6, 1996, the Corporation's Board of Directors declared a
quarterly dividend of $.36 per share of Common Stock payable on March 15,
1996, to stockholders of record as of February 23, 1996. It is the
Corporation's 265th consecutive Common Stock dividend. A quarterly dividend of
$.325 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 30.5 million shares of the Corporation's Common Stock were
traded during 1995. The Class B Stock is not publicly traded.
A-7
The closing price of the Common Stock on December 31, 1995, was $65. There
were 38,480 stockholders of record of the Common Stock and the Class B Stock
as of December 31, 1995.
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 COMMON STOCK
PER SHARE PRICE RANGE*
-------------- ---------------
COMMON CLASS B
STOCK STOCK HIGH LOW
------ ------- ------- -------
1995
1st Quarter $ .325 $ .2950 $52 3/8 $48
2nd Quarter .325 .2950 55 7/8 50 1/8
3rd Quarter .360 .3250 64 7/8 53 5/8
4th Quarter .360 .3250 67 7/8 59
------ -------
Total $1.370 $1.2400
====== =======
1994
1st Quarter $ .300 $ .2725 $53 1/2 $45 3/4
2nd Quarter .300 .2725 46 3/4 41 5/8
3rd Quarter .325 .2950 48 41 1/8
4th Quarter .325 .2950 49 5/8 44 1/2
------ -------
Total $1.250 $1.1350
====== =======
- --------
* 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 22.2%
in 1995. Over the most recent five-year period, the return has ranged from
17.0% in 1991 to 22.2% in 1995. For the purpose of calculating operating
return on average stockholders' equity, earnings is defined as net income,
excluding the catch-up adjustments for accounting changes and the after-tax
gain on the sale of the investment in Freia in 1993, and the after-tax
restructuring activities in 1994 and 1995.
OPERATING RETURN ON AVERAGE INVESTED CAPITAL
The Corporation's operating return on average invested capital was 17.1% in
1995. Over the most recent five-year period, the return has ranged from 13.8%
in 1991 to 17.1% in 1995. 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,
excluding the sale of the investment in Freia, the catch-up adjustments for
accounting changes, the after-tax restructuring activities in 1994 and 1995,
and the after-tax effect of interest on long-term debt.
A-8
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
NET SALES $3,690,667 $3,606,271 $3,488,249
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,126,274 2,097,556 1,995,502
Selling, marketing and administrative 1,053,758 1,034,115 1,035,519
---------- ---------- ----------
Total costs and expenses 3,180,032 3,131,671 3,031,021
---------- ---------- ----------
RESTRUCTURING CREDIT (CHARGE) 151 (106,105) --
GAIN ON SALE OF INVESTMENT INTEREST -- -- 80,642
---------- ---------- ----------
INCOME BEFORE INTEREST, INCOME TAXES AND
ACCOUNTING CHANGES 510,786 368,495 537,870
Interest expense, net 44,833 35,357 26,995
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND ACCOUNTING
CHANGES 465,953 333,138 510,875
Provision for income taxes 184,034 148,919 213,642
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 281,919 184,219 297,233
Net cumulative effect of accounting changes -- -- (103,908)
---------- ---------- ----------
NET INCOME $ 281,919 $ 184,219 $ 193,325
========== ========== ==========
INCOME PER SHARE:
Before accounting changes $ 3.40 $ 2.12 $ 3.31
Net cumulative effect of accounting changes -- -- (1.16)
---------- ---------- ----------
Net income $ 3.40 $ 2.12 $ 2.15
========== ========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ 1.370 $ 1.250 $ 1.140
Class B Common Stock 1.240 1.135 1.035
The notes to consolidated financial statements are an integral part of these
statements.
A-9
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,346 $ 26,738
Accounts receivable--trade 326,024 331,670
Inventories 397,570 445,702
Deferred income taxes 84,785 105,948
Prepaid expenses and other 81,598 38,608
---------- ----------
Total current assets 922,323 948,666
PROPERTY, PLANT AND EQUIPMENT, NET 1,436,009 1,468,397
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 428,714 453,582
OTHER ASSETS 43,577 20,336
---------- ----------
Total assets $2,830,623 $2,890,981
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 127,067 $ 115,428
Accrued liabilities 300,549 265,283
Accrued restructuring reserves 7,574 82,055
Accrued income taxes 15,514 8,718
Short-term debt 413,268 316,783
Current portion of long-term debt 383 7,954
---------- ----------
Total current liabilities 864,355 796,221
LONG-TERM DEBT 357,034 157,227
OTHER LONG-TERM LIABILITIES 333,814 303,056
DEFERRED INCOME TAXES 192,461 193,377
---------- ----------
Total liabilities 1,747,664 1,449,881
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued: none in 1995 and 1994 -- --
Common Stock, shares issued: 74,733,982 in 1995 and
74,679,357 in 1994 74,734 74,679
Class B Common Stock, shares issued: 15,241,454 in
1995 and 15,242,979 in 1994 15,241 15,243
Additional paid-in capital 47,732 49,880
Cumulative foreign currency translation adjustments (29,240) (24,537)
Unearned ESOP compensation (35,128) (38,321)
Retained earnings 1,694,696 1,522,867
Treasury--Common Stock shares, at cost: 12,709,553 in
1995 and 3,187,139 in 1994 (685,076) (158,711)
---------- ----------
Total stockholders' equity 1,082,959 1,441,100
---------- ----------
Total liabilities and stockholders' equity $2,830,623 $2,890,981
========== ==========
The notes to consolidated financial statements are an integral part of these
balance sheets.
A-10
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES
Net income $ 281,919 $ 184,219 $ 193,325
Adjustments to reconcile net income to net
cash provided from operations:
Net cumulative effect of accounting changes -- -- 103,908
Depreciation and amortization 133,884 129,041 113,064
Deferred income taxes 26,380 (2,328) 11,047
Restructuring (credit) charge (151) 106,105 --
Gain on sale of investment interest -- -- (80,642)
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade 1,666 (36,696) (100,957)
Inventories 28,147 7,740 32,347
Accounts payable 14,767 (10,230) (12,809)
Other assets and liabilities (11,297) (58,146) 111,358
Other, net 19,614 20,032 9,399
--------- --------- ---------
Net Cash Provided from Operating Activities 494,929 339,737 380,040
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
INVESTING ACTIVITIES
Capital additions (140,626) (138,711) (211,621)
Business acquisitions (12,500) -- (164,787)
Sale of investment interest -- -- 259,718
Other, net 8,720 (4,492) (717)
--------- --------- ---------
Net Cash (Used by) Investing Activities (144,406) (143,203) (117,407)
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
FINANCING ACTIVITIES
Net increase (decrease) in short-term debt 103,530 (20,503) 67,485
Long-term borrowings 202,448 102 1,130
Repayment of long-term debt (7,887) (14,413) (104,792)
Cash dividends paid (110,090) (106,961) (100,499)
Exercise of stock options 15,106 3,494 2,574
Incentive plan transactions (21,903) (7,726) (4,903)
Repurchase of Common Stock (526,119) (39,748) (131,783)
--------- --------- ---------
Net Cash (Used by) Financing Activities (344,915) (185,755) (270,788)
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents 5,608 10,779 (8,155)
Cash and Cash Equivalents as of January 1 26,738 15,959 24,114
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 32,346 $ 26,738 $ 15,959
========= ========= =========
Interest Paid $ 43,731 $ 36,803 $ 32,073
Income Taxes Paid 148,629 177,876 171,586
The notes to consolidated financial statements are an integral part of these
statements.
