UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
|X| OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 -- $6,450,447,595 as of March 2, 1998.
Class B Common Stock, one dollar par value -- $9,780,020 as of March 2,
1998. 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 2, 1998.
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 -- 112,637,318 shares, as of
March 2, 1998.
Class B Common Stock, one dollar par value -- 30,453,908 shares, as of
March 2, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The Corporation's Consolidated Financial Statements and Management's
Discussion and Analysis for the year ended December 31, 1997 are included in
Appendix A to the Corporation's Proxy Statement for the Corporation's 1998
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.
<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.
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, flavors 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 classic
caramels, 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, GOOD & PLENTY candy, HEATH toffee bar, JOLLY RANCHER candy, KIT KAT
wafer bars, LUDEN'S throat drops, MILK DUDS chocolate covered caramels, MR.
GOODBAR milk chocolate bars with peanuts, PAYDAY peanut caramel bar, PETER PAUL
ALMOND JOY candy bars, PETER PAUL MOUNDS candy bars, RAIN-BLO and SUPER BUBBLE
gum, REESE'S NUTRAGEOUS candy bars, REESE'S peanut butter cups, REESE'S PIECES
candies, ROLO caramels in milk chocolate, SIXLETS candies, SKOR toffee bars,
SYMPHONY milk chocolate bars, SWEET ESCAPES candy bars, TASTETATIONS candy,
TWIZZLERS candy, WHATCHAMACALLIT candy bars, WHOPPERS malted milk balls, YORK
peppermint pattie candy, 5TH AVENUE candy bars and ZERO 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.
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, REESE'S AND HEATH baking pieces, HERSHEY'S
drink boxes, HERSHEY'S chocolate milk mix, HERSHEY'S cocoa, HERSHEY'S CHOCOLATE
SHOPPE ice cream toppings, HERSHEY'S HOT COCOA COLLECTION hot cocoa mix,
HERSHEY'S syrup and REESE'S peanut butter. 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.
<PAGE>
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 1997, 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 markets
chocolate and non-chocolate confectionery products in over 90 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.
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.
COCOA FUTURES CONTRACT PRICES
(CENTS PER POUND)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Annual Average.... 47.3 59.1 61.2 62.1 70.0
High.............. 56.7 66.1 64.1 64.4 77.2
Low............... 41.8 51.3 58.3 57.4 59.1
Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics
<PAGE>
The Federal Agricultural and Improvement Reform Act of 1996, which is a
seven-year farm bill, 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 remained near normal levels for the first three quarters of
1997 but increased slightly during the fourth quarter due to a late season
drought in the southeastern U.S.
Dairy prices returned to more normal levels in 1997 after reaching
historically high levels in 1996.
Almond prices were at historically high levels for the first three quarters
of the year. During the fourth quarter, prices declined 30-40% as the much
larger new crop was harvested.
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. Durum wheat production during 1997 decreased
in almost every area of the world, resulting in historically high 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,
corn sweeteners and natural gas, price risks are also managed by entering into
futures and options contracts. At the present time, active futures and options
contracts are not available for use in pricing the Corporation's other major raw
materials. Futures contracts are used in combination with forward purchasing of
cocoa, sugar, corn sweetener and natural gas requirements principally to take
advantage of market fluctuations which provide more favorable pricing
opportunities and to increase diversity or flexibility in sourcing these raw
materials. 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 futures exchanges 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.
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, corn sweeteners and natural gas
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 YORK, PETER PAUL ALMOND JOY and PETER PAUL MOUNDS confectionery
products worldwide as well as CADBURY and CARAMELLO confectionery products in
the United States. The Corporation's rights under these agreements are
extendible 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 1997. 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 extendible on a long-
<PAGE>
term basis at the Corporation's option, subject to certain conditions, including
minimum unit volume sales. In 1997, the minimum volume requirements were
exceeded. The Corporation has an agreement with an affiliate of Huhtamaki Oy
(Huhtamaki) pursuant to which it licenses the use of certain trademarks,
including the GOOD & PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and
WHOPPERS confectionery products in the North, Central and South American
regions. The Corporation's rights under this agreement are extendible on a
long-term basis at the Corporation's option.
In late 1996, the Corporation approved a project to implement an
enterprise-wide integrated information system to replace most of the transaction
systems and applications currently supporting operations of the Corporation.
Total commitments for this system are expected to be in the range of $75 million
to $85 million. This system is Year 2000 compliant and will replace a large
portion of the Corporation's legacy information systems. Legacy systems not
being replaced by the new integrated information system are being upgraded to be
Year 2000 compliant and the costs are not expected to be material to the
Corporation's business, operations, or financial condition. Progress toward
compliance with Year 2000 issues by the Corporation's major business partners
and suppliers is being reviewed for the most significant operations and business
activities. The extent of Year 2000 compliance efforts by major partners and
suppliers and the possible effect on the Corporation's business of their failure
to comply cannot be reliably determined and estimated at this time. The
remediation of Year 2000 issues involving the Corporation's information systems
is expected to be completed in time to prevent any material adverse consequences
to the Corporation's business, operations or financial condition.
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.
<PAGE>
EMPLOYEES
As of December 31, 1997, the Corporation had approximately 14,900 full-
time and 1,300 part-time employees, of whom approximately 6,800 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 A to the Proxy
Statement for its 1998 Annual Meeting of Stockholders (the "Proxy Statement"),
which information is incorporated herein by reference and filed as Exhibit 13
hereto.
SAFE HARBOR STATEMENT
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Corporation's business partners and suppliers),
the impact of the use of derivative instruments, the amount of future capital
expenditures and the possible uses of proceeds from any future borrowings under
the Corporation's currently effective credit facility or 1997 Registration
Statement. Factors which could cause results to differ include, but are not
limited to: changes in the confectionery and pasta business environment,
including actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
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 and grocery products
Stuarts Draft, Virginia - confectionery and grocery products
Winchester, Virginia - pasta products
CANADA
Smiths Falls, Ontario - confectionery and grocery 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.
<PAGE>
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.
<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 A-9 and A-10 of the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix A 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, 1997, found
in the section "Eleven-Year Consolidated Financial Summary" on pages A-34
through A-36 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix A 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 - Basic
(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 A-1
through A-11 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix A 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 A 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, 1997, 1996 and 1995. (Page A-12)
2. Consolidated Balance Sheets as of December 31, 1997 and 1996.
(Page A-13)
3. Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995. (Page A-14)
4. Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. (Page A-15)
5. Notes to Consolidated Financial Statements (Pages A-16
through A-31), including "Quarterly Data (Unaudited)." (Page A-31)
6. Report of Independent Public Accountants. (Page A-33)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<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.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE CORPORATION AS OF MARCH 2, 1998
NAME AGE POSITIONS HELD DURING THE LAST FIVE YEARS
---- --- -----------------------------------------
<S> <C> <C>
K. L. Wolfe............... 59 Chairman of the Board and Chief Executive Officer (1993);
President and Chief Operating Officer (1985)
J. P. Viviano............. 59 President and Chief Operating Officer (1993); President, Hershey
Chocolate U.S.A., now part of Hershey Chocolate North America, a
division of Hershey Foods Corporation (1985)
W. F. Christ ............. 57 Senior Vice President, Chief Financial Officer and Treasurer
(1997); Senior Vice President and Chief Financial Officer
(1994); President, Hershey International, a division of Hershey
Foods Corporation (1988)
R. Brace ................ 54 Vice President, Operations (1997); Vice President,
Manufacturing, Hershey Chocolate North America (1995); Vice
President, Manufacturing, Hershey Chocolate U.S.A. (1987)
J. F. Carr .............. 53 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)
K. B. Kwiat............... 58 Vice President, Manufacturing, Hershey Foods Corporation (1998);
Vice President, Manufacturing, Hershey Chocolate North America
(1997); Vice President, Manufacturing, Technical Services and
Logistics, Hershey International (1994); Vice President,
Technical, Hershey Chocolate U.S.A. (1992)
P. N. Le Maire .......... 40 President, Hershey International (1997). Mr. Le Maire was
previously employed by The Procter & Gamble Company (Procter &
Gamble) where he served in a succession of positions with export
responsibility. He was most recently Director, Global Export
and Special Operations with responsibility for restructuring
Procter & Gamble's worldwide export operations.
M. F. Pasquale............ 50 President, Hershey Chocolate North America (1995); President,
Hershey Chocolate U.S.A. (1994); Senior Vice President and Chief
Financial Officer (1988)
R. M. Reese .............. 48 Vice President, General Counsel and Secretary (1995); Vice
President and General Counsel (1992)
D. W. Tacka............... 44 Corporate Controller and Chief Accounting Officer (1995); Vice
President, Finance and Administration, Hershey Pasta Group, now
part of Hershey Pasta and Grocery Group (1989)
</TABLE>
There are no family relationships among any of the above-named officers of
the Corporation.
<PAGE>
Corporate Officers and Division Presidents are generally elected each year
at the organization meeting of the Board of Directors 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."
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 "1997 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 director, 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 A 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, 1997, 1996 and 1995 is
filed herewith on the indicated page in response to Item 14(d):
Schedule II -- Valuation and Qualifying Accounts (Page 16)
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.
<PAGE>
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.
(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. 6.95% Notes due 2012
e. 8.8% Debentures due 2021
f. 7.2% Debentures due 2027
g. 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.
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.
<PAGE>
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 renewed in late 1997.
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 renewed in late 1997.
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.
Executive Compensation Plans
g. The restated Key Employee Incentive Plan is incorporated by
reference from the Corporation's Proxy Statement dated March 17,
1997 filed in connection with the April 29, 1997 Annual Meeting
of Stockholders.
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 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.
j. 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.
k. Hershey Foods Corporation's Deferred Compensation Plan, is
incorporated by reference from Exhibit 10.3 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
l. Hershey Foods Directors' Compensation Plan is incorporated by
reference from Exhibit 10 to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997.
(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, 1997, 1996, 1995, 1994 and 1993 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 A to the Proxy
Statement and is filed as Exhibit 13 hereto.
<PAGE>
(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
The consent to the incorporation of reports of the Corporation's
Independent Public Accountants dated January 28, 1998, is filed as
Exhibit 23 hereto.
<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 16, 1998 By W. F. CHRIST
-------------------------------------
(W. F. Christ, Senior Vice President,
Chief Financial Officer and
Treasurer)
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 16, 1998
--------------
(K. L. Wolfe)
W. F. CHRIST Chief Financial Officer and Treasurer March 16, 1998
--------------
(W. F. Christ)
D. W. TACKA Chief Accounting Officer March 16, 1998
-------------
(D. W. Tacka)
J. P. VIVIANO Director March 16, 1998
--------------
(J. P. Viviano)
W. H. ALEXANDER Director March 16, 1998
---------------
(W. H. Alexander)
R. H. CAMPBELL Director March 16, 1998
--------------
(R. H. Campbell)
C. M. EVARTS Director March 16, 1998
------------
(C. M. Evarts)
B. GUITON HILL Director March 16, 1998
--------------
(B. Guiton Hill)
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
J. C. JAMISON Director March 16, 1998
-------------
(J. C. Jamison)
M. J. MCDONALD Director March 16, 1998
-----------------
(M. J. McDonald)
J. M. PIETRUSKI Director March 16, 1998
-----------------
(J. M. Pietruski)
V. A. SARNI Director March 16, 1998
--------------
(V. A. Sarni)
</TABLE>
<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 1998 Annual Meeting of Stockholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated January 28, 1998.
Our audit was made for the purpose of forming an opinion on those financial
statements taken as a whole. The schedule listed on page 9 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 28, 1998
<PAGE>
<TABLE>
<CAPTION>
Schedule II
HERSHEY FOODS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, 1997:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade.... $ 14,059 $ 2,623 $ 522 $(1,361) $ 15,843
========= ======= ======== ======= ========
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
========= ======= ======= ======= ========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes recoveries of amounts previously written off.
