<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HERSHEY FOODS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
HERSHEY FOODS CORPORATION
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
March 17, 1997
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
Re: Hershey Foods Corporation Definitive Proxy Materials
Gentlemen:
We are transmitting to you herewith for filing pursuant to the
Securities and Exchange Act of 1934, the definitive proxy materials listed below
relating to the 1997 Annual Meeting of Shareholders:
- Proxy Statement, which includes the notice of meeting;
- Proxy card for common shareholders;
- Proxy card for Class B common shareholders;
- Proxy card for bank, broker, nominee;
- Proxy card for participants in the Hershey Foods' Employee
Savings and Stock Investment Plan and explanation letters;
- Voting instruction letter for Hershey Foods' Employee Stock
Purchase Plan participants.
The above materials, along with the Annual Report, will be mailed to
common shareholders beginning on March 17, 1997.
The Company respectfully requests that a copy of each notice or
communication from the Securities and Exchange Commission to the Company
concerning the definitive proxy materials or any questions or comments regarding
the information filed herewith, be directed to:
Ms. Belva M. Miller
Hershey Foods Corporation
CIK-00000471111
Staff Financial Accountant, Assistant Controller
(717) 534-7577
Compuserve 72741, 252
Sincerely,
Mark E. Kimmel
Senior Counsel
<PAGE>
Notice of 1997 Annual Meeting
Proxy Statement
Consolidated Financial Statements and Management's Discussion and Analysis
[LOGO OF HERSHEY FOODS APPEARS HERE]
March 17, 1997
To Our Stockholders:
It is my pleasure to invite you to attend the 1997 Annual Meeting of
Stockholders of Hershey Foods Corporation, to be held at 2:00 p.m. on
April 29, 1997. The meeting will be held at the Hershey Theatre, located one-
half block east of Cocoa Avenue on East Caracas Avenue, Hershey, Pennsylvania.
The doors to the Theatre will open at 1:00 p.m.
We also invite you to visit HERSHEY'S CHOCOLATE WORLD Visitors Center from
9:00 a.m. to 6:00 p.m. on the day of the Annual Meeting. We will be offering a
special 30% discount on confectionery products and a 20% discount on Hershey's
gift and souvenir items. In addition, product samples for stockholders will be
distributed and refreshments will be available at CHOCOLATE WORLD between 9:00
a.m. and 2:00 p.m. You will need to show the coupon provided with your proxy
card to receive your discount and free product sample. A map showing
directions to CHOCOLATE WORLD is included on the back page of this Proxy
Statement. Please note that there will be no refreshments or product sample
distribution at the Hershey Theatre.
Business scheduled to be considered at the meeting includes the election of
ten directors, the approval of the Corporation's Key Employee Incentive Plan
and the approval of the appointment of Arthur Andersen LLP as independent
public accountants for the Corporation for 1997. Additional information
concerning these matters is included in the Notice of Annual Meeting and Proxy
Statement. Members of management will also review with you the Corporation's
operations during the past year and will be available to respond to questions
during the meeting.
If you plan to attend the meeting, please bring the admission ticket located
on the bottom half of your proxy card with you to the meeting. If your shares
are currently held in the name of your broker, bank or other nominee and you
wish to attend the meeting, you should obtain a letter from your broker, bank
or other nominee indicating that you are the beneficial owner of a stated
number of shares of stock as of the record date, February 28, 1997. You will
need to show the letter from your broker, bank or nominee at CHOCOLATE WORLD
to receive the discount and product sample.
To assure proper representation of your shares at the meeting, please
carefully mark the enclosed proxy card; then sign, date and return it at your
earliest convenience.
I look forward to seeing you at the meeting.
Sincerely yours,
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman of the Board and
Chief Executive Officer
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
NOTICE OF ANNUAL MEETING............................................. 1
PROXY STATEMENT...................................................... 2
Solicitation and Voting of Proxies................................. 2
Voting Securities.................................................. 2
Description of the Milton Hershey School Trust and Hershey Trust
Company........................................................... 5
Election of Directors.............................................. 6
The Board of Directors and its Committees.......................... 9
Compensation of Directors.......................................... 10
Executive Compensation............................................. 12
Section 16(a) Beneficial Ownership Reporting Compliance............ 21
Certain Transactions and Relationships............................. 22
Approval of the Key Employee Incentive Plan, as Amended............ 22
Appointment of Auditors............................................ 28
Other Business..................................................... 28
Stockholder Proposals and Nominations.............................. 28
Summary Annual Report and Form 10-K................................ 29
KEY EMPLOYEE INCENTIVE PLAN.......................................... A-1--A-11
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND
ANALYSIS............................................................ B- 1
Management's Discussion and Analysis............................... B- 1
Consolidated Financial Statements.................................. B- 9
Notes to Consolidated Financial Statements......................... B-13
Responsibility for Financial Statements............................ B-28
Report of Independent Public Accountants........................... B-29
Eleven-Year Consolidated Financial Summary......................... B-30
</TABLE>
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NOTE: In order that the Annual Report to Stockholders may provide a more
succinct discussion of the Corporation's businesses and to save costs in
connection with its printing and distribution, the Consolidated
Financial Statements and Management's Discussion and Analysis are no
longer included in the Annual Report to Stockholders but are instead
included as Appendix B to the Proxy Statement.
<PAGE>
[LOGO OF HERSHEY FOODS CORPORATION]
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON
APRIL 29, 1997
----------------
The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held
at 2:00 p.m. on April 29, 1997 at the Hershey Theatre, East Caracas Avenue,
Hershey, Pennsylvania 17033 for the following purposes:
(1) To elect ten directors;
(2) To approve the Corporation's Key Employee Incentive Plan, as amended;
(3) To approve the appointment of Arthur Andersen LLP, as the Corporation's
independent public accountants for 1997; and
(4) To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
In accordance with the By-Laws and action of the Board of Directors,
stockholders of record at the close of business on February 28, 1997 will be
entitled to notice of, and to vote at, the meeting and any and all
adjournments thereof.
By order of the Board of Directors,
Robert M. Reese
Vice President, General Counsel and
Secretary
March 17, 1997
KINDLY MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING IN PERSON.
<PAGE>
---------------------------------
PROXY STATEMENT
---------------------------------
SOLICITATION AND VOTING OF PROXIES
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of HERSHEY FOODS CORPORATION, a Delaware
corporation (the "Corporation" or "Hershey Foods"), for use at the Annual
Meeting of Stockholders which will be held at 2:00 p.m., Tuesday, April 29,
1997 at the Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania 17033,
and at any and all adjournments of that meeting for the purposes set forth in
the accompanying Notice of Annual Meeting of Stockholders. This Proxy
Statement and the enclosed proxy card are being sent to stockholders on or
about March 17, 1997. The Corporation's principal executive offices are
located at 100 Crystal A Drive, Hershey, Pennsylvania 17033.
Shares represented by properly executed proxy cards received by the
Corporation at or prior to the meeting will be voted according to the
instructions indicated on the proxy card. Unless contrary instructions are
given, the persons named on the proxy card intend to vote the shares so
represented FOR the election of the nominees for director named in this Proxy
Statement, FOR the approval of the Corporation's Key Employee Incentive Plan,
as amended, and FOR approval of the appointment of Arthur Andersen LLP as the
Corporation's independent public accountants for 1997. As to any other
business which may properly come before the meeting, the persons named on the
proxy card will vote according to their best judgment.
A proxy may be revoked at any time before it is voted at the meeting by
filing with the Secretary of the Corporation an instrument revoking it, by a
duly executed proxy bearing a later date, or by voting by ballot at the
meeting. Shares held for each participant in the Corporation's Automatic
Dividend Reinvestment Service Plan or the Corporation's Employee Savings Stock
Investment and Ownership Plan ("ESSIOP") will be voted by the plan trustee as
directed by the participant's proxy card. If an Automatic Dividend
Reinvestment Service Plan participant does not return a card, the
participant's shares in the plan will not be voted. If an ESSIOP participant
does not return a card, that participant's shares will be voted by the plan
trustee in proportion to the final aggregate vote of the plan participants
actually voting on the matter.
The cost of preparing, assembling, and mailing this proxy soliciting
material and Notice of Annual Meeting of Stockholders will be paid by the
Corporation. The Corporation has retained ChaseMellon Shareholder Services to
assist in soliciting proxies for a fee of $4,750 plus reimbursement of
reasonable out-of-pocket expenses. Additional solicitation by mail, telephone,
telecopier or by personal solicitation may be done by directors, officers and
regular employees of the Corporation, for which they will receive no
additional compensation. Brokerage houses and other nominees, fiduciaries, and
custodians nominally holding shares of the Corporation's stock as of the
record date will be requested to forward proxy soliciting material to the
beneficial owners of such shares, and will be reimbursed by the Corporation
for their reasonable expenses.
VOTING SECURITIES
The Corporation has shares of two classes of stock outstanding, Common Stock
("Common Stock") and Class B Common Stock ("Class B Stock"), each with one
dollar par value. At the close of business on February 28, 1997, the record
date for the Annual Meeting, there were outstanding 122,314,799 shares of the
Common Stock, and 30,470,908 shares of the Class B Stock, all of which are
entitled to vote. Holders of record of the Corporation's Common Stock on
February 28, 1997 will be entitled to cast one vote for each share held, and
holders of record of the Class B Stock on February 28, 1997 will
2
<PAGE>
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 Restated
Certificate of Incorporation, as amended (the "Certificate"), and By-Laws. The
specific vote requirements for the proposals being submitted to a stockholder
vote at this year's Annual Meeting are set forth under the description of each
proposal in this Proxy Statement.
Abstentions and broker non-votes are counted for the purpose of determining
whether a quorum is present at the Annual Meeting. For the purpose of
determining whether a proposal (except for the election of directors) has
received a majority vote, abstentions will be included in the vote totals with
the result that an abstention will have the same effect as a negative vote. In
instances where brokers are prohibited from exercising discretionary authority
for beneficial owners who have not returned a proxy (broker non-votes), those
shares will not be included in the vote totals and, therefore, will have no
effect on the vote.
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<PAGE>
As of February 28, 1997, stockholders noted in the following table owned
beneficially the indicated number of shares of the Corporation's Common Stock
and Class B Stock. The individuals listed below have voting and disposition
power over the shares indicated. The voting and disposition power over the
shares held by the Milton Hershey School and School Trust and the Hershey
Trust Company are as indicated in the section entitled "Description of the
Milton Hershey School Trust and Hershey Trust Company".
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OR GROUP(1) CLASS OF STOCK BENEFICIAL OWNERSHIP OF CLASS
- --------------------------- ------------------- ------------------------ --------
<S> <C> <C> <C>
Milton Hershey School
and School Trust
Founders Hall Common Stock 23,757,440 shares 19.4%
Hershey, PA 17033
Class B
Hershey Trust Company Common Stock 30,306,006 shares 99.5%
100 Mansion Road East
Hershey, PA 17033
Hershey Trust Company Common Stock 815,782 shares *
W. H. Alexander, Director Common Stock 2,636 shares/(2)//(4)/ *
R. H. Campbell, Director Common Stock 1,026 shares/(2)/ *
C. M. Evarts, Director Common Stock 400 shares/(2)/ *
T. C. Graham, Director Common Stock 6,800 shares/(2)/ *
B. Guiton Hill, Director Common Stock 1,020 shares/(2)/ *
J. C. Jamison, Director Common Stock 10,800 shares/(2)/ *
M. J. McDonald, Director Common Stock 400 shares/(2)/ *
J. M. Pietruski, Director Common Stock 4,800 shares/(2)/ *
V. A. Sarni, Director Common Stock 3,808 shares/(2)/ *
J. P. Viviano, Director, Common Stock 103,374 shares/(3)//(5)/ *
President and Chief
Operating Officer
K. L. Wolfe, Director, Common Stock 133,080 shares/(3)/ *
Chairman of the Board
and Chief Executive Officer
M. F. Pasquale Common Stock 58,168 shares/(3)/ *
President, Hershey
Chocolate North America
W. F. Christ Common Stock 31,223 shares/(3)/ *
Senior Vice President
and Chief Financial
Officer
R. M. Reese Common Stock 34,805 shares/(3)//(6)/ *
Vice President, General
Counsel and Secretary
All current Directors, Common Stock 440,705 shares/(2)//(3)/ *
Nominees for Director
and Executive Officers
as a Group
(18 persons)
</TABLE>
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* Less than 1%
4
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/(1)/ None of the current directors, director nominees or officers of the
Corporation owns more than 1% of the outstanding shares of the Common Stock.
No current director, director nominee or officer of the Corporation owns
beneficially any shares of Class B Stock. Beneficial ownership includes shares
held individually and jointly, as well as by spouses and other family members.
Such ownership also includes shares credited to the accounts of officers who
are participants in ESSIOP. All participants are given the opportunity to vote
shares held for their accounts in this plan.
/(2)/ The Directors' Pension Plan was discontinued during 1996 and each
director's accrued balance under such Plan as of December 31, 1996 was
converted into Common Stock equivalent shares under the Directors'
Compensation Plan adopted by the Board of Directors in December, 1996. As of
February 28, 1997, the following amount of Common Stock equivalent shares were
credited to the following directors named in the above table: W. H. Alexander,
432 shares; R. H. Campbell, 415 shares; C. M. Evarts, 417 shares; T. C.
Graham, 2,995 shares; B. Guiton Hill, 1,046 shares; J. C. Jamison, 3,959
shares; M. J. McDonald, 206 shares; J. M. Pietruski, 3,928 shares; and V. A.
Sarni, 2,345 shares. The preceding beneficial ownership table does not include
these Common Stock equivalent shares.
/(3)/ Certain directors and officers of the Corporation are participants in
the Long-Term Incentive Program of the Corporation's Key Employee Incentive
Plan, as amended. These individuals are eligible to receive incentive awards
payable, in whole or in part, in the Corporation's Common Stock, stock options
or in certain circumstances, cash. They are permitted to defer, in certain
instances, receipt of performance stock unit ("PSUs") awards until a future
date. The following are the amount of deferred PSU awards as of February 28,
1997 for those officers named in the preceding table: K. L. Wolfe, 10,026
shares; J. P. Viviano, 30,126 shares; M. F. Pasquale, 8,404 shares; W. F.
Christ, 10,222 shares; and R. M. Reese, 6,373 shares. As of February 28, 1997,
receipt of PSU awards equivalent to 107,281 shares had been deferred by all
current executive officers as a group. The following are the amount of stock
options, as of February 28, 1997, held by those officers named in the
preceding table: K. L. Wolfe, 291,000 options; J. P. Viviano, 211,050 options;
M. F. Pasquale, 123,750 options; W. F. Christ, 86,800 options; R. M. Reese,
59,600 options; and all directors and executive officers as a group, 920,100
options. The preceding beneficial ownership table does not include deferred
PSU awards or stock options.
/(4)/ Includes 1,200 shares held in trust for which Mr. Alexander is a
beneficiary.
/(5)/ Includes 7,745 shares held in several trusts for various family
members.
/(6)/ Includes 30,000 shares held in trust for which Mr. Reese is both a
trustee and a beneficiary.
DESCRIPTION OF THE MILTON HERSHEY SCHOOL TRUST AND HERSHEY TRUST COMPANY
Milton Hershey School, a non-profit school for the full-time care and
education of disadvantaged children located in Hershey, Pennsylvania, is the
sole beneficiary of the trust established by Milton S. and Catherine S.
Hershey in 1909. Investment decisions with respect to securities held by
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School,
are made by the Board of Directors of Hershey Trust Company, as Trustee, with
the approval of the Board of Managers (governing body) of Milton Hershey
School. Decisions regarding the voting of such securities are made by the
Board of Directors of Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School. Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School ("Milton Hershey School Trust"), will be entitled to
cast 23,757,440 of the total 122,314,799 votes, or 19.4%, entitled to be cast
on matters required to be voted on separately by the holders of the Common
Stock, and 326,817,500 of the total 427,023,879 votes, or 76.5%, entitled to
be cast by the holders of the Common Stock and the Class B Stock voting
together on matters to be voted on without regard to class.
5
<PAGE>
Hershey Trust Company is a state chartered trust company and holds 515,782
shares of the Corporation's Common Stock in its capacity as institutional
fiduciary for 57 estates and trusts unrelated to the Milton Hershey School
Trust. The Hershey Trust Company also holds 300,000 shares of Common Stock as
investments. Investment decisions and decisions with respect to voting of
securities held by Hershey Trust Company as institutional fiduciary and as
investments are made by the Board of Directors or management of Hershey Trust
Company.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School,
as fiduciary of the above-noted individual trusts and estates, and as direct
owner of investment shares, will be entitled to vote 24,573,222 shares of
Common Stock and 30,306,006 shares of Class B Stock at the meeting.
Pursuant to the Corporation's Certificate, all holders of Class B Stock,
including the Milton Hershey School Trust, are entitled to convert any or all
of their Class B Stock shares into shares of Common Stock at any time on a
share-for-share basis. In the event the Milton Hershey School Trust ceases to
hold more than 50% of the outstanding shares of the Class B Stock and at least
15% of the total outstanding shares of both the Common Stock and Class B
Stock, all shares of the Class B Stock will automatically be converted into
shares of the Common Stock on a share-for-share basis. The Corporation's
Certificate requires the approval of the Milton Hershey School Trust prior to
the Corporation issuing shares of Common Stock or undertaking any other action
which would cause the Milton Hershey School Trust to cease having voting
control of the Corporation.
All of the outstanding shares of Hershey Trust Company are owned by the
Milton Hershey School Trust. The members of the Board of Managers of Milton
Hershey School are appointed by and from the Board of Directors of Hershey
Trust Company. There are fifteen members of the Board of Directors of Hershey
Trust Company and fourteen members of the Board of Managers of Milton Hershey
School, including William H. Alexander and Dr. C. McCollister Evarts, who are
also members of the Board of Directors of the Corporation, and Kenneth L.
Wolfe, who is also a director and Chairman of the Board and Chief Executive
Officer of the Corporation. Mr. Alexander is also chair of the Board of
Directors of Hershey Trust Company and of the Board of Managers of Milton
Hershey School. Directors of Hershey Trust Company and members of the Milton
Hershey School Board of Managers individually are not considered to be
beneficial owners of the Corporation's shares of Common Stock or Class B Stock
held by the Milton Hershey School Trust.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
Ten directors are to be elected at the meeting, each to serve until the next
annual meeting and until his or her successor shall have been elected and
qualified. Each of the nominees named in the following pages is currently a
member of the Board of Directors. Mr. Thomas C. Graham, currently a director,
will be retiring from the Board as of the Annual Meeting of Stockholders on
April 29, 1997, having reached the mandatory retirement age of 70. Pursuant to
the Corporation's Certificate and By-Laws, one-sixth of the directors, which
presently equates to two directors, is entitled to be elected by the Common
Stock voting separately as a class. The two nominees receiving the greatest
number of votes of the Common Stock voting separately as a class will be
elected. Messrs. Mackey J. McDonald and Vincent A. Sarni have been nominated
by the Board of Directors for the two positions to be elected separately by
the Common Stock. The remaining eight individuals listed have been nominated
by the Board of Directors for the eight positions to be elected by the holders
of the Common Stock and the Class B Stock voting together without regard to
class and nominees receiving the greatest number of votes of the Common Stock
and Class B Stock voting together shall be so elected. In case any of the
nominees should become unavailable for election for any reason not presently
known or contemplated, the persons named on the proxy card will have
discretionary authority to vote pursuant to the proxy for a substitute.
6
<PAGE>
[PHOTO OF WILLIAM H. ALEXANDER APPEARS HERE]
WILLIAM H. ALEXANDER, age 55, is Managing Director, Snider
Entrepreneurial Center, The Wharton School of the University of
Pennsylvania, Philadelphia, Pennsylvania. He was with H. B.
Alexander Enterprises, Inc. from 1969 until 1993 and held a
number of management positions, including Vice President and
General Manager, President and Chairman. A Hershey Foods
director since 1995, he is a member of the Audit Committee. He
is also a director of Harristown Development Corporation;
Merchants and Business Men's Mutual Insurance Company; Penn
National Holding Corporation; and Highmark, Inc.; and is chair
of the Board of Directors of Hershey Trust Company and the
Board of Managers of Milton Hershey School and is a member of
the M. S. Hershey Foundation.
----------------
[PHOTO OF ROBERT H. CAMPBELL APPEARS HERE]
ROBERT H. CAMPBELL, age 59, is Chairman of the Board and Chief
Executive Officer, Sun Company, Inc., Philadelphia,
Pennsylvania, a petroleum refiner and marketer. He has been
Chief Executive Officer since 1991, Chairman of the Board since
1992 and has been a Director of Sun Company, Inc. since 1988.
Previously, he had been Executive Vice President since 1988 and
a Group Vice President since 1983 of Sun Company, Inc. A
Hershey Foods director since 1995, he is a member of the
Compensation and Executive Organization Committee and the
Committee on Directors and Corporate Governance. He is also a
director of CIGNA Corporation.
----------------
[PHOTO OF DR. C. MCCOLLISTER EVARTS APPEARS HERE]
DR. C. MCCOLLISTER EVARTS, age 65, is Chief Executive Officer,
Senior Vice President for Health Affairs, Dean of the College
of Medicine, and Professor of Orthopaedics, The Pennsylvania
State University, College of Medicine and University Hospitals,
The Milton S. Hershey Medical Center, Hershey, Pennsylvania. He
has held these positions since 1987. Previously, Dr. Evarts was
Professor and Chairman of the Department of Orthopaedics and
Vice President for Development at the University of Rochester
School of Medicine and Dentistry. He is past Chairman of the
Board of Directors of the Association of Academic Health
Centers, a member of the Association of American Medical
Colleges, Society of Medical Administrators, and serves on the
Board of Directors of Hershey Trust Company, Carpenter
Technology Corporation, Capital Region Health Futures Project,
Capital Region Economic Development Corporation, and the Lehigh
Valley Hospital; and is a member of the Board of Managers of
Milton Hershey School and the M. S. Hershey Foundation. A
Hershey Foods director since 1996, he is a member of the
Compensation and Executive Organization Committee.
7
<PAGE>
[PHOTO OF BONNIE GUITON HILL APPEARS HERE]
BONNIE GUITON HILL, age 55, is President and Chief Executive
Officer of Times Mirror Foundation and Vice President of Times
Mirror Company, a news and information company, Los Angeles,
California. Previously she was Dean, McIntire School of
Commerce, University of Virginia from 1992 through 1996. She
was a member of the California Governor's cabinet, serving as
Secretary of the State and Consumer Services Agency from 1991
to 1992. From 1990 to 1991, she was President and Chief
Executive Officer, Earth Conservation Corps, Washington D.C.
and from 1989 to 1990, she served as Special Advisor for
Consumer Affairs to the President of the United States. A
Hershey Foods director since 1993, she chairs the Audit
Committee and is a member of the Committee on Directors and
Corporate Governance. She is also a director of AK Steel
Corporation; Crestar Financial Services Corporation; Louisiana-
Pacific Corporation; Niagara Mohawk Power Corporation; and The
American Forestry Foundation.
----------------
[PHOTO OF JOHN C. JAMISON APPEARS HERE]
JOHN C. JAMISON, age 62, is Chairman, Mallardee Associates, a
privately-held corporate financial services firm, Williamsburg,
Virginia. From 1990 to 1992 he was President and Chief
Executive Officer of The Mariners Museum, Newport News,
Virginia. From 1983 to 1990 he was Dean of the Graduate School
of Business Administration, The College of William & Mary,
Williamsburg, Virginia. He was a General Partner with Goldman
Sachs & Co. until 1982, when he became a Limited Partner. A
Hershey Foods director since 1974, he is a member of the Audit
Committee. He is also a director of Richfood Holdings, Inc.;
Riverside Health System, Inc.; and Williamsburg Winery, Ltd.;
and a trustee of The Mariners' Museum.
----------------
[PHOTO OF MACKEY J. MCDONALD APPEARS HERE]
MACKEY J. MCDONALD, age 50, is President and Chief Executive
Officer of VF Corporation, Wyomissing, Pennsylvania, an
international apparel company. He became Chief Executive
Officer of VF Corporation in 1996. Previously, he had been
President and Chief Operating Officer since 1993 and Group Vice
President since 1990 of VF Corporation. He is also a director
of First Union National Bank of North Carolina,
Textile/Clothing Technology Corporation, American Apparel
Manufacturers Association, Fashion Association and Berks County
Chamber of Commerce. A Hershey Foods director since 1996, he is
a member of the Audit Committee. He has been nominated for
election by the Common Stock as a class.
----------------
[PHOTO OF JOHN M. PIETRUSKI APPEARS HERE]
JOHN M. PIETRUSKI, age 64, is Chairman of the Board of Texas
Biotechnology Corp., Houston, Texas, a pharmaceutical research
and development company. He is retired Chairman of the Board
and Chief Executive Officer of Sterling Drug Inc. With Sterling
Drug Inc. from 1977 to his retirement in 1988, he also held the
positions of Executive Vice President and President and Chief
Operating Officer. A Hershey Foods director since 1987, he
chairs the Compensation and Executive Organization Committee.
Mr. Pietruski is also a director of GPU, Inc.; Lincoln National
Corporation; and McKesson Corporation; and is a regent of
Concordia College.
8
<PAGE>
[PHOTO OF VINCENT A. SARNI APPEARS HERE]
VINCENT A. SARNI, age 68, is retired Chairman of the Board and
Chief Executive Officer of PPG Industries Inc., Pittsburgh,
Pennsylvania, a manufacturer of glass, coatings and industrial
and specialty chemicals. Mr. Sarni held these positions from
1984 until his retirement in 1993. Mr. Sarni joined PPG
Industries Inc. in 1968 and held a number of senior management
positions, including Senior Vice President and Vice Chairman. A
Hershey Foods director since 1991, Mr. Sarni chairs the
Committee on Directors and Corporate Governance and serves as a
member of the Compensation and Executive Organization
Committee. He is also a director of PNC Financial Corp.; PPG
Industries Inc.; and The LTV Corp. He has been nominated for
election by the Common Stock as a class.
