Letter to
Stockholders

Notice of 2001
Annual
Meeting
and Proxy
Statement

2000 Annual
Report to
Stockholders

Proxy Statement and 2000 Annual Report to Stockholders

     March 15, 2001

To Our Stockholders:

Whether it was the first year of the New Millennium or the last year of the Old Millennium, 2000 was an eventful year for Hershey Foods Corporation. The Corporation began the year experiencing a few residual effects of the old century and ended the year embracing the promise and challenges of the new century. It became evident that we were again upon our historical track of sustainable growth, and the price of the stock was more aligned with the economic value of the Corporation based on that performance.

During the first six months of 2000, Hershey’s domestic confectionery retail sales lagged the industry’s growth rate as a result of our shipping problems during the second half of 1999. At that time, we were introducing our first half 2000 programs to customers, but their preoccupation with our service levels plus concerns about our ability to achieve acceptable service levels in the future led to some sales shortfalls versus our expectations in the first half of 2000. As anticipated, however, demand for Hershey’s products during the second half materialized well as a result of the Corporation’s selling and marketing programs and customers’ renewed faith in our ability to deliver products in a satisfactory manner. We executed well at Easter 2000 when the second half programs were being sold, a performance which essentially re-established credibility with our customers.

During the first part of the year, the Corporation experienced a slight erosion of domestic market share. We are happy to report, however, that our retail sales growth rate began to match the category in August 2000, and it exceeded the industry growth rate in subsequent periods, especially during the important Halloween and Christmas seasons. This performance at retail led to a market share gain for Hershey in 2000 and enhanced our position as the leading confectionery company in the United States. Hershey Canada and Hershey Mexico also achieved excellent results for the year, further strengthening Hershey’s overall position as the leading confectioner in North America.

Hershey International had an excellent year in 2000 compared with 1999 when its business was also hampered by the Corporation’s shipping difficulties. Customers were gratified by our ability to deliver their orders and restored their inventories to appropriate levels during 2000. In addition, the division benefited from market growth initiatives

in Latin America, especially Brazil. Operationally, the division was profitable during the year, but earnings were reinvested in further growth initiatives, resulting in no contribution to the Corporation’s bottom line.

Financial Performance

In the aggregate, Hershey Foods delivered fine financial results in 2000. On a basis comparable to 1999, our sales in 2000 grew by 7.6 percent, essentially all volume growth. Eliminating one-time items such as the gain on the sale of the Corporation’s pasta business in January 1999 (along with one month of pasta operating results), the gain on a change in the retiree medical program in the first quarter of 1999 and the gain on the swap of corporate aircraft in the first quarter 2000, net income increased by 15.3 percent. Earnings per share-diluted grew 17.7 percent on the same basis, reflecting the higher income and fewer weighted average shares outstanding. Hershey’s stock price increased by 35.7 percent, significantly outperforming the S & P 500 and the S & P Food Group. Our dividend was increased for the 26th consecutive year, further enhancing our performance on a total return basis.

Systems Issues

An important step during the early part of 2000 was to fix the few remaining glitches in our new enterprise-wide information system with which we experienced serious difficulties in the latter half of 1999, when the final phase was implemented. These problem areas were remedied, and we began to execute the business with acceptable service levels in time for the important Easter season. The most critical test, however, was our peak shipping period for Back-to-School/Halloween and Christmas which stretches from July through October. We are happy to report that our system performed well throughout this period.

With over 18 months experience using the system, Hershey employees are much more comfortable and are able to execute at a higher level of performance. We have moved into a continuous improvement mode and have begun to realize the benefits of the new system’s power. We now have real time access to key data which leads to better informed business management decisions.

Enhanced Distribution Capability

Another reason for our improved performance in 2000 was the start up of a new Eastern Distribution Center (EDC III) near Hershey, PA, as well as a revamped Southeastern Distribution Center near Atlanta, GA. During 1999, a major issue for Hershey, which exacerbated the slow and problem-ridden start-up of the final phase of the information system, was the lack of dock door space during peak shipping demand. The new facilities, especially EDC III with 160 dock doors, have more than doubled the Corporation’s shipping capacity in the eastern United States. The new warehouse management system deployed at EDC III is highly compatible with our enterprise-wide information system, and the interface is working very well. Our third party operator, Power Logistics, did an excellent job of hiring and training staff, and their day-to-day management of the facility is first rate.

Full utilization of EDC III was achieved in November 2000, and by the end of the year, six expensive surge storage facilities were eliminated, leading to cost savings in logistics. The success of these new facilities has encouraged us to continue to revamp our entire distribution system, specifically the western and mid-western facilities. Until the completion of this project, our logistics and warehousing costs will remain higher than we would like, but the additional investment required to accomplish this revamping and consolidation is expected to provide a further reduction in costs and considerable payback in terms of improved customer service in the years ahead.

Acquisition

The December 2000 acquisition of the intense and breath freshener mints and gum businesses of Nabisco, Inc. should prove positive for the Corporation. We paid $135 million to acquire the businesses, including Ice Breakers and Breath Savers Cool Blasts intense mints, Breath Savers mints, and Ice Breakers, Carefree, Stick*Free, Bubble Yum and Fruit Stripe gums. Also included in the purchase were

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manufacturing machinery and equipment and a gum-manufacturing plant in Las Piedras, Puerto Rico. The businesses had 1999 sales of approximately $270 million.

Thus far the integration of this business is proceeding according to plan. This is a fine, profitable business which adds to our position in the confectionery, gum and mint category. Although initial transition costs will moderate the first-year earnings contribution, the acquisition is expected to deliver earnings accretion in 2001 and beyond.

New Products

While it is true there were no blockbuster new product introductions in 2000, the Corporation did benefit from significant new product activity during the year. Kit Kat Big Kat wafer bar was quite successful, and Twizzlers Twist-n-Fill candy, Hershey’s Nuggets creamy milk chocolate with raisins and almonds, York Bites, Kit Kat Bites and Heath Bites also made significant contributions to our sales growth during the year. Our new product development funnel is quite full, and we expect to realize additional contributions from new products in 2001.

Merchandising

Given the impulse nature of the confectionery business, in-store merchandising, especially those activities associated with theme events and seasons, is critical to Hershey’s success in driving retail sales growth. Our seasonal business was quite strong in 2000 with solid performances in the three major seasons: Easter, Halloween and Christmas. Our summer theme program fell short of our expectations in 2000, but the tie-in with the highly successful movie, Dr. Seuss’s How the Grinch Stole Christmas, worked particularly well in conjunction with the seasonal activities normally associated with Christmas.

Board and Management Changes

We are very pleased that Richard H. Lenny joined the Corporation as President and Chief Executive Officer and became a member of the Hershey Foods Board, effective March 12, 2001. I will remain Chairman of the Board during a transitional period not to exceed one year, at which time Mr. Lenny will add the Chairman position to his title. Mr. Lenny is joining us after heading up Kraft Foods’ Nabisco Biscuit and Snack business, which includes such brands as Oreo, Chips Ahoy!, Ritz, Planters and Life Savers. He is an accomplished executive with a 24-year career in packaged goods and has a strong track record of building brands and people. His enormous record of success will be a tremendous asset to Hershey Foods. I am confident our stockholders and employees can look to a bright future as he assumes the leadership of our Corporation. The election of Mr. Lenny was the culmination of a planned succession process and a search by the Board of Directors for my successor as I approached the normal retirement age for Hershey executives.

William H. Alexander, who has been a director since 1995, will step down from the Board at the 2001 Annual Meeting of Stockholders in accordance with the policies of Hershey Trust Company and Milton Hershey School regarding service on the Board. The Corporation has benefited greatly from Mr. Alexander’s judgment and sound business insight during his time on the Board, and we thank him for his contributions to the Corporation. Effective September 20, 2000, Allan Z. Loren, Chairman and Chief Executive Officer of The Dun & Bradstreet Corporation, resigned from the Board due to scheduling conflicts with our meeting dates. We also thank him for his service on the Board.

