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 [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HERSHEY FOODS CORPORATION
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(Name of Registrant as Specified In Its Charter)
--Enter Company Name Here--
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
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[_] Fee paid previously with preliminary materials.
[_] 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
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Notes:
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
Notice of 1998 Annual Meeting
Proxy Statement
Consolidated Financial Statements and Management's Discussion and Analysis
March 16, 1998
To Our Stockholders:
It is my pleasure to invite you to attend the 1998 Annual Meeting of
Stockholders of Hershey Foods Corporation, to be held at 2:00 p.m. on
April 28, 1998. 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. CHOCOLATE WORLD is
celebrating its 25th anniversary with an exciting new tour ride presentation.
We will be offering stockholders a special 25% discount on confectionery
products and Hershey's gift and souvenir items. In addition, product samples
for stockholders will be distributed and refreshments will be available at
CHOCOLATE WORLD. 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 page of this Proxy
Statement.
Business scheduled to be considered at the meeting includes the election of
ten directors and the approval of the appointment of Arthur Andersen LLP as
independent public accountants for the Corporation for 1998. 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 2, 1998. 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.
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
Description of the Milton Hershey School Trust and Hershey Trust
Company................................................................ 5
Election of Directors................................................... 6
The Board of Directors and its Committees............................... 9
Compensation of Directors............................................... 11
Executive Compensation.................................................. 12
Section 16(a) Beneficial Ownership Reporting Compliance................. 21
Certain Transactions and Relationships.................................. 22
Appointment of Auditors................................................. 22
Other Business.......................................................... 22
Stockholder Proposals and Nominations................................... 22
Summary Annual Report and Form 10-K..................................... 23
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S
DISCUSSION AND ANALYSIS.................................................. A- 1
Management's Discussion and Analysis.................................... A- 1
Consolidated Financial Statements....................................... A-12
Notes to Consolidated Financial Statements.............................. A-16
Responsibility for Financial Statements................................. A-32
Report of Independent Public Accountants................................ A-33
Eleven-Year Consolidated Financial Summary.............................. A-34
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON
APRIL 28, 1998
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The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held
at 2:00 p.m. on April 28, 1998 at the Hershey Theatre, East Caracas Avenue,
Hershey, Pennsylvania 17033 for the following purposes:
(1) To elect ten directors;
(2) To approve the appointment of Arthur Andersen LLP as the Corporation's
independent public accountants for 1998; 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 2, 1998 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 16, 1998
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 28,
1998 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 16, 1998. 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 1998. 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 ChaseMellon 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. At the close of business on March 2, 1998, the record date
for the Annual Meeting, there were outstanding 112,637,318 shares of the
Common Stock, and 30,453,908 shares of the Class B Stock, all of which are
entitled to vote. Holders of record of the Corporation's Common Stock on March
2, 1998 will be entitled to cast one vote for each share held, and holders of
record of the Class B Stock on March 2, 1998 will be entitled
2
to cast ten votes for each share held. The Common Stock is entitled to cash
dividends 10% higher than those declared on the Class B Stock.
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 (broker non-votes), those
shares will not be included in the vote totals and, therefore, will have no
effect on the vote.
3
As of March 2, 1998, stockholders noted in the following table owned the
indicated number of shares of the Corporation's Common Stock (including Common
Stock equivalent shares) and Class B Stock. Unless otherwise indicated in a
footnote, the individuals listed below have voting and disposition power over
the shares indicated. The voting and disposition power over the shares held by
the Milton Hershey School and School Trust and the Hershey Trust Company are
as indicated in the section entitled "Description of the Milton Hershey School
Trust and Hershey Trust Company".
AMOUNT AND NATURE OF PERCENT
NAME OR GROUP(1) CLASS OF STOCK BENEFICIAL OWNERSHIP OF CLASS
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Milton Hershey School and
School Trust
Founders Hall Common Stock 13,856,450 shares 12.3%
Hershey, PA 17033
Class B
Hershey Trust Company Common Stock 30,306,006 shares 99.5%
100 Mansion Road East
Hershey, PA 17033
Hershey Trust Company Common Stock 769,945 shares *
W. H. Alexander, Director Common Stock 4,204 shares/(2)/(4)/ *
R. H. Campbell, Director Common Stock 3,492 shares/(2)/ *
C. M. Evarts, Director Common Stock 1,093 shares/(2)/ *
B. Guiton Hill, Director Common Stock 2,513 shares/(2)/(5)/ *
J. C. Jamison, Director Common Stock 15,088 shares/(2)/ *
M. J. McDonald, Director Common Stock 1,221 shares/(2)/ *
J. M. Pietruski, Director Common Stock 9,056 shares/(2)/ *
V. A. Sarni, Director Common Stock 6,458 shares/(2)/ *
K. L. Wolfe, Director, Common Stock 143,190 shares/(3)/ *
Chairman of the Board
and Chief Executive Officer
J. P. Viviano, Director, Common Stock 125,567 shares/(3)/ *
President and Chief
Operating Officer
M. F. Pasquale Common Stock 66,829 shares/(3)/ *
President, Hershey Chocolate
North America
W. F. Christ Common Stock 49,971 shares/(3)/ *
Senior Vice President,
Chief Financial Officer and
Treasurer
C. M. Skinner** Common Stock 32,122 shares/(3)/ *
Vice Chair, Hershey Pasta
and Grocery Group
All current Directors, Common Stock 584,384 shares/(2)/(3)/ *
Nominees for Director and
Executive Officers as a Group
(19 persons)
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* Less than 1%
** Mr. Skinner retired from the Corporation on January 1, 1998.
4
/(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
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.
/(2)/ As of March 2, 1998, the following amount of Common Stock equivalent
shares under the Directors' Compensation Plan were credited to the following
non-employee directors named in the above table: W. H. Alexander, 1,568
shares; R. H. Campbell, 2,451 shares; C. M. Evarts, 423 shares; B. Guiton
Hill, 1,331 shares; J. C. Jamison, 4,288 shares; M. J. McDonald, 821 shares;
J. M. Pietruski, 4,256 shares; and V. A. Sarni, 2,380 shares. The shares are
fully vested and may be paid out in Common Stock shares upon the expiration of
the deferral period. The preceding beneficial ownership table INCLUDES these
Common Stock equivalent shares.
/(3)/ Certain 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 stock unit ("PSUs") awards until a future
date. Deferred PSUs may be paid in Common Stock and are fully vested. The
following are the amount of deferred PSU awards as of March 2, 1998 for those
officers named in the preceding table: K. L. Wolfe, 10,026 shares; J. P.
Viviano, 30,126 shares; M. F. Pasquale, 8,404 shares; W. F. Christ, 18,145
shares; and C. M. Skinner, 3,152 shares. As of March 2, 1998, receipt of PSU
awards equivalent to 130,245 shares had been deferred by all current executive
officers as a group. The preceding beneficial ownership table INCLUDES
deferred PSU awards. The following are the amount of stock options exercisable
as of March 2, 1998, held by those officers named in the preceding table: K.
L. Wolfe, 209,500 options; J. P. Viviano, 171,400 options; M. F. Pasquale,
89,600 options; W. F. Christ, 63,700 options; and C. M. Skinner, 0 options;
and all directors and executive officers as a group, 703,900 options. The
preceding beneficial ownership table DOES NOT INCLUDE stock options.
/(4)/ Includes 1,200 shares held in trust for which Mr. Alexander is
trustee.
/(5)/ Includes 150 shares held in trust by Ms. Guiton Hill's husband.
DESCRIPTION OF THE MILTON HERSHEY SCHOOL TRUST
AND HERSHEY TRUST COMPANY
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. 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. 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. Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School ("Milton Hershey School Trust"), will be entitled to
cast 13,856,450 of the total 112,637,318 votes, or 12.3%, entitled to be cast
on matters required to be voted on separately by the holders of the Common
Stock, and 316,916,510 of the total 417,176,398 votes, or 76.0%, entitled to
be cast by the holders of the Common Stock and the Class B Stock voting
together on matters to be voted on without regard to class.
5
Hershey Trust Company is a state chartered trust company and holds 492,945
shares of the Corporation's Common Stock in its capacity as institutional
fiduciary for 61 estates and trusts unrelated to the Milton Hershey School
Trust. The Hershey Trust Company also holds 277,000 shares of Common Stock as
investments. 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.
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 14,626,395 shares of
Common Stock and 30,306,006 shares of Class B Stock at the meeting.
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 fifteen members of the Board of Directors of Hershey
Trust Company and of the Board of Managers of Milton Hershey School, including
William H. Alexander and Dr. C. McCollister Evarts, who are also members of
the Board of Directors of the Corporation, and Kenneth L. Wolfe, who is also a
director and Chairman of the Board and Chief Executive Officer of the
Corporation. Mr. Alexander is also chair of the Board of Directors of Hershey
Trust Company and of the Board of Managers of Milton Hershey School. 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
Ten 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. Each of the nominees named in the following pages is currently a
member of the Board of Directors. Pursuant to the Corporation's Certificate
and By-Laws, one-sixth of the directors, which presently equates to two
directors, is 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 by the Board of Directors for the two
positions to be elected separately by the Common Stock. The remaining eight
individuals listed have been nominated by the Board of Directors for the eight
positions to be elected by the holders of the Common Stock and the Class B
Stock voting together without regard to class. Nominees receiving the greatest
number of votes of the Common Stock and Class B Stock voting together shall be
so 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.
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[PHOTO OF WILLIAM H. ALEXANDER APPEARS HERE]
WILLIAM H. ALEXANDER, age 56, is Administrator of the Family
Business Program, 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;
Merchants and Business Men's Mutual Insurance Company; Penn
National Holding Corporation; Penn State Geisinger Health
System; and Morefield Communications, Inc. He also chairs the
Board of Directors of Hershey Trust Company and the Board of
Managers of Milton Hershey School and is a member of the Board
of Managers of the M. S. Hershey Foundation.
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[PHOTO OF ROBERT H. CAMPBELL APPEARS HERE]
ROBERT H. CAMPBELL, age 60, is Chairman of the Board and Chief
Executive Officer, Sun Company, Inc., Philadelphia,
Pennsylvania, a petroleum refiner and marketer. He has been
Chief Executive Officer since 1991, Chairman of the Board since
1992 and has been a Director of Sun Company, Inc. since 1988.
Previously, he had been Executive Vice President since 1988 and
a Group Vice President since 1983 of Sun Company, Inc. A
Hershey Foods director since 1995, he chairs the Compensation
and Executive Organization Committee and is a member of the
Audit Committee. He is also a director of CIGNA Corporation.
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[PHOTO OF DR. C. MCCOLLISTER EVARTS APPEARS HERE]
DR. C. MCCOLLISTER EVARTS, age 66, is Senior Vice President for
Health Affairs, Dean of the College of Medicine, and Professor
of Orthopaedics, The Pennsylvania State University, College of
Medicine and University Hospitals, The Milton S. Hershey
Medical Center, Hershey, Pennsylvania. He is also the President
and Chief Academic Officer of the Penn State Geisinger Health
System. 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 past Chairman of the Board of Directors of
the Association of Academic Health Centers, a member of the
Association of American Medical Colleges and the National
Academy of Science Institute of Medicine, and serves on the
Board of Directors of Hershey Trust Company, Carpenter
Technology Corporation, Capital Region Economic Development
Corporation, and the Lehigh Valley Hospital; and is a member of
the Board of Managers of Milton Hershey School and the M. S.
Hershey Foundation. A Hershey Foods director since 1996, he is
a member of the Compensation and Executive Organization
Committee.
7
[PHOTO OF BONNIE GUITON HILL APPEARS HERE]
BONNIE GUITON HILL, age 56, is President and Chief Executive
Officer of The Times Mirror Foundation and Vice President of
The Times Mirror Company, a news and information company, Los
Angeles, California. Previously she was Dean, McIntire School
of Commerce, University of Virginia from 1992 through 1996. She
was a member of the California Governor's cabinet, serving from
1991 to 1992. From 1985 to 1991, she held a variety of
presidential appointments, serving as Assistant Secretary in
the Department of Education, Vice Chair of the Postal Rate
Commission and Special Advisor for Consumer Affairs to the
President of the United States. Prior to working in Washington
D.C., Ms. Guiton Hill was a vice president with Kaiser Aluminum
and Chemical Corporation. A Hershey Foods director since 1993,
she chairs 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 Urban League.
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[PHOTO OF JOHN C. JAMISON APPEARS HERE]
JOHN C. JAMISON, age 63, is Chairman, Mallardee Associates, a
privately-held corporate financial services firm, 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 is a member of the
Committee on Directors and Corporate Governance. He is also a
director of Richfood Holdings, Inc.; Riverside Health System,
Inc.; and Williamsburg Winery, Ltd.; and a trustee of The
Mariners Museum.
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[PHOTO OF MACKEY J. MCDONALD APPEARS HERE]
MACKEY J. MCDONALD, age 51, is President and Chief Executive
Officer of VF Corporation, Wyomissing, Pennsylvania, an
international apparel company. He became Chief Executive
Officer of VF Corporation in 1996. Previously, he had been
President and Chief Operating Officer since 1993 and Group Vice
President since 1990 of VF Corporation. He is also a director
of First Union Corporation, Textile/Clothing Technology
Corporation, American Apparel Manufacturers Association,
Fashion Association and a trustee of Davidson College. A
Hershey Foods director since 1996, he is a member of the Audit
Committee and the Compensation and Executive Organization
Committee. He has been nominated for election by the Common
Stock as a class.