----------------
[PHOTO OF JOSEPH P. VIVIANO APPEARS HERE]
JOSEPH P. VIVIANO, age 58, is President and Chief Operating
Officer, Hershey Foods Corporation. He was President, Hershey
Chocolate U.S.A., a division of the Corporation, from 1985 to
1993. From 1975 through 1978, he served as President of San
Giorgio, and then as President of San Giorgio-Skinner Company
(presently part of the Hershey Pasta and Grocery Group) through
1983. In 1984, he was elected Senior Vice President of the
Corporation. A director of the Corporation since 1986, he
serves as a member of the Executive Committee. He is also a
director of Chesapeake Corporation, Huffy Corporation and is a
member of the Board of Trustees of Xavier University.
----------------
[PHOTO OF KENNETH L. WOLFE APPEARS HERE]
KENNETH L. WOLFE, age 58, is Chairman of the Board and Chief
Executive Officer, Hershey Foods Corporation. He was elected
President and Chief Operating Officer in 1985, positions he
held through 1993. He was elected Vice President, Finance and
Chief Financial Officer of the Corporation in 1981, and Senior
Vice President and Chief Financial Officer in 1984. A director
of the Corporation since 1984, he chairs the Executive
Committee and serves as a member of the Committee on Directors
and Corporate Governance. He is also a director of Bausch &
Lomb Inc.; Carpenter Technology Corporation; and Hershey Trust
Company and is a member of the Board of Managers of Milton
Hershey School and the M. S. Hershey Foundation.
----------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DIRECTOR NOMINEES LISTED
ABOVE, AND SIGNED PROXIES WHICH ARE RETURNED WILL BE SO VOTED UNLESS OTHERWISE
INSTRUCTED ON THE PROXY CARD.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
There were eight regular meetings of the Board of Directors during 1996. No
director attended less than 75% of the sum of the total number of meetings of
the Board of Directors and the total number of meetings held by all committees
of the Board of Directors on which he or she served during 1996, except for
Mr. McDonald who attended 71%. Average attendance for all of these meetings
equalled 95%.
The Board of Directors has four standing committees. These are the Audit
Committee, the Committee on Directors and Corporate Governance, the
Compensation and Executive Organization
9
<PAGE>
Committee, and the Executive Committee. In addition to the four standing
committees, from time to time the Board establishes committees of limited
duration for special purposes.
The AUDIT COMMITTEE, which held three meetings during 1996, consists of Ms.
Guiton Hill (Chair), and Messrs. Alexander, Jamison and McDonald. The
Committee's responsibilities include recommending to the full Board the
selection of the Corporation's independent public accountants; discussing the
arrangements for and the scope and results of, the annual audit with
management and the independent public accountants; reviewing non-audit
professional services provided by the independent public accountants;
obtaining from both management and the independent public accountants their
observations on the Corporation's system of internal accounting controls;
reviewing compliance by the Corporation and its employees with laws and
regulations applicable to the Corporation's business and with the
Corporation's Code of Ethical Business Conduct; and reviewing the activities
and recommendations of the Corporation's Internal Audit Department.
The COMMITTEE ON DIRECTORS AND CORPORATE GOVERNANCE, which held three
meetings during 1996, consists of Messrs. Sarni (Chair), Campbell, Graham and
Wolfe and Ms. Guiton Hill. The Committee's responsibilities include reviewing
and making recommendations to the Board on the composition of the Board and
its committees; evaluating and recommending candidates for election to the
Board; administering the Directors' Compensation Plan and the Directors'
Charitable Award Program; and reviewing and making recommendations to the full
Board on corporate governance matters and the Board's corporate governance
policies. The Committee will consider nominees recommended by stockholders.
Such recommendations should be sent to the Secretary of the Corporation, 100
Crystal A Drive, Hershey, Pennsylvania 17033-0810, and should include the
proposed nominee's name, address and biographical information.
The COMPENSATION AND EXECUTIVE ORGANIZATION COMMITTEE, which held three
meetings during 1996, consists of Messrs. Pietruski (Chair), Campbell, Evarts,
Graham and Sarni. The Committee sets the salaries of the Corporation's elected
officers; makes grants of performance stock units, stock options and other
rights under the Corporation's Key Employee Incentive Plan ("KEIP"); sets
target award levels and makes awards under the Annual Incentive Program and
the Long-Term Incentive Program of the KEIP; administers the KEIP, the
Employee Benefits Protection Plan, and the Supplemental Executive Retirement
Plan; monitors compensation arrangements for management employees for
consistency with corporate objectives and stockholders' interests; reviews the
executive organization of the Corporation; and monitors the development of
personnel available to fill key management positions as part of the succession
planning process.
The EXECUTIVE COMMITTEE, which held ten meetings during 1996, consists of
Messrs. Wolfe (Chair) and Viviano. The Committee reviews and recommends to the
full Board for approval major capital projects and expenditures. During 1996
the Committee also assumed responsibility for overseeing the administration of
and the making of any changes to, the Corporation's retirement and welfare
benefit plans, including the pension plans covered by the Employee Retirement
Income Security Act of 1974.
COMPENSATION OF DIRECTORS
Directors who are employees of the Corporation receive no additional
remuneration for their services as directors. Non-employee directors received
in 1996 an annual retainer of $20,000; a fee of $1,000 for each Board meeting
attended; a fee of $900 for each Board committee meeting attended; and a fee
of $100 for each Board or Board committee meeting held by telephone conference
call. Board committee chairs receive an annual retainer of $2,000 in addition
to meeting fees. Under the Directors' Fees Deferral Plan, directors may elect
to defer receipt of part or all of each year's fees for such period as they
may select, to be paid beginning no later than retirement from the Board. In
1996, to ensure the directors' compensation package remained competitive, non-
employee directors were granted 100 shares of Common Stock in lieu of an
increase in their annual retainer.
10
<PAGE>
In December 1996, the Corporation reevaluated the payment of director's
fees, adjusted the method and amount of fees that would be paid, and adopted a
new Directors' Compensation Plan. Starting in 1997, the director's annual
retainer will be $42,500 (one-third of which must be paid in Common Stock),
board meeting fees will be $1,500 per meeting and a fee of $1,000 will be paid
for each Board Committee meeting attended. Committee chairs receive an annual
retainer of $3,000 in addition to meeting fees. These changes were the result
of a review of competitive data which disclosed the need to adjust the
retainer and fees to bring them in line with other comparable companies. The
Directors' Compensation Plan, while not establishing the amount of fees to be
paid, does provide directors flexibility in the manner in which they receive
their fees. Starting in 1997, directors may elect to receive the retainer in
cash or Common Stock, (meeting and chair fees are payable in cash only) or may
defer receipt of the retainer and meeting fees until their retirement as a
director. The new plan offers several return options from which directors may
choose to invest any retainer and meeting fees that are deferred. In addition,
deferrals may be made into Common Stock equivalent shares. The plan is not
funded by the Corporation.
All directors are reimbursed for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance at meetings of the Board and
its committees and for minor incidental expenses incurred in connection with
performance of directors' services. In addition, directors are provided with
travel accident insurance while traveling on the Corporation's business;
receive the same discounts as employees on the purchase of the Corporation's
products; and are eligible to participate in the Corporation's Higher
Education Gift Matching Program.
In December 1996, the Board of Directors voted to terminate the Directors'
Pension Plan, which had generally provided for the payment to non-employee
directors of their retainer for 10 years following retirement from the Board.
Director's accrued balances under the plan as of December 31, 1996 were
converted into Common Stock equivalent shares and credited to a deferral
account established under the Directors' Compensation Plan discussed above.
The Common Stock equivalent shares for current directors are listed in
footnote (2) to the table of stockholdings under "Voting Securities."
The Corporation maintains a Directors' Charitable Award Program, which is
designed to acknowledge the service of directors, recognize the mutual
interest of the Corporation and its directors in support of worthy nonprofit
institutions and provide an indirect enhancement to the overall
competitiveness of the directors' benefit program. The charitable donations by
the Corporation will be directed primarily to educational institutions as
designated by the directors. The amount of the donation varies according to
the director's length of service as a director, up to a maximum donation of
$1,000,000 after five years of service. Individual directors derive no
financial benefit from the program since all charitable tax deductible
donations accrue solely to the Corporation. All current directors and eight
retired directors participate in the program. The amount of the charitable
donation per current participating director is $1,000,000, except for Ms.
Guiton Hill, for whom the current amount is $600,000, and Messrs. Alexander,
Campbell, Evarts and McDonald for whom the current amount is $200,000, because
of their shorter length of service as directors. In December 1996, the Board
of Directors determined that the program would be self-funded, and life
insurance policies on the directors that had previously funded the program
were cancelled. In addition, the Board determined that the program will not be
made available to individuals becoming directors after December 31, 1996.
11
<PAGE>
1996 EXECUTIVE COMPENSATION
COMPENSATION AND EXECUTIVE ORGANIZATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation and Executive Organization Committee of the Board of
Directors ("Committee") is composed entirely of non-employee directors, and is
responsible for the establishment and oversight of the Corporation's executive
compensation program.
EXECUTIVE COMPENSATION PHILOSOPHY
The Corporation's executive compensation program is designed to meet the
following objectives:
. To connect the interests of the executive officers with corporate
performance and the interests of stockholders;
. To attract, retain and motivate executive talent;
. To assure a significant portion of the executive officers' total
compensation is dependent upon the appreciation of the Corporation's
Common Stock; and
. To provide a balanced total compensation package that recognizes the
individual contributions of the executive officers and the overall
business results of the Corporation.
Each year the Committee conducts a full review of the Corporation's
executive compensation program. The annual compensation review permits an
ongoing evaluation of the link between the Corporation's performance and its
executive compensation in the context of the compensation programs of other
companies. This review is performed periodically with the assistance of an
independent outside consultant whose services are retained by the Corporation.
The Committee reserves the right to select and/or meet independently with any
consultant at its discretion. This annual review includes analyzing survey
data comparing the competitiveness of the Corporation's executive
compensation, corporate performance, stock price appreciation and total return
to stockholders with a peer group of companies representing the Corporation's
most direct food industry competitors for executive talent. The Committee also
considers compensation data compiled from surveys of a broader group of
general industry companies, some of which are from the food industry. In the
performance graph on page 20, the Corporation's performance is compared to the
Standard and Poor's Food Group Index. The peer group considered relevant for
the Corporation's compensation comparison purposes does not include all of the
companies in the Food Group Index as compensation data on all such companies
is not readily available. Also, the peer group includes some companies that
are not in this index because the Corporation selects those companies it
believes to be the most relevant and direct competitors for executive talent.
The Committee reviews which peer companies are selected for compensation
analysis.
In the review of survey data, a statistical process involving regression
analysis is used to determine competitive compensation levels. This approach
adjusts compensation levels for factors such as net sales, return on equity,
and time in position within the organization in determining predicted values
or "going rates" within the marketplace for each element of compensation. The
Corporation targets total compensation "at or above" such "going rates."
The Committee believes the holding of significant equity interests in the
Corporation by management aligns the interests of stockholders and management.
Through the programs described in this report, a very significant portion of
each executive officer's total compensation is linked directly to individual
and corporate performance and stock price appreciation.
The key elements of the Corporation's executive compensation program consist
of base salary, an annual cash incentive program, and a long-term incentive
program consisting of performance stock
12
<PAGE>
units and stock options. Incentives play an important role in motivating
executive performance and in aligning executive pay practices with the
interests of the stockholders. The Corporation's executive compensation
program is intended to reward achievement of both short-term and long-term
business goals. To ensure proper balance in the achievement of these business
objectives, the incentive program places greater dollars at risk in long-term
incentives compared to short-term incentives. The long-term incentive program
is especially designed to assure that the Corporation's executive officers
have a significant portion of their total compensation tied to factors which
affect the performance of the Corporation's stock.
The Committee determined the total compensation of K. L. Wolfe, Chairman of
the Board and Chief Executive Officer, and it reviewed and approved the total
compensation of the most highly-compensated executive officers, including the
individuals whose compensation is detailed in this Proxy Statement. This is
designed to ensure consistency throughout the executive compensation program.
The Committee's policies with respect to each of the elements of the
executive compensation program, including the basis for the compensation
awarded to Mr. Wolfe, are discussed below. While the elements of compensation
are described separately below, the Committee considers the total compensation
package afforded by the Corporation when determining each component of the
executive officer's compensation, including pension benefits, supplemental
retirement benefits, insurance and other benefits.
BASE SALARIES
Base salaries for new executive officers are initially determined by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the salaries paid in the competitive
marketplace for executive talent, including a comparison of base salaries for
comparable positions at other companies.
Salary reviews are conducted annually and salary adjustments are made based
upon the performance of the Corporation and of each executive officer and
their position in the applicable salary grade. The Committee considers both
financial and, where appropriate, non-financial performance measures in making
salary adjustments. Base salaries for executive officers and all other
salaried employees are set within salary ranges established for the position
as determined through the annual competitive salary surveys described above.
In the case of executive officers with responsibility for a particular
business unit, such unit's financial results are also considered.
With respect to the base salary granted to Mr. Wolfe in 1996, the Committee
made a favorable assessment of the Corporation's actual business results
versus plan goals and the results achieved by Mr. Wolfe on various objectives
the Committee established in 1996. The Committee also considered Mr. Wolfe's
relative position in his salary grade. Based on these factors, the Committee
increased Mr. Wolfe's salary by $40,000, a 7.0% increase.
ANNUAL INCENTIVE PROGRAM
The Corporation's executive officers, as well as other key management and
professional employees, are eligible for an annual cash incentive award under
the Annual Incentive Program ("AIP") of the Corporation's Key Employee
Incentive Plan, as amended ("Incentive Plan"), a plan which is administered by
the Committee. Participating executive officers are eligible to earn
individual awards expressed as a percentage of base salary.
The final award is the product of the executive officer's base salary, the
applicable target percentage, the corporate or business unit performance score
and the individual performance score. Individual and short-term (annual)
corporate and business unit performance objectives are established
13
<PAGE>
at the beginning of each year by the Committee. For executive officers at the
corporate level, the performance objectives for AIP award payments for 1996
were based on financial measures including consolidated net sales, earnings
per share, return on net assets and control of certain corporate
administrative costs. For executive officers at the business unit level, the
performance objectives for 1996 were varying combinations of consolidated
earnings per share, operating income, sales growth, return on business unit
net assets, quality and cost controls, cash flow and market share. Adjustments
are made to the performance results, if necessary, to take into account
extraordinary or unusual items occurring during the performance year. Since
the final award is the product of the factors described above, the corporate
or business unit performance and individual performance scores are given equal
weight in the formula. With respect to executives at the corporate level in
1996, the relative weights of performance objectives were 40% each for
earnings per share and return on net assets and 10% each for administrative
cost control and consolidated net sales. Performance scores in excess of the
objectives for financial measures and/or individual performance expectations
may result in the individual executive officer receiving more than his/her
target percentage. The maximum corporate or business unit performance score
for a plan participant is 175%. The maximum score on the individual
performance score is 120%. Guidelines have been established which in certain
instances limit the personal performance score in relationship to the
corporate or business unit scores. The range of the target percentages of base
salary used in 1996 for annual cash incentive awards for executive officers
was 25% to 60%, with the highest rate of 60% applicable only to Mr. Wolfe.
No annual cash incentive awards are granted unless a corporate "performance
hurdle" is achieved. This hurdle is defined as the minimum rate of return
which average total invested capital must earn before any awards are paid.
This is designed with the stockholders' interest in mind by assuring the
Corporation achieves certain profitability levels before any executive is
granted an annual incentive award.
In 1996, corporate-level participants (which included Mr. Wolfe) in the AIP
exceeded the corporate performance objectives set for return on net assets,
consolidated net sales, earnings per share and control of certain corporate
administrative costs. In addition, the Committee took into account Mr. Wolfe's
performance against his personal objectives, which Mr. Wolfe exceeded. Based
on these results, Mr. Wolfe was awarded a 1996 annual cash incentive award of
$787,815.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE STOCK UNITS
Performance stock units (PSUs) were contingently granted in 1996 under the
Incentive Plan to members of the Corporation's senior executive group most in
a position to affect the Corporation's long-term results (a combined total of
23 individuals in 1996). PSU grants are based upon a percent of the
executive's annual salary. PSUs are granted every year and are earned based on
the Corporation's performance over a three-year cycle. Each year begins a new
three-year cycle. Provided the Corporation has achieved the established
performance objectives at the end of the three-year cycle, a payment is made,
either in stock, cash or a combination of both, based on the market value of
the shares at the end of the cycle. In determining whether performance
objectives have been achieved, specified adjustments established by the
Committee can be made to the corporate performance to take into account
extraordinary or unusual items occurring during the performance cycle. Payment
may be deferred to a later date at the election of the executive. The value of
each of the PSUs is tied to corporate performance (in determining what
percentage of shares are earned) and stock price appreciation. The established
performance measures are earnings per share and return on net assets and
beginning with the 1995-1997 cycle, cumulative free cash flow. The performance
scores can range from 0% to 120% for the 1994-1996 cycle and from 0% to 150%
for the 1995-1997 cycle and thereafter.
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
14
<PAGE>
of the shares which must be acquired and held are equal to a multiple of the
individual's base salary. Minimum stockholding requirements for executive
officers range from three to five times base salary. If the minimum has not
been met, the executive officer is required to take the PSU award in Common
Stock (net of withholding taxes) or deferred PSUs. For Mr. Wolfe, the
applicable multiple in 1996 was five times his base salary.
In January 1994, each eligible member of the senior executive group was
granted PSUs having a value at the time of grant equal to a percentage of
their annual salary. This percentage was determined by the Committee based on
the recommendation of senior management and competitive survey information.
The performance objectives established for the grant for earnings per share
and return on net assets were largely achieved for the period ended December
31, 1996. Accordingly, Mr. Wolfe's award was valued at $685,588 based on the
December 1996 averaged value of the PSUs from the 1994 grant.
In January 1996, eligible members of the senior executive group were granted
new contingent PSUs. The grants were consistent with past practices. The
"Long-Term Incentive Program Performance Stock Unit Awards in Year Ended
December 31, 1996" table in this Proxy Statement provides additional
information regarding these grants for the five most highly-compensated
executive officers.
LONG-TERM INCENTIVE PROGRAM--STOCK OPTIONS
Under the Incentive Plan, stock options are periodically granted to the
Corporation's senior executive group as well as to other key management and
professional employees. In 1996, the Committee recommended and the Board
adopted a plan which grants, on a one time basis, stock options to the
majority of the Corporation's full-time employees who do not participate in
the Incentive Plan. Stock options entitle the holder to purchase during a
specified time period a fixed number of shares of Common Stock at a set price.
The Committee sets guidelines for the number of stock options to be granted
based on competitive compensation data gathered from survey information
discussed above. The number of stock options granted is a function of the
employee's base pay, stock option multiples for the employee's grade level and
the imputed value of the option. The Committee also takes into account
management's recommendations regarding the number of options to be awarded to
specific employees as well as competitive pay practices within the food
industry and the amounts of options outstanding or previously granted. While
stock options have been granted annually to members of the senior executive
group, the Committee can elect not to grant stock options in a given year.
Stock option recipients other than the senior executive group (over 350 key
employees) generally receive stock option grants every two years.
Minimum stockholding requirements are applicable to stock options granted
after 1995. If the minimums are not satisfied, an individual can receive only
one-half of the after-tax profit from the option exercise in cash. The
remaining one-half of the profit must be retained in Hershey Foods stock.
Minimum stockholding requirements range from one to five times base salary.
For Mr. Wolfe, the applicable multiple in 1996 was five times his base salary.
Stock options are designed to align the interests of executives with those
of the stockholders. Stock options are granted with a ten-year term and an
exercise price equal to the closing market price of the Common Stock on the
day preceding the date of grant. Starting in 1997, options granted to the
senior executive group have a two-year vesting requirement similar to that
already applicable to the non-senior management group receiving options. This
approach is designed as an incentive for future performance by the creation of
stockholder value over the long-term since the benefit of the stock options
cannot be realized unless stock price appreciation occurs.
15
<PAGE>
In 1996, Mr. Wolfe received options to purchase 61,000 shares of Common
Stock with an exercise price of $33.0625 per share, the closing market price
on the day preceding the grant. The number of options granted and the exercise
price have been adjusted for the two-for-one stock split on September 13,
1996.
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).
The proposal included in this Proxy Statement requesting stockholders to
approve the Key Employee Incentive Plan, as amended, is consistent with the
Committee's position. However, the Committee believes that it needs to retain
the flexibility to exercise its judgment in assessing an executive's
performance and that the total compensation system for executive officers
should be managed in accordance with the objectives outlined in the "Executive
Compensation Philosophy" section of this report and in the best overall
interest of the Corporation's stockholders. Should compliance with Section
162(m) conflict with the "Executive Compensation Philosophy" or with what the
Committee believes to be in the best interest of the stockholders, the
Committee will act in accordance with the Philosophy and in the best interest
of the stockholders, notwithstanding the effect of such action on
deductibility for any given year. However, to assure that the Corporation does
not lose deductions for compensation paid, the Committee has adopted a
deferral policy requiring the executive to defer receipt of any compensation
in excess of $1 million that is not deductible in any given year to the year
in which such compensation would be deductible by the Corporation.
CONCLUSION
In 1996, as in previous years, a substantial portion of the Corporation's
executive compensation consisted of performance-based variable elements. In
the case of Mr. Wolfe, approximately 69% of his 1996 total compensation
consisted of performance-based variable elements, without including stock
options in the computation. The Committee intends to continue the policy of
linking executive compensation to corporate performance and returns to
stockholders.
SUBMITTED BY THE COMPENSATION AND EXECUTIVE ORGANIZATION
COMMITTEE OF THE CORPORATION'S BOARD OF DIRECTORS:
John M. Pietruski, Chairman Robert H. Campbell C. McCollister Evarts
Thomas C. Graham Vincent A. Sarni
16
<PAGE>
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows for the fiscal years ending December 31, 1994,
1995 and 1996, the cash compensation paid by the Corporation, as well as
certain other compensation paid or accrued for those years, to each of the
five most highly-compensated executive officers of the Corporation in the
capacities in which they served in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------- ----------------------
NAME AND
PRINCIPAL NUMBER
POSITION OF STOCK ALL OTHER/(5)/
AS OF OPTION LTIP/(4)/ COMPENSA-
12/31/96 YEAR SALARY/(1)/ BONUS/(2)/ AWARDS/(3)/ PAYOUTS TION
- --------------------- ---- ----------- ---------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 1996 $610,000 787,815 61,000 685,588 $ 3,750
Chairman and 1995 570,000 508,246 50,200 469,483 3,750
Chief Executive 1994 550,000 346,500 66,300 345,777 14,711
Officer
J. P. Viviano 1996 $490,000 533,691 41,500 462,282 $ 3,750
President and 1995 460,000 375,983 34,300 312,988 3,750
Chief Operating 1994 430,000 248,325 50,600 247,319 17,903
Officer
M. F. Pasquale 1996 $317,500 254,722 25,500 378,827 $ 3,750
President, Hershey 1995 304,000 171,188 21,500 181,534 3,750
Chocolate North 1994 295,000 170,378 30,000 146,560 3,750
America
W. F. Christ 1996 $263,000 237,765 17,000 245,992 $ 3,750
Senior Vice 1995 248,500 188,005 14,200 156,494 3,750
President and 1994 240,000 126,000 18,100 100,760 4,706
Chief Financial
Officer
R. M. Reese 1996 $218,500 168,939 11,800 152,515 $ 3,750
Vice President, 1995 190,000 113,970 9,100 103,286 3,750
General Counsel 1994 175,000 77,910 8,000 0 3,750
and Secretary
</TABLE>
- --------
/(1)/ This column includes amounts deferred pursuant to Section 401(k) of
the Internal Revenue Code that were contributed by the executive officer to
ESSIOP.
/(2)/ This column represents annual cash incentive awards (paid out or
deferred) attributable to services rendered for that year. Mr. Wolfe deferred
receipt of $472,815 of his 1996 annual cash incentive award.
/(3)/ The number of stock options granted has been adjusted for the two-for-
one stock split on September 13, 1996.
/(4)/ This column reports the cash value earned in PSU payouts during each
of the last three fiscal years at the end of the following three performance
cycles: 1994-96, 1993-95 and 1992-94 under the KEIP which were paid or
deferred in the fiscal year immediately following the last year of the
respective three-year cycle. Mr. Wolfe deferred receipt of his entire 1996 PSU
award.
/(5)/ This column includes the Corporation's matching contributions to the
individual's ESSIOP account for 1994, 1995 and 1996, and for year 1994 also
includes payments for unused vacation days. Payment for unused vacation days
was discontinued in 1995.
