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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
|-| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ..... to .....
Registrant, State of Incorporation,
Address and Telephone Number
----------------------------
Hershey Foods Corporation
Commission I.R.S. Employer
File No. (a Delaware Corporation) Identification No.
-------- ------------------
1-183 100 Crystal A Drive 23-0691590
Hershey, Pennsylvania 17033
(717) 534-6799
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, one dollar par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, one dollar par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of a specified date within 60 days prior to the date of
filing.
Common Stock, one dollar par value -- $4,402,864,458 as of March 3, 1997.
Class B Common Stock, one dollar par value -- $7,461,816 as of March 3,
1997. While the Class B Common Stock is not listed for public trading on any
exchange or market system, shares of that class are convertible into shares
of Common Stock at any time on a share-for-share basis. The market value
indicated is calculated based on the closing price of the Common Stock on
the New York Stock Exchange on March 3, 1997.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of the latest practicable date.
Common Stock, one dollar par value -- 122,314,799 shares, as of March 3,
1997.
Class B Common Stock, one dollar par value -- 30,470,908 shares, as of March
3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The Corporation's Consolidated Financial Statements and Management's
Discussion and Analysis for the year ended December 31, 1996 are included in
Appendix B to the Corporation's Proxy Statement for the Corporation's 1997
Annual Meeting of Stockholders and are incorporated by reference into Part II
and are filed as Exhibit 13 hereto. Portions of the Proxy Statement are
incorporated by reference herein into Part III.
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<PAGE>
PART I
Item 1. BUSINESS
Hershey Foods Corporation and its subsidiaries (the "Corporation") are
engaged in the manufacture, distribution and sale of consumer food products. The
Corporation, primarily through its Hershey Chocolate North America, Hershey
International and Hershey Pasta and Grocery Group divisions, produces and
distributes a broad line of chocolate and non-chocolate confectionery, pasta and
grocery products.
The Corporation was organized under the laws of the State of Delaware on
October 24, 1927, as a successor to a business founded in 1894 by Milton S.
Hershey.
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. In addition, the parties
entered into a trademark and technology license agreement under which the
Corporation will manufacture and/or market and distribute in North, Central and
South America Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH,
JOLLY RANCHER, MILK DUDS, PAYDAY and WHOPPERS. Leaf's principal manufacturing
facilities are located in Denver, Colorado; Memphis, Tennessee; and Robinson,
Illinois.
Also 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 Corporation's principal product groups include: chocolate and
non-chocolate confectionery products sold in the form of bar goods, bagged items
and boxed items; grocery products in the form of baking ingredients, chocolate
drink mixes, peanut butter, dessert toppings and beverages; and pasta products
sold in a variety of shapes, sizes and packages. The Corporation believes it is
a major factor in these product groups in North America. Operating profit
margins vary considerably among individual products and brands. Generally, such
margins on chocolate and non-chocolate confectionery products are greater than
those on pasta and other food products.
In North America, the Corporation manufactures chocolate and non-chocolate
confectionery products in a variety of packaged forms and markets them under
more than 50 brands. The different packaged forms include various arrangements
of the same bar products, such as boxes, trays and bags, as well as a variety of
different sizes and weights of the same bar product, such as snack size,
standard, king size, large and giant bars. Among the principal chocolate and
non-chocolate confectionery products in the United States are: HERSHEY'S COOKIES
'N' CREME chocolate bars, HERSHEY'S COOKIES 'N' MINT chocolate bars, HERSHEY'S
HUGS chocolates, HERSHEY'S HUGS WITH ALMONDS chocolates, HERSHEY'S KISSES
chocolates, HERSHEY'S KISSES WITH ALMONDS chocolates, HERSHEY'S milk chocolate
bars, HERSHEY'S milk chocolate bars with almonds, HERSHEY'S MINIATURES chocolate
bars, HERSHEY'S NUGGETS chocolates, AMAZIN' FRUIT gummy bears fruit candy,
CADBURY'S CREME EGGS candy, CARAMELLO candy bars, KIT KAT wafer bars, LUDEN'S
throat drops, MR. GOODBAR milk chocolate bars with peanuts, PETER PAUL ALMOND
JOY candy bars, PETER PAUL MOUNDS candy bars, REESE'S NUTRAGEOUS candy bars,
REESE'S peanut butter cups, REESE'S PIECES candies, ROLO caramels in milk
chocolate, SKOR toffee bars, SYMPHONY milk chocolate bars, SWEET ESCAPES candy
bars, TASTETATIONS candy, TWIZZLERS candy, WHATCHAMACALLIT candy bars, YORK
peppermint pattie candy and 5TH AVENUE candy bars. Principal products in Canada
include CHIPITS chocolate chips, GLOSETTE chocolate-covered raisins, peanuts and
almonds, OH HENRY! candy bars, POT OF GOLD boxed chocolates, REESE PEANUT BUTTER
CUPS candy, and TWIZZLERS candy. The Corporation also manufactures, imports,
markets, sells and distributes chocolate products in Mexico under the HERSHEY'S
brand name.
1
<PAGE>
The Corporation manufactures and markets a line of grocery products in the
baking, beverage, peanut butter and toppings categories. Principal products in
the United States include HERSHEY'S baking chips, HERSHEY'S drink boxes,
HERSHEY'S chocolate milk mix, HERSHEY'S cocoa, HERSHEY'S CHOCOLATE SHOPPE
toppings, HERSHEY'S HOT COCOA COLLECTION hot cocoa mix, HERSHEY'S syrup, REESE'S
peanut butter and REESE'S peanut butter baking chips. HERSHEY'S chocolate milk
is produced and sold under license by certain independent dairies throughout the
United States, using a chocolate milk mix manufactured by the Corporation. Ice
cream, baking and various other products are produced and sold under the
HERSHEY'S and REESE'S brand names by third parties who have been granted
licenses by the Corporation to use these trademarks.
The Corporation manufactures and sells quality pasta products throughout the
United States. The Corporation markets its products on a regional basis under
several brand names, including AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT 'N
FLUFFY, MRS. WEISS, P&R, RONZONI, SAN GIORGIO and SKINNER, as well as certain
private labels.
The Corporation's products are sold primarily to grocery wholesalers, chain
grocery stores, candy distributors, mass merchandisers, chain drug stores,
vending companies, wholesale clubs, convenience stores, concessionaires and food
distributors by full-time sales representatives, food brokers and part-time
retail sales merchandisers throughout the United States, Canada and Mexico. The
Corporation believes its products are sold in over 2 million retail outlets in
North America. In 1996, sales to Wal-Mart Stores, Inc. and Subsidiaries amounted
to approximately 12% of total net sales.
In Japan, China and Russia/CIS, the Corporation imports and/or markets
selected confectionery and grocery products. The Corporation also exports
chocolate and non-chocolate confectionery products to over 60 countries
worldwide.
The Corporation's marketing strategy is based upon the consistently superior
quality of its products, mass distribution and the best possible consumer value
in terms of price and weight. In addition, the Corporation devotes considerable
resources to the identification, development, testing, manufacturing and
marketing of new products. The Corporation utilizes a variety of promotional
programs for customers and advertising and promotional programs for consumers.
The Corporation employs promotional programs at various times during the year to
stimulate sales of certain products. Chocolate and non-chocolate confectionery
and grocery seasonal and holiday-related sales have typically been highest
during the third and fourth quarters of the year.
The Corporation recognizes that the mass distribution of its consumer food
products is an important element in maintaining sales growth and providing
service to its customers. The Corporation attempts to meet the changing demands
of its customers by planning optimum stock levels and reasonable delivery times
consistent with achievement of efficiencies in distribution. To achieve these
objectives, the Corporation has developed a distribution network from its
manufacturing plants, distribution centers and field warehouses strategically
located throughout the United States, Canada and Mexico. The Corporation uses a
combination of public and contract carriers to deliver its products from the
distribution points to its customers. In conjunction with sales and marketing
efforts, the distribution system has been instrumental in the effective
promotion of new, as well as established, products on both national and regional
scales.
From time to time, the Corporation has changed the prices and weights of its
products to accommodate changes in manufacturing costs, the competitive
environment and profit objectives, while at the same time maintaining consumer
value. The last standard candy bar price increase was implemented by the
Corporation in December 1995, resulting in a wholesale price increase of
approximately 11% on its standard and king-size candy bars sold in the United
States.
The most significant raw material used in the production of the
Corporation's chocolate products is cocoa beans. This commodity is imported
principally from West African, South American and Far Eastern equatorial
regions. West Africa accounts for approximately 60% of the world's crop. Cocoa
beans are not uniform, and the various grades and varieties reflect the diverse
agricultural practices and natural conditions found in the many growing areas.
The Corporation buys a mix of cocoa beans to meet its manufacturing
requirements.
2
<PAGE>
The table below sets forth annual average cocoa prices as well as the
highest and lowest monthly averages for each of the calendar years indicated.
The prices are the monthly average of the quotations at noon of the three active
futures trading contracts closest to maturity on the New York Coffee, Sugar and
Cocoa Exchange. Because of the Corporation's forward purchasing practices
discussed below, and premium prices paid for certain varieties of cocoa beans,
these average futures contract prices are not necessarily indicative of the
Corporation's average cost of cocoa beans or cocoa products.
<TABLE>
<CAPTION>
Cocoa Futures Contract Prices
(cents per pound)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Annual Average......... 47.6 47.3 59.1 61.2 62.1
High................... 56.2 56.7 66.1 64.1 64.4
Low.................... 41.3 41.8 51.3 58.3 57.4
</TABLE>
Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics
The Federal Agricultural and Improvement Reform Act of 1996, which is a
seven-year farm bill, was signed into law in April 1996. This legislation
impacts the prices of sugar, peanuts, and milk because it sets price support
levels for these commodities.
The price of sugar, the Corporation's second most important commodity for
its domestic chocolate and confectionery products, is subject to price supports
under the above referenced farm legislation. Due to import quotas and duties
imposed to support the price of sugar established by that legislation, sugar
prices paid by United States users are currently substantially higher than
prices on the world sugar market. The average wholesale list price of refined
sugar, F.O.B. Northeast, has remained relatively stable in a range of $.28
to $.35 per pound for the past ten years.
Peanut prices were firm throughout the first three quarters of 1996,
averaging about 10 - 20% higher than 1995. During the fourth quarter of 1996,
prices returned to the 1995 levels as a result of the harvest of an above
average new crop.
Dairy prices reached historically high levels in 1996 as the high price of
dairy feeds negatively impacted milk production. While dairy product prices fell
to 1995 levels during the fourth quarter as a result of inventory buildup and
consumer price resistance, fluid milk prices did not fall to lower levels until
the first quarter of 1997 as such pricing formulas lag the prices of other dairy
products.
Almond prices remained at unprecedented high levels for the first three
quarters of 1996. A slight decline in prices resulted during the fourth quarter
as the new crop was harvested, but prices remained at historically high levels.
Pasta is made from semolina milled from durum wheat, a class of hard wheat
grown in the United States and Canada. 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.
The Corporation attempts to minimize the effect of price fluctuations
related to the purchase of its major raw materials primarily through the forward
purchasing of such commodities to cover future manufacturing requirements
generally for periods ranging 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 Corporation's ability
to benefit from possible price decreases.
The primary effect on liquidity from using futures contracts is associated
with margin requirements related to cocoa and sugar futures. Cash outflows and
inflows result from original margins which are "good faith deposits" established
by the New York Coffee, Sugar and Cocoa Exchange to ensure that market
participants will meet their contractual financial obligations. Additionally,
variation margin payments and receipts are required when the value of open
positions is adjusted to reflect daily price movements. The magnitude of such
cash inflows and outflows is dependent upon price coverage levels and the
volatility of the market. Historically, cash flows related to margin
requirements have not been material to the Corporation's total working capital
requirements.
3
<PAGE>
The Corporation manages the purchase of forward and futures contracts by
developing and monitoring procurement strategies for each of its major
commodities. These procurement strategies, including the use of futures
contracts to hedge the pricing of cocoa, sugar and corn sweeteners, are directly
linked to the overall planning and management of the Corporation's business,
since the cost of raw materials accounts for a significant portion of the cost
of finished goods. Procurement strategies with regard to cocoa, sugar and other
major raw material requirements are developed by the analysis of fundamentals,
including weather and crop analysis, and by discussions with market analysts,
brokers and dealers. Procurement strategies are determined, implemented and
monitored on a regular basis by senior management. Procurement activities for
all major commodities are also reported to the Board of Directors on a regular
basis.
The Corporation has license agreements with several companies to manufacture
and/or sell products worldwide. Among the more significant are agreements with
affiliated companies of Cadbury Schweppes p.l.c. to manufacture and/or market
and distribute PETER PAUL ALMOND JOY and PETER PAUL MOUNDS confectionery
products worldwide as well as YORK, CADBURY and CARAMELLO confectionery products
in the United States. The Corporation's rights under these agreements are
extendable on a long-term basis at the Corporation's option. The license for
CADBURY and CARAMELLO products is subject to a minimum sales requirement which
the Corporation exceeded in 1996. The Corporation also has an agreement with
Societe des Produits Nestle SA, which licenses the Corporation to manufacture
and distribute KIT KAT and ROLO confectionery products in the United States. The
Corporation's rights under this agreement are extendable on a long-term basis at
the Corporation's option, subject to certain conditions, including minimum unit
volume sales. In 1996, the minimum volume requirements were exceeded. The
Corporation has also entered into an agreement with Huhtamaki pursuant to which
it licenses the use of certain trademarks, including the GOOD & PLENTY, HEATH,
JOLLY RANCHER, MILK DUDS, PAYDAY and WHOPPERS brands in the North, Central and
South American regions. The Corporation's rights under this agreement are
extendable on a long-term basis at the Corporation's option.