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[PHOTO OF JOHN M. PIETRUSKI APPEARS HERE]
JOHN M. PIETRUSKI, age 65, is Chairman of the Board of Texas
Biotechnology Corporation, Houston, Texas, a pharmaceutical
research and development company. He is 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 is a member of the Compensation and Executive
Organization Committee and the Committee on Directors and
Corporate Governance. Mr. Pietruski is also a director of GPU,
Inc.; Lincoln National Corporation; and McKesson Corporation;
and is a regent of Concordia College.
8
[PHOTO OF VINCENT A. SARNI APPEARS HERE]
VINCENT A. SARNI, age 69, is retired Chairman of the Board and
Chief Executive Officer of PPG Industries Inc., Pittsburgh,
Pennsylvania, a manufacturer of glass, coatings and industrial
and specialty chemicals. Mr. Sarni held these positions 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 chairs the
Committee on Directors and Corporate Governance and serves as a
member of the Compensation and Executive Organization
Committee. He is also a director of PNC Financial Corp.; PPG
Industries Inc.; and The LTV Corp. He has been nominated for
election by the Common Stock as a class.
----------------
[PHOTO OF JOSEPH P. VIVIANO APPEARS HERE]
JOSEPH P. VIVIANO, age 59, is President and Chief Operating
Officer, Hershey Foods Corporation. He was President, Hershey
Chocolate U.S.A. (presently part of Hershey Chocolate North
America, 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
part of the Hershey Pasta and Grocery 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 Huffy Corporation and is a member of the Board
of Trustees of Xavier University.
----------------
[PHOTO OF KENNETH L. WOLFE APPEARS HERE]
KENNETH L. WOLFE, age 59, 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 of Milton
Hershey School.
----------------
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 seven regular meetings of the Board of Directors during 1997. No
director attended less than 80% 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 1997. Average
attendance for all of these meetings equalled 97%.
9
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. 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 1997, consists of Ms.
Guiton Hill (Chair), and Messrs. Alexander, Campbell and McDonald. The
Committee's responsibilities include recommending to the full Board the
selection of the Corporation's independent public accountants; discussing the
arrangements for and the scope and results of, the annual audit with
management and the independent public accountants; reviewing 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 activities
and recommendations of the Corporation's Internal Audit Department.
The COMMITTEE ON DIRECTORS AND CORPORATE GOVERNANCE, which held four
meetings during 1997, consists of Messrs. Sarni (Chair), Jamison, Pietruski
and Wolfe. The Committee's responsibilities include reviewing and making
recommendations to the Board on the composition of the Board and its
committees; evaluating and recommending candidates for election to the Board;
administering the Directors' Compensation Plan and the Directors' Charitable
Award Program; and reviewing and making recommendations to the full Board on
corporate governance matters and the Board's corporate governance policies.
The Committee will consider nominees recommended by stockholders. Such
recommendations should be sent 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.
The COMPENSATION AND EXECUTIVE ORGANIZATION COMMITTEE, which held two
meetings during 1997, consists of Messrs. Campbell (Chair), Evarts, McDonald,
Pietruski and Sarni. The Committee sets the salaries of the Corporation's
elected officers; makes grants of performance stock units, stock options and
other rights under the Corporation's Key Employee Incentive Plan ("KEIP");
sets target-award levels and makes awards under the Annual Incentive Program
and the Long-Term Incentive Program of the KEIP; administers the KEIP, the
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 as part of the succession
planning process.
The EXECUTIVE COMMITTEE, which held nine meetings during 1997, consists of
Messrs. Wolfe (Chair) and Viviano. The Committee reviews and recommends to the
full Board for approval major capital projects and expenditures. The Committee
also oversees the administration of and revisions to the Corporation's
retirement and welfare benefit plans, including the pension plans covered by
the Employee Retirement Income Security Act of 1974.
10
COMPENSATION OF DIRECTORS
Directors who are employees of the Corporation receive no additional
remuneration for their services as directors. Non-employee directors received
in 1997 an annual retainer of $42,500 (one-third of which must be paid in
Common Stock); a fee of $1,500 for each Board meeting attended; and a fee of
$1,000 for each Board committee meeting attended. Board committee chairs
receive an annual retainer of $3,000 in addition to meeting fees. Under the
Directors' Compensation Plan, directors may elect to receive their retainer in
cash or Common Stock (meeting and chair fees are payable in cash only), or may
defer receipt of the retainer and meeting fees until their retirement as a
director. The Directors' Compensation Plan offers several investment options
from which directors may choose to invest any retainer and meeting fees that
are deferred. In addition, deferrals may be made into Common Stock equivalent
shares. The plan is not funded by the Corporation.
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 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 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 charitable tax deductions accrue
solely to the Corporation. All current directors and nine retired directors
participate in the program. The amount of the charitable donation per current
participating director is $1,000,000, except for Ms. Guiton Hill, for whom the
current amount is $800,000, and Messrs. Alexander, Campbell, Evarts and
McDonald for whom the current amount is $400,000, because of their shorter
length of service as directors. In December 1996, the Board of Directors
determined that the program would be self-funded, and life insurance policies
on the directors that had previously funded the program were cancelled. In
addition, the Board determined that the program would not be made available to
individuals becoming directors after December 31, 1996.
11
1997 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 that 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
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.
12
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 stock 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 Common Stock.
The Committee determined the total compensation of K. 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 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 1997, 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 objectives
the Committee established in 1996. The Committee also considered Mr. Wolfe's
relative position in his salary grade. Based on these factors, the Committee
increased Mr. Wolfe's salary by $50,000, an 8.2% increase.
ANNUAL 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 Annual Incentive Program ("AIP") of the Corporation's Key Employee
Incentive Plan ("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.
13
The final award is the product of the executive officer's base salary, the
applicable target percentage, a corporate or business unit performance score
and an 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 at the
corporate level, the performance objectives for AIP award payments for 1997
were based on financial measures including earnings per share, return on net
assets and free cash flow. For executive officers at the business unit level,
the performance objectives for 1997 were varying combinations of consolidated
earnings per share, operating income, sales growth, return on business unit
net assets, productivity, quality and cost controls, and free cash flow.
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 executives at the corporate
level in 1997, the relative weights of performance objectives were 40% each
for earnings per share and return on net assets and 20% for free cash flow.
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. The maximum corporate
or business unit performance score for a plan participant is 175%. The maximum
score on the individual performance score is 120%. The applicable individual
performance score for the Chairman of the Board and Chief Executive Officer
and President and Chief Operating Officer is 120% with the Committee having
discretion to adjust this percentage downward. Guidelines have been
established which in certain instances limit the personal performance score in
relationship to the corporate or business unit scores. The range of the target
percentages of base salary used in 1997 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 specific corporate
performance level is achieved. This performance level 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 1997, corporate-level participants (which included Mr. Wolfe) in the AIP
exceeded the corporate performance objectives set for earnings per share,
return on net assets and free cash flow. Based on these results, Mr. Wolfe was
awarded a 1997 annual cash incentive award of $778,750.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE STOCK UNITS
Performance stock units (PSUs) were contingently granted in 1997 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
23 individuals in 1997). PSU grants are based upon a percent of the
executive's annual salary. PSUs are 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 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, return on net assets and
cumulative free cash flow. The performance scores can range from 0% to 150%.
Prior to 1997, the payout on PSU grants was capped at two times the price of
the Corporation's Common Stock on the date of grant. During 1997, the
Committee removed this cap, both on existing and future grants.
14
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 is equal to a multiple of the
individual's base salary. Minimum stockholding requirements for executive
officers range from three to five times base salary. If the minimum has not
been met, the executive officer is required to take the PSU award in Common
Stock (net of withholding taxes) or deferred PSUs. For Mr. Wolfe, the
applicable multiple in 1997 was five times his base salary.
In January 1995, 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 performance objectives established for the grant for earnings per share,
return on net assets and cumulative free cash flow were exceeded for the
period ended December 31, 1997. Accordingly, Mr. Wolfe's award was valued at
$1,770,640 based on the December 1997 averaged value of the PSUs from the 1995
grant.
In January 1997, eligible members of the senior executive group were granted
new contingent PSUs. The grants were consistent with past practices. The
"Long-Term Incentive Program Performance Stock Unit Awards in Year Ended
December 31, 1997" table in this Proxy Statement provides additional
information regarding these grants for the five most highly-compensated
executive officers.
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.
Minimum stockholding requirements are 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 Common Stock. Minimum
stockholding requirements range from one to five times base salary. For Mr.
Wolfe, the applicable multiple in 1997 was five times his base salary.
15
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. Starting in 1997, options granted to the
senior executive group have a two-year vesting requirement similar to that
already applicable to the non-senior management group receiving options. 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 1997, Mr. Wolfe received options to purchase 47,500 shares of Common
Stock with an exercise price of $44.50 per share, the closing market price on
the day preceding the grant.
POLICY REGARDING TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of 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 that it needs to retain the flexibility to
exercise its judgment in assessing an executive's performance and that 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 for
any given year. 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 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 1997, 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 79% of his 1997 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:
Robert H. Campbell, Chairman C. McCollister Evarts Mackey J. McDonald
John M. Pietruski Vincent A. Sarni
16
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows for the fiscal years ending December 31, 1995,
1996 and 1997 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 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------- -----------------------
NUMBER
NAME AND OF STOCK
PRINCIPAL POSITION OPTION LTIP/(3)/ ALL OTHER/(4)/
AS OF 12/31/97 YEAR SALARY/(1)/ BONUS/(2)/ AWARDS PAYOUTS COMPENSATION
- ------------------ ---- ----------- ---------- ---------- ------------ --------------
K. L. Wolfe 1997 $660,000 778,750 47,500 1,770,640 $4,000
Chairman 1996 610,000 787,815 61,000 685,588 3,750
and Chief 1995 570,000 508,246 50,200 469,483 3,750
Executive
Officer
J. P. 1997 $530,000 610,051 32,250 1,211,007 $4,000
Viviano 1996 490,000 533,691 41,500 462,282 3,750
President 1995 460,000 375,983 34,300 312,988 3,750
and Chief
Operating
Officer
M. F. 1997 $340,000 248,710 19,650 761,467 $4,000
Pasquale 1996 317,500 254,722 25,500 378,827 3,750
President, 1995 304,000 171,188 21,500 181,534 3,750
Hershey
Chocolate
North
America
W. F. 1997 $281,000 281,787 13,100 495,412 $4,000
Christ 1996 263,000 237,765 17,000 245,992 3,750
Senior Vice 1995 248,500 188,005 14,200 156,494 3,750
President,
Chief
Financial
Officer and
Treasurer
C. M. 1997 $256,300 228,796 10,600 422,018 $4,000
Skinner 1996 256,300 128,515 14,100 216,473 3,750
Vice Chair, 1995 248,500 91,020 12,100 156,494 3,750
Hershey
Pasta and
Grocery
Group
- --------
/(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 1997 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: 1995-97, 1994-96, and 1993-95 under the KEIP which were paid or
deferred in the fiscal year immediately following the last year of the
respective three-year cycle. Mr. Wolfe deferred receipt of $1,520,610 of his
1997 PSU award.
/(4)/ This column includes the Corporation's matching contributions to the
individual's ESSIOP account for 1995, 1996 and 1997.
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, 1997
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL
% OF TOTAL REALIZABLE VALUE AT
NUMBER STOCK ASSUMED ANNUAL RATES
OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO OR STOCK OPTION TERM
OPTIONS EMPLOYEES BASE PRICE EXPIRATION ------------------------------
NAME GRANTED/(1)/ IN 1997/(2)/ PER SHARE/(3)/ DATE 5%/(4)/ 10%/(4)/
- ---- ------------ ------------ -------------- ---------- -------------- ---------------
K. L. Wolfe 47,500 19.03% $44.50 01/06/07 $1,329,326 $3,368,773
J. P. Viviano 32,250 12.92% 44.50 01/06/07 902,542 2,287,220
M. F. Pasquale 19,650 7.87% 44.50 01/06/07 549,921 1,393,608
W. F. Christ 13,100 5.25% 44.50 01/06/07 366,614 929,072
C. M. Skinner 10,600 4.25% 44.50 01/06/07 296,650 751,768
- ---------------------------------------------------------------------------------------------------------
All Stockholders/(5)/ N/A N/A N/A N/A $4,279,269,932 $10,844,510,190
- --------
/(1)/ All stock options listed in this column are subject to a two-year
vesting period and have a ten year term. The stock options having a $44.50
exercise price were granted on January 7, 1997 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 five years of the date of retirement, total disability
or death (three years for options granted prior to 1997).