We look forward to J. Robert Hillier joining the Board following the 2001 Annual Meeting of Stockholders. He is a successful entrepreneur, having founded and built The Hillier Group into one of the leading architectural firms in the United States. Mr. Hillier also serves on the boards of Hershey Trust Company and Milton Hershey School and is Chair of the Milton Hershey School Trust’s Investment Committee.

On December 11, 2000, William F. Christ, formerly Senior Vice President, Chief Financial Officer and Treasurer, was named Executive Vice President and Chief Operating Officer, with responsibility for the Corporation’s confectionery, grocery and international businesses, operations and manufacturing shared

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services, and research and development activities. A 31-year veteran of Hershey Foods, he brings solid leadership skills, as well as broad experience and in-depth knowledge of Hershey’s businesses, to the task of leading Hershey forward.

Mr. Christ succeeds Michael F. Pasquale, who resigned as an officer and director of the Corporation in December. Mr. Pasquale had served Hershey Foods very well in a variety of capacities for 22 years and made many excellent contributions to the Corporation’s growth and strategic direction.

Concurrently, Frank Cerminara, formerly Vice President, Procurement, was named Vice President, Chief Financial Officer and Treasurer, succeeding Mr. Christ. A 28-year veteran of Hershey Foods, Mr. Cerminara has held a variety of positions in finance, marketing, commodity procurement and order fulfillment. He has a solid grounding in finance, as well as an extensive background in operational areas of critical importance to the Corporation.

George F. Davis was named Vice President and Chief Information Officer, effective January 1, 2001. He is responsible for the Corporation’s Information Technology Integration Group, e-business/e-commerce and electronic data interchange activities. He comes to Hershey from Computer Services Corporation where he served as Vice President–Global Infrastructure Services.

Our Future

While Hershey Foods went through a period of some difficulty during late 1999 and early 2000, the Corporation’s future looks bright. Our corporate-wide information system is functioning smoothly, and the revamping of our distribution system is moving apace. New products continue to make significant contributions to our growth, while seasonal and thematic merchandising create incremental sales opportunities. We have made an excellent acquisition in a product area which enhances our overall presence in the domestic confectionery category. Market share has been strengthened, and our brands continue to be recognized for their power by our customers and their attractiveness by consumers.

Above all, Hershey employees remain focused on their responsibilities and provide the Corporation with the ultimate competitive advantage, an organization devoted to providing the best quality products and services possible. We thank our employees for their dedication and loyalty. We are truly a stronger, more competitive enterprise as we enter the New Millennium under new leadership.

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2001 Annual Meeting of Stockholders

Hershey’s On-Line Annual Report

For a more comprehensive look at Hershey Foods and its operations during 2000, please visit www.hersheys.com and click on “View HERSHEY’S Annual Report 2000.”

Safe Harbor Statement

Please refer to the Safe Harbor Statement on page A-11 for information about factors which could cause future results to differ materially from forward-looking statements, expectations and assumptions expressed or implied in this publication.

TABLE OF CONTENTS

Notice of Annual Meeting

and

Proxy Statement

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
on
April 24, 2001

The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held at 2:00 p.m. on April 24, 2001 at the Hershey Theatre, 15 East Caracas Avenue, Hershey, Pennsylvania 17033 for the following purposes:

In accordance with the By-Laws and action of the Board of Directors, stockholders of record at the close of business on February 26, 2001 will be entitled to notice of, and to vote at, the meeting and any and all adjournments thereof.

March 15, 2001

Please follow the instructions on the enclosed proxy card for voting by Internet or by telephone whether or not you plan to attend the meeting in person, or if you prefer, kindly mark, sign and date the enclosed proxy card and return it promptly in the enclosed, postage-paid envelope.

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 (“Annual Meeting”) which will be held at 2:00 p.m., Tuesday, April 24, 2001 at the Hershey Theatre, 15 East Caracas Avenue, Hershey, Pennsylvania, and at any and all adjournments of that meeting. This Proxy Statement and the enclosed proxy card are being sent to stockholders on or about March 15, 2001. The Corporation’s principal executive offices are located at 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810.

Shares represented by properly voted proxies received by the Corporation at or prior to the Annual Meeting will be voted according to the instructions indicated by such proxies. 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, FOR approval of the appointment of Arthur Andersen LLP as the Corporation’s independent auditors for 2001 and AGAINST the stockholder proposal on genetically engineered food, if presented at the meeting. As to any other business which may properly come before the Annual Meeting, the persons named on the proxy card will vote according to their best judgment.

Proposal No. 1 – ELECTION OF DIRECTORS

Nine directors are to be elected at the Annual Meeting, each to serve until the next Annual Meeting and until his or her successor shall have been elected and qualified. With the exception of J. Robert Hillier, each of the nominees named in the following pages is currently a member of the Board of Directors (the “Board”). Allan Z. Loren, formerly a director, resigned from the Board on September 30, 2000, and Michael F. Pasquale, formerly Executive Vice President and Chief Operating Officer and a director, resigned from the Board on December 11, 2000. William H. Alexander, currently a director of the Corporation and a member of the Board of Directors of Hershey Trust Company and the Board of Managers of Milton Hershey School, will resign from the Board as of the Annual Meeting on April 24, 2001 in accordance with the policies of Hershey Trust Company and the Milton Hershey School regarding service on the Hershey Foods Board. Pursuant to the Corporation’s Restated Certificate of Incorporation, as amended (“Certificate”), and By-Laws, one-sixth of the directors, which equates presently to two directors, are to be elected by the Corporation’s Common Stock, one dollar par value (“Common Stock”), voting separately as a class. The nominees receiving the greatest number of votes of the Common Stock voting separately as a class will be elected.

Messrs. Robert H. Campbell and Mackey J. McDonald have been nominated by the Board for the positions to be elected separately by the Common Stock. The remaining seven individuals listed have been nominated by the Board for the seven positions to be elected by the holders of the Common Stock and the Corporation’s Class B Common Stock, one dollar par value (“Class B Stock”), voting together without regard to class. The seven nominees receiving the greatest number of votes of the Common Stock and Class B Stock voting together will be elected. In case any of the nominees should become unavailable for election for any reason not presently known or contemplated, the persons named on the proxy card will have discretionary authority to vote pursuant to the proxy for a substitute.

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The Board of Directors recommends a vote FOR the director nominees listed above, and proxies that are returned will be so voted unless otherwise instructed.

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BOARD COMMITTEES

The Board has four standing committees: 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, the Board from time to time establishes committees of limited duration for special purposes.

The Committee will consider nominees recommended by stockholders. Such recommendations must comply with the procedures for nomination set forth in the section entitled “Stockholder Proposals and Nominations,” appearing on page 25.

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DIRECTORS’ ATTENDANCE

There were 7 regular meetings and 3 special meetings of the Board of Directors during 2000. No director attended less than 86% of the sum of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served during 2000. Average attendance for all of these meetings equaled 98%.

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DIRECTORS’ COMPENSATION

Directors who are employees of the Corporation receive no remuneration for their services as directors.

One-third of the annual retainer must be paid in Common Stock. The remainder may be taken in cash or Common Stock (meeting and chair fees are payable in cash only). A director may also defer receipt of the retainer and meeting fees until his or her retirement as a director.

All directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at Board and committee meetings and for minor incidental expenses incurred in connection with performance of directors’ services. The Chair of the Compensation and Executive Organization Committee is also compensated for attendance at the Annual Meeting if the Annual Meeting does not coincide with a scheduled Board Meeting. 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 for individuals who became directors prior to December 31, 1996. This program is a self-funded life insurance program on the directors and funds charitable donations by the Corporation to educational institutions 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 million after five years of service. With the exception of R.H. Lenny, who became a director in 2001, all current directors and eleven retired directors participate in the program. The amount of the charitable donation per current participating director is $1 million.

AUDIT COMMITTEE REPORT

The role of the Audit Committee of the Board of Directors is to assist the Board in its oversight of the Corporation’s financial reporting process. The Board has determined that all members of the Audit Committee are “independent,” as required by applicable listing standards of the New York Stock Exchange. The Audit Committee operates pursuant to a Charter that was last amended and restated by the Board on February 7, 2001, a copy of which is attached to this Proxy Statement as Appendix B. As set forth in the Charter, management of the Corporation is responsible for the preparation, presentation and integrity of the Corporation’s financial statements, the Corporation’s accounting and financial reporting principles, and internal controls designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for auditing the Corporation’s financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States.