Competition
Many of the Corporation's brands enjoy wide consumer acceptance and are
among the leading brands sold in the marketplace. However, these brands are sold
in highly competitive markets and compete with many other multinational,
national, regional and local firms, some of which have resources in excess of
those available to the Corporation.
Trademarks
The Corporation owns various registered and unregistered trademarks and
service marks, and has rights under licenses to use various trademarks which are
of material importance to the Corporation's business.
Backlog of Orders
The Corporation manufactures primarily for stock and fills customer orders
from finished goods inventories. While at any given time there may be some
backlog of orders, such backlog is not material in respect to total sales, nor
are the changes from time to time significant.
Research and Development
The Corporation engages in a variety of research activities. These
principally involve development of new products, improvement in the quality of
existing products, improvement and modernization of production processes, and
the development and implementation of new technologies to enhance the quality
and value of both current and proposed product lines.
Regulation
The Corporation's domestic plants are subject to inspection by the Food and
Drug Administration and various other governmental agencies, and its products
must comply with regulations under the Federal Food, Drug and Cosmetic Act and
with various comparable state statutes regulating the manufacturing and
marketing of food products.
Environmental Considerations
In the past the Corporation has made investments based on compliance with
environmental laws and regulations. Such expenditures have not been material
with respect to the Corporation's capital expenditures, earnings or competitive
position.
4
<PAGE>
Employees
As of December 31, 1996, the Corporation had approximately 14,000 full-time
and 1,300 part-time employees, of whom approximately 6,000 were covered by
collective bargaining agreements. The Corporation considers its employee
relations to be good.
Financial Information by Geographic Area
Information concerning the Corporation's geographic segments is contained in
Footnote 16 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix B to the Proxy
Statement for its 1997 Annual Meeting of Stockholders (the "Proxy Statement"),
which information is incorporated herein by reference and filed as Exhibit 13
hereto.
Item 2. PROPERTIES
The following is a list of the Corporation's principal manufacturing
properties. The Corporation owns each of these properties.
UNITED STATES
Hershey, Pennsylvania - confectionery and grocery products (3
principal plants)
Lancaster, Pennsylvania - confectionery products
Oakdale, California - confectionery and grocery products
Robinson, Illinois - confectionery products
Stuarts Draft, Virginia - confectionery products
Winchester, Virginia - pasta products
CANADA
Smiths Falls, Ontario - confectionery products
In addition to the locations indicated above, the Corporation owns or
leases several other properties used for manufacturing chocolate and
non-chocolate confectionery, grocery and pasta products and for sales,
distribution and administrative functions.
The Corporation's plants are efficient and well maintained. These plants
generally have adequate capacity and can accommodate seasonal demands, changing
product mixes and certain additional growth. The largest plants are located in
Hershey, Pennsylvania. Many additions and improvements have been made to these
facilities over the years and the plants' manufacturing equipment includes
equipment of the latest type and technology.
Item 3. LEGAL PROCEEDINGS
The Corporation has no material pending legal proceedings, other than
ordinary routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
5
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the principal United States trading market for,
market prices of and dividends on the Corporation's Common Stock and Class B
Common Stock, and the approximate number of stockholders, may be found in the
section "Market Prices and Dividends" on pages B-7 and B-8 of the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix B to the Proxy Statement which is deemed to be part of the
Annual Report to Stockholders and which information is incorporated herein by
reference and filed as Exhibit 13 hereto.
Item 6. SELECTED FINANCIAL DATA
The following information, for the five years ended December 31, 1996,
found in the section "Eleven-Year Consolidated Financial Summary" on pages B-30
through B-32 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix B to the Proxy
Statement, is incorporated herein by reference and filed as Exhibit 13 hereto:
Net Sales; Income from Continuing Operations Before Accounting Changes; Income
Per Share from Continuing Operations Before Accounting Changes (excluding Notes
h, i, j and k); Dividends Paid on Common Stock (and related Per Share amounts);
Dividends Paid on Class B Common Stock (and related Per Share amounts); Long-
term Portion of Debt; and Total Assets.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section "Management's Discussion and Analysis," found on pages B-1
through B-8 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix B to the Proxy
Statement, is incorporated herein by reference and filed as Exhibit 13 hereto.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements of the Corporation
and its subsidiaries are found at the indicated pages in the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix B to the Proxy Statement, and such financial statements,
along with the report of the independent public accountants thereon, are
incorporated herein by reference and filed as Exhibit 13 hereto.
1. Consolidated Statements of Income for the years ended December
31, 1996, 1995 and 1994. (Page B-9)
2. Consolidated Balance Sheets as of December 31, 1996 and 1995.
(Page B-10)
3. Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. (Page B-11)
4. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994. (Page B-12)
5. Notes to Consolidated Financial Statements (Pages B-13 through
B-27), including "Quarterly Data (Unaudited)." (Page B-27)
6. Report of Independent Public Accountants. (Page B-29)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
6
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions held with the Corporation, periods of service as
a director, principal occupations, business experience and other directorships
of nominees for director of the Corporation are set forth in the section
"Election of Directors" in the Proxy Statement. This information is incorporated
herein by reference.
Executive Officers of the Corporation as of March 3, 1997
<TABLE>
<CAPTION>
Name Age Positions Held During the Last Five Years
---- --- -----------------------------------------
<S> <C> <C>
K. L. Wolfe..................... 58 Chairman of the Board and Chief Executive Officer (1993); President and Chief
Operating Officer (1985)
J. P. Viviano................... 58 President and Chief Operating Officer (1993); President, Hershey Chocolate
U.S.A., now Hershey Chocolate North America, a division of Hershey Foods
Corporation (1985)
W. F. Christ ................... 56 Senior Vice President and Chief Financial Officer (1994); President, Hershey
International, a division of Hershey Foods Corporation (1988)
R. Brace ...................... 53 Vice President, Operations (1997); Vice President, Manufacturing, Hershey
Chocolate North America (1995); Vice President, Manufacturing, Hershey
Chocolate U.S.A. (1987)
J. F. Carr .................... 52 President, Hershey Pasta and Grocery Group, a division of Hershey Foods
Corporation (1997); President, Hershey International (1994); Vice President,
Marketing, Hershey Chocolate U.S.A. (1984)
M. F. Pasquale.................. 49 President, Hershey Chocolate North America (1995); President, Hershey
Chocolate U.S.A. (1994); Senior Vice President and Chief Financial Officer
(1988)
R. M. Reese .................... 47 Vice President, General Counsel and Secretary (1995); Vice President and
General Counsel (1992)
C. M. Skinner................... 63 Vice Chair, Hershey Pasta and Grocery Group (1997); President, Hershey Pasta
and Grocery Group (1996); President, Hershey Pasta Group (1984)
D. W. Tacka..................... 43 Corporate Controller and Chief Accounting Officer (1995); Vice President,
Finance and Administration, Hershey Pasta Group (1989)
- ------------------
</TABLE>
There are no family relationships among any of the above-named officers of
the Corporation.
Corporate Officers and Division Presidents are generally elected each year
at the organization meeting of the Board of Directors following the Annual
Meeting of Stockholders in April.
Reporting of inadvertent late filings of a Securities and Exchange
Commission Form 4 under Section 16 of the Securities Exchange Act of 1934, as
amended, is set forth in the section of the Proxy Statement "Section 16(a)
Beneficial Ownership Reporting Compliance."
7
<PAGE>
Item 11. EXECUTIVE COMPENSATION
Information concerning compensation of the five most highly-compensated
executive officers, including the Chairman of the Board and Chief Executive
Officer, of the Corporation individually, and compensation of directors, is set
forth in the sections "1996 Executive Compensation" and "Compensation of
Directors" in the Proxy Statement. This information is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of the Corporation's voting securities by
certain beneficial owners, individual nominees for directors, and by management,
including the five most highly-compensated executive officers, is set forth in
the section "Voting Securities" in the Proxy Statement. This information is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning "Certain Relationships and Related Transactions" is
set forth in the section "Certain Transactions and Relationships" in the Proxy
Statement. This information is incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14(a)(1): Financial Statements
The audited consolidated financial statements of the Corporation and its
subsidiaries and the Report of Independent Public Accountants thereon, as
required to be filed with this report, are set forth in Item 8 of this report
and are incorporated therein by reference to specific pages of the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix B to the Proxy Statement and filed as Exhibit 13 hereto.
Item 14(a)(2): Financial Statement Schedule
The following consolidated financial statement schedule of the Corporation
and its subsidiaries for the years ended December 31, 1996, 1995 and 1994 is
filed herewith on the indicated page in response to Item 14(d):
Schedule II -- Valuation and Qualifying Accounts (Page 14)
Other schedules have been omitted as not applicable or required, or because
information required is shown in the consolidated financial statements or notes
thereto.
Financial statements of the parent corporation only are omitted because the
Corporation is primarily an operating corporation and there are no significant
restricted net assets of consolidated and unconsolidated subsidiaries.
Item 14(a)(3): Exhibits
The following items are attached or incorporated by reference in response to
Item 14(c):
(3) Articles of Incorporation and By-laws
The Corporation's Restated Certificate of Incorporation, as amended, is
incorporated by reference from Exhibit 3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended April 3, 1988. The By-laws, as
amended on October 3, 1995, are incorporated by reference from Exhibit 3
to the Corporation's Report on Form 10-Q for the quarter ended October
1, 1995.
8
<PAGE>
(4) Instruments defining the rights of security holders, including
indentures
The Corporation has issued certain long-term debt instruments, no one
class of which creates indebtedness exceeding 10% of the total assets of
the Corporation and its subsidiaries on a consolidated basis. These
classes consist of the following:
a. 8.85% to 9.92% Medium-Term Notes due 1997-1998
b. 6.7% Notes due 2005
c. 6.95% Notes due 2007
d. 8.8% Debentures due 2021
e. Other Obligations
The Corporation will furnish copies of the above debt instruments to
the Commission upon request.
(10) Material contracts
a. Kit Kat and Rolo License Agreement (the "License Agreement")
between Hershey Foods Corporation and Rowntree Mackintosh
Confectionery Limited is incorporated by reference from Exhibit
10(a) to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1980. The License Agreement was
amended in 1988 and the Amendment Agreement is incorporated by
reference from Exhibit 19 to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended July 3, 1988. The License
Agreement was assigned by Rowntree Mackintosh Confectionery
Limited to Societe des Produits Nestle SA as of January 1, 1990.
The Assignment Agreement is incorporated by reference from
Exhibit 19 to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.
b. Peter Paul/York Domestic Trademark & Technology License
Agreement between Hershey Foods Corporation and Cadbury
Schweppes Inc. (now CBI Holdings, Inc.) dated August 25, 1988,
is incorporated by reference from Exhibit 2(a) to the
Corporation's Current Report on Form 8-K dated September 8,
1988. This agreement was assigned by the Corporation to its
wholly owned subsidiary, Homestead, Inc., effective January 1,
1997.
c. Cadbury Trademark & Technology License Agreement among Hershey
Foods Corporation and Cadbury Schweppes Inc. (now CBI Holdings,
Inc.) and Cadbury Limited dated August 25, 1988, is incorporated
by reference from Exhibit 2(a) to the Corporation's Current
Report on Form 8-K dated September 8, 1988.
d. 364-Day Credit Agreement among Hershey Foods Corporation, the
banks, financial institutions and other institutional lenders
listed on the signature pages thereof, and Citibank, N.A. as
administrative agent bank and Citicorp Securities, Inc. and BA
Securities, Inc. as co-syndication agents, is incorporated by
reference from Exhibit 10.1 to the Corporation's Current Report
on Form 8-K dated January 29, 1996. The 364-Day Credit Agreement
was amended and renewed in late 1996 and the Amendment Agreement
is attached hereto as Exhibit 10.1.
e. Five-Year Credit Agreement among Hershey Foods Corporation, the
banks, financial institutions and other institutional lenders
listed on the signature pages thereof, and Citibank, N.A. as
administrative agent bank and Citicorp Securities, Inc. and BA
Securities, Inc. as co-syndication agents, is incorporated by
reference from Exhibit 10.2 to the Corporation's Current Report
on Form 8-K dated January 29, 1996. The Five-Year Credit
Agreement was amended and renewed in late 1996 and the Amendment
Agreement is attached hereto as Exhibit 10.2.
f. Trademark and Technology License Agreement between Huhtamaki and
Hershey Foods Corporation dated December 30, 1996, is
incorporated by reference from Exhibit 10 to the Corporation's
Current Report on Form 8-K dated February 26, 1997. This
agreement was assigned by the Corporation to its wholly owned
subsidiary, Homestead, Inc., effective January 1, 1997.