/(2)/ In 1997, 23 employees were granted a total of 249,550 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 152,908,556
shares, the number of outstanding shares of Common Stock and Class B Stock on
January 7, 1997, is based on a $44.50 per share price (the exercise price of
the 1997 options). The value of the Common Stock and Class B Stock at $44.50
per share was $6,804,430,742. 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 7, 1997 through
January 6, 2007. 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, 1997 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) 12/31/97/(1)/ 12/31/97/(1)/
- ---- -------- ---------- -------------- --------------
K. L. Wolfe................... 34,000 $1,115,550 209,500 $7,368,531
J. P. Viviano................. 3,400 110,500 175,400 6,299,038
M. F. Pasquale................ 14,500 561,456 89,600 3,155,375
W. F. Christ.................. 10,000 409,306 63,700 2,262,994
C. M. Skinner................. 18,200 539,563 0 0
- --------
/(1)/ All of the stock options were granted under the Key Employee Incentive
Plan. Stock Options granted after 1996 have a two-year vesting period and
therefore are not listed in this table. The fair market value of the Common
Stock on December 31, 1997, the last trading day of the Corporation's fiscal
year, was $61.9375.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE STOCK UNITS
The following table provides information concerning performance stock 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, 1997, are reported in
the Summary Compensation Table.
LONG-TERM INCENTIVE PROGRAM PERFORMANCE STOCK UNIT AWARDS IN YEAR-ENDED
DECEMBER 31, 1997
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................ 11,900 3 years 992 11,900 17,850
J. P. Viviano.............. 8,050 3 years 671 8,050 12,075
M. F. Pasquale............. 4,900 3 years 408 4,900 7,350
W. F. Christ............... 3,300 3 years 275 3,300 4,950
C. M. Skinner.............. 0 n/a 0 0 0
- --------
/(1)/ The performance stock units (PSUs) reported in this table were granted
on January 7, 1997 for the cycle commencing January 1, 1997 and ending
December 31, 1999.
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 is the number of PSUs awarded at the commencement of the three-year
cycle. The second factor relates to the performance score as measured against
predetermined earnings per share, return on net assets and cumulative free
cash flow objectives for the 1997-99 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.
/(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 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 Industry Group Index.
[PERFORMANCE GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
HERSHEY FOODS CORPORATION, S&P 500 INDEX & S&P FOOD GROUP INDEX
- -------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------
HERSHEY $100 $107 $108 $149 $204 $293
S&P 500 $100 $110 $112 $153 $188 $251
S&P FOOD $100 $92 $103 $131 $155 $222
- -------------------------------------------------------------------
*Total return assumes reinvestment of dividends.
Assumes $100 invested on 12/31/92 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
("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 25% 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
Executive officers are eligible to receive pension benefits payable 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. The combined
benefit paid to a participant pursuant to these plans is equal to 55% of that
individual's final average compensation. Final average compensation is
determined by adding the participant's three years' average of base salary and
five years' average annual cash incentive award. The combined amounts paid
under the two plans are reduced by any applicable Social Security benefits
received, by a specified percentage for each month that retirement occurs
before age 60, and by a specified percentage for each year that retirement
occurs prior to the individual completing 15 years of service with the
Corporation.
The final average compensation and the estimated credited years of service
as of December 31, 1997, respectively, for each of the named executive
officers are: K. L. Wolfe, $1,159,337, 28.8 years; J. P. Viviano, $890,261,
29.7 years; M. F. Pasquale, $518,043, 18.4 years; W. F. Christ, $459,228, 27.2
years; and C. M. Skinner, $368,098, 39.1 years.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Corporation's executive officers, directors and 10% stockholders are
required under the Securities 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
21
Corporation's Common 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 inadvertently a report was not timely filed in connection
with one acquisition of the Corporation's Common Stock by the spouse of
director Bonnie Guiton Hill.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1997 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
Hershey, Pennsylvania, and wholly-owned by the Milton Hershey School Trust.
In August 1997, the Corporation purchased 9,900,990 shares of its Common
Stock for approximately $500 million from the Milton Hershey School Trust. The
price per share of $50.50 was determined based on the then market price of the
Common Stock less a discount reflecting the avoidance of transaction costs.
The aggregate value of sales made during 1997 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 $2,200,000. 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.
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, 1998. 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 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
22
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 1998 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 1, 1998.
The 1999 Annual Meeting of Stockholders will be held on April 27, 1999. To
be eligible for inclusion in the Corporation's Proxy Statement for the 1999
Annual Meeting of Stockholders, stockholder proposals must be received by the
Corporation by November 16, 1998.
In accordance with the Corporation's By-Laws, if a stockholder wishes to
make a nomination for director at the 1999 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 February 27, 1999: 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.
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, 1997 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, 1997 accompanies this Proxy Statement. Appendix A 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 16, 1998
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.
23
APPENDIX A
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
PAGE
----
Management's Discussion and Analysis....................................... A-1
Consolidated Financial Statements.......................................... A-12
Notes to Consolidated Financial Statements................................. A-16
Responsibility for Financial Statements.................................... A-32
Report of Independent Public Accountants................................... A-33
Eleven-Year Consolidated Financial Summary................................. A-34
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved record sales and income levels in 1997, following
record sales in 1996. This performance was driven by strategic acquisitions
and divestitures, which increased the focus on profitable North American
confectionery operations, aggressive new product introductions in the
confectionery and grocery categories, and growth in sales of traditional core
confectionery and grocery brands.
Net sales during the two-year period increased at a compound annual rate of
8%, while net income increased at a compound annual rate of 9%. The increase
in net income over the period reflected the growth in sales, partially offset
by a slightly lower gross margin and higher selling, marketing and
administrative expenses.
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 in early 1991. Hershey Pasta Group
implemented selected price increases in late 1995 in an effort to recover
substantial increases in semolina costs.
The following acquisitions and divestitures occurred during the period:
. December 1996--The acquisition from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, of
Huhtamaki's Leaf North America (Leaf) confectionery operations for $437.2
million, plus the assumption of $17.0 million in debt. In addition, the
parties entered into a trademark and technology license agreement under
which the Corporation will manufacture and/or market and distribute in
North, Central and South America Huhtamaki's confectionery brands
including GOOD & PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and
WHOPPERS.
. December 1996--The sale to Huhtamaki of the outstanding shares of Gubor
Holding GmbH (Gubor) and Sperlari, S.r.l. (Sperlari). Gubor manufactures
and markets high-quality assorted pralines and seasonal chocolate
products in Germany and Sperlari manufactures and markets various
confectionery and grocery products in Italy. The sale resulted in an
after-tax loss of $35.4 million, since no tax benefit associated with the
transaction was recorded. Combined net sales for Gubor and Sperlari were
$216.6 million and $222.0 million in 1996 and 1995, respectively.
. January 1996--The sale of the assets of Hershey Canada, Inc.'s PLANTERS
nut (Planters) business to Johnvince Foods Group and LIFE SAVERS and
BREATH SAVERS hard candy and BEECH-NUT cough drops (Life Savers) business
to Beta Brands Inc. Both transactions were part of a restructuring
program announced by the Corporation in late 1994.
. December 1995--The acquisition of Henry Heide, Incorporated, a
confectionery company which manufactures a variety of non-chocolate
confectionery products including JUJYFRUITS candy and WUNDERBEANS
jellybeans.
. June 1995--The sale of the outstanding shares of OZF Jamin to a
management buyout group at OZF Jamin also as part of the restructuring
program.
NET SALES
Net sales rose $312.9 million in 1997 and $298.6 million in 1996, an
increase of 8% in both years. The increase in 1997 was primarily due to
incremental sales from the Leaf acquisition, increased sales
A-1
of core confectionery items and the introduction of new confectionery
products. These increases were offset somewhat by lower sales resulting from
the divestiture of the Gubor and Sperlari businesses and a decline in sales of
pasta and grocery products. The increase in 1996 was primarily due to
incremental sales from new confectionery and grocery products, increased
confectionery sales volume in the North American seasonal packaged candy line
and in various international markets, selected confectionery selling price
increases in the United States partially offset by related sales volume
declines, and incremental sales from the acquisition of Henry Heide.
COSTS AND EXPENSES
Cost of sales as a percent of net sales increased from 57.6% in 1995 to
57.7% in 1996, and to 57.9% in 1997. The decrease in gross margin in 1997 was
primarily the result of the lower margin associated with the Leaf business and
higher costs associated with certain new products and seasonal items,
partially offset by lower costs for certain major raw materials, primarily
milk and semolina, and the favorable impact of the Gubor and Sperlari
divestitures. The decrease in gross margin in 1996 was principally the result
of higher costs for certain major raw materials, primarily cocoa beans, milk,
almonds and semolina and increased manufacturing labor and overhead rates,
substantially offset by selected confectionery price increases, manufacturing
efficiency improvements and the favorable impact of the OZF Jamin divestiture.
Selling, marketing and administrative expenses increased by 5% in 1997, as a
result of incremental expenses associated with the Leaf business and increased
marketing expenses related to the introduction of new products, partially
offset by decreases resulting from the Gubor and Sperlari divestitures and
reduced marketing spending for existing brands. Selling, marketing and
administrative costs increased by 7% in 1996 primarily due to a net increase
in advertising and promotion expenses associated with the introduction of new
products and higher selling expenses primarily related to international sales
volume increases and new product introductions.
RESTRUCTURING ACTIVITIES
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. The impact of this charge was more than offset by the partial
reversal of $16.7 million of 1994 accrued restructuring reserves, resulting in
an increase to income before income taxes of $151,000 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. The partial reversal of 1994 accrued restructuring
reserves related to revised workforce reductions and relocation expenses along
with a lower loss on the disposal of the Planters and Life Savers businesses.
In 1996, $7.6 million of 1994 accrued restructuring reserves were utilized as
the restructuring program was completed.
INTEREST EXPENSE, NET
Net interest expense in 1997 was $28.2 million above prior year, primarily
as a result of incremental borrowings associated with the Leaf acquisition and
the purchase of Common Stock from the Hershey Trust Company, as Trustee for
the benefit of Milton Hershey School (Milton Hershey School Trust). Fixed
interest expense increased as a result of the issuance of $150 million of
6.95% Notes due 2007 (6.95% Notes) in March 1997 and $150 million of 6.95%
Notes due 2012 (Notes) and $250 million of 7.2% Debentures due 2027
(Debentures) in August 1997.
Net interest expense increased $3.2 million in 1996 as higher fixed interest
expense was only partially offset by reduced short-term interest expense.
Increased fixed interest expense resulted from
A-2
the issuance of $200 million of 6.7% Notes due 2005 (6.7% Notes) in the fourth
quarter of 1995. Lower short-term interest expense resulted from lower average
borrowing balances and reduced interest rates as compared to 1995.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate was 39.3%, 43.1%, and 39.5% in
1997, 1996 and 1995, respectively. The rate decreased in 1997 compared to 1996
primarily due to the lack of any tax benefit associated with the 1996 loss on
disposal of businesses and the lower 1997 effective state income tax rate. The
higher 1996 rate compared to 1995 was due primarily to the lack of any tax
benefit associated with the 1996 loss on disposal of businesses.
NET INCOME
Net income increased $63.1 million or 23% in 1997, following a decrease of
$8.7 million or 3% in 1996. Excluding the loss on the disposal of the Gubor
and Sperlari businesses in 1996 and the net after-tax effects of restructuring
activities in 1995, 1997 income increased $27.7 million or 9% and 1996 income
increased $28.6 million or 10%. Net income as a percent of net sales was 7.8%
in 1997, 6.8% in 1996 and 7.6% in 1995. Income as a percent of net sales
excluding the loss on the sale of the Gubor and Sperlari businesses was 7.7%
in 1996.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1997. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 60% as of December
31, 1997, and 46% as of December 31, 1996. The higher capitalization ratio in
1997 primarily reflected the additional borrowings to finance the purchase of
Common Stock and the related decrease in stockholders' equity as a result of
the additional Treasury Stock. The ratio of current assets to current
liabilities was 1.3:1 as of December 31, 1997, and 1.2:1 as of December 31,
1996.
ASSETS
Total assets increased $106.4 million or 3% as of December 31, 1997,
primarily as a result of increases in accounts receivable, property, plant and
equipment, inventories and other non-current assets.
Current assets increased by $48.6 million or 5% reflecting increased
accounts receivable and higher inventories, partially offset by a decrease in
prepaid expenses and other current assets. The increase in accounts receivable
was primarily the result of higher sales in December and the increase in
inventories reflected higher raw material and finished goods inventory levels.
The decrease in prepaid expenses and other current assets was principally
associated with commodities transactions.
The $46.3 million net increase in property, plant and equipment principally
reflected capital additions of $172.9 million, partially offset by
depreciation expense of $135.0 million. The increase in other non-current
assets was associated with the capitalization of software in 1997.
LIABILITIES
Total liabilities increased by $414.7 million or 20% as of December 31,
1997, primarily due to an increase in long-term debt. The increase in long-
term debt of $373.8 million reflected the long-term debt issued during the
year to repay a portion of the commercial paper borrowings associated with the
Leaf acquisition and the repurchase of Common Stock from the Milton Hershey
School Trust. As of December 31, 1997 and 1996, respectively, $150.0 million
and $300.0 million of commercial paper borrowings were reclassified as long-
term debt in accordance with the Corporation's intent and ability
A-3
to refinance such obligations on a long-term basis. In addition, deferred
taxes increased by $43.1 million primarily reflecting adjustments to the
preliminary acquisition accounting for Leaf.