In the performance of its oversight function, the Audit Committee has considered and discussed the audited financial statements with management and the independent auditors. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as currently in effect. Finally, the Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect, has discussed with the independent auditors the auditors’ independence from the Corporation and its management, and has considered whether the provision of non-audit services to the Corporation by the independent auditors is compatible with maintaining the auditors’ independence.

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The members of the Audit Committee are not professionally engaged in the practice of auditing or accounting, are not employed by the Corporation for accounting, financial management or internal control purposes, and are not experts in the fields of accounting or auditing, including with respect to auditor independence. Members of the Audit Committee rely, without independent verification, on the information provided to them and on the representations made by management and the independent auditors. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles and policies, or internal controls and procedures, designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not assure that the audit of the Corporation’s financial statements has been carried out in accordance with auditing standards generally accepted in the United States, that the financial statements are presented in accordance with accounting principles generally accepted in the United States or that the Corporation’s auditors are in fact “independent.”

Based upon the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Charter, the Audit Committee recommended to the Board that the audited financial statements be included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000 to be filed with the Securities and Exchange Commission.

SUBMITTED BY THE AUDIT COMMITTEE OF THE CORPORATION’S
BOARD OF DIRECTORS

VOTING SECURITIES

The Corporation has shares of two classes of stock outstanding, Common Stock and Class B Stock. At the close of business on February 26, 2001, the record date for the Annual Meeting, there were outstanding 106,049,141 shares of Common Stock and 30,441,858 shares of Class B Stock, all of which are entitled to be voted. Holders of record of the Corporation’s Common Stock on February 26, 2001 will be entitled to cast one vote for each share held, and holders of record of the Class B Stock on February 26, 2001 will be entitled 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 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 (defined below) 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.

As of February 26, 2001, 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.

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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 Trust and Hershey Trust Company are as indicated in the section entitled “Description of the Milton Hershey School Trust and Hershey Trust Company.”

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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 (the “Milton Hershey School Trust”), 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. The Milton Hershey School Trust will be entitled to cast 12,276,671 of the total 106,049,141 votes, or 11.6%, entitled to be cast on matters required to be voted on separately by the holders of the Common Stock, and 315,336,731 of the total 410,467,721 votes, or 76.8%, 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.

Hershey Trust Company is a state-chartered trust company and holds 248,183 shares of the Corporation’s Common Stock in its capacity as institutional fiduciary for 70 estates and trusts unrelated to the Milton Hershey School Trust. Hershey Trust Company also holds 262,000 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 for the above-noted individual trusts and estates, and as direct owner of investment shares, will be entitled to vote 12,786,854 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 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

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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 16 members of the Board of Directors of Hershey Trust Company and of the Board of Managers of Milton Hershey School, including William H. Alexander, who is currently a director of the Corporation but will resign as such as of the Annual Meeting on April 24, 2001; C. McCollister Evarts, M.D., who is a director of the Corporation; J. Robert Hillier, who has been nominated to become a new director of the Corporation; and Kenneth L. Wolfe, who is a director and Chairman of the Board of the Corporation. 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. 2 – APPOINTMENT OF AUDITORS

The Board of Directors, on the recommendation of the Audit Committee, has appointed Arthur Andersen LLP as independent auditors for the Corporation for the year ending December 31, 2001. Although not required to do so, the Board 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 will reconsider its appointment. Representatives of Arthur Andersen LLP will be present at the Annual Meeting with the opportunity to make a statement if they so desire and will be available to respond to questions.

Set forth below are the aggregate fees billed by Arthur Andersen LLP for professional or other services rendered to the Corporation during the year ended December 31, 2000:

The amount set forth as “All Other Fees billed by Andersen Consulting” was billed by Andersen Consulting for services rendered prior to August 7, 2000. On that date, Andersen Consulting formally became independent of Arthur Andersen LLP.

The affirmative vote of a majority of the votes represented at the Annual 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 proxies that are returned will be so voted unless a contrary vote is designated.

Proposal No. 3 – STOCKHOLDER PROPOSAL

Jeremy Kagan, c/o As you Sow, Barbara Overby, trustee of the Paul M. Hancock Second Charitable Remainder Trust, c/o Trillium Asset Management, Citizens Core Growth Fund, Adrian Dominican Sisters, Domini Social Investments, and Mercy Health Services advised the Corporation that they intend to present the following stockholder proposal at the Annual Meeting. The addresses and the share ownership of the proponents will be furnished to any stockholder upon request.

Report on Phasing Out Genetically Engineered Food

WHEREAS:
Domestic and International markets for genetically engineered (GE) foods are threatened by extensive resistance:

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There is scientific concern that GE agricultural products may be harmful to humans, animals, or the environment:

RESOLVED:
Shareholders request that the Board of Directors review our Company’s sales of genetically engineered (GE) food products and issue a report (prepared at reasonable cost and omitting proprietary information) which would lay out the steps required to phase out GE crops, organisms, or products thereof from all products sold under the company’s brand names or private labels, unless long term testing proves them safe to humans, animals and the environment.

Supporting Statement

We suggest this report list our Company’s products that are derived from GE ingredients, identify alternative sources of non-GE food, and include an action plan and timeline to phase out all sales of GE food within 24 months. We believe that our company can avoid financial, legal and reputational risk, gain competitive advantage, and build brand name in the marketplace by completely phasing out the sale of GE foods.

Board of Directors’ Statement in Opposition to the Proposal

Above all else, the Corporation is committed to providing products that are safe and wholesome. The Corporation’s leadership position in its industry has resulted, in part, from its steadfast commitment to the quality and safety of its products. Customers and consumers of the Corporation’s products have relied on that commitment throughout the Corporation’s 107 year history, and never before has there been a greater emphasis by the Corporation on assuring the quality and safety of its products.

The proponents request that a review and report of the Corporation’s sales of GE food be undertaken and compiled by the Board, with the goal of establishing an action plan and timeline to eliminate GE food

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from the Corporation’s products within 24 months. The proposal fails to take into consideration the complexity surrounding the growth and distribution of agricultural commodities.

The Corporation controls the safety and quality of its ingredients by requiring that all suppliers adhere strictly to the regulatory standards of the United States Food and Drug Administration (“FDA”), the Environmental Protection Agency (“EPA”) and the United States Department of Agriculture (“USDA”). Each of these agencies plays a role in ensuring that the United States’ food supply is the safest in the world, and the Corporation relies on these agencies for leadership and scientific expertise in determining which foods are safe. These agencies have repeatedly assured that there are no meaningful health, safety or environmental risks associated with GE crops, and, in fact, have recognized their many nutritional, healthful and environmental benefits.

Given the storage and distribution systems utilized for agricultural commodities in the United States, it would be extremely costly and virtually impossible to segregate GE crops from non-GE crops. Suppliers of certain commodities, such as corn, have stated that they cannot guarantee that supplies will be GE-free. Any requirement to use only GE-free ingredients would therefore deprive the Corporation of the flexibility needed to manufacture the highest quality products at competitive prices. The Corporation would suffer a severe competitive disadvantage vis-à-vis its major competitors if forced to pursue the requested course of action.

Adoption of this proposal will require the affirmative vote of a majority of the votes represented at the Annual Meeting in person or by proxy of the Common Stock and Class B Stock voting together without regard to class.

The Milton Hershey School Trust and Hershey Trust Company have informed the Corporation that they intend to cast their votes against Proposal No. 3. These votes represent 76.9% of all of the votes entitled to be cast on the proposal. Since this represents a majority of the votes entitled to be cast, the proposal would be defeated.

The Board of Directors recommends a vote AGAINST Proposal No. 3, and proxies that are returned will be so voted unless a contrary vote is designated.

2000 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:

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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 industrial companies, some of which are from the food industry. In the performance graph on page 23, the Corporation’s performance is compared, in part, 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 are not readily available. Also, the peer group includes some companies that are not in the Food Group Index because the Corporation selects those companies it believes to be 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 to stock price appreciation.