A-11
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CUMULATIVE
FOREIGN
CLASS B ADDITIONAL CURRENCY UNEARNED TREASURY TOTAL
PREFERRED COMMON COMMON PAID-IN TRANSLATION ESOP RETAINED COMMON STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL ADJUSTMENTS COMPENSATION EARNINGS STOCK EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS OF
DOLLARS
BALANCE AS OF JANUARY
1, 1993 $ -- $74,929 $15,257 $52,129 $ 2,484 $(44,708) $1,365,188 $ -- $1,465,279
Net income 193,325 193,325
Dividends:
Common Stock, $1.140
per share (84,711) (84,711)
Class B Common
Stock, $1.035 per
share (15,788) (15,788)
Foreign currency
translation
adjustments (16,389) (16,389)
Conversion of Class B
Common Stock into
Common Stock 4 (4) --
Incentive plan
transactions (195) (195)
Exercise of stock
options (1,074) (1,074)
Employee stock
ownership trust
transactions 487 3,193 3,680
Repurchase of Common
Stock (264) (151) (12,405) (118,963) (131,783)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1993 -- 74,669 15,253 51,196 (13,905) (41,515) 1,445,609 (118,963) 1,412,344
Net income 184,219 184,219
Dividends:
Common Stock, $1.250
per share (89,660) (89,660)
Class B Common
Stock, $1.135 per
share (17,301) (17,301)
Foreign currency
translation
adjustments (10,632) (10,632)
Conversion of Class B
Common Stock into
Common Stock 10 (10) --
Incentive plan
transactions (1,264) (1,264)
Exercise of stock
options (548) (548)
Employee stock
ownership trust
transactions 496 3,194 3,690
Repurchase of Common
Stock (39,748) (39,748)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1994 -- 74,679 15,243 49,880 (24,537) (38,321) 1,522,867 (158,711) 1,441,100
Net income 281,919 281,919
Dividends:
Common Stock, $1.370
per share (91,190) (91,190)
Class B Common
Stock, $1.240 per
share (18,900) (18,900)
Foreign currency
translation
adjustments (4,703) (4,703)
Conversion of Class B
Common Stock into
Common Stock 2 (2) --
Incentive plan
transactions (180) (180)
Exercise of stock
options 53 (2,456) (246) (2,649)
Employee stock
ownership trust
transactions 488 3,193 3,681
Repurchase of Common
Stock (526,119) (526,119)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1995 $ -- $74,734 $15,241 $47,732 $(29,240) $(35,128) $1,694,696 $(685,076) $1,082,959
===== ======= ======= ======= ======== ======== ========== ========= ==========
The notes to consolidated financial statements are an integral part of these
statements.
A-12
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. Certain
reclassifications have been made to prior year amounts to conform to the 1995
presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries after elimination of intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates,
particularly for accounts receivable and certain current and long-term
liabilities.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar and corn sweeteners for
anticipated manufacturing requirements, the Corporation enters into
commodities futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations. In accordance with Statement of Financial
Accounting Standards No. 80 "Accounting for Futures Contracts," these futures
and options contracts are accounted for as hedges and, accordingly, gains and
losses are deferred and recognized in cost of sales as part of the product
cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment is computed using the straight-line method over the
estimated useful lives.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Intangible assets resulting from business acquisitions principally consist
of the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill is amortized on a straight-line basis
over 40 years. Other intangible assets are amortized on a straight-line basis
over the estimated useful lives. The Corporation periodically evaluates
whether events or circumstances have occurred indicating that the carrying
amount of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Corporation uses an estimate
of the acquired business' undiscounted future cash flows compared to the
related carrying amount of net assets, including goodwill, to determine if an
impairment loss should be recognized.
Accumulated amortization of intangible assets resulting from business
acquisitions was $101.5 million and $86.7 million as of December 31, 1995 and
1994, respectively.
A-13
FOREIGN CURRENCY TRANSLATION
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 in a
separate component of stockholders' equity, "Cumulative Foreign Currency
Translation Adjustments."
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward and options 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. Gains and losses are deferred and accounted for as part of the
underlying transactions. 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 losses as a result of counterparty defaults.
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 extendable 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.
RESEARCH AND DEVELOPMENT
The Corporation expenses research and development costs as incurred.
Research and development expense was $26.2 million, $26.3 million and $26.2
million in 1995, 1994 and 1993, respectively.
ADVERTISING
The Corporation expenses advertising costs as incurred. Advertising expense
was $159.2 million, $120.6 million and $130.0 million in 1995, 1994 and 1993,
respectively. Prepaid advertising as of December 31, 1995 and 1994 was $3.0
million and $8.5 million, respectively.
2. ACQUISITIONS AND DIVESTITURES
In December 1995, the Corporation completed the acquisition of the
outstanding shares of the confectionery company Henry Heide, Incorporated
(Henry Heide), for approximately $12.5 million. Henry Heide's headquarters and
manufacturing facility are located in New Brunswick, N.J., where it
manufactures a variety of non-chocolate confectionery products including
JUJYFRUITS candies and WUNDERBEANS jellybeans.
In September 1993, the Corporation completed the acquisition of the Italian
confectionery business of Heinz Italia S.p.A. (Sperlari) for approximately
$130.0 million. Sperlari is a leader in the Italian non-chocolate
confectionery market and manufactures and distributes a wide range of
confectionery products, including nougat and sugar candies. Products are
marketed primarily under the SPERLARI, DONDI and SCARAMELLINI brands.
In March 1993, the Corporation acquired certain assets of the Ideal Macaroni
and Weiss Noodle companies for approximately $14.6 million.
A-14
In accordance with the purchase method of accounting, the purchase prices of
the acquisitions summarized above were allocated to the underlying assets and
liabilities at the date of acquisition based on their estimated respective
fair values, which may be revised at a later date. Total liabilities assumed,
including debt, were $10.6 million in 1995 and $54.0 million in 1993. Results
subsequent to the dates of acquisition are included in the consolidated
financial statements. Had the results of these acquisitions been included in
consolidated results for the entire length of each period presented, the
effect would not have been material.
In December 1995, the Corporation entered into definitive agreements to sell
the assets of Hershey Canada, Inc.'s PLANTERS nut (Planters) and LIFE SAVERS
and BREATH SAVERS hard candy, and BEECH-NUT cough drop (Life Savers)
businesses to Johnvince Foods Group and Beta Brands Inc., respectively. Both
transactions were completed in January 1996, as part of a restructuring
program announced by the Corporation in late 1994.
In June 1995, the Corporation completed the sale of the outstanding shares
of Overspecht B.V. (OZF Jamin) to a management buyout group at OZF Jamin, as
part of the Corporation's restructuring program. The Corporation purchased the
outstanding shares of OZF Jamin in October 1993 for approximately $20.2
million. OZF Jamin manufactures chocolate and non-chocolate confectionery
products, cookies, biscuits and ice cream for distribution primarily to
customers in the Netherlands and Belgium.
3. RESTRUCTURING ACTIVITIES
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million, following a comprehensive review of
domestic and foreign operations designed to enhance performance of operating
assets by lowering operating and administrative costs, eliminating
underperforming assets and streamlining the overall decision-making process.
The charge of $106.1 million resulted in an after-tax charge of $80.2 million
or $.92 per share in 1994.
The charge included $34.3 million of severance and termination benefits for
the elimination of approximately 500 positions in the manufacturing, technical
and administrative areas at both domestic and foreign operations. The charge
also included anticipated losses on disposals of certain businesses of $39.1
million, product line discontinuations of $17.5 million and the consolidation
of operations and disposal of machinery and equipment of $15.2 million.