STOCKHOLDERS' EQUITY
Total stockholders' equity declined by 27% in 1997, as increased Treasury
Stock from the repurchase of Common Stock and dividends paid exceeded net
income. Total stockholders' equity has increased at a compound annual rate of
less than 1% over the past ten years reflecting the $1.3 billion of Common
Stock repurchased since 1993.
CAPITAL STRUCTURE
The Corporation has two classes of stock outstanding, Common Stock and Class
B Common Stock (Class B Stock). Holders of the Common Stock and the Class B
Stock generally vote together without regard to class on matters submitted to
stockholders, including the election of directors, with the Common Stock
having one vote per share and the Class B Stock having ten votes per share.
However, the Common Stock, voting separately as a class, is entitled to elect
one-sixth of the Board of Directors. With respect to dividend rights, the
Common Stock is entitled to cash dividends 10% higher than those declared and
paid on the Class B Stock.
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
divestitures, 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, business acquisitions and dividend payments exceeded cash provided
from operating activities and proceeds from business divestitures by $784.2
million. Total debt, including debt assumed, increased during the period by
$804.7 million. Cash and cash equivalents increased by $27.5 million during
the period.
The Corporation anticipates that capital expenditures will be in the range
of $175 million to $200 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,
1997, the Corporation's principal capital commitments included manufacturing
capacity expansion and modernization.
In late 1996, the Corporation approved a project to implement an enterprise-
wide integrated information system to replace most of the transaction systems
and applications currently supporting operations of the Corporation. Total
commitments for this system are expected to be in the range of $75 million to
$85 million. This system is Year 2000 compliant and will replace a large
portion of the Corporation's legacy information systems. Legacy systems not
being replaced by the new integrated information system are being upgraded to
be Year 2000 compliant and the costs are not expected to be material to the
Corporation's business, operations, or financial condition. Progress toward
compliance with Year 2000 issues by the Corporation's major business partners
and suppliers is being reviewed for the most significant operations and
business activities. The extent of Year 2000 compliance efforts by major
partners and suppliers and the possible effect on the Corporation's business
of their failure to comply cannot be reliably determined and estimated at this
time. The remediation of Year 2000 issues involving the Corporation's
information systems is expected to be completed in time to prevent any
material adverse consequences to the Corporation's business, operations or
financial condition.
A-4
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Stock effective September 13, 1996, to
stockholders of record August 23, 1996. The split was effected as a stock
dividend by distributing one additional share for each share held. Unless
otherwise indicated, all shares and per share information have been restated
to reflect the stock split.
Under share repurchase programs which began in 1993, a total of 9,546,030
shares of Common Stock have been repurchased for approximately $271.4 million.
Of the shares repurchased, 528,000 shares were retired and the remaining
9,018,030 shares were held as Treasury Stock as of December 31, 1997.
In August 1995, the Corporation purchased 18,099,546 shares (9,049,773
shares on a pre-split basis) of its Common Stock to be held as Treasury Stock
from the Milton Hershey School Trust for $500.0 million. In August 1997, the
Corporation purchased an additional 9,900,990 shares of its Common Stock from
the Milton Hershey School Trust for $500.0 million. As of December 31, 1997, a
total of 37,018,566 shares were held as Treasury Stock and $128.6 million
remained available for repurchases of Common Stock under a program approved by
the Corporation's Board of Directors in February 1996.
In October 1995, the Corporation issued $200 million of 6.7% Notes under
Form S-3 Registration Statements which were declared effective in June 1990
and November 1993. In March 1997, the Corporation issued $150 million of 6.95%
Notes under the November 1993 Form S-3 Registration Statement. Proceeds from
the debt issuance were used to repay a portion of the commercial paper
borrowings associated with the Leaf acquisition.
In August 1997, the Corporation filed another Form S-3 Registration
Statement under which it could offer, on a delayed or continuous basis, up to
$500 million of additional debt securities. Also in August 1997, the
Corporation issued $150 million of Notes and $250 million of Debentures under
the November 1993 and August 1997 Registration Statements. Proceeds from the
debt issuance were used to repay a portion of the short-term borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust. As of December 31, 1997, $250 million of debt securities remained
available for issuance under the August 1997 Registration Statement. Proceeds
from any offering of the $250 million of debt securities available under the
shelf registration may be used for general corporate requirements which
include reducing existing commercial paper borrowings, financing capital
additions, and funding future business acquisitions and working capital
requirements.
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 with options to increase borrowings by $1.0 billion with the
concurrence of the banks. Lines of credit previously maintained by the
Corporation were significantly reduced when the credit facility agreements
became effective. 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.
Both the short-term and long-term committed credit facility agreements were
amended and renewed effective December 12, 1997. The credit facilities may be
used to fund general corporate requirements, to support commercial paper
borrowings and, in certain instances, to finance future business acquisitions.
The Corporation also had lines of credit with domestic and international
commercial banks of $20.7 million as of December 31, 1997.
CASH FLOW ACTIVITIES
Cash provided from operating activities totaled $1.4 billion during the past
three years. Over this period, cash used by or provided from accounts
receivable and inventories has tended to fluctuate as a result of sales during
December and inventory management practices. The change in cash required for
or provided from other assets and liabilities between the years was primarily
related to commodities transactions, the timing of payments for accrued
liabilities, including income taxes, capitalized software, variations in the
funding status of pension plans, and, in 1995, restructuring expenses.
A-5
Investing activities included capital additions and business acquisitions
and divestitures. 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
Leaf in 1996 and Henry Heide in 1995. The Gubor, Sperlari, Planters and Life
Savers businesses were sold in 1996 and OZF Jamin was sold in 1995. Cash used
for business acquisitions represented the purchase price paid and consisted of
the current assets, property, plant and equipment, intangibles and other
assets 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, share repurchase programs
and purchases of Common Stock from the Milton Hershey School Trust. The
proceeds from the issuance of $200 million of 6.7% Notes in October 1995, $150
million of 6.95% Notes in March 1997 and $150 million of Notes and $250
million of Debentures in August 1997 were used to reduce short-term
borrowings. During the past three years, a total of 30,644,288 shares of
Common Stock has been repurchased for approximately $1.1 billion. Cash
requirements for incentive plan transactions were $102.6 million during the
past three years, partially offset by cash received from the exercise of stock
options of $51.6 million.
ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
The Corporation utilizes certain derivative instruments, including interest
rate swaps, foreign currency forward exchange contracts and commodity futures
and options contracts, to manage interest rate, currency exchange rate and
commodity market price risk exposures. The interest rate swaps and foreign
currency contracts are entered into for periods consistent with related
underlying exposures and do not constitute positions independent of those
exposures. Commodity futures and options contracts are entered into for
varying periods and are intended and effective as hedges of anticipated raw
material purchases. The Corporation does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage or prepayment features. In entering into these contracts, the
Corporation has assumed the risk 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.
The information below summarizes the Corporation's market risks associated
with long-term debt and derivative instruments outstanding as of December 31,
1997. This information should be read in conjunction with Note 1, Note 5, Note
7, and Note 8 to the Consolidated Financial Statements.
LONG-TERM DEBT
The table below presents the principal cash flows and related interest rates
by maturity date for long-term debt as of December 31, 1997. The table does
not include $150.0 million of commercial paper borrowings classified as long-
term debt as of December 31, 1997, in accordance with the Corporation's intent
and ability to refinance such obligations on a long-term basis. Generally,
commercial paper borrowings have an original maturity of three months or less.
The fair value of long-term debt was determined based upon quoted market
prices for the same or similar debt issues.
MATURITY DATE
-----------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT FOR RATES)
THERE- FAIR
1998 1999 2000 2001 2002 AFTER TOTAL VALUE
------- ---- ------ ---- ---- -------- -------- --------
Long-term Debt $25,095 $192 $2,199 $203 $194 $876,348 $904,231 $961,011
Fixed Rate 8.9% 2.0% 6.4% 2.0% 2.0% 7.1% 7.2%
A-6
INTEREST RATE SWAPS
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate swap
agreements to effectively convert a portion of its floating rate debt,
principally commercial paper borrowings or bank loans with an original
maturity of three months or less, to fixed rate debt. As of December 31, 1997
and 1996, the Corporation had agreements outstanding with an aggregate
notional amount of $150.0 million and $125.0 million with maturities through
September 1999 and October 1997, respectively. As of December 31, 1997 and
1996, interest rates payable were at weighted average fixed rates of 6.3% and
5.8%, respectively, and interest rates receivable were floating based on 30-
day commercial paper composite rates which were 5.7% and 5.5% as of December
31, 1997 and 1996, respectively. Any interest rate differential on interest
rate swaps is recognized as an adjustment to interest expense over the term of
each agreement. The Corporation's risk related to swap agreements is limited
to the cost of replacing such agreements at prevailing market rates. The
potential loss in fair value of interest rate swaps resulting from a
hypothetical near-term adverse change in market rates of ten percent was not
material as of December 31, 1997.
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward contracts to hedge
transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies,
and to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate
movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments. In accordance with Statement
of Financial Accounting Standards No. 52 "Foreign Currency Translation," these
contracts meet the conditions for hedge accounting treatment and accordingly,
gains and losses are deferred and accounted for as part of the underlying
transactions. Gains and losses on terminated derivatives designated as hedges
are accounted for as part of the originally hedged transaction. Gains and
losses on derivatives designated as hedges of items which mature, are sold or
terminated, are recorded currently in income.
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
As of December 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $25.0 million in foreign
currency, primarily British sterling and German marks, and to sell $24.6
million in foreign currency, primarily Canadian dollars and Japanese yen, at
contracted forward rates.
The fair value of foreign exchange forward contracts was estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences. As of December 31, 1997 and 1996, the fair
value of foreign exchange forward contracts approximated the contract value.
The potential loss in fair value of foreign exchange forward contracts
resulting from a hypothetical near-term adverse change in market rates of ten
percent was not material as of December 31, 1997.
FOREIGN EXCHANGE OPTIONS
To hedge foreign currency exposure related to firm commitments to purchase
equipment and anticipated transactions associated with the purchase of certain
raw materials and finished goods generally covering 3 to 24 months, the
Corporation, from time to time, 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. Foreign
exchange options are intended and
A-7
effective as hedges of anticipated transactions. Accordingly, gains and losses
are deferred and accounted for as part of the underlying transactions. Gains
and losses on options designated as hedges of anticipated transactions which
are no longer likely to occur are recorded currently in income.
As of December 31, 1997, the Corporation had purchased foreign exchange
options of $3.6 million maturing in 1998, related to Swiss francs. No foreign
exchange options were outstanding as of December 31, 1996. The fair value of
foreign exchange options is estimated using active market quotations. As of
December 31, 1997, the fair value of foreign exchange options approximated the
contract value. The potential loss in fair value of foreign exchange options
contracts resulting from a hypothetical near-term adverse change in market
rates of ten percent was not material as of December 31, 1997.
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
future price fluctuations related to the purchase of these raw materials
primarily through forward purchasing to cover future manufacturing
requirements, generally for periods from 3 to 24 months. With regard to cocoa,
sugar, corn sweeteners and natural gas, price risks are also managed by
entering into futures and options contracts. At the present time, active
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, corn sweetener and
natural gas 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 and energy requirements. 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 have been rising since 1992 due to cocoa demand
exceeding production. During 1998, any problems with the development of the
West African crop to be harvested beginning in the fall could again result in
demand exceeding production, leading to possible additional cocoa futures
price increases. The Corporation's costs during 1998 will not necessarily
reflect market price fluctuations because of its forward purchasing practices,
premiums and discounts reflective of relative values, varying delivery times,
and supply and demand for specific varieties and grades of cocoa beans.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar, corn sweeteners and
natural gas 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 meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost. Gains and losses on futures and options designated
as hedges of anticipated purchases which are no longer likely to occur are
recorded currently in income.
Exchange traded futures contracts are used to fix the price of physical
forward purchase contracts. Cash transfers reflecting changes in the value of
futures contracts are made on a daily basis and are included in other current
assets or accrued liabilities on the consolidated balance sheets. Such cash
transfers will be offset by higher or lower cash requirements for payment of
invoice prices of raw materials and energy requirements in the future. Futures
being held in excess of the amount required
A-8
to fix the price of unpriced physical forward contracts are intended and
effective as hedges of anticipated purchases.
The following sensitivity analysis reflects the market risk of the
Corporation to a hypothetical adverse market price movement of ten percent,
based on the Corporation's net commodity positions at four dates spaced
equally throughout the year. The Corporation's net commodity positions consist
of the excess of futures contracts held over unpriced physical forward
contracts for the same commodities, relating to cocoa, sugar, corn sweeteners
and natural gas. Inventories, priced forward contracts and estimated
anticipated purchases not yet contracted for were not included in the
sensitivity analysis calculations. A loss is defined, for purposes of
determining market risk, as the potential decrease in fair value or the
opportunity cost resulting from the hypothetical adverse price movement. The
fair values of net commodity positions were based upon quoted market prices or
estimated future prices including estimated carrying costs corresponding with
the future delivery period.