9
<PAGE>
Executive Compensation Plans
g. The 1987 Key Employee Incentive Plan, as amended, is
incorporated by reference from Exhibit 19(i) to the
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
h. Hershey Foods Corporation's Restated Supplemental Executive
Retirement Plan is incorporated by reference from Exhibit 19(ii)
to the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
i. Hershey Foods Corporation's Non-Management Director Retirement
Plan is incorporated by reference from Exhibit 19 to the
Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1992.
j. Hershey Foods Corporation's Deferral Plan for Non-Management
Directors is incorporated by reference from Exhibit 10 to the
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.
k. A form of the Benefit Protection Agreements entered into between
the Corporation and certain of its executive officers is
incorporated by reference from Exhibit 10 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994.
l. Hershey Foods Corporation's Deferred Compensation Plan, as
revised, is attached hereto as Exhibit 10.3.
m. Hershey Foods Directors' Compensation Plan which is attached
hereto as Exhibit 10.4.
(12) Computation of ratio of earnings to fixed charges statement
A computation of ratio of earnings to fixed charges for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 is filed as Exhibit 12
hereto.
(13) Annual report to security holders
The Corporation's Consolidated Financial Statements and Management's
Discussion and Analysis is included in Appendix B to the Proxy
Statement and is filed as Exhibit 13 hereto.
(21) Subsidiaries of the Registrant
A list setting forth subsidiaries of the Corporation is filed as
Exhibit 21 hereto.
(23) Consent of Independent Public Accountants
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HERSHEY FOODS CORPORATION
(Registrant)
Date: March 17, 1997 By W. F. CHRIST
------------------------------------
(W. F. Christ, Senior Vice President
and Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
K. L. WOLFE Chief Executive Officer and Director March 17, 1997
(K. L. Wolfe)
W. F. CHRIST Chief Financial Officer March 17, 1997
(W. F. Christ)
D. W. TACKA Chief Accounting Officer March 17, 1997
(D.W. Tacka)
J. P. VIVIANO Director March 17, 1997
(J. P. Viviano)
W. H. ALEXANDER Director March 17, 1997
(W. H. Alexander)
R. H. CAMPBELL Director March 17, 1997
(R. H. Campbell)
C. M. EVARTS Director March 17, 1997
(C. M. Evarts)
T. C. GRAHAM Director March 17, 1997
(T. C. Graham)
B. GUITON HILL Director March 17, 1997
(B. Guiton Hill)
11
<PAGE>
Signature Title Date
--------- ----- ----
J. C. JAMISON Director March 17, 1997
(J. C. Jamison)
M. J. MCDONALD Director March 17, 1997
(M. J. McDonald)
J. M. PIETRUSKI Director March 17, 1997
(J. M. Pietruski)
V. A. SARNI Director March 17, 1997
(V. A. Sarni)
</TABLE>
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hershey Foods Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Hershey Foods Corporation's Proxy
Statement for its 1997 Annual Meeting of Stockholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated January 27, 1997.
Our audit was made for the purpose of forming an opinion on those financial
statements taken as a whole. The schedule listed on page 8 in Item 14(a)(2)is
the responsibility of the Corporation's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 27, 1997
13
<PAGE>
<TABLE>
<CAPTION>
Schedule II
HERSHEY FOODS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands of dollars)
Additions
-------------------------
Balance at Charged to Charged Deductions Balance
Beginning Costs and to Other from at End
Description of Period Expenses Accounts (a) Reserves of Period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade ................ $ 14,801 $ 1,238 $ 298 $ (2,278) $14,059
========= ========= ========= ======== =======
Year Ended December 31, 1995:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade................. $ 13,972 $ 1,318 $ (432) $(57) $14,801
========= ========= ========= ==== =======
Year Ended December 31, 1994:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade................. $ 12,479 $ 3,144 $ (1,016) $(635) $13,972
========= ========= ========= ===== =======
</TABLE>
- -----------------------------------
(a) Includes recoveries of amounts previously written off.
14
<PAGE>
HERSHEY FOODS CORPORATION ANNUAL REPORT ON FORM 10-K
Index to Exhibits
Exhibit No.
- -----------
10.1 - Amended and Restated 364-Day Credit Agreement
10.2 - Amended and Restated Five-Year Credit Agreement
10.3 - Hershey Foods Corporation Deferred Compensation Plan
10.4 - Hershey Foods Corporation Directors' Compensation Plan
12 - Computation of ratio of earnings to fixed charges statement
13 - Consolidated Financial Statements and Management's Discussion and
Analysis for the year ended December 31, 1996
21 - Subsidiaries of Registrant
23 - Consent of Independent Public Accountants
EXHIBIT 10.1
AMENDED AND RESTATED
364-DAY CREDIT AGREEMENT
Dated as of December 13, 1996
THIS AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT (this
"Amendment and Restatement") among HERSHEY FOODS CORPORATION, a Delaware
corporation (the "Company"), the banks, financial institutions and other
institutional lenders parties to the Credit Agreement referred to below
(collectively, the "Lenders"), CITIBANK, N.A. ("Citibank"), as administrative
agent (the "Agent") for the Lenders, and BA SECURITIES, INC. and CITICORP
SECURITIES, INC., as co-syndication agents (the "Co-Syndication Agents"),
evidences the agreement of the parties as follows:
PRELIMINARY STATEMENTS:
(1) The Company, the Lenders, the Agent and the Co-Syndication
Agents have entered into a 364-Day Credit Agreement dated as of December 15,
1995 (the "Credit Agreement"). Capitalized terms not otherwise defined in this
Amendment and Restatement have the same meanings as specified in the Credit
Agreement.
(2) The Company and the Lenders have agreed to amend the Credit
Agreement as hereinafter set forth and to restate the Credit Agreement in its
entirety to read as set forth in the Credit Agreement with the amendments
specified below.
(3) The Lenders are, on the terms and conditions stated below,
willing to grant the request of the Company and the Company and the Lenders have
agreed to amend and restate the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2, hereby amended as follows:
(a) The definition of the term "Termination Date"
appearing in Section 1.01 is amended in full to read
as follows:
"'Termination Date' means the earlier of (a) December
12, 1997 or, if the Termination Date is extended pursuant to
Section 2.18(a), the date to which the Termination Date is
extended pursuant to Section 2.18(a), and (b) the date of
termination in whole of the Commitments pursuant to Section
2.05 (a), 2.05 (b) or 6.01."
<PAGE>
(b) Section 2.04 is amended by deleting the percentage ".05 %
" in the ninth line therein and substituting for such
percentage the percentage ".035 % ".
(c) Section 2.07(a)(ii) is amended by deleting the percentage
".15 % " in the fifth line therein and substituting for such
percentage the percentage ".14 % ".
(d) Section 4.01 (e) is amended by deleting the reference to "
December 31, 1994" in each place in which it appears and
substituting "December 31, 1995" therefor, and deleting the
reference to "October 1, 1995" in each place in which it
appears and substituting "September 29, 1996" therefor.
SECTION 2. Conditions of Effectiveness. This Amendment and
Restatement shall become effective as of the date first above written when, and
only when, the Agent shall have received counterparts of this Amendment and
Restatement executed by the Company and all of the Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Amendment and Restatement and when the Agent shall have additionally received
all of the following documents, each such document (unless otherwise specified)
dated the date of receipt thereof by the Agent (unless otherwise specified) and
in sufficient copies for each Lender, in form and substance satisfactory to the
Agent (unless otherwise specified):
(a) Certified copies of (i) the resolutions of the Board
of Directors of the Company approving this Amendment and
Restatement and (ii) all documents evidencing other necessary
corporate action and governmental approvals, if any, with
respect to this Amendment and Restatement.
(b) A certificate of the Secretary or an Assistant
Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to sign
this Amendment and Restatement and the other documents to be
delivered hereunder.
(c) A favorable opinion of Robert M. Reese, Vice
President and General Counsel of the Company, in substantially
the form of Exhibit A hereto and as to such other matters as
any Lender through the Agent may reasonably request.
(d) A favorable opinion of Shearman & Sterling, counsel
for the Agent, in form and substance satisfactory to the
Agent.
(e) A certificate signed by a duly authorized officer of
the Company stating that:
<PAGE>
(i) The representations and warranties contained in Section
4.01 of the Credit Agreement (except the representations set forth in
the last sentence of subsection (e) thereof and in subsection (f)
thereof (other than clause (i)(B) thereof) and in Section 3 hereof are
correct on and as of the date of such certificate as though made on and
as of such date; and
(ii) No event has occurred and is continuing that
constitutes a Default.
SECTION 3. Representations and Warranties of the Company. The
Company represents and warrants as follows:
(a) The execution, delivery and performance by the Company of
this Amendment and Restatement are within the Company's corporate powers, have
been duly authorized by all necessary corporate action and do not contravene (i)
the Company's charter or by-laws or (ii) any law or any contractual restriction
binding on or affecting the Company, except where such contravention would not
be reasonably likely to have a Material Adverse Effect.
(b) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body or any
other third party is required for the due execution, delivery or performance by
the Company of this Amendment and Restatement, except where the Company's
failure to receive, take or make such authorization, approval, action, notice or
filing would not have a Material Adverse Effect.
(c) This Amendment and Restatement has been duly executed and
delivered by the Company. This Amendment and Restatement is a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and general
principles of equity.
SECTION 4. Reference to and Effect on the Credit Agreement.
(a) On and after the effectiveness of this Amendment and Restatement, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, shall mean and be a
reference to the Credit Agreement, as amended and restated by this Amendment and
Restatement.
(b) The Credit Agreement, as specifically amended and
restated by this Amendment and Restatement, is and shall continue to be in full
force and effect and is hereby in all respects ratified and confirmed.
<PAGE>
(c) The execution, delivery and effectiveness of this
Amendment and Restatement shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of any Lender or the Agent
under the Credit Agreement, nor constitute a waiver of any provision of the
Credit Agreement.
SECTION 5. Costs, Expenses. The Company agrees to pay on demand
all costs and expenses of the Agent in connection with the preparation,
execution, delivery and administration, modification and amendment of this
Amendment and Restatement and the other instruments and documents to be
delivered hereunder (including, without limitation, the reasonable fees and
expenses of counsel for the Agent) in accordance with the terms of Section 9.04
of the Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment and
Restatement may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement. Delivery of an executed counterpart of a signature
page to this Amendment and Restatement by telecopier shall be effective as
delivery of a manually executed counterpart of this Amendment and Restatement.
SECTION 7. Governing Law. This Amendment and Restatement shall
be governed by, and construed in accordance with, the laws of the State of
New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
and Restatement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
HERSHEY FOODS CORPORATION
By _____________________________
Title:
CITIBANK, N.A.,
as Administrative Agent
By _____________________________
Title:
BA SECURITIES, INC.,
as Co-Syndication Agent
By ______________________________
Title:
CITICORP SECURITIES, INC.,
as Co-Syndication Agent
By _______________________________
Title:
<PAGE>
BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION
By _______________________________
Title:
CIBC INC.
By _______________________________
Title:
CITIBANK, N.A.
By _______________________________
Title:
CREDIT SUISSE
By _______________________________
Title:
By _______________________________
Title:
<PAGE>
DEUTSCHE BANK AG NEW YORK
BRANCH AND/OR CAYMAN
ISLANDS BRANCH
By _______________________________
Title:
By _______________________________
Title:
ISTITUTO BANCARIO SAN PAOLO
DI TORINO SPA
By _______________________________
Title:
By _______________________________
Title:
NATIONSBANK, N.A.
By _______________________________
Title:
PNC BANK,
NATIONAL ASSOCIATION
By _______________________________
Title:
<PAGE>
THE FIRST NATIONAL BANK
OF CHICAGO
By _______________________________
Title:
THE FUJI BANK, LIMITED,
NEW YORK BRANCH
By _______________________________
Title:
<PAGE>
EXHIBIT A - FORM OF
OPINION OF ROBERT M. REESE,
VICE PRESIDENT AND GENERAL COUNSEL
OF THE COMPANY
[ ], 1996
To each of the Lenders party
to the Amended and Restated
Credit Agreement referred
to below and to Citibank, N.A., as
Agent for such Lenders
Hershey Foods Corporation
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 2(c) of the
Amended and Restated 364-Day Credit Agreement, dated as of [ ], 1996 (the
"Amended and Restated Credit Agreement"), among Hershey Foods Corporation (the
"Company"), the Lenders party thereto, Citibank, N.A., as administrative agent
(the "Agent") for said Lenders, and BA Securities, Inc. and Citicorp Securities,
Inc., as co-syndication agents (the "Co-Syndication Agents"), which amends and
restates in its entirety the 364-Day Credit Agreement, dated as of December 15,
1995 among the Company, the Lenders party thereto, the Agent and the Co-
Syndication Agents. Terms defined in the Amended and Restated Credit Agreement
and used herein as therein defined.
I am the Vice President and General Counsel of the Company, and I have
acted as counsel for the Company in connection with the preparation, execution
and delivery of the Amended and Restated Credit Agreement.
In that connection, I have examined:
(1) the Amended and Restated Credit Agreement;
<PAGE>
(2) the documents furnished by the Company pursuant to
Section 2 of the Amended and Restated Credit Agreement;
(3) the Amended and Restated Certificate of Incorporation
of the Company and all amendments thereto (the "Charter"); and
(4) the by-laws of the Company and all amendments thereto
(the "By-laws").