17
<PAGE>
LONG-TERM INCENTIVE PROGRAM--STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Key Employee Incentive Plan to the five most highly-
compensated executive officers of the Corporation as of the end of the last
fiscal year:
STOCK OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS STOCK OPTION TERM
--------------------------------------------------- -----------------------------
% OF TOTAL
NUMBER STOCK
OF OPTIONS
SECURITIES GRANTED EXERCISE
UNDERLYING TO OR
OPTIONS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED/(1)/ IN 1996/(2)/ PER SHARE/(3)/ DATE 5%/(4)/ 10%/(4)/
- ---- ------------ ------------ -------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 61,000 2.33% $33.0625 01/02/06 $1,268,363 $3,214,280
J. P. Viviano 41,500 1.58% 33.0625 01/02/06 862,902 2,186,764
M. F. Pasquale 25,500 0.97% 33.0625 01/02/06 530,217 1,343,674
W. F. Christ 17,000 0.65% 33.0625 01/02/06 353,478 895,783
R. M. Reese 11,800 0.45% 33.0625 01/02/06 245,355 621,779
- --------------------------------------------------------------------------------------------------------
All Stockholders/(5)/ N/A N/A N/A N/A $3,213,152,525 $8,142,759,358
</TABLE>
- --------
/(1)/ All stock options listed in this column are exercisable and have a
ten-year term. The stock options having a $33.0625 exercise price were granted
on January 3, 1996 and were granted at a price not less than 100% of the fair
market value of the shares of Common Stock on the date of grant determined as
the closing price on the business date immediately preceding the date the
stock options were granted. All stock options expire at the end of the stock
option holder's employment, except in the case of a stock option held by an
employee whose employment ends due to retirement, total disability or death,
in which instance the employee or his estate may exercise the stock option
within five years of the date of retirement, total disability or death (three
years for options granted prior to 1997). The number of stock options granted
were adjusted for the two-for-one stock split on September 13, 1996.
/(2)/ In 1996, 415 employees were granted a total of 2,619,200 stock
options. The number of options granted was adjusted for the two-for-one stock
split on September 13, 1996.
/(3)/ The exercise price may be paid in cash, shares of Common Stock valued
at the fair market value on the date of exercise, or pursuant to a cashless
exercise procedure under which the stock option holder provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit to
the Corporation, out of the sales proceeds, an amount equal to the exercise
price plus all applicable withholding taxes.
/(4)/ The dollar amounts under these columns for all the individuals are the
result of calculations at the 5% and 10% annual appreciation rates for the
term of the options (10 years) as required by the Securities and Exchange
Commission, and, therefore, are not intended to forecast possible future
appreciation, if any, of the stock price of the Corporation.
/(5)/ For "All Stockholders," the potential realizable value on 154,531,766
shares, the number of outstanding shares of Common Stock and Class B Stock on
January 3, 1996, is based on a $33.0625 per share price (the exercise price of
the 1996 options). The value of the Common Stock and Class B Stock at $33.0625
per share was $5,109,206,513. The amounts listed under these columns for "All
Stockholders" are the result of calculations at the 5% and 10% annual
appreciation rates for a period of ten years from January 3, 1996 through
January 2, 2006. These amounts are not intended to forecast possible future
appreciation, if any, of the stock price of the Corporation.
18
<PAGE>
The following table sets forth information with respect to the named
executives concerning the exercise of stock options during the last fiscal
year and unexercised stock options held as of the end of the fiscal year:
AGGREGATED STOCK OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1996
AND YEAR-END STOCK OPTION VALUES
<TABLE>
<CAPTION>
NUMBER
VALUE OF
REALIZED SECURITIES
NUMBER (MARKET UNDERLYING VALUE OF
OF PRICE AT UNEXERCISED UNEXERCISED
SHARES EXERCISE STOCK IN-THE-MONEY
ACQUIRED LESS OPTIONS STOCK OPTIONS
ON EXERCISE EXERCISABLE AT EXERCISABLE AT
NAME EXERCISE PRICE) 12/31/96/(1)/ 12/31/96/(1)/
- ---- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
K. L. Wolfe..................... 24,500 $684,863 243,500 $4,285,000
J. P. Viviano................... 14,100 407,181 178,800 3,196,075
M. F. Pasquale.................. 18,000 462,881 104,100 1,835,713
W. F. Christ.................... 6,500 173,406 73,700 1,337,881
R. M. Reese..................... 0 0 50,300 958,681
</TABLE>
- --------
/(1)/ All of the stock options were granted under the Key Employee Incentive
Plan and are exercisable. The fair market value of the Common Stock on
December 31, 1996, the last trading day of the Corporation's fiscal year, was
$43.75.
LONG-TERM INCENTIVE PROGRAM--PERFORMANCE STOCK UNITS
The following table provides information concerning performance stock unit
grants made to the five most highly-compensated executive officers of the
Corporation during the last fiscal year under the long-term incentive program
portion of the Key Employee Incentive Plan. Payments made under the program
for the three-year performance cycle ending December 31, 1996, are reported in
the Summary Compensation Table.
LONG-TERM INCENTIVE PROGRAM
PERFORMANCE STOCK UNIT AWARDS IN YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERFORMANCE
NUMBER OF OR OTHER
SHARES, PERIOD UNTIL ESTIMATED FUTURE PAYOUTS
UNITS OR MATURATION ---------------------------
OTHER OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS/(1)/ PAYOUT (#)/(2)/ (#)/(3)/ (#)/(4)/
- ---- ----------- ------------ --------- -------- --------
<S> <C> <C> <C> <C> <C>
K. L. Wolfe................ 15,200 3 years 1,267 15,200 22,800
J. P. Viviano.............. 10,400 3 years 867 10,400 15,600
M. F. Pasquale............. 6,400 3 years 533 6,400 9,600
W. F. Christ............... 4,300 3 years 358 4,300 6,450
R. M. Reese................ 3,000 3 years 250 3,000 4,500
</TABLE>
- --------
/(1)/ The performance stock units (PSUs) reported in this table were granted
on January 3, 1996 for the cycle commencing January 1, 1996 and ending
December 31, 1998. The number of units granted were adjusted for the two-for-
one stock split on September 13, 1996.
For purposes of determining the number of grants, the value of each PSU is
based on the average of the daily closing prices of Hershey Foods' Common
Stock on the New York Stock Exchange as reported in The Wall Street Journal
for the December preceding the new three-year performance cycle.
19
<PAGE>
The final value of the award is determined based upon three factors. The
first involves the number of PSUs awarded at the commencement of the three-year
cycle. The second factor relates to the performance score as measured against
predetermined earnings per share, return on net assets and cumulative free cash
flow objectives for the 1996-98 three-year cycle. The performance scoring can
range from a minimum of 0% to a maximum of 150% achievement. The third factor
involves the value per unit which is determined at the conclusion of the three-
year cycle. The final award is limited to a value of two times the grant price
over the term of the three-year cycle. In the case of the 1996-98 cycle, this
limit is $65.21 per share.
/(2)/ This column lists the number of shares of Common Stock, the value of
which would be payable to the named executives at the threshold achievement
level of 8-1/3%. If the achievement level at the end of the three-year cycle is
less than this threshold, no payments are made.
/(3)/ This column lists the number of shares of Common Stock the value of
which would be payable to the named executives at the target, or 100%
achievement level.
/(4)/ This column lists the number of shares of Common Stock the value of
which would be payable to the named executives at the 150% or more achievement
level.
PERFORMANCE GRAPH
The following 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 & S&P FOOD GROUP INDEX
---------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HERSHEY $100 $108 $116 $117 $161 $221
S&P 500 $100 $108 $118 $120 $165 $203
S&P FOOD $100 $100 $92 $102 $131 $155
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Total return assumes reinvestment of dividends.
Assumes $100 invested on 12/31/91 in Hershey Common Stock, S&P 500 Index and
S&P Food Group Index.
20
<PAGE>
BENEFIT PROTECTION ARRANGEMENTS
In August 1994, the Corporation entered into severance agreements (the
"Severance Agreements") with the five executive officers named in the Summary
Compensation Table and other key management personnel. The terms of these
Severance Agreements are consistent with the practices followed by other major
public corporations in the U.S. and provide that in the event the executive's
employment with the Corporation is terminated without "cause" within two years
after a "change in control" of the Corporation, the executive is entitled to
certain severance payments and benefits. A "change in control" is defined to
include an event in which the Milton Hershey School Trust no longer holds
voting control of the Corporation and another party acquires twenty-five (25)
percent or more of the combined voting power or common equity of the
Corporation. Under the terms of the Severance Agreements, upon the executive's
termination after a change in control as described above, and in order to
assist the executive in transitioning to new employment, the executive would
be generally entitled to receive in a lump sum three times the executive's
base salary and annual incentive bonus. The executive would also be entitled
to continuation of health benefits for such period and reimbursement for
federal excise taxes payable (but not for income taxes payable). The executive
would also become vested in benefits under existing compensation and benefit
programs (including those described in this Executive Compensation section)
and would generally be paid such benefits at the time of any such change in
control.
The Milton Hershey School Trust has indicated to the Corporation that it
intends to maintain voting control of the Corporation and therefore it is
unlikely that the Severance Agreements would be utilized. The Milton Hershey
School Trust has also indicated that it, however, accepts the position of the
Corporation's Board of Directors that such arrangements are part of the usual
and ordinary compensation packages at major public companies and are important
to the Corporation's ability to attract and retain key employees.
PENSION PLANS
Executive Officers are eligible to receive pension benefits payable under
the Corporation's qualified benefit pension plan ("Pension Plan"), as well as
the nonqualified supplemental executive retirement plan that provides benefits
in excess of those that may be provided under plans (such as the Pension Plan)
that are subject to limitations under the Internal Revenue Code. The combined
benefit paid to a participant pursuant to these plans is equal to fifty-five
percent of that individual's final average compensation. Final average
compensation is determined by adding the participant's three years' average of
base salary and five years' average annual cash incentive award. The combined
amounts paid under the two plans are reduced by any applicable Social Security
benefits received, by a specified percentage for each month that retirement
occurs before age 60, and by a specified percentage for each year that
retirement occurs prior to the individual completing 15 years of service with
the Corporation.
The final average compensation and the estimated credited years of service
as of December 31, 1996, respectively, for each of the named executive
officers are: K. L. Wolfe, $1,024,226, 27.8 years; J. P. Viviano, $794,581,
28.7 years; M. F. Pasquale, $479,669, 17.4 years; W. F. Christ, $414,330, 26.2
years; and R. M. Reese, $292,504, 17.4 years.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Corporation's executive officers, directors and 10% stockholders are
required under the Securities and Exchange Act of 1934 to file with the
Securities and Exchange Commission and the New York Stock Exchange reports of
ownership and changes in ownership in their holdings of the Corporation's
stock. Copies of these reports must also be furnished to the Corporation.
Based on an
21
<PAGE>
examination of these reports and on written representations provided to the
Corporation, all such reports have been timely filed except that, due to
administrative error, reports were not timely filed in connection with one
sale of the Corporation's Common Stock by Mr. Jay Carr, President, Hershey
Pasta and Grocery Group and one sale by Mr. David Tacka, Controller, Hershey
Foods Corporation.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1996 the Corporation and its subsidiaries had a number of
transactions with Milton Hershey School; with Milton Hershey School Trust; and
with companies owned by the Milton Hershey School Trust, involving the
purchase or sale of goods and services. These latter transactions were
primarily with HERCO Inc., an entertainment and resort company based in
Hershey, Pennsylvania, and wholly-owned by the Milton Hershey School Trust.
The aggregate value of sales made during 1996 by the Corporation and its
subsidiaries to the School, the Milton Hershey School Trust, and companies
owned by the Milton Hershey School Trust, amounted to approximately $800,000.
During the year, the Corporation purchased goods and services from these
entities in the amount of approximately $1,550,000. 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.
Pursuant to the Corporation's Directors' Charitable Award Program, as
described in the section "The Board of Directors and its Committees" in this
Proxy Statement, one former director of the Corporation designated the Milton
Hershey School Trust as beneficiary of $500,000 in charitable donations by the
Corporation. This individual retains the discretion to change beneficiary
designees.
PROPOSAL NO. 2--APPROVAL OF THE KEY EMPLOYEE INCENTIVE PLAN, AS AMENDED
The purpose of the Key Employee Incentive Plan (the "Plan") is to provide
key employees with incentives to work for the growth and success of the
Corporation and its subsidiaries. The Plan helps the Corporation to achieve
competitive compensation levels and is designed to meet the present and
anticipated needs of the Corporation in attracting, retaining and rewarding a
key employee group of outstanding dedication and ability. The Plan consists of
two separate programs--an Annual Incentive Program ("AIP") that rewards key
employees based on their performance relative to annual operating objectives
and a Long-Term Incentive Program ("LTIP") that rewards longer term
objectives.
The Plan was originally adopted by the Board of Directors and approved by
the stockholders in 1987. In February 1997, the Board of Directors approved
various amendments to the Plan ("1997 Amendments"), and is submitting the
Plan, as amended, to stockholders for their approval. The Board is seeking
stockholder approval of the Plan, as amended, in order to satisfy certain
requirements of the Plan and in order that the compensation paid under the
Plan may be eligible to qualify as performance-based compensation under
Section 162(m) of the Internal Revenue Code of 1986 ("IRC") and the
regulations thereunder.
DESCRIPTION OF AND REASONS FOR THE 1997 AMENDMENTS. The 1997 Amendments
revised the Plan in a number of respects. A copy of the Plan, as amended, is
attached to this Proxy Statement as Appendix A. Each stockholder is urged to
review the Plan in its entirety.
Two of the 1997 Amendments are further described below. The first is an
amendment to the Plan to eliminate the requirement for stockholder approval of
certain amendments; stockholder approval of certain amendments still may be
required, however, under applicable laws or regulations. The second is an
amendment to the Plan that is intended to conform certain provisions of the
Plan to the
22
<PAGE>
requirements of an exception for "performance-based compensation" under
Section 162(m) of the IRC. In general, Section 162(m) limits the deduction of
compensation paid to certain executives of publicly-held corporations to $1
million per year, subject to certain exceptions, including one for
"performance-based compensation."
Section 162(m) deduction limitation. Under Section 162(m) of the IRC no
deduction is allowed for annual compensation in excess of $1 million paid by a
publicly-traded corporation to its chief executive officer and the four other
most highly-compensated officers. Under this IRC provision, however, there is
no limitation on the deductibility of "performance-based compensation". In
general to qualify as "performance-based compensation" (i) the compensation
must be paid solely on account of the attainment of one or more pre-
established objective performance goals; (ii) the performance goals under
which compensation is paid must be established by a compensation committee
comprised solely of two or more directors who qualify as "outside directors"
for purposes of the exception; (iii) the material terms under which the
compensation is to be paid must be disclosed to and subsequently approved by
stockholders of the corporation, before payment is made, in a separate vote;
and (iv) the compensation committee must certify in writing before payment of
the compensation that the performance goals and any other material terms were
in fact satisfied. Regulations issued under Section 162(m) require that
maximum payouts under the plan be determined and disclosed to stockholders as
part of the plan approval process.
As a part of the 1997 Amendments, the Board of Directors amended the Plan to
limit the number of stock options, stock appreciation rights and restricted
stock units that may be granted to individual participants during any calendar
year. The Board also capped the payouts that individual participants can
receive under the AIP and Performance Stock Unit ("PSU") sections of the Plan.
Under the amendment, the number of shares of Common Stock that may be
covered by stock options and stock appreciation rights awarded to a
participant during a calendar year is 250,000 with respect to each type of
award and 50,000 with respect to restricted stock units. The maximum payout a
participant can receive under AIP is capped at $2,100,000 and the maximum
payout a participant may receive under the PSU portion of the Plan is
$2,430,000.
Elimination of Stockholder Approval Requirement. In May 1996, the Securities
and Exchange Commission (the "Commission") adopted changes to its rules under
Section 16 of the Securities Exchange Act of 1934 ("Section 16"). Among other
changes, the Commission eliminated the requirement that stockholders approve
certain amendments to stock-based benefit plans.
Prior to the 1997 Amendments, the Plan generally required shareholder
approval of those amendments that would have required stockholder approval
under the Commission's rules. The Board of Directors believes that this
restriction is no longer necessary and that removing this requirement from the
Plan, as permitted under the revised Section 16 rules, will give it greater
flexibility and control over the operation and administration of the Plan.
Stockholder approval of certain amendments still may be required under the
rules of the IRC and other applicable rules and regulations.
DESCRIPTION OF THE PLAN
General. AIP awards are paid in cash subject to the annual payment
limitation formula described below. Awards and distributions under the Plan's
LTIP components, whether payable in stock, cash or a combination thereof, are
currently charged against the shares of Common Stock available for use under
the Plan. As of February 28, 1997, there are still 2,547,938 shares available
for use under the Plan. The total number of shares available under the Plan is
also subject to adjustment in the event of stock splits or other occurrences
as discussed below under "Adjustments". The shares available under the Plan
may be either authorized but unissued shares, treasury shares or shares
acquired by the Corporation through open market purchases or otherwise. If any
option or other
23
<PAGE>
interest granted under the Plan expires, terminates or is forfeited before
exercise or payment in full, the shares covered by the unexercised or unpaid
portion may be used again for new grants under the Plan.
Participants may receive grants under any one or more of the various Plan
components as follows:
1. Contingent target incentive grants under the AIP entitle participants
to receive cash awards based on the achievement of unit and personal
performance goals during annual performance cycles.
2. Performance stock units entitle the holders to receive shares of
Common Stock or a combination of shares and cash, without payment to the
Corporation, based on the achievement of performance goals over multi-year
performance cycles not exceeding five years.
3. Stock options are rights to purchase, for cash or previously owned
shares of the Corporation's stock, shares of Common Stock of the
Corporation, at a price at least equal to the fair market value of such
shares based on the closing market price on the business date immediately
preceding the date the options are granted.
4. Stock appreciation rights (SARs) are rights relating to a fixed number
of shares of Common Stock pursuant to which upon exercise, without payment
to the Corporation, the holder is paid the appreciation in value of the
Common Stock between the dates of grant and exercise of the SARs.
5. Restricted stock units are rights to receive either cash or shares of
Common Stock or a combination of both, without payment to the Corporation,
conditioned upon the holder's continued employment throughout a specified
restriction period.
The Plan is administered by the Compensation and Executive Organization
Committee of the Corporation's Board of Directors (the "Committee"). The
current membership of the Committee is provided in the section "The Board of
Directors and its Committees" of this Proxy Statement. The Committee has
general authority to administer and interpret the provisions of the Plan and
adopt such rules and regulations as it deems necessary or desirable. Its
further functions involve such matters as the selection of participants and
the determination of the kind, number, amounts, terms and provisions of grants
under the Plan to such persons. The Committee's determinations are conclusive.
The Plan provides flexibility in creating incentive packages for specific
individuals as well as various groups of key employees. Persons eligible to
participate in the Plan are broadly defined to include those officers,
executive, administrative, professional and other key employees who, in the
opinion of the Committee, are in a position to contribute significantly to the
success of the Corporation. Directors who are employees of the Corporation are
also eligible to receive awards under the Plan.
Contingent AIP Awards. The Plan provides that annual contingent target
incentive grants are established for each participant and awards are paid in
cash based on both a personal and a unit or corporate performance factor. The
corporate or unit performance factor may be based on earnings per share,
return on net assets, market share, control of costs, net sales, cash flow,
economic value-added measures, sales growth, earnings growth, stock price,
return on equity, improvements in financial ratings, regulatory compliance,
achievement of balance sheet or income statement objectives, or other
objectives as may be established by the Committee (collectively, "Performance
Objectives"), and may be absolute in their terms or measured against or in
relationship to other companies. Performance Objectives may be particular to a
participant or the division, department, line of business or other unit in
which the participant works, or may be based on the performance of the
Corporation generally and may cover such periods as may be specified by the
Committee. The aggregate maximum of annual awards under the AIP is determined
by application of the formula contained in the Plan which stipulates that
aggregate AIP payments for any one year may not exceed 6% of the excess of
Before-Tax Income over 16% of Total Invested Capital (as those terms are
defined in the Plan). Payment of all or a portion of such awards may be
deferred by the participant with the approval of the Committee.
24
<PAGE>
The Plan limits the amount of AIP that may be paid to any participant in any
calendar year to $2,100,000. The calculation of an award under AIP is further
described in the Annual Incentive Program section of the Committee's Report in
this Proxy Statement.
Performance Stock Units. Performance Stock Units provide the opportunity for
key employees in positions affecting the long-term performance of the
Corporation to earn awards related to the achievement of goals based on the
Corporation's long-range strategic plan. Under the Plan, the Committee sets
each year specific Performance Objectives for the new long-term performance
cycle and contingently grants units (each of which represents one share of
Common Stock) payable upon the achievement of the objectives. The Performance
Objectives currently utilized relate to the achievement of earnings per share,
free cash flow and return on net asset targets. The Plan provides that the
Committee may establish the length of each cycle in its discretion, subject to
a five-year maximum period. After completion of each cycle, awards are paid in
Common Stock or in a combination of Common Stock and cash, depending on the
extent such objectives were achieved. Regardless of the form of payment, such
payments are charged against the shares available and reserved for use under
the Plan. Payment of all or a portion of such award may be deferred by the
participant with the approval of the Committee. The Plan limits the amount
that may be paid to a participant in any calendar year in performance stock
awards to $2,430,000.
As a general rule, the holder of Performance Stock Units must have
participated in the performance cycle for its entire period to be eligible to
receive an award. However, upon termination of employment due to retirement,
total disability or death, a pro rata award will be paid provided that the
employee was employed for at least two-thirds of the applicable performance
cycle. In the event that the employee is discharged by the Corporation for any
reason, such participant's rights and interests under the Plan will end
automatically upon notice of discharge.
The Performance Stock Unit portion of the Plan is further described in the
Long-Term Incentive Program--Performance Stock Units section of the
Committee's Report in the Proxy Statement.
Stock Options. Stock options under the Plan are nonqualified for purposes of
the IRC. The period during which a key employee can exercise his or her stock
options is determined by the Committee, but no option is exercisable for a
period longer than 10 years from the date of grant. The purchase price payable
upon the exercise of a stock option is not less than 100% of the fair market
value of a share based on the closing market price on the business date
immediately preceding the date the option is granted. The purchase price may
be paid either in cash or in stock, or any combination of cash and stock.
Other terms and conditions of the option are determined by the Committee
which, among other things, may stipulate specific exercise terms including
times and frequency of exercise and minimum or maximum numbers of shares that
may be exercised at any one time. The Board, at its February 1997 meeting,
amended the Plan to limit the number of shares of Common Stock that may be
covered by options granted in any calendar year to a participant to 250,000
shares.
As a general rule all stock options expire at the end of the participant's
employment. However, except as may be provided differently in the
participant's stock option agreement, in the case of an option held by an
employee whose employment ends due to retirement, total disability or death,
the employee or his estate must exercise the option within five years of the
date of retirement, total disability or death. For options issued prior to
1997, the exercise period after death, disability or retirement is three
years. In the event that the employee is discharged by the Corporation for any
reason, the option will end automatically upon notice of discharge.
The Stock Option portion of the Plan is further described in the Stock
Option section of the Committee's Report in this Proxy Statement.
25
<PAGE>
Stock Appreciation Rights. Stock Appreciation Rights ("SARs") relating to a
specified number of shares of the Corporation's Common Stock may be granted
for such periods of exercise as the Committee determines, provided that SARs
may not be exercised after 10 years from the date of grant. Upon exercise, the
holder of SARs receives a payment in cash or shares of Common Stock or a
combination of both, at the discretion of the Committee, equal to the
difference between the fair market value of the shares at the time of exercise
and at the time the SARs were granted. Other terms of the grant, including
targets and conditions for the grant are established by the Committee. Targets
and conditions of an award may be either objective or subjective, as
determined by the Committee.
Under the Plan, SARs may be related to or separate from stock options, as
the Committee determines. SARs related to options are exercisable in whole or
in part only at such times and to the extent that the options to which they
relate are exercisable, and upon exercise of the SARs the number of shares
purchasable pursuant to the related options will be reduced on a one-to-one
basis. Upon termination of employment, SARs are exercisable to the same extent
as are stock options as described in the preceding section. The Plan limits
the number of shares of Common Stock that may be covered by SARs granted to a
participant during any calendar year to 250,000 shares.
Restricted Stock Units. A restricted stock unit is a right granted to a key
employee to receive either cash or shares of Common Stock or a combination of
both without payment to the Corporation, conditioned upon continued employment
with the Corporation throughout a specified restriction period. If payment is
to be made in cash, the amount will be determined by multiplying the number of
restricted stock units paid out by the fair market value of a share of Common
Stock at the time the restriction period ends. If payment is made in Common
Stock, the number of shares paid shall be equal to the number of restricted
stock units contingently granted. Targets and conditions of an award are
determined by the Committee and may be based on one or more of the Performance
Objectives. Only awards granted for objective targets or conditions will
qualify for the performance-based exemption under Section 162(m).
As a general rule a holder of such units must remain employed throughout the
restriction period to be eligible to receive a payment, although a pro rata
award will be paid upon termination of employment due to total disability or
death. In the event of retirement or discharge by the Corporation for any
reason, an employee's restricted stock units will terminate automatically.
The Plan limits the number of shares of Common Stock that may be covered by
Restricted Stock Units granted in any calendar year to a participant to 50,000
shares.
Federal Income Tax Consequences. A participant who is granted a contingent
AIP award, performance stock units, stock options, SARs or restricted stock
units will not realize any income, nor will the Corporation receive any
deduction, for Federal income tax purposes, in the year of the grant.
Ordinary income will be realized by the participant at the time that he or
she receives payment of an AIP award, or that shares are transferred or cash
is distributed to him or her in payment of a performance stock award or
pursuant to his or her exercise of a stock option or SAR. In the case of
performance stock units or SARs, the amount of income will be equal to the
cash received or the fair market value of the shares issued plus the amount of
any cash or shares withheld to pay withholding taxes. In the case of a stock
option, the amount of income will be equal to the difference between the
option exercise price and the fair market value of the shares of Common Stock
on the date of exercise. Ordinary income will be realized by a holder of
restricted stock units in the year in which the restriction period ends and
such units are paid, in an amount equal to the cash received or the fair
market value of the shares of Common Stock issued plus the amount of any cash
or shares withheld to pay withholding taxes. The Corporation will receive a
deduction on its consolidated Federal income tax return for the taxable year
in the amount of such ordinary income realized by a Plan participant.