The key elements of the Corporation’s executive compensation program consist of base salary, an annual cash incentive program, and a long-term incentive program consisting of performance 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- and long-term business goals. To ensure proper balance in the achievement of these business goals, the incentive program places greater dollars at risk in long-term incentives compared to short-term incentives. The long-term incentive program is designed especially to ensure 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 in 2000, and it reviewed and approved the total compensation of the most highly-compensated executive officers, including those 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 determined initially by evaluating the responsibilities of the position held, the experience of the individual, and 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 his/her position in the applicable salary grade. The

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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 their positions 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 2000, the Committee reviewed the Corporation’s actual business results versus plan goals and the results achieved by Mr. Wolfe on various objectives the Committee established in 1999. Based on the Committee’s review of the Corporation’s 1999 performance, Mr. Wolfe received no annual increase in salary for 2000.

Annual Incentive Program

The Corporation’s executive officers, as well as other key managerial and professional employees, are eligible for an annual cash incentive award under the Annual Incentive Program (“AIP”) of the Incentive Plan. Participating executive officers are eligible to earn individual awards expressed as a percentage of base salary.

The final award is the product of the executive officer’s base salary, the applicable target percentage, 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 2000 were based on financial measures including diluted earnings per share, economic value added and free cash flow. For executive officers at the business unit level, the performance objectives for 2000 were varying combinations of diluted earnings per share; economic value added; free cash flow; business unit contribution income; various sales, growth rate and customer service objectives; and certain subjective measurements as determined by the Chief Operating Officer. Adjustments are made to the performance results, if necessary, to take into account extraordinary or unusual items occurring during the performance year. Payment of annual cash incentive awards may be deferred to a later date at the election of the executive officer. 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.

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 an executive officer is 175%. The maximum score on the individual performance score is 120%. In 2000, the applicable individual performance score for the Chairman of the Board and Chief Executive Officer and Executive Vice President and Chief Operating Officer was 120% with the Committee having discretion to adjust this percentage downward. The range of the target percentages of base salary used in 2000 for annual cash incentive awards for executive officers was 35% to 60%, with the highest rate of 60% applicable only to Mr. Wolfe.

For 2000, the grant of annual cash incentive awards was conditioned upon the Corporation achieving a specific corporate performance level. This performance level is defined as a minimum rate of return which average total invested capital must earn before any awards are paid.

In 2000, corporate-level participants in the AIP (which included Mr. Wolfe) exceeded the corporate performance objectives set for diluted earnings per share, free cash flow and economic value added. Based on these results, Mr. Wolfe was awarded a 2000 annual cash incentive award of $640,584.

Long-Term Incentive Program—Performance Stock Units

Performance stock units (“PSUs”) were granted contingently in January 2000 under the Incentive Plan to those 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 2000). PSU grants are based upon a percentage of the executive’s annual salary. PSUs are granted every year and are earned based upon the Corporation’s performance over a three-year cycle. Each year begins a new three-year cycle. Provided

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the Corporation has achieved the established performance objectives at the end of the three-year cycle, a payment is made either in shares of Common 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, specific adjustments established by the Committee may be made to the corporate performance to take into account extraordinary or unusual items occurring during the performance cycle. Payment of PSU awards 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 is earned) and stock price appreciation. The established performance measures are basic earnings per share, economic value added and cumulative free cash flow. The performance scores can range from 0% to 150%.

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 for 2000 was five times his base salary.

In January 1998, each eligible member of the senior executive group was granted PSUs having a value at the time of grant equal to a percentage of his or her annual salary. This percentage was determined by the Committee based on the recommendation of senior management and competitive survey information. For the three-year cycle ending December 31, 2000, the performance objective established for the grant for cumulative free cash flow was exceeded, the performance objective for economic value added was partially achieved and the performance objective for basic earnings per share was not achieved. Accordingly, Mr. Wolfe’s award was valued at $234,847 based on the December 2000 average market value of the PSUs from the 1998 grant.

The table in this Proxy Statement, entitled “Long-Term Incentive Program Performance Stock Unit Awards in Year-Ended December 31, 2000,” provides additional information regarding PSU grants for the five most highly-compensated executive officers; P. N. Le Maire, an appointed officer; and M. F. Pasquale, a former executive officer who resigned in December 2000 (collectively the “named executive officers”).

Long-Term Incentive Program—Stock Options

Under the Incentive Plan, stock options are granted periodically to the Corporation’s senior executive group as well as to other key managerial 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 the 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 amount of options outstanding or previously granted. While stock options have been granted annually to members of the senior executive group, the Committee may elect not to grant stock options in a given year. Stock option recipients other than the senior executive group (over 500 key employees) generally receive stock option grants every two years.

Beginning with stock options granted after 1995, employees desiring to receive cash upon exercise through a same-day purchase and sale transaction must first meet certain minimum stockholding requirements. 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 2000 was five times his base salary.

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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, and again in 1998 and 1999, stock options granted to the senior executive group had a two-year vesting requirement similar to that already applicable to the non-senior management group receiving options. Beginning in 2000, stock options granted to all eligible recipients, including the senior executive group, have a four-year step vesting requirement of 25% per year, with full vesting occurring at the end of the fourth year following the date of grant. These approaches are designed as incentives 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 2000, Mr. Wolfe received options to purchase 54,650 shares of Common Stock with an exercise price of $45.00 per share, the closing market price on the day preceding the grant. The Committee has the right under the Incentive Plan to grant stock options that are not subject to the requirements set forth above. In 2000, the Committee made two special grants of options to purchase 60,000 shares and 40,000 shares, respectively, of Common Stock to K. L. Wolfe, which vest and become exercisable only after the achievement of specific share price thresholds and certain other criteria. These special grants will expire on January 1, 2002.

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 ensure 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 2000, as in previous years, a substantial portion of the Corporation’s executive compensation consisted of performance-based variable elements. 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

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Summary of Cash and Certain Other Compensation

The following table shows for the fiscal years ended December 31, 2000, 1999 and 1998 the cash compensation paid by the Corporation, as well as certain other compensation paid or accrued for those years, to each of the named executive officers of the Corporation.

Summary Compensation Table

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Long-Term Incentive Program – Stock Options

The following table contains information concerning the grant of stock options under the Incentive Plan to the named executive officers as of the end of the last fiscal year.

Option Grants for the Year-Ended December 31, 2000

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The following table sets forth information with respect to the named executive officers 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 Option Exercises in Year-Ended December 31, 2000
and Year-End Option Values

Long-Term Incentive Program – Performance Stock Units

The following table provides information concerning performance stock unit grants made to the named executive officers during the last fiscal year under the long-term incentive program portion of the Incentive Plan. Payments made under the program for the three-year performance cycle ending December 31, 2000 are reported in the Summary Compensation Table.

Long-Term Incentive Program
Performance Stock Unit Awards in Year-Ended December 31, 2000

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Richard H. Lenny was appointed as a director of the Corporation and elected as its President and Chief Executive Officer, effective March 12, 2001. Under the terms of the employment agreement entered into by the Corporation with Mr. Lenny, he is entitled to an annual salary of $750,000, and to participate in the Annual and Long-Term Incentive Programs of the Incentive Plan and in the Corporation’s other executive and employee benefits programs. The employment agreement also provides for a sign-on award, in lieu of participation in certain on-going corporate incentive programs, of 400,000 stock options (at a price of $64.65, the closing price of the Common Stock on the trading day preceding the date of the grant in accordance with the Incentive Plan) and a restricted stock unit award of 50,000 shares to replace compensation forfeited as a result of his resignation from his prior employer. Mr. Lenny’s employment agreement has a continuous term of three years, unless earlier terminated. In the event the Corporation should terminate Mr. Lenny’s employment without cause, he will be entitled to a lump sum severance benefit equal to annual salary and AIP bonus for two years, vesting of restricted stock awards, continued vesting of stock option awards and continuation of certain executive and employee benefits.