I have also examined the originals, or copies certified to my
satisfaction, of such other corporate records of the Company, certificates of
public officials and of officers of the Company, and agreements, instruments and
other documents, as I have deemed necessary as a basis for the opinions
expressed below. In making such examinations, I have assumed the genuineness of
all signatures (other than those on behalf of the Company), the authenticity of
all documents submitted to me as originals and the conformity to authentic
original documents of all documents submitted to me as certified, conformed or
photographic copies. As to questions of fact material to such opinions, I have,
when relevant facts were not independently established by me, relied upon
certificates of the Company or its officers or of public officials and as to
questions of fact and law, on opinions or statements by other lawyers reporting
to me. I have assumed the due execution and delivery, pursuant to due
authorization, of the Amended and Restated Credit Agreement by the Lenders, the
Agent and the Co-Syndication Agents.
My opinions expressed below are limited to the law of the Commonwealth
of Pennsylvania, and, where applicable, the General Corporation Law of the State
of Delaware and the Federal law of the United States.
Based upon the foregoing and upon such investigation as I have deemed
necessary, I am of the following opinion:
1. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
2. The execution, delivery and performance by the Company of the
Amended and Restated Credit Agreement are within the Company's corporate powers,
have been duly authorized by all necessary corporate action, and do not
contravene (i) the Charter or the Bylaws or (ii) any law, rule or regulation
applicable to the Company (including, without limitation, Regulation X of the
Board of Governors of the Federal Reserve System) or (iii) any contractual or
legal restriction binding on or affecting the Company or, to the best of my
knowledge, contained in any other similar document, except where such
contravention would not be reasonably likely to have a Material Adverse Effect.
The Amended and Restated Credit Agreement has been duly executed and delivered
on behalf of the Company.
3. No authorization, approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body or any other
party is required for the due execution, delivery and performance by the
Company of the Amended and Restated Credit
<PAGE>
Agreement.
4. There are no pending or, to the best of my knowledge, threatened
actions, investigations, litigations or proceedings against the Company or any
of its Subsidiaries before any court, governmental agency or arbitrator that (a)
would be reasonably likely to have a Material Adverse Effect or (b) purport to
affect the legality, validity, binding effect or enforceability of the Amended
and Restated Credit Agreement.
This opinion letter may be relied upon by you only in connection with
the transaction being consummated pursuant to the Amended and Restated Credit
Agreement and may not be used or relied upon by any other person for any other
purpose.
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED
FIVE-YEAR CREDIT AGREEMENT
Dated as of December 13, 1996
THIS AMENDED AND RESTATED FIVE-YEAR CREDIT AGREEMENT (this
"Amendment and Restatement") among HERSHEY FOODS CORPORATION, a Delaware
corporation (the "Company"), the banks, financial institutions and other
institutional lenders parties to the Credit Agreement referred to below
(collectively, the "Lenders"), CITIBANK, N.A. ("Citibank"), as administrative
agent (the "Agent") for the Lenders, and BA SECURITIES, INC. and CITICORP
SECURITIES, INC., as co-syndication agents (the "Co-Syndication Agents"),
evidences the agreement of the parties as follows:
PRELIMINARY STATEMENTS:
(1) The Company, the Lenders, the Agent and the Co-Syndication
Agents have entered into a Five-Year Credit Agreement dated as of December 15,
1995 (the "Credit Agreement"). Capitalized terms not otherwise defined in this
Amendment and Restatement have the same meanings as specified in the Credit
Agreement.
(2) The Company and the Lenders have agreed to amend the Credit
Agreement as hereinafter set forth and to restate the Credit Agreement in its
entirety to read as set forth in the Credit Agreement with the amendments
specified below.
(3) The Lenders are, on the terms and conditions stated below,
willing to grant the request of the Company and the Company and the Lenders have
agreed to amend and restate the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2, hereby amended as follows:
(a) The definitions of the terms "Applicable Margin", "Applicable
Percentage", "Public Debt Rating" and "Termination Date" appearing in
Section 1.01 are amended in full to read as follows:
"'Applicable Margin' means, as of any date, a percentage per
annum determined by reference to the Public Debt Rating in
effect on such date as set forth below:
<PAGE>
============================================================================
Public Debt Rating Applicable
S&P/Moody's Margin
============================================================================
============================================================================
Level 1 .12%
Long-Term Senior
Unsecured Debt
Rated at Least
A- by S&P
or
A3 by Moody's
- ----------------------------------------------------------------------------
Level 2 .20%
Long-Term Senior
Unsecured Debt
Rated at Least
BBB- by S&P
and
Baa3 by Moody's
- ----------------------------------------------------------------------------
Level 3 .30%
Long-Term Senior
Unsecured Debt
Rated Lower than
Level 2
============================================================================
'Applicable Percentage' means, as of any date, a percentage
per annum determined by reference to the Public Debt Rating in effect
on such date as set forth below:
============================================================================
Public Debt Rating Applicable
S&P/Moody's Percentage
============================================================================
- ----------------------------------------------------------------------------
Level 1 .055%
Long-Term Senior
Unsecured Debt
Rated at Least
A- by S&P
or
A3 by Moody's
- ----------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------------------------------
Level 2 .10%
Long-Term Senior
Unsecured Debt
Rated at Least
BBB- by S&P
and
Baa3 by Moody's
- ----------------------------------------------------------------------------
Level 3 .20%
Long-Term Senior
Unsecured Debt
Rated Lower than
Level 2
============================================================================
'Public Debt Rating' means, as of any date, the
lowest rating that has been most recently and officially
announced by either S&P or Moody's, as the case may be, for
any class of non-credit enhanced long-term senior unsecured
debt issued by the Company. For purposes of the foregoing, (a)
if only one of S&P and Moody's shall have in effect a Public
Debt Rating, the Applicable Margin and the Applicable
Percentage shall be determined by reference to the available
rating; (b) if neither S&P nor Moody's shall have in effect a
Public Debt Rating, the Applicable Margin and the Applicable
Percentage will be set in accordance with Level 3 under the
definition of "Applicable Margin" or "Applicable Percentage",
as the case may be; (c) with respect to Level 1, the specified
Public Debt Rating must be met with respect to either S&P or
Moody's, and with respect to Level 2, the specified Public
Debt rating must be met with respect to both S&P and Moody's;
(d) if any rating established by S&P or Moody's shall be
changed, such change shall be effective as of the date on
which such change is first announced publicly by the rating
agency making such change (regardless of the effective date
thereof); and (e) if S&P or Moody's shall change the basis on
which ratings are established, each reference to the Public
Debt Rating announced by S&P or Moody's, as the case may be,
shall refer to the then equivalent rating by S&P or Moody's,
as the case may be.
'Termination Date' means the earlier of December
15, 2001 and the date of termination in whole of
the Commitments pursuant to Section 2.05(a), 2.05(b)
or 6.01.
<PAGE>
(b) Section 4.01 (e) is amended by deleting the reference
to "December 31, 1994" in each place in which it appears and
substituting "December 31, 1995" therefor, and deleting the
reference to "October 1, 1995" in each place in which it
appears and substituting "September 29, 1996" therefor.
SECTION 2. Conditions of Effectiveness. This Amendment and
Restatement shall become effective as of the date first above written when, and
only when, the Agent shall have received counterparts of this Amendment and
Restatement executed by the Company and all of the Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Amendment and Restatement and when the Agent shall have additionally received
all of the following documents, each such document (unless otherwise specified)
dated the date of receipt thereof by the Agent (unless otherwise specified) and
in sufficient copies for each Lender, in form and substance satisfactory to the
Agent (unless otherwise specified):
(a) Certified copies of (i) the resolutions of the Board
of Directors of the Company approving this Amendment and
Restatement and (ii) all documents evidencing other necessary
corporate action and governmental approvals, if any, with
respect to this Amendment and Restatement.
(b) A certificate of the Secretary or an Assistant
Secretary of the Company certifying the names and true
signatures of the officers of the Company authorized to sign
this Amendment and Restatement and the other documents to be
delivered hereunder.
(c) A favorable opinion of Robert M. Reese, Vice
President and General Counsel of the Company, in substantially
the form of Exhibit A hereto and as to such other matters as
any Lender through the Agent may reasonably request.
(d) A favorable opinion of Shearman & Sterling, counsel
for the Agent, in form and substance satisfactory to the
Agent.
(e) A certificate signed by a duly authorized officer of
the Company stating that:
(i) The representations and warranties contained in
Section 4.01 of the Credit Agreement (except the
representations set forth in the last sentence of subsection
(e) thereof and in subsection (f) thereof (other than clause
(i)(B) thereof) and in Section 3 hereof are correct on and as
of the date of such certificate as though made on and as of
such date; and
(ii) No event has occurred and is continuing that
constitutes a Default.
<PAGE>
SECTION 3. Representations and Warranties of the Company. The Company
represents and warrants as follows:
(a) The execution, delivery and performance by the
Company of this Amendment and Restatement are within the
Company's corporate powers, have been duly authorized by all
necessary corporate action and do not contravene (i) the
Company's charter or by-laws or (ii) any law or any
contractual restriction binding on or affecting the Company,
except where such contravention would not be reasonably likely
to have a Material Adverse Effect.
(b) No authorization or approval or other action by, and
no notice to or filing with, any governmental authority or
regulatory body or any other third party is required for the
due execution, delivery or performance by the Company of this
Amendment and Restatement, except where the Company's failure
to receive, take or make such authorization, approval, action,
notice or filing would not have a Material Adverse Effect.
(c) This Amendment and Restatement has been duly executed
and delivered by the Company. This Amendment and Restatement
is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights
generally and general principles of equity.
SECTION 4. Reference to and Effect on the Credit Agreement. (a)
On and after the effectiveness of this Amendment and Restatement, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of
like import referring to the Credit Agreement, shall mean and be a reference to
the Credit Agreement, as amended and restated by this Amendment and Restatement.
(b) The Credit Agreement, as specifically amended and restated by
this Amendment and Restatement, is and shall continue to be in full force and
effect and is hereby in all respects ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
and Restatement shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of any Lender or the Agent under the Credit
Agreement, nor constitute a waiver of any provision of the Credit Agreement.
SECTION 5. Costs, Expenses. The Company agrees to pay on demand
all costs and expenses of the Agent in connection with the preparation,
execution, delivery and administration, modification and amendment of this
Amendment and Restatement and the other instruments and documents to be
delivered hereunder (including, without limitation, the reasonable fees and
expenses of counsel for the Agent) in accordance with the terms of Section
<PAGE>
9.04 of the Credit Agreement.
SECTION 6. Execution in Counterparts. This Amendment and
Restatement may be executed in any number of counterparts and by different
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement. Delivery of an executed counterpart of a signature
page to this Amendment and Restatement by telecopier shall be effective as
delivery of a manually executed counterpart of this Amendment and Restatement.
SECTION 7. Governing Law. This Amendment and Restatement shall
be governed by, and construed in accordance with, the laws of the State of
New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
and Restatement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
HERSHEY FOODS CORPORATION
By _____________________________
Title:
CITIBANK, N.A.,
as Administrative Agent
By ____________________________
Title:
<PAGE>
BA SECURITIES, INC.,
as Co-Syndication Agent
By ____________________________
Title:
CITICORP SECURITIES, INC.,
as Co-Syndication Agent
By ____________________________
Title:
BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION
By _____________________________
Title:
CIBC INC.
By _____________________________
Title:
CITIBANK, N.A.
By _____________________________
Title:
<PAGE>
CREDIT SUISSE
By ______________________________
Title:
By ______________________________
Title:
DEUTSCHE BANK AG NEW YORK
BRANCH AND/OR CAYMAN ISLANDS
BRANCH
By ______________________________
Title:
By ______________________________
Title:
ISTITUTO BANCARIO SAN PAOLO DI
TORINO SPA
By ______________________________
Title:
By ______________________________
Title:
NATIONSBANK, N.A.
By ______________________________
Title:
<PAGE>
PNC BANK,
NATIONAL ASSOCIATION
By _____________________________
Title:
THE FIRST NATIONAL BANK
OF CHICAGO
By _____________________________
Title:
THE FUJI BANK, LIMITED,
NEW YORK BRANCH
By _____________________________
Title:
<PAGE>
EXHIBIT A - FORM OF
OPINION OF ROBERT M. REESE,
VICE PRESIDENT AND GENERAL COUNSEL
OF THE COMPANY
[ ],1996
To each of the Lenders party
to the Amended and Restated
Credit Agreement referred
to below and to Citibank, N.A., as
Agent for such Lenders
Hershey Foods Corporation
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 2(c) of the
Amended and Restated Five-Year Credit Agreement, dated as of [ ], 1996 (the
"Amended and Restated Credit Agreement"), among Hershey Foods Corporation (the
"Company"), the Lenders party thereto, Citibank, N.A., as administrative agent
(the "Agent") for said Lenders, and BA Securities, Inc. and Citicorp Securities,
Inc., as co-syndication agents (the "Co-Syndication Agents"), which amends and
restates in its entirety the Five-Year Credit Agreement, dated as of December
15, 1995 among the Company, the Lenders party thereto, the Agent and the
Co-Syndication Agents. Terms defined in the Amended and Restated Credit
Agreement are used herein as therein defined.