<TABLE>
<CAPTION>
Exhibit 12
HERSHEY FOODS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 1995, 1994 AND 1993
(in thousands of dollars except for ratios)
(Unaudited)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Earnings:
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes and accounting changes ........... $ 553,955 $479,737(a) $465,953(b) $333,138(c) $510,875(d)
Add (Deduct):
Interest on indebtedness....................... 79,138 52,036 47,568 37,249 30,224
Portion of rents representative of the interest
factor(e) ................................... 10,592 8,618 8,176 8,556 8,175
Amortization of debt expense................... 412 234 97 64 84
Amortization of capitalized interest........... 3,496 3,359 3,183 2,958 2,684
--------- -------- -------- -------- --------
Earnings as adjusted......................... $ 647,593 $543,984 $524,977 $381,965 $552,042
========= ======== ======== ======== ========
Fixed Charges:
Interest on indebtedness......................... $ 79,138 $ 52,036 $ 47,568 $ 37,249 $ 30,224
Portion of rents representative of the interest
factor(e).................................... 10,592 8,618 8,176 8,556 8,175
Amortization of debt expense..................... 412 234 97 64 84
Capitalized interest............................. 1,883 1,534 1,957 3,009 4,646
--------- -------- -------- -------- --------
Total fixed charges.......................... $ 92,025 $ 62,422 $ 57,798 $ 48,878 $ 43,129
========= ======== ======== ======== ========
Ratio of earnings to fixed charges................... 7.04 8.71 9.08 7.81 12.80
========= ======== ======== ======== ========
</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.
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, 1997.
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
Christiana, Inc. Delaware
Hershey Canada Inc. Canada
Hershey Holding Corporation Delaware
Homestead, Inc. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated January 28, 1998, included or incorporated by reference in
this Form 10-K for the year ended December 31, 1997, into the Corporation's
previously filed Registration Statements on Forms S-8 and S-3, (File No.
333-25853, File No. 333-33507, File No. 33-45431 and File No. 33-45556).
ARTHUR ANDERSEN LLP
New York, New York
March 16, 1998
<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, 1997
and Consolidated Statement of Income for the twelve months ended December 31,
1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 54,237
<SECURITIES> 0
<RECEIVABLES> 360,831<F1>
<ALLOWANCES> 0
<INVENTORY> 505,525
<CURRENT-ASSETS> 1,034,814
<PP&E> 2,587,230
<DEPRECIATION> 938,993
<TOTAL-ASSETS> 3,291,236
<CURRENT-LIABILITIES> 795,715
<BONDS> 1,029,136
0
0
<COMMON> 179,950
<OTHER-SE> 672,856
<TOTAL-LIABILITY-AND-EQUITY> 3,291,236
<SALES> 4,302,236
<TOTAL-REVENUES> 4,302,236
<CGS> 2,488,896
<TOTAL-COSTS> 3,672,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,255
<INCOME-PRETAX> 553,955
<INCOME-TAX> 217,704
<INCOME-CONTINUING> 336,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,251
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.23
<FN>
<F1>Balance is net of Reserves for Doubtful Accounts and Cash Discounts.
</FN>
</TABLE>
<PAGE>
APPENDIX A
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Discussion and Analysis....................................... A-1
Consolidated Financial Statements.......................................... A-12
Notes to Consolidated Financial Statements................................. A-16
Responsibility for Financial Statements.................................... A-32
Report of Independent Public Accountants................................... A-33
Eleven-Year Consolidated Financial Summary................................. A-34
</TABLE>
<PAGE>
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved record sales and income levels in 1997, following
record sales in 1996. This performance was driven by strategic acquisitions and
divestitures, which increased the focus on profitable North American
confectionery operations, aggressive new product introductions in the
confectionery and grocery categories, and growth in sales of traditional core
confectionery and grocery brands.
Net sales during the two-year period increased at a compound annual rate of
8%, while net income increased at a compound annual rate of 9%. The increase in
net income over the period reflected the growth in sales, partially offset by a
slightly lower gross margin and higher selling, marketing and administrative
expenses.
Hershey Chocolate U.S.A. increased the wholesale price of its standard bar
line and king size bars by approximately eleven percent in December 1995. These
products represented approximately 25% of the Corporation's 1995 sales. Price
increases were intended to offset higher costs for raw materials and packaging,
together with the cumulative impact of inflation on other costs since the last
standard bar price increase in early 1991. Hershey Pasta Group implemented
selected price increases in late 1995 in an effort to recover substantial
increases in semolina costs.
The following acquisitions and divestitures occurred during the period:
. December 1996--The acquisition from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, of
Huhtamaki's Leaf North America (Leaf) confectionery operations for $437.2
million, plus the assumption of $17.0 million in debt. In addition, the
parties entered into a trademark and technology license agreement under
which the Corporation will manufacture and/or market and distribute in
North, Central and South America Huhtamaki's confectionery brands including
GOOD & PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and WHOPPERS.
. December 1996--The sale to Huhtamaki of the outstanding shares of Gubor
Holding GmbH (Gubor) and Sperlari, S.r.l. (Sperlari). Gubor manufactures and
markets high-quality assorted pralines and seasonal chocolate products in
Germany and Sperlari manufactures and markets various confectionery and
grocery products in Italy. The sale resulted in an after-tax loss of $35.4
million, since no tax benefit associated with the transaction was recorded.
Combined net sales for Gubor and Sperlari were $216.6 million and $222.0
million in 1996 and 1995, respectively.
. January 1996--The sale of the assets of Hershey Canada, Inc.'s PLANTERS nut
(Planters) business to Johnvince Foods Group and LIFE SAVERS and BREATH
SAVERS hard candy and BEECH-NUT cough drops (Life Savers) business to Beta
Brands Inc. Both transactions were part of a restructuring program announced
by the Corporation in late 1994.
. December 1995--The acquisition of Henry Heide, Incorporated, a confectionery
company which manufactures a variety of non-chocolate confectionery products
including JUJYFRUITS candy and WUNDERBEANS jellybeans.
. June 1995--The sale of the outstanding shares of OZF Jamin to a management
buyout group at OZF Jamin also as part of the restructuring program.
NET SALES
Net sales rose $312.9 million in 1997 and $298.6 million in 1996, an increase
of 8% in both years. The increase in 1997 was primarily due to incremental sales
from the Leaf acquisition, increased sales
A-1
<PAGE>
of core confectionery items and the introduction of new confectionery products.
These increases were offset somewhat by lower sales resulting from the
divestiture of the Gubor and Sperlari businesses and a decline in sales of pasta
and grocery products. The increase in 1996 was primarily due to incremental
sales from new confectionery and grocery products, increased confectionery sales
volume in the North American seasonal packaged candy line and in various
international markets, selected confectionery selling price increases in the
United States partially offset by related sales volume declines, and incremental
sales from the acquisition of Henry Heide.
COSTS AND EXPENSES
Cost of sales as a percent of net sales increased from 57.6% in 1995 to 57.7%
in 1996, and to 57.9% in 1997. The decrease in gross margin in 1997 was
primarily the result of the lower margin associated with the Leaf business and
higher costs associated with certain new products and seasonal items, partially
offset by lower costs for certain major raw materials, primarily milk and
semolina, and the favorable impact of the Gubor and Sperlari divestitures. The
decrease in gross margin in 1996 was principally the result of higher costs for
certain major raw materials, primarily cocoa beans, milk, almonds and semolina
and increased manufacturing labor and overhead rates, substantially offset by
selected confectionery price increases, manufacturing efficiency improvements
and the favorable impact of the OZF Jamin divestiture.
Selling, marketing and administrative expenses increased by 5% in 1997, as a
result of incremental expenses associated with the Leaf business and increased
marketing expenses related to the introduction of new products, partially offset
by decreases resulting from the Gubor and Sperlari divestitures and reduced
marketing spending for existing brands. Selling, marketing and administrative
costs increased by 7% in 1996 primarily due to a net increase in advertising and
promotion expenses associated with the introduction of new products and higher
selling expenses primarily related to international sales volume increases and
new product introductions.
RESTRUCTURING ACTIVITIES
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program announced
by the Corporation in August 1995. The charge was primarily related to the
funding of retirement benefits for eligible employees who elected early
retirement. The impact of this charge was more than offset by the partial
reversal of $16.7 million of 1994 accrued restructuring reserves, resulting in
an increase to income before income taxes of $151,000 and an increase to net
income of $2.0 million as the tax benefit associated with the 1995 charge more
than offset the tax provision associated with the reversal of 1994 restructuring
reserves. The partial reversal of 1994 accrued restructuring reserves related to
revised workforce reductions and relocation expenses along with a lower loss on
the disposal of the Planters and Life Savers businesses. In 1996, $7.6 million
of 1994 accrued restructuring reserves were utilized as the restructuring
program was completed.
INTEREST EXPENSE, NET
Net interest expense in 1997 was $28.2 million above prior year, primarily as
a result of incremental borrowings associated with the Leaf acquisition and the
purchase of Common Stock from the Hershey Trust Company, as Trustee for the
benefit of Milton Hershey School (Milton Hershey School Trust). Fixed interest
expense increased as a result of the issuance of $150 million of 6.95% Notes due
2007 (6.95% Notes) in March 1997 and $150 million of 6.95% Notes due 2012
(Notes) and $250 million of 7.2% Debentures due 2027 (Debentures) in August
1997.
Net interest expense increased $3.2 million in 1996 as higher fixed interest
expense was only partially offset by reduced short-term interest expense.
Increased fixed interest expense resulted from
A-2
<PAGE>
the issuance of $200 million of 6.7% Notes due 2005 (6.7% Notes) in the fourth
quarter of 1995. Lower short-term interest expense resulted from lower average
borrowing balances and reduced interest rates as compared to 1995.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate was 39.3%, 43.1%, and 39.5% in
1997, 1996 and 1995, respectively. The rate decreased in 1997 compared to 1996
primarily due to the lack of any tax benefit associated with the 1996 loss on
disposal of businesses and the lower 1997 effective state income tax rate. The
higher 1996 rate compared to 1995 was due primarily to the lack of any tax
benefit associated with the 1996 loss on disposal of businesses.
NET INCOME
Net income increased $63.1 million or 23% in 1997, following a decrease of
$8.7 million or 3% in 1996. Excluding the loss on the disposal of the Gubor and
Sperlari businesses in 1996 and the net after-tax effects of restructuring
activities in 1995, 1997 income increased $27.7 million or 9% and 1996 income
increased $28.6 million or 10%. Net income as a percent of net sales was 7.8% in
1997, 6.8% in 1996 and 7.6% in 1995. Income as a percent of net sales excluding
the loss on the sale of the Gubor and Sperlari businesses was 7.7% in 1996.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1997. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 60% as of December 31,
1997, and 46% as of December 31, 1996. The higher capitalization ratio in 1997
primarily reflected the additional borrowings to finance the purchase of Common
Stock and the related decrease in stockholders' equity as a result of the
additional Treasury Stock. The ratio of current assets to current liabilities
was 1.3:1 as of December 31, 1997, and 1.2:1 as of December 31, 1996.
ASSETS
Total assets increased $106.4 million or 3% as of December 31, 1997, primarily
as a result of increases in accounts receivable, property, plant and equipment,
inventories and other non-current assets.
Current assets increased by $48.6 million or 5% reflecting increased accounts
receivable and higher inventories, partially offset by a decrease in prepaid
expenses and other current assets. The increase in accounts receivable was
primarily the result of higher sales in December and the increase in inventories
reflected higher raw material and finished goods inventory levels. The decrease
in prepaid expenses and other current assets was principally associated with
commodities transactions.
The $46.3 million net increase in property, plant and equipment principally
reflected capital additions of $172.9 million, partially offset by depreciation
expense of $135.0 million. The increase in other non-current assets was
associated with the capitalization of software in 1997.
LIABILITIES
Total liabilities increased by $414.7 million or 20% as of December 31, 1997,
primarily due to an increase in long-term debt. The increase in long-term debt
of $373.8 million reflected the long-term debt issued during the year to repay a
portion of the commercial paper borrowings associated with the Leaf acquisition
and the repurchase of Common Stock from the Milton Hershey School Trust. As of
December 31, 1997 and 1996, respectively, $150.0 million and $300.0 million of
commercial paper borrowings were reclassified as long-term debt in accordance
with the Corporation's intent and ability
A-3
<PAGE>
to refinance such obligations on a long-term basis. In addition, deferred taxes
increased by $43.1 million primarily reflecting adjustments to the preliminary
acquisition accounting for Leaf.