William F. Christ became Executive Vice President and Chief Operating Officer, and Frank Cerminara became Vice President, Chief Financial Officer and Treasurer, on December 11, 2000. In connection with their new duties, Messrs. Christ and Cerminara each received written assurance from the Corporation that, should the Corporation terminate his employment without cause within one year of the date of the election of a new Chief Executive Officer succeeding K. L. Wolfe, he would receive: (1) in the case of Mr. Christ, a lump-sum payment equal to two times his then current annual base salary; and (2) in the case of Mr. Cerminara, payment of his then current annual base salary for a two-year period, commencing on the date of termination.

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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.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
HERSHEY FOODS CORPORATION, S&P 500 INDEX AND S&P FOOD GROUP INDEX

Benefit Protection Arrangements

The Corporation provides an Executive Benefits Protection Plan (“Benefits Protection Plan”) for the named executive officers and other key management personnel. The terms of the Benefits Protection Plan are consistent with the practices followed by other major public corporations in the U.S. and generally provide that in the event the executive’s employment with the Corporation terminates 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 of common equity of the Corporation. Under the Benefits Protection Plan, 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 generally would be entitled to receive in a lump sum three times the executive’s base salary, AIP bonus and PSU payout. The executive would also be entitled to continuation of health benefits for a period of three years 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 the Executive Compensation section) and would generally be paid such benefits at the time of the executive’s termination from a grantor trust to be established and funded at the time of any such change in control.

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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 Benefits Protection Plan 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 defined 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-year average of base salary and five-year average AIP bonus. 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 credited years of service as of December 31, 2000, respectively, for each of the named executive officers were: K. L. Wolfe, $1,317,918, 31.8 years; M. F. Pasquale, $609,274, 21.4 years; W. F. Christ, $518,144, 30.2 years; R. M. Reese, $400,161, 21.4 years; R. Brace, $325,638, 26.9 years; P. N. Le Maire, $316,945, 2.5 years; and J. F. Carr, $382,846, 26.8 years.

VOTING OF PROXIES

A proxy may be revoked at any time before it is voted at the meeting by submitting to the Secretary of the Corporation a written notice revoking it, by a duly-executed proxy bearing a later date, by a telephone or Internet vote cast at 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 ESSIOP will be voted by the plan trustee as directed by the participant’s proxy. If an Automatic Dividend Reinvestment Service Plan participant does not return a proxy, the participant’s shares in the plan will not be voted. If an ESSIOP participant does not return a proxy, that participant’s shares will be voted by the plan trustee in the same proportion as the final aggregate votes of plan participants actually voting on the matter.

SOLICITATION OF PROXIES

Solicitation of proxies will be made by use of the mails or, if consented to by a stockholder, by electronic transmission over the Internet. The cost of preparing, assembling and distributing this proxy solicitation material and Notice of Annual Meeting of Stockholders will be paid by the Corporation. Solicitation by mail, telephone, telefax or personal contact may be done by directors, officers and other 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 solicitation material to the beneficial owners of such shares and will be reimbursed by the Corporation for their reasonable expenses.

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 Corporation’s stock. Copies of these reports must also be furnished to the Corporation. Based on an examination of these reports and on written representations provided to the Corporation, all such reports have been timely filed.

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CERTAIN TRANSACTIONS AND RELATIONSHIPS

During 2000 the Corporation and its subsidiaries had a number of transactions with Milton Hershey School, the Milton Hershey School Trust, and companies owned by the Milton Hershey School Trust, involving the purchase or sale of goods and services. These transactions were primarily with Hershey Entertainment & Resorts Company, based in Hershey, Pennsylvania, and wholly-owned by the Milton Hershey School Trust.

The aggregate value of sales made during 2000 by the Corporation and its subsidiaries to Milton Hershey School, the Milton Hershey School Trust, and companies owned by the Milton Hershey School Trust, amounted to approximately $800,000. During the same year, the Corporation purchased goods and services from these entities in the amount of approximately $1,850,000. These transactions were on terms that the Corporation believes to be no less favorable to the Corporation than those which could have been obtained from other purchasers or vendors.

OTHER BUSINESS

As of January 29, 2001, the Corporation had received no proposal, nomination for director or other business submitted in accordance with its By-Laws for consideration at the Annual Meeting, other than that set forth in the Notice of Annual Meeting of Stockholders and as more specifically described in this Proxy Statement, and, therefore, it is not expected that any other business will be brought before the Annual Meeting. However, if any other business should properly come before the Annual 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 Annual Meeting.

STOCKHOLDER PROPOSALS AND NOMINATIONS

The 2002 Annual Meeting of Stockholders will be held on April 30, 2002. To be eligible for inclusion in the Corporation’s Proxy Statement for the 2002 Annual Meeting of Stockholders, stockholder proposals must be received by the Corporation by November 15, 2001.

Stockholders (other than those holding 25% of the outstanding votes entitled to be cast) who do not submit proposals for inclusion in the Proxy Statement but who intend to present a proposal, nomination for director or other business for consideration at any meeting of stockholders, including any annual meeting, are required by the Corporation’s By-Laws 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 2002 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 earlier than December 24, 2001 and no later than January 24, 2002.

In addition, the Corporation’s By-Laws require that a stockholder wishing to make a nomination for director at the 2002 Annual Meeting must submit the following information to the Corporation no earlier than December 24, 2001 and no later than January 24, 2002: name and address of the stockholder who intends to make the nomination; a representation that the stockholder is a holder of record and intends to make the nomination in person or by proxy at the 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 written consent of the nominee to serve as a director if elected.

All notices for stockholder proposals and director nominations should be sent to Hershey Foods Corporation, Attn: Secretary, 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810.

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ANNUAL REPORT ON FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS

The Corporation will provide without charge to each beneficial owner of its Common Stock and Class B 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, 2000 filed with the Securities and Exchange Commission. Requests for copies should be addressed to Hershey Foods Corporation, Attn: Investor Relations Department, 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810.

Appendix A to this Proxy Statement contains the Annual Report to Stockholders, including Management’s Discussion and Analysis, the Consolidated Financial Statements and other investor information. Appendix B contains the Charter of the Audit Committee of the Board of Directors. Appendix A; Appendix B; the Audit Committee Report beginning on page 7 (other than any information contained therein not permitted to be so excluded); the report on 2000 Executive Compensation beginning on page 13; and the Performance Graph appearing on page 23 shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission under or pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934 as currently in effect, and shall not be deemed to be incorporated by reference into any filing by the Corporation under such Acts, unless specifically provided otherwise in such filing.

March 15, 2001

Stockholders who desire to have their stock voted at the meeting are requested to either (1) follow the Internet or telephone voting instructions on the enclosed proxy card or (2) 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.

Appendix A

Annual Report to Stockholders

HERSHEY FOODS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Net Sales

Net sales increased $250.1 million, or 6%, from 1999 to 2000. The higher sales primarily reflected an increase in sales of core confectionery and grocery products in North America, incremental sales from the introduction of new confectionery products, increased international exports and lower product returns, discounts, and allowances. In 2000, certain international distributor allowances were netted against sales instead of being reported in selling, marketing and administrative expenses as in 1999 and 1998. These distributor allowances amounted to $18.3 million and $17.8 million in 1999 and 1998, respectively. Net sales in 1999 included $29.3 million related to the Corporation’s pasta business, which was sold in January 1999.

Net sales decreased $464.7 million, or 10%, from 1998 to 1999. The decrease in sales in 1999 was primarily a result of the divestiture of the Corporation’s pasta business, which resulted in a sales reduction of $343.8 million, and sales decreases in the United States of core confectionery and grocery products. Sales of confectionery and grocery products declined in the first quarter of 1999 primarily as a result of the December 1998 buy-in on promotions of regular count and vending items. Decreases in sales in the third and fourth quarters of 1999 were primarily the result of problems encountered after the July 1999 start-up of new business systems and processes. These sales declines were partially offset by incremental sales from the introduction of new confectionery products, increased export sales in international markets and sales increases in the Corporation’s Canadian and Mexican markets.