26
<PAGE>
When a participant disposes of shares of Common Stock acquired under the
Plan, any amount received in excess of the value of the shares of Common Stock
on which the participant was previously taxed will be treated as long-term or
short-term capital gain, depending upon the holding period of the shares. If
the amount received is less than that value, the loss will be treated as long-
term or short-term capital loss, depending upon the holding period of the
shares.
Payment of dividend equivalents which may be made pursuant to the grant of
restricted stock units will be fully taxable as ordinary income when received.
Certain Accounting Consequences. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS No. 123"). This statement
defines a fair value based method of measuring and recording compensation cost
associated with employee stock compensation plans. Under the fair value based
method, compensation cost is measured at the grant date based on the value of
the award and is recognized in income over the service period. FAS No. 123
encourages adoption of this method of accounting; however, it also allows an
entity to continue to measure compensation cost using the method of accounting
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB No. 25"). Entities electing to continue using the
accounting method in APB No. 25 must make pro forma disclosures of net income
and earnings per share as if the fair value based method prescribed under FAS
No. 123 had been applied. The Corporation has elected to use this approach.
Under APB No. 25, the grant or exercise of stock options does not result in
a charge against the Corporation's earnings as long as the exercise price is
not less than 100% of the fair market value of the Corporation's Common Stock
as of the date of the grant of the option, which under the Plan is determined
based on the closing market price on the business date immediately preceding
the date the option is granted. All other awards granted in accordance with
the provisions of the Plan do result in a charge against the Corporation's
earnings and the recognition of a liability during the performance period or
through the exercise date. The charge against earnings and the related
liability are determined based on the nature of the specific awards granted.
The charge for SARs is equal to the appreciation in the fair market value of
the Common Stock between the dates of grant and exercise. The charges for AIP
cash awards, or for performance stock units and restricted stock units, are
based on the cash or the fair market value of the Common Stock, respectively,
awarded to the participant at the end of the performance cycle or period.
Awards paid using previously authorized but unissued shares of Common Stock
are accounted for by crediting to stockholders' equity the proceeds received
upon the exercise of stock options or the above-referenced liability. To the
extent that the Corporation acquires shares through open market purchases or
otherwise for award or distribution purposes, any difference between the price
paid by the Corporation for such shares and the stock option proceeds or
liability is recorded as an adjustment to stockholders' equity.
Adjustments. The Plan provides for adjustments in the total shares reserved
and available for the Plan, and in outstanding units, options and SARs granted
pursuant to the Plan in the event of any change in the outstanding Common
Stock by reason of a stock split, stock dividend, merger, consolidation,
recapitalization, reclassification, combination of shares or similar
occurrence.
Change of Control. In the event of a "Change of Control" (as defined in the
Plan) Stock Options, if not otherwise vested and exercisable, become
immediately vested and exercisable. Certain notice requirements are applicable
in the event of a "Potential Change of Control" (as defined in the Plan).
Other benefits offered under the Plan and described herein are also affected
in the event of a Change of Control. See the "Benefit Protection Agreements"
section of this Proxy Statement for an explanation of this effect.
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Termination and Amendments. The Plan does not have a stated term, but may be
terminated by the Board at any time, in which event options and other
interests theretofore granted under the Plan will remain in effect in
accordance with their terms and conditions. The Board may amend the Plan to
conform to any change in applicable law or for any other reason.
The affirmative vote of a majority of the votes represented at the meeting
in person or by proxy of the Common Stock and Class B Stock voting together
without regard to class is required for approval of the Key Employee Incentive
Plan, as amended.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2, AND PROXIES
WHICH ARE RETURNED WILL BE SO VOTED UNLESS A CONTRARY VOTE IS DESIGNATED ON
THE PROXY CARD.
PROPOSAL NO. 3--APPOINTMENT OF AUDITORS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed Arthur Andersen LLP as independent public accountants of the
Corporation for the year ending December 31, 1997. Although not required to do
so, the Board of Directors is submitting the appointment of that firm for
approval at the Annual Meeting. Arthur Andersen LLP has audited the
Corporation's financial statements since 1927 and is considered to be well
qualified. If the appointment is not approved, the Board of Directors will
reconsider its appointment. Representatives of Arthur Andersen LLP will be
present at the meeting with the opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
The affirmative vote of a majority of the votes represented at the meeting
in person or by proxy of the Common Stock and Class B Stock voting together
without regard to class is required for approval of the appointment of
auditors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 3, AND SIGNED
PROXIES WHICH ARE RETURNED WILL BE SO VOTED UNLESS A CONTRARY VOTE IS
DESIGNATED ON THE PROXY CARD.
OTHER BUSINESS
It is not expected that any business other than that set forth in the Notice
of Annual Meeting of Stockholders and more specifically described in this
Proxy Statement will be brought before the meeting. However, if any other
business should properly come before the meeting, it is the intention of the
persons named on the enclosed proxy card to vote the signed proxies received
by them in accordance with their best judgment on such business and any
matters dealing with the conduct of the meeting.
STOCKHOLDER PROPOSALS AND NOMINATIONS
In accordance with the Corporation's By-Laws, stockholders (other than those
holding 25% of the outstanding votes entitled to be cast) who do not submit
proposals for inclusion in the Proxy Statement but who intend to present a
proposal, nomination for director or other business for consideration at any
meeting of stockholders, including any Annual Meeting, are required to notify
the Secretary of the Corporation of their proposal or nomination and provide
other information in advance of such meeting. Stockholders interested in
making proposals at the 1997 Annual Meeting should submit their name and
address, their shareholdings, a brief description of the proposal, and any
financial or other interest they have in such proposal to the Corporation no
later than April 1, 1997.
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To be eligible for inclusion in the Corporation's Proxy Statement for the
1998 Annual Meeting of Stockholders, stockholder proposals must be received by
the Corporation by November 18, 1997.
In accordance with the Corporation's By-Laws, if a stockholder wishes to
make a nomination for director at the 1998 Annual Meeting but does not submit
the nomination for inclusion in the Proxy Statement for such meeting, the
stockholder must submit the following information to the Corporation no later
than February 28, 1998: name and address, a representation that the
stockholder is a holder of record and intends to attend such meeting, a
description of any arrangement between the stockholder and the individual
planned to be nominated, the nominee's name, address and biographical
information, and the consent of the nominee.
All notices for stockholder proposals and director nominations should be
sent to the attention of the Secretary of the Corporation at 100 Crystal A
Drive, Hershey, Pennsylvania 17033-0810.
SUMMARY ANNUAL REPORT AND FORM 10-K
The Corporation will provide without charge to each beneficial owner of its
Common Stock and Class B Common Stock, upon such stockholder's request, a copy
(without exhibits) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Securities and Exchange
Commission. Requests for copies should be addressed to Hershey Foods
Corporation, Investor Relations Department, 100 Crystal A Drive, Hershey, PA
17033-0810.
A copy of the Corporation's Summary Annual Report to Stockholders for the
year ended December 31, 1996 accompanies this Proxy Statement. Appendix B to
this Proxy Statement containing the Consolidated Financial Statements and
Management's Discussion and Analysis comprises a portion of that report. The
Summary Annual Report, Appendix B and the Annual Report on Form 10-K are not
part of the Corporation's proxy solicitation materials.
By order of the Board of Directors,
Robert M. Reese Vice
President, General
Counsel and Secretary
March 17, 1997
STOCKHOLDERS WHO DESIRE TO HAVE THEIR STOCK VOTED AT THE MEETING ARE
REQUESTED TO MARK, SIGN, AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. STOCKHOLDERS MAY REVOKE THEIR
PROXIES AT ANY TIME PRIOR TO THE MEETING AND STOCKHOLDERS WHO ARE PRESENT AT
THE MEETING MAY REVOKE THEIR PROXIES AND VOTE, IF THEY SO DESIRE, IN PERSON.
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APPENDIX A
HERSHEY FOODS CORPORATION
KEY EMPLOYEE INCENTIVE PLAN
1. ESTABLISHMENT AND PURPOSE
Hershey Foods Corporation (the "Corporation") hereby establishes the Key
Employee Incentive Plan (the "Plan"). The purpose of the Plan is to provide to
selected key employees of the Corporation and its subsidiaries (as defined
below), upon whose efforts the Corporation is dependent for the successful
conduct of its business, further incentive to continue and increase their
efforts as employees and to remain in the employ of the Corporation and its
subsidiaries.
The Plan continues the Annual Incentive Program ("AIP"), with certain
modifications, as in effect under the Corporation's Management Incentive Plan
("MIP") established in 1975 and as amended thereafter, pursuant to which
participants are entitled to receive cash awards based on achievement of
performance goals during annual performance cycles. The Plan also continues
the Long-Term Incentive Program ("LTIP") portion of the MIP with certain
modifications. In addition to performance stock units ("Performance Stock
Units"), the LTIP portion now also includes nonqualified stock options for the
purchase of Common Stock ("Options"); stock appreciation rights ("SARs"); and
restricted stock units ("Restricted Stock Units").
As used herein, (i) the term "Subsidiary Corporation" shall mean any present
or future corporation which is or would be a "subsidiary corporation" of the
Corporation as defined in Section 424 of the Internal Revenue Code of 1986
(the "Code"), and (ii) the term "Corporation" defined above shall refer
collectively to Hershey Foods Corporation and its Subsidiary Corporations
unless the context indicates otherwise.
2. STOCK SUBJECT TO THE PLAN
The aggregate number of shares which may be covered by Performance Stock
Units, Options, SARs and Restricted Stock Units granted pursuant to the LTIP
portion of the Plan is 6.5 million (6,500,000) shares of the Corporation's
Common Stock, $1.00 Par Value (the "Common Stock"), subject to adjustment in
accordance with Section 12 below. The shares issued under this Plan may be
either authorized but unissued shares, treasury shares held by the corporation
or any direct or indirect subsidiary thereof or shares acquired by the
Corporation through open market purchases (whether made before or after any
exercise of Option(s) or the granting of stock compensation hereunder) or
otherwise. In addition to shares of Common Stock actually issued or
distributed under the Plan, there shall be deemed to have been issued a number
of shares equal to (i) the number of shares of Common Stock in respect of
which optionees utilize the manner of exercise of, and payment for, Options as
provided in Paragraph 7II(g) of this Plan, and (ii) the number of shares of
Common Stock which is equivalent in value to any cash amounts distributed upon
payment of Performance Stock Units, SARs or Restricted Stock Units. For
purposes of determining the charge to be made pursuant to subpart (ii) against
the shares of Common Stock subject to the Plan, the value of a share of Common
Stock shall be its Fair Market Value as defined in Paragraph 4 when awards are
made with respect to Performance Stock Units, upon exercise of SARs, and upon
expiration of the applicable restriction period of Restricted Stock Units. Any
shares subject under the Plan to Performance Stock Units, Options, SARs or
Restricted Stock Units which, for any reason, expire or terminate or are
forfeited or surrendered shall again be available for issuance under the Plan.
3. ADMINISTRATION
The Plan shall be administered by the Compensation and Executive
Organization Committee (the "Committee"), or any successor committee,
appointed by and consisting solely of members of the Board of Directors (the
"Board") of the Corporation, each of whom qualifies as both a "nonemployee
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director" within the meaning of Rule 16b-3 or its successor under the
Securities Exchange Act of 1934 (the "Exchange Act") and an "outside director"
within the meaning of Section 162(m) of the Code. Committee members shall not
be eligible to participate in the Plan. The Board may from time to time remove
and appoint members of the Committee in substitution for, or in addition to,
members previously appointed and may fill vacancies, however caused, in the
Committee. The Committee may adopt such rules and regulations as it deems
useful in governing its affairs. Any action of the Committee with respect to
the administration of the Plan shall be taken by majority vote at a Committee
meeting or written consent of all Committee members.
Subject to the terms and conditions of the Plan, the Committee shall have
authority: (i) to construe and interpret Plan provisions; (ii) to define the
terms used in the Plan; (iii) to prescribe, amend and rescind rules and
regulations relating to the Plan; (iv) to select particular employees to
participate in the Plan, (v) to determine the terms, conditions, form and
amount of grants, distributions or payments made to each participant,
including conditions upon and provisions for vesting, exercise and
acceleration of any grants, distributions or payments; (vi) upon the request
of a participant in the Plan, to approve and determine the duration of leaves
of absence which may be granted to the participant without constituting a
termination of his or her employment for purposes of the Plan; and (vii) to
make all other determinations necessary or advisable for the administration
and operation of the Plan. The Committee shall have the right to impose
varying terms and conditions with respect to each grant or award. All
determinations and interpretations made by the Committee shall be final,
binding and conclusive on all participants and on their legal representatives
and beneficiaries.
4. FAIR MARKET VALUE
As used in the Plan (unless a different method of calculation is required by
applicable law, and except as otherwise specifically provided in any Plan
provision), "Fair Market Value" on or as of any date shall mean (i) the
closing price of the Common Stock as reported in the New York Stock Exchange
Composite Transactions Report (or any other consolidated transactions
reporting system which subsequently may replace such Composite Transactions
Report) for the New York Stock Exchange trading day immediately preceding such
date, or if there are no sales on such date, on the next preceding day on
which there were sales, or (ii) in the event that the Common Stock is no
longer listed for trading on the New York Stock Exchange, an amount determined
in accordance with standards adopted by the Committee.
5. ELIGIBILITY AND PARTICIPATION
Key employees of the Corporation or of any of its Subsidiary Corporations,
including officers and directors who are regular employees but not members of
the Committee, who in the opinion of the Committee are in a position to
contribute significantly to the success of the Corporation or any Subsidiary
Corporation, division or operating unit thereof, shall be eligible for
selection to participate in the Plan. In making this selection and in
determining the form and amount of grants, distributions and payments under
the Plan, the Committee shall take into account the duties of the respective
employees, their present and potential contributions to the success of the
Corporation or any Subsidiary Corporation, division or operating unit thereof,
and such other factors as the Committee may deem relevant in connection with
accomplishing the purposes of the Plan. An employee who has been selected to
participate may, if he or she is otherwise eligible, receive more than one
grant from time to time, and may be granted any combination of contingent
target grants under the AIP or under the LTIP components of the Plan, as the
Committee shall determine.
6. ANNUAL INCENTIVE PROGRAM
The Committee may from time to time, subject to the provisions of the Plan
and such other terms and conditions as the Committee may determine, establish
contingent target grants for those eligible
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employees it selects to participate in the AIP. Each such contingent grant may
be, but need not be, evidenced by a written instrument, and shall be
determined in relation to the participant's level of responsibility in the
Corporation and the competitive compensation practices of other major
businesses, and such other factors as are deemed appropriate by the Committee.
(a) Awards actually earned by and paid to AIP participants ("AIP Awards")
will be based primarily upon achievement of performance goals over a one-
year performance cycle as approved by the Committee.
(b) The Committee, within the limits of the Plan, shall have full
authority and discretion to determine the time or times of establishing
contingent target grants; to select from among those eligible the employees
to receive awards; to review and certify the achievement of performance
goals; to designate levels of awards to be earned in relation to levels of
achievement of performance goals; to adopt such financial and nonfinancial
performance or other criteria for the payment of awards as it may determine
from time to time; to make awards; and to establish such other measures as
may be necessary to achieve the objectives of the Plan. The financial or
non-financial performance goals established by the Committee may be based
upon one or more of the following: earnings per share, return on net
assets, market share, control of costs, net sales, cash flow, economic
value-added measures, sales growth, earnings growth, stock price, return on
equity, improvements in financial ratings, regulatory compliance,
achievement of balance sheet or income statement objectives, or any other
goals established by the Committee (the "Performance Factors").
(c) Aggregate annual AIP Awards shall not exceed six (6%) percent of the
excess of Before-Tax Income (defined for these purposes as Net Income plus
provision for Federal, state and local income taxes and interest expense on
long-term debt, but after consideration of the cost of the Plan) over
sixteen (16%) percent of Total Invested Capital (defined for these purposes
as Stockholders' Equity plus Long-Term Debt plus Deferred Income Taxes)
determined as the average of such Total Invested Capital at the beginning
of the year and the end of each calendar quarter of such year. The maximum
amount any participant can receive as an AIP Award for any calendar year
shall not exceed $2,100,000.
(d) AIP Awards as earned under the terms of the Plan shall be paid in
cash and may exceed or be less than the contingent target grants, provided
that payments do not exceed the maximum permitted cost of the AIP
calculated pursuant to subparagraph (c) above. Payment shall normally be
made as soon as possible following the close of the year, but payment of
all or any portion may be deferred by participants with the approval of the
Committee.
7. LONG-TERM INCENTIVE PROGRAM
The LTIP consists of the following four components:
I. Performance Stock Units
The Committee may, subject to the provisions of the Plan and such other
terms and conditions as the Committee may determine, grant Performance Stock
Units to reflect the value of contingent target grants established for each
eligible employee selected for participation. Each grant of Performance Stock
Units may be, but need not be, evidenced by a written instrument. Such
contingent target grants shall be determined in relation to the employee's
level of responsibility in the Corporation or any Subsidiary Corporation,
division or operating unit thereof, and the competitive compensation practices
of other major businesses.
(a) Awards actually earned by and paid to holders of Performance Stock
Units ("PSU Awards") will be based upon achievement of performance goals
over performance cycles as
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approved by the Committee. Such performance cycles each shall cover such
period of time, not exceeding five years, as the Committee from time to
time shall determine.
(b) The Committee, within the limits of the Plan, shall have full
authority and discretion to determine the time or times of establishing
contingent target grants and the granting of Performance Stock Units; to
select from among those eligible the employees to receive PSU Awards; to
review and certify the achievement of performance goals; to designate
levels of awards to be earned in relation to levels of achievement of
performance goals; to adopt such financial and nonfinancial performance or
other criteria for the payment of PSU Awards as it may determine from time
to time; to make awards; and to establish such other measures as may be
necessary to the objectives of the Plan. The performance goals established
by the Committee may be based on one or more of the Performance Factors.
(c) Payments of PSU Awards shall be made in shares of Common Stock or
partly in cash as the Committee in its sole discretion shall determine and
shall be charged against the shares available under the LTIP portion of the
Plan as provided in Paragraph 2; provided, however, that no fractional
shares shall be issued and any such fraction will be eliminated by rounding
downward to the nearest whole share. In any case in which actual payment of
a PSU Award is deferred as provided below, a charge will be made against
the available shares for the number of shares equivalent to the dollar
amount of the deferred PSU Award.
(d) PSU Awards as earned under the terms of the Plan may exceed or be
less than the contingent target grants. Payment shall normally be made as
soon as possible following the close of the year, but payment of all or any
portion may be deferred by participants with the approval of the Committee.
(e) The maximum amount a participant can receive as a PSU Award in any
calendar year is $2,430,000.
II. Stock Options
The Committee may, from time to time, subject to the provisions of the Plan
and such other terms and conditions as it may determine, grant nonqualified
Options to purchase shares of Common Stock of the Corporation to employees
eligible to participate in the Plan. Each grant of an Option shall be on such
terms and conditions and be in such form as the Committee may from time to
time approve, subject to the following:
(a) The exercise price per share with respect to each Option shall be
determined by the Committee in its sole discretion, but shall not be less
than 100% of the Fair Market Value of the Common Stock as of the date of
the grant of the Option.
(b) Options granted under the Plan shall be exercisable, in such
installments and for such periods, as shall be provided by the Committee at
the time of granting, but in no event shall any Option granted extend for a
period in excess of ten years from the date of grant.
(c) The maximum number of shares of Common Stock covered by Options
granted to a participant for any calendar year shall not exceed 250,000.
(d) Among other conditions that may be imposed by the Committee, if
deemed appropriate, are those relating to (i) the period or periods and the
conditions of exercisability of any Option; (ii) the minimum periods during
which grantees of Options must be employed, or must hold Options before
they may be exercised; (iii) the minimum periods during which shares
acquired upon exercise must be held before sale or transfer shall be
permitted; (iv) conditions under which such Options or shares may be
subject to forfeiture; and (v) the frequency of exercise or the minimum or
maximum number of shares that may be acquired at any one time.
(e) Exercise of an Option shall be by written notice stating the election
to exercise in the form and manner determined by the Committee.
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(f) The purchase price upon exercise of any Option shall be paid in full
by making payment (i) in cash; (ii) in whole or in part by the delivery of
a certificate or certificates of shares of Common Stock of the Corporation,
valued at its then Fair Market Value; or (iii) by a combination of (i) and
(ii).
(g) Notwithstanding subparagraph (e) above, any optionee may make payment
of the Option price through a simultaneous exercise of his or her Option
and sale of the shares thereby acquired pursuant to a brokerage arrangement
approved in advance by the Committee to assure its conformity with the
terms and conditions of the Plan.
(h) The Committee may require the surrender of outstanding Options as a
condition to the grant of new Options.
(i) Notwithstanding any other provision of the Plan or of any Option
agreement between the Corporation and an employee, upon the occurrence of a
Change in Control, each outstanding Option held by a participant who is an
employee of the Corporation or any Subsidiary Corporation shall become
fully vested and exercisable notwithstanding any vesting schedule or
installment schedule relating to the exercisability of such Option
contained in the applicable Option agreement or otherwise established at
the time of grant of the Option.
(j) For purposes of this Plan, a "Change in Control" means:
(1) The acquisition or holding by any Person of beneficial ownership
(within the meaning of Section 13(d) under the Exchange Act and the
rules and regulations promulgated thereunder) of shares of the Common
Stock and/or the Class B Common Stock of the Corporation representing
25% or more of either (i) the total number of then outstanding shares
of both Common Stock and Class B Common Stock of the Corporation (the
"Outstanding Corporation Stock") or (ii) the combined voting power of
the then outstanding voting securities of the Corporation entitled to
vote generally in the election of directors (the "Outstanding
Corporation Voting Power"), provided that, at the time of such
acquisition or holding of beneficial ownership of any such shares, the
Hershey Trust does not beneficially hold more than 50% of the
Outstanding Corporation Voting Power; and provided, further, that any
such acquisition or holding of beneficial ownership of shares of either
Common Stock or Class B Common Stock of the Corporation by any of the
following entities shall not by itself constitute such a Change in
Control hereunder: (i) the Hershey Trust; (ii) any trust established by
the Corporation, or by any Subsidiary, for the benefit of the
Corporation and/or its employees or those of any Subsidiary; or (iii)
any employee benefit plan (or related trust) sponsored or maintained by
the Corporation or by any Subsidiary; or
(2) The approval by the stockholders of the Corporation of any
merger, reorganization, recapitalization, consolidation or other form
of business combination (a "Business Combination") if, following
consummation of such Business Combination, the Hershey Trust does not
beneficially own more than 50% of the total voting power of all
outstanding voting securities of the surviving entity or entities; or
(3) The approval by the stockholders of the Corporation of (i) any
sale or other disposition of all or substantially all of the assets of
the Corporation, other than to a corporation as to which the Hershey
Trust beneficially owns more than 50% of the total voting power of all
outstanding voting securities, or (ii) a liquidation or dissolution of
the Corporation.
For purposes of this Plan: (i) "Hershey Trust" means either or both of
(a) the Hershey Trust Company, a Pennsylvania corporation, as Trustee for
the Milton Hershey School, or any successor to the Hershey Trust Company as
such trustee, and (b) the Milton Hershey School, a Pennsylvania not-for-
profit corporation; and (ii) "Person" shall have the meaning given in
Section 3 (a) (9) of the Exchange Act, as modified and used in Sections 13
(d) (3) and 14 (d) thereof."
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(k) For purposes of this Plan, a "Potential Change in Control" means:
(1) The Hershey Trust, or any person acting or purporting to act on
its (or their) behalf, makes a public announcement that it (or they),
or its (or their) Board of Trustees or Board of Governors or any other
responsible official, (i) intends to take, (ii) is taking or (iii) has
taken actions which would lead to a Change in Control (a "public
announcement" being defined for this purpose as any statement quoted or
otherwise reported in any print, broadcast, wire service or other means
of publication available to the public in any locality in which any
employee of the Corporation is regularly located);
(2) The Hershey Trust enters into any contract, agreement or other
agreement with any Person which would lead to a Change in Control; or
(3) The Board approves a transaction described in subsection (2) or
(3) of the definition of Change in Control contained in subparagraph
(j) of Paragraph 7II hereof.
(l) In the event that a transaction which would constitute a Change in
Control if approved by the stockholders of the Corporation is to be
submitted to such stockholders for their approval, each participant who is
an employee and who holds an Option granted under the Plan at the time
scheduled for the taking of such vote, whether or not then exercisable,
shall have the right to receive a notice at least ten (10) business days
prior to the date on which such vote is to be taken. Such notice shall set
forth the date on which such vote of stockholders is to be taken, a
description of the transaction being proposed to stockholders for such
approval, a description of the provisions of subparagraph (i) of Paragraph
7II of the Plan and a description of the impact thereof on such participant
in the event that such stockholder approval is obtained. Such notice shall
also set forth the manner in which and price at which all Options then held
by each such participant could be exercised upon the obtaining of such
stockholder approval.
III. Stock Appreciation Rights
The Committee may, from time to time, subject to the provisions of the Plan
and such other terms and conditions as the Committee may determine, grant SARs
to employees eligible to participate in the Plan. SARs may, but need not be
evidenced by an agreement executed by the Corporation and the holder, and
shall be subject to such terms and conditions consistent with the Plan as the
Committee shall impose from time to time, including the following:
(a) SARs may, but need not, relate to Options granted under the Plan, as
the Committee shall determine from time to time. In no event shall any SARs
granted extend for a period in excess of ten years from the date of grant.
(b) A holder shall exercise his or her SARs by giving written notice of
such exercise in the form and manner determined by the Committee, and the
date upon which such written notice is received by the Corporation shall be
the exercise date for the SARs.