I am the Vice President and General Counsel of the Company, and I
have acted as counsel for the Company in connection with the preparation,
execution and delivery of the Amended and Restated Credit Agreement.
In that connection, I have examined:
(1) the Amended and Restated Credit Agreement;
(2) the documents furnished by the Company pursuant to Section
2 of the Amended and Restated Credit Agreement;
(3) the Amended and Restated Certificate of Incorporation of
the Company and all amendments thereto (the "Charter"); and
(4) The by-laws of the Company and all amendments thereto (the
"By-laws").
<PAGE>
I have also examined the originals, or copies certified to my
satisfaction, of such other corporate records of the Company, certificates of
public officials and of officers of the Company, and agreements, instruments and
other documents, as I have deemed necessary as a basis for the opinions
expressed below. In making such examinations, I have assumed the genuineness of
all signatures (other than those on behalf of the Company), the authenticity of
all documents submitted to me as originals and the conformity to authentic
original documents of all documents submitted to me as certified, conformed or
photographic copies. As to questions of fact material to such opinions, I have,
when relevant facts were not independently established by me, relied upon
certificates of the Company or its officers or of public officials and as to
questions of fact and law, on opinions or statements by other lawyers reporting
to me. I have assumed the due execution and delivery, pursuant to due
authorization, of the Amended and Restated Credit Agreement by the Lenders, the
Agent and the Co-Syndication Agents.
My opinions expressed below are limited to the law of the
Commonwealth of Pennsylvania, and, where applicable, the General Corporation Law
of the State of Delaware and the Federal law of the United States.
Based upon the foregoing and upon such investigation as I have
deemed necessary, I am of the following opinion:
1 The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
2. The execution, delivery and performance by the Company of
the Amended and Restated Credit Agreement are within the Company's
corporate powers, have been duly authorized by all necessary corporate
action, and do not contravene (i) the Charter or the Bylaws or (ii) any
law, rule or regulation applicable to the Company (including, without
limitation, Regulation X of the Board of Governors of the Federal
Reserve System) or (iii) any contractual or legal restriction binding
on or affecting the Company or, to the best of my knowledge, contained
in any other similar document, except where such contravention would
not be reasonably likely to have a Material Adverse Effect. The Amended
and Restated Credit Agreement has been duly executed and delivered on
behalf of the Company.
3. No authorization, approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body
or any other third party is required for the due execution, delivery
and performance by the Company of the Amended and Restated Credit
Agreement.
4. There (i) are no pending or, to the best of my knowledge,
threatened actions, investigations, litigations or proceedings against
the Company or any of its Subsidiaries before any court, governmental
agency or arbitrator that (a) would be reasonably likely to have a
Material Adverse Effect [(other than the Disclosed Litigation)] or (b)
purport to affect the legality, validity, binding effect or
enforceability of the Amended and Restated Credit Agreement.
This opinion letter may be relied upon by you only in
connection with the transaction being consummated pursuant to the Amended and
Restated Credit Agreement and may not be used or relied upon by any other person
for any other purpose.
<PAGE>
EXHIBIT 10.3
HERSHEY FOODS CORPORATION
DEFERRED COMPENSATION PLAN
This Deferred Compensation Plan (the "Plan") allows
participants in the Annual Incentive Program (the "AIP") of Hershey Foods
Corporation's Key Employee Incentive Plan to defer receipt of all or part of
their awards under the AIP. Participants in the Long Term Incentive Program
("LTIP") of the Key Employee Incentive Plan may also defer under this plan the
cash equivalent of their PSU awards provided certain minimum stockholding
requirements have been satisfied. The Plan is intended to benefit those key
executives of Hershey Foods Corporation (and subsidiaries as specified in the
AIP and LTIP) who participate in the AIP or LTIP, to secure their goodwill,
loyalty and achievement, and to help attract and retain high quality executives.
AIP awards for 1995 and beyond may be deferred under this
Plan. Also, Participants who have previously deferred AIP awards under the
deferral arrangement in effect for awards prior to 1995 may elect to credit
their deferral accounts under the prior deferral arrangement to their Accounts
under this Plan as hereinafter described.
PSU awards under LTIP may also be deferred under the Plan, but
only if the Participant has satisfied the employee minimum stockholding
requirements established by the Compensation and Executive Organization
Committee of the Board of Directors. Dividends previously earned, as well as
future dividends earned on deferred PSU awards are eligible for deferral under
the Plan.
ARTICLE I
DEFINITIONS
The following definitions apply to this Plan:
1.1 ACCOUNT. "Account" means the Account maintained by the Company
pursuant to Article II with respect to each Participant.
1.2 AIP. "AIP" means the Annual Incentive Program of Hershey Foods
Corporation's Key Employee Incentive Plan.
1.3 BOARD. "Board" or "Board of Directors" means the Board of Directors
of Hershey Foods Corporation.
1.4 COMMITTEE OR COMPENSATION COMMITTEE. "Committee" or "Compensation
Committee" means the Compensation and Executive Organization Committee of the
Board.
1.5 COMPANY. "Company" means Hershey Foods Corporation, a Delaware
corporation.
1.6 DEFERRAL ELECTION. "Deferral Election" means a Participant's
election to defer all or part of the Participant's AIP or PSU award as described
in Article II.
1.7 DETERMINATION DATE. "Determination Date" means the last day of each
calendar quarter.
<PAGE>
1.8 DISABILITY. "Disability" means a condition or circumstance
entitling a Participant to be classified as "disabled" pursuant to the Company's
Long Term Disability Plan.
1.9 INVESTMENT OPTIONS. "Investment Options" means the following
investment options which are to be used as earnings indices as described in
Section 2.3:
1. Hershey Fixed Income Fund
2. IDS Cash Management Fund
3. American Express Trust Equity Index Fund I
The Investment Options are chosen by the Plan Administrator and are subject to
change from time to time as the Plan Administrator, in its discretion, deems
necessary or appropriate. No provision of this Plan shall be construed as giving
any Participant an interest in any of these Investment Options nor shall any
provision require that the Company make any investment in any such funds.
1.10 LTIP. "LTIP" means the Long Term Incentive Program of Hershey Foods
Corporation's Key Employee Incentive Plan.
1.11 PARTICIPANT. "Participant" means an employee of the Company who is
eligible to participate in the AIP or LTIP and who elects to participate in this
Plan by filing a Deferral Election as provided in Article II.
1.12 PLAN. "Plan" means this Hershey Foods Corporation Deferred
Compensation Plan as set forth herein and as amended from time to time.
1.13 PLAN ADMINISTRATOR. "Plan Administrator" means the Director,
Executive Compensation and Employee Benefits, for Hershey Foods Corporation.
1.14 PLAN YEAR. "Plan Year" means the calendar year.
1.15 PSU. "PSU" means performance share units granted under the LTIP
portion of the KEIP.
1.16 RETIREMENT. "Retirement" means termination of employment with a
Company after becoming eligible for retirement under the Hershey Foods
Corporation Retirement Plan.
- 2 -
<PAGE>
ARTICLE II
DEFERRAL ELECTIONS: ACCOUNTS
2.1. ELECTION TO DEFER.
a. AIP AWARDS. A Participant may elect to defer receipt of all or
a portion of his or her anticipated bonus under the AIP. A Participant's
election must be made no later than November 1st of the year in which the
Participant renders the services which result in the bonus award. The election
must be made on a form supplied by the Plan Administrator. The election to defer
a bonus is irrevocable except as specifically provided otherwise in this Plan.
b. PSU AWARDS. A Participant may elect under this Plan to defer
receipt of all or a portion of the amount earned as a PSU award under LTIP. An
election to defer a PSU award under this Plan can only be made if the
Participant has satisfied the minimum stockholding requirements established by
the Board of Directors. A Participant's election must be made at least sixty
(60) days prior to the date the PSU award will be paid. The election must be
made on a form supplied by the Plan Administrator. The election to defer receipt
of a PSU award is irrevocable except as specifically provided otherwise in this
Plan.
2.2. ACCOUNTS.
a. ESTABLISHMENT OF ACCOUNTS. Any amounts deferred by a
Participant will not be funded or set aside for future payment by the Company.
Instead, an Account will be noted for the Participant on the Company's books.
A Participant's Account will be credited with amounts deferred and with
investment credits as provided in subparagraph c. below. A separate Account
will be established for each Deferral Election.
b. PARTICIPANTS AS UNSECURED CREDITORS. A Participant's
entitlement to receive the amount reflected by his or her Account will be based
solely on an unconditional promise to pay by the Company and is not assignable;
however, except as provided in Section 7.5 below, the Participant at all times
will be fully vested in the Account.
c. INVESTMENT CREDITS TO ACCOUNTS. Subject to such limitations as
may from time to time be required by law or imposed by the Plan Administrator,
and subject to such operating rules and procedures as may be imposed from time
to time by the Plan Administrator, each Participant may express to the Plan
Administrator a preference as to how the Participant's Account should be
constructively invested among the Investment Options. Such preference shall
designate the percentage of the Participant's Accounts which is requested to be
constructively invested in each Investment Option.
(1) Any initial or subsequent expression of
investment preference shall be in writing, on a form supplied by and filed with
the Plan Administrator, and shall be subject to such rules and procedures as the
Plan Administrator may promulgate from time to time. Participants may change
their investment preferences effective as of the beginning of each Plan Year.
- 3 -
<PAGE>
(2) All investment preferences shall be advisory only
and shall not bind the Company or the Plan Administrator. The Company shall not
be obligated to invest any funds in connection with this Plan. If, however, the
Company chooses to invest funds to provide for its liabilities under this Plan,
the Plan Administrator shall have complete discretion as to investments.
(3) Whether or not a Participant's investment
preferences are followed, the Participant's Account will be credited with
earnings or losses as follows. As of each Determination Date, the net earnings
or losses (as defined below) of each Investment Option since the preceding
Determination Date shall be allocated among all Accounts in accordance with the
preferences indicated by each Participant as though the Accounts had been
invested in the Investment Option in accordance with each Participant's
indicated preference.
(4) If the Plan Administrator receives an initial or
revised investment preference which it deems to be incomplete, unclear or
improper, the Participant's investment preference then in effect shall remain in
effect (or, in the case of a deficiency in an initial investment preference, the
Participant shall be deemed to have filed no investment preference) until the
beginning of the next Plan Year, unless the Plan Administrator provides for, and
permits the application of, corrective action prior thereto. If a Participant
fails to file an effective investment preference, the Participant's Account will
be constructively invested in the IDS Federal Income Fund.
(5) If the Plan Administrator determines that the
constructive value of an Account as of any date on which distributions are to be
made differs materially from the constructive value of the Account on the prior
Determination Date upon which the distribution is to be based, the Plan
Administrator, in its discretion, shall have the right to designate any date in
the interim as a Determination Date for the purpose of constructively revaluing
the Account so that the account from which the distribution is being made will,
prior to the distribution, reflect its share of such material difference in
value. Similarly, the Plan Administrator may adopt a policy of providing for
regular interim valuations without regard to the materiality of changes in the
value of the Accounts.
d. STATEMENT OF ACCOUNTS. Within a reasonable time after the
end of each calendar year, the Plan Administrator shall submit to each
Participant a statement of the balance in his Accounts.
2.3 CREDIT OF PREVIOUS AIP DEFERRALS TO ACCOUNTS. Participants who have
previously deferred AIP awards under the deferral arrangements in effect for
awards prior to 1995 may elect as of any beginning of any Plan Year to credit
any portion of their deferral accounts under the prior arrangement to their
Accounts under this Plan. Credits shall be made to this Plan pursuant to this
Section on January 1 of the year subsequent to any such election being made.
Amounts so credited shall become part of a Participant's Account and shall be
subject to the terms and conditions of this Plan, except that prior elections as
to payment of deferred amounts shall remain in effect. Once amounts are credited
to a Participant's Account pursuant to this Section 2.3, they may not thereafter
be returned to the Participant's deferral accounts under the prior deferral
arrangement.
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<PAGE>
2.4 CREDIT OF PREVIOUS DIVIDENDS PAID ON PSU DEFERRALS TO ACCOUNTS.
Participants who have previously received dividends on deferred PSU awards under
the deferral arrangements in effect for awards prior to 1995 may elect as of the
beginning of any Plan Year to credit any portion of their previously deferred
dividends under the prior arrangement to their Accounts under this Plan.
Notwithstanding the above, previously deferred PSU dividends are not eligible to
be deferred pursuant to the terms of the Plan unless the Participant has
satisfied the employee minimum stockholding requirements established by the
Committee. Credits shall be made to this Plan pursuant to this Section on the
January 1 of the year subsequent to any such election being made. Amounts so
credited shall become part of a Participant's Account and shall be subject to
the terms and conditions of this Plan, except that prior elections as to payment
of deferred amounts shall remain in effect. Once amounts are credited to a
Participant's Account pursuant to this Section 2.4, they may not thereafter be
returned to the Participant's deferral accounts under the prior deferral
arrangement.
ARTICLE III
DISTRIBUTION OF DEFERRALS
3.1 INITIAL ELECTION OF DISTRIBUTION OPTIONS IN DEFERRAL ELECTION. A
Participant must specify in his or her Deferral Election when the Participant's
Account will be distributed. Distribution may be made or begin in any year or
years in the future, but distributions must begin not later than the calendar
year following the calendar year in which the Participant attains age 70. The
Participant may elect to receive amounts deferred in a lump sum or in up to ten
approximately equal annual installments. A Participant may specify different
distribution dates and forms of payment under each of his or her Deferral
Elections.