Gross Margin

Gross margin increased from 40.7% in 1999 to 41.5% in 2000. The increase in gross margin reflected decreased costs for certain major raw materials, primarily cocoa, as well as lower product returns, discounts, and allowances. The impact of these items was offset partially by higher absorption of fixed manufacturing costs in 2000, primarily related to decreased finished goods inventory levels in 2000 compared to 1999. In addition, the sales mix of confectionery items sold in 2000 compared to 1999 contributed to lower profitability, as the growth in sales of the more profitable standard bars was outpaced by sales of packaged confectionery items. Also, higher distribution and warehousing costs in 2000 reflected higher warehouse handling costs, incremental costs associated with expanded warehousing capacity and one-time start-up costs for new distribution centers located near Hershey, Pennsylvania and Atlanta, Georgia.

Gross margin in 1999 benefited .3 percentage points from the inclusion in cost of sales of a one-time $12.5 million gain from revisions to the Corporation’s retiree medical plan, net of contributions into the Employee Savings Stock Investment and Ownership Plan (“ESSIOP”). During the first quarter of 1999, the Corporation changed its retiree medical plan to eliminate coverage for all eligible hourly employees under age 45, to be replaced by annual contributions into the ESSIOP. The change applied primarily to U.S. hourly employees working in Pennsylvania. In addition, gross margin in 1999 would have been .3 percentage points lower if certain international distributor allowances were reclassified and reported as discussed above for 2000.

Gross margin decreased from 40.8% in 1998 to 40.7% in 1999. The decrease reflected lower profitability resulting from the mix of confectionery items sold in 1999 compared with sales during 1998, primarily related to lower sales of the more profitable standard bars. Higher freight and distribution costs, reflecting increased costs related to the implementation of new business systems and processes and distribution center capacity constraints, and higher depreciation expense as a percent of sales, also contributed to the lower gross margin. These cost increases were offset partially by selling price

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increases in the Corporation’s Canadian and Mexican markets and decreased costs for packaging materials and certain raw materials. Effective December 1998, the Corporation changed its retiree medical plan to eliminate coverage for all U.S. full-time salaried employees and all non-union hourly plant employees working outside Hershey, Pennsylvania under age 45, replacing it with annual ESSIOP contributions, resulting in the recognition of a $13.0 million pre-tax gain in 1998.

Selling, Marketing and Administrative

Selling, marketing and administrative expenses increased $69.3 million, or 7%, from 1999 to 2000, primarily reflecting: increased marketing expenditures for core confectionery brands, international exports and the introduction of new products; increased selling and administrative expenses primarily related to higher staffing levels to support sales and customer service activity in North America and the international export business; higher incentive compensation expense reflecting improved operating performance in 2000; and higher software amortization costs. The impact of these items was offset partially by the inclusion in administrative expense in 2000 of a one-time gain of $7.3 million arising from the sale of certain corporate aircraft. Selling, marketing and administrative costs in 1999 included $10.7 million related to the Corporation’s pasta business, which was sold in January 1999.

Selling, marketing and administrative expenses decreased by $110.1 million, or 9%, from 1998 to 1999, reflecting lower expenses resulting from the divestiture of the pasta business, reduced marketing expenses for core confectionery brands and lower administrative expenses. These decreases were offset partially by increased spending associated with the introduction of new products and international exports, in addition to higher amortization expense for capitalized software. Excluding the divestiture of the pasta business, advertising and promotion expense was essentially equal to the prior year as a percent of sales.

Interest Expense, Net

Net interest expense for 2000 was $1.7 million above the prior year, primarily as a result of higher short-term interest expense related to increased average short-term borrowings and borrowing rates, and lower capitalized interest. The impact of these items was offset partially by higher interest income, and lower fixed interest expense as a result of interest rate swap and forward agreements entered into in October 1999. Net interest expense in 1999 was $11.4 million below the prior year, primarily as a result of lower short-term interest expense as a portion of the proceeds from the sale of the pasta business and positive cash flow were used to reduce short-term borrowings.

Income Taxes

The Corporation’s effective income tax rate was 38.8%, 36.8% and 38.8% in 1998, 1999 and 2000, respectively. Excluding the provision for income taxes associated with the gain on the sale of the Corporation’s pasta business, the effective income tax rate was 39.0% in 1999.

Net Income

Net income decreased $125.8 million, or 27%, from 1999 to 2000. In the first quarter of 1999, the Corporation received cash proceeds of $450.0 million, retained a 6% minority interest and recorded a gain of approximately $243.8 million before tax, $165.0 million or $1.17 per share—diluted after tax, as a result of the sale of the Corporation’s pasta business. Excluding the gain, net income increased $39.2 million, or 13%, from 1999 to 2000. The Corporation’s net income increased $119.4 million, or 35%, from 1998 to 1999, reflecting the gain on the sale of the pasta business. Excluding the gain, net income decreased $45.6 million, or 13% from 1998 to 1999.

Net income as a percent of net sales was 7.9% in 2000, 7.4% in 1999, excluding the gain on the sale of the pasta business, and 7.7% in 1998.

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FINANCIAL CONDITION

The Corporation’s financial condition remained strong during 2000. The capitalization ratio (total short-term and long-term debt as a percent of stockholders’ equity, short-term and long-term debt) was 49% as of December 31, 2000 and 50% as of December 31, 1999. The ratio of current assets to current liabilities was 1.7:1 as of December 31, 2000, and 1.8:1 as of December 31, 1999. The lower ratio of current assets to current liabilities as of December 31, 2000, primarily reflected increased short-term borrowings to finance stock repurchases and a business acquisition.

In December 2000, the Corporation completed the purchase of the intense and breath freshener mints and gum businesses of Nabisco, Inc. (“Nabisco”). The Corporation paid $135.0 million to acquire the businesses, including Ice Breakers and Breath Savers Cool Blasts intense mints, Breath Savers mints, and Ice Breakers, Carefree, Stick*Free, Bubble Yum and Fruit Stripe gums. Also included in the purchase were manufacturing machinery and equipment and a gum-manufacturing plant in Las Piedras, Puerto Rico. These businesses had sales of approximately $270 million in 1999. The Corporation’s results of operations for 2000 did not include results of the acquisition, as the transaction was completed very late in the year. Had the results of the acquired businesses been included in the consolidated results, the effect would not have been material.

Assets

Total assets increased $101.1 million, or 3%, as of December 31, 2000, primarily as a result of higher accounts receivable, prepaid expenses and other current assets, property, plant and equipment, and intangibles resulting from business acquisitions, substantially offset by a decrease in cash and cash equivalents. These increases were due, in part, to the acquisition of Nabisco’s mint and gum businesses.

Current assets increased by $15.4 million, or 1%, reflecting increased accounts receivable, inventories, prepaid expenses and other current assets. An increase in accounts receivable of $26.9 million reflected higher sales in December 2000. The increase in prepaid expenses and other current assets was principally associated with hedging transactions. The decrease in cash and cash equivalents reflected the comparison to an unusually high balance as of December 31, 1999, as a result of year 2000 (Y2K) liquidity contingency plans.

Property, plant and equipment was higher than the prior year primarily due to capital additions of $138.3 million and the acquisition of the Nabisco businesses, partially offset by depreciation expense of $140.2 million. The increase in intangibles resulting from business acquisitions primarily reflected preliminary goodwill associated with the Nabisco acquisition, partly offset by the amortization of intangibles. The decrease in other non-current assets was primarily associated with the amortization of capitalized software.

Liabilities

Total liabilities increased by $24.7 million, or 1%, as of December 31, 2000, primarily reflecting higher accrued liabilities and an increase in short-term borrowings to finance the acquisition of the Nabisco businesses and stock repurchases, partially offset by a decrease in accrued and deferred income taxes. The increase in accrued liabilities was associated primarily with higher accruals for promotion and advertising programs and accrued liabilities related to the Nabisco acquisition. The decrease in accrued income taxes primarily reflected a decrease in the income tax provision which included accrued income taxes for the gain on sale of the pasta business as of December 31, 1999, and the decrease in deferred income taxes was associated with the payment in September 2000 of an assessment related to a Corporate Owned Life Insurance program discussed further under Liquidity below.

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

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Common Stock having one vote per share and the Class B Stock having ten votes per share. However, the Common Stock, voting separately as a class, is entitled to elect one-sixth of the Board of Directors. With respect to dividend rights, the Common Stock is entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.