STOCKHOLDERS' EQUITY
Total stockholders' equity declined by 27% in 1997, as increased Treasury
Stock from the repurchase of Common Stock and dividends paid exceeded net
income. Total stockholders' equity has increased at a compound annual rate of
less than 1% over the past ten years reflecting the $1.3 billion of Common Stock
repurchased since 1993.
CAPITAL STRUCTURE
The Corporation has two classes of stock outstanding, Common Stock and Class B
Common Stock (Class B Stock). Holders of the Common Stock and the Class B Stock
generally vote together without regard to class on matters submitted to
stockholders, including the election of directors, with the Common Stock having
one vote per share and the Class B Stock having ten votes per share. However,
the Common Stock, voting separately as a class, is entitled to elect one-sixth
of the Board of Directors. With respect to dividend rights, the Common Stock is
entitled to cash dividends 10% higher than those declared and paid on the Class
B Stock.
LIQUIDITY
Historically, the Corporation's major source of financing has been cash
generated from operations. The Corporation's income and, consequently, cash
provided from operations during the year are affected by seasonal sales
patterns, the timing of new product introductions, business acquisitions and
divestitures, and price increases. Chocolate, confectionery and grocery seasonal
and holiday-related sales have typically been highest during the third and
fourth quarters of the year, representing the principal seasonal effect.
Generally, seasonal working capital needs peak during the summer months and have
been met by issuing commercial paper.
Over the past three years, cash requirements for share repurchases, capital
additions, business acquisitions and dividend payments exceeded cash provided
from operating activities and proceeds from business divestitures by $784.2
million. Total debt, including debt assumed, increased during the period by
$804.7 million. Cash and cash equivalents increased by $27.5 million during the
period.
The Corporation anticipates that capital expenditures will be in the range of
$175 million to $200 million per annum during the next several years as a result
of continued modernization of existing facilities and capacity expansion to
support new products and line extensions. As of December 31, 1997, the
Corporation's principal capital commitments included manufacturing capacity
expansion and modernization.
In late 1996, the Corporation approved a project to implement an enterprise-
wide integrated information system to replace most of the transaction systems
and applications currently supporting operations of the Corporation. Total
commitments for this system are expected to be in the range of $75 million to
$85 million. This system is Year 2000 compliant and will replace a large portion
of the Corporation's legacy information systems. Legacy systems not being
replaced by the new integrated information system are being upgraded to be Year
2000 compliant and the costs are not expected to be material to the
Corporation's business, operations, or financial condition. Progress toward
compliance with Year 2000 issues by the Corporation's major business partners
and suppliers is being reviewed for the most significant operations and business
activities. The extent of Year 2000 compliance efforts by major partners and
suppliers and the possible effect on the Corporation's business of their failure
to comply cannot be reliably determined and estimated at this time. The
remediation of Year 2000 issues involving the Corporation's information systems
is expected to be completed in time to prevent any material adverse consequences
to the Corporation's business, operations or financial condition.
A-4
<PAGE>
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Stock effective September 13, 1996, to
stockholders of record August 23, 1996. The split was effected as a stock
dividend by distributing one additional share for each share held. Unless
otherwise indicated, all shares and per share information have been restated to
reflect the stock split.
Under share repurchase programs which began in 1993, a total of 9,546,030
shares of Common Stock have been repurchased for approximately $271.4 million.
Of the shares repurchased, 528,000 shares were retired and the remaining
9,018,030 shares were held as Treasury Stock as of December 31, 1997.
In August 1995, the Corporation purchased 18,099,546 shares (9,049,773 shares
on a pre-split basis) of its Common Stock to be held as Treasury Stock from the
Milton Hershey School Trust for $500.0 million. In August 1997, the Corporation
purchased an additional 9,900,990 shares of its Common Stock from the Milton
Hershey School Trust for $500.0 million. As of December 31, 1997, a total of
37,018,566 shares were held as Treasury Stock and $128.6 million remained
available for repurchases of Common Stock under a program approved by the
Corporation's Board of Directors in February 1996.
In October 1995, the Corporation issued $200 million of 6.7% Notes under Form
S-3 Registration Statements which were declared effective in June 1990 and
November 1993. In March 1997, the Corporation issued $150 million of 6.95% Notes
under the November 1993 Form S-3 Registration Statement. Proceeds from the debt
issuance were used to repay a portion of the commercial paper borrowings
associated with the Leaf acquisition.
In August 1997, the Corporation filed another Form S-3 Registration Statement
under which it could offer, on a delayed or continuous basis, up to $500 million
of additional debt securities. Also in August 1997, the Corporation issued $150
million of Notes and $250 million of Debentures under the November 1993 and
August 1997 Registration Statements. Proceeds from the debt issuance were used
to repay a portion of the short-term borrowings associated with the purchase of
Common Stock from the Milton Hershey School Trust. As of December 31, 1997, $250
million of debt securities remained available for issuance under the August 1997
Registration Statement. Proceeds from any offering of the $250 million of debt
securities available under the shelf registration may be used for general
corporate requirements which include reducing existing commercial paper
borrowings, financing capital additions, and funding future business
acquisitions and working capital requirements.
In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million with options to increase borrowings by $1.0 billion with the concurrence
of the banks. Lines of credit previously maintained by the Corporation were
significantly reduced when the credit facility agreements became effective. Of
the total committed credit facility, $200 million is for a renewable 364-day
term and $400 million is effective for a five-year term. Both the short-term and
long-term committed credit facility agreements were amended and renewed
effective December 12, 1997. The credit facilities may be used to fund general
corporate requirements, to support commercial paper borrowings and, in certain
instances, to finance future business acquisitions. The Corporation also had
lines of credit with domestic and international commercial banks of $20.7
million as of December 31, 1997.
CASH FLOW ACTIVITIES
Cash provided from operating activities totaled $1.4 billion during the past
three years. Over this period, cash used by or provided from accounts receivable
and inventories has tended to fluctuate as a result of sales during December and
inventory management practices. The change in cash required for or provided from
other assets and liabilities between the years was primarily related to
commodities transactions, the timing of payments for accrued liabilities,
including income taxes, capitalized software, variations in the funding status
of pension plans, and, in 1995, restructuring expenses.
A-5
<PAGE>
Investing activities included capital additions and business acquisitions and
divestitures. Capital additions during the past three years included the
purchase of manufacturing equipment, and expansion and modernization of existing
facilities. Businesses acquired during the past three years included Leaf in
1996 and Henry Heide in 1995. The Gubor, Sperlari, Planters and Life Savers
businesses were sold in 1996 and OZF Jamin was sold in 1995. Cash used for
business acquisitions represented the purchase price paid and consisted of the
current assets, property, plant and equipment, intangibles and other assets
acquired, net of liabilities assumed.
Financing activities included debt borrowings and repayments, payment of
dividends, the exercise of stock options, incentive plan transactions and the
repurchase of Common Stock. During the past three years, short-term borrowings
in the form of commercial paper or bank borrowings were used to fund seasonal
working capital requirements, business acquisitions, share repurchase programs
and purchases of Common Stock from the Milton Hershey School Trust. The proceeds
from the issuance of $200 million of 6.7% Notes in October 1995, $150 million of
6.95% Notes in March 1997 and $150 million of Notes and $250 million of
Debentures in August 1997 were used to reduce short-term borrowings. During the
past three years, a total of 30,644,288 shares of Common Stock has been
repurchased for approximately $1.1 billion. Cash requirements for incentive plan
transactions were $102.6 million during the past three years, partially offset
by cash received from the exercise of stock options of $51.6 million.
ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
The Corporation utilizes certain derivative instruments, including interest
rate swaps, foreign currency forward exchange contracts and commodity futures
and options contracts, to manage interest rate, currency exchange rate and
commodity market price risk exposures. The interest rate swaps and foreign
currency contracts are entered into for periods consistent with related
underlying exposures and do not constitute positions independent of those
exposures. Commodity futures and options contracts are entered into for varying
periods and are intended and effective as hedges of anticipated raw material
purchases. The Corporation does not hold or issue derivative instruments for
trading purposes and is not a party to any instruments with leverage or
prepayment features. In entering into these contracts, the Corporation has
assumed the risk which might arise from the possible inability of counterparties
to meet the terms of their contracts. The Corporation does not expect any losses
as a result of counterparty defaults.
The information below summarizes the Corporation's market risks associated
with long-term debt and derivative instruments outstanding as of December 31,
1997. This information should be read in conjunction with Note 1, Note 5, Note
7, and Note 8 to the Consolidated Financial Statements.
LONG-TERM DEBT
The table below presents the principal cash flows and related interest rates
by maturity date for long-term debt as of December 31, 1997. The table does not
include $150.0 million of commercial paper borrowings classified as long-term
debt as of December 31, 1997, in accordance with the Corporation's intent and
ability to refinance such obligations on a long-term basis. Generally,
commercial paper borrowings have an original maturity of three months or less.
The fair value of long-term debt was determined based upon quoted market prices
for the same or similar debt issues.
<TABLE>
<CAPTION>
MATURITY DATE
-----------------------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT FOR RATES)
THERE- FAIR
1998 1999 2000 2001 2002 AFTER TOTAL VALUE
------- ---- ------ ---- ---- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt $25,095 $192 $2,199 $203 $194 $876,348 $904,231 $961,011
Fixed Rate 8.9% 2.0% 6.4% 2.0% 2.0% 7.1% 7.2%
</TABLE>
A-6
<PAGE>
INTEREST RATE SWAPS
In order to minimize its financing costs and to manage interest rate exposure,
the Corporation, from time to time, enters into interest rate swap agreements to
effectively convert a portion of its floating rate debt, principally commercial
paper borrowings or bank loans with an original maturity of three months or
less, to fixed rate debt. As of December 31, 1997 and 1996, the Corporation had
agreements outstanding with an aggregate notional amount of $150.0 million and
$125.0 million with maturities through September 1999 and October 1997,
respectively. As of December 31, 1997 and 1996, interest rates payable were at
weighted average fixed rates of 6.3% and 5.8%, respectively, and interest rates
receivable were floating based on 30- day commercial paper composite rates which
were 5.7% and 5.5% as of December 31, 1997 and 1996, respectively. Any interest
rate differential on interest rate swaps is recognized as an adjustment to
interest expense over the term of each agreement. The Corporation's risk related
to swap agreements is limited to the cost of replacing such agreements at
prevailing market rates. The potential loss in fair value of interest rate swaps
resulting from a hypothetical near-term adverse change in market rates of ten
percent was not material as of December 31, 1997.
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward contracts to hedge
transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies, and
to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments. In accordance with Statement
of Financial Accounting Standards No. 52 "Foreign Currency Translation," these
contracts meet the conditions for hedge accounting treatment and accordingly,
gains and losses are deferred and accounted for as part of the underlying
transactions. Gains and losses on terminated derivatives designated as hedges
are accounted for as part of the originally hedged transaction. Gains and losses
on derivatives designated as hedges of items which mature, are sold or
terminated, are recorded currently in income.
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
As of December 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $25.0 million in foreign
currency, primarily British sterling and German marks, and to sell $24.6 million
in foreign currency, primarily Canadian dollars and Japanese yen, at contracted
forward rates.
The fair value of foreign exchange forward contracts was estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences. As of December 31, 1997 and 1996, the fair
value of foreign exchange forward contracts approximated the contract value. The
potential loss in fair value of foreign exchange forward contracts resulting
from a hypothetical near-term adverse change in market rates of ten percent was
not material as of December 31, 1997.