As of December 31, 1995, $81.8 million of restructuring reserves had been
utilized and $16.7 million had been reversed to reflect revisions and changes
in estimates to the original restructuring program. The remaining $7.6 million
of accrued restructuring reserves will be utilized in early 1996 as the final
aspects of the restructuring program are completed. Operating cash flows were
used to fund cash requirements which represented approximately 25% of the
total reserves utilized. The non-cash portion of restructuring reserve
utilization was associated primarily with the divestiture of foreign
businesses and the discontinuation of certain product lines.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program
announced by the Corporation in August 1995. The charge was primarily related
to the funding of retirement benefits for eligible employees who elected early
retirement. This cash charge will be funded from operating cash flows. The
impact of this charge was more than offset by the partial reversal of 1994
accrued restructuring reserves resulting in an increase to income before
income taxes of $.2 million and an increase to net income of $2.0 million, as
the tax benefit associated with the 1995 charge more than offset the tax
provision associated with the reversal of 1994 restructuring reserves.
A-15
4. GAIN ON SALE OF INVESTMENT INTEREST
In March 1993, the Corporation recorded a pre-tax gain of $80.6 million on
the sale of its 18.6% investment interest in Freia Marabou a.s. This gain had
the effect of increasing net income by $40.6 million. Gross proceeds from the
sale amounted to $259.7 million.
5. RENTAL AND LEASE COMMITMENTS
Rent expense was $24.9 million, $25.7 million and $24.5 million for 1995,
1994 and 1993, respectively. Rent expense pertains to all operating leases,
which were principally related to certain administrative buildings,
distribution facilities and transportation equipment. Future minimum rental
payments under non-cancellable operating leases with a remaining term in
excess of one year as of December 31, 1995, were: 1996, $12.6 million; 1997,
$11.6 million; 1998, $10.8 million; 1999, $12.7 million; 2000, $12.6 million;
2001 and beyond, $80.7 million.
6. 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, 1995 and 1994, because of the
relatively short maturity of these instruments. The carrying value of long-
term debt, including the current portion, approximated fair value as of
December 31, 1995 and 1994, based upon quoted market prices for the same or
similar debt issues.
As of December 31, 1995, the Corporation had foreign exchange forward
contracts maturing in 1996 and 1997 to purchase $54.7 million in foreign
currency, primarily Canadian dollars, British sterling, and Swiss francs, and
to sell $26.4 million in foreign currency, primarily Italian lira, Canadian
dollars and Japanese yen, at contracted forward rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished goods
generally covering 3 to 24 months, the Corporation also purchases foreign
exchange options which permit, but do not require, the Corporation to exchange
foreign currencies at a future date with another party at a contracted
exchange rate. To finance premiums paid on such options, from time to time the
Corporation may also write offsetting options at exercise prices which limit
but do not eliminate the effect of purchased options and forward contracts as
a hedge. As of December 31, 1995 and 1994, the Corporation had purchased
foreign exchange options of $11.5 million and $11.6 million, respectively, and
written foreign exchange options of $8.9 million and $10.9 million as of
December 31, 1995 and 1994, respectively, principally related to British
sterling.
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, and the fair value of foreign exchange
options is estimated using active market quotations. As of December 31, 1995
and 1994, the fair value of foreign exchange forward and options contracts
approximated carrying value. The Corporation does not hold or issue financial
instruments for trading purposes.
As of December 31, 1994, the Corporation had foreign exchange forward
contracts maturing in 1995 and 1996 to purchase $35.7 million in foreign
currency, primarily British sterling and Canadian dollars, and to sell $7.5
million in foreign currency, primarily Japanese yen, at contracted forward
rates.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation entered into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1995, the Corporation had agreements outstanding with an
aggregate notional amount of $200.0 million with maturities through 1997. As
of December 31, 1995,
A-16
interest rates payable were at a weighted average fixed rate of 5.6% 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 over the term of the
agreement. The Corporation's risk related to swap agreements is limited to the
cost of replacing such agreements at current market rates.
7. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Long-term debt and lease obligations $20,949 $19,103 $23,016
Short-term debt 28,576 21,155 11,854
Capitalized interest (1,957) (3,009) (4,646)
------- ------- -------
Interest expense, gross 47,568 37,249 30,224
Interest income (2,735) (1,892) (3,229)
------- ------- -------
Interest expense, net $44,833 $35,357 $26,995
======= ======= =======
8. 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. In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million as of December 31, 1995, with options to increase borrowings by $1.0
billion with the concurrence of the banks. Of the total committed credit
facility, $200 million is for a renewable 364-day term and $400 million is
effective for a five-year term. 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. As of December 31,
1994, the Corporation maintained lines of credit arrangements with domestic
and international commercial banks, under which it could borrow in various
currencies up to $516 million, at the lending banks' prime commercial interest
rates or lower. These lines of credit were reduced by the Corporation to
approximately $97.7 million when the credit facility agreements became
effective. The Corporation had combined domestic commercial paper borrowings
and short-term foreign bank loans against its credit facilities and lines of
credit of $413.3 million as of December 31, 1995, and $316.8 million against
its lines of credit as of December 31, 1994. The weighted average interest
rates on short-term borrowings outstanding as of December 31, 1995 and 1994
were 5.7% and 6.0%, respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee was approximately .06% per annum of the
commitment. 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 at certain banks. Such overdrafts,
which were included in accounts payable, were $24.8 million and $23.0 million
as of December 31, 1995 and 1994, respectively.
A-17
9. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Medium-term Notes, 8.45% to 9.92%, due 1995-1998 $ 40,400 $ 45,400
6.7% Notes due 2005 200,000 --
8.8% Debentures due 2021 100,000 100,000
Other obligations, net of unamortized debt discount 17,017 19,781
-------- --------
Total long-term debt 357,417 165,181
Less--current portion 383 7,954
-------- --------
Long-term portion $357,034 $157,227
======== ========
In October 1995, the Corporation issued $200 million of 6.7% Notes due 2005
(Notes) under Form S-3 Registration Statements which were declared effective
in June 1990 and November 1993. The proceeds from issuance of the Notes were
used to reduce short-term borrowings.
Aggregate annual maturities during the next five years are: 1996, $.4
million; 1997, $15.6 million; 1998, $25.2 million; 1999, $.2 million; and
2000, $2.2 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.
10. INCOME TAXES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (FAS No. 109),
which requires the use of the liability method of accounting for deferred
income taxes. This change in accounting as of January 1, 1993, which was
recorded as a catch-up adjustment, increased 1993 net income by $8.2 million
or $.09 per share.
Income before income taxes and accounting changes was as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Domestic $452,084 $411,089 $417,226
Foreign 13,869 (77,951) 13,007
Gain on sale of investment interest -- -- 80,642
-------- -------- --------
Income before income taxes and accounting changes $465,953 $333,138 $510,875
======== ======== ========
The provision for income taxes excluding the FAS No. 109 catch-up adjustment
in 1993, was as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Current:
Federal $135,034 $126,234 $141,541
State 22,620 24,712 37,358
Foreign -- 301 23,696
-------- -------- --------
Current provision for income taxes 157,654 151,247 202,595
-------- -------- --------
Deferred:
Federal 12,455 6,221 2,949
State 8,198 2,652 1,764
Foreign 5,727 (11,201) 6,334
-------- -------- --------
Deferred provision for income taxes 26,380 (2,328) 11,047
-------- -------- --------
Total provision for income taxes $184,034 $148,919 $213,642
======== ======== ========
The 1994 Foreign deferred income tax benefit was associated primarily with
the restructuring charge recorded in the fourth quarter of that year.