(c) A holder of SARs shall be entitled to receive upon exercise the
excess of the Fair Market Value of a share of Common Stock at the time of
exercise over the Fair Market Value of a share at the time the SARs were
granted, multiplied by the number of shares with respect to which the SARs
relate.
(d) In the sole discretion of the Committee, the amount payable to the
holder upon exercise of SARs may be paid either in Common Stock or in cash
or in a combination thereof. To the extent paid in Common Stock, the value
of the Common Stock that shall be distributed shall be the Fair Market
Value of a share of Common Stock upon exercise of the SARs as provided in
Paragraph 2; provided, however, that no fractional shares shall be issued
and any such fraction will be eliminated by rounding downward to the
nearest whole share.
(e) In the sole discretion of the Committee, SARs related to specific
Options may be exercisable only upon surrender of all or a portion of the
related Option, or may be exercisable, in
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whole or in part, only at such times and to the extent that the related
Option is exercisable, and the number of shares purchasable pursuant to the
related Option may be reduced to the extent of the number of shares with
respect to which the SARs are exercised.
(f) In lieu of receiving payment at the time of exercise of SARs, payment
of all or any portion may be deferred by the participant with the approval
of the Committee.
(g) The maximum number of SARs granted to a participant during any
calendar year shall not exceed 250,000.
IV. Restricted Stock Units
The Committee may, from time to time, subject to the provisions of the Plan
and such other terms and conditions as it may determine, grant Restricted
Stock Units to employees eligible to participate in the Plan. Each grant of
Restricted Stock Units may be, but need not be evidenced by a written
instrument. The grant of Restricted Stock Units shall state the number of
Restricted Stock Units covered by the grant, and shall contain such terms and
conditions and be in such form as the Committee may from time to time approve,
subject to the following:
(a) Each Restricted Stock Unit shall be equivalent in value to a share of
Common Stock.
(b) Vesting of each grant of Restricted Stock Units shall require the
holder to remain in the employment of the Corporation or a Subsidiary
Corporation for a prescribed period (a "Restriction Period"). The Committee
shall determine the Restriction Period or Periods which shall apply to the
shares of Common Stock covered by each grant of Restricted Stock Units.
Except as otherwise determined by the Committee and provided in the written
instrument granting the Restricted Stock Units, and except as otherwise
provided in Paragraph 8, all Restricted Stock Units granted to a
participant under the Plan shall terminate upon termination of the
participant's employment with the Corporation or any Subsidiary Corporation
before the end of the Restriction Period or Periods applicable to such
Restricted Stock Units, and in such event the holder shall not be entitled
to receive any payment with respect to those Restricted Stock Units. The
Committee may also, in its sole discretion, establish other terms and
conditions for the vesting of Restricted Stock Units, including
conditioning vesting on the achievement of one or more of the Performance
Factors.
(c) Upon expiration of the Restriction Period or Periods applicable to
each grant of Restricted Stock Units, the holder shall, without payment on
his part, be entitled to receive payment in an amount equal to the
aggregate Fair Market Value of the shares of Common Stock covered by such
grant upon such expiration. Such payment may be made in cash, in shares of
Common Stock equal to the number of Restricted Stock Units with respect to
which such payment is made, or in any combination thereof, as the Committee
in its sole discretion shall determine. Any payment in cash shall reduce
the number of shares of Common Stock available under the Plan as provided
in Paragraph 2, to the extent of the number of Restricted Stock Units to
which such payment relates. Further upon such expiration, the holder shall
be entitled to receive a cash payment in an amount equal to each cash
dividend the Corporation would have paid to such holder during the term of
those Restricted Stock Units as if the holder had been the owner of record
of the shares of Common Stock covered by such Restricted Stock Units on the
record date for the payment of such dividend.
(d) In lieu of receiving payment at the time of expiration of the
Restriction Period or Periods, payment of all or any portion may be
deferred by the participant with the approval of the Committee.
(e) The maximum number of shares of Common Stock as to which Restricted
Stock Units may be granted to a participant for any calendar year shall not
exceed 50,000.
A-7
<PAGE>
8. TERMINATION OF EMPLOYMENT
Upon termination of employment with the Corporation of any participant, such
participant's rights with respect to any contingent target grants under the
AIP, or any Performance Stock Units, Options, SARs or Restricted Stock Units
granted under the LTIP, shall be as follows:
(a) In the event that the participant is terminated or discharged by the
Corporation for any reason, the participant's rights and interests under
the Plan shall immediately terminate upon notice of termination of
employment. Upon the occurrence of a Potential Change in Control (as
defined in subparagraph (k) of Paragraph 7II hereof) and for a period of
one year thereafter, and upon the occurrence of a Change in Control (as
defined in subparagraph (j) of Paragraph 7II hereof), the following special
provisions and notice requirements shall be applicable in the event of the
termination of the employment of any participant holding an Option under
the Plan: (i) in no event may a notice of termination of employment be
issued to such a participant unless at least ten (10) business days prior
to the effective date of such termination the participant is provided with
a written notice of intent to terminate the participant's employment which
sets forth in reasonable detail the reason for such intent to terminate,
the date on which such termination is to be effective, and a description of
the participant's rights under this Plan and under the agreements granting
such Option or Options, including the fact that no such Option may be
exercised after such termination has become effective and the manner,
extent and price at which all Options then held by such participant may be
exercised; and (ii) such notice of intent to terminate a participant's
employment shall not be considered a "notice of termination of employment"
for purposes of the first sentence of this Paragraph 8 (a). This Paragraph
8 (a) is intended only to provide for a requirement of notice to terminate
upon the occurrence of the events set forth herein and shall not be
construed to create an obligation of continued employment or a contract of
employment in any manner or to otherwise affect or limit the Corporation's
ability to terminate the employment of any participant holding an Option
under the Plan.
(b) If a participant terminates employment with the Corporation as the
result, in the sole judgment of the Committee, of his or her becoming
totally disabled (in which event termination will be deemed to occur on the
date the Committee makes such determination), or if a participant should
die or (except as to Restricted Stock Units) retire while employed by the
Corporation or any of its Subsidiary Corporations, then the participant or,
as the case may be, the person or persons to whom the participant's
interest under the Plan shall pass by will or by the laws of descent and
distribution (the "Estate"), shall have the following rights:
(i) the grantee of a contingent AIP grant or the Estate shall be
entitled to receive payment of an AIP award as, and to the extent,
determined by the Committee;
(ii) if the holder of Performance Stock Units shall have been
employed for at least two-thirds of the related performance cycle prior
to the date of termination or death, then, except as otherwise provided
in the written instrument (if any) evidencing the Performance Stock
Units, and subject to any further adjustments the Committee may make in
its absolute discretion, the participant or the Estate shall be
entitled to receive payment of a PSU Award upon the expiration of the
related performance cycle, provided that such award shall be adjusted
by multiplying the amount thereof by a fraction, the numerator of which
shall be the number of full and partial calendar months between the
date of the beginning of each such performance cycle and the date of
termination or death, and the denominator of which shall be the number
of full and partial calendar months from the date of the beginning of
the performance cycle to the end of the said performance cycle;
(iii) except as otherwise provided in the terms and conditions of the
stock option or SAR grant, the holder or the Estate shall be entitled
to exercise (provided any vesting requirement has been satisfied as of
the date of exercise) any Option or SAR for a period of
A-8
<PAGE>
five years (three years in the case of options or SARs granted prior to
1997) from such date of death, total disability or retirement, or for
such longer period as the Committee may determine in the case of
financial hardship or other unusual circumstances (subject to the
maximum exercise period for Options and SARs specified in Paragraph
7II(b) and 7III(a) hereof, respectively);
(iv) except as otherwise provided in the written instrument
evidencing the Restricted Stock Units, upon death or termination due to
total disability the holder or the Estate shall be entitled to receive
payment in respect of the Restricted Stock Units, provided that such
Units shall be adjusted by multiplying the amount thereof by a
fraction, the numerator of which shall be the number of full and
partial calendar months between the date of grant of such Units and the
date of death or termination, and the denominator of which shall be the
number of full and partial calendar months from the date of the grant
to the end of the Restriction Period. Upon retirement, the
participant's rights with respect to Restricted Stock Units shall
immediately terminate.
(c) In the event of resignation by the participant, the participant's
rights and interests under the Plan shall immediately terminate upon such
resignation; provided, however, that the Committee shall have the absolute
discretion to review the reasons and circumstances of the resignation and
to determine whether, alternatively, and to what extent, if any, the
participant may continue to hold any rights or interests under the Plan.
(d) A transfer of a participant's employment without an intervening
period from the Corporation to a Subsidiary Corporation or vice versa, or
from one Subsidiary Corporation to another, shall not be deemed a
termination of employment.
(e) The Committee shall be authorized to make all determinations and
calculations required by this Paragraph 8, including any determinations
necessary to establish the reason for terminations of employment for
purposes of the Plan, which determinations and calculations shall be
conclusive and binding on any affected participants and Estates.
9. ADDITIONAL REQUIREMENTS
No Performance Stock Units, Options, SARs or Restricted Stock Units
(hereinafter collectively an "Interest") granted pursuant to the Plan shall be
exercisable or realized in whole or in part, and the Corporation shall not be
obligated to sell, distribute or issue any shares subject to any such
Interest, if such exercise and sale would, in the opinion of counsel for the
Corporation, violate the Securities Act of 1933, as amended (or other Federal
or state statutes having similar requirements). Each Interest shall be subject
to the further requirement that, if at any time the Board of Directors shall
determine in its discretion that the listing or qualification of the shares
relating or subject to such Interest under any securities exchange
requirements or under any applicable law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or
in connection with, the granting of such Interest or the distribution or issue
of shares thereunder, such Interest may not be exercised in whole or in part
unless such listing, qualification, consent or approval shall have been
effected or obtained free of any condition not acceptable to the Board of
Directors.
Interests may be subject to restrictions as to resale or other disposition
and to such other provisions as may be appropriate to comply with Federal and
state securities laws and stock exchange requirements, and the exercise of any
Interest or entitlement to payment thereunder may be contingent upon receipt
from the holder (or any other person permitted by this Plan to exercise any
Interest or receive any distribution hereunder) of a representation that at
the time of such exercise it is his or her then present intention to acquire
the shares being distributed for investment and not for resale.
A-9
<PAGE>
10. NONTRANSFERABILITY
Unless otherwise approved by the Committee, contingent AIP grants,
Performance Stock Units, Options, SARs and Restricted Stock Units granted
under the Plan to an employee shall be nonassignable and shall not be
transferable by him or her otherwise than by will or the laws of descent and
distribution, and shall be exercisable, during the employee's lifetime, only
by the employee or the employee's guardian or legal representative.
11. DISCLAIMER OF RIGHTS
No provision in the Plan or any contingent target AIP grants, Performance
Stock Units, Options, SARs or Restricted Stock Units granted pursuant to the
Plan shall be construed to confer upon the participant any right to be
employed by the Corporation or by any Subsidiary Corporation, or to interfere
in any way with the right and authority of the Corporation or any Subsidiary
Corporation either to increase or decrease the compensation of the participant
at any time, or to terminate any relationship of employment between the
participant and the Corporation or any of its Subsidiary Corporations.
Participants under the Plan shall have none of the rights of a stockholder
of the Corporation with respect to shares subject to Performance Stock Units,
Options, SARs or Restricted Stock Units unless and until such shares have been
issued to him or her.
12. STOCK ADJUSTMENTS
In the event that the shares of Common Stock, as presently constituted,
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Corporation or of another corporation
(whether by reason of merger, consolidation, recapitalization,
reclassification, stock split, combination of shares or otherwise), or if the
number of such shares of Common Stock shall be increased through the payment
of a stock dividend, or a dividend on the shares of Common Stock of rights or
warrants to purchase securities of the Corporation shall be made, then there
shall be substituted for or added to each share available under and subject to
the Plan as provided in Paragraph 2 hereof, and to the limitations set forth
in Paragraphs 7II (c); 7III (g) and 7IV (e), and each share theretofore
appropriated or thereafter subject or which may become subject to Performance
Stock Units, Options, SARs or Restricted Stock Units under the Plan, the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each such
share shall be exchanged or to which each such share shall be entitled, as the
case may be. Outstanding Options and SARs also shall be appropriately amended
as to price and other terms as may be necessary to reflect the foregoing
events. In the event there shall be any other change in the number or kind of
the outstanding shares of Common Stock, or of any stock or other securities
into which the Common Stock shall have been changed or for which it shall have
been exchanged, then if the Board of Directors shall, in its sole discretion,
determine that such change equitably requires an adjustment in the shares
available under and subject to the Plan, or in any Performance Stock Units,
Options, SARs or Restricted Stock Units theretofore granted or which may be
granted under the Plan, such adjustments shall be made in accordance with such
determination.
No fractional shares of Common Stock or units of other securities shall be
issued pursuant to any such adjustment, and any fractions resulting from any
such adjustment shall be eliminated in each case by rounding downward to the
nearest whole share or unit.
13. TAXES
The Corporation shall be entitled to withhold the amount of any tax
attributable to any amounts payable or shares of Common Stock deliverable
under the Plan. The person entitled to any such delivery, whether due to the
settlement of PSUs, the exercise of an Option or SAR, or the vesting of
A-10
<PAGE>
Restricted Stock Units, or any other taxable event may, by notice to the
Corporation, elect to have such withholding satisfied by a reduction of the
number of shares otherwise so deliverable (a "Stock Withholding Election"), or
by delivery of shares of Stock already owned by the Participant, with the
amount of shares subject to such reduction or delivery to be calculated based
on the Fair Market Value on the date of such taxable event. Reporting Persons
may make a Stock Withholding Election only in accordance with the methods then
permitted under applicable Securities and Exchange Commission interpretations.
14. EFFECTIVE DATE AND TERMINATION OF PLAN
The Plan shall become effective upon adoption by the Board of Directors of
the Corporation, provided such adoption is approved by the stockholders,
within twelve months of adoption by the Board of Directors. Contingent target
AIP grants, Performance Stock Units, Options, SARs and Restricted Stock Units
under this Plan, granted before approval of the Plan by the stockholders,
shall be granted subject to such approval and shall not be exercisable or
payable before such approval.
The Board of Directors at any time may terminate the Plan, but such
termination shall not alter or impair any of the rights or obligations under
any contingent target AIP grants, Performance Stock Units, Options, SARs or
Restricted Stock Units theretofore granted under the Plan unless the affected
participant shall so consent.
15. PRIOR PLAN
Effective upon the adoption of this Plan by the Board of Directors, no
additional grants of contingent target grants under the AIP or of Performance
Stock Units shall be made under the MIP; provided, that any payments of AIP
awards or deferrals thereof made with respect to prior grants of contingent
AIP awards, any prior grants of any LTIP Units, and any payments of LTIP
awards or deferrals thereto made with respect to such prior grants, shall not
be affected. Notwithstanding the foregoing, to the extent the remaining shares
reserved for use under the LTIP portion of the MIP are insufficient for any
LTIP awards under performance cycles that began prior to January 1, 1987,
shares available under this Plan may be used for such purpose.
16. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of capital stock
pursuant to Options will be used for general corporate purposes.
17. NO OBLIGATION TO EXERCISE OPTION OR SAR
The granting of an Option or SAR shall impose no obligation upon the
optionee to exercise such Option or SAR.
18. AMENDMENT
The Board of Directors by majority vote, at any time and from time to time,
may amend the Plan in such respects as it shall deem advisable, to conform to
any change in any applicable law or in any other respect. Notwithstanding the
foregoing, the Plan may not be terminated or amended in a manner adverse to
the interests of any participant (without the consent of the participant)
either: (a) after a Potential Change in Control occurs and for one (1) year
following the cessation of a Potential Change in Control, or (b) for a two-
year period beginning as of the date of a Change in Control (the "Coverage
Period"). Upon the expiration of the Coverage Period, subparagraph (l) of
Paragraph 7II of the Plan and Paragraph 8 (a) of the Plan may not be amended
in any manner that would adversely affect any participant without the consent
of the participant.
A-11
<PAGE>
Appendix B
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management's Discussion and Analysis....................................... B-1
Consolidated Financial Statements.......................................... B-9
Notes to Consolidated Financial Statements................................. B-13
Responsibility for Financial Statements.................................... B-28
Report of Independent Public Accountants................................... B-29
Eleven-Year Consolidated Financial Summary................................. B-30
</TABLE>
<PAGE>
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved record sales levels in 1996 and 1995. Net sales
during this two-year period increased at a compound annual rate of 5%,
primarily reflecting volume growth from the introduction of new confectionery
and grocery products and significant volume increases from seasonal packaged
candy items. Sales increases also resulted from selected confectionery selling
price increases in the United States partially offset by related sales volume
declines, increased confectionery sales volume in various international
markets and incremental sales from the acquisition of Henry Heide,
Incorporated (Henry Heide). These increases were partially offset by lower
sales resulting from the divestitures of Hershey Canada, Inc.'s PLANTERS nut
(Planters) and LIFE SAVERS and BREATH SAVERS hard candy, and BEECH-NUT cough
drops (Life Savers) businesses in January 1996 and Overspecht B.V. (OZF Jamin)
in the second quarter of 1995. The discontinuance of the Corporation's
refrigerated pudding line in late 1994 also reduced sales during the two-year
period.
Hershey Chocolate U.S.A. increased the wholesale price of its standard bar
line and king size bars by approximately eleven percent in December 1995.
These products represented approximately 25% of the Corporation's 1995 sales.
Price increases were intended to offset higher costs for raw materials and
packaging, together with the cumulative impact of inflation on other costs
since the last standard bar price increase in early 1991. Hershey Pasta Group
implemented selected price increases in late 1993, early 1994 and late 1995 in
an effort to recover substantial increases in semolina costs. The price
increases have not been sufficient to recover the full impact of the higher
semolina costs, partly due to competition from subsidized pasta imports
shipped into the United States.
The following acquisitions and divestitures occurred during the period:
. December 1996--The acquisition from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, of
Huhtamaki's Leaf North America (Leaf) confectionery operations for $437.2
million, plus the assumption of $17.0 million in debt. In addition, the
parties entered into a trademark and technology license agreement under
which the Corporation will manufacture and/or market and distribute in
North, Central and South America Huhtamaki's confectionery brands
including GOOD & PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and
WHOPPERS.
. December 1996--The sale to Huhtamaki of the outstanding shares of Gubor
Holding GmbH (Gubor) and Sperlari, S.r.l. (Sperlari). Gubor manufactures
and markets high-quality assorted pralines and seasonal chocolate
products in Germany and Sperlari manufactures and markets various
confectionery and grocery products in Italy. The sale resulted in an
after-tax loss of $35.4 million, since no tax benefit associated with the
transaction was recorded. Combined net sales for Gubor and Sperlari were
$216.6 million, $222.0 million and $186.6 million in 1996, 1995 and 1994,
respectively.
. January 1996--The sale of the assets of Hershey Canada, Inc.'s Planters
and Life Savers businesses to Johnvince Foods Group and Beta Brands Inc.,
respectively. Both transactions were part of a restructuring program
announced by the Corporation in late 1994.
. December 1995--The acquisition of Henry Heide, a confectionery company
which manufactures a variety of non-chocolate confectionery products
including JUJYFRUITS candy and WUNDERBEANS jellybeans.
. June 1995--The sale of the outstanding shares of OZF Jamin to a
management buyout group at OZF Jamin also as part of the restructuring
program.
Income, excluding the loss on disposal of businesses in 1996 and the net
after-tax effect of restructuring activities recorded in 1994, increased at a
compound annual rate of 8% during the two-year
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period. This increase was a result of the growth in sales, partially offset by
a slightly lower gross profit margin and higher selling, marketing and
administrative expenses.
The Corporation's net sales, net income and cash flows are affected by the
timing of business acquisitions and divestitures, new product introductions,
promotional activities, price increases, and a seasonal sales bias toward the
second half of the year. These factors, from time to time, cause fluctuations
in net sales and net income versus the comparable quarterly periods of prior
years.
NET SALES
Net sales rose $298.6 million or 8% in 1996 and $84.4 million or 2% in 1995.
The increase in 1996 was primarily due to incremental sales from new
confectionery and grocery products, increased confectionery sales volume in
the North American seasonal packaged candy line and in various international
markets, selected confectionery selling price increases in the United States
partially offset by related sales volume declines, and incremental sales from
the acquisition of Henry Heide. The increase in 1995 was due to incremental
sales from new confectionery and grocery products, volume growth from existing
domestic and foreign confectionery brands and pasta products, and selected
selling price increases, principally in the Corporation's foreign businesses.
These increases were partially offset by lower sales resulting from the
divestiture of OZF Jamin in the second quarter of 1995 and the discontinuance
of the Corporation's refrigerated pudding line in late 1994.
COSTS AND EXPENSES
Cost of sales as a percent of net sales declined from 58.2% in 1994 to 57.6%
in 1995, but increased slightly to 57.7% in 1996. The decrease in gross margin
in 1996 was principally the result of higher costs for certain major raw
materials, primarily cocoa beans, milk, almonds and durum semolina and
increased manufacturing labor and overhead rates, substantially offset by
selected confectionery price increases, manufacturing efficiency improvements
and the favorable impact of the OZF Jamin divestiture. The increase in gross
margin in 1995 was primarily the result of manufacturing efficiency
improvements, selling price increases in the Corporation's foreign businesses,
and the favorable impact of the OZF Jamin divestiture. These increases were
partially offset by higher costs for certain major raw materials and
packaging, along with inflation in labor and overhead costs.
Selling, marketing and administrative costs increased by 7% in 1996
primarily due to a net increase in advertising and promotion expenses
associated with the introduction of new products and higher selling expenses
primarily related to international sales volume increases and new product
introductions. Selling, marketing and administrative costs increased by 2% in
1995 primarily due to increased advertising for existing confectionery brands
and the introduction of new products, partially offset by reduced promotion
and administrative expenses.
RESTRUCTURING ACTIVITIES
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million ($80.2 million after tax or $.46 per
share) following a comprehensive review of domestic and foreign operations
designed to enhance performance of operating assets by lowering operating and
administrative costs, eliminating underperforming assets and streamlining the
overall decision-making process. As of December 31, 1995, $81.8 million of
restructuring reserves had been utilized and $16.7 million had been reversed
to reflect revisions and changes in estimates to the original restructuring
program.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program
announced by the Corporation in August 1995. The charge was primarily related
to the funding of retirement benefits for eligible employees who elected
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<PAGE>
early retirement. The impact of this charge was more than offset by the
partial reversal of 1994 accrued restructuring reserves, resulting in an
increase to income before income taxes of $.2 million and an increase to net
income of $2.0 million as the tax benefit associated with the 1995 charge more
than offset the tax provision associated with the reversal of 1994
restructuring reserves.
The remaining $7.6 million of accrued restructuring reserves were utilized
during 1996 as the restructuring program was completed. A portion of the
restructuring reserves were used for severance and relocation benefits related
to the consolidation of the pasta and grocery field sales organizations.
INTEREST EXPENSE, NET
Net interest expense increased $3.2 million in 1996 as higher fixed interest
expense was only partially offset by reduced short-term interest expense.
Increased fixed interest expense resulted from the issuance of $200 million of
6.7% Notes due 2005 (Notes) in the fourth quarter of 1995. Lower short-term
interest expense resulted from lower average borrowing balances and reduced
interest rates as compared to 1995.
Net interest expense increased $9.5 million in 1995 primarily as a result of
higher short-term interest expense. Short-term interest expense increased due
to higher borrowing rates and increased borrowings associated with the
purchase of approximately 9.0 million shares, on a pre-split basis, of the
Corporation's Common Stock from the Hershey Trust Company, as Trustee for the
benefit of Milton Hershey School (Milton Hershey School Trust).
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate was 43.1%, 39.5%, and 44.7% in
1996, 1995 and 1994, respectively. The higher 1996 rate compared to 1995 was
due primarily to the lack of any tax benefit associated with the loss on
disposal of businesses. The lower rate in 1995 compared to 1994 was
principally due to the impact of restructuring activities.
NET INCOME
Net income decreased by 3% in 1996. Excluding the loss on the disposal of
the Gubor and Sperlari businesses in 1996 and the net after-tax effects of the
1995 restructuring activities, income increased $28.6 million or 10%. Net
income increased $15.5 million or 6% in 1995, excluding the net after-tax
effects of the 1995 and 1994 restructuring activities. Income as a percent of
net sales, after excluding the loss on the sale of the Gubor and Sperlari
businesses in 1996 and the net after-tax effects of restructuring activities
in 1995 and 1994 was 7.7% in 1996, 7.6% in 1995 and 7.3% in 1994.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1996. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 46% as of December
31, 1996, and 42% as of December 31, 1995. The higher capitalization ratio in
1996 primarily reflected increased borrowings for business acquisitions and
share repurchases. The ratio of current assets to current liabilities was
1.2:1 as of December 31, 1996, and 1.1:1 as of December 31, 1995.
ASSETS
Total assets increased $354.2 million or 13% as of December 31, 1996,
primarily as a result of increases in inventories, property, plant and
equipment and intangibles resulting from the Leaf acquisition, offset somewhat
by decreases associated with the divestitures of Gubor and Sperlari.
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<PAGE>
Current assets increased by $63.9 million or 7% reflecting increased cash
and cash equivalents and higher inventories in existing businesses, partly to
support the introduction of new products, and current assets resulting from
the Leaf acquisition, substantially offset by decreases associated with the
business divestitures.
The $165.9 million net increase in property, plant and equipment principally
reflected the Leaf acquisition and capital additions of $159.4 million, partly
offset by the divestiture of the Gubor and Sperlari businesses, and
depreciation expense of $119.4 million.