3.2 CHANGES IN DISTRIBUTION OPTIONS.
a. A Participant is entitled to one future opportunity to further
lengthen (not shorten) the deferral period provided in a Deferral Election and
to make one future change with regard to lengthening (not shortening) the
payment schedule provided in that Election up to a maximum payment schedule of
ten years.
b. Any change in the deferral period or the payment schedule must
be submitted to the Plan Administrator in writing, on a form provided by the
Plan Administrator, at least twelve months before the date payments were
originally scheduled to begin. Any change in the deferral period shall not
require payments to begin after the calendar year following the Participant's
attainment of age 70.
3.3 PAYMENT OF DEFERRED AMOUNTS.
a. Upon the date elected by the Participant, the Company shall
begin to pay an amount equal to the total amount then credited to the
Participant's Account. Such amount is to be paid either in one lump sum or in
approximately equal annual installments over a period of years as elected by the
Participant, which period shall be not more than ten years. Each annual
installment shall include investment credits on the remaining balance during the
previous year until the Account shall have been paid out in full. A Participant
may continue to express investment preferences as provided in paragraph c of
Section 2.2 during the period that the
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<PAGE>
Account is being distributed.
b. If the Participant should die before payment in full of the
amount standing to the Participant's credit in the Account, the unpaid balance
may be paid in one lump sum or in installments to the Participant's beneficiary
in accordance with whichever election has been made by the Participant. If the
Participant should die before the beginning date of the deferral payment and did
not indicate a specific method of distribution, then the beneficiary may
petition the Plan Administrator regarding the method of distribution. In the
absence of a designated beneficiary, the balance of the Account will be paid in
a lump sum to the estate of the Participant as soon as possible.
c. If the Participant's employment is terminated for any reason
other than Retirement, death or Disability before the elected payment date, then
the Company, acting through the Plan Administrator, at its discretion and at any
time thereafter may:
(1) Immediately pay over any amounts credited to the
Participant's Account to the Participant.
(2) Deposit any amounts credited to the Participant's
Account with a third party fiduciary in trust for the Company's benefit who will
manage and pay over such amounts to the Participant in accordance with the terms
of this Plan, with administrative costs in such event being charged to the
Participant's Account.
(3) Continue to itself maintain and pay over amounts
deferred to the Participant in accordance with the terms of this Plan and the
Participant's election pursuant thereto.
d. If both the Participant and his beneficiary shall die after
payments to the Participant begin and before all payments are made from the
Participant's Account, the remaining value of the Account shall be determined as
of the date of death of the beneficiary or Participant, whichever is later, and
shall be paid as promptly as possible in one lump sum to the estate of such
beneficiary or as specified in the beneficiary's last will and testament, as the
case may be.
e. A Participant may designate or change his or her beneficiary
(without the consent of any prior beneficiary) on a form provided by the Plan
Administrator and delivered to the Plan Administrator before the Participant's
death.
f. Installment payments shall commence on or before the fifteenth
day of the year selected by the Participant (or on or before the fifteenth day
of the year after the year in which the Participant retires, if the Participant
has elected to defer until after Retirement).
3.4 HARDSHIP DISTRIBUTIONS. The Compensation Committee may, in its
discretion, accelerate payments to a Participant in an amount up to the bonus
previously deferred, together with investment credits to date, in the event of
demonstrated severe financial hardship. Any such payments made will be limited
to the amount needed to meet the demonstrated financial need. A Participant
seeking a financial hardship withdrawal from his or her Account must request a
hearing with the Plan Administrator, who will gather facts and render a report
to the
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<PAGE>
Compensation Committee for a decision.
3.5 OTHER WITHDRAWALS: FORFEITURE PENALTY. A Participant may, by
written request on a form provided by the Plan Administrator, withdraw all or
any portion of his Account as of any Determination Date, provided that the
Participant shall forfeit 15% of the amount withdrawn as a penalty.
3.6. WITHHOLDING. Any payments made pursuant to this Article III
shall be subject to appropriate federal, state or local income tax withholdings.
ARTICLE IV
CLAIMS PROCEDURE
4.1 The following provisions are incorporated in the Plan in accordance
with the requirements of the Employment Retirement Income Security Act of 1974:
a. The following claims procedure is hereby established:
(1) A Participant or beneficiary shall make a claim for
the benefits provided by delivering a written request to the Plan Administrator.
Upon receipt of a claim, the Plan Administrator shall determine whether to grant
the claim, deny it, or grant it in part.
(2) If a claim is wholly or partially denied, notice of
the decision, meeting the requirements of paragraph (3) following shall be
furnished to the claimant within a reasonable period of time after receipt of a
claim by the Plan Administrator.
(3) The Plan Administrator shall provide to every
claimant who is denied a claim for benefits, written notice setting forth in a
manner calculated to be understood by the claimant, the specific reason or
reasons for the denial; specific reference to pertinent Plan provisions on which
denial is based; a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and an explanation of the Plan's claim
review procedure as set forth herein.
(4) The purpose of the review procedures set forth
herein is to provide a procedure by which a claimant under the Plan may have a
reasonable opportunity to appeal a denial of a claim to the named fiduciary for
a full and fair review. To accomplish that purpose, the claimant or his duly
authorized representative may request a review upon written application to the
Committee may review pertinent Plan documents; and may submit issues and
comments in writing. A claimant (or his duly authorized representative) shall
request a review by filing a written application for review with the Committee
at any time within sixty (60) days after receipt by the claimant of written
notice of denial of this claim.
(5) The decision on review of a denied claim shall be
made as follows. The decision on review shall be made by the Committee, which
may in its discretion hold a hearing on the denied claim. The Committee shall
make a decision promptly, and not later than sixty (60) days after receipt of
the request for review, unless special circumstances (such as the
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<PAGE>
need to hold a hearing) require an extension of time of reprocessing, in which
case a decision shall be rendered as soon as possible, but not later than one
hundred twenty (120) days after receipt of the request for review. The decision
on review shall be in writing and shall include specific reasons for the
decisions, written in the manner calculated to be understood by the claimant,
and specific references to the pertinent Plan revisions on which the decision is
based. The Committee shall have full discretion to decide the claim and its
decision on review shall be final and binding on all parties.
b. For purposes of implementing the claims procedure (but not
for any other purposes), the Committee is hereby designated as a named
fiduciary of this Plan.
ARTICLE V
PLAN ADMINISTRATOR
5.1 PLAN ADMINISTRATOR DUTIES. The Plan Administrator shall administer
this Plan and shall be a named fiduciary of the Plan for that purpose. The Plan
Administrator may be a Participant. A Plan Administrator who is a Participant
may not vote on matters affecting his or her personal benefit under this Plan,
but any such individual shall otherwise be fully entitled to act in matters
arising out of or affecting this Plan notwithstanding his or her participation
herein. The Plan Administrator shall have the authority to make, amend,
interpret, and enforce all appropriate rules and regulations for the
administration of this Plan and decide or resolve any and all questions,
including interpretations of this Plan, as may arise in connection with the
Plan.
5.2 AGENTS. In the administration of this Plan, the Plan Administrator
may, from time to time, employ agents and delegate to them or to others
(including employees of the Company) such administrative duties as it sees fit.
The Plan Administrator may from time to time consult with counsel, who may be
counsel to the Company.
5.3 BINDING EFFECT OF DECISIONS. In carrying out its duties herein, the
Plan Administrator (or its designee) shall have full discretion to exercise all
powers and to make all determinations, consistent with the terms of the Plan, in
all matters entrusted to it, and its determinations shall be final and binding
on all parties.
5.4 INDEMNITY. The Company shall indemnify and hold harmless the Plan
Administrator and any employees to whom administrative duties under this Plan
are delegated, against any and all claims, loss, damage, expense, or liability
arising from any action or failure to act with respect to this Plan, except in
the case of willful misconduct.
ARTICLE VI
AMENDMENT AND TERMINATION
6.1 AMENDMENT. The Committee may at any time amend the Plan in whole or
in part. However, no amendment shall be effective to decrease or restrict any
then existing Account or to change the Company's obligations under any then
existing Deferral Election.
6.2 BOARD'S RIGHT TO TERMINATE. The Board may at any time terminate
the Plan in its
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<PAGE>
entirety, in which event no new Deferral Elections shall be made, but the
obligations of the Company under existing Deferral Elections shall continue.
ARTICLE VII
MISCELLANEOUS
7.1 UNFUNDED PLAN. This Plan is intended to be an "unfunded" plan
maintained primarily to provide deferred compensation for a "select group of
management or highly compensated employees" within the meaning of the Employee
Retirement Income Security Act of 1974, as amended, and shall be so construed.
7.2 UNSECURED GENERAL CREDITOR. This Plan is unfunded. Benefits shall be
paid from the Company's general assets. Participants and their beneficiaries,
heirs, successors, and assigns shall have no legal or equitable rights, interest
or claims in any property or assets owned or which may be acquired by the
Company. Such assets of the Company shall not be held under any trust for the
benefit of Participants, their beneficiaries, heirs, successors or assigns, or
held in any way as collateral security against the obligations of the Company
under this Plan. The Company's obligation under the Plan shall be that of an
unfunded and unsecured promise of the Company to pay money in the future. The
Company in its sole discretion, may, however, elect to provide for its
liabilities under this Plan through a trust or funding vehicle, provided,
however, that the terms of any such trust or funding vehicle shall not alter the
status of Participants and beneficiaries as mere general unsecured creditors of
the Company or otherwise cause the Plan to be funded or benefits taxable to
Participants except upon actual receipt.
7.3 NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage,
or otherwise encumber, transfer, hypothecate, or convey in advance of actual
receipt the amounts, if any, payable hereunder, or any part thereof. The rights
to all such amounts are expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony, or separate maintenance owned by Participants or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency, except as required by law.
7.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
shall not be deemed to constitute a contract of employment between the Company
and a Participant, and a Participant shall have no rights against the Company
except as may otherwise be specifically provided herein. Moreover, nothing in
the Plan shall be deemed to give a Participant the right to be retained in the
service of the Company or to interfere with the right of the Company to
discipline or discharge an employee at any time.
7.5 FORFEITURE OF BENEFITS. If a Participant's employment is terminated
because of willful misfeasance or gross negligence in the performance of his or
her duties, his or her right to benefits under this Plan shall, in the
discretion of the Committee, be forfeited, and the Company shall have no further
obligation hereunder to such Participant or his or her beneficiary(ies).
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7.6 TERMS. Use of the masculine pronoun in this Plan will include the
feminine and use of the singular will include the plural, unless the context
clearly indicates otherwise.
7.7 CAPTIONS. The captions of the articles, sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
7.8 GOVERNING LAW. This Plan shall be governed by the laws of the United
States and, to the extent not preempted thereby, the laws of Pennsylvania.
7.9 VALIDITY. The illegality or invalidity of any provision of this Plan
shall not affect its remaining parts, but this Plan shall be construed and
enforced without such illegal or invalid provisions.
7.10 NOTICE. Any notice or filing required or permitted to be given to
the Plan Administrator under the Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, to:
Director, Executive Compensation
and Employee Benefits
Hershey Foods Corporation
100 Crystal A Drive
Hershey, Pennsylvania 17033
Such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification.
7.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of the Company and its successors and assigns. The term successors as
used herein shall include any corporation or other business entity which shall,
whether by merger, consolidation, purchase of assets, or otherwise, acquire all
or substantially all of the business or assets of the Company, and successors of
any such corporation or other business entity.
7.12 INCAPACITY. If the Plan Administrator finds that any Participant or
beneficiary to whom a benefit is payable under this Plan is unable to care for
his affairs, any payment due (unless prior claim therefore shall have been made
by a duly authorized guardian or other legal representative) may be paid, upon
appropriate indemnification of the Plan Administrator, to any person who is
charged with the support of the Participant or beneficiary. Any such payment
shall be payment for the account of the Participant and shall be a complete
discharge of any liability of the Company to the Participant or beneficiary.
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EXHIBIT 10.4
HERSHEY FOODS CORPORATION
DIRECTORS COMPENSATION PLAN
1
PURPOSE
The purposes of the Directors' Compensation Plan (Plan) are to provide
Directors of Hershey Foods Corporation (Corporation) with payment alternatives
for the retainer and fees payable for services as a member of the Board of
Directors (Board) of the Corporation or as a member or chair of any committee
thereof (together, Director Fees) and to promote the identification of interests
between such Directors and the stockholders of the Corporation by paying a
portion of the retainer in shares of Common Stock, par value $1.00 per share, of
the Corporation (Common Stock) and providing Directors the opportunity to elect
to receive a greater portion of the retainer in Common Stock.
2
ELIGIBILITY
Any Director of the Corporation who is not an employee of the Corporation
or any of its subsidiaries shall be eligible to participate in the Plan.