A-18
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Deferred tax assets:
Post-retirement benefit obligations $ 85,907 $ 85,530
Accrued expenses and other reserves 78,506 75,949
Net operating loss carryforwards, net of valuation
allowances of $25,544 in 1995 and $7,860 in 1994 7,298 7,913
Accrued trade promotion reserves 16,389 14,926
Restructuring reserves 3,352 19,598
Other 24,517 30,830
-------- --------
Total deferred tax assets 215,969 234,746
-------- --------
Deferred tax liabilities:
Depreciation 239,389 231,035
Other 84,256 91,140
-------- --------
Total deferred tax liabilities 323,645 322,175
-------- --------
Net deferred tax liabilities $107,676 $ 87,429
======== ========
Included in:
Current deferred tax assets, net $ 84,785 $105,948
Non-current deferred tax liabilities, net 192,461 193,377
-------- --------
Net deferred tax liabilities $107,676 $ 87,429
======== ========
As of December 31, 1995, the Corporation had $67.4 million of operating loss
carryforwards available to reduce the future taxable income of certain foreign
subsidiaries. Loss carryforwards of $24.0 million must be utilized within the
next ten years and $43.4 million can be utilized over an indefinite period.
The following table reconciles the Federal statutory income tax rate with
the Corporation's effective income tax rate:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits 4.6 6.0 6.2
Restructuring (credit) charge for which no tax benefit was
provided (.3) 4.5 --
Non-deductible acquisition costs .6 .8 .6
Other, net (.4) (1.6) --
---- ---- ----
Effective income tax rate 39.5% 44.7% 41.8%
==== ==== ====
11. RETIREMENT PLANS
The Corporation and its subsidiaries sponsor several defined benefit
retirement plans covering substantially all employees. Plans covering most
domestic salaried and hourly employees provide retirement benefits based on
individual account balances which are increased annually by pay-related and
interest credits. Plans covering certain non-domestic employees provide
retirement benefits based on career average pay, final pay, or final average
pay as defined within the provisions of the individual
A-19
plans. The Corporation also participates in several multi-employer retirement
plans which provide defined benefits to employees covered under certain
collective bargaining agreements.
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.
Pension expense included the following components:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 25,311 $ 30,077 $ 27,835
Interest cost on projected benefit obligations 32,531 28,351 26,423
Investment (return) loss on plan assets (71,578) 8,288 (46,232)
Net amortization and deferral 40,823 (40,550) 18,519
-------- -------- --------
Corporate sponsored plans 27,087 26,166 26,545
Multi-employer plans 361 374 612
Other 615 622 678
-------- -------- --------
Total pension expense $ 28,063 $ 27,162 $ 27,835
======== ======== ========
The funded status and amounts recognized in the consolidated balance sheets
for the retirement plans were as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Actuarial present value of:
Vested benefit obligations $17,241 $417,027 $310,061 $33,272
======= ======== ======== =======
Accumulated benefit
obligations $17,833 $447,792 $330,161 $39,966
======= ======== ======== =======
Actuarial present value of
projected benefit obligations $27,005 $476,439 $367,656 $43,250
Plan assets at fair value 19,765 389,064 341,373 1,748
------- -------- -------- -------
Plan assets less than
projected benefit obligations 7,240 87,375 26,283 41,502
Net gain (loss) unrecognized
at date of transition 525 (818) 1,711 (2,198)
Prior service cost and
amendments not yet recognized
in earnings (1,159) (28,701) (19,620) (1,744)
Unrecognized net loss from
past experience different
than that assumed (3,615) (3,660) (9,711) (455)
Minimum liability adjustment -- 21,678 -- 4,031
------- -------- -------- -------
Pension liability (prepaid
pension expense) $ 2,991 $ 75,874 $ (1,337) $41,136
======= ======== ======== =======
The projected benefit obligations for the plans were determined principally
using discount rates of 7.25% as of December 31, 1995, and 8.5% as of December
31, 1994. For both 1995 and 1994 the assumed long-term rate of return on plan
assets was 9.5%. The assumed long-term compensation increase rate for 1995 and
1994 was primarily 4.8%.
A-20
In the third quarter of 1995, the Corporation offered a voluntary retirement
program to domestic eligible employees age 55 and over. The voluntary
retirement program gave eligible salaried employees an opportunity to retire
with enhanced retirement benefits. The pre-tax impact on pension expense of
the 1995 charge was $13.0 million or $7.7 million after tax. This amount has
not been included in the disclosure of pension expense by component.
12. POST-RETIREMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees subject to pre-defined limits.
Substantially all of the Corporation's domestic employees become eligible for
these benefits at retirement with a pre-defined benefit being available at an
early retirement date. The post-retirement medical benefit is contributory for
pre-Medicare retirees and for most post-Medicare retirees retiring on or after
February 1, 1993. Retiree contributions are based upon a combination of years
of service and age at retirement. The post-retirement life insurance benefit
is non-contributory.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Post-retirement
Benefits Other Than Pensions" (FAS No. 106) which requires that the cost of
post-retirement benefits be accrued during employees' working careers. The
Corporation elected to adopt FAS No. 106 by means of a catch-up adjustment.
This change in accounting as of January 1, 1993, had the effect of decreasing
net income by $112.2 million, or $1.25 per share, after a deferred tax benefit
of $76.3 million.
Prior to 1993, the Corporation expensed such benefits as paid. Expense
recognized under FAS No. 106 during 1993 incrementally reduced net income by
$5.9 million.
Net post-retirement benefit costs consisted of the following components:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 3,262 $ 3,642 $ 3,997
Interest cost on projected benefit obligations 12,918 13,334 12,897
Amortization (2,322) (1,028) (280)
------- ------- -------
Total $13,858 $15,948 $16,614
======= ======= =======
Obligations are unfunded and the actuarial present values of accumulated
post-retirement benefit obligations recognized in the consolidated balance
sheets were as follows:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Retirees $ 78,090 $ 92,051
Fully eligible active plan participants 24,686 26,030
Other active plan participants 57,448 49,338
-------- --------
Total 160,224 167,419
Plan amendments 31,377 19,224
Unrecognized net gain from past experience different than
that assumed 20,892 20,285
-------- --------
Accrued post-retirement benefits $212,493 $206,928
======== ========
The accumulated post-retirement benefit obligations were determined
principally using discount rates of 7.25% and 8.5% as of December 31, 1995 and
1994, respectively. The assumed average health care cost trend rate used in
measuring the accumulated post-retirement benefit obligation as of December
31, 1995, was 6% which was also the ultimate trend rate. As of December 31,
1994, this rate
A-21
was 12%, gradually declining to approximately 7% by 2003. A one percentage
point increase in the average health care cost trend rate for each year would
increase the accumulated post-retirement benefit obligations as of December
31, 1995 and 1994, by $22.2 million and $23.5 million, respectively, and would
increase the sum of the net service and interest cost components of net post-
retirement benefit costs for 1995 and 1994 by $2.4 million and $2.8 million,
respectively.
The pre-tax impact on post-retirement benefits expense and liabilities of
the 1995 charge for the voluntary retirement program was $.4 million or $.2
million after tax. This amount has not been included in the disclosure of net
post-retirement benefit costs by component.
As part of its long-range financing plans, the Corporation, in 1989,
implemented a corporate-owned life insurance program covering most of its
domestic employees. After paying employee death benefits, proceeds from this
program will be available for general corporate purposes and may be used to
offset future employee benefits costs, including retiree medical benefits. The
Corporation's investment in corporate-owned life insurance policies was
recorded net of policy loans in other assets, and interest accrued on the
policy loans was included in accrued liabilities as of December 31, 1995 and
1994. Net life insurance expense, including interest expense, was included in
selling, marketing and administrative expenses.
13. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the
primary vehicle for contributions to its existing employee savings and stock
investment 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 1995 and 1994, 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 79,588 shares of Common
Stock each year. As of December 31, 1995, the ESOP held 285,757 of allocated
shares and 875,464 of 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 $40 1/8 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to
the ESOP for 1995, 1994 and 1993 was $1.9 million, $1.7 million and $2.0
million, respectively. Dividends paid on unallocated ESOP shares were $1.2
million in 1995, 1994 and 1993. 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.
14. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1995, 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, 1995, a combined total of 89,975,436
shares of both classes of common stock had been issued of which 77,265,883
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1995.
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
A-22
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 1995, 1994 and 1993, a total of 1,525 shares, 10,300
shares and 4,000 shares, respectively, of Class B Stock were converted into
Common Stock.
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 12,300,979 shares of the Common Stock, and as Trustee
for the benefit of Milton Hershey School, held 15,153,003 shares of the Class
B Stock as of December 31, 1995, and was entitled to cast approximately 76% 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.
In 1993, the Corporation's Board of Directors approved a share repurchase
program to acquire from time to time, through open market or privately
negotiated transactions, up to $200 million of Common Stock. A total of
3,923,780 shares of Common Stock had been acquired for approximately $197.7
million under the program, of which 264,000 shares were retired and the
remaining 3,659,780 shares were held as Treasury Stock as of December 31,
1995.
In August 1995, the Corporation purchased an additional 9,049,773 shares of
its Common Stock to be held as Treasury Stock from the Milton Hershey School
Trust for $500.0 million. In connection with the share repurchase program
begun in 1993, a total of 2,000,000 shares were also acquired from the Milton
Hershey School Trust in 1993 for approximately $103.1 million. As of December
31, 1995, a total of 12,709,553 shares were held as Treasury Stock.
Net income per share has been computed based on the weighted average number
of shares of the Common Stock and the Class B Stock outstanding during the
year. Average shares outstanding were 82,843,541 for 1995, 87,018,626 for 1994
and 89,757,135 for 1993.
15. INCENTIVE PLAN
The long-term portion of the 1987 Key Employee Incentive Plan, as amended
(Plan), provides for grants or awards to senior executives and key employees
of one or more of the following: performance stock units, non-qualified stock
options (stock options), stock appreciation rights and restricted stock units.
The Plan also provides for the deferral of performance stock unit awards by
participants.
As of December 31, 1995, a total of 133,365 contingent performance stock
units had been granted for potential future distribution, primarily related to
three-year cycles ending December 31, 1995, 1996 and 1997. Deferred
performance stock units and accumulated dividend amounts totaled 211,113
shares as of December 31, 1995.
Stock options are granted at exercise prices of not less than 100% of the
fair market value of a share of Common Stock at the time the option is granted
and are exercisable for periods no longer than ten years from the date of
grant. Each option may be used to purchase one share of Common Stock. No
compensation expense is recognized under the stock options portion of the
Plan.
No stock appreciation rights or restricted stock units were outstanding as
of December 31, 1995. Stock options exercisable as of December 31, 1995 and
1994 were 1,450,900 shares and 1,734,750 shares, respectively.
A-23
Stock option activity was as follows:
SHARES UNDER OPTIONS
-----------------------------
NUMBER OPTION PRICE
OF SHARES PER SHARE
- -------------------------------------------------------------
Outstanding--January 1, 1993 1,716,975 $25 3/8 to 44 3/4
Granted 116,600 $47 to 53
Exercised (82,850) $25 3/8 to 35 3/8
Cancelled (20,300) $44 3/4
---------
Outstanding--December 31, 1993 1,730,425 $25 3/8 to 53
Granted 963,800 $49
Exercised (104,975) $25 3/8 to 44 3/4
Cancelled (55,300) $44 3/4 to 49
---------
Outstanding--December 31, 1994 2,533,950 $25 3/8 to 53
Granted 118,700 $48 3/8
Exercised (421,550) $25 3/8 to 47
Cancelled (13,200) $44 3/4 to 49
---------
Outstanding--December 31, 1995 2,217,900 $25 3/8 to 53
=========
16. SUPPLEMENTAL BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE--TRADE
In the normal course of business, the Corporation extends credit to
customers which satisfy pre-defined credit criteria. The Corporation believes
that it has little concentration of credit risk due to the diversity of its
customer base. Receivables, as shown on the consolidated balance sheets, were
net of allowances and anticipated discounts of $14.8 million and $14.0 million
as of December 31, 1995 and 1994, 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. LIFO cost of inventories valued using the
LIFO method was $282.0 million and $318.5 million as of December 31, 1995 and
1994, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
DECEMBER 31, 1995 1994
-----------------------------------------
IN THOUSANDS OF
DOLLARS
Raw materials $189,371 $234,317
Goods in process 28,201 28,680
Finished goods 249,106 247,272
-------- --------
Inventories at FIFO 466,678 510,269
Adjustment to LIFO (69,108) (64,567)
-------- --------
Total inventories $397,570 $445,702
======== ========
A-24
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances included construction in progress of
$119.5 million and $76.9 million as of December 31, 1995 and 1994,
respectively. Major classes of property, plant and equipment were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Land $ 35,385 $ 50,678
Buildings 471,663 467,950
Machinery and equipment 1,683,338 1,604,901
---------- ----------
Property, plant and equipment, gross 2,190,386 2,123,529
Accumulated depreciation (754,377) (655,132)
---------- ----------
Property, plant and equipment, net $1,436,009 $1,468,397
========== ==========
ACCRUED LIABILITIES
Accrued liabilities were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Payroll and other compensation $ 97,710 $ 67,155
Advertising and promotion 87,368 81,561
Other 115,471 116,567
---------- ----------
Total accrued liabilities $ 300,549 $ 265,283
========== ==========
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Accrued post-retirement benefits $ 204,044 $ 198,251
Other 129,770 104,805
---------- ----------
Total other long-term liabilities $ 333,814 $ 303,056
========== ==========
A-25
17. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the domestic and foreign manufacture, distribution and sale of
chocolate, confectionery, grocery and pasta products. The Corporation's
principal operations and markets are located in the United States.
Operations in Canada and Europe represent the majority of the Corporation's
foreign business. Historically, transfers of product between geographic areas
have not been significant. In 1995 and 1994, sales to Wal-Mart Stores, Inc. and
Subsidiaries amounted to approximately 11% and 10% of total net sales,
respectively. Net sales, income before interest, income taxes and accounting
changes, and identifiable assets by geographic segment were as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Net sales:
Domestic $3,218,935 $3,124,155 $3,080,329
Foreign 471,732 482,116 407,920
---------- ---------- ----------
Total $3,690,667 $3,606,271 $3,488,249
========== ========== ==========
Income (loss) before interest, income taxes
and accounting changes:
Domestic $ 499,161 $ 446,585 $ 446,565
Foreign 11,625 (78,090) 10,663
Gain on sale of investment interest -- -- 80,642
---------- ---------- ----------
Total $ 510,786 $ 368,495 $ 537,870
========== ========== ==========
Identifiable assets as of December 31:
Domestic $2,336,078 $2,338,184 $2,281,766
Foreign 494,545 552,797 573,325
---------- ---------- ----------
Total $2,830,623 $2,890,981 $2,855,091
========== ========== ==========
18. QUARTERLY DATA (UNAUDITED)
Summary quarterly results were as follows:
YEAR 1995 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
Net sales $867,446 $722,269 $981,101 $1,119,851
Gross profit 364,085 298,506 408,658 493,144
Net income 60,633 33,323 82,127 105,836(a)
Net income per share(b) .70 .38 1.02 1.37
YEAR 1994 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
Net sales $883,890 $675,983 $966,511 $1,079,887
Gross profit 357,162 272,883 404,543 474,127
Net income 53,016 25,325 81,063 24,815(c)
Net income per share .61 .29 .93 .29
- --------
(a) Net income for the fourth quarter and year 1995 included a net after-tax
credit of $2.0 million associated with adjustments to accrued restructuring
reserves. Net income per share was similarly impacted.