FOREIGN EXCHANGE OPTIONS
To hedge foreign currency exposure related to firm commitments to purchase
equipment and anticipated transactions associated with the purchase of certain
raw materials and finished goods generally covering 3 to 24 months, the
Corporation, from time to time, also purchases foreign exchange options which
permit, but do not require, the Corporation to exchange foreign currencies at a
future date with another party at a contracted exchange rate. Foreign exchange
options are intended and
A-7
<PAGE>
effective as hedges of anticipated transactions. Accordingly, gains and losses
are deferred and accounted for as part of the underlying transactions. Gains and
losses on options designated as hedges of anticipated transactions which are no
longer likely to occur are recorded currently in income.
As of December 31, 1997, the Corporation had purchased foreign exchange
options of $3.6 million maturing in 1998, related to Swiss francs. No foreign
exchange options were outstanding as of December 31, 1996. The fair value of
foreign exchange options is estimated using active market quotations. As of
December 31, 1997, the fair value of foreign exchange options approximated the
contract value. The potential loss in fair value of foreign exchange options
contracts resulting from a hypothetical near-term adverse change in market rates
of ten percent was not material as of December 31, 1997.
COMMODITY PRICE RISK MANAGEMENT
The Corporation's most significant raw materials include cocoa, sugar, milk,
peanuts, flour and almonds. The Corporation attempts to minimize the effect of
future price fluctuations related to the purchase of these raw materials
primarily through forward purchasing to cover future manufacturing requirements,
generally for periods from 3 to 24 months. With regard to cocoa, sugar, corn
sweeteners and natural gas, price risks are also managed by entering into
futures and options contracts. At the present time, active futures and options
contracts are not available for use in pricing the Corporation's other major raw
materials. Futures contracts are used in combination with forward purchasing of
cocoa, sugar, corn sweetener and natural gas requirements principally to take
advantage of market fluctuations which provide more favorable pricing
opportunities and to increase diversity or flexibility in sourcing these raw
materials and energy requirements. The Corporation's commodity procurement
practices are intended to reduce the risk of future price increases, but also
may potentially limit the ability to benefit from possible price decreases.
The cost of cocoa beans and the prices for the related commodity futures
contracts historically have been subject to wide fluctuations attributable to a
variety of factors, including the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates and speculative
influences. Cocoa prices have been rising since 1992 due to cocoa demand
exceeding production. During 1998, any problems with the development of the West
African crop to be harvested beginning in the fall could again result in demand
exceeding production, leading to possible additional cocoa futures price
increases. The Corporation's costs during 1998 will not necessarily reflect
market price fluctuations because of its forward purchasing practices, premiums
and discounts reflective of relative values, varying delivery times, and supply
and demand for specific varieties and grades of cocoa beans.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar, corn sweeteners and natural
gas for anticipated manufacturing requirements, the Corporation enters into
commodities futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations. In accordance with Statement of Financial
Accounting Standards No. 80 "Accounting for Futures Contracts," these futures
and options contracts meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost. Gains and losses on futures and options designated as
hedges of anticipated purchases which are no longer likely to occur are recorded
currently in income.
Exchange traded futures contracts are used to fix the price of physical
forward purchase contracts. Cash transfers reflecting changes in the value of
futures contracts are made on a daily basis and are included in other current
assets or accrued liabilities on the consolidated balance sheets. Such cash
transfers will be offset by higher or lower cash requirements for payment of
invoice prices of raw materials and energy requirements in the future. Futures
being held in excess of the amount required
A-8
<PAGE>
to fix the price of unpriced physical forward contracts are intended and
effective as hedges of anticipated purchases.
The following sensitivity analysis reflects the market risk of the Corporation
to a hypothetical adverse market price movement of ten percent, based on the
Corporation's net commodity positions at four dates spaced equally throughout
the year. The Corporation's net commodity positions consist of the excess of
futures contracts held over unpriced physical forward contracts for the same
commodities, relating to cocoa, sugar, corn sweeteners and natural gas.
Inventories, priced forward contracts and estimated anticipated purchases not
yet contracted for were not included in the sensitivity analysis calculations. A
loss is defined, for purposes of determining market risk, as the potential
decrease in fair value or the opportunity cost resulting from the hypothetical
adverse price movement. The fair values of net commodity positions were based
upon quoted market prices or estimated future prices including estimated
carrying costs corresponding with the future delivery period.
<TABLE>
<CAPTION>
MARKET RISK
FAIR VALUE (HYPOTHETICAL 10% CHANGE)
------------------------------------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Highest long position $210.8 $21.1
Lowest long position 39.6 4.0
Average position (long) 96.2 9.6
</TABLE>
Sensitivity analysis disclosures represent forward-looking statements which
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those presently anticipated or projected. The
important factors that could affect the sensitivity analysis disclosures include
significant increases or decreases in market prices reflecting fluctuations
attributable to the effect of weather on crop yield, other imbalances between
supply and demand, currency exchange rates, political unrest in producing
countries and speculative influences in addition to changes in the Corporation's
hedging strategies.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$121.5 million in 1997 and $114.8 million in 1996. The annual dividend rate on
the Common Stock was $.88 per share, an increase of 10% over the 1996 rate of
$.80 per share. The 1997 dividend represented the 23rd consecutive year of
Common Stock dividend increases.
On February 3, 1998, the Corporation's Board of Directors declared a quarterly
dividend of $.22 per share of Common Stock payable on March 13, 1998, to
stockholders of record as of February 24, 1998. It is the Corporation's 273rd
consecutive Common Stock dividend. A quarterly dividend of $.20 per share of
Class B Stock also was declared.
Hershey Foods Corporation's Common Stock is listed and traded principally on
the New York Stock Exchange (NYSE) under the ticker symbol "HSY." Approximately
74.8 million shares of the Corporation's Common Stock were traded during 1997.
The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1997, was $61 15/16.
There were 44,602 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1997.
A-9
<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*
-------------- -------------------
COMMON CLASS B
STOCK STOCK HIGH LOW
------ ------- --------- ---------
<S> <C> <C> <C> <C>
1997
1st Quarter $.200 $.1800 $52 7/8 $42 1/8
2nd Quarter .200 .1800 58 5/8 48 3/8
3rd Quarter .220 .2000 59 15/16 51 7/8
4th Quarter .220 .2000 63 7/8 50 5/8
----- ------
Total $.840 $.7600
===== ======
1996
1st Quarter $.180 $.1625 $40 5/8 $31 15/16
2nd Quarter .180 .1625 38 15/16 34 7/8
3rd Quarter .200 .1800 51 3/4 35
4th Quarter .200 .1800 51 3/4 43 1/2
----- ------
Total $.760 $.6850
===== ======
</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 33.4%
in 1997. Over the most recent five-year period, the return has ranged from 17.8%
in 1993 to 33.4% in 1997. For the purpose of calculating operating return on
average stockholders' equity, earnings is defined as net income, excluding the
catch-up adjustments for accounting changes and the after-tax gain on the sale
of the investment in Freia Marabou a.s (Freia) in 1993, the after-tax
restructuring activities in 1994 and 1995 and the after-tax loss on the disposal
of businesses in 1996.
OPERATING RETURN ON AVERAGE INVESTED CAPITAL
The Corporation's operating return on average invested capital was 17.5% in
1997. Over the most recent five-year period, the return has ranged from 15.0% in
1993 to 17.8% in 1996. Average invested capital consists of the annual average
of beginning and ending balances of long-term debt, deferred income taxes and
stockholders' equity. For the purpose of calculating operating return on average
invested capital, earnings is defined as net income, excluding the sale of the
investment in Freia, the catch-up adjustments for accounting changes, the
after-tax restructuring activities in 1994 and 1995, the after-tax loss on
disposal of businesses in 1996, and the after-tax effect of interest on
long-term debt.
A-10
<PAGE>
SAFE HARBOR STATEMENT
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Corporation's business partners and suppliers),
the impact of the use of derivative instruments, the amount of future capital
expenditures and the possible uses of proceeds from any future borrowings under
the Corporation's currently effective credit facility or 1997 Registration
Statement. Factors which could cause results to differ include, but are not
limited to: changes in the confectionery and pasta business environment,
including actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
A-11
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C>
NET SALES $4,302,236 $3,989,308 $3,690,667
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,488,896 2,302,089 2,126,274
Selling, marketing and administrative 1,183,130 1,124,087 1,053,758
Restructuring (credit) -- -- (151)
Loss on disposal of businesses -- 35,352 --
---------- ---------- ----------
Total costs and expenses 3,672,026 3,461,528 3,179,881
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 630,210 527,780 510,786
Interest expense, net 76,255 48,043 44,833
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 553,955 479,737 465,953
Provision for income taxes 217,704 206,551 184,034
---------- ---------- ----------
NET INCOME $ 336,251 $ 273,186 $ 281,919
========== ========== ==========
NET INCOME PER SHARE--BASIC $ 2.25 $ 1.77 $ 1.70
========== ========== ==========
NET INCOME PER SHARE--DILUTED $ 2.23 $ 1.75 $ 1.69
========== ========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .840 $ .760 $ .685
Class B Common Stock .760 .685 .620
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-12
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 54,237 $ 61,422
Accounts receivable--trade 360,831 294,606
Inventories 505,525 474,978
Deferred income taxes 84,024 94,464
Prepaid expenses and other 30,197 60,759
---------- ----------
Total current assets 1,034,814 986,229
PROPERTY, PLANT AND EQUIPMENT, NET 1,648,237 1,601,895
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 551,849 565,962
OTHER ASSETS 56,336 30,710
---------- ----------
Total assets $3,291,236 $3,184,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 146,932 $ 134,213
Accrued liabilities 371,545 357,828
Accrued income taxes 19,692 10,254
Short-term debt 232,451 299,469
Current portion of long-term debt 25,095 15,510
---------- ----------
Total current liabilities 795,715 817,274
LONG-TERM DEBT 1,029,136 655,289
OTHER LONG-TERM LIABILITIES 346,500 327,209
DEFERRED INCOME TAXES 267,079 224,003
---------- ----------
Total liabilities 2,438,430 2,023,775
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued: none in 1997 and 1996 -- --
Common Stock, shares issued: 149,484,964 in 1997 and
149,471,964 in 1996 149,485 149,472
Class B Common Stock, shares issued: 30,465,908 in
1997 and 30,478,908 in 1996 30,465 30,478
Additional paid-in capital 33,852 42,432
Cumulative foreign currency translation adjustments (42,243) (32,875)
Unearned ESOP compensation (28,741) (31,935)
Retained earnings 1,977,849 1,763,144
Treasury--Common Stock shares, at cost: 37,018,566 in
1997 and 27,009,316 in 1996 (1,267,861) (759,695)
---------- ----------
Total stockholders' equity 852,806 1,161,021
---------- ----------
Total liabilities and stockholders' equity $3,291,236 $3,184,796
========== ==========
</TABLE>
The notes to consolidated financial statements are an integral part of these
balance sheets.