MARKET RISK
FAIR VALUE (HYPOTHETICAL 10% CHANGE)
------------------------------------
(IN MILLIONS OF DOLLARS)
Highest long position $210.8 $21.1
Lowest long position 39.6 4.0
Average position (long) 96.2 9.6
Sensitivity analysis disclosures represent forward-looking statements which
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those presently anticipated or projected. The
important factors that could affect the sensitivity analysis disclosures
include significant increases or decreases in market prices reflecting
fluctuations attributable to the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates, political
unrest in producing countries and speculative influences in addition to
changes in the Corporation's hedging strategies.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$121.5 million in 1997 and $114.8 million in 1996. The annual dividend rate on
the Common Stock was $.88 per share, an increase of 10% over the 1996 rate of
$.80 per share. The 1997 dividend represented the 23rd consecutive year of
Common Stock dividend increases.
On February 3, 1998, the Corporation's Board of Directors declared a
quarterly dividend of $.22 per share of Common Stock payable on March 13,
1998, to stockholders of record as of February 24, 1998. It is the
Corporation's 273rd consecutive Common Stock dividend. A quarterly dividend of
$.20 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 74.8 million shares of the Corporation's Common Stock were
traded during 1997. The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1997, was $61 15/16.
There were 44,602 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1997.
A-9
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
------ ------- --------- ---------
1997
1st Quarter $.200 $.1800 $52 7/8 $42 1/8
2nd Quarter .200 .1800 58 5/8 48 3/8
3rd Quarter .220 .2000 59 15/16 51 7/8
4th Quarter .220 .2000 63 7/8 50 5/8
----- ------
Total $.840 $.7600
===== ======
1996
1st Quarter $.180 $.1625 $40 5/8 $31 15/16
2nd Quarter .180 .1625 38 15/16 34 7/8
3rd Quarter .200 .1800 51 3/4 35
4th Quarter .200 .1800 51 3/4 43 1/2
----- ------
Total $.760 $.6850
===== ======
- --------
*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 33.4%
in 1997. Over the most recent five-year period, the return has ranged from
17.8% in 1993 to 33.4% in 1997. 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 Marabou a.s (Freia) in 1993, the
after-tax restructuring activities in 1994 and 1995 and the after-tax loss on
the disposal of businesses in 1996.
OPERATING RETURN ON AVERAGE INVESTED CAPITAL
The Corporation's operating return on average invested capital was 17.5% in
1997. Over the most recent five-year period, the return has ranged from 15.0%
in 1993 to 17.8% in 1996. 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,
the after-tax loss on disposal of businesses in 1996, and the after-tax effect
of interest on long-term debt.
A-10
SAFE HARBOR STATEMENT
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Corporation notes the following factors which, among others, could
cause future results to differ materially from the forward-looking statements,
expectations and assumptions expressed or implied herein. Forward looking
statements contained in this document include, but are not limited to Year
2000 issues (particularly with regard to the Corporation's business partners
and suppliers), the impact of the use of derivative instruments, the amount of
future capital expenditures and the possible uses of proceeds from any future
borrowings under the Corporation's currently effective credit facility or 1997
Registration Statement. Factors which could cause results to differ include,
but are not limited to: changes in the confectionery and pasta business
environment, including actions of competitors and changes in consumer
preferences; changes in governmental laws and regulations, including income
taxes; market demand for new and existing products; and raw material pricing.
A-11
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS
NET SALES $4,302,236 $3,989,308 $3,690,667
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,488,896 2,302,089 2,126,274
Selling, marketing and administrative 1,183,130 1,124,087 1,053,758
Restructuring (credit) -- -- (151)
Loss on disposal of businesses -- 35,352 --
---------- ---------- ----------
Total costs and expenses 3,672,026 3,461,528 3,179,881
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 630,210 527,780 510,786
Interest expense, net 76,255 48,043 44,833
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 553,955 479,737 465,953
Provision for income taxes 217,704 206,551 184,034
---------- ---------- ----------
NET INCOME $ 336,251 $ 273,186 $ 281,919
========== ========== ==========
NET INCOME PER SHARE--BASIC $ 2.25 $ 1.77 $ 1.70
========== ========== ==========
NET INCOME PER SHARE--DILUTED $ 2.23 $ 1.75 $ 1.69
========== ========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .840 $ .760 $ .685
Class B Common Stock .760 .685 .620
The notes to consolidated financial statements are an integral part of these
statements.
A-12
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 54,237 $ 61,422
Accounts receivable--trade 360,831 294,606
Inventories 505,525 474,978
Deferred income taxes 84,024 94,464
Prepaid expenses and other 30,197 60,759
---------- ----------
Total current assets 1,034,814 986,229
PROPERTY, PLANT AND EQUIPMENT, NET 1,648,237 1,601,895
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 551,849 565,962
OTHER ASSETS 56,336 30,710
---------- ----------
Total assets $3,291,236 $3,184,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 146,932 $ 134,213
Accrued liabilities 371,545 357,828
Accrued income taxes 19,692 10,254
Short-term debt 232,451 299,469
Current portion of long-term debt 25,095 15,510
---------- ----------
Total current liabilities 795,715 817,274
LONG-TERM DEBT 1,029,136 655,289
OTHER LONG-TERM LIABILITIES 346,500 327,209
DEFERRED INCOME TAXES 267,079 224,003
---------- ----------
Total liabilities 2,438,430 2,023,775
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued: none in 1997 and 1996 -- --
Common Stock, shares issued: 149,484,964 in 1997 and
149,471,964 in 1996 149,485 149,472
Class B Common Stock, shares issued: 30,465,908 in
1997 and 30,478,908 in 1996 30,465 30,478
Additional paid-in capital 33,852 42,432
Cumulative foreign currency translation adjustments (42,243) (32,875)
Unearned ESOP compensation (28,741) (31,935)
Retained earnings 1,977,849 1,763,144
Treasury--Common Stock shares, at cost: 37,018,566 in
1997 and 27,009,316 in 1996 (1,267,861) (759,695)
---------- ----------
Total stockholders' equity 852,806 1,161,021
---------- ----------
Total liabilities and stockholders' equity $3,291,236 $3,184,796
========== ==========
The notes to consolidated financial statements are an integral part of these
balance sheets.
A-13
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES
Net income $ 336,251 $ 273,186 $ 281,919
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 152,750 133,476 133,884
Deferred income taxes 16,915 22,863 26,380
Restructuring (credit) -- -- (151)
Loss on disposal of businesses -- 35,352 --
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade (68,479) 5,159 1,666
Inventories (33,538) (41,038) 28,147
Accounts payable 12,967 14,032 14,767
Other assets and liabilities 55,974 15,120 (11,297)
Other, net 4,018 5,593 19,614
--------- --------- ---------
Net Cash Provided from Operating Activities 476,858 463,743 494,929
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
INVESTING ACTIVITIES
Capital additions (172,939) (159,433) (140,626)
Business acquisitions -- (437,195) (12,500)
Proceeds from divestitures -- 149,222 --
Other, net 21,368 9,333 8,720
--------- --------- ---------
Net Cash (Used by) Investing Activities (151,571) (438,073) (144,406)
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
FINANCING ACTIVITIES
Net change in short-term borrowings
partially classified as long-term debt (217,018) 210,929 103,530
Long-term borrowings 550,000 -- 202,448
Repayment of long-term debt (15,588) (3,103) (7,887)
Cash dividends paid (121,546) (114,763) (110,090)
Exercise of stock options 14,397 22,049 15,106
Incentive plan transactions (35,063) (45,634) (21,903)
Repurchase of Common Stock (507,654) (66,072) (526,119)
--------- --------- ---------
Net Cash (Used by) Provided from Financing
Activities (332,472) 3,406 (344,915)
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (7,185) 29,076 5,608
Cash and Cash Equivalents as of January 1 61,422 32,346 26,738
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 54,237 $ 61,422 $ 32,346
========= ========= =========
Interest Paid $ 64,937 $ 52,143 $ 43,731
Income Taxes Paid 181,377 180,347 148,629
The notes to consolidated financial statements are an integral part of these
statements.
A-14
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, 1995 $ -- $ 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,
$.685 per share (91,190) (91,190)
Class B Common
Stock, $.62 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
Net income 273,186 273,186
Dividends:
Common Stock,
$.76 per share (93,884) (93,884)
Class B Common
Stock, $.685
per share (20,879) (20,879)
Foreign currency
translation
adjustments (3,635) (3,635)
Two-for-one
stock split 74,736 15,239 (89,975) --
Conversion of
Class B Common
Stock
into Common
Stock 2 (2) --
Incentive plan
transactions (426) (426)
Exercise of
stock options (5,391) (8,547) (13,938)
Employee stock
ownership trust
transactions 517 3,193 3,710
Repurchase of
Common Stock (66,072) (66,072)
----- --------- -------- -------- --------- --------- ----------- ------------ -------------
BALANCE AS OF
DECEMBER 31,
1996 -- 149,472 30,478 42,432 (32,875) (31,935) 1,763,144 (759,695) 1,161,021
Net income 336,251 336,251
Dividends:
Common Stock,
$.84 per share (98,390) (98,390)
Class B Common
Stock, $.76 per
share (23,156) (23,156)
Foreign currency
translation
adjustments (9,368) (9,368)
Conversion of
Class B Common
Stock
into Common
Stock 13 (13) --
Incentive plan
transactions (879) (879)
Exercise of
stock options (8,200) (512) (8,712)
Employee stock
ownership trust
transactions 499 3,194 3,693
Repurchase of
Common Stock (507,654) (507,654)
----- --------- -------- -------- --------- --------- ----------- ------------ -------------
BALANCE AS OF
DECEMBER 31,
1997 $ -- $ 149,485 $ 30,465 $ 33,852 $ (42,243) $ (28,741) $ 1,977,849 $ (1,267,861) $ 852,806
===== ========= ======== ======== ========= ========= =========== ============ =============
The notes to consolidated financial statements are an integral part of these
statements.
A-15
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 1997
presentation. Unless otherwise indicated, all shares and per share information
have been restated for the two-for-one stock split effective September 13,
1996.
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, corn sweeteners and
natural gas 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 meet the hedge criteria and are accounted for as hedges.
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 was $527.6 million and $539.9 million
as of December 31, 1997 and 1996, respectively. 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.
A-16
Accumulated amortization of intangible assets resulting from business
acquisitions was $116.5 million and $100.0 million as of December 31, 1997 and
1996, respectively.
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.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments and foreign exchange options
contracts meet required hedge criteria for anticipated transactions.
Accordingly, gains and losses are deferred and accounted for as part of the
underlying transactions. Gains and losses on terminated derivatives designated
as hedges are accounted for as part of the originally hedged transaction.
Gains and losses on derivatives designated as hedges of items which mature,
are sold or terminated, or of anticipated transactions which are no longer
likely to occur, are recorded currently in income. 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.
LICENSE AGREEMENTS
The Corporation has entered into license agreements under which it has
access to certain trademarks and proprietary technology, and manufactures
and/or markets and distributes certain products. The rights under these
agreements are extendible on a long-term basis at the Corporation's option
subject to certain conditions, including minimum sales levels, which the
Corporation has met. License fees and royalties, payable under the terms of
the agreements, are expensed as incurred.
RESEARCH AND DEVELOPMENT
The Corporation expenses research and development costs as incurred.
Research and development expense was $27.5 million, $26.1 million and $26.2
million in 1997, 1996 and 1995, respectively.
ADVERTISING
The Corporation expenses advertising costs as incurred. Advertising expense
was $202.4 million, $174.2 million and $159.2 million in 1997, 1996 and 1995,
respectively. Prepaid advertising as of December 31, 1997 and 1996, was $2.0
million and $2.2 million, respectively.
COMPUTER SOFTWARE
In 1997, the Corporation began capitalizing certain costs of computer
software developed or obtained for internal use. The amount capitalized as of
December 31, 1997, was $29.1 million. If such costs were capitalized in prior
years, the effect would not have been material. Software assets are classified
as other non-current assets and will be amortized over periods up to five
years.
A-17
2. ACQUISITIONS AND DIVESTITURES
In December 1996, the Corporation acquired from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, Huhtamaki's
Leaf North America (Leaf) confectionery operations for $437.2 million, plus
the assumption of $17.0 million in debt. In addition, the parties entered into
a trademark and technology license agreement under which the Corporation will
manufacture and/or market and distribute in North, Central and South America
Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH, JOLLY
RANCHER, MILK DUDS, PAYDAY and WHOPPERS. Leaf's principal manufacturing
facilities are located in Denver, Colorado; Memphis, Tennessee; and Robinson,
Illinois.
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 candy and WUNDERBEANS jellybeans.
In accordance with the purchase method of accounting, the purchase prices of
the acquisitions summarized above were allocated on a preliminary basis to the
underlying assets and liabilities at the date of acquisition based on their
estimated respective fair values, which were revised and finalized by the
anniversary date of each acquisition. Total liabilities assumed, including
debt, were $138.0 million in 1996 and $10.6 million in 1995. Results
subsequent to the dates of acquisition are included in the consolidated
financial statements.