(b) Quarterly income per share amounts for 1995 do not total to the annual
amount due to the changes in weighted average shares outstanding during the
year.
(c) Net income for the fourth quarter and year 1994 included an after-tax
restructuring charge of $80.2 million. Net income per share was similarly
impacted.
A-26
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 generally
accepted accounting principles 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 financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose appointment was ratified by stockholder
vote at the stockholders' meeting held on April 24, 1995. Their report
expresses an opinion that the Corporation's financial statements are fairly
stated in conformity with generally accepted accounting principles, and they
have indicated to us that their examination was performed in accordance with
generally accepted auditing standards 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
public accountants, internal auditors and management to discuss, among other
things, the audit scopes and results. Arthur Andersen LLP and the internal
auditors both have full and free access to the Audit Committee, with and
without the presence of management.
A-27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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,
1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, appearing on pages A-9 through A-26. 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 generally accepted auditing
standards. 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, 1995 and 1994, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes 10 and 12 to the consolidated financial statements,
effective January 1, 1993, the Corporation changed its methods of accounting
for income taxes and post-retirement benefits other than pensions.
/s/ Arthur Andersen
New York, New York
January 25, 1996
A-28
HERSHEY FOODS CORPORATION
ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS EXCEPT
MARKET PRICE AND PER SHARE STATISTICS
10-YEAR
COMPOUND
GROWTH RATE 1995 1994 1993
----------- ---------- ------------- -------------
SUMMARY OF
OPERATIONS(a)
Net Sales 9.2% $3,690,667 3,606,271 3,488,249
---------- ------------- -------------
Cost of Sales 8.0% $2,126,274 2,097,556 1,995,502
Selling, Marketing and
Administrative 11.8% $1,053,758 1,034,115 1,035,519
Restructuring Credit,
(Charge) and Gain,
Net $ 151 (106,105) --
Gain on Sale of
Investment Interest $ -- -- 80,642
Interest Expense, Net 15.9% $ 44,833 35,357 26,995
Income Taxes 7.2% $ 184,034 148,919 213,642
---------- ------------- -------------
Income from Continuing
Operations Before
Accounting Changes 11.3% $ 281,919 184,219 297,233
Net Cumulative Effect
of Accounting Changes $ -- -- (103,908)
Discontinued
Operations $ -- -- --
---------- ------------- -------------
Net Income 9.6% $ 281,919 184,219 193,325
========== ============= =============
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 12.7% $ 3.40(g) 2.12(h) 3.31(i)
Net Cumulative Effect
of Accounting Changes $ -- -- (1.16)
Net Income(b) 11.1% $ 3.40(g) 2.12(h) 2.15(i)
Weighted Average
Shares Outstanding(b) 82,844 87,019 89,757
Dividends Paid on
Common Stock 9.3% $ 91,190 89,660 84,711
Per Share(b) 11.2% $ 1.370 1.250 1.140
Dividends Paid on
Class B Common Stock 11.2% $ 18,900 17,301 15,788
Per Share(b) 11.2% $ 1.240 1.135 1.035
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 7.6% 7.3%(c) 7.4%(d)
Depreciation 15.5% $ 119,438 114,821 100,124
Advertising 7.5% $ 159,200 120,629 130,009
Promotion 14.3% $ 402,454 419,164 444,546
Payroll 7.6% $ 461,928 472,997 469,564
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 8.6% $ 140,626 138,711 211,621
Total Assets 9.8% $2,830,623 2,890,981 2,855,091
Long-term Portion of
Debt 15.2% $ 357,034 157,227 165,757
Stockholders' Equity 4.1% $1,082,959 1,441,100 1,412,344
Net Book Value Per
Share(b) 6.1% $ 14.02 16.61 16.12
Operating Return on
Average Stockholders'
Equity 22.2% 18.5% 17.8%
Operating Return on
Average Invested
Capital 17.1% 15.6% 15.0%
Full-time Employees 13,300 14,000 14,300
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 77,266 86,735 87,613
Market Price of Common
Stock at Year-end(b) 14.3% $ 65 48 3/8 49
Range During Year(b) $67 7/8-48 53 1/2-41 1/8 55 7/8-43 1/2
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-31.
A-29
1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ ------------
SUMMARY OF
OPERATIONS(a)
Net Sales 3,219,805 2,899,165 2,715,609 2,420,988 2,168,048 1,863,816
------------- ------------- ------------- ------------- ------------- -------------
Cost of Sales 1,833,388 1,694,404 1,588,360 1,455,612 1,326,458 1,149,663
Selling, Marketing and
Administrative 958,189 814,459 776,668 655,040 575,515 468,062
Restructuring Credit,
(Charge) and Gain,
Net -- -- 35,540 -- -- --
Gain on Sale of
Investment Interest -- -- -- -- -- --
Interest Expense, Net 27,240 26,845 24,603 20,414 29,954 22,413
Income Taxes 158,390 143,929 145,636 118,868 91,615 99,604
------------- ------------- ------------- ------------- ------------- -------------
Income from Continuing
Operations Before
Accounting Changes 242,598 219,528 215,882 171,054 144,506 124,074
Net Cumulative Effect
of Accounting Changes -- -- -- -- -- --
Discontinued
Operations -- -- -- -- 69,443 24,097
------------- ------------- ------------- ------------- ------------- -------------
Net Income 242,598 219,528 215,882 171,054 213,949 148,171
============= ============= ============= ============= ============= =============
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 2.69 2.43 2.39(j) 1.90 1.60 1.38
Net Cumulative Effect
of Accounting Changes -- -- -- -- -- --
Net Income(b) 2.69 2.43 2.39(j) 1.90 2.37 1.64
Weighted Average
Shares Outstanding(b) 90,186 90,186 90,186 90,186 90,186 90,186
Dividends Paid on
Common Stock 77,174 70,426 74,161(e) 55,431 49,433 43,436
Per Share(b) 1.030 .940 .990(e) .740 .660 .580
Dividends Paid on
Class B Common Stock 14,270 12,975 13,596(e) 10,161 9,097 8,031
Per Share(b) .935 .850 .890(e) .665 .595 .525
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 7.5% 7.6% 7.2%(f) 7.1% 6.7% 6.7%
Depreciation 84,434 72,735 61,725 54,543 43,721 35,397
Advertising 137,631 117,049 146,297 121,182 99,082 97,033
Promotion 398,577 325,465 315,242 256,237 230,187 171,162
Payroll 433,162 398,661 372,780 340,129 298,483 263,529
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 249,795 226,071 179,408 162,032 101,682 68,504
Total Assets 2,672,909 2,341,822 2,078,828 1,814,101 1,764,665 1,544,354
Long-term Portion of
Debt 174,273 282,933 273,442 216,108 233,025 280,900
Stockholders' Equity 1,465,279 1,335,251 1,243,537 1,117,050 1,005,866 832,410
Net Book Value Per
Share(b) 16.25 14.81 13.79 12.39 11.15 9.23
Operating Return on
Average Stockholders'
Equity 17.3% 17.0% 16.6% 16.1% 17.5% 19.0%
Operating Return on
Average Invested
Capital 14.4% 13.8% 13.4% 13.2% 13.3% 13.5%
Full-time Employees 13,700 14,000 12,700 11,800 12,100 10,540
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 90,186 90,186 90,186 90,186 90,186 90,186
Market Price of Common
Stock at Year-end(b) 47 44 3/8 37 1/2 35 7/8 26 24 1/2
Range During Year(b) 48 3/8-38 1/4 44 1/2-35 1/8 39 5/8-28 1/4 36 7/8-24 3/4 28 5/8-21 7/8 37 3/4-20 3/4
1986 1985
--------- -------------
SUMMARY OF
OPERATIONS(a)
Net Sales 1,635,486 1,526,584
--------- -------------