A-13
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES
Net income $ 336,251 $ 273,186 $ 281,919
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 152,750 133,476 133,884
Deferred income taxes 16,915 22,863 26,380
Restructuring (credit) -- -- (151)
Loss on disposal of businesses -- 35,352 --
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade (68,479) 5,159 1,666
Inventories (33,538) (41,038) 28,147
Accounts payable 12,967 14,032 14,767
Other assets and liabilities 55,974 15,120 (11,297)
Other, net 4,018 5,593 19,614
--------- --------- ---------
Net Cash Provided from Operating Activities 476,858 463,743 494,929
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
INVESTING ACTIVITIES
Capital additions (172,939) (159,433) (140,626)
Business acquisitions -- (437,195) (12,500)
Proceeds from divestitures -- 149,222 --
Other, net 21,368 9,333 8,720
--------- --------- ---------
Net Cash (Used by) Investing Activities (151,571) (438,073) (144,406)
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
FINANCING ACTIVITIES
Net change in short-term borrowings
partially classified as long-term debt (217,018) 210,929 103,530
Long-term borrowings 550,000 -- 202,448
Repayment of long-term debt (15,588) (3,103) (7,887)
Cash dividends paid (121,546) (114,763) (110,090)
Exercise of stock options 14,397 22,049 15,106
Incentive plan transactions (35,063) (45,634) (21,903)
Repurchase of Common Stock (507,654) (66,072) (526,119)
--------- --------- ---------
Net Cash (Used by) Provided from Financing
Activities (332,472) 3,406 (344,915)
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (7,185) 29,076 5,608
Cash and Cash Equivalents as of January 1 61,422 32,346 26,738
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 54,237 $ 61,422 $ 32,346
========= ========= =========
Interest Paid $ 64,937 $ 52,143 $ 43,731
Income Taxes Paid 181,377 180,347 148,629
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-14
<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, 1995 $ -- $ 74,679 $ 15,243 $ 49,880 $ (24,537) $ (38,321) $ 1,522,867 $ (158,711) $ 1,441,100
Net income 281,919 281,919
Dividends:
Common Stock,
$.685 per share (91,190) (91,190)
Class B Common
Stock, $.62 per
share (18,900) (18,900)
Foreign currency
translation
adjustments (4,703) (4,703)
Conversion of
Class B Common
Stock
into Common
Stock 2 (2) --
Incentive plan
transactions (180) (180)
Exercise of
stock options 53 (2,456) (246) (2,649)
Employee stock
ownership trust
transactions 488 3,193 3,681
Repurchase of
Common Stock (526,119) (526,119)
----- --------- -------- -------- --------- --------- ----------- ------------ ----------
BALANCE AS OF
DECEMBER 31,
1995 -- 74,734 15,241 47,732 (29,240) (35,128) 1,694,696 (685,076) 1,082,959
Net income 273,186 273,186
Dividends:
Common Stock,
$.76 per share (93,884) (93,884)
Class B Common
Stock, $.685
per share (20,879) (20,879)
Foreign currency
translation
adjustments (3,635) (3,635)
Two-for-one
stock split 74,736 15,239 (89,975) --
Conversion of
Class B Common
Stock
into Common
Stock 2 (2) --
Incentive plan
transactions (426) (426)
Exercise of
stock options (5,391) (8,547) (13,938)
Employee stock
ownership trust
transactions 517 3,193 3,710
Repurchase of
Common Stock (66,072) (66,072)
----- --------- -------- -------- --------- --------- ----------- ------------ ----------
BALANCE AS OF
DECEMBER 31,
1996 -- 149,472 30,478 42,432 (32,875) (31,935) 1,763,144 (759,695) 1,161,021
Net income 336,251 336,251
Dividends:
Common Stock,
$.84 per share (98,390) (98,390)
Class B Common
Stock, $.76 per
share (23,156) (23,156)
Foreign currency
translation
adjustments (9,368) (9,368)
Conversion of
Class B Common
Stock
into Common
Stock 13 (13) --
Incentive plan
transactions (879) (879)
Exercise of
stock options (8,200) (512) (8,712)
Employee stock
ownership trust
transactions 499 3,194 3,693
Repurchase of
Common Stock (507,654) (507,654)
----- --------- -------- -------- --------- --------- ----------- ------------ ----------
BALANCE AS OF
DECEMBER 31,
1997 $ -- $ 149,485 $ 30,465 $ 33,852 $ (42,243) $ (28,741) $ 1,977,849 $ (1,267,861) $ 852,806
===== ========= ======== ======== ========= ========= =========== ============ ==========
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-15
<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 1997
presentation. Unless otherwise indicated, all shares and per share information
have been restated for the two-for-one stock split effective September 13, 1996.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries after elimination of intercompany accounts and
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates, particularly for accounts
receivable and certain current and long-term liabilities.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar, corn sweeteners and natural
gas for anticipated manufacturing requirements, the Corporation enters into
commodities futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations. In accordance with Statement of Financial
Accounting Standards No. 80 "Accounting for Futures Contracts," these futures
and options contracts meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment is computed using the straight-line method over the
estimated useful lives.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Intangible assets resulting from business acquisitions principally consist of
the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill was $527.6 million and $539.9 million
as of December 31, 1997 and 1996, respectively. Goodwill is amortized on a
straight-line basis over 40 years. Other intangible assets are amortized on a
straight-line basis over the estimated useful lives. The Corporation
periodically evaluates whether events or circumstances have occurred indicating
that the carrying amount of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Corporation uses an estimate of the acquired business' undiscounted future cash
flows compared to the related carrying amount of net assets, including goodwill,
to determine if an impairment loss should be recognized.
A-16
<PAGE>
Accumulated amortization of intangible assets resulting from business
acquisitions was $116.5 million and $100.0 million as of December 31, 1997 and
1996, respectively.
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated using the average
exchange rates during the period. For foreign entities, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the balance
sheet date. Resulting translation adjustments are recorded in a separate
component of stockholders' equity, "Cumulative Foreign Currency Translation
Adjustments."
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward and options contracts to
hedge transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies, and
to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments and foreign exchange options
contracts meet required hedge criteria for anticipated transactions.
Accordingly, gains and losses are deferred and accounted for as part of the
underlying transactions. Gains and losses on terminated derivatives designated
as hedges are accounted for as part of the originally hedged transaction. Gains
and losses on derivatives designated as hedges of items which mature, are sold
or terminated, or of anticipated transactions which are no longer likely to
occur, are recorded currently in income. In entering into these contracts the
Corporation has assumed the risk which might arise from the possible inability
of counterparties to meet the terms of their contracts.
LICENSE AGREEMENTS
The Corporation has entered into license agreements under which it has access
to certain trademarks and proprietary technology, and manufactures and/or
markets and distributes certain products. The rights under these agreements are
extendible on a long-term basis at the Corporation's option subject to certain
conditions, including minimum sales levels, which the Corporation has met.
License fees and royalties, payable under the terms of the agreements, are
expensed as incurred.
RESEARCH AND DEVELOPMENT
The Corporation expenses research and development costs as incurred. Research
and development expense was $27.5 million, $26.1 million and $26.2 million in
1997, 1996 and 1995, respectively.
ADVERTISING
The Corporation expenses advertising costs as incurred. Advertising expense
was $202.4 million, $174.2 million and $159.2 million in 1997, 1996 and 1995,
respectively. Prepaid advertising as of December 31, 1997 and 1996, was $2.0
million and $2.2 million, respectively.
COMPUTER SOFTWARE
In 1997, the Corporation began capitalizing certain costs of computer software
developed or obtained for internal use. The amount capitalized as of December
31, 1997, was $29.1 million. If such costs were capitalized in prior years, the
effect would not have been material. Software assets are classified as other
non-current assets and will be amortized over periods up to five years.
A-17
<PAGE>
2. ACQUISITIONS AND DIVESTITURES
In December 1996, the Corporation acquired from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, Huhtamaki's Leaf
North America (Leaf) confectionery operations for $437.2 million, plus the
assumption of $17.0 million in debt. In addition, the parties entered into a
trademark and technology license agreement under which the Corporation will
manufacture and/or market and distribute in North, Central and South America
Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH, JOLLY RANCHER,
MILK DUDS, PAYDAY AND WHOPPERS. Leaf's principal manufacturing facilities are
located in Denver, Colorado; Memphis, Tennessee; and Robinson, Illinois.
In December 1995, the Corporation completed the acquisition of the outstanding
shares of the confectionery company Henry Heide, Incorporated (Henry Heide), for
approximately $12.5 million. Henry Heide's headquarters and manufacturing
facility are located in New Brunswick, N.J., where it manufactures a variety of
non-chocolate confectionery products including JUJYFRUITS candy and WUNDERBEANS
jellybeans.
In accordance with the purchase method of accounting, the purchase prices of
the acquisitions summarized above were allocated on a preliminary basis to the
underlying assets and liabilities at the date of acquisition based on their
estimated respective fair values, which were revised and finalized by the
anniversary date of each acquisition. Total liabilities assumed, including debt,
were $138.0 million in 1996 and $10.6 million in 1995. Results subsequent to the
dates of acquisition are included in the consolidated financial statements.
Had the acquisition of Leaf occurred at the beginning of 1996, pro forma
consolidated results would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31, 1996
-------------------------------------------
IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS (unaudited)
<S> <C>
Net sales $4,473,950
Net income 234,000
Net income per share --Basic 1.52
Net income per share--Diluted 1.50
</TABLE>
The pro forma results are based on historical financial information provided
by Huhtamaki, including a business restructuring charge recorded by Huhtamaki in
1996, and adjusted to give effect to certain costs and expenses, including fees
under the trademark and technology license agreement, goodwill amortization,
interest expense and income taxes which would have been incurred by the
Corporation if it had owned and operated the Leaf confectionery business
throughout 1996. These results are not necessarily reflective of the actual
results which would have occurred if the acquisition had been completed at the
beginning of 1996, nor are they necessarily indicative of future combined
financial results.
In December 1996, the Corporation completed the sale to Huhtamaki of the
outstanding shares of Gubor Holding GmbH (Gubor) and Sperlari, S.r.l.
(Sperlari). Gubor manufactures and markets high-quality assorted pralines and
seasonal chocolate products in Germany and Sperlari manufactures and markets
various confectionery and grocery products in Italy. The total proceeds from the
sale of the Gubor and Sperlari businesses were $121.7 million. The transaction
resulted in an after-tax loss of $35.4 million since no tax benefit associated
with the transaction was recorded. Combined net sales for Gubor and Sperlari
were $216.6 million and $222.0 million in 1996 and 1995, respectively. The sale
of Gubor and Sperlari allowed the Corporation to place additional focus on its
North American markets and improve financial returns.
A-18
<PAGE>
In January 1996, the Corporation completed the sale of the assets of Hershey
Canada, Inc.'s PLANTERS nut (Planters) business to Johnvince Foods Group and
LIFE SAVERS and BREATH SAVERS hard candy and BEECH-NUT cough drops (Life Savers)
business to Beta Brands Inc. Both transactions were part of a restructuring
program announced by the Corporation in late 1994.
In June 1995, the Corporation completed the sale of the outstanding shares of
Overspecht B.V. (OZF Jamin) to a management buyout group at OZF Jamin, as part
of the Corporation's restructuring program. OZF Jamin manufactures chocolate and
non-chocolate confectionery products, cookies, biscuits and ice cream for
distribution primarily to customers in the Netherlands and Belgium.
3. RESTRUCTURING ACTIVITIES
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million, following a comprehensive review of
domestic and foreign operations designed to enhance performance of operating
assets by lowering operating and administrative costs, eliminating
underperforming assets and streamlining the overall decision-making process. As
of December 31, 1995, $81.8 million of restructuring reserves had been utilized
and $16.7 million had been reversed to reflect revisions and changes in
estimates to the original restructuring program. Such changes related to revised
workforce reductions and a lower loss on the sale of the Planters and Life
Savers businesses. Operating cash flows were used to fund cash requirements
which represented approximately 25% of the total reserves utilized. The non-cash
portion of restructuring reserve utilization was associated primarily with the
divestiture of foreign businesses and the discontinuation of certain product
lines. The remaining $7.6 million of accrued restructuring reserves as of
December 31, 1995, were utilized during 1996 as the restructuring program was
completed.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a voluntary retirement program announced
by the Corporation in August 1995. The charge was primarily related to the
funding of retirement benefits for eligible employees who elected early
retirement. This cash charge was funded from operating cash flows. The impact of
this charge was more than offset by the partial reversal of $16.7 million of
1994 accrued restructuring reserves in the fourth quarter of 1995 resulting in
an increase to income before income taxes of $151,000 and an increase to net
income of $2.0 million, as the tax benefit associated with the 1995 charge more
than offset the tax provision associated with the reversal of 1994 restructuring
reserves.
4. RENTAL AND LEASE COMMITMENTS
Rent expense was $31.8 million, $25.3 million and $24.9 million for 1997, 1996
and 1995, respectively. Rent expense pertains to all operating leases, which
were principally related to certain administrative buildings, distribution
facilities and transportation equipment. Future minimum rental payments under
non-cancelable operating leases with a remaining term in excess of one year as
of December 31, 1997, were: 1998, $11.6 million; 1999, $13.1 million; 2000,
$12.8 million; 2001, $12.7 million; 2002, $9.6 million; 2003 and beyond, $55.8
million.
5. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value as of December 31, 1997 and 1996, because of the
relatively short maturity of these instruments. The carrying value of long-term
debt, including the current portion, was $904.2 million as of December 31, 1997,
compared to a fair value of $961.0 million based on quoted market prices for the
same or similar debt issues. The carrying value of long-term debt, including the
current portion, was $370.8 million as of December 31, 1996, compared to a fair
value of $388.0 million.
A-19
<PAGE>
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
As of December 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $25.0 million in foreign
currency, primarily British sterling and German marks, and to sell $24.6 million
in foreign currency, primarily Canadian dollars and Japanese yen, at contracted
forward rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished goods
generally covering 3 to 24 months, the Corporation also purchases foreign
exchange options which permit, but do not require, the Corporation to exchange
foreign currencies at a future date with another party at a contracted exchange
rate. As of December 31, 1997, the Corporation had purchased foreign exchange
options of $3.6 million, related to Swiss francs. No options were outstanding as
of December 31, 1996.
The fair value of foreign exchange forward contracts is estimated by obtaining
quotes for future contracts with similar terms, adjusted where necessary for
maturity differences, and the fair value of foreign exchange options is
estimated using active market quotations. As of December 31, 1997 and 1996, the
fair value of foreign exchange forward and options contracts approximated the
contract value. The Corporation does not hold or issue financial instruments for
trading purposes.
In order to minimize its financing costs and to manage interest rate exposure,
the Corporation, from time to time, enters into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1997 and 1996, the Corporation had agreements outstanding with
an aggregate notional amount of $150.0 million and $125.0 million with
maturities through September 1999 and October 1997, respectively. As of December
31, 1997 and 1996, interest rates payable were at weighted average fixed rates
of 6.3% and 5.8%, respectively, and interest rates receivable were floating
based on 30-day commercial paper composite rates which were 5.7% and 5.5% as of
December 31, 1997 and 1996, respectively. Any interest rate differential on
interest rate swaps is recognized as an adjustment to interest expense over the
term of each agreement. The Corporation's risk related to swap agreements is
limited to the cost of replacing such agreements at prevailing market rates.
6. INTEREST EXPENSE
Interest expense, net consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Long-term debt and lease obligations $48,737 $30,818 $20,949
Short-term debt 32,284 22,752 28,576
Capitalized interest (1,883) (1,534) (1,957)
------- ------- -------
Interest expense, gross 79,138 52,036 47,568
Interest income (2,883) (3,993) (2,735)
------- ------- -------
Interest expense, net $76,255 $48,043 $44,833
======= ======= =======
</TABLE>
7. SHORT-TERM DEBT
Generally, the Corporation's short-term borrowings are in the form of commercial
paper or bank loans with an original maturity of three months or less. In
December 1995, the Corporation entered into committed credit facility agreements
with a syndicate of banks under which it could borrow up to
A-20
<PAGE>
$600 million, with options to increase borrowings by $1.0 billion with the
concurrence of the banks. Of the total committed credit facility, $200 million
is for a renewable 364-day term and $400 million is effective for a five-year
term. Both the short-term and long-term committed credit facility agreements
were amended and renewed effective December 12, 1997. The credit facilities may
be used to fund general corporate requirements, to support commercial paper
borrowings and, in certain instances, to finance future business acquisitions.
As of December 31, 1997 and 1996, respectively, $150.0 million and $300.0
million of commercial paper borrowings were reclassified as long-term debt in
accordance with the Corporation's intent and ability to refinance such
obligations on a long-term basis.
The Corporation also maintains lines of credit arrangements with domestic and
international commercial banks, under which it could borrow in various
currencies up to approximately $20.7 million and $96.1 million as of December
31, 1997 and 1996, respectively, at the lending banks' prime commercial interest
rates or lower. The Corporation had combined domestic commercial paper
borrowings, including the portion classified as long-term debt, and short-term
foreign bank loans against its credit facilities and lines of credit of $382.5
million as of December 31, 1997, and $599.5 million as of December 31, 1996. The
weighted average interest rates on short-term borrowings outstanding as of
December 31, 1997 and 1996, were 5.7% and 5.5%, respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1997 was approximately .05% per annum of
the commitment. The Corporation's credit facility agreements contain a financial
covenant which requires that a specified interest and fixed charge ratio be
maintained. These agreements are also subject to other representations and
covenants which do not materially restrict the Corporation's activities. The
Corporation is in compliance with all covenants included in the credit facility
agreements. There were no significant compensating balance agreements which
legally restricted these funds.
As a result of maintaining a consolidated cash management system, the
Corporation maintains overdraft positions at certain banks. Such overdrafts,
which were included in accounts payable, were $30.7 million and $25.2 million as
of December 31, 1997 and 1996, respectively.
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Commercial Paper at interest rates ranging from 5.35% to
6.55% $ 150,000 $300,000
Medium-term Notes, 8.85% to 9.92% due 1997-1998 25,000 40,400
6.7% Notes due 2005 200,000 200,000
6.95% Notes due 2007 150,000 --
6.95% Notes due 2012 150,000 --
8.8% Debentures due 2021 100,000 100,000
7.2% Debentures due 2027 250,000 --
Other obligations, net of unamortized debt discount 29,231 30,399
---------- --------
Total long-term debt 1,054,231 670,799
Less--current portion 25,095 15,510
---------- --------
Long-term portion $1,029,136 $655,289
========== ========
</TABLE>
As of December 31, 1997 and 1996, respectively, $150.0 million and $300.0
million of commercial paper borrowings were reclassified as long-term debt in
accordance with the Corporation's intent and ability to refinance such
obligations on a long-term basis.
A-21
<PAGE>
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under the November 1993 Form S-3 Registration Statement. Proceeds from the debt
issuance were used to repay a portion of the commercial paper borrowings
associated with the Leaf acquisition.
In August 1997, the Corporation issued $150 million of 6.95% Notes due 2012
and $250 million of 7.2% Debentures due 2027 under the November 1993 and August
1997 Registration Statements. Proceeds from the debt issuance were used to repay
a portion of the short-term borrowings associated with the purchase of Common
Stock from the Milton Hershey School Trust.
Aggregate annual maturities during the next five years, excluding short-term
borrowings reclassified, are: 1998, $25.1 million; 1999, $.2 million; 2000, $2.2
million; 2001, $.2 million; and 2002, $.2 million. The Corporation's debt is
principally unsecured and of equal priority. None of the debt is convertible
into stock of the Corporation. The Corporation is in compliance with all
covenants included in the related debt agreements.
9. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Current:
Federal $177,145 $158,040 $135,034
State 20,252 23,288 22,620
Foreign 3,392 2,360 --
-------- -------- --------
Current provision for income taxes 200,789 183,688 157,654
-------- -------- --------
Deferred:
Federal 9,370 12,952 12,455
State 5,103 8,134 8,198
Foreign 2,442 1,777 5,727
-------- -------- --------
Deferred provision for income taxes 16,915 22,863 26,380
-------- -------- --------
Total provision for income taxes $217,704 $206,551 $184,034
======== ======== ========
</TABLE>
A-22
<PAGE>
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Deferred tax assets:
Post-retirement benefit obligations $ 91,706 $ 88,885
Accrued expenses and other reserves 91,067 91,675
Accrued trade promotion reserves 30,905 22,910
Other 23,234 20,676
-------- --------
Total deferred tax assets 236,912 224,146
-------- --------
Deferred tax liabilities:
Depreciation 302,675 256,424
Other 117,292 97,261
-------- --------
Total deferred tax liabilities 419,967 353,685
-------- --------
Net deferred tax liabilities $183,055 $129,539
======== ========
Included in:
Current deferred tax assets, net $ 84,024 $ 94,464
Non-current deferred tax liabilities, net 267,079 224,003
-------- --------
Net deferred tax liabilities $183,055 $129,539
======== ========
</TABLE>
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, 1997 1996 1995
- -------------------------------------------------------------------------------
<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 3.4 4.7 4.6
Non-deductible acquisition costs .9 .6 .6
Loss on disposal of businesses for which no tax benefit was
provided -- 2.6 --
Other, net -- .2 (.7)
---- ---- ----
Effective income tax rate 39.3% 43.1% 39.5%
==== ==== ====
</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.
The Corporation's policy is to fund domestic pension liabilities in accordance
with the minimum and maximum limits imposed by the Employee Retirement Income
Security Act of 1974 and Federal income tax laws, respectively. Non-domestic
pension liabilities are funded in accordance with applicable local laws and
regulations. Plan assets are invested in a broadly diversified portfolio
consisting primarily of domestic and international common stocks and fixed
income securities.
A-23
<PAGE>
Pension expense included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Service cost $ 26,177 $ 29,311 $ 25,311
Interest cost on projected benefit obligations 39,385 35,374 32,531
Investment (return) on plan assets (91,767) (51,205) (71,578)
Net amortization and deferral 47,605 14,844 40,823
-------- -------- --------
Corporate sponsored plans 21,400 28,324 27,087
Multi-employer plans 1,627 571 361
Other 864 1,340 615
-------- -------- --------
Total pension expense $ 23,891 $ 30,235 $ 28,063
======== ======== ========
</TABLE>
The funded status and amounts recognized in the consolidated balance sheets
for the retirement plans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations $464,816 $28,951 $427,839 $27,316
======== ======= ======== =======
Accumulated benefit
obligations $493,371 $35,135 $452,907 $32,422
======== ======= ======== =======
Actuarial present value of
projected benefit obligations $565,330 $36,751 $502,371 $34,135
Plan assets at fair value 566,810 -- 488,222 --
-------- ------- -------- -------
Plan assets (greater than)
less than projected benefit
obligations (1,480) 36,751 14,149 34,135
Net gain (loss) unrecognized
at date of transition 558 (751) 906 (1,233)
Prior service cost and
amendments not yet recognized
in earnings (37,351) (1,986) (26,885) (2,305)
Unrecognized net gain (loss)
from past experience
different than that assumed 32,325 (5,007) 12,386 (2,502)
Minimum liability adjustment -- 6,336 -- 4,494
-------- ------- -------- -------
(Prepaid pension expense)
Pension liability $ (5,948) $35,343 $ 556 $32,589
======== ======= ======== =======
</TABLE>
The projected benefit obligations for the plans were determined principally
using discount rates of 7.0% as of December 31, 1997, and 7.5% as of December
31, 1996. For both 1997 and 1996, the assumed long-term rate of return on plan
assets was 9.5%. The assumed long-term compensation increase rate for 1997 and
1996 was primarily 4.8%.
In the third quarter of 1995, the Corporation offered a voluntary retirement
program to domestic eligible employees age 55 and over. The voluntary retirement
program gave eligible salaried employees an opportunity to retire with enhanced
retirement benefits. The pre-tax impact on pension expense of the 1995 charge
was $13.0 million or $7.7 million after tax. This amount has not been included
in the disclosure of pension expense by component.
A-24
<PAGE>
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, 1997 1996 1995
- --------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
Service cost $ 4,390 $ 3,947 $ 3,262
Interest cost on projected benefit obligations 13,395 10,853 12,918
Amortization (2,246) (2,986) (2,322)
------- ------- -------
Total $15,539 $11,814 $13,858
======= ======= =======
</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, 1997 1996
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Retirees $115,353 $ 96,870
Fully eligible active plan participants 16,087 22,096
Other active plan participants 75,255 58,578
-------- --------
Total 206,695 177,544
Plan amendments 25,685 28,903
Unrecognized net (loss) gain from past experience different
than that assumed (4,330) 12,127
-------- --------
Accrued post-retirement benefits $228,050 $218,574
======== ========
</TABLE>
The accumulated post-retirement benefit obligations were determined
principally using discount rates of 7.0% and 7.5% as of December 31, 1997 and
1996, respectively. The assumed average health care cost trend rate used in
measuring the accumulated post-retirement benefit obligation as of December 31,
1997 and 1996, was 6% which was also the ultimate trend rate. A one percentage
point increase in the average health care cost trend rate for each year would
increase the accumulated post-retirement benefit obligations as of December 31,
1997 and 1996, by $14.4 million and $24.4 million, respectively, and would
increase the sum of the net service and interest cost components of net
post-retirement benefit costs for 1997 and 1996 by $1.4 million and $2.9
million, respectively.