In December 2000, the Corporation’s Board of Directors unanimously adopted a Stockholder Protection Rights Agreement (“Rights Agreement”). The Rights Agreement was supported by the Corporation’s largest stockholder, Hershey Trust Company, as trustee for the benefit of Milton Hershey School (“Milton Hershey School Trust”). This action was not in response to any specific effort to acquire control of the Corporation. Under the Rights Agreement, the Corporation’s Board of Directors declared a dividend of one right (“Right”) for each outstanding share of Common Stock and Class B Stock payable to stockholders of record at the close of business on December 26, 2000. The Rights will at no time have voting power or receive dividends. The issuance of the Rights has no dilutive effect, will not affect reported earnings per share, is not taxable and will not change the manner in which the Corporation’s Common Stock is traded. The Rights Agreement is discussed further in Note 12 to the Consolidated Financial Statements.

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 provided from operating activities and proceeds from the sale of the pasta business exceeded cash requirements for share repurchases, capital expenditures, capitalized software additions, dividend payments and a business acquisition by $88.7 million. Total debt, including debt assumed, decreased during the period by $150.9 million, reflecting reduced short-term borrowings and the repayment of long-term debt. Cash and cash equivalents decreased by $22.3 million during the period.

The Corporation anticipates that capital expenditures and capitalized software additions will be in the range of $150 million to $170 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, along with continued improvement and enhancements of computer software. As of December 31, 2000, the Corporation’s principal capital commitments included manufacturing capacity expansion to support new products and line extensions, modernization and efficiency improvements.

In February 2001, the Corporation made a $75.0 million contribution to its domestic pension plans to improve the funded status and reduce future expense.

In December 2000, the Corporation entered into an operating lease agreement for a warehouse and distribution facility to be constructed in southern California. The lease term is approximately ten years and shall begin upon completion of the facility, but no later than September 1, 2001. The Corporation or its designee has an option between December 15, 2001 and March 31, 2002 to purchase the facility at original cost. The estimated cost of the facility, including land, is approximately $38.0 million.

In October 2000, the Corporation entered into an operating lease agreement to finance the purchase of a warehouse and distribution facility near Atlanta, Georgia for $18.2 million. The lease term is five years, with up to four renewal periods of five years each with the consent of the lessor. In July 1999, the Corporation entered into an operating lease agreement to finance the construction of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor paid construction costs totaling $61.7 million. The lease term is six years, including the one-year construction period, with up to four renewal periods of five years each with the consent of

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the lessor. Both leases provide for substantial residual guarantees and include options to purchase the facilities at original cost.

In 1999, the Corporation implemented the first phase of an enterprise-wide integrated information system in the United States. The first phase of system implementation included new business systems and processes related to purchasing, accounts payable, fixed assets, the general ledger, production reporting, and tracking of plant inventories. The second phase of system implementation included systems and processes in the areas of sales order and billing, transportation planning and management, electronic data interchange communications with warehouses, finished goods inventories, accounts receivable and tracking of marketing promotions. Initial implementation costs amounted to approximately $101.0 million of capitalized software and hardware and $10.6 million of expenses. These expenditures were financed with cash provided from operations and proceeds from the sale of the Corporation’s pasta business.

Under share repurchase programs which began in 1993, a total of 17,624,037 shares of Common Stock have been repurchased for approximately $705.5 million. Of the shares repurchased, 528,000 shares were retired, 1,427,289 shares were reissued to satisfy stock options obligations, Supplemental Retirement Contributions and employee stock ownership trust (“ESOP”) obligations and the remaining 15,668,748 shares were held as Treasury Stock as of December 31, 2000. Additionally, the Corporation has purchased a total of 28,000,536 shares of its Common Stock to be held as Treasury Stock from the Milton Hershey School Trust for $1.0 billion. As of December 31, 2000, a total of 43,669,284 shares were held as Treasury Stock and $124.5 million remained available for repurchases of Common Stock under a program approved by the Corporation’s Board of Directors in October 1999.

In March 1997, the Corporation issued $150 million of 6.95% Notes under a November 1993 Form S-3 Registration Statement. In August 1997, the Corporation filed another Form S-3 Registration Statement under which it could offer, on a delayed or continuous basis, up to $500 million of additional debt securities. Also in August 1997, the Corporation issued $150 million of 6.95% Notes due 2012 and $250 million of 7.2% Debentures due 2027 under the November 1993 and August 1997 Registration Statements. Proceeds from the debt issuance were used to repay a portion of the short-term borrowings associated with the purchase of Common Stock from the Milton Hershey School Trust. As of December 31, 2000, $250 million of debt securities remained available for issuance under the August 1997 Registration Statement. Proceeds from any offering of the $250 million of debt securities available under the shelf registration may be used for general corporate requirements, which include reducing existing commercial paper borrowings, financing capital additions and share repurchases, and funding future business acquisitions and working capital requirements.

As of December 31, 2000, the Corporation maintained a committed credit facility agreement with a syndicate of banks in the amount of $500 million which could be borrowed directly or used to support the issuance of commercial paper. The Corporation may increase the credit facility by $1.0 billion with the concurrence of the banks. In December 2000, the short-term credit facility agreement was renewed for a total of $200 million and the long-term committed credit facility agreement remained in effect for $300 million, expiring in December 2002. 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 $27.5 million and $25.0 million as of December 31, 2000 and 1999, respectively.

In January 1999, the Corporation received a Notice of Proposed Deficiency (“Notice”) from the Internal Revenue Service (“IRS”) related to years 1989 through 1996. The Notice pertained to the Corporate Owned Life Insurance (“COLI”) program which was implemented by the Corporation in 1989. The IRS disallowed the interest expense deductions associated with the underlying life insurance policies. The total deficiency of $61.2 million, including interest, was paid to the IRS in September 2000 to eliminate further accruing of interest. The Corporation may be subject to additional assessments for federal taxes and interest for 1997 and 1998 and for state taxes and interest for 1989 through 1998. The Corporation believes that it has fully complied with the tax law as it relates to its COLI program, has filed for the refund of amounts paid and will continue to seek favorable resolution of this matter.

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Cash Flow Activities

Over the past three years, cash from operating activities provided approximately $1.1 billion. Over this period, cash used by or provided from accounts receivable and inventories has tended to fluctuate as a result of sales during December and inventory management practices. The change in cash required for or provided from other assets and liabilities between the years was primarily related to hedging transactions, the timing of payments for accrued liabilities, including income taxes, and variations in the funding status of pension plans.

Investing activities included capital additions, capitalized software additions, a business acquisition and a business divestiture. Capital additions during the past three years included the purchase of manufacturing equipment, and expansion and modernization of existing facilities. Capitalized software additions over the past three years were associated primarily with the implementation of an enterprise-wide integrated information system.

The acquisition of Nabisco’s mint and gum businesses for $135.0 million was completed in 2000 and the Corporation’s pasta business was sold for $450.0 million in 1999.

Financing activities included debt borrowings and repayments, payments of dividends, the exercise of stock options, incentive plan transactions, and the repurchase of Common Stock. During the past three years, short-term borrowings in the form of commercial paper or bank borrowings were used to purchase Nabisco’s mint and gum businesses, fund seasonal working capital requirements, and finance share repurchase programs. During the past three years, a total of 8,013,318 shares of Common Stock have been repurchased for $434.1 million, including 1,579,779 shares purchased from the Milton Hershey School Trust for $100.0 million. Cash used for incentive plan transactions of $74.3 million during the past three years was substantially offset by cash received from the exercise of stock options of $62.6 million. Cash used by incentive plan transactions reflected purchases, from time to time, of the Corporation’s Common Stock in the open market to repurchase treasury stock issued for stock options exercises, mitigating dilution of weighted-average shares outstanding.

ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS

The Corporation utilizes certain derivative instruments, from time to time, including interest rate swaps and forward agreements, foreign currency forward exchange contracts and commodity futures contracts, to manage interest rate, currency exchange rate and commodity market price risk exposures. Interest rate swaps and forward agreements, 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 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, 2000. 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, including the current portion, as of December 31, 2000. The fair value of long-term debt was determined based upon quoted market prices for the same or similar debt issues.