3
PAYMENT
A Director shall be entitled to Director Fees, in such amounts as shall
be determined by the Board, for services on the Board and as a member or chair
of any committee of the Board. Except as modified by the Board, at least
one-third of the portion of the Director Fees payable as the annual retainer
shall be payable in shares of Common Stock. Directors may elect to have all or
any portion of such retainer in excess of the one-third minimum to be paid in
shares of Common Stock. Fees payable for services as a member or chair of any
committee of the Board shall be payable currently only in cash. Any shares of
Common Stock payable under this Section 3 shall be paid by the issuance to the
Director of a number of shares of Common Stock equal to the cash amount of the
retainer so payable divided by the Fair Market Value of one share of the Common
Stock, as defined in Section 12 hereof. Any fractional share of Common Stock
resulting from such payment shall be rounded to the nearest whole share. The
Corporation shall issue share certificates to the Director for the shares of
Common Stock acquired or, if requested in writing by the Director and permitted
under such plan, the shares acquired shall be added to the Director's account
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under the Corporation's Automatic Dividend Reinvestment Plan. As of the date on
which the part or whole of the retainer is payable in shares of Common Stock,
the Director shall be a stockholder of the Corporation with respect to such
shares. Unless otherwise elected in Section 4, any remaining Director Fees shall
be payable in cash.
4
ELECTIONS
(a) Director Fee Payment Alternatives. A Director may elect
any one of the following alternatives for the payment of Director
Fees:
(1) to receive currently full payment in cash and Common Stock,
as set forth in Section 3 above, on the date or dates on which the
Director Fees are payable;
(2) to defer payment of all or a portion of the Director Fees
payable in cash for subsequent payment in cash (a "Cash Deferral
Election"); or
(3) to defer payment of all or a portion of the Director Fees for
subsequent payment in shares of Common Stock (a "Stock Deferral
Election").
(b) Filing and Effectiveness of Elections. The election by a Director to
receive payment of Director Fees other than as set forth in Section 3 on the
date on which the Director Fees are otherwise payable is made by filing with the
Secretary of the Corporation a Notice of Election in the form prescribed by the
Corporation (an Election). In order to be effective for any calendar year, an
Election must be received by the Secretary of the Corporation on or before
December 31 of the preceding calendar year, except that if a Director files a
Notice of Election on or before 30 days subsequent to the Director's initial
election to the office of Director, the Election shall be effective on the date
of filing with respect to Director Fees payable for any portion of the calendar
year which remains at the date of such filing. An Election may not be modified
or terminated after the beginning of a calendar year for which it is effective.
Unless modified or terminated by filing a new Notice of Election on or before
December 31 immediately preceding the calendar year for which such modification
or termination is effective, an Election shall be effective for and apply to
Director Fees payable for each subsequent calendar year. Director Fees earned at
any time for which an Election is not effective shall be paid as set forth in
Section 3 on the date when the Director Fees are otherwise payable. Any Election
shall terminate on the date a Director ceases to be a member of the Board.
(c) Cash Deferral Elections. Director Fees deferred pursuant
to a Cash Deferral Election shall be deferred and paid as provided
in Sections 5 and 7. The Director may elect to defer payment of the
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Common Stock portion or cash portion, as determined under Section 3, of the
Director Fees separately, and any deferral of the portion of the Director Fees
payable in Common Stock shall be deemed to be a Stock Deferral Election subject
to the provisions of Section 4(d). If only a portion of the Director Fees
otherwise payable in cash for a calendar year is deferred pursuant to a Cash
Deferral Election, the Director Fees deferred shall be on a pro-rata basis with
the Director Fees earned and not deferred (excluding one-third of the annual
retainer) during such year after the Cash Deferral Election becomes effective up
to the amount of the Director Fees subject to such Cash Deferral Election.
(d) Stock Deferral Elections. Director Fees deferred pursuant to a Stock
Deferral Election shall be deferred and paid as provided in Sections 6 and 7.
The Director may elect to defer payment of the portion of the Director Fees
payable in Common Stock in accordance with Section 3 and any remaining Director
Fees for later payment in Common Stock pursuant to a Stock Deferral Election. If
only a portion of the Director Fees otherwise payable for a calendar year is
deferred pursuant to a Stock Deferral Election, the Director Fees deferred shall
be on a pro-rata basis with the Director Fees earned and not deferred during
such year and payable after the Stock Deferral Election becomes effective up to
the amount of the Director Fees subject to such Stock Deferral Election.
(e) Previous Deferral Election. In addition to the amounts otherwise permitted
to be deferred under this Plan, a current Director as of January 1, 1997 who has
previously deferred director fees under the Hershey Foods Corporation's Deferral
Plan for Non-Management Directors (Prior Plan) may elect to credit any portion
of their deferral accounts under the Prior Plan to the Deferred Cash
Compensation Account or the Deferred Stock Compensation Account under this Plan.
If a Director elects to credit any portion of his account under the Prior Plan
to the Deferred Stock Compensation Account, the amount of the credit to such
account shall be determined by dividing the account balance under the Prior Plan
by the Fair Market Value of a share of Common Stock and rounding the balance to
the nearest whole share. Credits shall be made to the Plan pursuant to this
Section as soon as practicable after an election form has been filed with the
Secretary of the Corporation. Amounts so credited shall become part of a
Director's account under this Plan and shall be subject to the terms and
conditions of this Plan, except that prior elections as to payment of deferred
amounts shall remain in effect. Once amounts are credited to a Director's
account pursuant to this Section, they may not thereafter be returned to the
Director's deferral accounts under the prior deferral arrangement.
5
DEFERRED CASH COMPENSATION ACCOUNT
(a) General. The amount of any Director Fees deferred in
accordance with a Cash Deferral Election shall be credited on the
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date on which such Director Fees are otherwise payable to a deferred cash
compensation account maintained by the Corporation in the name of the Director
(a "Deferred Cash Compensation Account"). A separate Deferred Cash Compensation
Account shall be maintained for each calendar year for which a Director has
elected a different number of payment installments or as otherwise may be agreed
between the Directors and the Corporation.
(b) Adjustment for Earnings or Losses. The amount in the Director's
Deferred Cash Compensation Account shall be adjusted to reflect net earnings,
gains or losses in accordance with the provisions of the Hershey Foods
Corporation Deferred Compensation Plan relating to Investment Credits and
Investment Options. The adjustment for earnings, gains or losses shall be equal
to the amount determined under (1) below as follows:
(1) Deemed Investment Options. The total amount determined by
multiplying the rate earned (positive or negative) by each fund available
(taking into account earnings distributed and share appreciation (gains)
or depreciation (losses) on the value of shares of the fund) for the
applicable period by the portion of the balance in the Director's
Deferred Cash Compensation Account as of the end of each such period,
respectively, which is deemed to be invested in such fund pursuant to
paragraph (2) below. Subject to elimination, modification or addition by
the Board, the funds available for the Director's election of deemed
investments pursuant to paragraph (2) below shall be the funds available
under the Investment Options of the Hershey Foods Corporation Deferred
Compensation Plan.
(2) Deemed Investment Elections.
(A) The Director shall designate, on a form prescribed by
the Corporation, the percentage, of the deferred Director Fees
that are to be deemed to be invested in the available funds under
paragraph (1) above. Said designation shall be effective on a
date specified by the Board and remain in effect and apply to all
subsequent deferred Director Fees until changed as provided
below.
(B) A Director may elect to change, on a calendar year
basis (or on such other basis as permitted from time to time by
the Board), the deemed investment election under paragraph (A)
above with respect to future deferred Director Fees among one or
more of the options then available by written notice to the
Secretary of the Corporation, on a form prescribed by the
Corporation (or by voice or other form of notice permitted by the
Corporation), at least 10 days before the first day of the
calendar year as of which the change is to be effective, with
such change to be effective for deferred Director Fees credited
to the Deferred Cash Compensation Account on or after the
effective date.
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(C) A Director may elect to reallocate the balance of his
Deferred Cash Compensation Account, subject to limitations
imposed by the Board, on a calendar year basis, among the deemed
investment options then available. A Director may make such an
election by written notice to the Secretary of the Corporation,
on a form prescribed by the Corporation (or by voice or other
form of notice permitted by the Corporation), at least 10 days
before the first day of the calendar year as of which the
transfer election is to be effective, with such transfer to be
based on the value of the Deferred Cash Compensation Account on
the last day of the preceding year.
(D) The election of deemed investments among the options
provided above shall be the sole responsibility of each Director.
The Corporation and Board members are not authorized to make any
recommendation to any Director with respect to such election.
Each Director assumes all risk connected with any adjustment to
the value of his Deferred Cash Compensation Account. Neither the
Board nor the Corporation in any way guarantees against loss or
depreciation.
(E) All payments from the Plan shall be made pro rata from
the portion of the Director's Deferred Cash Compensation Account
which is deemed to be invested in such funds as may be available
from time to time for deemed investment elections under the Plan.
(F) The Corporation shall not be required or obligated to
invest any amounts in the funds provided as deemed investment
options, and such funds shall be used solely to measure
investment performance. Further, the Corporation shall not be
precluded from providing for its liabilities hereunder by
investing in such funds or in any other investments deemed to be
appropriate by the Board.
(c) Manner of Payment. The balance of a Director's Deferred Cash
Compensation Account will be paid to the Director or, in the event of the
Director's death, to the Director's designated beneficiary, in accordance with
the Cash Deferral Election. A Director may elect at the time of filing the
Notice of Election for a Cash Deferral Election to receive payment of the
Director Fees in annual installments rather than a lump sum, provided that the
payment period for installment payments shall not exceed ten years following the
Payment Commencement Date, as described in Section 7 hereof. The amount of any
installment shall be determined by multiplying (i) the balance in the Director's
Deferred Cash Compensation Account on the date of such installment by (ii) a
fraction, the numerator of which is one and the denominator of which is the
number of remaining unpaid installments. The balance of the Deferred Cash
Compensation Account shall be appropriately reduced on the date of payment to
the Director or the Director's designated beneficiary to reflect the installment
payments made hereunder.
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Amounts held pending distribution pursuant to this Section 5(c) shall continue
to be credited with the earnings, gains or losses as described in Section 5(b)
hereof.
6
DEFERRED STOCK COMPENSATION ACCOUNT
(a) General. The amount of any Director Fees deferred in accordance with
a Stock Deferral Election shall be credited to a deferred stock compensation
account maintained by the Corporation in the name of the Director (a "Deferred
Stock Compensation Account"). A separate Deferred Stock Compensation Account
shall be maintained for each calendar year for which a Director has elected a
different number of payment installments or as otherwise determined by the
Board. On each date on which Director Fees are otherwise payable and a Stock
Deferral Election is effective for a Director, the Director's Deferred Stock
Compensation Account for that calendar year shall be credited with a number of
shares of Common Stock (including fractional shares) equal to the cash amount of
the Director Fees payable divided by the Fair Market Value of one share of the
Common Stock, as defined in Section 12 hereof, on the date on which such
Director Fees are payable. If a dividend or distribution is paid on the Common
Stock in cash or property other than Common Stock, on the date of payment of the
dividend or distribution to holders of the Common Stock each Deferred Stock
Compensation Account shall be credited with a number of shares of Common Stock
(including fractional shares) equal to the number of shares of Common Stock
credited to such Account on the date fixed for determining the stockholders
entitled to receive such dividend or distribution times the amount of the
dividend or distribution paid per share of Common Stock divided by the Fair
Market Value of one share of the Common Stock, as defined in Section 12 hereof,
on the date on which the dividend or distribution is paid. If the dividend or
distribution is paid in property, the amount of the dividend or distribution
shall equal the fair market value of the property on the date on which the
dividend or distribution is paid. The Deferred Stock Compensation Account of a
Director shall be charged on the date of distribution with any distribution of
shares of Common Stock made to the Director from such Account pursuant to
Section 6(d) hereof.
(b) Effective January 1, 1997 the Corporation will no longer provide
accruals under the Hershey Foods Corporation Non-Management Directors Pension
Plan ("Pension Plan"). Effective as of that date, Directors participating in the
Pension Plan (other than those who are age 68 or older as of that date who may
elect to continue to participate in the Pension Plan) will have their accrual
balances as of that date converted into equivalent shares of Hershey Foods
Common Stock and these shares will be credited to such Directors Deferred Stock
Compensation Account established pursuant to this Section 6. The conversion rate
of the accrual to shares will be as determined by the Board of Directors and
will not necessarily be as provided for in this Plan.
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(c) Adjustment and Substitution. The number of shares of Common Stock
credited to each Deferred Stock Compensation Account shall be proportionately
adjusted to reflect any dividend or other distribution on the outstanding Common
Stock payable in shares of Common Stock or any split or consolidation of the
outstanding shares of Common Stock. If the outstanding Common Stock shall, in
whole or in part, be changed into or exchangeable for a different class or
classes of securities of the Corporation or securities of another corporation or
cash or property other than Common Stock, whether through reorganization,
reclassification, recapitalization, merger, consolidation or otherwise, the
Board shall adopt such amendments to the Plan as it deems necessary to carry out
the purposes of the Plan, including the continuing deferral of any amount of any
Deferred Stock Compensation Account.