The increase in intangibles resulting from business acquisitions primarily
reflected preliminary goodwill associated with the acquisition of the Leaf
confectionery operations, partially offset by a decrease related to the
divestiture of the Gubor and Sperlari businesses and the amortization of
intangibles. The decrease in other assets was primarily associated with
employee retirement plans.
LIABILITIES
Total liabilities increased by $276.1 million or 16% as of December 31,
1996, primarily due to an increase in long-term debt. The increase in long-
term debt of $298.3 million reflected an increase in commercial paper
borrowings associated with the acquisition of Leaf, net of proceeds received
from the sale of the Gubor, Sperlari, Planters and Life Savers businesses. As
of December 31, 1996, $300.0 million of commercial paper borrowings were
reclassified as long-term debt in accordance with the Corporation's intent and
ability to refinance such obligations on a long-term basis.
STOCKHOLDERS' EQUITY
Total stockholders' equity rose by 7% in 1996, as net income exceeded
dividends paid and the repurchase of Common Stock. Total stockholders' equity
has increased at a compound annual rate of 5% over the past ten years.
CAPITAL STRUCTURE
The Corporation has two classes of stock outstanding, Common Stock and Class
B Common Stock (Class B Stock). Holders of the Common Stock and the Class B
Stock generally vote together without regard to class on matters submitted to
stockholders, including the election of directors, with the Common Stock
having one vote per share and the Class B Stock having ten votes per share.
However, the Common Stock, voting separately as a class, is entitled to elect
one-sixth of the Board of Directors. With respect to dividend rights, the
Common Stock is entitled to cash dividends 10% higher than those declared and
paid on the Class B Stock.
LIQUIDITY
Historically, the Corporation's major source of financing has been cash
generated from operations. The Corporation's income and, consequently, cash
provided from operations during the year are affected by seasonal sales
patterns, the timing of new product introductions, business acquisitions and
divestitures, and price increases. Chocolate, confectionery and grocery
seasonal and holiday-related sales have typically been highest during the
third and fourth quarters of the year, representing the principal seasonal
effect. Generally, seasonal working capital needs peak during the summer
months and have been met by issuing commercial paper.
Over the past three years, cash requirements for share repurchases, business
acquisitions, capital additions, and dividend payments exceeded cash provided
from operating activities and proceeds from business divestitures by $404.6
million. Total debt, including debt assumed, increased during the period by
$453.9 million. Cash and cash equivalents increased by $45.5 million during
the period.
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<PAGE>
The Corporation anticipates that capital expenditures will be in the range
of $175 million to $225 million per annum during the next several years as a
result of continued modernization of existing facilities and capacity
expansion to support new products and line extensions. As of December 31,
1996, the Corporation's principal capital commitments included manufacturing
capacity expansion and modernization.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13,
1996, to stockholders of record as of August 23, 1996. The split was effected
as a stock dividend by distributing one additional share for each share held.
Unless otherwise indicated, all shares and per share information have been
restated to reflect the stock split.
A total of 9,437,770 shares of Common Stock have been repurchased for
approximately $263.7 million under share repurchase programs which began in
1993. Of the shares repurchased, 528,000 shares were retired and the remaining
8,909,770 shares were held as Treasury Stock as of December 31, 1996.
In August 1995, the Corporation purchased an additional 18,099,546 shares
(9,049,773 shares on a pre-split basis) of its Common Stock to be held as
Treasury Stock from the Milton Hershey School Trust for $500.0 million. In
connection with the share repurchase program begun in 1993, a total of
4,000,000 shares (2,000,000 shares on a pre-split basis) were also acquired
from the Milton Hershey School Trust in 1993 for approximately $103.1 million.
As of December 31, 1996, a total of 27,009,316 shares were held as Treasury
Stock and $136.3 million remained available for repurchases of Common Stock
under a program approved by the Corporation's Board of Directors in February
1996.
In October 1995, the Corporation issued $200 million of Notes under Form S-3
Registration Statements which were declared effective in June 1990 and
November 1993. As of December 31, 1996, $300 million of debt securities
remained available for issuance under the November 1993 Registration
Statement. Proceeds from any offering of the $300 million of debt securities
available under the shelf registration may be used for general corporate
requirements including, reducing existing commercial paper borrowings,
financing capital additions and funding future business acquisitions and
working capital requirements.
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under the November 1993 Registration Statement. Proceeds from the debt
issuance were used to repay a portion of the commercial paper borrowings
associated with the Leaf acquisition.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate swap
agreements to effectively convert a portion of its floating rate debt to fixed
rate debt. As of December 31, 1996, the Corporation had agreements outstanding
with an aggregate notional amount of $125.0 million, with maturities through
October 1997. Any interest rate differential on interest rate swaps is
recognized as an adjustment to interest expense over the term of each
agreement. The Corporation's risk related to swap agreements is limited to the
cost of replacing such agreements at current market rates.
In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million with options to increase borrowings by $1.0 billion with the
concurrence of the banks. Lines of credit previously maintained by the
Corporation were significantly reduced when the credit facility agreements
became effective. Of the total committed credit facility, $200 million is for
a renewable 364-day term and $400 million is effective for a five-year term.
Both the short-term and long-term committed credit facility agreements were
amended and renewed effective December 13, 1996. 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.
B-5
<PAGE>
CASH FLOW ACTIVITIES
Cash provided from operating activities totaled $1.3 billion during the past
three years. Over this period, cash used by or provided from accounts
receivable and inventories has tended to fluctuate as a result of sales during
December and inventory management practices. The change in cash required for
or provided from other assets and liabilities between the years was primarily
related to variations in the funding status of pension plans, commodities
transactions and the timing of payments for accrued liabilities, including
income taxes, and in 1995 and 1994, restructuring expenses.
Investing activities included capital additions and business acquisitions
and divestitures. Capital additions during the past three years included the
purchase of manufacturing equipment, and expansion and modernization of
existing facilities. Businesses acquired during the past three years included
Leaf in 1996 and Henry Heide in 1995. The Gubor, Sperlari, Planters and Life
Savers businesses were sold in 1996 and OZF Jamin was sold in 1995. Cash used
for business acquisitions represented the purchase price paid and consisted of
the current assets, property, plant and equipment, intangibles and other
assets acquired, net of liabilities assumed.
Financing activities included debt borrowings and repayments, payment of
dividends, the exercise of stock options, incentive plan transactions and the
repurchase of Common Stock. During the past three years, short-term borrowings
in the form of commercial paper or bank borrowings were used to fund seasonal
working capital requirements, business acquisitions, a share repurchase
program and the purchase of Common Stock from the Milton Hershey School Trust.
The proceeds from the issuance of $200 million of Notes in October 1995 were
used to reduce short-term borrowings. During the past three years, a total of
22,391,116 shares of Common Stock has been repurchased for approximately
$631.9 million. Cash requirements for incentive plan transactions were $75.3
million during the past three years, partially offset by cash received from
the exercise of stock options of $40.6 million.
COMMODITY PRICE RISK MANAGEMENT
The Corporation's most significant raw materials include cocoa, sugar, milk,
peanuts, flour and almonds. The Corporation attempts to minimize the effect of
price fluctuations related to the purchase of these raw materials primarily
through forward purchasing to cover future manufacturing requirements,
generally for periods from 3 to 24 months. With regard to cocoa, sugar and
corn sweeteners, price risks are also managed by entering into futures and
options contracts. At the present time, similar futures and options contracts
are not available for use in pricing the Corporation's other major raw
materials. Futures contracts are used in combination with forward purchasing
of cocoa, sugar and corn sweetener requirements, principally to take advantage
of market fluctuations which provide more favorable pricing opportunities and
to increase diversity or flexibility in sourcing these raw materials. The
Corporation's commodity procurement practices are intended to reduce the risk
of future price increases, but also may potentially limit the ability to
benefit from possible price decreases.
The cost of cocoa beans and the prices for the related commodity futures
contracts historically have been subject to wide fluctuations attributable to
a variety of factors, including the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates and speculative
influences. Cocoa prices have been rising since 1992 due to cocoa demand
exceeding production. During 1996, prices for cocoa futures were relatively
stable as a result of record high cocoa production in West Africa. During
1997, any problems with the development of the West African crop to be
harvested beginning in the fall, could result in demand exceeding production,
leading to possible cocoa futures price increases. The Corporation's costs
during 1997 will not necessarily reflect market price fluctuations because of
its forward purchasing practices, premiums and discounts reflective of
B-6
<PAGE>
relative values, varying delivery times, and supply and demand for specific
varieties and grades of cocoa beans.
The major raw material used in the manufacture of pasta products is semolina
milled from durum wheat. The Corporation purchases semolina from commercial
mills and is also engaged in custom milling agreements to obtain sufficient
quantities of semolina. In the first half of 1996, the market price for durum
semolina remained near historic highs. Durum wheat production during 1996
increased in almost every area of the world, resulting in some price declines
in the last quarter of the year. However, prices remained well above long-term
historical price levels.
Generally, the Corporation has been able to offset the effects of increases
in the cost of its major raw materials, particularly cocoa beans, through
selling price increases or reductions in product weights. Conversely, declines
in the cost of major raw materials have served as a source of funds to enhance
consumer value through increases in product weights, respond to competitive
activity, develop new products and markets, and offset rising costs of other
raw materials and expenses.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$114.8 million in 1996 and $110.1 million in 1995. After adjustment for the
two-for-one stock split, the annual dividend rate on the Common Stock was $.80
per share, an increase of 11% over the 1995 rate of $.72 per share. The 1996
dividend represented the 22nd consecutive year of Common Stock dividend
increases.
On February 4, 1997, the Corporation's Board of Directors declared a
quarterly dividend of $.20 per share of Common Stock payable on March 14,
1997, to stockholders of record as of February 24, 1997. It is the
Corporation's 269th consecutive Common Stock dividend. A quarterly dividend of
$.18 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 47.0 million shares of the Corporation's Common Stock were
traded during 1996. The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1996, was $43 3/4.
There were 42,483 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1996.
B-7
<PAGE>
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:
<TABLE>
<CAPTION>
DIVIDENDS
PAID COMMON STOCK
PER SHARE PRICE RANGE*
------------- -------------------
CLASS
COMMON B
STOCK STOCK HIGH LOW
------ ------ --------- ---------
<S> <C> <C> <C> <C>
1996
1st Quarter $ .180 $.1625 $40 5/8 $31 15/16
2nd Quarter .180 .1625 38 15/16 34 7/8
3rd Quarter .200 .1800 51 3/4 35
4th Quarter .200 .1800 51 3/4 43 1/2
------ ------
Total $ .760 $.6850
====== ======
1995
1st Quarter $.1625 $.1475 $26 3/16 $24
2nd Quarter .1625 .1475 27 15/16 25 1/16
3rd Quarter .1800 .1625 32 7/16 26 13/16
4th Quarter .1800 .1625 33 15/16 29 1/2
------ ------
Total $.6850 $.6200
====== ======
</TABLE>
- --------
* NYSE-Composite Quotations for Common Stock by calendar quarter.
RETURN MEASURES
OPERATING RETURN ON AVERAGE STOCKHOLDERS' EQUITY
The Corporation's operating return on average stockholders' equity was 27.5%
in 1996. Over the most recent five-year period, the return has ranged from
17.3% in 1992 to 27.5% in 1996. For the purpose of calculating operating
return on average stockholders' equity, earnings is defined as net income,
excluding the catch-up adjustments for accounting changes and the after-tax
gain on the sale of the investment in Freia Marabou a.s (Freia) in 1993, the
after-tax restructuring activities in 1994 and 1995 and the after-tax loss on
the disposal of businesses in 1996.
OPERATING RETURN ON AVERAGE INVESTED CAPITAL
The Corporation's operating return on average invested capital was 17.8% in
1996. Over the most recent five-year period, the return has ranged from 14.4%
in 1992 to 17.8% in 1996. Average invested capital consists of the annual
average of beginning and ending balances of long-term debt, deferred income
taxes and stockholders' equity. For the purpose of calculating operating
return on average invested capital, earnings is defined as net income,
excluding the sale of the investment in Freia, the catch-up adjustments for
accounting changes, the after-tax restructuring activities in 1994 and 1995,
the after-tax loss on disposal of businesses in 1996, and the after-tax effect
of interest on long-term debt.
B-8
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER
SHARE AMOUNTS
<S> <C> <C> <C>
NET SALES $3,989,308 $3,690,667 $3,606,271
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,302,089 2,126,274 2,097,556
Selling, marketing and administrative 1,124,087 1,053,758 1,034,115
---------- ---------- ----------
Total costs and expenses 3,426,176 3,180,032 3,131,671
---------- ---------- ----------
RESTRUCTURING CREDIT (CHARGE) -- 151 (106,105)
LOSS ON DISPOSAL OF BUSINESSES (35,352) -- --
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 527,780 510,786 368,495
Interest expense, net 48,043 44,833 35,357
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 479,737 465,953 333,138
Provision for income taxes 206,551 184,034 148,919
---------- ---------- ----------
NET INCOME $ 273,186 $ 281,919 $ 184,219
========== ========== ==========
NET INCOME PER SHARE $ 1.77 $ 1.70 $ 1.06
========== ========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .7600 $ .6850 $ .6250
Class B Common Stock .6850 .6200 .5675
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
B-9
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,422 $ 32,346
Accounts receivable--trade 294,606 326,024
Inventories 474,978 397,570
Deferred income taxes 94,464 84,785
Prepaid expenses and other 60,759 81,598
---------- ----------
Total current assets 986,229 922,323
PROPERTY, PLANT AND EQUIPMENT, NET 1,601,895 1,436,009
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 565,962 428,714
OTHER ASSETS 30,710 43,577
---------- ----------
Total assets $3,184,796 $2,830,623
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 134,213 $ 127,067
Accrued liabilities 357,828 308,123
Accrued income taxes 10,254 15,514
Short-term debt 299,469 413,268
Current portion of long-term debt 15,510 383
---------- ----------
Total current liabilities 817,274 864,355
LONG-TERM DEBT 655,289 357,034
OTHER LONG-TERM LIABILITIES 327,209 333,814
DEFERRED INCOME TAXES 224,003 192,461
---------- ----------
Total liabilities 2,023,775 1,747,664
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued: none in 1996 and
1995 -- --
Common Stock, shares issued: 149,471,964 in 1996 and
74,733,982 on a pre-split basis in 1995 149,472 74,734
Class B Common Stock, shares issued: 30,478,908 in
1996 and 15,241,454 on a pre-split basis in 1995 30,478 15,241
Additional paid-in capital 42,432 47,732
Cumulative foreign currency translation adjustments (32,875) (29,240)
Unearned ESOP compensation (31,935) (35,128)
Retained earnings 1,763,144 1,694,696
Treasury--Common Stock shares, at cost: 27,009,316
in 1996 and 12,709,553 on a pre-split basis in 1995 (759,695) (685,076)
---------- ----------
Total stockholders' equity 1,161,021 1,082,959
---------- ----------
Total liabilities and stockholders' equity $3,184,796 $2,830,623
========== ==========
</TABLE>
The notes to consolidated financial statements are an integral part of these
balance sheets.
B-10
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES
Net income $ 273,186 $ 281,919 $ 184,219
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 133,476 133,884 129,041
Deferred income taxes 22,863 26,380 (2,328)
Restructuring (credit) charge -- (151) 106,105
Loss on disposal of businesses 35,352 -- --
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade 5,159 1,666 (36,696)
Inventories (41,038) 28,147 7,740
Accounts payable 14,032 14,767 (10,230)
Other assets and liabilities 15,120 (11,297) (58,146)
Other, net 5,593 19,614 20,032
--------- --------- ---------
Net Cash Provided from Operating Activities 463,743 494,929 339,737
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
INVESTING ACTIVITIES
Capital additions (159,433) (140,626) (138,711)
Business acquisitions (437,195) (12,500) --
Proceeds from divestitures 149,222 -- --
Other, net 9,333 8,720 (4,492)
--------- --------- ---------
Net Cash (Used by) Investing Activities (438,073) (144,406) (143,203)
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
FINANCING ACTIVITIES
Net change in short-term borrowings
partially classified as long-term debt 210,929 103,530 (20,503)
Long-term borrowings -- 202,448 102
Repayment of long-term debt (3,103) (7,887) (14,413)
Cash dividends paid (114,763) (110,090) (106,961)
Exercise of stock options 22,049 15,106 3,494
Incentive plan transactions (45,634) (21,903) (7,726)
Repurchase of Common Stock (66,072) (526,119) (39,748)
--------- --------- ---------
Net Cash Provided from (Used by) Financing
Activities 3,406 (344,915) (185,755)
--------- --------- ---------
Increase in Cash and Cash Equivalents 29,076 5,608 10,779
Cash and Cash Equivalents as of January 1 32,346 26,738 15,959
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 61,422 $ 32,346 $ 26,738
========= ========= =========
Interest Paid $ 52,143 $ 43,731 $ 36,803
Income Taxes Paid 180,347 148,629 177,876
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
B-11
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
CLASS B ADDITIONAL CURRENCY UNEARNED TREASURY TOTAL
PREFERRED COMMON COMMON PAID-IN TRANSLATION ESOP RETAINED COMMON STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL ADJUSTMENTS COMPENSATION EARNINGS STOCK EQUITY
- --------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS OF
DOLLARS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF
JANUARY 1, 1994 $ -- $ 74,669 $15,253 $51,196 $(13,905) $(41,515) $1,445,609 $(118,963) $1,412,344
Net income 184,219 184,219
Dividends:
Common Stock, $.625
per share (89,660) (89,660)
Class B Common
Stock, $.5675 per
share (17,301) (17,301)
Foreign currency
translation
adjustments (10,632) (10,632)
Conversion of Class
B Common Stock into
Common Stock 10 (10) --
Incentive plan
transactions (1,264) (1,264)
Exercise of stock
options (548) (548)
Employee stock
ownership trust
transactions 496 3,194 3,690
Repurchase of Common
Stock (39,748) (39,748)
----- -------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1994 -- 74,679 15,243 49,880 (24,537) (38,321) 1,522,867 (158,711) 1,441,100
Net income 281,919 281,919
Dividends:
Common Stock, $.685
per share (91,190) (91,190)
Class B Common
Stock, $.62 per
share (18,900) (18,900)
Foreign currency
translation
adjustments (4,703) (4,703)
Conversion of Class
B Common Stock into
Common Stock 2 (2) --
Incentive plan
transactions (180) (180)
Exercise of stock
options 53 (2,456) (246) (2,649)
Employee stock
ownership trust
transactions 488 3,193 3,681
Repurchase of Common
Stock (526,119) (526,119)
----- -------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1995 -- 74,734 15,241 47,732 (29,240) (35,128) 1,694,696 (685,076) 1,082,959
Net income 273,186 273,186
Dividends:
Common Stock, $.76
per share (93,884) (93,884)
Class B Common
Stock, $.685 per
share (20,879) (20,879)
Foreign currency
translation
adjustments (3,635) (3,635)
Two-for-one stock
split 74,736 15,239 (89,975) --
Conversion of Class
B Common Stock into
Common Stock 2 (2) --
Incentive plan
transactions (426) (426)
Exercise of stock
options (5,391) (8,547) (13,938)
Employee stock
ownership trust
transactions 517 3,193 3,710
Repurchase of Common
Stock (66,072) (66,072)
----- -------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1996 $ -- $149,472 $30,478 $42,432 $(32,875) $(31,935) $1,763,144 $(759,695) $1,161,021
===== ======== ======= ======= ======== ======== ========== ========= ==========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
B-12
<PAGE>
HERSHEY FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies employed by the Corporation are discussed
below and in other notes to the consolidated financial statements. Certain
reclassifications have been made to prior year amounts to conform to the 1996
presentation. Unless otherwise indicated, all shares and per share information
have been restated for the two-for-one stock split effective September 13,
1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries after elimination of intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates,
particularly for accounts receivable and certain current and long-term
liabilities.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar and corn sweeteners for
anticipated manufacturing requirements, the Corporation enters into
commodities futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations. In accordance with Statement of Financial
Accounting Standards No. 80 "Accounting for Futures Contracts," these futures
and options contracts meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment is computed using the straight-line method over the
estimated useful lives.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Intangible assets resulting from business acquisitions principally consist
of the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill is amortized on a straight-line basis
over 40 years. Other intangible assets are amortized on a straight-line basis
over the estimated useful lives. The Corporation periodically evaluates
whether events or circumstances have occurred indicating that the carrying
amount of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Corporation uses an estimate
of the acquired business' undiscounted future cash flows compared to the
related carrying amount of net assets, including goodwill, to determine if an
impairment loss should be recognized.
B-13
<PAGE>
Accumulated amortization of intangible assets resulting from business
acquisitions was $110.1 million and $101.5 million as of December 31, 1996 and
1995, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated using the average
exchange rates during the period. For foreign entities, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the
balance sheet date. Resulting translation adjustments are recorded in a
separate component of stockholders' equity, "Cumulative Foreign Currency
Translation Adjustments."
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward and options contracts
to hedge transactions primarily related to firm commitments to purchase
equipment, certain raw materials and finished goods denominated in foreign
currencies, and to hedge payment of intercompany transactions with its non-
domestic subsidiaries. These contracts reduce currency risk from exchange rate
movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments and foreign exchange options
contracts meet required hedge criteria for anticipated transactions.
Accordingly, gains and losses are deferred and accounted for as part of the
underlying transactions. Gains and losses on terminated derivatives designated
as hedges are accounted for as part of the originally hedged transaction.
Gains and losses on derivatives designated as hedges of items which mature,
are sold or terminated, or of anticipated transactions which are no longer
likely to occur, are recorded currently in income. In entering into these
contracts the Corporation has assumed the risk which might arise from the
possible inability of counterparties to meet the terms of their contracts. The
Corporation does not expect any losses as a result of counterparty defaults.
LICENSE AGREEMENTS
The Corporation has entered into license agreements under which it has
access to certain trademarks and proprietary technology, and manufactures
and/or markets and distributes certain products. The rights under these
agreements are extendable on a long-term basis at the Corporation's option
subject to certain conditions, including minimum sales levels, which the
Corporation has met. License fees and royalties, payable under the terms of
the agreements, are expensed as incurred.
RESEARCH AND DEVELOPMENT
The Corporation expenses research and development costs as incurred.
Research and development expense was $26.1 million, $26.2 million and $26.3
million in 1996, 1995 and 1994, respectively.
ADVERTISING
The Corporation expenses advertising costs as incurred. Advertising expense
was $174.2 million, $159.2 million and $120.6 million in 1996, 1995 and 1994,
respectively. Prepaid advertising as of December 31, 1996 and 1995, was $2.2
million and $3.0 million, respectively.
2. ACQUISITIONS AND DIVESTITURES
In December 1996, the Corporation acquired from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, Huhtamaki's
Leaf North America (Leaf) confectionery operations for $437.2 million, plus
the assumption of $17.0 million in debt. In addition, the parties entered into
a trademark and technology license agreement under which the Corporation will
B-14
<PAGE>
manufacture and/or market and distribute in North, Central and South America
Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH, JOLLY
RANCHER, MILK DUDS, PAYDAY and WHOPPERS. Leaf's principal manufacturing
facilities are located in Denver, Colorado; Memphis, Tennessee; and Robinson,
Illinois.
In December 1995, the Corporation completed the acquisition of the
outstanding shares of the confectionery company Henry Heide, Incorporated
(Henry Heide), for approximately $12.5 million. Henry Heide's headquarters and
manufacturing facility are located in New Brunswick, N.J., where it
manufactures a variety of non-chocolate confectionery products including
JUJYFRUITS candy and WUNDERBEANS jellybeans.
In accordance with the purchase method of accounting, the purchase prices of
the acquisitions summarized above were allocated on a preliminary basis to the
underlying assets and liabilities at the date of acquisition based on their
estimated respective fair values, which may be revised at a later date. Total
liabilities assumed, including debt, were $138.0 million in 1996 and $10.6
million in 1995. Results subsequent to the dates of acquisition are included
in the consolidated financial statements. Had the results of the Henry Heide
acquisition been included in consolidated results for the entire length of
each period presented, the effect would not have been material.
Had the acquisition of Leaf occurred at the beginning of 1996, pro forma
consolidated results would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
----------------------------------
IN THOUSANDS OF
DOLLARS EXCEPT PER
SHARE AMOUNT (UNAUDITED)
<S> <C>
Net sales $4,473,950
Net income 256,300
Net income per share 1.66
</TABLE>
The pro forma results are based on historical financial information provided
by Huhtamaki, excluding a business restructuring charge recorded by Huhtamaki
in 1996 and adjusted to give effect to certain costs and expenses, including
fees under the trademark and technology license agreement, goodwill
amortization, interest expense and income taxes which would have been incurred
by the Corporation if it had owned and operated the Leaf confectionery
business throughout 1996. These results are not necessarily reflective of the
actual results which would have occurred if the acquisition had been completed
at the beginning of the year, nor are they necessarily indicative of future
combined financial results.
In December 1996, the Corporation completed the sale to Huhtamaki of the
outstanding shares of Gubor Holding GmbH (Gubor) and Sperlari, S.r.l.
(Sperlari). Gubor manufactures and markets high-quality assorted pralines and
seasonal chocolate products in Germany and Sperlari manufactures and markets
various confectionery and grocery products in Italy. The total proceeds from
the sale of the Gubor and Sperlari businesses were $121.7 million. The
transaction resulted in an after-tax loss of $35.4 million since no tax
benefit associated with the transaction was recorded. Combined net sales for
Gubor and Sperlari were $216.6 million, $222.0 million and $186.6 million in
1996, 1995 and 1994, respectively.