Cost of Sales 1,032,061 982,370
Selling, Marketing and
Administrative 387,227 345,299
Restructuring Credit,
(Charge) and Gain,
Net -- --
Gain on Sale of
Investment Interest -- --
Interest Expense, Net 8,061 10,240
Income Taxes 100,931 91,910
--------- -------------
Income from Continuing
Operations Before
Accounting Changes 107,206 96,765
Net Cumulative Effect
of Accounting Changes -- --
Discontinued
Operations 25,558 15,462
--------- -------------
Net Income 132,764 112,227
========= =============
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 1.15 1.03
Net Cumulative Effect
of Accounting Changes -- --
Net Income(b) 1.42 1.19
Weighted Average
Shares Outstanding(b) 93,508 94,011
Dividends Paid on
Common Stock 40,930 37,386
Per Share(b) .520 .475
Dividends Paid on
Class B Common Stock 7,216 6,556
Per Share(b) .472 .428
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 6.6% 6.3%
Depreciation 31,254 28,348
Advertising 83,600 77,135
Promotion 122,508 105,401
Payroll 238,742 222,267
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 74,452 61,361
Total Assets 1,262,332 1,116,074
Long-term Portion of
Debt 185,676 86,986
Stockholders' Equity 727,941 727,899
Net Book Value Per
Share(b) 8.07 7.74
Operating Return on
Average Stockholders'
Equity 18.2% 17.2%
Operating Return on
Average Invested
Capital 13.5% 13.5%
Full-time Employees 10,210 10,380
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 90,186 94,011
Market Price of Common
Stock at Year-end(b) 24 5/8 17 1/8
Range During Year(b) 30-15 1/2 18 3/8-11 5/8
A-30
NOTES TO THE ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(a) All amounts for years prior to 1988 have been restated for discontinued
operations, where applicable. Operating Return on Average Stockholders'
Equity and Operating Return on Average Invested Capital have been computed
using Net Income, excluding the 1988 gain and 1985 loss on disposal
included in Discontinued Operations, the 1993 Net Cumulative Effect of
Accounting Changes, and the after-tax impacts of the 1990 Restructuring
Gain, Net, the 1993 Gain on Sale of the Investment Interest in Freia
Marabou a.s (Freia), the 1994 Restructuring Charge and the net 1995
Restructuring Credit.
(b) All shares and per share amounts have been adjusted for the three-for-one
stock split effective September 15, 1986.
(c) Calculated percent excludes the 1994 Restructuring Charge. Including the
charge, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 5.1%.
(d) Calculated percent excludes the Gain on Sale of Investment Interest in
Freia. Including the gain, Income from Continuing Operations Before
Accounting Changes as a Percent of Net Sales was 8.5%.
(e) Amounts included a special dividend for 1990 of $11.2 million or $.15 per
share of Common Stock and $2.1 million or $.135 per share of Class B
Common Stock.
(f) Calculated percent excludes the 1990 Restructuring Gain, Net. Including
the gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 7.9%.
(g) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1995 included a net $.02 per share credit
associated with adjustments to accrued restructuring reserves. Excluding
the impact of this net credit, Income Per Share from Continuing Operations
Before Accounting Changes and Net Income Per Share would have been $3.38.
(h) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1994 included a $.92 per share restructuring
charge. Excluding the impact of this charge, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $3.04.
(i) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1993 included a $.45 per share gain on the sale
of the investment interest in Freia. Excluding the impact of this gain,
Income Per Share from Continuing Operations Before Accounting Changes
would have been $2.86.
(j) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1990 included a $.22 per share Restructuring
Gain, Net. Excluding the impact of this gain, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $2.17.
A-31
- --------------------------------------------------------------------------------
HERSHEY FOODS CORPORATION THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS
P The undersigned, having received the Notice of Meeting and Proxy
Statement dated March 18, 1996, appoints K. L. Wolfe, J. P. Viviano, and
R. M. Reese, and each or any of them as Proxies, with full power of
substitution, to represent and vote all of the undersigned's shares of
R the Corporation's Common Stock at the Annual Meeting of Stockholders to
be held at 2:00 P.M., April 30, 1996, at the Hershey Theatre, East
Caracas Avenue, Hershey, Pennsylvania, or at any adjournment thereof.
O THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S), WHO SHALL BE
ENTITLED TO ONE VOTE FOR EACH SUCH SHARE HELD. IF NO DIRECTION IS MADE,
THE PROXY WILL BE VOTED FOR THE ELECTION OF THE ELEVEN NOMINEES FOR
X DIRECTOR AND FOR ITEM 2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2.
Y ITEM 1. Election of M.J. McDonald and V.A. Sarni as Directors by holders
of the Common Stock voting as a class; and election of the
following as Directors by holders of the Common Stock and the
Class B Common Stock voting together without regard to class:
W.H. Alexander, R.H. Campbell, C.M. Evarts, T.C. Graham, B.
Guiton Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L.
Wolfe.
(item 1. continued on back)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[_] FOR all nominees [_] WITHHOLD AUTHORITY to vote for all nominees
To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.
FOR AGAINST ABSTAIN
--- ------- -------
ITEM 2. Approval of Arthur Andersen LLP as the
Corporation's independent public accountants
for 1996. [_] [_] [_]
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
-----------------------------------
Signature Date
-----------------------------------
Signature Date
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HERSHEY FOODS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 18, 1996, appoints K. L. Wolfe, J. P. Viviano and R. M. Reese and
each or any of them as Proxies, with full power of substitution, to represent
and vote all of the undersigned's shares of the Corporation's Common Stock at
the Annual Meeting of Stockholders to be held at 2:00 P.M., April 30, 1996, at
the Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania, or at any
adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S), WHO SHALL BE ENTITLED
TO ONE VOTE FOR EACH SUCH SHARE HELD. IF NO DIRECTION IS MADE, THE PROXY WILL
BE VOTED FOR THE ELECTION OF THE ELEVEN NOMINEES FOR DIRECTOR AND FOR ITEM 2.
EXCEPT WITH REGARD TO VOTING SEPARATELY AS A CLASS ON THE ELECTION OF MESSRS.
MCDONALD AND SARNI, SHARES OF THE COMMON STOCK WILL VOTE TOGETHER WITH SHARES
OF THE CLASS B COMMON STOCK WITHOUT REGARD TO CLASS.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
- --------------------------------------------------------------------------------
[MAP OF HERSHEY APPEARS HERE]
This map will help you
find your way to the
Hershey Theatre
located on
East Caracas Avenue,
Hershey, PA
- --------------------------------------------------------------------------------
[MAP OF HERSHEY APPEARS HERE]
This map will help you
find your way to the
Hershey Theatre
located on
East Caracas Avenue,
Hershey, PA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[X] Please mark
your votes
this way
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2.