The pre-tax impact on post-retirement benefits expense and liabilities of the
1995 charge for the voluntary retirement program was $.4 million or $.2 million
after tax. This amount has not been included in the disclosure of net
post-retirement benefit costs by component.
As part of its long-range financing plans, the Corporation, in 1989,
implemented a corporate-owned life insurance program covering most of its
domestic employees. After paying employee death benefits, proceeds from this
program were available for general corporate purposes and also could be used to
offset future employee benefits costs, including retiree medical benefits.
During 1996, Federal tax legislation sharply curtailed the financial viability
of most corporate-owned life insurance programs. As a result, the Corporation
began the phase-out of its corporate-owned life insurance
A-25
<PAGE>
program during 1996. The Corporation's investment in corporate-owned life
insurance policies was recorded net of policy loans in other assets, and
interest accrued on the policy loans was included in accrued liabilities as of
December 31, 1997 and 1996. Net life insurance expense, including interest
expense, was included in selling, marketing and administrative expenses.
12. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the primary
vehicle for contributions to its existing employee savings and stock investment
plan for participating domestic salaried and hourly employees. The ESOP was
funded by a 15-year 7.75% loan of $47.9 million from the Corporation. During
1997 and 1996, the ESOP received a combination of dividends on unallocated
shares and contributions from the Corporation equal to the amount required to
meet its principal and interest payments under the loan. Simultaneously, the
ESOP allocated to participants 159,176 shares of Common Stock each year. As of
December 31, 1997, the ESOP held 811,235 allocated shares and 1,432,576
unallocated shares. All ESOP shares are considered outstanding for income per
share computations.
The Corporation recognized net compensation expense equal to the shares
allocated multiplied by the original cost of $20 1/16 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to the
ESOP for 1997, 1996 and 1995 was $1.4 million, $1.8 million and $1.9 million,
respectively. Dividends paid on unallocated ESOP shares were $1.3 million in
1997 and 1996 and $1.2 million in 1995. The unearned ESOP compensation balance
in stockholders' equity represented deferred compensation expense to be
recognized by the Corporation in future years as additional shares are allocated
to participants.
13. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1997, the Corporation had 530,000,000 authorized shares of
capital stock. Of this total, 450,000,000 shares were designated as Common
Stock, 75,000,000 shares as Class B Common Stock (Class B Stock), and 5,000,000
shares as Preferred Stock, each class having a par value of one dollar per
share. As of December 31, 1997, a combined total of 179,950,872 shares of both
classes of common stock had been issued of which 142,932,306 shares were
outstanding. No shares of the Preferred Stock were issued or outstanding during
the three-year period ended December 31, 1997.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13, 1996,
to stockholders of record August 23, 1996. The split was effected as a stock
dividend by distributing one additional share for each share held.
Holders of the Common Stock and the Class B Stock generally vote together
without regard to class on matters submitted to stockholders, including the
election of directors, with the Common Stock having one vote per share and the
Class B Stock having ten votes per share. However, the Common Stock, voting
separately as a class, is entitled to elect one-sixth of the Board of Directors.
With respect to dividend rights, the Common Stock is entitled to cash dividends
10% higher than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis at
any time. During 1997, 1996 and 1995, a total of 13,000 shares, 2,000 shares and
1,525 shares, respectively, of Class B Stock were converted into Common Stock
(shares converted in 1996 and 1995 are on a pre-split basis).
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
(Milton Hershey School Trust), as institutional fiduciary for estates and trusts
unrelated to Milton Hershey School, and as direct owner of investment shares,
held a total of 14,635,252 shares of the Common Stock, and as
A-26
<PAGE>
Trustee for the benefit of Milton Hershey School, held 30,306,006 shares of the
Class B Stock as of December 31, 1997, and was entitled to cast approximately
76% of the total votes of both classes of the Corporation's common stock. The
Milton Hershey School Trust must approve the issuance of shares of Common Stock
or any other action which would result in the Milton Hershey School Trust not
continuing to have voting control of the Corporation.
A total of 9,546,030 shares of Common Stock have been repurchased for
approximately $271.4 million under share repurchase programs which were approved
by the Corporation's Board of Director's in 1993 and 1996. Of the shares
repurchased, 528,000 shares were retired and the remaining 9,018,030 shares were
held as Treasury Stock as of December 31, 1997. In August 1997, the Corporation
purchased an additional 9,900,990 shares of its Common Stock to be held as
Treasury Stock from the Milton Hershey School Trust for $500.0 million. This was
in addition to the 18,099,546 shares (9,049,773 shares on a pre-split basis)
purchased from the Milton Hershey School Trust in August 1995 for $500.0
million. A total of 37,018,566 shares were held as Treasury Stock as of December
31, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No. 128).
Under FAS No. 128, Basic and Diluted Earnings per Share are computed based on
the weighted average number of shares of the Common Stock and the Class B
Stock outstanding as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
<S> <C> <C> <C>
Net Income per Share--Basic
Net income $336,251 149,173,558 $2.25
=====
Effect of Dilutive Securities
Stock options -- 1,726,761
Performance stock units -- 112,649
Restricted stock units -- 3,389
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $336,251 151,016,357 $2.23
======== =========== =====
<CAPTION>
INCOME SHARES PER-SHARE
FOR THE YEAR ENDED DECEMBER 31, 1996 (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
<S> <C> <C> <C>
Net Income per Share--Basic
Net income $273,186 154,333,549 $1.77
=====
Effect of Dilutive Securities
Stock options -- 1,270,177
Performance stock units -- 84,697
Restricted stock units -- 1,528
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $273,186 155,689,951 $1.75
======== =========== =====
</TABLE>
A-27
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, INCOME SHARES PER-SHARE
1995 (NUMERATOR) (DENOMINATOR) AMOUNT
- -----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
SHARES AND PER SHARE AMOUNTS
<S> <C> <C> <C>
Net Income per Share--Basic
Net income $281,919 166,036,254 $1.70
=====
Effect of Dilutive Securities
Stock options -- 610,132
Performance stock units -- 74,576
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $281,919 166,720,962 $1.69
======== =========== =====
</TABLE>
14. STOCK COMPENSATION PLAN
The long-term portion of the Key Employee Incentive Plan (KEIP), provides for
grants of stock-based compensation awards to senior executives and key employees
of one or more of the following: non-qualified stock options (fixed stock
options), performance stock units, stock appreciation rights and restricted
stock units. The KEIP also provides for the deferral of performance stock unit
awards by participants. As of December 31, 1997, 9.3 million shares were
authorized for grants under the long-term portion of the KEIP. In February 1998,
the Corporation's Board of Directors approved the registration of an additional
6.0 million shares of Common Stock to be granted under the KEIP.
In 1996, the Corporation's Board of Directors approved a world-wide,
broad-based employee stock option program, called HSY Growth. HSY Growth
provides all eligible employees with a one-time grant of 100 non-qualified stock
options. Under HSY Growth, over 1.2 million shares were granted on January 7,
1997.
The Corporation applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related Interpretations in accounting for the
KEIP and HSY Growth. Accordingly, no compensation cost has been recognized for
its fixed stock option grants. Had compensation cost for the Corporation's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under the KEIP and HSY Growth consistent with the method
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," the Corporation's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
<S> <C> <C> <C> <C>
Net income As reported $336,251 $273,186 $281,919
Pro forma 330,710 266,517 281,015
Net income per share--Basic As reported $2.25 $1.77 $1.70
Pro forma 2.22 1.73 1.69
Net income per share--Diluted As reported $2.23 $1.75 $1.69
Pro forma 2.19 1.71 1.69
</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 1997, 1996 and 1995, respectively: dividend
yields of 1.9%, 2.4% and 2.7%, expected volatility of 20%, 20% and 21%, risk-
free interest rates of 6.2%, 5.6% and 7.8%, and expected lives of 5.7, 7.5 and 7
years.
FIXED STOCK OPTIONS
The exercise price of each option equals the market price of the Corporation's
Common Stock on the date of grant. Under the KEIP, options are granted in
January and generally vest at the end of
A-28
<PAGE>
the second year and have a term of ten years. Options granted under the HSY
Growth program vest at the end of the fifth year and have a term of ten years.
A summary of the status of the Corporation's fixed stock options as of
December 31, 1997, 1996, and 1995, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- --------------------
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 5,902,220 $27.40 4,435,800 $22.54 5,067,900 $21.62
Granted 1,485,250 $44.64 2,619,200 $33.08 237,400 $24.19
Exercised (656,350) $21.94 (1,062,980) $20.74 (843,100) $17.43
Forfeited (17,200) $33.06 (89,800) $31.92 (26,400) $24.24
--------- ---------- ---------
Outstanding at end of year 6,713,920 $31.73 5,902,220 $27.40 4,435,800 $22.54
========= ========== =========
Options exercisable at year-end 3,013,670 $24.38 3,670,020 $23.94 2,901,800 $21.50
========= ========== =========
Weighted-average fair value
of options granted during
the year (per share) $ 11.66 $ 8.70 $ 7.38
========= ========== =========
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<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 12/31/97 LIFE IN YEARS EXERCISE PRICE 12/31/97 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$12 11/16-26 1/2 2,718,570 5.2 $23.43 2,718,570 $23.43
$33 1/16-37 5/8 2,510,100 8.0 $33.08 295,100 $33.08
$44 1/2-56 1/4 1,485,250 9.0 $44.64 --
--------- ---------
$12 11/16-56 1/4 6,713,920 7.1 $31.73 3,013,670 $24.38
========= =========
</TABLE>
PERFORMANCE STOCK UNITS
Under the long-term portion of the KEIP, each January the Corporation grants
selected executives and other key employees performance stock units whose
vesting is contingent upon the achievement of certain performance objectives. If
at the end of three-year performance cycles, targets for financial measures of
earnings per share, return on net assets and free cash flow are met, the full
number of shares are awarded to the participants. The performance scores can
range from 0% to 150%. The compensation cost charged against income for the
performance-based plan was $9.1 million, $5.8 million, and $3.6 million for
1997, 1996, and 1995, respectively. The compensation cost associated with the
long-term portion of the KEIP is recognized ratably over the three-year term
based on the year-end market value of the stock. Performance stock units and
restricted stock units granted for potential future distribution were as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Shares granted 95,250 86,000 97,600
Weighted-average fair value at date of grant $ 45.17 $ 33.56 $ 24.56
</TABLE>
A-29
<PAGE>
Deferred performance stock units, deferred directors' fees and accumulated
dividend amounts totaled 384,009 shares as of December 31, 1997.
No stock appreciation rights were outstanding as of December 31, 1997.
15. SUPPLEMENTAL BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE--TRADE
In the normal course of business, the Corporation extends credit to customers
which satisfy pre-defined credit criteria. The Corporation believes that it has
little concentration of credit risk due to the diversity of its customer base.
Receivables, as shown on the consolidated balance sheets, were net of allowances
and anticipated discounts of $15.8 million and $14.1 million as of December 31,
1997 and 1996, respectively.
INVENTORIES
The Corporation values the majority of its inventories under the last-in,
first-out (LIFO) method and the remaining inventories at the lower of first-in,
first-out (FIFO) cost or market. LIFO cost of inventories valued using the LIFO
method was $372.7 million and $299.2 million as of December 31, 1997 and 1996,
respectively, and all inventories were stated at amounts that did not exceed
realizable values. Total inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF
DOLLARS
<S> <C> <C>
Raw materials $223,702 $204,419
Goods in process 36,015 31,444
Finished goods 334,639 316,726
-------- --------
Inventories at FIFO 594,356 552,589
Adjustment to LIFO (88,831) (77,611)
-------- --------
Total inventories $505,525 $474,978
======== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances included construction in progress of
$144.0 million and $91.9 million as of December 31, 1997 and 1996, respectively.