In January 1996, the Corporation completed the sale of the assets of Hershey
Canada, Inc.'s PLANTERS nut (Planters) and LIFE SAVERS and BREATH SAVERS hard
candy, and BEECH-NUT cough drops (Life Savers) businesses to Johnvince Foods
Group and Beta Brands Inc., respectively. Both transactions were part of a
restructuring program announced by the Corporation in late 1994.
In June 1995, the Corporation completed the sale of the outstanding shares
of Overspecht B.V. (OZF Jamin) to a management buyout group at OZF Jamin, as
part of the Corporation's restructuring
B-15
<PAGE>
program. OZF Jamin manufactures chocolate and non-chocolate confectionery
products, cookies, biscuits and ice cream for distribution primarily to
customers in the Netherlands and Belgium.
3. RESTRUCTURING ACTIVITIES
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million, following a comprehensive review of
domestic and foreign operations designed to enhance performance of operating
assets by lowering operating and administrative costs, eliminating
underperforming assets and streamlining the overall decision-making process.
The charge of $106.1 million resulted in an after-tax charge of $80.2 million
or $.46 per share in 1994.
The charge included $34.3 million of severance and termination benefits for
the elimination of approximately 500 positions in the manufacturing, technical
and administrative areas at both domestic and foreign operations. The charge
also included anticipated losses on disposals of certain businesses of $39.1
million, product line discontinuations of $17.5 million and the consolidation
of operations and disposal of machinery and equipment of $15.2 million.
As of December 31, 1995, $81.8 million of restructuring reserves had been
utilized and $16.7 million had been reversed to reflect revisions and changes
in estimates to the original restructuring program. Operating cash flows were
used to fund cash requirements which represented approximately 25% of the
total reserves utilized. The non-cash portion of restructuring reserve
utilization was associated primarily with the divestiture of foreign
businesses and the discontinuation of certain product lines.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program
announced by the Corporation in August 1995. The charge was primarily related
to the funding of retirement benefits for eligible employees who elected early
retirement. This cash charge was funded from operating cash flows. The impact
of this charge was more than offset by the partial reversal of 1994 accrued
restructuring reserves in the fourth quarter of 1995 resulting in an increase
to income before income taxes of $.2 million and an increase to net income of
$2.0 million, as the tax benefit associated with the 1995 charge more than
offset the tax provision associated with the reversal of 1994 restructuring
reserves.
The remaining $7.6 million of accrued restructuring reserves as of December
31, 1995, were utilized during 1996 as the restructuring program was
completed. A portion of the restructuring reserves were used for severance and
relocation benefits related to the consolidation of the pasta and grocery
field sales organizations.
4. RENTAL AND LEASE COMMITMENTS
Rent expense was $25.3 million, $24.9 million and $25.7 million for 1996,
1995 and 1994, respectively. Rent expense pertains to all operating leases,
which were principally related to certain administrative buildings,
distribution facilities and transportation equipment. Future minimum rental
payments under non-cancelable operating leases with a remaining term in excess
of one year as of December 31, 1996, were: 1997, $16.4 million; 1998, $15.1
million; 1999, $15.5 million; 2000, $15.1 million; 2001, $15.1 million; 2002
and beyond, $90.8 million.
5. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value as of December 31, 1996 and 1995, because of the
relatively short maturity of these instruments. The carrying value of long-
term debt, including the current portion, approximated fair value as of
December 31, 1996 and 1995, based upon quoted market prices for the same or
similar debt issues.
B-16
<PAGE>
As of December 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $25.0 million in foreign
currency, primarily British sterling and German marks, and to sell $24.6
million in foreign currency, primarily Canadian dollars and Japanese yen, at
contracted forward rates.
As of December 31, 1995, the Corporation had foreign exchange forward
contracts maturing in 1996 and 1997 to purchase $54.7 million in foreign
currency, primarily Canadian dollars, British sterling and Swiss francs, and
to sell $26.4 million in foreign currency, primarily Italian lira, Canadian
dollars and Japanese yen, at contracted forward rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished goods
generally covering 3 to 24 months, the Corporation also purchases, from time
to time, foreign exchange options which permit, but do not require, the
Corporation to exchange foreign currencies at a future date with another party
at a contracted exchange rate. To finance premiums paid on such options, the
Corporation may also write offsetting options at exercise prices which limit
but do not eliminate the effect of purchased options and forward contracts as
a hedge. As of December 31, 1995, the Corporation had purchased foreign
exchange options of $11.5 million and written foreign exchange options of $8.9
million, principally related to British sterling. Such options expired or were
settled in the first quarter of 1996.
The fair value of foreign exchange forward contracts is estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences, and the fair value of foreign exchange
options is estimated using active market quotations. As of December 31, 1996
and 1995, the fair value of foreign exchange forward and options contracts
approximated carrying value. The Corporation does not hold or issue financial
instruments for trading purposes.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate swap
agreements to effectively convert a portion of its floating rate debt to fixed
rate debt. Agreements outstanding with an aggregate notional amount of $75.0
million matured during 1996. As of December 31, 1996, the Corporation had
agreements outstanding with an aggregate notional amount of $125.0 million
with maturities through October 1997. As of December 31, 1996 and 1995,
interest rates payable were at weighted average fixed rates of 5.8% and 5.6%,
respectively, and interest rates receivable were floating based on 30-day
commercial paper composite rates. Any interest rate differential on interest
rate swaps is recognized as an adjustment to interest expense over the term of
each agreement. The Corporation's risk related to swap agreements is limited
to the cost of replacing such agreements at current market rates.
6. INTEREST EXPENSE
Interest expense, net consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Long-term debt and lease obligations $30,818 $20,949 $19,103
Short-term debt 22,752 28,576 21,155
Capitalized interest (1,534) (1,957) (3,009)
------- ------- -------
Interest expense, gross 52,036 47,568 37,249
Interest income (3,993) (2,735) (1,892)
------- ------- -------
Interest expense, net $48,043 $44,833 $35,357
======= ======= =======
</TABLE>
B-17
<PAGE>
7. SHORT-TERM DEBT
Generally, the Corporation's short-term borrowings are in the form of
commercial paper or bank loans with an original maturity of three months or
less. In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million as of December 31, 1996, with options to increase borrowings by $1.0
billion with the concurrence of the banks. Of the total committed credit
facility, $200 million is for a renewable 364-day term and $400 million is
effective for a five-year term. Both the short-term and long-term committed
credit facility agreements were amended and renewed effective December 13,
1996. The credit facilities may be used to fund general corporate
requirements, to support commercial paper borrowings and, in certain
instances, to finance future business acquisitions. As of December 31, 1996,
$300.0 million of commercial paper borrowings were reclassified as long-term
debt in accordance with the Corporation's intent and ability to refinance such
obligations on a long-term basis.
The Corporation also maintains lines of credit arrangements with domestic
and international commercial banks, under which it could borrow in various
currencies up to approximately $96.1 million and $97.7 million as of December
31, 1996 and 1995, respectively, at the lending banks' prime commercial
interest rates or lower. The Corporation had combined domestic commercial
paper borrowings, including the portion classified as long-term debt, and
short-term foreign bank loans against its credit facilities and lines of
credit of $599.5 million as of December 31, 1996, and $413.3 million as of
December 31, 1995. The weighted average interest rates on short-term
borrowings outstanding as of December 31, 1996 and 1995, were 5.5% and 5.7%,
respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1996 was approximately .05% per annum of
the commitment. The Corporation is in compliance with all covenants included
in the credit facility agreements. There were no significant compensating
balance agreements which legally restricted these funds.
As a result of maintaining a consolidated cash management system, the
Corporation maintains overdraft positions at certain banks. Such overdrafts,
which were included in accounts payable, were $25.2 million and $24.8 million
as of December 31, 1996 and 1995, respectively.
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ---------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Commercial Paper at interest rates ranging from 5.54% to
5.59% $300,000 $ --
Medium-term Notes, 8.85% to 9.92%, due 1997-1998 40,400 40,400
6.7% Notes due 2005 200,000 200,000
8.8% Debentures due 2021 100,000 100,000
Other obligations, net of unamortized debt discount 30,399 17,017
-------- --------
Total long-term debt 670,799 357,417
Less--current portion 15,510 383
-------- --------
Long-term portion $655,289 $357,034
======== ========
</TABLE>
As of December 31, 1996, $300.0 million of commercial paper borrowings were
reclassified as long-term debt in accordance with the Corporation's intent and
ability to refinance such obligations on a long-term basis.
B-18
<PAGE>
Aggregate annual maturities during the next five years, excluding short-term
borrowings reclassified, are: 1997, $15.5 million; 1998, $25.2 million; 1999,
$.2 million; 2000, $2.2 million; and 2001, $.2 million. The Corporation's debt
is principally unsecured and of equal priority. None of the debt is
convertible into stock of the Corporation. The Corporation is in compliance
with all covenants included in the related debt agreements.
9. INCOME TAXES
Income before income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Domestic $499,607 $452,084 $411,089
Foreign (19,870) 13,869 (77,951)
-------- -------- --------
Income before income taxes $479,737 $465,953 $333,138
======== ======== ========
</TABLE>
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Current:
Federal $158,040 $135,034 $126,234
State 23,288 22,620 24,712
Foreign 2,360 -- 301
-------- -------- --------
Current provision for income taxes 183,688 157,654 151,247
-------- -------- --------
Deferred:
Federal 12,952 12,455 6,221
State 8,134 8,198 2,652
Foreign 1,777 5,727 (11,201)
-------- -------- --------
Deferred provision for income taxes 22,863 26,380 (2,328)
-------- -------- --------
Total provision for income taxes $206,551 $184,034 $148,919
======== ======== ========
</TABLE>
The 1994 Foreign deferred income tax benefit was associated primarily with
the restructuring charge recorded in the fourth quarter of that year.
B-19
<PAGE>
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Deferred tax assets:
Post-retirement benefit obligations $ 88,885 $ 85,907
Accrued expenses and other reserves 91,675 78,506
Net operating loss carryforwards, net of valuation allow-
ances
of $2,663 in 1996 and $25,544 in 1995 2,663 7,298
Accrued trade promotion reserves 22,910 16,389
Other 18,013 27,869
-------- --------
Total deferred tax assets 224,146 215,969
-------- --------
Deferred tax liabilities:
Depreciation 256,424 239,389
Other 97,261 84,256
-------- --------
Total deferred tax liabilities 353,685 323,645
-------- --------
Net deferred tax liabilities $129,539 $107,676
======== ========
Included in:
Current deferred tax assets, net $ 94,464 $ 84,785
Non-current deferred tax liabilities, net 224,003 192,461
-------- --------
Net deferred tax liabilities $129,539 $107,676
======== ========
</TABLE>
As of December 31, 1996, the Corporation had $15.7 million of operating loss
carryforwards available to reduce the future taxable income of a foreign
subsidiary. The loss carryforwards must be utilized within the next ten years.
The following table reconciles the Federal statutory income tax rate with
the Corporation's effective income tax rate:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits 4.7 4.6 6.0
Restructuring (credit) charge for which no tax benefit was
provided -- (.3) 4.5
Non-deductible acquisition costs .6 .6 .8
Loss on disposal of businesses for which no tax benefit was
provided 2.6 -- --
Other, net .2 (.4) (1.6)
---- ---- ----
Effective income tax rate 43.1% 39.5% 44.7%
==== ==== ====
</TABLE>
10. RETIREMENT PLANS
The Corporation and its subsidiaries sponsor several defined benefit
retirement plans covering substantially all employees. Plans covering most
domestic salaried and hourly employees provide retirement benefits based on
individual account balances which are increased annually by pay-related and
interest credits. Plans covering certain non-domestic employees provide
retirement benefits based on career average pay, final pay, or final average
pay as defined within the provisions of the individual plans. The Corporation
also participates in several multi-employer retirement plans which provide
defined benefits to employees covered under certain collective bargaining
agreements.
B-20
<PAGE>
The Corporation's policy is to fund domestic pension liabilities in
accordance with the minimum and maximum limits imposed by the Employee
Retirement Income Security Act of 1974 and Federal income tax laws,
respectively. Non-domestic pension liabilities are funded in accordance with
applicable local laws and regulations. Plan assets are invested in a broadly
diversified portfolio consisting primarily of domestic and international
common stocks and fixed income securities.
Pension expense included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Service cost $ 29,311 $ 25,311 $ 30,077
Interest cost on projected benefit obligations 35,374 32,531 28,351
Investment (return) loss on plan assets (51,205) (71,578) 8,288
Net amortization and deferral 14,844 40,823 (40,550)
-------- -------- --------
Corporate sponsored plans 28,324 27,087 26,166
Multi-employer plans 571 361 374
Other 1,340 615 622
-------- -------- --------
Total pension expense $ 30,235 $ 28,063 $ 27,162
======== ======== ========
</TABLE>
The funded status and amounts recognized in the consolidated balance sheets
for the retirement plans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations $427,839 $27,316 $17,241 $417,027
======== ======= ======= ========
Accumulated benefit
obligations $452,907 $32,422 $17,833 $447,792
======== ======= ======= ========
Actuarial present value of
projected benefit obligations $502,371 $34,135 $27,005 $476,439
Plan assets at fair value 488,222 -- 19,765 389,064
-------- ------- ------- --------
Plan assets less than
projected benefit obligations 14,149 34,135 7,240 87,375
Net gain (loss) unrecognized
at date of transition 906 (1,233) 525 (818)
Prior service cost and
amendments not yet recognized
in earnings (26,885) (2,305) (1,159) (28,701)
Unrecognized net gain (loss)
from past experience
different than that assumed 12,386 (2,502) (3,615) (3,660)
Minimum liability adjustment -- 4,494 -- 21,678
-------- ------- ------- --------
Pension liability $ 556 $32,589 $ 2,991 $ 75,874
======== ======= ======= ========
</TABLE>
The projected benefit obligations for the plans were determined principally
using discount rates of 7.50% as of December 31, 1996, and 7.25% as of
December 31, 1995. For both 1996 and 1995 the assumed long-term rate of return
on plan assets was 9.5%. The assumed long-term compensation increase rate for
1996 and 1995 was primarily 4.8%.
B-21
<PAGE>
In the third quarter of 1995, the Corporation offered a voluntary retirement
program to domestic eligible employees age 55 and over. The voluntary
retirement program gave eligible salaried employees an opportunity to retire
with enhanced retirement benefits. The pre-tax impact on pension expense of
the 1995 charge was $13.0 million or $7.7 million after tax. This amount has
not been included in the disclosure of pension expense by component.
11. POST-RETIREMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees subject to pre-defined limits.
Substantially all of the Corporation's domestic employees become eligible for
these benefits at retirement with a pre-defined benefit being available at an
early retirement date. The post-retirement medical benefit is contributory for
pre-Medicare retirees and for most post-Medicare retirees retiring on or after
February 1, 1993. Retiree contributions are based upon a combination of years
of service and age at retirement. The post-retirement life insurance benefit
is non-contributory.
Net post-retirement benefit costs consisted of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Service cost $ 3,947 $ 3,262 $ 3,642
Interest cost on projected benefit obligations 10,853 12,918 13,334
Amortization (2,986) (2,322) (1,028)
------- ------- -------
Total $11,814 $13,858 $15,948
======= ======= =======
</TABLE>
Obligations are unfunded and the actuarial present values of accumulated
post-retirement benefit obligations recognized in the consolidated balance
sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Retirees $ 96,870 $ 78,090
Fully eligible active plan participants 22,096 24,686
Other active plan participants 58,578 57,448
-------- --------
Total 177,544 160,224
Plan amendments 28,903 31,377
Unrecognized net gain from past experience different than
that assumed 12,127 20,892
-------- --------
Accrued post-retirement benefits $218,574 $212,493
======== ========
</TABLE>
The accumulated post-retirement benefit obligations were determined
principally using discount rates of 7.50% and 7.25% as of December 31, 1996
and 1995, respectively. The assumed average health care cost trend rate used
in measuring the accumulated post-retirement benefit obligation as of December
31, 1996 and 1995, was 6% which was also the ultimate trend rate. A one
percentage point increase in the average health care cost trend rate for each
year would increase the accumulated post-retirement benefit obligations as of
December 31, 1996 and 1995, by $24.4 million and $22.2 million, respectively,
and would increase the sum of the net service and interest cost components of
net post-retirement benefit costs for 1996 and 1995 by $2.9 million and $2.4
million, respectively.
The pre-tax impact on post-retirement benefits expense and liabilities of
the 1995 charge for the voluntary retirement program was $.4 million or $.2
million after tax. This amount has not been included in the disclosure of net
post-retirement benefit costs by component.
B-22
<PAGE>
As part of its long-range financing plans, the Corporation, in 1989,
implemented a corporate-owned life insurance program covering most of its
domestic employees. After paying employee death benefits, proceeds from this
program were available for general corporate purposes and also could be used
to offset future employee benefits costs, including retiree medical benefits.
During 1996, Federal tax legislation sharply curtailed the financial viability
of most corporate-owned life insurance programs. As a result, the Corporation
began the phase-out of its corporate-owned life insurance program during 1996.
The Corporation's investment in corporate-owned life insurance policies was
recorded net of policy loans in other assets, and interest accrued on the
policy loans was included in accrued liabilities as of December 31, 1996 and
1995. Net life insurance expense, including interest expense, was included in
selling, marketing and administrative expenses.
12. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the
primary vehicle for contributions to its existing employee savings and stock
investment plan for participating domestic salaried and hourly employees. The
ESOP was funded by a 15-year 7.75% loan of $47.9 million from the Corporation.
During 1996 and 1995, the ESOP received a combination of dividends on
unallocated shares and contributions from the Corporation equal to the amount
required to meet its principal and interest payments under the loan.
Simultaneously, the ESOP allocated to participants 159,176 shares of Common
Stock each year. As of December 31, 1996, the ESOP held 687,610 allocated
shares and 1,591,752 unallocated shares. All ESOP shares are considered
outstanding for income per share computations.
The Corporation recognized net compensation expense equal to the shares
allocated multiplied by the original cost of $20 1/16 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to
the ESOP for 1996, 1995 and 1994 was $1.8 million, $1.9 million and $1.7
million, respectively. Dividends paid on unallocated ESOP shares were $1.3
million in 1996 and $1.2 million in 1995 and 1994. The unearned ESOP
compensation balance in stockholders' equity represented deferred compensation
expense to be recognized by the Corporation in future years as additional
shares are allocated to participants.
13. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1996, the Corporation had 530,000,000 authorized shares
of capital stock. Of this total, 450,000,000 shares were designated as Common
Stock, 75,000,000 shares as Class B Common Stock (Class B Stock), and
5,000,000 shares as Preferred Stock, each class having a par value of one
dollar per share. As of December 31, 1996, a combined total of 179,950,872
shares of both classes of common stock had been issued of which 152,941,556
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1996.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13,
1996, to stockholders of record as of August 23, 1996. The split was effected
as a stock dividend by distributing one additional share for each share held.
Holders of the Common Stock and the Class B Stock generally vote together
without regard to class on matters submitted to stockholders, including the
election of directors, with the Common Stock having one vote per share and the
Class B Stock having ten votes per share. However, the Common Stock, voting
separately as a class, is entitled to elect one-sixth of the Board of
Directors. With respect to dividend rights, the Common Stock is entitled to
cash dividends 10% higher than those declared and paid on the Class B Stock.
B-23
<PAGE>
Class B Stock can be converted into Common Stock on a share-for-share basis
at any time. On a pre-split basis during 1996, 1995 and 1994, a total of 2,000
shares, 1,525 shares and 10,300 shares, respectively, of Class B Stock were
converted into Common Stock.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
(Milton Hershey School Trust), as institutional fiduciary for estates and
trusts unrelated to Milton Hershey School, and as direct owner of investment
shares, held a total of 24,587,025 shares of the Common Stock, and as Trustee
for the benefit of Milton Hershey School, held 30,306,006 shares of the Class
B Stock as of December 31, 1996, and was entitled to cast approximately 77% of
the total votes of both classes of the Corporation's common stock. The Milton
Hershey School Trust must approve the issuance of shares of Common Stock or
any other action which would result in the Milton Hershey School Trust not
continuing to have voting control of the Corporation.
A total of 9,437,770 shares of Common Stock have been repurchased for
approximately $263.7 million under share repurchase programs which were
approved by the Corporation's Board of Director's in 1993 and 1996. Of the
shares repurchased, 528,000 shares were retired and the remaining 8,909,770
shares were held as Treasury Stock as of December 31, 1996. In August 1995,
the Corporation purchased an additional 18,099,546 shares (9,049,773 shares on
a pre-split basis) of its Common Stock to be held as Treasury Stock from the
Milton Hershey School Trust for $500.0 million. A total of 27,009,316 shares
were held as Treasury Stock as of December 31, 1996.
Net income per share has been computed based on the weighted average number
of shares of the Common Stock and the Class B Stock outstanding during the
year. Average shares outstanding were 153,995,307 for 1996, 165,687,082 for
1995 and 174,037,252 for 1994.
14. STOCK COMPENSATION PLAN
The long-term portion of the 1987 Key Employee Incentive Plan (Plan),
provides for grants of stock-based compensation awards to senior executives
and key employees of one or more of the following: non-qualified stock options
(fixed stock options), performance stock units, stock appreciation rights and
restricted stock units. The Plan also provides for the deferral of performance
stock unit awards by participants. Under the long-term portion of the Plan,
the Corporation may grant to its employees up to 6.5 million shares of Common
Stock on a pre-split basis. The Corporation applies Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its Plan.
Accordingly, no compensation cost has been recognized for its fixed stock
option plan. Had compensation cost for the Corporation's stock-based
compensation plan been determined based on the fair value at the grant dates
for awards under the Plan consistent with the method of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," the
Corporation's net income and net income per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1996 1995
------------------------------------------------------
IN THOUSANDS OF
DOLLARS EXCEPT PER
SHARE AMOUNTS
<S> <C> <C> <C>
Net income As reported $273,186 $281,919
Pro forma 266,517 281,015
Net income per share As reported $1.77 $1.70
Pro forma 1.73 1.70
</TABLE>
The fair value of each option grant is estimated on the date of grant using
a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yields of
2.4% and 2.7%, expected volatility of 20% and 21%, risk-free interest rates of
5.6% and 7.8%, and expected lives of 7 1/2 and 7 years.
B-24
<PAGE>
FIXED STOCK OPTIONS
The exercise price of each option equals the market price of the
Corporation's common stock on the date of grant and an option's maximum term
is ten years. Options are granted in January and generally vest at the end of
the second year.
A summary of the status of the Corporation's fixed stock options as of
December 31, 1996, 1995, and 1994, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 4,435,800 $22.54 5,067,900 $21.62 3,460,850 $19.91
Granted 2,619,200 $33.08 237,400 $24.19 1,927,600 $24.50
Exercised (1,062,980) $20.74 (843,100) $17.43 (209,950) $18.58
Forfeited (89,800) $31.92 (26,400) $24.24 (110,600) $24.01
---------- --------- ---------
Outstanding at end of
year 5,902,220 $27.40 4,435,800 $22.54 5,067,900 $21.62
========== ========= =========
Options exercisable at
year-end 3,670,020 2,901,800 3,469,500
========== ========= =========
Weighted-average fair
value of options
granted during the year
(per share) $8.70 $7.38
===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF EXERCISE OUTSTANDING AS CONTRACTUAL AVERAGE EXERCISABLE AS OF AVERAGE
PRICES OF 12/31/96 LIFE IN YEARS EXERCISE PRICE 12/31/96 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12 11/16-
22 3/8 1,370,820 4.5 $21.22 1,370,820 $21.22
$23 1/2 -
26 1/2 1,990,000 7.0 $24.40 1,990,000 $24.40
$33 1/16-
37 5/8 2,541,400 9.0 $33.08 309,200 $33.08
--------- ---------
$12 11/16-
37 5/8 5,902,220 7.3 $27.40 3,670,020 $23.94
========= =========
</TABLE>
PERFORMANCE STOCK UNITS
Under the long-term portion of the Plan, each January the Corporation grants
selected executives and other key employees performance stock units whose
vesting is contingent upon the achievement of certain performance objectives.
If at the end of three-year performance cycles, targets for financial measures
of earnings per share, return on net assets and free cash flow are met, the
full number of shares are awarded to the participants. The performance scores
can range from 0% to 150%. The compensation cost charged against income for
the performance-based plan was $5.8 million, $3.6 million, and $1.8 million
for 1996, 1995, and 1994, respectively.
As of December 31, 1996, a total of 259,730 contingent performance stock
units and restricted stock units had been granted for potential future
distribution, primarily related to three-year cycles ending December 31, 1996,
1997, and 1998. Deferred performance stock units and accumulated dividend
amounts totaled 391,750 shares as of December 31, 1996.
No stock appreciation rights were outstanding as of December 31, 1996.
B-25
<PAGE>
15. SUPPLEMENTAL BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE--TRADE
In the normal course of business, the Corporation extends credit to
customers which satisfy pre-defined credit criteria. The Corporation believes
that it has little concentration of credit risk due to the diversity of its
customer base. Receivables, as shown on the consolidated balance sheets, were
net of allowances and anticipated discounts of $14.1 million and $14.8 million
as of December 31, 1996 and 1995, respectively.