ITEM 1. Election of M.J. McDonald and V.A. Sarni as Directors by holders of the
Common Stock voting as a class; and election of the following as Directors by
holders of the Common Stock and the Class B Common Stock voting together with-
out regard to class: W.H. Alexander, R.H. Campbell, C.M. Evarts, T.C. Graham,
B. Guiton Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
WITHHOLD
FOR AUTHORITY
FOR all for
all Nominees all
Nominees Except* Nominees
[_] [_] [_]
*Exceptions:
--------------------------------------------------------------------
ITEM 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1996.
For Against Abstain
[_] [_] [_]
- --------------------------------------------------------------------------------
In their discretion, the Proxies are authorized to vote for a substitute should
any nominee become unavailable for election and upon such other business as may
properly come before the meeting.
If you plan to attend the WILL
Annual Meeting, please mark ATTEND
the Will Attend block. [_]
Signature(s) Date ,1996
-------------------------------------------- --------
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ATTORNEYS, GUARDIANS, ETC., SHOULD SO INDICATE WHEN
SIGNING.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Detach here
[ART APPEARS HERE]
- --------------------------------------------------------------------------------
[ART APPEARS HERE]
- --------------------------------------------------------------------------------
HERSHEY FOODS CORPORATION
EMPLOYEE SAVINGS STOCK INVESTMENT AND OWNERSHIP PLAN
THIS VOTING INSTRUCTION IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 18, 1996, instructs American Express Trust Company*, as Trustee, to
represent and vote all of the shares of Common Stock of Hershey Foods
Corporation which are credited to my account under the above Plan at the Annual
Meeting of Stockholders to be held at 2:00 P.M., April 30, 1996 or at any
adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED BY THE
TRUSTEE IN THE MANNER DIRECTED. IF NO DIRECTION IS GIVEN, OR IS RECEIVED BY THE
TRUSTEE AFTER APRIL 23, 1996, THE SHARES IN THE EMPLOYEE SAVINGS STOCK
INVESTMENT AND OWNERSHIP PLAN (ESSIOP) WILL BE VOTED BY THE TRUSTEE IN
PROPORTION TO THE FINAL AGGREGATE VOTE OF THE PLAN PARTICIPANTS ACTUALLY VOTING
ON THE MATTER. EXCEPT WITH REGARD TO VOTING SEPARATELY AS A CLASS ON THE
ELECTION OF MESSRS. MCDONALD AND SARNI, SHARES OF THE COMMON STOCK WILL VOTE
TOGETHER WITH SHARES OF THE CLASS B COMMON STOCK WITHOUT REGARD TO CLASS.
THIS VOTING INSTRUCTION CARD IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
* American Express Trust Company, Trustee, has appointed Chemical Mellon
Shareholder Services as agent to tally the vote.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[_] Please mark
your votes
this way
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2.
ITEM 1. Election of M.J. McDonald and V.A. Sarni as Directors by holders of the
Common Stock voting as a class; and election of the following as Directors by
holders of the Common Stock and the Class B Common Stock voting together with-
out regard to class: W.H. Alexander, R.H. Campbell, C.M. Evarts, T.C. Graham,
B. Guiton Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
WITHHOLD
FOR AUTHORITY
FOR all for
all Nominees all
Nominees Except* Nominees
[_] [_] [_]
*Exceptions:
--------------------------------------------------------------------
ITEM 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1996.
For Against Abstain
[_] [_] [_]
- --------------------------------------------------------------------------------
Signature(s) Date ,1996
-------------------------------------------- --------
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ATTORNEYS, GUARDIANS, ETC., SHOULD SO INDICATE WHEN
SIGNING.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Detach Here
HERSHEY FOODS CORPORATION
CLASS B COMMON STOCK
This Proxy is Solicited on
behalf of the Board of
Directors
The undersigned, having received the Notice of Meeting and Proxy Statement dated
March 18, 1996, appoints K.L. Wolfe, J.P. Viviano, and R.M. Reese and each or
any of them as Proxies, with full power of substitution, to represent and vote
all of the undersigned's shares of the Corporation's Class B Common Stock at the
Annual Meeting of Stockholders to be held at 2:00 P.M., April 30, 1996, at the
Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania, or at any
adjournment thereof.
The shares of Class B Common Stock represented by this proxy will be voted in
the manner directed herein by the undersigned stockholder(s), who shall be
entitled to ten votes for each such share held. If no direction is made, the
proxy will be voted FOR the election of the nine nominees for Director listed on
the reverse side and FOR Item 2.
This proxy is continued on reverse side.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2
Item 1. Election of the following as Directors by holders of the Common Stock
and the Class B Common Stock voting together without regard to class:
W.H. Alexander, R.H. Campbell, C.M. Evarts, T.C. Graham, B. Guiton
Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
[_] FOR all nominees [_] WITHHOLD AUTHORITY for all nominees
To withhold authority to vote for any individual nominee, write the nominee's
name in the space below:
Item 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1996.
FOR AGAINST ABSTAIN
--- ------- -------
[_] [_] [_]
In their discretion, the Proxies are authorized to vote upon such other business
as may come before the meeting.
Dated:_______ ___, 1996
_________________________________________
Signature
_________________________________________
Signature
Please mark, sign (exactly as name(s) appears above), date and mail this card
promptly in the postage prepaid return envelope provided. Executors,
administrators, trustees, attorneys, guardians, etc., should so indicate when
signing.
Enclosures
March 18, 1996
TO: HERSHEY EMPLOYEE STOCK PURCHASE PLAN (HESPP) PARTICIPANTS
I am pleased to provide you a copy of Hershey Foods' 1995 Annual Report to
Stockholders. This mailing of Annual Reports to our HESPP participants has
been designed to eliminate the duplicate mailing of Annual Reports to those
participants who will receive an Annual Report as a result of participation
in another employee plan. Your proxy card for voting your shares in HESPP
along with the Proxy Statement will be arriving shortly, directly from
Merrill Lynch. Your completed card should be returned in the envelope
Merrill Lynch provides.
If you should have any questions, you can call the Law Department at (717)
534-7911.
Remember, your vote is important.
--
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
Enclosures
March 18, 1996
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
Enclosed for your attention is a voting instruction card and a Proxy
Statement which explains the items to be voted upon at this year's Annual
Meeting of Stockholders on April 30, 1996. Your completed card must be
received by April 23, 1996 in order to be tallied. For your convenience in
returning the voting card, a postage-paid envelope is provided. I urge you
to take advantage of this opportunity to have the shares being held for you
voted at the Annual Meeting.
This mailing of the voting instruction card and Proxy Statement to ESSIOP
participants has been designed to eliminate the duplicate mailing of Annual
Reports to those employees who will receive such as a registered
stockholder.
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card from Merrill
Lynch for voting those shares.
If you should have any questions, you can call the Law Department at (717)
534-7911.
Remember, your vote is important.
--
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
Chairman and Chief Executive Officer
Enclosures
March 18, 1996
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a copy of Hershey Foods' 1995 Annual Report
to Stockholders. Also enclosed is a voting instruction card and a Proxy
Statement which explains the items upon which you are voting. Your
completed card must be received by April 23, 1996 in order to be tallied.
For your convenience in returning the voting card, a postage-paid envelope
is provided. I urge you to take advantage of this opportunity to have the
shares being held for you voted at the Annual Meeting of Stockholders on
April 30, 1996.
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card from Merrill
Lynch for voting those shares.
If you should have any questions, you can call the Law Department at (717)
534-7911.
Remember, your vote is important.
--
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