Had the acquisition of Leaf occurred at the beginning of 1996, pro forma
consolidated results would have been as follows:
FOR THE YEAR ENDED DECEMBER
31, 1996
-------------------------------------------
IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS (unaudited)
Net sales $4,473,950
Net income 234,000
Net income per share --Basic 1.52
Net income per share--Diluted 1.50
The pro forma results are based on historical financial information provided
by Huhtamaki, including a business restructuring charge recorded by Huhtamaki
in 1996, and adjusted to give effect to certain costs and expenses, including
fees under the trademark and technology license agreement, goodwill
amortization, interest expense and income taxes which would have been incurred
by the Corporation if it had owned and operated the Leaf confectionery
business throughout 1996. These results are not necessarily reflective of the
actual results which would have occurred if the acquisition had been completed
at the beginning of 1996, nor are they necessarily indicative of future
combined financial results.
In December 1996, the Corporation completed the sale to Huhtamaki of the
outstanding shares of Gubor Holding GmbH (Gubor) and Sperlari, S.r.l.
(Sperlari). Gubor manufactures and markets high-quality assorted pralines and
seasonal chocolate products in Germany and Sperlari manufactures and markets
various confectionery and grocery products in Italy. The total proceeds from
the sale of the Gubor and Sperlari businesses were $121.7 million. The
transaction resulted in an after-tax loss of $35.4 million since no tax
benefit associated with the transaction was recorded. Combined net sales for
Gubor and Sperlari were $216.6 million and $222.0 million in 1996 and 1995,
respectively. The sale of Gubor and Sperlari allowed the Corporation to place
additional focus on its North American markets and improve financial returns.
A-18
In January 1996, the Corporation completed the sale of the assets of Hershey
Canada, Inc.'s PLANTERS nut (Planters) business to Johnvince Foods Group and
LIFE SAVERS and BREATH SAVERS hard candy and BEECH-NUT cough drops (Life
Savers) business to Beta Brands Inc. Both transactions were 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. 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.
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. Such changes related to
revised workforce reductions and a lower loss on the sale of the Planters and
Life Savers businesses. 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. The remaining $7.6 million of
accrued restructuring reserves as of December 31, 1995, were utilized during
1996 as the restructuring program was completed.
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 was funded from operating cash flows. The impact
of this charge was more than offset by the partial reversal of $16.7 million
of 1994 accrued restructuring reserves in the fourth quarter of 1995 resulting
in an increase to income before income taxes of $151,000 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.
4. RENTAL AND LEASE COMMITMENTS
Rent expense was $31.8 million, $25.3 million and $24.9 million for 1997,
1996 and 1995, 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-cancelable operating leases with a remaining term in excess
of one year as of December 31, 1997, were: 1998, $11.6 million; 1999, $13.1
million; 2000, $12.8 million; 2001, $12.7 million; 2002, $9.6 million; 2003
and beyond, $55.8 million.
5. 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, 1997 and 1996, because of the
relatively short maturity of these instruments. The carrying value of long-
term debt, including the current portion, was $904.2 million as of December
31, 1997, compared to a fair value of $961.0 million based on quoted market
prices for the same or similar debt issues. The carrying value of long-term
debt, including the current portion, was $370.8 million as of December 31,
1996, compared to a fair value of $388.0 million.
A-19
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
As of December 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $25.0 million in foreign
currency, primarily British sterling and German marks, and to sell $24.6
million in foreign currency, primarily 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. As of December 31, 1997, the Corporation had purchased foreign
exchange options of $3.6 million, related to Swiss francs. No options were
outstanding as of December 31, 1996.
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, 1997
and 1996, the fair value of foreign exchange forward and options contracts
approximated the contract value. The Corporation does not hold or issue
financial instruments for trading purposes.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate swap
agreements to effectively convert a portion of its floating rate debt to fixed
rate debt. As of December 31, 1997 and 1996, the Corporation had agreements
outstanding with an aggregate notional amount of $150.0 million and $125.0
million with maturities through September 1999 and October 1997, respectively.
As of December 31, 1997 and 1996, interest rates payable were at weighted
average fixed rates of 6.3% and 5.8%, respectively, and interest rates
receivable were floating based on 30-day commercial paper composite rates
which were 5.7% and 5.5% as of December 31, 1997 and 1996, respectively. Any
interest rate differential on interest rate swaps is recognized as an
adjustment to interest expense over the term of each agreement. The
Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at prevailing market rates.
6. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Long-term debt and lease obligations $48,737 $30,818 $20,949
Short-term debt 32,284 22,752 28,576
Capitalized interest (1,883) (1,534) (1,957)
------- ------- -------
Interest expense, gross 79,138 52,036 47,568
Interest income (2,883) (3,993) (2,735)
------- ------- -------
Interest expense, net $76,255 $48,043 $44,833
======= ======= =======
7. 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
A-20
$600 million, 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. Both the short-term and long-term committed credit facility agreements
were amended and renewed effective December 12, 1997. 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, 1997 and 1996, respectively, $150.0 million
and $300.0 million of commercial paper borrowings were reclassified as long-
term debt in accordance with the Corporation's intent and ability to refinance
such obligations on a long-term basis.
The Corporation also maintains lines of credit arrangements with domestic
and international commercial banks, under which it could borrow in various
currencies up to approximately $20.7 million and $96.1 million as of December
31, 1997 and 1996, respectively, at the lending banks' prime commercial
interest rates or lower. The Corporation had combined domestic commercial
paper borrowings, including the portion classified as long-term debt, and
short-term foreign bank loans against its credit facilities and lines of
credit of $382.5 million as of December 31, 1997, and $599.5 million as of
December 31, 1996. The weighted average interest rates on short-term
borrowings outstanding as of December 31, 1997 and 1996, were 5.7% and 5.5%,
respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1997 was approximately .05% per annum of
the commitment. The Corporation's credit facility agreements contain a
financial covenant which requires that a specified interest and fixed charge
ratio be maintained. These agreements are also subject to other
representations and covenants which do not materially restrict the
Corporation's activities. The Corporation is in compliance with all covenants
included in the credit facility agreements. There were no significant
compensating balance agreements which legally restricted these funds.
As a result of maintaining a consolidated cash management system, the
Corporation maintains overdraft positions at certain banks. Such overdrafts,
which were included in accounts payable, were $30.7 million and $25.2 million
as of December 31, 1997 and 1996, respectively.
8. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Commercial Paper at interest rates ranging from 5.35% to
6.55% $ 150,000 $300,000
Medium-term Notes, 8.85% to 9.92% due 1997-1998 25,000 40,400
6.7% Notes due 2005 200,000 200,000
6.95% Notes due 2007 150,000 --
6.95% Notes due 2012 150,000 --
8.8% Debentures due 2021 100,000 100,000
7.2% Debentures due 2027 250,000 --
Other obligations, net of unamortized debt discount 29,231 30,399
---------- --------
Total long-term debt 1,054,231 670,799
Less--current portion 25,095 15,510
---------- --------
Long-term portion $1,029,136 $655,289
========== ========
As of December 31, 1997 and 1996, respectively, $150.0 million and $300.0
million of commercial paper borrowings were reclassified as long-term debt in
accordance with the Corporation's intent and ability to refinance such
obligations on a long-term basis.
A-21
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under the November 1993 Form S-3 Registration Statement. Proceeds from the
debt issuance were used to repay a portion of the commercial paper borrowings
associated with the Leaf acquisition.
In August 1997, the Corporation issued $150 million of 6.95% Notes due 2012
and $250 million of 7.2% Debentures due 2027 under the November 1993 and
August 1997 Registration Statements. Proceeds from the debt issuance were used
to repay a portion of the short-term borrowings associated with the purchase
of Common Stock from the Milton Hershey School Trust.
Aggregate annual maturities during the next five years, excluding short-term
borrowings reclassified, are: 1998, $25.1 million; 1999, $.2 million; 2000,
$2.2 million; 2001, $.2 million; and 2002, $.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.
9. INCOME TAXES
The provision for income taxes was as follows:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Current:
Federal $177,145 $158,040 $135,034
State 20,252 23,288 22,620
Foreign 3,392 2,360 --
-------- -------- --------
Current provision for income taxes 200,789 183,688 157,654
-------- -------- --------
Deferred:
Federal 9,370 12,952 12,455
State 5,103 8,134 8,198
Foreign 2,442 1,777 5,727
-------- -------- --------
Deferred provision for income taxes 16,915 22,863 26,380
-------- -------- --------
Total provision for income taxes $217,704 $206,551 $184,034
======== ======== ========
A-22
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Deferred tax assets:
Post-retirement benefit obligations $ 91,706 $ 88,885
Accrued expenses and other reserves 91,067 91,675
Accrued trade promotion reserves 30,905 22,910
Other 23,234 20,676
-------- --------
Total deferred tax assets 236,912 224,146
-------- --------
Deferred tax liabilities:
Depreciation 302,675 256,424
Other 117,292 97,261
-------- --------
Total deferred tax liabilities 419,967 353,685
-------- --------
Net deferred tax liabilities $183,055 $129,539
======== ========
Included in:
Current deferred tax assets, net $ 84,024 $ 94,464
Non-current deferred tax liabilities, net 267,079 224,003
-------- --------
Net deferred tax liabilities $183,055 $129,539
======== ========
The following table reconciles the Federal statutory income tax rate with
the Corporation's effective income tax rate:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits 3.4 4.7 4.6
Non-deductible acquisition costs .9 .6 .6
Loss on disposal of businesses for which no tax benefit was
provided -- 2.6 --
Other, net -- .2 (.7)
---- ---- ----
Effective income tax rate 39.3% 43.1% 39.5%
==== ==== ====
10. 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 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.
A-23
Pension expense included the following components:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 26,177 $ 29,311 $ 25,311
Interest cost on projected benefit obligations 39,385 35,374 32,531
Investment (return) on plan assets (91,767) (51,205) (71,578)
Net amortization and deferral 47,605 14,844 40,823
-------- -------- --------
Corporate sponsored plans 21,400 28,324 27,087
Multi-employer plans 1,627 571 361
Other 864 1,340 615
-------- -------- --------
Total pension expense $ 23,891 $ 30,235 $ 28,063
======== ======== ========
The funded status and amounts recognized in the consolidated balance sheets
for the retirement plans were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
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 $464,816 $28,951 $427,839 $27,316
======== ======= ======== =======
Accumulated benefit
obligations $493,371 $35,135 $452,907 $32,422
======== ======= ======== =======
Actuarial present value of
projected benefit obligations $565,330 $36,751 $502,371 $34,135
Plan assets at fair value 566,810 -- 488,222 --
-------- ------- -------- -------
Plan assets (greater than)
less than projected benefit
obligations (1,480) 36,751 14,149 34,135
Net gain (loss) unrecognized
at date of transition 558 (751) 906 (1,233)
Prior service cost and
amendments not yet recognized
in earnings (37,351) (1,986) (26,885) (2,305)
Unrecognized net gain (loss)
from past experience
different than that assumed 32,325 (5,007) 12,386 (2,502)
Minimum liability adjustment -- 6,336 -- 4,494
-------- ------- -------- -------
(Prepaid pension expense)
Pension liability $ (5,948) $35,343 $ 556 $32,589
======== ======= ======== =======
The projected benefit obligations for the plans were determined principally
using discount rates of 7.0% as of December 31, 1997, and 7.5% as of December
31, 1996. For both 1997 and 1996, the assumed long-term rate of return on plan
assets was 9.5%. The assumed long-term compensation increase rate for 1997 and
1996 was primarily 4.8%.
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.
A-24
11. 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.
Net post-retirement benefit costs consisted of the following components:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 4,390 $ 3,947 $ 3,262
Interest cost on projected benefit obligations 13,395 10,853 12,918
Amortization (2,246) (2,986) (2,322)
------- ------- -------
Total $15,539 $11,814 $13,858
======= ======= =======
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, 1997 1996
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Retirees $115,353 $ 96,870
Fully eligible active plan participants 16,087 22,096
Other active plan participants 75,255 58,578
-------- --------
Total 206,695 177,544
Plan amendments 25,685 28,903
Unrecognized net (loss) gain from past experience different
than that assumed (4,330) 12,127
-------- --------
Accrued post-retirement benefits $228,050 $218,574
======== ========
The accumulated post-retirement benefit obligations were determined
principally using discount rates of 7.0% and 7.5% as of December 31, 1997 and
1996, respectively. The assumed average health care cost trend rate used in
measuring the accumulated post-retirement benefit obligation as of December
31, 1997 and 1996, was 6% which was also the ultimate trend rate. 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, 1997 and 1996, by $14.4 million and $24.4 million, respectively,
and would increase the sum of the net service and interest cost components of
net post-retirement benefit costs for 1997 and 1996 by $1.4 million and $2.9
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 were available for general corporate purposes and also could be used
to offset future employee benefits costs, including retiree medical benefits.
During 1996, Federal tax legislation sharply curtailed the financial viability
of most corporate-owned life insurance programs. As a result, the Corporation
began the phase-out of its corporate-owned life insurance
A-25
program during 1996. 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, 1997 and 1996. Net life insurance expense, including interest
expense, was included in selling, marketing and administrative expenses.
12. 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 1997 and 1996, the ESOP received a combination of dividends on
unallocated shares and contributions from the Corporation equal to the amount
required to meet its principal and interest payments under the loan.