INVENTORIES
The Corporation values the majority of its inventories under the last-in,
first-out (LIFO) method and the remaining inventories at the lower of first-
in, first-out (FIFO) cost or market. LIFO cost of inventories valued using the
LIFO method was $299.2 million and $282.0 million as of December 31, 1996 and
1995, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
-----------------------------------------
IN THOUSANDS OF
DOLLARS
<S> <C> <C>
Raw materials $204,419 $189,371
Goods in process 31,444 28,201
Finished goods 316,726 249,106
-------- --------
Inventories at FIFO 552,589 466,678
Adjustment to LIFO (77,611) (69,108)
-------- --------
Total inventories $474,978 $397,570
======== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances included construction in progress of
$91.9 million and $119.5 million as of December 31, 1996 and 1995,
respectively. Major classes of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Land $ 34,056 $ 35,385
Buildings 533,559 471,663
Machinery and equipment 1,855,087 1,683,338
---------- ----------
Property, plant and equipment, gross 2,422,702 2,190,386
Accumulated depreciation (820,807) (754,377)
---------- ----------
Property, plant and equipment, net $1,601,895 $1,436,009
========== ==========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
--------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Payroll and other compensation $ 81,264 $ 97,710
Advertising and promotion 77,351 87,368
Other 199,213 123,045
-------- --------
Total accrued liabilities $357,828 $308,123
======== ========
</TABLE>
B-26
<PAGE>
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
-----------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Accrued post-retirement benefits $207,881 $204,044
Other 119,328 129,770
-------- --------
Total other long-term liabilities $327,209 $333,814
======== ========
</TABLE>
16. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of chocolate,
confectionery, grocery and pasta products. The Corporation's principal
operations and markets are located in North America. In December 1996, the
Corporation sold its Gubor and Sperlari European businesses.
Net sales, income before interest and income taxes and identifiable assets
of businesses outside of North America were not significant. Historically,
transfers of product between geographic areas have not been significant. In
1996 and 1995, sales to Wal-Mart Stores, Inc. and Subsidiaries amounted to
approximately 12% and 11% of total net sales, respectively.
17. QUARTERLY DATA (UNAUDITED)
Summary quarterly results were as follows:
<TABLE>
<CAPTION>
YEAR 1996 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C> <C>
Net sales $931,514 $796,343 $1,072,336 $1,189,115
Gross profit 381,766 326,545 458,362 520,546
Net income 59,415 40,847 94,270 78,654(A)
Net income per share(b) .38 .26 .61 .51
<CAPTION>
YEAR 1995 FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C> <C>
Net sales $867,446 $722,269 $ 981,101 $1,119,851
Gross profit 364,085 298,506 408,658 493,144
Net income 60,633 33,323 82,127 105,836(c)
Net income per share(b) .35 .19 .51 .68
</TABLE>
- --------
(a) Net income for the fourth quarter and year 1996 included an after-tax loss
on the sale of Gubor and Sperlari of $35.4 million. Net income per share
was similarly impacted.
(b) Quarterly income per share amounts for 1996 and 1995 do not total to the
annual amount due to the changes in weighted average shares outstanding
during the year.
(c) Net income for the fourth quarter and year 1995 included a net after-tax
credit of $2.0 million associated with adjustments to accrued
restructuring reserves. Net income per share was similarly impacted.
B-27
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Hershey Foods Corporation is responsible for the financial statements and
other financial information contained in this report. The Corporation believes
that the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate under the circumstances to reflect
in all material respects the substance of applicable events and transactions.
In preparing the financial statements, it is necessary that management make
informed estimates and judgments. The other financial information in this
annual report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls designed
to provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements and that assets are properly
accounted for and safeguarded. The concept of reasonable assurance is based on
the recognition that the cost of the system must be related to the benefits to
be derived. The Corporation believes its system provides an appropriate
balance in this regard. The Corporation maintains an Internal Audit Department
which reviews the adequacy and tests the application of internal accounting
controls.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose appointment was ratified by stockholder
vote at the stockholders' meeting held on April 30, 1996. Their report
expresses an opinion that the Corporation's financial statements are fairly
stated in conformity with generally accepted accounting principles, and they
have indicated to us that their examination was performed in accordance with
generally accepted auditing standards which are designed to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors of the Corporation, consisting
solely of non-management directors, meets regularly with the independent
public accountants, internal auditors and management to discuss, among other
things, the audit scopes and results. Arthur Andersen LLP and the internal
auditors both have full and free access to the Audit Committee, with and
without the presence of management.
B-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Hershey Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hershey
Foods Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, appearing on pages B-9 through B-27. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hershey Foods Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen
New York, New York
January 27, 1997
B-29
<PAGE>
HERSHEY FOODS CORPORATION
ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS EXCEPT
MARKET PRICE AND PER SHARE STATISTICS
<TABLE>
<CAPTION>
10-YEAR
COMPOUND
GROWTH RATE 1996 1995 1994
----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS(a)
Net Sales 9.33% $ 3,989,308 3,690,667 3,606,271
---------------- ----------- --------------
Cost of Sales 8.35% $ 2,302,089 2,126,274 2,097,556
Selling, Marketing and
Administrative 11.25% $ 1,124,087 1,053,758 1,034,115
Restructuring Credit,
(Charge) and Gain, Net $ -- 151 (106,105)
(Loss)/Gain on Sale of
Businesses and
Investment Interest $ (35,352) -- --
Interest Expense, Net 19.54% $ 48,043 44,833 35,357
Income Taxes 7.42% $ 206,551 184,034 148,919
---------------- ----------- --------------
Income from Continuing
Operations Before
Accounting Changes 9.81% $ 273,186 281,919 184,219
Net Cumulative Effect
of Accounting Changes $ -- -- --
Discontinued Operations $ -- -- --
---------------- ----------- --------------
Net Income 7.48% $ 273,186 281,919 184,219
================ =========== ==============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes 12.00% $ 1.77(h) 1.70(i) 1.06(j)
Net Cumulative Effect
of Accounting Changes $ -- -- --
Net Income 9.56% $ 1.77(h) 1.70(i) 1.06(j)
Weighted Average Shares
Outstanding(b) 153,995 165,687 174,037
Dividends Paid on
Common Stock 8.66% $ 93,884 91,190 89,660
Per Share(b) 11.32% $ .760 .685 .625
Dividends Paid on Class
B Common Stock 11.21% $ 20,879 18,900 17,301
Per Share(b) 11.24% $ .685 .620 .5675
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.7%(c) 7.6% 7.3%(d)
Depreciation 14.35% $ 119,443 119,438 114,821
Advertising 7.62% $ 174,199 159,200 120,629
Promotion 13.36% $ 429,208 402,454 419,164
Payroll 7.49% $ 491,677 461,928 472,997
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 7.91% $ 159,433 140,626 138,711
Total Assets 9.70% $ 3,184,796 2,830,623 2,890,981
Long-term Portion of
Debt 13.44% $ 655,289 357,034 157,227
Stockholders' Equity 4.78% $ 1,161,021 1,082,959 1,441,100
Net Book Value Per
Share(b) 6.51% $ 7.59 7.01 8.31
Operating Return on
Average Stockholders'
Equity 27.5% 22.2% 18.5%
Operating Return on
Average Invested
Capital 17.8% 17.1% 15.6%
Full-time Employees 14,000 13,300 14,000
STOCKHOLDERS' DATA(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 152,942 154,532 173,470
Market Price of Common
Stock at Year-end 13.52% $ 43 3/4 32 1/2 24 3/16
Range During Year $51 3/4-31 15/16 33 15/16-24 26 3/4-20 9/16
</TABLE>
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page B-32.
B-30
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- --------------- -------------- -------------- --------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
3,488,249 3,219,805 2,899,165 2,715,609 2,420,988 2,168,048 1,863,816
- --------------- -------------- -------------- --------------- -------------- ---------------- -------------
1,995,502 1,833,388 1,694,404 1,588,360 1,455,612 1,326,458 1,149,663
1,035,519 958,189 814,459 776,668 655,040 575,515 468,062
-- -- -- 35,540 -- -- --
80,642 -- -- -- -- -- --
26,995 27,240 26,845 24,603 20,414 29,954 22,413
213,642 158,390 143,929 145,636 118,868 91,615 99,604
- --------------- -------------- -------------- --------------- -------------- ---------------- -------------
297,233 242,598 219,528 215,882 171,054 144,506 124,074
(103,908) -- -- -- -- -- --
-- -- -- -- -- 69,443 24,097
- --------------- -------------- -------------- --------------- -------------- ---------------- -------------
193,325 242,598 219,528 215,882 171,054 213,949 148,171
=============== ============== ============== =============== ============== ================ =============
1.66(k) 1.34 1.22 1.20(l) .95 .80 .69
(.58) -- -- -- -- -- --
1.08(k) 1.34 1.22 1.20(l) .95 1.19 .82
179,514 180,373 180,373 180,373 180,373 180,373 180,373
84,711 77,174 70,426 74,161(f) 55,431 49,433 43,436
.570 .515 .470 .495(f) .370 .330 .290
15,788 14,270 12,975 13,596(f) 10,161 9,097 8,031
.5175 .4675 .425 .445(f) .3325 .2975 .2625
7.4%(e) 7.5% 7.6% 7.2%(g) 7.1% 6.7% 6.7%
100,124 84,434 72,735 61,725 54,543 43,721 35,397
130,009 137,631 117,049 146,297 121,182 99,082 97,033
444,546 398,577 325,465 315,242 256,237 230,187 171,162
469,564 433,162 398,661 372,780 340,129 298,483 263,529
211,621 249,795 226,071 179,408 162,032 101,682 68,504
2,855,091 2,672,909 2,341,822 2,078,828 1,814,101 1,764,665 1,544,354
165,757 174,273 282,933 273,442 216,108 233,025 280,900
1,412,344 1,465,279 1,335,251 1,243,537 1,117,050 1,005,866 832,410
8.06 8.12 7.40 6.89 6.19 5.58 4.61
17.8% 17.3% 17.0% 16.6% 16.1% 17.5% 19.0%
15.0% 14.4% 13.8% 13.4% 13.2% 13.3% 13.5%
14,300 13,700 14,000 12,700 11,800 12,100 10,540
175,226 180,373 180,373 180,373 180,373 180,373 180,373
24 1/2 23 1/2 22 3/16 18 3/4 17 15/16 13 12 1/4
27 15/16-21 3/4 24 3/16-19 1/8 22 1/4-17 9/16 19 13/16-14 1/8 18 7/16-12 3/8 14 5/16-10 15/16 18 7/8-10 3/8
<CAPTION>
1986
- ----------
<C>
1,635,486
- ----------
1,032,061
387,227
--
--
8,061
100,931
- ----------
107,206
--
25,558
- ----------
132,764
==========
.57
--
.71
187,017
40,930
.260
7,216
.236
6.6%
31,254
83,600
122,508
238,742
74,452
1,262,332
185,676
727,941
4.04
18.2%
13.5%
10,210
180,373
12 5/16
15-7 3/4
</TABLE>
B-31
<PAGE>
NOTES TO THE ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(a) All amounts for years prior to 1988 have been restated for discontinued
operations, where applicable. Operating Return on Average Stockholders'
Equity and Operating Return on Average Invested Capital have been computed
using Net Income, excluding the 1988 gain on disposal included in
Discontinued Operations, the 1993 Net Cumulative Effect of Accounting
Changes, and the after-tax impacts of the 1990 Restructuring Gain, Net,
the 1993 Gain on Sale of the Investment Interest in Freia Marabou a.s
(Freia), the 1994 Restructuring Charge, the net 1995 Restructuring Credit
and the 1996 Loss on Sale of Businesses.
(b) All shares and per share amounts have been adjusted for the two-for-one
stock split effective September 13, 1996.
(c) Calculated percent excludes the 1996 Loss on Sale of Businesses. Including
the loss, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 6.8%.
(d) Calculated percent excludes the 1994 Restructuring Charge. Including the
charge, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 5.1%.
(e) Calculated percent excludes the 1993 Gain on Sale of Investment Interest
in Freia. Including the gain, Income from Continuing Operations Before
Accounting Changes as a Percent of Net Sales was 8.5%.
(f) Amounts included a special dividend for 1990 of $11.2 million or $.075 per
share of Common Stock and $2.1 million or $.0675 per share of Class B
Common Stock.
(g) Calculated percent excludes the 1990 Restructuring Gain, Net. Including
the gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 7.9%.
(h) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1996 included a $.23 per share loss on the sale
of the Gubor and Sperlari businesses. Excluding the impact of this loss,
Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share would have been $2.00.
(i) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1995 included a net $.01 per share credit
associated with adjustments to accrued restructuring reserves. Excluding
the impact of this net credit, Income Per Share from Continuing Operations
Before Accounting Changes and Net Income Per Share would have been $1.69.
(j) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1994 included a $.46 per share restructuring
charge. Excluding the impact of this charge, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $1.52.
(k) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1993 included a $.23 per share gain on the sale
of the investment interest in Freia. Excluding the impact of this gain,
Income Per Share from Continuing Operations Before Accounting Changes
would have been $1.43.
(l) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1990 included an $.11 per share Restructuring
Gain, Net. Excluding the impact of this gain, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $1.08.
B-32
<PAGE>
[MAP OF HERSHEY PARK AREA APPEARS HERE]
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
This map will help you
find your way to the
Hershey Theatre (located on East Caracas Avenue)
and Hershey's Chocolate World
(located on Park Blvd.)
Hershey, PA
<PAGE>
- --------------------------------------------------------------------------------
HERSHEY FOODS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 17, 1997, appoints K. L. Wolfe, J. P. Viviano and R. M. Reese and
each or any of them as Proxies, with full power of substitution, to represent
and vote all of the undersigned's shares of the Corporation's Common Stock at
the Annual Meeting of Stockholders to be held at 2:00 P.M., April 29, 1997, at
the Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania, or at any
adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S), WHO SHALL BE ENTITLED
TO ONE VOTE FOR EACH SUCH SHARE HELD. IF NO DIRECTION IS MADE, THE PROXY WILL
BE VOTED FOR THE ELECTION OF THE TEN NOMINEES FOR DIRECTOR, FOR THE APPROVAL OF
THE KEY EMPLOYEE INCENTIVE PLAN AS AMENDED AND FOR THE APPROVAL OF ARTHUR
ANDERSEN LLP AS THE CORPORATION'S INDEPENDENT PUBLIC ACCOUNTANTS FOR 1997.
EXCEPT WITH REGARD TO VOTING SEPARATELY AS A CLASS ON THE ELECTION OF MESSRS.
MCDONALD AND SARNI, SHARES OF THE COMMON STOCK WILL VOTE TOGETHER WITH SHARES
OF THE CLASS B COMMON STOCK WITHOUT REGARD TO CLASS.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
- --------------------------------------------------------------------------------
<PAGE>
Please mark
[X] your votes
this way
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3.
ITEM 1. Election of M.J. McDonald and V.A. Sarni as Directors by holders of the
Common Stock voting as a class; and election of the following as Directors by
holders of the Common Stock and the Class B Common Stock voting together with-
out regard to class: W.H. Alexander, R.H. Campbell, C.M. Evarts, B. Guiton
Hill, J.C. Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
WITHHOLD
FOR all AUTHORITY
FOR all Nominees for all
Nominees Except* Nominees
[_] [_] [_]
*Exceptions:
--------------------------------------------------------------------
ITEM 2. Approval of the Key Employee Incentive Plan, as amended.
For Against Abstain
[_] [_] [_]
ITEM 3. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1997.
For Against Abstain
[_] [_] [_]
- --------------------------------------------------------------------------------
In their discretion, the Proxies are authorized If you plan to WILL
to vote for a substitute should any nominee attend the Annual ATTEND
become unavailable for election and upon such Meeting, please mark
other business as may properly come before the Will Attend block. [_]
the meeting.
+++++
+
+
Signature(s) _________________________________________ Date______ ,1997
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ATTORNEYS, GUARDIANS, ETC., SHOULD SO INDICATE WHEN
SIGNING.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
. FOLD AND DETACH HERE .
====================================== ==================================
Presenting this coupon at Presenting this coupon at
Hershey's Chocolate World Hershey's Chocolate World
entitles you to 30% off all entitles you to a free sample of
confectionery products, and 20% Hershey product distributed
off Hershey's gift and souvenir items from 9:00 a.m. until 2:00 p.m.
from 9:00 a.m. till 6:00 p.m. on April 29, 1997
on April 29, 1997
====================================== ==================================
Stockholders must be present in person to obtain product sample and discount.
Limit on product sample per stockholder.
Offer good on April 29, 1997 only.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
. FOLD AND DETACH HERE .
Admission Ticket
Hershey Foods Corporation
1997 Annual Meeting of Stockholders
+++++ Tuesday, April 29, 1997
+ 2:00 P.M.
+ Hershey Theatre
East Caracas Avenue
Hershey, PA
<PAGE>
HERSHEY FOODS CORPORATION
CLASS B COMMON STOCK
This Proxy is Solicited on
behalf of the Board of
Directors
The undersigned, having received the Notice of Meeting and Proxy Statement dated
March 17, 1997, appoints K.L. Wolfe, J.P. Viviano, and R.M. Reese and each or
any of them as Proxies, with full power of substitution, to represent and vote
all of the undersigned's shares of the Corporation's Class B Common Stock at the
Annual Meeting of Stockholders to be held at 2:00 P.M., April 29, 1997, at the
Hershey Theatre, East Caracas Avenue, Hershey, Pennsylvania, or at any
adjournment thereof.
The shares of Class B Common Stock represented by this proxy will be voted in
the manner directed herein by the undersigned stockholder(s), who shall be
entitled to ten votes for each such share held. If no direction is made, the
proxy will be voted FOR the election of the eight nominees for Director listed
on the reverse side, FOR Item 2 and FOR Item 3.
This proxy is continued on reverse side.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3
Item 1. Election of the following as Directors by holders of the Common Stock
and the Class B Common Stock voting together without regard to class:
W.H. Alexander, R.H. Campbell, C.M. Evarts, B. Guiton Hill, J.C.
Jamison, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
[_] FOR all nominees [_] WITHHOLD AUTHORITY for all nominees
To withhold authority to vote for any individual nominee, write the nominee's
name in the space below:
FOR AGAINST ABSTAIN
--- ------- -------
Item 2. Approval of the Key Employee
Incentive Plan, as amended [_] [_] [_]
Item 3. Approval of Arthur Andersen LLP
as the Corporation's independent
public accountants for 1997. [_] [_] [_]
In their discretion, the Proxies are authorized to vote upon such other business
as may come before the meeting.
Dated: ,1997
----------------------- --------------------------------
Signature
--------------------------------
Signature
Please mark, sign (exactly as name(s) appears above), date and mail this card
promptly in the postage prepaid return envelope provided. Executors,
administrators, trustees, attorneys, guardians, etc., should so indicate when
signing.
<PAGE>
HERSHEY FOODS CORPORATION THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS
P The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 17, 1997, appoints K. L. Wolfe, J. P. Viviano, and R. M. Reese,
and each or any of them as Proxies, with full power of substitution, to
R represent and vote all of the undersigned's shares of the Corporation's
Common Stock at the Annual Meeting of Stockholders to be held at 2:00 P.M.,
April 29, 1997, at the Hershey Theatre, East Caracas Avenue, Hershey,
O Pennsylvania, or at any adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE
X MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S), WHO SHALL BE
ENTITLED TO ONE VOTE FOR EACH SUCH SHARE HELD. IF NO DIRECTION IS MADE, THE
PROXY WILL BE VOTED FOR THE ELECTION OF THE TEN NOMINEES FOR DIRECTOR, FOR
Y THE APPROVAL OF THE KEY EMPLOYEE INCENTIVE PLAN AS AMENDED AND FOR THE
APPROVAL OF ARTHUR ANDERSEN LLP AS THE CORPORATION'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR 1997.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3.
ITEM 1. Election of M.J. McDonald and V.A. Sarni as Directors by holders of
the Common Stock voting as a class; and election of the following
as Directors by holders of the Common Stock and the Class B Common
Stock voting together without regard to class: W.H. Alexander, R.H.
Campbell, C.M. Evarts, B. Guiton Hill, J.C. Jamison, J.M.
Pietruski, J.P. Viviano, K.L. Wolfe.
(item 1. continued on back)
<PAGE>
[_] FOR all nominees [_] WITHHOLD AUTHORITY to vote for all nominees
To withhold authority to vote for any individual nominee, write that nominee's
name in the space below.
FOR AGAINST ABSTAIN
--- ------- -------
ITEM 2. Approval of the Key Employee Incentive Plan, as
amended. [_] [_] [_]
FOR AGAINST ABSTAIN
--- ------- -------
ITEM 3. Approval of Arthur Andersen LLP as the [_] [_] [_]
Corporation's independent public accountants for
1997.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
-------------------------------------
Signature Date
-------------------------------------
Signature Date
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED.
<PAGE>
- --------------------------------------------------------------------------------
HERSHEY FOODS CORPORATION
EMPLOYEE SAVINGS STOCK INVESTMENT AND OWNERSHIP PLAN
THIS VOTING INSTRUCTION IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 17, 1997, instructs American Express Trust Company*, as Trustee, to
represent and vote all of the shares of Common Stock of Hershey Foods
Corporation which are credited to my account under the above Plan at the Annual
Meeting of Stockholders to be held at 2:00 P.M., April 29, 1997 or at any
adjournment thereof.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED BY THE
TRUSTEE IN THE MANNER DIRECTED. IF NO DIRECTION IS GIVEN, OR IS RECEIVED BY THE
TRUSTEE AFTER APRIL 22, 1997, THE SHARES IN THE EMPLOYEE SAVINGS STOCK
INVESTMENT AND OWNERSHIP PLAN (ESSIOP) WILL BE VOTED BY THE TRUSTEE IN
PROPORTION TO THE FINAL AGGREGATE VOTE OF THE PLAN PARTICIPANTS ACTUALLY VOTING
ON THE MATTER. EXCEPT WITH REGARD TO VOTING SEPARATELY AS A CLASS ON THE
ELECTION OF MESSRS. MCDONALD AND SARNI, SHARES OF THE COMMON STOCK WILL VOTE
TOGETHER WITH SHARES OF THE CLASS B COMMON STOCK WITHOUT REGARD TO CLASS.
THIS VOTING INSTRUCTION CARD IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
* American Express Trust Company, Trustee, has appointed Chase Mellon
Shareholder Services as agent to tally the vote.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Please mark
[X] your votes
this way
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2 AND 3.
ITEM 1. Election of M.J. McDonald WITHHOLD
and V.A. Sarni as Directors by holders FOR all AUTHORITY
of the Common Stock voting as a class; FOR all Nominees for all
and election of the following as Directors Nominees Except* Nominees
by holders of the Common Stock and the [_] [_] [_]
Class B Common Stock voting together with-
out regard to class: W.H. Alexander, R.H.
Campbell, C.M. Evarts, B. Guiton
Hill, J.C. Jamison, J.M. Pietruski, J.P.
Viviano, K.L. Wolfe.
*Exceptions:
-----------------------------
ITEM 2. Approval of the Key Employee For Against Abstain
Incentive Plan, as amended. [_] [_] [_]
ITEM 3. Approval of Arthur Andersen LLP as For Against Abstain
the Corporation's independent public [_] [_] [_]
accountants for 1997.
- --------------------------------------------------------------------------------
In its discretion, the Trustee is authorized to vote for a substitute should any
nominee become unavailable for election and upon such other business as may
properly come before the meeting.
Signature(s) _________________________________________ Date______ ,1997
PLEASE MARK, SIGN (EXACTLY AS NAME(S) APPEARS ABOVE), DATE AND MAIL THIS CARD
PROMPTLY IN THE POSTAGE PREPAID RETURN ENVELOPE PROVIDED. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ATTORNEYS, GUARDIANS, ETC., SHOULD SO INDICATE WHEN
SIGNING.
- --------------------------------------------------------------------------------
Detach here.
<PAGE>
[LETTERHEAD OF HERSHEY FOODS APPEARS HERE]
March 17, 1997
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a copy of Hershey Foods' 1996 Annual Report
to Stockholders. Also enclosed is a voting instruction card and a Proxy
Statement which explains the items upon which you are voting. Your
completed card must be received by April 22, 1997 in order to be tallied.
For your convenience in returning the voting card, a postage-paid envelope
is provided. I urge you to take advantage of this opportunity to have the
shares being held for you voted at the Annual Meeting of Stockholders on
April 29, 1997
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card from Merrill
Lynch for voting those shares.
If you should have any questions, you can call the Law Department at
(717) 534-7911.
Remember, your vote is important.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosures
<PAGE>
[LOGO OF HERSHEY FOODS APPEARS HERE]
Hershey Foods Corporation
KENNETH L. WOLFE Corporate Headquarters
Chairman and 100 Crystal A Drive
Chief Executive Officer P.O. Box 810
Hershey, PA 17033-0810
Phone: (717) 534-4233
Fax: (717) 534-4055
March 17, 1997
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
Enclosed for your attention is a voting instruction card and a Proxy
Statement which explains the items to be voted upon at this year's
Annual Meeting of Stockholders on April 29, 1997. Your completed card
must be received by April 22, 1997 in order to be tallied. For your
convenience in returning the voting card, a postage-paid envelope is
provided. I urge you to take advantage of this opportunity to have the
shares being held for you voted at the Annual Meeting.
This mailing of the voting instruction card and Proxy Statement to
ESSIOP participants has been designed to eliminate the duplicate mailing
of Annual Reports to those employees who will receive such as a
registered stockholder.
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card from
Merrill Lynch for voting those shares.
If you should have any questions, you can call the Law Department at
(717) 534-7911.
Remember, your vote is important.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosures
<PAGE>
[HERSHEY FOODS LETTERHEAD APPEARS HERE]
March 17, 1997
TO: HERSHEY EMPLOYEE STOCK PURCHASE PLAN (HESPP) PARTICIPANTS
I am pleased to provide you a copy of Hershey Foods' 1996 Annual Report to
Stockholders. This mailing of Annual Reports to our HESPP participants has
been designed to eliminate the duplicate mailing of Annual Reports to those
participants who will receive an Annual Report as a result of participation
in another employee plan. Your proxy card for voting your shares in HESPP
along with the Proxy Statement will be arriving shortly, directly from
Merrill Lynch. Your completed card should be returned in the envelope
Merrill Lynch provides.
If you should have any questions, you can call the Law Department at
(717) 534-7911.
Remember, your vote is important.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