(d) Manner of Payment. The balance of a Director's Deferred Stock
Compensation Account including amounts credited pursuant to Section 6(b) will be
paid in shares of Common Stock to the Director or, in the event of the
Director's death, to the Director's designated beneficiary, in accordance with
the Stock Deferral Election. A Director may elect at the time of filing of the
Notice of Election for a Stock Deferral Election to receive payment of the
shares of Common Stock credited to the Director's Deferred Stock Compensation
Account in annual installments rather than a lump sum, provided that the payment
period for installment payments shall not exceed ten years following the Payment
Commencement Date as described in Section 7 hereof. The number of shares of
Common Stock distributed in each installment shall be determined by multiplying
(i) the number of shares of Common Stock in the Deferred Stock Compensation
Account on the date of payment of such installment, by (ii) a fraction, the
numerator of which is one and the denominator of which is the number of
remaining unpaid installments, and by rounding such result down to the nearest
whole number of shares. The balance of the number of shares of Common Stock in
the Deferred Stock Compensation Account shall be appropriately reduced in
accordance with Section 6(d) hereof to reflect the installment payments made
hereunder. Shares of Common Stock remaining in a Deferred Stock Compensation
Account pending distribution pursuant to this Section 6(d) shall continue to be
credited with respect to dividends or distributions paid on the Common Stock
pursuant to Section 6(a) hereof and shall be subject to adjustment pursuant to
Section 6(c) hereof. If a lump sum payment or the final installment payment
hereunder would result in the issuance of a fractional share of Common Stock,
such fractional share shall not be issued and cash in lieu of such fractional
share shall be paid to the Director based on the Fair Market Value of a share of
Common Stock, as defined in Section 12 hereof, on the date immediately preceding
the date of such payment. The Corporation shall issue share certificates to the
Director, or the Director's designated beneficiary, for the shares of Common
Stock distributed hereunder, or if requested in writing by the Director and
permitted under such plan, the shares to be distributed shall be added to the
Director's account under the Corporation's Automatic Dividend Reinvestment Plan.
As of the date on which the Director is entitled to receive payment of shares of
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Common Stock, a Director shall be a stockholder of the Corporation with respect
to such shares.
7
PAYMENT COMMENCEMENT DATE
Payment of amounts in a Deferred Cash Compensation Account or a Deferred
Stock Compensation Account shall commence on March 30 (or if March 30 is not a
business day, on the first preceding business day) of the calendar year
following the calendar year during which the Director ceases to be a member of
the Board for any reason, including death or disability.
8
BENEFICIARY DESIGNATION
A Director may designate, in the Beneficiary Designation form prescribed
by the Corporation, any person to whom payments of cash or shares of Common
Stock are to be made if the Director dies before receiving payment of all
amounts due hereunder. A beneficiary designation will be effective only after
the signed beneficiary designation form is filed with the Secretary of the
Corporation while the Director is alive and will cancel all beneficiary
designations signed and filed earlier. If the Director fails to designate a
beneficiary, or if all designated beneficiaries of the Director die before the
Director or before complete payment of all amounts due hereunder, any remaining
unpaid amounts shall be paid in one lump sum to the estate of the last to die of
the Director or the Director's designated beneficiaries, if any.
9
NON-ALIENABILITY OF BENEFITS
Neither the Director nor any beneficiary designated by the Director shall
have the right to, directly or indirectly, alienate, assign, transfer, pledge,
anticipate or encumber (except by reason of death) any amount that is or may be
payable hereunder, nor shall any such amount be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of the Director or the Director's designated
beneficiary or to the debts, contracts, liabilities, engagements, or torts of
any Director or designated beneficiary, or transfer by operation of law in the
event of bankruptcy or insolvency of the Director or any beneficiary, or any
legal process.
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10
NATURE OF DEFERRED ACCOUNTS
Any Deferred Cash Compensation Account or Deferred Stock Compensation
Account shall be established and maintained only on the books and records of the
Corporation, and no assets or funds of the Corporation or the Plan or shares of
Common Stock of the Corporation shall be removed from the claims of the
Corporation's general or judgment creditors or otherwise made available until
such amounts are actually payable to Directors or their designated beneficiaries
as provided herein. The Plan constitutes a mere promise by the Corporation to
make payments in the future. The Directors and their designated beneficiaries
shall have the status of, and their rights to receive a payment of cash or
shares of Common Stock under the Plan shall be no greater than the rights of,
general unsecured creditors of the Corporation. No person shall be entitled to
any voting rights with respect to shares credited to a Deferred Stock
Compensation Account and not yet payable to a Director or the Director's
designated beneficiary. The Corporation shall not be obligated under any
circumstance to fund its financial obligations under the Plan, and the Plan is
intended to constitute an unfunded plan for tax purposes. However, the
Corporation may, in its discretion, set aside funds in a trust or other vehicle,
subject to the claims of its creditors, in order to assist it in meeting its
obligations under the Plan, if such arrangement will not cause the Plan to be
considered a funded deferred compensation plan under the Internal Revenue Code
of 1986, as amended.
11
ADMINISTRATION OF PLAN; HARDSHIP WITHDRAWAL
Full power and authority to construe, interpret, and administer the Plan
shall be vested in the Board. Decisions of the Board shall be final, conclusive,
and binding upon all parties. Notwithstanding the terms of a Cash Deferral
Election or a Stock Deferral Election made by a Director hereunder, the Board
may, in its sole discretion, permit the withdrawal of amounts credited to a
Deferred Cash Compensation Account or shares credited to a Deferred Stock
Compensation Account with respect to Director Fees previously payable, upon the
request of a Director or the Director's representative, or following the death
of a Director upon the request of a Director's beneficiary or such beneficiary's
representative, if the Board determines that the Director or the Director's
beneficiary, as the case may be, is confronted with an unforeseeable emergency.
For this purpose, an unforeseeable emergency is an unanticipated emergency
caused by an event that is beyond the control of the Director or the Director's
beneficiary and that would result in severe financial hardship to the Director
or the Director's beneficiary if an early hardship withdrawal were not
permitted. The Director or the Director's beneficiary shall provide to the Board
such evidence as the Board, in its discretion, may
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require to demonstrate that such emergency exists and financial hardship would
occur if the withdrawal were not permitted. The withdrawal shall be limited to
the amount or to the number of shares, as the case may be, necessary to meet the
emergency. For purposes of the Plan, a hardship shall be considered to
constitute an immediate and unforeseen financial hardship if the Director has an
unexpected need for cash to pay for expenses incurred by the Director or a
member of the Director's immediate family (spouse and/or natural or adopted
children) such as those arising from illness, casualty loss, or death. Cash
needs arising from foreseeable events, such as the purchase or building of a
house or education expenses, will not be considered to be the result of an
unforeseeable financial emergency. Payment shall be made as soon as practicable
after the Board approves the payment and determines the amount of the payment or
number of shares which shall be withdrawn, in a single lump sum from the portion
of the Deferred Cash Compensation Account or Deferred Stock Compensation
Account, as applicable, with the largest number and in reverse order of
installment payments, in each case in accordance with Section 5(b)(2)(E) if the
distribution is from the Deferred Cash Compensation Account. No Director shall
participate in any decision of the Board regarding such Director's request for a
withdrawal under this Section 11.
12
FAIR MARKET VALUE
Fair market value of the Common Stock shall be the average of the closing
price for all trading dates of the month immediately preceding the date as of
which fair market value is to be determined as quoted in The Wall Street Journal
(or in such other reliable publication as the Board or its delegate, in its
discretion, may determine to rely upon) of the Common Stock.
13
SECURITIES LAWS; ISSUANCE OF SHARES
The obligation of the Corporation to issue or credit shares of Common
Stock under the Plan shall be subject to (i) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to such
shares, if deemed necessary or appropriate by counsel for the Corporation, (ii)
the condition that the shares shall have been listed (or authorized for listing
upon official notice of issuance) upon each stock exchange, if any, on which the
Common Stock shares may then be listed and (iii) all other applicable laws,
regulations, rules and orders which may then be in effect. If, on the date on
which any shares of Common Stock would be issued or credited to a Deferred Stock
Compensation Account, sufficient shares of Common Stock are not available under
the Plan or the Corporation is not obligated to
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issue shares pursuant to this Section 13, then no shares of Common Stock shall
be issued or credited but rather, in the case of Common Stock to be issued
currently, cash shall be paid in payment of the Director Fees payable, and in
the case of a Deferred Stock Compensation Account, Director Fees and dividends
which would otherwise have been credited in shares of Common Stock shall be
credited in cash to a Deferred Cash Compensation Account in the name of the
Director. The Board shall adopt appropriate rules and regulations to carry out
the intent of the immediately preceding sentence if the need for such rules and
regulations arises.
14
GOVERNING LAW
The provisions of this Plan shall be interpreted and construed in
accordance with the laws of the State of Delaware.
15
EFFECTIVE DATE; AMENDMENT AND TERMINATION
The Plan was adopted by the Board on December 4, 1996, and is effective
as of January 1, 1997. The Board may amend or terminate the Plan at any time,
provided that no such amendment or termination shall adversely affect rights
with respect to amounts or shares then credited to any Deferred Cash
Compensation Account or Deferred Stock Compensation Account.
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<TABLE>
<CAPTION>
HERSHEY FOODS CORPORATION EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Years Ended December 31, 1996, 1995, 1994, 1993, and 1992
(in thousands of dollars except for ratios)
(Unaudited)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Earnings:
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes and accounting changes .........................$479,737(a) $465,953(b) $333,138(c) $510,875(d) $400,988
Add (Deduct):
Interest on indebtedness..................................... 52,036 47,568 37,249 30,224 29,708
Portion of rents representative of the interest factor(e).... 8,618 8,176 8,556 8,175 7,987
Amortization of debt expense................................. 234 97 64 84 165
Amortization of capitalized interest......................... 3,359 3,183 2,958 2,684 1,988
Adjustment for equity companies(f)........................... -- -- -- -- 628
Adjustment for majority-owned subsidiary(g).................. -- -- -- -- 17
-------- -------- -------- -------- --------
Earnings as adjusted....................................$534,984 $524,977 $381,965 $552,042 $441,481
======== ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness.......................................... $52,036 $47,568 $37,249 $30,224 $29,708
Portion of rents representative of the interest factor(e)......... 8,618 8,176 8,556 8,175 7,987
Amortization of debt expense...................................... 234 97 64 84 165
Capitalized interest.............................................. 1,534 1,957 3,009 4,646 12,055
----- ----- ----- ----- ------
Total fixed charges.......................................... $62,422 $57,798 $48,878 $43,129 $49,915
======= ======= ======= ======= =======
Ratio of earnings to fixed charges.................................... 8.71 9.08 7.81 12.80 8.84
==== ==== ==== ===== ====
</TABLE>
NOTES:
(a) Includes a loss on the disposal of businesses of $35.4 million.
(b) Includes a restructuring credit of $.2 million.
(c) Includes a restructuring charge of $106.1 million.
(d) Includes a gain of $80.6 million on the sale of the Corporation's 18.6%
investment interest in Freia Marabou a.s.
(e) Portion of rents representative of the interest factor consists of
one-third of rental expense for operating leases.
(f) Adjustment for equity companies includes the eliminations from income of
both undistributed earnings and losses of companies in which at least 20%
but less than 50% equity is owned. In April 1992, the Corporation sold its
equity interest in its Brazilian joint venture.
(g) In December 1992, the Corporation purchased the remaining shares of Hershey
Japan. Prior to the acquisition, the Corporation owned 51% of Hershey
Japan.
Appendix B
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
PAGE
----
<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
B-1
<PAGE>
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
B-2
<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.
B-3
<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.
B-4
<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
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a listing of Subsidiaries of the Corporation, their
jurisdictions of incorporation, and the name under which they do business. Each
is wholly owned. Certain subsidiaries are not listed since, considered in the
aggregate as a single subsidiary, they would not constitute a significant
subsidiary as of December 31, 1996.
Jurisdiction of
Name of Subsidiary Incorporation
------------------ -------------
Christiana, Inc. Delaware
Hershey Canada Inc. Canada
Hershey Holding Corporation Delaware
Homestead, Inc. Delaware
Huhtamaki, Inc. Delaware
Leaf, Inc. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated January 27, 1997, included or incorporated by reference in
this Form 10-K for the year ended December 31, 1996, into the Corporation's
previously filed Registration Statements on Forms S-8 and S-3, (File No.
33-45431, File No. 33-45556 and File No. 33- 51089).
ARTHUR ANDERSEN LLP
New York, New York
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERSHEY
FOODS CORPORATION'S CONSOLIDATED CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1996
AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 61,422
<SECURITIES> 0
<RECEIVABLES> 294,606<F1>
<ALLOWANCES> 0
<INVENTORY> 474,978
<CURRENT-ASSETS> 986,229
<PP&E> 2,422,702
<DEPRECIATION> 820,807
<TOTAL-ASSETS> 3,184,796
<CURRENT-LIABILITIES> 817,274
<BONDS> 655,289
0
0
<COMMON> 179,950
<OTHER-SE> 981,071
<TOTAL-LIABILITY-AND-EQUITY> 3,184,796
<SALES> 3,989,308
<TOTAL-REVENUES> 3,989,308
<CGS> 2,302,089
<TOTAL-COSTS> 3,426,176
<OTHER-EXPENSES> 35,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,043
<INCOME-PRETAX> 479,737
<INCOME-TAX> 206,551
<INCOME-CONTINUING> 273,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273,186
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 0
<FN>
<F1> Balance is net of Reserves for Doubtful Accounts and Cash Discounts.
</FN>
</TABLE>