Major classes of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Land $ 31,340 $ 34,056
Buildings 540,729 533,559
Machinery and equipment 2,015,161 1,855,087
---------- ----------
Property, plant and equipment, gross 2,587,230 2,422,702
Accumulated depreciation (938,993) (820,807)
---------- ----------
Property, plant and equipment, net $1,648,237 $1,601,895
========== ==========
</TABLE>
ACCRUED LIABILITIES
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Payroll and other compensation $ 92,102 $ 81,264
Advertising and promotion 86,184 77,351
Other 193,259 199,213
-------- --------
Total accrued liabilities $371,545 $357,828
======== ========
</TABLE>
A-30
<PAGE>
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
-----------------------------------------------------
IN THOUSANDS OF DOLLARS
<S> <C> <C>
Accrued post-retirement benefits $216,901 $207,881
Other 129,599 119,328
-------- --------
Total other long-term liabilities $346,500 $327,209
======== ========
</TABLE>
16. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of chocolate and non-
chocolate confectionery, grocery and pasta products. The Corporation's principal
operations and markets are located in North America. In December 1996, the
Corporation sold its Gubor and Sperlari European businesses.
Net sales, income before interest and income taxes and identifiable assets of
businesses outside of North America were not significant. Historically,
transfers of product between geographic areas have not been significant. In 1997
and 1996, sales to Wal-Mart Stores, Inc. and Subsidiaries amounted to
approximately 12% of total net sales.
17. QUARTERLY DATA (UNAUDITED)
Summary quarterly results were as follows:
<TABLE>
<CAPTION>
YEAR 1997 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT
PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Net sales $1,002,469 $905,729 $1,151,610 $1,242,428
Gross profit 413,188 375,411 479,006 545,735
Net income 68,894 50,564 100,673 116,120
Net income per share--Basic(a) .45 .33 .68 .81
Net income per share--Diluted(a) .45 .33 .67 .80
<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(b)
Net income per share--Basic(a) .38 .26 .61 .51
Net income per share--Diluted(a) .38 .26 .61 .51
</TABLE>
- --------
(a) Quarterly income per share amounts for 1997 and 1996 do not total to the
annual amount due to the changes in weighted average shares outstanding
during the year.
(b) Net income for the fourth quarter and year 1996 included an after-tax loss
on the sale of Gubor and Sperlari of $35.4 million. Net income per share
was similarly impacted.
A-31
<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 29, 1997. Their report expresses an opinion
that the Corporation's financial statements are fairly stated in conformity with
generally accepted accounting principles, and they have indicated to us that
their examination was performed in accordance with generally accepted auditing
standards which are designed to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
The Audit Committee of the Board of Directors of the Corporation, consisting
solely of non-management directors, meets regularly with the independent public
accountants, internal auditors and management to discuss, among other things,
the audit scopes and results. Arthur Andersen LLP and the internal auditors both
have full and free access to the Audit Committee, with and without the presence
of management.
A-32
<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, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997, appearing on pages A-12 through A-31. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hershey Foods Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
January 28, 1998
A-33
<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 1997 1996 1995
----------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS(a)
Net Sales 8.72% $ 4,302,236 3,989,308 3,690,667
-------------- --------------- -----------
Cost of Sales 8.03% $ 2,488,896 2,302,089 2,126,274
Selling, Marketing and
Administrative 9.72% $ 1,183,130 1,124,087 1,053,758
Non-recurring
Credits/(Charges)(n) $ -- (35,352) 151
Interest Expense, Net 13.03% $ 76,255 48,043 44,833
Income Taxes 8.13% $ 217,704 206,551 184,034
-------------- --------------- -----------
Income from Continuing
Operations Before
Accounting Changes 10.48% $ 336,251 273,186 281,919
Net Cumulative Effect of
Accounting Changes $ -- -- --
Discontinued Operations $ -- -- --
-------------- --------------- -----------
Net Income 8.54% $ 336,251 273,186 281,919
============== =============== ===========
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic(m) 12.71% $ 2.25 1.77(h) 1.70(i)
--Diluted(m) 12.61% $ 2.23 1.75 1.69
Net Cumulative Effect of
Accounting Changes
--Basic and Diluted(m) $ -- -- --
Net Income--Basic(m) 10.62% $ 2.25 1.77(h) 1.70(i)
Net Income--Diluted(m) 10.52% $ 2.23 1.75 1.69
Weighted Average Shares
Outstanding--Basic(b) 149,174 154,334 166,036
Weighted Average Shares
Outstanding--Diluted(b) 151,016 155,690 166,721
Dividends Paid on Common
Stock 8.52% $ 98,390 93,884 91,190
Per Share(b) 11.22% $ .840 .760 .685
Dividends Paid on Class B
Common Stock 11.17% $ 23,156 20,879 18,900
Per Share(b) 11.22% $ .760 .685 .620
Income from Continuing
Operations Before
Accounting Changes as a
Percent of Net Sales 7.8% 7.7%(c) 7.6%
Depreciation 14.33% $ 135,016 119,443 119,438
Advertising 7.63% $ 202,408 174,199 159,200
Promotion 10.19% $ 451,580 429,208 402,454
Payroll 7.13% $ 524,827 491,677 461,928
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 9.70% $ 172,939 159,433 140,626
Total Assets 7.86% $ 3,291,236 3,184,796 2,830,623
Long-term Portion of Debt 13.87% $ 1,029,136 655,289 357,034
Stockholders' Equity .24% $ 852,806 1,161,021 1,082,959
Operating Return on
Average Stockholders'
Equity 33.4% 27.5% 22.2%
Operating Return on
Average Invested Capital 17.5% 17.8% 17.1%
Full-time Employees 14,900 14,000 13,300
STOCKHOLDERS' DATA(b)
Outstanding Shares of
Common Stock and
Class B Common Stock at
Year-end 142,932 152,942 154,532
Market Price of Common
Stock at Year-end 17.59% $ 61 15/16 43 3/4 32 1/2
Range During Year $63 7/8-42 1/8 51 3/4-31 15/16 33 15/16-24
</TABLE>
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-36.
A-34
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
- -------------- --------------- -------------- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
3,606,271 3,488,249 3,219,805 2,899,165 2,715,609 2,420,988 2,168,048
- -------------- --------------- -------------- -------------- --------------- -------------- ----------------
2,097,556 1,995,502 1,833,388 1,694,404 1,588,360 1,455,612 1,326,458
1,034,115 1,035,519 958,189 814,459 776,668 655,040 575,515
(106,105) 80,642 -- -- 35,540 -- --
35,357 26,995 27,240 26,845 24,603 20,414 29,954
148,919 213,642 158,390 143,929 145,636 118,868 91,615
- -------------- --------------- -------------- -------------- --------------- -------------- ----------------
184,219 297,233 242,598 219,528 215,882 171,054 144,506
-- (103,908) -- -- -- -- --
-- -- -- -- -- -- 69,443
- -------------- --------------- -------------- -------------- --------------- -------------- ----------------
184,219 193,325 242,598 219,528 215,882 171,054 213,949
============== =============== ============== ============== =============== ============== ================
1.06(j) 1.65(k) 1.34 1.21 1.19(l) .95 .80
1.05 1.65 1.34 1.21 1.19 .95 .80
-- (.58) -- -- -- -- --
1.06(j) 1.07(k) 1.34 1.21 1.19(l) .95 1.18
1.05 1.07 1.34 1.21 1.19 .95 1.18
174,367 179,929 180,775 180,767 180,766 180,824 180,981
174,740 180,495 181,160 181,112 180,987 180,984 181,140
89,660 84,711 77,174 70,426 74,161(f) 55,431 49,433
.625 .570 .515 .470 .495(f) .370 .330
17,301 15,788 14,270 12,975 13,596(f) 10,161 9,097
.5675 .5175 .4675 .425 .445(f) .3325 .2975
7.3%(d) 7.4%(e) 7.5% 7.6% 7.2%(g) 7.1% 6.7%
114,821 100,124 84,434 72,735 61,725 54,543 43,721
120,629 130,009 137,631 117,049 146,297 121,182 99,082
419,164 444,546 398,577 325,465 315,242 256,237 230,187
472,997 469,564 433,162 398,661 372,780 340,129 298,483
138,711 211,621 249,795 226,071 179,408 162,032 101,682
2,890,981 2,855,091 2,672,909 2,341,822 2,078,828 1,814,101 1,764,665
157,227 165,757 174,273 282,933 273,442 216,108 233,025
1,441,100 1,412,344 1,465,279 1,335,251 1,243,537 1,117,050 1,005,866
18.5% 17.8% 17.3% 17.0% 16.6% 16.1% 17.5%
15.6% 15.0% 14.4% 13.8% 13.4% 13.2% 13.3%
14,000 14,300 13,700 14,000 12,700 11,800 12,100
173,470 175,226 180,373 180,373 180,373 180,373 180,373
24 3/16 24 1/2 23 1/2 22 3/16 18 3/4 17 15/16 13
26 3/4-20 9/16 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
<CAPTION>
1987
--------------
<C>
1,863,816
--------------
1,149,663
468,062
--
22,413
99,604
--------------
124,074
--
24,097
--------------
148,171
==============
.68
.68
--
.82
.82
181,189
181,372
43,436
.290
8,031
.2625
6.7%
35,397
97,033
171,162
263,529
68,504
1,544,354
280,900
832,410
19.0%
13.5%
10,540
180,373
12 1/4
18 7/8-10 3/8
</TABLE>
A-35
<PAGE>
NOTES TO THE ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(a) All amounts for 1987 and 1988 have been restated for discontinued
operations, where applicable. Operating Return on Average Stockholders'
Equity and Operating Return on Average Invested Capital have been computed
using Net Income, excluding the 1988 gain on disposal included in
Discontinued Operations, the 1993 Net Cumulative Effect of Accounting
Changes, and the after-tax impacts of the 1990 Restructuring Gain, Net, the
1993 Gain on Sale of the Investment Interest in Freia Marabou a.s (Freia),
the 1994 Restructuring Charge, the net 1995 Restructuring Credit and the
1996 Loss on Sale of Businesses.
(b) All shares and per share amounts have been adjusted for the two-for-one
stock split effective September 13, 1996.
(c) Calculated percent excludes the 1996 Loss on Sale of Businesses. Including
the loss, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 6.8%.
(d) Calculated percent excludes the 1994 Restructuring Charge. Including the
charge, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 5.1%.
(e) Calculated percent excludes the 1993 Gain on Sale of Investment Interest in
Freia. Including the gain, Income from Continuing Operations Before
Accounting Changes as a Percent of Net Sales was 8.5%.
(f) Amounts included a special dividend for 1990 of $11.2 million or $.075 per
share of Common Stock and $2.1 million or $.0675 per share of Class B Common
Stock.
(g) Calculated percent excludes the 1990 Restructuring Gain, Net. Including the
gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 7.9%.
(h) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1996 included a $.23 per share
loss on the sale of the Gubor and Sperlari businesses. Excluding the impact
of this loss, Income Per Share from Continuing Operations Before Accounting
Changes--Basic and Net Income Per Share--Basic would have been $2.00.
(i) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1995 included a net $.01 per share
credit associated with adjustments to accrued restructuring reserves.
Excluding the impact of this net credit, Income Per Share from Continuing
Operations Before Accounting Changes--Basic and Net Income Per Share--Basic
would have been $1.69.
(j) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1994 included a $.46 per share
restructuring charge. Excluding the impact of this charge, Income Per Share
from Continuing Operations Before Accounting Changes--Basic and Net Income
Per Share--Basic would have been $1.52.
(k) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1993 included a $.23 per share
gain on the sale of the investment interest in Freia. Excluding the impact
of this gain, Income Per Share from Continuing Operations Before Accounting
Changes--Basic would have been $1.43.
(l) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1990 included an $.11 per share
Restructuring Gain, Net. Excluding the impact of this gain, Income Per Share
from Continuing Operations Before Accounting Changes--Basic and Net Income
Per Share--Basic would have been $1.08.
(m) In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS No.
128). Under FAS No. 128, Basic and Diluted Earnings per Share are required
to be computed for all prior-period EPS data.
(n) Includes the 1996 Loss on Sale of Businesses; the net 1995 Restructuring
Credit; the 1994 Restructuring Charge; the 1993 Gain on Sale of Investment
Interest and the 1990 Restructuring Gain, Net.
A-36