Simultaneously, the ESOP allocated to participants 159,176 shares of Common
Stock each year. As of December 31, 1997, the ESOP held 811,235 allocated
shares and 1,432,576 unallocated shares. All ESOP shares are considered
outstanding for income per share computations.
The Corporation recognized net compensation expense equal to the shares
allocated multiplied by the original cost of $20 1/16 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to
the ESOP for 1997, 1996 and 1995 was $1.4 million, $1.8 million and $1.9
million, respectively. Dividends paid on unallocated ESOP shares were $1.3
million in 1997 and 1996 and $1.2 million in 1995. 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.
13. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1997, 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, 1997, a combined total of 179,950,872
shares of both classes of common stock had been issued of which 142,932,306
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1997.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13,
1996, to stockholders of record August 23, 1996. The split was effected as a
stock dividend by distributing one additional share for each share held.
Holders of the Common Stock and the Class B Stock generally vote together
without regard to class on matters submitted to stockholders, including the
election of directors, with the Common Stock having one vote per share and the
Class B Stock having ten votes per share. However, the Common Stock, voting
separately as a class, is entitled to elect one-sixth of the Board of
Directors. With respect to dividend rights, the Common Stock is entitled to
cash dividends 10% higher than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis
at any time. During 1997, 1996 and 1995, a total of 13,000 shares, 2,000
shares and 1,525 shares, respectively, of Class B Stock were converted into
Common Stock (shares converted in 1996 and 1995 are on a pre-split basis).
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 14,635,252 shares of the Common Stock, and as
A-26
Trustee for the benefit of Milton Hershey School, held 30,306,006 shares of
the Class B Stock as of December 31, 1997, 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.
A total of 9,546,030 shares of Common Stock have been repurchased for
approximately $271.4 million under share repurchase programs which were
approved by the Corporation's Board of Director's in 1993 and 1996. Of the
shares repurchased, 528,000 shares were retired and the remaining 9,018,030
shares were held as Treasury Stock as of December 31, 1997. In August 1997,
the Corporation purchased an additional 9,900,990 shares of its Common Stock
to be held as Treasury Stock from the Milton Hershey School Trust for $500.0
million. This was in addition to the 18,099,546 shares (9,049,773 shares on a
pre-split basis) purchased from the Milton Hershey School Trust in August 1995
for $500.0 million. A total of 37,018,566 shares were held as Treasury Stock
as of December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No. 128).
Under FAS No. 128, Basic and Diluted Earnings per Share are computed based on
the weighted average number of shares of the Common Stock and the Class B
Stock outstanding as follows:
INCOME SHARES PER-SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
Net Income per Share--Basic
Net income $336,251 149,173,558 $2.25
=====
Effect of Dilutive Securities
Stock options -- 1,726,761
Performance stock units -- 112,649
Restricted stock units -- 3,389
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $336,251 151,016,357 $2.23
======== =========== =====
INCOME SHARES PER-SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
Net Income per Share--Basic
Net income $273,186 154,333,549 $1.77
=====
Effect of Dilutive Securities
Stock options -- 1,270,177
Performance stock units -- 84,697
Restricted stock units -- 1,528
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $273,186 155,689,951 $1.75
======== =========== =====
A-27
FOR THE YEAR ENDED DECEMBER 31, INCOME SHARES PER-SHARE
1995 (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
Net Income per Share--Basic
Net income $281,919 166,036,254 $1.70
=====
Effect of Dilutive Securities
Stock options -- 610,132
Performance stock units -- 74,576
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $281,919 166,720,962 $1.69
======== =========== =====
14. STOCK COMPENSATION PLAN
The long-term portion of the Key Employee Incentive Plan (KEIP), provides
for grants of stock-based compensation awards to senior executives and key
employees of one or more of the following: non-qualified stock options (fixed
stock options), performance stock units, stock appreciation rights and
restricted stock units. The KEIP also provides for the deferral of performance
stock unit awards by participants. As of December 31, 1997, 9.3 million shares
were authorized for grants under the long-term portion of the KEIP. In
February 1998, the Corporation's Board of Directors approved the registration
of an additional 6.0 million shares of Common Stock to be granted under the
KEIP.
In 1996, the Corporation's Board of Directors approved a world-wide, broad-
based employee stock option program, called HSY Growth. HSY Growth provides
all eligible employees with a one-time grant of 100 non-qualified stock
options. Under HSY Growth, over 1.2 million shares were granted on January 7,
1997.
The Corporation applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for the KEIP and HSY Growth. Accordingly, no compensation cost has
been recognized for its fixed stock option grants. Had compensation cost for
the Corporation's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under the KEIP and HSY Growth
consistent with the method of Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation," the Corporation's net income
and net income per share would have been reduced to the pro forma amounts
indicated below:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
Net income As reported $336,251 $273,186 $281,919
Pro forma 330,710 266,517 281,015
Net income per share--Basic As reported $2.25 $1.77 $1.70
Pro forma 2.22 1.73 1.69
Net income per share--Diluted As reported $2.23 $1.75 $1.69
Pro forma 2.19 1.71 1.69
The fair value of each option grant is estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend
yields of 1.9%, 2.4% and 2.7%, expected volatility of 20%, 20% and 21%, risk-
free interest rates of 6.2%, 5.6% and 7.8%, and expected lives of 5.7, 7.5 and
7 years.
FIXED STOCK OPTIONS
The exercise price of each option equals the market price of the
Corporation's Common Stock on the date of grant. Under the KEIP, options are
granted in January and generally vest at the end of
A-28
the second year and have a term of ten years. Options granted under the HSY
Growth program vest at the end of the fifth year and have a term of ten years.
A summary of the status of the Corporation's fixed stock options as of
December 31, 1997, 1996, and 1995, and changes during the years ending on
those dates is presented below:
1997 1996 1995
-------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,902,220 $27.40 4,435,800 $22.54 5,067,900 $21.62
Granted 1,485,250 $44.64 2,619,200 $33.08 237,400 $24.19
Exercised (656,350) $21.94 (1,062,980) $20.74 (843,100) $17.43
Forfeited (17,200) $33.06 (89,800) $31.92 (26,400) $24.24
--------- ---------- ---------
Outstanding at end of year 6,713,920 $31.73 5,902,220 $27.40 4,435,800 $22.54
========= ========== =========
Options exercisable at year-end 3,013,670 $24.38 3,670,020 $23.94 2,901,800 $21.50
========= ========== =========
Weighted-average fair value
of options granted during
the year (per share) $ 11.66 $ 8.70 $ 7.38
========= ========== =========
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF EXERCISE OUTSTANDING AS CONTRACTUAL AVERAGE EXERCISABLE AS OF AVERAGE
PRICES OF 12/31/97 LIFE IN YEARS EXERCISE PRICE 12/31/97 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
$12 11/16-26 1/2 2,718,570 5.2 $23.43 2,718,570 $23.43
$33 1/16-37 5/8 2,510,100 8.0 $33.08 295,100 $33.08
$44 1/2-56 1/4 1,485,250 9.0 $44.64 --
--------- ---------
$12 11/16-56 1/4 6,713,920 7.1 $31.73 3,013,670 $24.38
========= =========
PERFORMANCE STOCK UNITS
Under the long-term portion of the KEIP, each January the Corporation grants
selected executives and other key employees performance stock units whose
vesting is contingent upon the achievement of certain performance objectives.
If at the end of three-year performance cycles, targets for financial measures
of earnings per share, return on net assets and free cash flow are met, the
full number of shares are awarded to the participants. The performance scores
can range from 0% to 150%. The compensation cost charged against income for
the performance-based plan was $9.1 million, $5.8 million, and $3.6 million
for 1997, 1996, and 1995, respectively. The compensation cost associated with
the long-term portion of the KEIP is recognized ratably over the three-year
term based on the year-end market value of the stock. Performance stock units
and restricted stock units granted for potential future distribution were as
follows:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
----------------------------------------------------------------------
Shares granted 95,250 86,000 97,600
Weighted-average fair value at date of grant $ 45.17 $ 33.56 $ 24.56
A-29
Deferred performance stock units, deferred directors' fees and accumulated
dividend amounts totaled 384,009 shares as of December 31, 1997.
No stock appreciation rights were outstanding as of December 31, 1997.
15. 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 $15.8 million and $14.1 million
as of December 31, 1997 and 1996, 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 $372.7 million and $299.2 million as of December 31, 1997 and
1996, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF
DOLLARS
Raw materials $223,702 $204,419
Goods in process 36,015 31,444
Finished goods 334,639 316,726
-------- --------
Inventories at FIFO 594,356 552,589
Adjustment to LIFO (88,831) (77,611)
-------- --------
Total inventories $505,525 $474,978
======== ========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances included construction in progress of
$144.0 million and $91.9 million as of December 31, 1997 and 1996,
respectively. Major classes of property, plant and equipment were as follows:
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Land $ 31,340 $ 34,056
Buildings 540,729 533,559
Machinery and equipment 2,015,161 1,855,087
---------- ----------
Property, plant and equipment, gross 2,587,230 2,422,702
Accumulated depreciation (938,993) (820,807)
---------- ----------
Property, plant and equipment, net $1,648,237 $1,601,895
========== ==========
ACCRUED LIABILITIES
Accrued liabilities were as follows:
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Payroll and other compensation $ 92,102 $ 81,264
Advertising and promotion 86,184 77,351
Other 193,259 199,213
-------- --------
Total accrued liabilities $371,545 $357,828
======== ========
A-30
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows:
DECEMBER 31, 1997 1996
-----------------------------------------------------
IN THOUSANDS OF DOLLARS
Accrued post-retirement benefits $216,901 $207,881
Other 129,599 119,328
-------- --------
Total other long-term liabilities $346,500 $327,209
======== ========
16. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of chocolate and non-
chocolate confectionery, grocery and pasta products. The Corporation's
principal operations and markets are located in North America. In December
1996, the Corporation sold its Gubor and Sperlari European businesses.
Net sales, income before interest and income taxes and identifiable assets
of businesses outside of North America were not significant. Historically,
transfers of product between geographic areas have not been significant. In
1997 and 1996, sales to Wal-Mart Stores, Inc. and Subsidiaries amounted to
approximately 12% of total net sales.
17. QUARTERLY DATA (UNAUDITED)
Summary quarterly results were as follows:
YEAR 1997 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS
Net sales $1,002,469 $905,729 $1,151,610 $1,242,428
Gross profit 413,188 375,411 479,006 545,735
Net income 68,894 50,564 100,673 116,120
Net income per share--Basic(a) .45 .33 .68 .81
Net income per share--Diluted(a) .45 .33 .67 .80
YEAR 1996 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS
Net sales $931,514 $796,343 $1,072,336 $1,189,115
Gross profit 381,766 326,545 458,362 520,546
Net income 59,415 40,847 94,270 78,654(b)
Net income per share--Basic(a) .38 .26 .61 .51
Net income per share--Diluted(a) .38 .26 .61 .51
- --------
(a) Quarterly income per share amounts for 1997 and 1996 do not total to the
annual amount due to the changes in weighted average shares outstanding
during the year.
(b) Net income for the fourth quarter and year 1996 included an after-tax
loss on the sale of Gubor and Sperlari of $35.4 million. Net income per
share was similarly impacted.
A-31
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 29, 1997. 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-32
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,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997, appearing on pages A-12 through A-31. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
New York, New York
January 28, 1998
A-33
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 1997 1996 1995
----------- -------------- --------------- -----------
SUMMARY OF OPERATIONS(a)
Net Sales 8.72% $ 4,302,236 3,989,308 3,690,667
-------------- --------------- -----------
Cost of Sales 8.03% $ 2,488,896 2,302,089 2,126,274
Selling, Marketing and
Administrative 9.72% $ 1,183,130 1,124,087 1,053,758
Non-recurring
Credits/(Charges)(n) $ -- (35,352) 151
Interest Expense, Net 13.03% $ 76,255 48,043 44,833
Income Taxes 8.13% $ 217,704 206,551 184,034
-------------- --------------- -----------
Income from Continuing
Operations Before
Accounting Changes 10.48% $ 336,251 273,186 281,919
Net Cumulative Effect of
Accounting Changes $ -- -- --
Discontinued Operations $ -- -- --
-------------- --------------- -----------
Net Income 8.54% $ 336,251 273,186 281,919
============== =============== ===========
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic(m) 12.71% $ 2.25 1.77(h) 1.70(i)
--Diluted(m) 12.61% $ 2.23 1.75 1.69
Net Cumulative Effect of
Accounting Changes
--Basic and Diluted(m) $ -- -- --
Net Income--Basic(m) 10.62% $ 2.25 1.77(h) 1.70(i)
Net Income--Diluted(m) 10.52% $ 2.23 1.75 1.69
Weighted Average Shares
Outstanding--Basic(b) 149,174 154,334 166,036
Weighted Average Shares
Outstanding--Diluted(b) 151,016 155,690 166,721
Dividends Paid on Common
Stock 8.52% $ 98,390 93,884 91,190
Per Share(b) 11.22% $ .840 .760 .685
Dividends Paid on Class B
Common Stock 11.17% $ 23,156 20,879 18,900
Per Share(b) 11.22% $ .760 .685 .620
Income from Continuing
Operations Before
Accounting Changes as a
Percent of Net Sales 7.8% 7.7%(c) 7.6%
Depreciation 14.33% $ 135,016 119,443 119,438
Advertising 7.63% $ 202,408 174,199 159,200
Promotion 10.19% $ 451,580 429,208 402,454
Payroll 7.13% $ 524,827 491,677 461,928
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 9.70% $ 172,939 159,433 140,626
Total Assets 7.86% $ 3,291,236 3,184,796 2,830,623
Long-term Portion of Debt 13.87% $ 1,029,136 655,289 357,034
Stockholders' Equity .24% $ 852,806 1,161,021 1,082,959
Operating Return on
Average Stockholders'
Equity 33.4% 27.5% 22.2%
Operating Return on
Average Invested Capital 17.5% 17.8% 17.1%
Full-time Employees 14,900 14,000 13,300
STOCKHOLDERS' DATA(b)
Outstanding Shares of
Common Stock and
Class B Common Stock at
Year-end 142,932 152,942 154,532
Market Price of Common
Stock at Year-end 17.59% $ 61 15/16 43 3/4 32 1/2
Range During Year $63 7/8-42 1/8 51 3/4-31 15/16 33 15/16-24
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-36.
A-34
1994 1993 1992 1991
-------------- --------------- -------------- --------------
SUMMARY OF OPERATIONS(a)
Net Sales 3,606,271 3,488,249 3,219,805 2,899,165
-------------- --------------- -------------- --------------
Cost of Sales 2,097,556 1,995,502 1,833,388 1,694,404
Selling, Marketing and
Administrative 1,034,115 1,035,519 958,189 814,459
Non-recurring
Credits/(Charges)(n) (106,105) 80,642 -- --
Interest Expense, Net 35,357 26,995 27,240 26,845
Income Taxes 148,919 213,642 158,390 143,929
-------------- --------------- -------------- --------------
Income from Continuing
Operations Before
Accounting Changes 184,219 297,233 242,598 219,528
Net Cumulative Effect of
Accounting Changes -- (103,908) -- --
Discontinued Operations -- -- -- --
-------------- --------------- -------------- --------------
Net Income 184,219 193,325 242,598 219,528
============== =============== ============== ==============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic(m) 1.06(j) 1.65(k) 1.34 1.21
--Diluted(m) 1.05 1.65 1.34 1.21
Net Cumulative Effect of
Accounting Changes
--Basic and Diluted(m) -- (.58) -- --
Net Income--Basic(m) 1.06(j) 1.07(k) 1.34 1.21
Net Income--Diluted(m) 1.05 1.07 1.34 1.21
Weighted Average Shares
Outstanding--Basic(b) 174,367 179,929 180,775 180,767
Weighted Average Shares
Outstanding--Diluted(b) 174,740 180,495 181,160 181,112
Dividends Paid on Common
Stock 89,660 84,711 77,174 70,426
Per Share(b) .625 .570 .515 .470
Dividends Paid on Class B
Common Stock 17,301 15,788 14,270 12,975
Per Share(b) .5675 .5175 .4675 .425
Income from Continuing
Operations Before
Accounting Changes as a
Percent of Net Sales 7.3%(d) 7.4%(e) 7.5% 7.6%
Depreciation 114,821 100,124 84,434 72,735
Advertising 120,629 130,009 137,631 117,049
Promotion 419,164 444,546 398,577 325,465
Payroll 472,997 469,564 433,162 398,661
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 138,711 211,621 249,795 226,071
Total Assets 2,890,981 2,855,091 2,672,909 2,341,822
Long-term Portion of Debt 157,227 165,757 174,273 282,933
Stockholders' Equity 1,441,100 1,412,344 1,465,279 1,335,251
Operating Return on
Average Stockholders'
Equity 18.5% 17.8% 17.3% 17.0%
Operating Return on
Average Invested Capital 15.6% 15.0% 14.4% 13.8%
Full-time Employees 14,000 14,300 13,700 14,000
STOCKHOLDERS' DATA(b)
Outstanding Shares of
Common Stock and
Class B Common Stock at
Year-end 173,470 175,226 180,373 180,373
Market Price of Common
Stock at Year-end 24 3/16 24 1/2 23 1/2 22 3/16
Range During Year 26 3/4-20 9/16 27 15/16-21 3/4 24 3/16-19 1/8 22 1/4-17 9/16
1990 1989 1988 1987
--------------- -------------- ---------------- --------------
SUMMARY OF OPERATIONS(a)
Net Sales 2,715,609 2,420,988 2,168,048 1,863,816
--------------- -------------- ---------------- --------------
Cost of Sales 1,588,360 1,455,612 1,326,458 1,149,663
Selling, Marketing and
Administrative 776,668 655,040 575,515 468,062
Non-recurring
Credits/(Charges)(n) 35,540 -- -- --
Interest Expense, Net 24,603 20,414 29,954 22,413
Income Taxes 145,636 118,868 91,615 99,604
--------------- -------------- ---------------- --------------
Income from Continuing
Operations Before
Accounting Changes 215,882 171,054 144,506 124,074
Net Cumulative Effect of
Accounting Changes -- -- -- --
Discontinued Operations -- -- 69,443 24,097
--------------- -------------- ---------------- --------------
Net Income 215,882 171,054 213,949 148,171
=============== ============== ================ ==============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic(m) 1.19(l) .95 .80 .68
--Diluted(m) 1.19 .95 .80 .68
Net Cumulative Effect of
Accounting Changes
--Basic and Diluted(m) -- -- -- --
Net Income--Basic(m) 1.19(l) .95 1.18 .82
Net Income--Diluted(m) 1.19 .95 1.18 .82
Weighted Average Shares
Outstanding--Basic(b) 180,766 180,824 180,981 181,189
Weighted Average Shares
Outstanding--Diluted(b) 180,987 180,984 181,140 181,372
Dividends Paid on Common
Stock 74,161(f) 55,431 49,433 43,436
Per Share(b) .495(f) .370 .330 .290
Dividends Paid on Class B
Common Stock 13,596(f) 10,161 9,097 8,031
Per Share(b) .445(f) .3325 .2975 .2625
Income from Continuing
Operations Before
Accounting Changes as a
Percent of Net Sales 7.2%(g) 7.1% 6.7% 6.7%
Depreciation 61,725 54,543 43,721 35,397
Advertising 146,297 121,182 99,082 97,033
Promotion 315,242 256,237 230,187 171,162
Payroll 372,780 340,129 298,483 263,529
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 179,408 162,032 101,682 68,504
Total Assets 2,078,828 1,814,101 1,764,665 1,544,354
Long-term Portion of Debt 273,442 216,108 233,025 280,900
Stockholders' Equity 1,243,537 1,117,050 1,005,866 832,410
Operating Return on
Average Stockholders'
Equity 16.6% 16.1% 17.5% 19.0%
Operating Return on
Average Invested Capital 13.4% 13.2% 13.3% 13.5%
Full-time Employees 12,700 11,800 12,100 10,540
STOCKHOLDERS' DATA(b)
Outstanding Shares of
Common Stock and
Class B Common Stock at
Year-end 180,373 180,373 180,373 180,373
Market Price of Common
Stock at Year-end 18 3/4 17 15/16 13 12 1/4
Range During Year 19 13/16-14 1/8 18 7/16-12 3/8 14 5/16-10 15/16 18 7/8-10 3/8
A-35
NOTES TO THE ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(a) All amounts for 1987 and 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 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, the net 1995 Restructuring Credit
and the 1996 Loss on Sale of Businesses.
(b) All shares and per share amounts have been adjusted for the two-for-one
stock split effective September 13, 1996.
(c) Calculated percent excludes the 1996 Loss on Sale of Businesses. Including
the loss, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 6.8%.
(d) 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%.
(e) Calculated percent excludes the 1993 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%.
(f) Amounts included a special dividend for 1990 of $11.2 million or $.075 per
share of Common Stock and $2.1 million or $.0675 per share of Class B
Common Stock.
(g) 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%.
(h) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1996 included a $.23 per share
loss on the sale of the Gubor and Sperlari businesses. Excluding the
impact of this loss, Income Per Share from Continuing Operations Before
Accounting Changes--Basic and Net Income Per Share--Basic would have been
$2.00.
(i) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1995 included a net $.01 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--Basic and Net Income Per
Share--Basic would have been $1.69.
(j) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1994 included a $.46 per share
restructuring charge. Excluding the impact of this charge, Income Per
Share from Continuing Operations Before Accounting Changes--Basic and Net
Income Per Share--Basic would have been $1.52.
(k) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1993 included a $.23 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--Basic would have been $1.43.
(l) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1990 included an $.11 per share
Restructuring Gain, Net. Excluding the impact of this gain, Income Per
Share from Continuing Operations Before Accounting Changes--Basic and Net
Income Per Share--Basic would have been $1.08.
(m) In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(FAS No. 128). Under FAS No. 128, Basic and Diluted Earnings per Share are
required to be computed for all prior-period EPS data.
(n) Includes the 1996 Loss on Sale of Businesses; the net 1995 Restructuring
Credit; the 1994 Restructuring Charge; the 1993 Gain on Sale of Investment
Interest and the 1990 Restructuring Gain, Net.
A-36
[MAP OF HERSHEY PARK AREA APPEARS HERE]
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
This map will help you
find your way to the
Hershey Theatre (located on East Caracas Avenue)
and Hershey's Chocolate World
(located on Park Blvd.)
Hershey, PA
0HERSHEY 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 16, 1998, 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 28, 1998, 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 eight nominees for Director listed
on the reverse side, FOR the approval of the Key Employee Incentive Plan as
amended, and FOR the approval of Arthur Andersen LLP as the Corporation's
independent public accountants for 1998.
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, 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:
FOR AGAINST ABSTAIN
--- ------- -------
Item 2. Approval of Arthur Andersen LLP as
the Corporation's independent
public accountants for 1998. [_] [_] [_]
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
come before the meeting.
Dated: 1998
--------------------, ---------------------------------
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.
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 16, 1998, appoints K. L. Wolfe, J. P. Viviano, and R. M.
Reese, and each or any of them as Proxies, with full power of
R 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 28, 1998, at the Hershey Theatre, East Caracas
O Avenue, Hershey, Pennsylvania, or at any adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
X 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 TEN NOMINEES FOR DIRECTOR
Y AND FOR THE APPROVAL OF ARTHUR ANDERSEN LLP AS THE CORPORATION'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR 1998.
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 without regard to class: W.H.
Alexander, R.H. Campbell, C.M. Evarts, 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
1998.
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
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 16, 1998, 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 28, 1998 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 21, 1998, 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 ChaseMellon
Shareholder Services as agent to tally the vote.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[X] Pleasemark
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, B. Guiton
Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
WITHHOLD
FOR all AUTHORITY
FOR all Nominees for all
Nominees Except* Nominees
[_] [_] [_]
*Exceptions:
--------------------------------------------------------------------
ITEM 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1998.
For Against Abstain
[_] [_] [_]
- --------------------------------------------------------------------------------
In its discretion, the Trustee is 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.
Signature(s) _________________________________________ Date _______,1998
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
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 16, 1998, 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 28, 1998, 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 TEN NOMINEES FOR DIRECTOR AND FOR THE APPROVAL
OF ARTHUR ANDERSEN LLP AS THE CORPORATION'S INDEPENDENT PUBLIC ACCOUNTANTS FOR
1998. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[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, B. Guiton
Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
WITHHOLD
FOR all AUTHORITY
FOR all Nominees for all
Nominees Except* Nominees
[_] [_] [_]
*Exceptions:
--------------------------------------------------------------------
ITEM 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1998.
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 Annual Meeting, please mark the Will Attend block.
WILL
ATTEND
[_]
Signature(s) ____________________________________________ Date ____,1998
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.
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
- --------------------------------------------------------------------------------
Presenting this coupon at Hershey's Chocolate World entitles you to 25% off all
confectionery products and Hershey's gift and souvenir items from 9:00 a.m.
until 6:00 p.m. on April 28, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Presenting this coupon at Hershey's Chocolate World entitles you to a free
sample of Hershey product distributed from 9:00 a.m. until 6:00 p.m. on April
28, 1998
- --------------------------------------------------------------------------------
Stockholders must be present in person to obtain product sample and discount.
Limit one product sample per stockholder.
Offer good on April 28, 1998 only.
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
Admission Ticket
Hershey Foods Corporation
1998 Annual Meeting of Stockholders
Tuesday, April 28, 1998
2:00 P.M.
Hershey Theatre
East Caracas Avenue
Hershey, PA
- --------------------------------------------------------------------------------
March 16, 1998
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a voting instruction card and Proxy
Statement which explains the items to be voted upon at this year's Annual
Meeting of Stockholders on April 28, 1998. Your completed card must be
received by April 21, 1998 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 them as registered
stockholders.
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
Enclosures
March 16, 1998
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' 1997 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 21, 1998 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 28, 1998.
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
Enclosures
March 16, 1998
TO: HERSHEY EMPLOYEE STOCK PURCHASE PLAN (HESPP) PARTICIPANTS
I am pleased to provide you a copy of Hershey Foods' 1997 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