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Interest Rate Swaps and Forward Agreements

In order to minimize its financing costs and to manage interest rate exposure, the Corporation, from time to time, enters into interest rate swaps and forward agreements. In October 1999, the Corporation entered into an interest rate swap agreement to effectively convert $200 million of 6.7% Notes Due 2005 (“Notes”) to variable rate debt. In December 2000, the counterparty chose to cancel the interest rate swap and forward agreements effective April 2, 2001. Subsequent to this date, the effective interest rate on the Notes will return to a fixed rate of 6.7%. The potential loss in fair value of interest rate swaps and forward agreements resulting from a hypothetical near-term adverse change in market rates of ten percent was not material as of December 31, 2000 and 1999.

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 to be and are 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, 2000, the Corporation had foreign exchange forward contracts maturing in 2001 and 2002 to purchase $36.3 million in foreign currency, primarily British sterling and euros, and to sell $11.5 million in foreign currency, primarily Japanese yen, at contracted forward rates.

As of December 31, 1999, the Corporation had foreign exchange forward contracts maturing in 2000 and 2001 to purchase $18.0 million in foreign currency, primarily euros and British sterling, and to sell $31.2 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, 2000 and 1999, 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, 2000 and 1999.

Commodity Price Risk Management

The Corporation’s most significant raw material requirements include cocoa, sugar, milk, peanuts and almonds. The Corporation attempts to minimize the effect of future price fluctuations related to the purchase of these raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from 3 to 24 months. With regard to cocoa, sugar, corn sweeteners, natural gas and certain dairy products, price risks are also managed by entering into futures contracts. At the present time, active futures contracts are not available for use in pricing the Corporation’s other major raw material requirements. Futures contracts are used in combination with forward purchasing of cocoa, sugar, corn sweetener, natural gas and certain dairy product requirements principally to take

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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, political unrest in producing countries and speculative influences. Cocoa prices remained near historical lows during most of 2000, as additional production, spurred by high prices in the mid-1990s, has come on stream under favorable climatic conditions. Additionally, demand has been reduced below historical levels as a result of economic difficulties in Eastern Europe, particularly the former Soviet Union. During 2001, continued improvement in chocolate consuming economies could result in prices stabilizing and possibly moving higher. The Corporation’s costs during 2001 will not necessarily reflect market price fluctuations because of its forward purchasing practices, premiums and discounts reflective of relative values, varying delivery times, and supply and demand for specific varieties and grades of cocoa beans.

Commodities Futures Contracts

In connection with the purchasing of cocoa, sugar, corn sweeteners, natural gas and certain dairy products for anticipated manufacturing requirements, the Corporation enters into commodities futures 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 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 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 to fix the price of unpriced physical forward contracts are effective as hedges of anticipated purchases.

The following sensitivity analysis reflects the market risk of the Corporation to a hypothetical adverse market price movement of ten percent, based on the Corporation’s net commodity positions at four dates spaced equally throughout the year. The Corporation’s net commodity positions consist of the excess of futures contracts held over unpriced physical forward contracts for the same commodities, relating to cocoa, sugar, corn sweeteners 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.

The decrease in fair values and market risks from 1999 to 2000 primarily reflected a decrease in net commodity positions and lower commodity futures prices in 2000. The negative lowest long position in 2000 resulted as commodities futures required to fix the price of unpriced physical forward contracts exceeded the amount of commodities futures being held at a point in time during the year.

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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 $144.9 million in 2000 and $136.7 million in 1999. The annual dividend rate on the Common Stock was $1.12 per share, an increase of 8% over the 1999 rate of $1.04 per share. The 2000 dividend represented the 26th consecutive year of Common Stock dividend increases.

On February 7, 2001, the Corporation’s Board of Directors declared a quarterly dividend of $.28 per share of Common Stock payable on March 15, 2001, to stockholders of record as of February 23, 2001. It is the Corporation’s 285th consecutive Common Stock dividend. A quarterly dividend of $.2525 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 138.6 million shares of the Corporation’s Common Stock were traded during 2000. The Class B Stock is not publicly traded.

The closing price of the Common Stock on December 31, 2000, was $64 3/8. There were 41,482 stockholders of record of the Common Stock and the Class B Stock as of December 31, 2000.

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:

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RETURN MEASURES

Operating Return on Average Stockholders’ Equity

The Corporation’s operating return on average stockholders’ equity was 29.4% in 2000. Over the most recent five-year period, the return has ranged from 27.5% in 1996 to 36.0% in 1998. For the purpose of calculating operating return on average stockholders’ equity, earnings is defined as net income, excluding the after-tax loss on the disposal of businesses in 1996 and the after-tax gain on the sale of the pasta business in 1999.

Operating Return on Average Invested Capital

The Corporation’s operating return on average invested capital was 16.1% in 2000. Over the most recent five-year period, the return has ranged from 17.8% in 1996 to 14.8% in 1999. 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 after-tax loss on disposal of businesses in 1996, the after-tax gain on the sale of the pasta business in 1999 and the after-tax effect of interest on long-term debt.

OUTLOOK

The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.

The Corporation’s strategy is to profitably grow its North American confectionery and grocery business, and to build growing and profitable confectionery businesses in selected markets outside North America. To implement this strategy, the Corporation plans to continue to attract and hold customers and consumers with products and services of consistently superior quality and value.

The total U.S. confectionery market is anticipated to grow at a rate of three to four percent in 2001. Over the years, the Corporation’s goal has been to grow at a faster rate than the overall confectionery category. The Corporation expects to achieve this goal in 2001 by the integration of recently acquired products, strong results from new product introductions and the continued volume growth of confectionery products in North America and selected international markets.

Variability of gross margin in future periods is affected by various factors, including raw material and logistics costs, manufacturing efficiencies, and the mix of products sold in any period. The Corporation expects to improve profitability in 2001. Gross margin is expected to increase in 2001, as compared to the full year 2000, as the Corporation anticipates a more profitable sales mix, manufacturing efficiencies, modest declines in freight and distribution costs as a percent of sales and relatively stable commodity costs. These profitability improvements are expected to more than offset anticipated increases in employee benefits and energy costs.

The industry in which the Corporation operates is characterized by brand recognition. The Corporation will continue spending to promote its products and to increase the value of its brands. Planned spending on advertising in 2001 is significantly higher than 2000, while selling and administrative expenses are expected to remain relatively constant as a percent of sales.

The tax rate is projected to slightly decrease in 2001, as incremental earnings from the Corporation’s recent acquisition will be taxed at a more favorable tax rate.

The Corporation expects continued strong cash flows from operating activities in 2001. Net cash provided from operating activities is expected to exceed cash requirements for capital additions, capitalized software additions and anticipated dividend payments. Additionally, cash provided from operations is expected to be sufficient to reduce short-term borrowings and/or finance possible business acquisitions and continued repurchases of the Corporation’s Common Stock.

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In May 2000, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board reached consensus on EITF Issue No. 00-14 “Accounting for Coupons, Rebates and Discounts,” requiring the reporting of certain sales incentives such as consumer coupon redemption costs and off-invoice allowances as a reduction of net sales. Effective with the quarter ending June 30, 2001, consumer coupon redemption costs and off-invoice allowances currently reported as marketing expense will be reported as a reduction of net sales. The implementation of EITF Issue No. 00-14, along with other similar pending EITF issues regarding the classification of certain sales incentives, may result in a material restatement to reduce net sales, with a corresponding restatement to reduce selling, marketing and administrative expenses. Upon adoption, all prior period amounts will be reclassified to conform to the new requirements.

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. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential,” among others. Factors which could cause results to differ include, but are not limited to: changes in the confectionery and grocery business environment, including actions of competitors and changes in consumer preferences; changes in governmental laws and regulations, including income taxes; market demand for new and existing products; changes in raw material costs; and the Corporation’s ability to implement improvements and to reduce costs associated with the Corporation’s customer service, warehousing and order fulfillment processes and systems.

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HERSHEY FOODS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

The notes to consolidated financial statements are an integral part of these statements.

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HERSHEY FOODS CORPORATION

CONSOLIDATED BALANCE SHEETS

The notes to consolidated financial statements are an integral part of these balance sheets.

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HERSHEY FOODS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

The notes to consolidated financial statements are an integral part of these statements.

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HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY