<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HERSHEY FOODS CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--Enter Company Name Here--
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF HERSHEY FOODS APPEARS HERE]
Notice of 1999 Annual Meeting
Proxy Statement
Consolidated Financial Statements and Management's Discussion and Analysis
March 15, 1999
To Our Stockholders:
It is my pleasure to invite you to attend the 1999 Annual Meeting of
Stockholders of Hershey Foods Corporation, to be held at 2:00 p.m. on April 27,
1999. The meeting location has changed from prior years and will be held at
The Hershey Lodge & Convention Center located on West Chocolate Avenue and
University Drive, Hershey, Pennsylvania. A map providing directions to The
Hershey Lodge is on the back cover of this Proxy Statement. Refreshments will
be available prior to the Annual Meeting. After the Annual Meeting, you will
be entitled to receive a product sample by exchanging the agenda provided to
you at the meeting. The doors to the refreshment room will open at 12:30 p.m.
and the doors to the Annual Meeting room will open at 1:00 p.m.
We also invite you to visit HERSHEY'S CHOCOLATE WORLD Visitors Center from
9:00 a.m. to 6:00 p.m. on the day of the Annual Meeting. We will again be
offering stockholders a special 25% discount on confectionery products and
Hershey's gift and souvenir items.
Business scheduled to be considered at the meeting includes the election of
eleven directors and the approval of the appointment of Arthur Andersen LLP as
independent public accountants for the Corporation for 1999. Additional
information concerning these matters is included in the Notice of Annual
Meeting and Proxy Statement. Members of management will also review with you
the Corporation's operations during the past year and will be available to
respond to questions during the meeting.
If you plan to attend the meeting, please bring the admission ticket located
on the bottom half of your proxy card with you to the meeting. If your shares
are currently held in the name of your broker, bank or other nominee and you
wish to attend the meeting, you should obtain a letter from your broker, bank
or other nominee, or bring your most recent account statement, indicating that
you are the beneficial owner of a stated number of shares of stock as of the
record date, March 1, 1999. You will need to show the letter from your broker,
bank or nominee or your account statement at CHOCOLATE WORLD to receive the
special discount.
To assure proper representation of your shares at the meeting, please submit
your proxy voting instructions. Two methods of voting your shares are
available this year. Telephone voting is fast, convenient and your vote is
immediately confirmed and posted. See the instructions for voting by telephone
on the enclosed proxy card. If you choose not to vote by telephone, please
carefully mark the enclosed proxy card; then sign, date and return it at your
earliest convenience.
I look forward to seeing you at the meeting.
Sincerely yours,
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman of the Board and
Chief Executive Officer
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
NOTICE OF ANNUAL MEETING.................................................. 1
PROXY STATEMENT........................................................... 2
Election of Directors................................................... 2
Board Committees........................................................ 5
Directors' Attendance................................................... 7
Directors' Compensation................................................. 7
Appointment of Auditors................................................. 8
Voting Securities....................................................... 8
Description of the Milton Hershey School Trust and Hershey Trust
Company................................................................ 10
Executive Compensation.................................................. 11
Voting of Proxies....................................................... 22
Solicitation of Proxies................................................. 22
Section 16(a) Beneficial Ownership Reporting Compliance................. 23
Certain Transactions and Relationships.................................. 23
Other Business.......................................................... 23
Stockholder Proposals and Nominations................................... 23
Summary Annual Report and Form 10-K..................................... 24
CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S
DISCUSSION AND ANALYSIS.................................................. A-1
Management's Discussion and Analysis.................................... A-1
Consolidated Financial Statements....................................... A-12
Notes to Consolidated Financial Statements.............................. A-16
Responsibility for Financial Statements................................. A-33
Report of Independent Public Accountants................................ A-34
Eleven-Year Consolidated Financial Summary.............................. A-35
</TABLE>
<PAGE>
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
on
April 27, 1999
----------------
The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held
at 2:00 p.m. on April 27, 1999 at The Hershey Lodge & Convention Center, West
Chocolate Avenue and University Drive, Hershey, Pennsylvania for the following
purposes:
(1) To elect eleven directors;
(2) To approve the appointment of Arthur Andersen LLP as the Corporation's
independent public accountants for 1999; and
(3) To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
In accordance with the By-Laws and action of the Board of Directors,
stockholders of record at the close of business on March 1, 1999 will be
entitled to notice of, and to vote at, the meeting and any and all
adjournments thereof.
By order of the Board of Directors,
Robert M. Reese
Senior Vice President,
General Counsel and Secretary
March 15, 1999
Kindly mark, sign and date the enclosed proxy card and return it promptly in
the enclosed postage-paid envelope whether or not you plan to attend the
meeting in person, or if you prefer, please follow the instructions on the
enclosed proxy card for voting by telephone.
<PAGE>
---------------------------------
PROXY STATEMENT
---------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of HERSHEY FOODS CORPORATION, a Delaware
corporation (the "Corporation" or "Hershey Foods"), for use at the Annual
Meeting of Stockholders which will be held at 2:00 p.m., Tuesday, April 27,
1999 at The Hershey Lodge & Convention Center, West Chocolate Avenue and
University Drive, Hershey, Pennsylvania, and at any and all adjournments of
that meeting. This Proxy Statement and the enclosed proxy card are being sent
to stockholders on or about March 15, 1999. The Corporation's principal
executive offices are located at 100 Crystal A Drive, Hershey, Pennsylvania
17033.
Shares represented by properly voted proxies received by the Corporation at
or prior to the meeting will be voted according to the instructions indicated
by such proxies. Unless contrary instructions are given, the persons named on
the proxy card intend to vote the shares so represented FOR the election of
the nominees for director named in this Proxy Statement and FOR approval of
the appointment of Arthur Andersen LLP as the Corporation's independent public
accountants for 1999. As to any other business which may properly come before
the meeting, the persons named on the proxy card will vote according to their
best judgment.
Proposal No. 1--ELECTION OF DIRECTORS
Eleven directors are to be elected at the meeting, each to serve until the
next annual meeting and until his or her successor shall have been elected and
qualified. Each of the nominees named in the following pages is currently a
member of the Board of Directors. Mr. Vincent A. Sarni, currently a director,
will be retiring from the Board as of the Annual Meeting of Stockholders on
April 27, 1999, having reached the mandatory retirement age of 70. Pursuant to
the Corporation's Certificate and By-Laws, one-sixth of the directors, which
presently equates to two directors, is to be elected by the Corporation's
Common Stock, one dollar par value, ("Common Stock") voting separately as a
class. The two nominees receiving the greatest number of votes of the Common
Stock voting separately as a class will be elected. Messrs. Mackey J. McDonald
and Allan Z. Loren have been nominated by the Board of Directors for the two
positions to be elected separately by the Common Stock. The remaining nine
individuals listed have been nominated by the Board of Directors for the nine
positions to be elected by the holders of the Common Stock and the
Corporation's Class B Common Stock, one dollar par value, ("Class B Stock")
voting together without regard to class. The nine nominees receiving the
greatest number of votes of the Common Stock and Class B Stock voting together
will be elected. In case any of the nominees should become unavailable for
election for any reason not presently known or contemplated, the persons named
on the proxy card will have discretionary authority to vote pursuant to the
proxy for a substitute.
[PHOTO OF WILLIAM H. ALEXANDER, age 57, is Administrator of the Family
WILLIAM H. Business Program, The Wharton School of the University of
ALEXANDER Pennsylvania, Philadelphia, Pennsylvania. Previously, he was
APPEARS HERE] with H. B. Alexander Enterprises, Inc. and held a number of
management positions, including Vice President and General
Manager, President and Chairman. A Hershey Foods director
since 1995, he is a member of the Committee on Directors and
Corporate Governance.
----------------
2
<PAGE>
[PHOTO OF ROBERT H. CAMPBELL, age 61, is Chairman of the Board and
ROBERT H. Chief Executive Officer, Sunoco, Inc., Philadelphia,
CAMPBELL Pennsylvania, a petroleum refiner and marketer. He has been
APPEARS HERE] Chief Executive Officer since 1991, Chairman of the Board
since 1992 and has been a Director of Sunoco, Inc. since
1988. A Hershey Foods director since 1995, he chairs the
Compensation and Executive Organization Committee and is a
member of the Audit Committee. He is also a director of CIGNA
Corporation.
----------------
[PHOTO OF DR. C. McCOLLISTER EVARTS, age 67, is Senior Vice President
DR. C. for Health Affairs, Dean of the College of Medicine, and
McCOLLISTER Professor of Orthopaedics, The Pennsylvania State University,
EVARTS College of Medicine and University Hospitals, The Milton S.
APPEARS HERE] Hershey Medical Center, Hershey, Pennsylvania. He is also the
President and Chief Academic Officer of the Penn State
Geisinger Health System. He serves on the Board of Directors
of Carpenter Technology Corporation. A Hershey Foods director
since 1996, he is a member of the Compensation and Executive
Organization Committee.
----------------
[PHOTO OF BONNIE GUITON HILL, age 57, is President and Chief Executive
BONNIE Officer of The Times Mirror Foundation; Vice President of The
GUITON HILL Times Mirror Company, a news and information company; and
APPEARS HERE] Senior Vice President, Communications and Public Affairs, The
Los Angeles Times, Los Angeles, California. Previously she
was Dean, McIntire School of Commerce, University of
Virginia. A Hershey Foods director since 1993, she chairs the
Audit Committee. She is also a director of AK Steel
Corporation, Louisiana-Pacific Corporation, and Niagara
Mohawk Power Corporation.
----------------
[PHOTO OF JOHN C. JAMISON, age 64, is Chairman of the Board, Mallardee
JOHN C. JAMISON Associates, a privately-held corporate financial services
APPEARS HERE] firm, Williamsburg, Virginia. A Hershey Foods director since
1974, he is a member of the Committee on Directors and
Corporate Governance. He is also a director of Richfood
Holdings, Inc.
----------------
3
<PAGE>
[PHOTO OF ALLAN Z. LOREN, age 60, is Executive Vice President and Chief
ALLAN Z. LOREN Information Officer of American Express Company, New York, a
APPEARS HERE] travel and financial services company. Prior to joining
American Express in 1994, he was President and Chief
Executive Officer of Galileo International and previously was
a senior executive at Apple Computer. A Hershey Foods
director since 1999, he is also a director of Reynolds &
Reynolds and the Venator Group. He has been nominated for
election by the Common Stock as a class.
----------------
[PHOTO OF MACKEY J. McDONALD, age 52, is Chairman of the Board,
MACKEY J. President and Chief Executive Officer of VF Corporation,
MCDONALD Greensboro, North Carolina, an international apparel company.
APPEARS HERE] He was elected Chairman of the Board of VF Corporation in
1998. He had been Chief Executive Officer since 1996 and
President since 1993. He is also a director of First Union
Corporation. A Hershey Foods director since 1996, he is a
member of the Audit Committee and the Compensation and
Executive Organization Committee. He has been nominated for
election by the Common Stock as a class.
----------------
[PHOTO OF MICHAEL F. PASQUALE, age 51, is Senior Vice President,
MICHAEL F. Confectionery and Grocery, Hershey Foods Corporation. He
PASQUALE served as President, Hershey Chocolate U.S.A. and President,
APPEARS HERE] Hershey Chocolate North America, from 1994 through 1998. A
director of the Corporation since 1999, he serves as a member
of the Executive Committee. He is also a director of Minerals
Technologies, Inc.
----------------
[PHOTO OF JOHN M. PIETRUSKI, age 66, is Chairman of the Board of Texas
JOHN M. Biotechnology Corporation, Houston, Texas, a pharmaceutical
PIETRUSKI research and development company. A Hershey Foods director
APPEARS HERE] since 1987, he is a member of the Audit Committee and the
Committee on Directors and Corporate Governance. Mr.
Pietruski is also a director of GPU, Inc., Lincoln National
Corporation, and Professional Detailing Inc.
4
<PAGE>
[PHOTO OF JOSEPH P. VIVIANO, age 60, is Vice Chairman of the Board,
JOSEPH P. Hershey Foods Corporation. He was President and Chief
VIVIANO Operating Officer, Hershey Foods Corporation, from 1994
APPEARS HERE] through 1998. A director of the Corporation since 1986, he
serves as a member of the Executive Committee. He is also a
director of Chesapeake Corporation, Harsco Corporation and
Huffy Corporation.
----------------
[PHOTO OF KENNETH L. WOLFE, age 60, is Chairman of the Board and Chief
KENNETH L. Executive Officer, Hershey Foods Corporation. He was elected
WOLFE APPEARS President and Chief Operating Officer in 1985 and has served
HERE] in his current positions since 1994. A director of the
Corporation since 1984, he chairs the Executive Committee and
serves as a member of the Committee on Directors and
Corporate Governance. He is also a director of Bausch & Lomb
Inc. and Carpenter Technology Corporation.
The Board of Directors recommends a vote FOR the director nominees listed
above, and proxies which are returned will be so voted unless otherwise
instructed.
BOARD COMMITTEES
The Board of Directors has four standing committees. These are the Audit
Committee, the Committee on Directors and Corporate Governance, the
Compensation and Executive Organization Committee, and the Executive
Committee. In addition to the four standing committees, from time to time the
Board establishes committees of limited duration for special purposes.
Audit Committee 3 meetings in 1998
Members: Bonnie Guiton Hill (Chair)
Robert H. Campbell
Mackey J. McDonald
John M. Pietruski
Responsibilities: Recommends the appointment of the Corporation's
independent public accountants;
Reviews the scope and results of the annual audit
of the independent public accountants and the
Corporation's internal auditors;
Reviews non-audit professional services provided by
the independent public accountants;
Reviews with management and the independent public
accountants the Corporation's system of internal
accounting controls;
Reviews compliance by the Corporation and its
employees with laws and regulations applicable to
the Corporation's business and with the
Corporation's Code of Ethical Business Conduct; and
Reviews the activities and recommendations of the
Corporation's Internal Audit Department.
5
<PAGE>
Committee on Directors and Corporate Governance 4 meetings in 1998
Members: Vincent A. Sarni (Chair)
William H. Alexander
John C. Jamison
John M. Pietruski
Kenneth L. Wolfe
Responsibilities: Reviews and makes recommendations on the
composition of the Board and its committees;
Evaluates and recommends candidates for election to
the Board;
Administers the Directors' Compensation Plan; and
Reviews and makes recommendations to the full Board
on corporate governance matters and the Board's
corporate governance policies.
The Committee will consider nominees recommended by stockholders. Such
recommendations should be sent to the Secretary of the Corporation, 100
Crystal A Drive, Hershey, Pennsylvania 17033-0810, and should include the
proposed nominee's name, address and biographical information.
----------------
Compensation and Executive Organization Committee 5 meetings in 1998
Members: Robert H. Campbell (Chair)
C. McCollister Evarts, M.D.
Mackey J. McDonald
Vincent A. Sarni
Responsibilities: Establishes the salaries of the Corporation's
elected officers;
Grants performance stock units, stock options and
other rights under the Corporation's Key Employee
Incentive Plan ("KEIP");
Establishes target-award levels and makes awards
under the Annual Incentive Program and the Long-
Term Incentive Program of the KEIP;
Administers the KEIP, the Employee Benefits
Protection Plan, and the Supplemental Executive
Retirement Plan;
Monitors compensation arrangements for management
employees for consistency with corporate objectives
and stockholders' interests;
Reviews the executive organization of the
Corporation; and
Monitors the development of personnel available to
fill key management positions as part of the
succession planning process.
6
<PAGE>
Executive Committee 8 meetings in 1998
Members: Kenneth L. Wolfe (Chair)
Joseph P. Viviano
Responsibilities: Reviews and recommends to the full Board for
approval major capital projects and expenditures.
Oversees the administration of and revisions to the
Corporation's retirement and welfare benefit plans,
including the pension plans covered by the Employee
Retirement Income Security Act of 1974.
DIRECTORS' ATTENDANCE
There were 7 regular meetings of the Board of Directors during 1998. No
director attended less than 82% of the sum of the total number of meetings of
the Board of Directors and the total number of meetings held by all committees
of the Board of Directors on which he or she served during 1998. Average
attendance for all of these meetings equaled 97%.
DIRECTORS' COMPENSATION
<TABLE>
<S> <C>
Annual Retainer $42,500
-------------------------------------------
Annual Retainer for Committee Chairs $ 3,000
-------------------------------------------
Board Attendance Fee (per meeting) $ 1,500
-------------------------------------------
Committee Attendance Fee (per meeting) $ 1,000
</TABLE>
Directors who are employees of the Corporation receive no remuneration for
their services as directors.
One-third of the annual retainer must be paid in Common Stock. The remainder
may be taken in cash or Common Stock (meeting and chair fees are payable in
cash only). A director may also defer receipt of the retainer and meeting fees
until their retirement as a director.
All directors are reimbursed for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance at meetings of the Board and
its committees and for minor incidental expenses incurred in connection with
performance of directors' services. In addition, directors are provided with
travel accident insurance while traveling on the Corporation's business;
receive the same discounts as employees on the purchase of the Corporation's
products; and are eligible to participate in the Corporation's Higher
Education Gift Matching Program.
The Corporation maintains a Directors' Charitable Award Program for
individuals who became directors prior to December 31, 1996. This program is a
self-funded life insurance program on the directors and funds charitable
donations by the Corporation to educational institutions designated by the
directors. The amount of the donation varies according to the director's
length of service as a director, up to a maximum donation of $1,000,000 after
five years of service. Seven current directors and ten retired directors
participate in the program. The amount of the charitable donation per current
participating director is $1,000,000, except for Mr. Alexander, Mr. Campbell,
Dr. Evarts and Mr. McDonald for whom the current amount is $600,000, because
of their shorter length of service as directors.
7
<PAGE>
Proposal No. 2--APPOINTMENT OF AUDITORS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed Arthur Andersen LLP as independent public accountants of the
Corporation for the year ending December 31, 1999. Although not required to do
so, the Board of Directors is submitting the appointment of that firm for
approval at the Annual Meeting. Arthur Andersen LLP has audited the
Corporation's financial statements since 1927 and is considered to be well
qualified. If the appointment is not approved, the Board of Directors will
reconsider its appointment. Representatives of Arthur Andersen LLP will be
present at the meeting with the opportunity to make a statement if they so
desire and will be available to respond to questions.
The affirmative vote of a majority of the votes represented at the meeting
in person or by proxy of the Common Stock and Class B Stock voting together
without regard to class is required for approval of the appointment of
auditors.
The Board of Directors recommends a vote FOR Proposal No. 2, and proxies
which are returned will be so voted unless a contrary vote is designated.
VOTING SECURITIES
The Corporation has shares of two classes of stock outstanding, Common Stock
and Class B Stock. At the close of business on March 1, 1999, the record date
for the Annual Meeting, there were outstanding 109,262,899 shares of Common
Stock, and 30,446,908 shares of Class B Stock, all of which are entitled to
vote. Holders of record of the Corporation's Common Stock on March 1, 1999
will be entitled to cast one vote for each share held, and holders of record
of the Class B Stock on March 1, 1999 will be entitled to cast ten votes for
each share held. The Common Stock is entitled to cash dividends 10% higher
than those declared on the Class B Stock.
According to the Corporation's By-Laws, the presence in person or by proxy
of the holders of a majority of the votes entitled to be cast of the
outstanding Common Stock and Class B Stock, respectively, shall constitute
quorums for matters to be voted on separately by the Common Stock as a class
and the Class B Stock as a class. The presence in person or by proxy of the
holders of a majority of the votes entitled to be cast by the combined
outstanding shares of the Common Stock and the Class B Stock shall constitute
a quorum for matters to be voted on without regard to class.
The vote required for approval of any matter which may be the subject of a
vote of the stockholders is provided for in the Corporation's Restated
Certificate of Incorporation, as amended (the "Certificate"), and By-Laws. The
specific vote requirements for the proposals being submitted to a stockholder
vote at this year's Annual Meeting are set forth under the description of each
proposal in this Proxy Statement.
Abstentions and broker non-votes are counted for the purpose of determining
whether a quorum is present at the Annual Meeting. For the purpose of
determining whether a proposal (except for the election of directors) has
received a majority vote, abstentions will be included in the vote totals with
the result that an abstention will have the same effect as a negative vote. In
instances where brokers are prohibited from exercising discretionary authority
for beneficial owners who have not returned a proxy (broker non-votes), those
shares will not be included in the vote totals and, therefore, will have no
effect on the vote.
8
<PAGE>
As of March 1, 1999, stockholders noted in the following table owned the
indicated number of shares of the Corporation's Common Stock (including Common
Stock equivalent shares) and Class B Stock. Unless otherwise indicated in a
footnote, the individuals listed below have voting and disposition power over
the shares indicated. The voting and disposition power over the shares held by
the Milton Hershey School and School Trust and the Hershey Trust Company are
as indicated in the section entitled "Description of the Milton Hershey School
Trust and Hershey Trust Company."
<TABLE>
<CAPTION>
Deferred Percent Percent
Perform. of Class B of
Common Common Stock Stock Common Common Class B
Holder Stock(/1/) Equivalents(/2/) Units(/3/) Stock Stock Stock
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Milton Hershey School
Trust Hershey, PA(/4/) 12,276,671 11.2% 30,306,006 99.5%
Hershey Trust
Company
Hershey, PA(/4/)
- ---------------------------------------------------------------------------------------------
Hershey Trust
Company(/4/) 666,187 **
- ---------------------------------------------------------------------------------------------
W. H. Alexander*(/5/) 2,636 2,027 **
- ---------------------------------------------------------------------------------------------
R. H. Campbell* 1,055 3,471 **
- ---------------------------------------------------------------------------------------------
J. F. Carr 6,341 20,682 **
- ---------------------------------------------------------------------------------------------
W. F. Christ 32,279 24,412 **
- ---------------------------------------------------------------------------------------------
C. M. Evarts, M.D.* 670 1,293 **
- ---------------------------------------------------------------------------------------------
B. Guiton Hill*(/6/) 1,194 1,560 **
- ---------------------------------------------------------------------------------------------
J. C. Jamison* 10,800 4,557 **
- ---------------------------------------------------------------------------------------------
A. Z. Loren* 100 **
- ---------------------------------------------------------------------------------------------
M. J. McDonald* 400 1,427 **
- ---------------------------------------------------------------------------------------------
M. F. Pasquale* 58,548 8,404 **
- ---------------------------------------------------------------------------------------------
J. M. Pietruski* 4,800 4,525 **
- ---------------------------------------------------------------------------------------------
V. A. Sarni* 4,288 2,413 **
- ---------------------------------------------------------------------------------------------
J. P. Viviano* 95,641 30,126 **
- ---------------------------------------------------------------------------------------------
K. L. Wolfe* 133,231 10,026 **
- ---------------------------------------------------------------------------------------------
All directors and
executive officers as a
group (17 persons) 392,693 21,273 106,743
</TABLE>
- --------
* Director
** Less than 1%
9
<PAGE>
(/1/) The executive officers listed above also hold the following number of
stock options which are exercisable as of March 1, 1999:
<TABLE>
<CAPTION>
Number of
Person Shares
------ ---------
<S> <C>
J. F. Carr......................... 56,800
W. F. Christ....................... 76,800
M. F. Pasquale..................... 109,250
J. P. Viviano...................... 172,650
K. L. Wolfe........................ 257,000
Executive Officers as a Group...... 724,300
</TABLE>
(/2/) These are Common Stock units credited under the Directors' Compensation
Plan. The shares are fully vested and may be paid out in Common Stock
shares upon the expiration of the deferral period.
(/3/) These units are Common Stock equivalents which are deferred under the
Corporation's Key Employee Incentive Plan. These units may be paid in
full or in part in Common Stock and are fully vested.
(/4/) See "Description of the Milton Hershey School Trust and Hershey Trust
Company" for further information on the voting of these securities.
(/5/) Includes 1,236 shares held in trust for which Mr. Alexander is trustee.
(/6/) Includes 150 shares held in trust by Ms. Guiton Hill's husband.
Description of the Milton Hershey School Trust and Hershey Trust Company
Milton Hershey School, a non-profit school for the full-time care and
education of disadvantaged children located in Hershey, Pennsylvania, is the
sole beneficiary of the trust established by Milton S. and Catherine S.
Hershey in 1909. Investment decisions with respect to securities held by
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
("Milton Hershey School Trust"), are made by the Board of Directors of Hershey
Trust Company, as Trustee, with the approval of the Board of Managers
(governing body) of Milton Hershey School. Decisions regarding the voting of
such securities are made by the Board of Directors of Hershey Trust Company,
as Trustee for the benefit of Milton Hershey School. The Milton Hershey School
Trust will be entitled to cast 12,276,671 of the total 109,262,899 votes, or
11.2%, entitled to be cast on matters required to be voted on separately by
the holders of the Common Stock, and 315,336,731 of the total 413,731,979
votes, or 76.2%, entitled to be cast by the holders of the Common Stock and
the Class B Stock voting together on matters to be voted on without regard to
class.
Hershey Trust Company is a state-chartered trust company and holds 389,187
shares of the Corporation's Common Stock in its capacity as institutional
fiduciary for 65 estates and trusts unrelated to the Milton Hershey School
Trust. The Hershey Trust Company also holds 277,000 shares of Common Stock as
investments. Investment decisions and decisions with respect to voting of
securities held by Hershey Trust Company as institutional fiduciary and as
investments are made by the Board of Directors or management of Hershey Trust
Company.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School,
as fiduciary of the above-noted individual trusts and estates, and as direct
owner of investment shares, will be entitled to vote 12,942,858 shares of
Common Stock and 30,306,006 shares of Class B Stock at the meeting.
Pursuant to the Corporation's Certificate, all holders of Class B Stock,
including the Milton Hershey School Trust, are entitled to convert any or all
of their Class B Stock shares into shares of Common Stock at any time on a
share-for-share basis. In the event the Milton Hershey School Trust ceases to
hold more than 50% of the outstanding shares of the Class B Stock and at least
15% of the
10
<PAGE>
total outstanding shares of both the Common Stock and Class B Stock, all
shares of the Class B Stock will automatically be converted into shares of the
Common Stock on a share-for-share basis. The Corporation's Certificate
requires the approval of the Milton Hershey School Trust prior to the
Corporation issuing shares of Common Stock or undertaking any other action
which would cause the Milton Hershey School Trust to cease having voting
control of the Corporation.
All of the outstanding shares of Hershey Trust Company are owned by the
Milton Hershey School Trust. The members of the Board of Managers of Milton
Hershey School are appointed by and from the Board of Directors of Hershey
Trust Company. There are eighteen members of the Board of Directors of Hershey
Trust Company and of the Board of Managers of Milton Hershey School, including
William H. Alexander and Dr. C. McCollister Evarts, who are also members of
the Board of Directors of the Corporation, and Kenneth L. Wolfe, who is also a
director and Chairman of the Board and Chief Executive Officer of the
Corporation. Dr. Evarts is also Chair of the Board of Directors of Hershey
Trust Company and of the Board of Managers of Milton Hershey School. Directors
of Hershey Trust Company and members of the Milton Hershey School Board of
Managers individually are not considered to be beneficial owners of the
Corporation's shares of Common Stock or Class B Stock held by the Milton
Hershey School Trust.
1998 EXECUTIVE COMPENSATION
Compensation and Executive Organization Committee Report
on Executive Compensation
The Compensation and Executive Organization Committee of the Board of
Directors ("Committee") is composed entirely of non-employee directors, and is
responsible for the establishment and oversight of the Corporation's executive
compensation program.
Executive Compensation Philosophy
The Corporation's executive compensation program is designed to meet the
following objectives:
To connect the interests of the executive officers with corporate
performance and the interests of stockholders;
To attract, retain and motivate executive talent;
To assure that a significant portion of the executive officers' total
compensation is dependent upon the appreciation of the Corporation's
Common Stock; and
To provide a balanced total compensation package that recognizes the
individual contributions of the executive officers and the overall
business results of the Corporation.
Each year the Committee conducts a full review of the Corporation's
executive compensation program. The annual compensation review permits an
ongoing evaluation of the link between the Corporation's performance and its
executive compensation in the context of the compensation programs of other
companies. This review is performed periodically with the assistance of an
independent outside consultant whose services are retained by the Corporation.
The Committee reserves the right to select and/or meet independently with any
consultant at its discretion. This annual review includes analyzing survey
data comparing the competitiveness of the Corporation's executive
compensation, corporate performance, stock price appreciation and total return
to stockholders with a peer group of companies representing the Corporation's
most direct food industry competitors for executive talent. The Committee also
considers compensation data compiled from surveys of a broader group of
general industry companies, some of which are from the food industry. In the
performance graph on page 21, the Corporation's performance is compared to the
Standard and
11
<PAGE>
Poor's Food Group Index. The peer group considered relevant for the
Corporation's compensation comparison purposes does not include all of the
companies in the Food Group Index as compensation data on all such companies
is not readily available. Also, the peer group includes some companies that
are not in this index because the Corporation selects those companies it
believes to be the most relevant and direct competitors for executive talent.
The Committee reviews which peer companies are selected for compensation
analysis.
In the review of survey data, a statistical process involving regression
analysis is used to determine competitive compensation levels. This approach
adjusts compensation levels for factors such as net sales, return on equity,
and time in position within the organization in determining predicted values
or "going rates" within the marketplace for each element of compensation. The
Corporation targets total compensation "at or above" such "going rates."
As a result of this review and other considerations, the Corporation took
several actions throughout 1998 to adjust the executive compensation program
described herein. First, the survey results reviewed by the Committee showed
that over the past three years there has been a shortfall, versus competitive
peer group companies, in the long-term portion of the Corporation's executive
compensation program. To address this shortfall, the Committee made a
supplemental grant of stock options in February to key executives of the
Corporation. The Corporation's Supplemental Executive Retirement Program was
amended to revise the interest rate and mortality factors used to calculate
lump sum payments under the plan and to require participants to give advance
notice of their retirement in order to receive a lump sum distribution.
Finally, the Corporation's Key Employee Incentive Plan ("Incentive Plan") was
amended to increase the authorized number of shares.
The Committee believes the holding of significant equity interests in the
Corporation by management aligns the interests of stockholders and management.
Through the programs described in this report, a very significant portion of
each executive officer's total compensation is linked directly to individual
and corporate performance and stock price appreciation.
The key elements of the Corporation's executive compensation program consist
of base salary, an annual cash incentive program, and a long-term incentive
program consisting of performance stock units and stock options. Incentives
play an important role in motivating executive performance and in aligning
executive pay practices with the interests of the stockholders. The
Corporation's executive compensation program is intended to reward achievement
of both short-term and long-term business goals. To ensure proper balance in
the achievement of these business objectives, the incentive program places
greater dollars at risk in long-term incentives compared to short-term
incentives. The long-term incentive program is especially designed to assure
that the Corporation's executive officers have a significant portion of their
total compensation tied to factors which affect the performance of the
Corporation's Common Stock.
The Committee determined the total compensation of K. L. Wolfe, Chairman of
the Board and Chief Executive Officer, and it reviewed and approved the total
compensation of the most highly-compensated executive officers, including the
individuals whose compensation is detailed in this Proxy Statement. This is
designed to ensure consistency throughout the executive compensation program.
The Committee's policies with respect to each of the elements of the
executive compensation program, including the basis for the compensation
awarded to Mr. Wolfe, are discussed below. While the elements of compensation
are described separately below, the Committee considers the total compensation
package afforded by the Corporation when determining each component of the
executive officer's compensation, including pension benefits, supplemental
retirement benefits, insurance and other benefits.
12
<PAGE>
Base Salaries
Base salaries for new executive officers are initially determined by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the salaries paid in the competitive
marketplace for executive talent, including a comparison of base salaries for
comparable positions at other companies.
Salary reviews are conducted annually and salary adjustments are made based
upon the performance of the Corporation and of each executive officer and
their position in the applicable salary grade. The Committee considers both
financial and, where appropriate, non-financial performance measures in making
salary adjustments. Base salaries for executive officers and all other
salaried employees are set within salary ranges established for the position
as determined through the annual competitive salary surveys described above.
In the case of executive officers with responsibility for a particular
business unit, such unit's financial results are also considered.
With respect to the base salary granted to Mr. Wolfe in 1998, the Committee
made a favorable assessment of the Corporation's actual business results
versus plan goals and the results achieved by Mr. Wolfe on various objectives
the Committee established in 1997. The Committee also considered Mr. Wolfe's
relative position in his salary grade. Based on these factors, the Committee
increased Mr. Wolfe's salary by $75,000, an 11.4 % increase.
Annual Incentive Program
The Corporation's executive officers, as well as other key management and
professional employees, are eligible for an annual cash incentive award under
the Annual Incentive Program ("AIP") of the Incentive Plan. Participating
executive officers are eligible to earn individual awards expressed as a
percentage of base salary.
The final award is the product of the executive officer's base salary, the
applicable target percentage, a corporate or business unit performance score
and an individual performance score. Individual and short-term (annual)
corporate and business unit performance objectives are established at the
beginning of each year by the Committee. For executive officers at the
corporate level, the performance objectives for AIP award payments for 1998
were based on financial measures including earnings per share, economic value
added, free cash flow and the results of the implementation of an enterprise-
wide information system. For executive officers at the business unit and
shared service level, the performance objectives for 1998 were varying
combinations of consolidated earnings per share, economic value added, free
cash flow, business unit operating income and various sales growth and market
share objectives. Adjustments are made to the performance results, if
necessary, to take into account extraordinary or unusual items occurring
during the performance year. Since the final award is the product of the
factors described above, the corporate or business unit performance and
individual performance scores are given equal weight in the formula.
Performance scores in excess of the objectives for financial measures and/or
individual performance expectations may result in the individual executive
officer receiving more than his/her target percentage. The maximum corporate
or business unit performance score for a plan participant is 175%. The maximum
score on the individual performance score is 120%. The applicable individual
performance score for the Chairman of the Board and Chief Executive Officer
and Vice Chairman is 120% with the Committee having discretion to adjust this
percentage downward. Guidelines have been established which in certain
instances limit the personal performance score in relationship to the
corporate or business unit scores. The range of the target percentages of base
salary used in 1998 for annual cash incentive awards for executive officers
was 25% to 60%, with the highest rate of 60% applicable only to Mr. Wolfe.
No annual cash incentive awards are granted unless a specific corporate
performance level is achieved. This performance level is defined as the
minimum rate of return which average total
13
<PAGE>
invested capital must earn before any awards are paid. This is designed with
the stockholders' interest in mind by assuring the Corporation achieves
certain profitability levels before any executive is granted an annual
incentive award.
In 1998, corporate-level participants (which included Mr. Wolfe) in the AIP
partially achieved the corporate performance objectives set for earnings per
share, free cash flow, economic value added and implementation of the
enterprise-wide information system. Based on these results, Mr. Wolfe was
awarded a 1998 annual cash incentive award of $359,944.
Long-Term Incentive Program--Performance Stock Units
Performance stock units (PSUs) were contingently granted in 1998 under the
Incentive Plan to members of the Corporation's senior executive group most in
a position to affect the Corporation's long-term results (a combined total of
22 individuals in 1998). PSU grants are based upon a percent of the
executive's annual salary. PSUs are granted every year and are earned based on
the Corporation's performance over a three-year cycle. Each year begins a new
three-year cycle. Provided the Corporation has achieved the established
performance objectives at the end of the three-year cycle, a payment is made,
either in stock, cash or a combination of both, based on the market value of
the shares at the end of the cycle. In determining whether performance
objectives have been achieved, specified adjustments established by the
Committee can be made to the corporate performance to take into account
extraordinary or unusual items occurring during the performance cycle. Payment
may be deferred to a later date at the election of the executive. The value of
each of the PSUs is tied to corporate performance (in determining what
percentage of shares are earned) and stock price appreciation. The established
performance measures are earnings per share, economic value added and
cumulative free cash flow. The performance scores can range from 0% to 150%.
The Corporation has minimum stockholding guidelines for its executive
officers and certain other key managerial and professional employees of the
Corporation which require these individuals to accumulate gradually over time
shares of Common Stock and/or deferred PSUs. The value equivalent of the
shares which must be acquired and held is equal to a multiple of the
individual's base salary. Minimum stockholding requirements for executive
officers range from three to five times base salary. If the minimum has not
been met, the executive officer is required to take the PSU award in Common
Stock (net of withholding taxes) or deferred PSUs. For Mr. Wolfe, the
applicable multiple in 1998 was five times his base salary.
In January 1996, each eligible member of the senior executive group was
granted PSUs having a value at the time of grant equal to a percentage of
their annual salary. This percentage was determined by the Committee based on
the recommendation of senior management and competitive survey information.
The performance objectives established for the grant for earnings per share,
return on net assets and cumulative free cash flow were exceeded for the
period ended December 31, 1998. Accordingly, Mr. Wolfe's award was valued at
$1,456,946 based on the December 1998 average value of the PSUs from the 1996
grant.
In January 1998, eligible members of the senior executive group were granted
new contingent PSUs. The grants were consistent with past practices. The
"Long-Term Incentive Program Performance Stock Unit Awards in Year Ended--
December 31, 1998" table in this Proxy Statement provides additional
information regarding these grants for the five most highly-compensated
executive officers.
Long-Term Incentive Program--Stock Options
Under the Incentive Plan, stock options are periodically granted to the
Corporation's senior executive group as well as to other key management and
professional employees. Stock options entitle
14
<PAGE>
the holder to purchase during a specified time period a fixed number of shares
of Common Stock at a set price.
The Committee sets guidelines for the number of stock options to be granted
based on competitive compensation data gathered from survey information
discussed above. The number of stock options granted is a function of the
employee's base pay, stock option multiples for the employee's grade level and
the imputed value of the option. The Committee also takes into account
management's recommendations regarding the number of options to be awarded to
specific employees as well as competitive pay practices within the food
industry and the amount of options outstanding or previously granted. While
stock options have been granted annually to members of the senior executive
group, the Committee can elect not to grant stock options in a given year.
Stock option recipients other than the senior executive group (over 500 key
employees) generally receive stock option grants every two years.
Minimum stockholding requirements are applicable to stock options granted
after 1995. If the minimums are not satisfied, an individual can receive only
one-half of the after-tax profit from the option exercise in cash. The
remaining one-half of the profit must be retained in Common Stock. Minimum
stockholding requirements range from one to five times base salary. For Mr.
Wolfe, the applicable multiple in 1998 was five times his base salary.
Stock options are designed to align the interests of executives with those
of the stockholders. Stock options are granted with a ten-year term and an
exercise price equal to the closing market price of the Common Stock on the
day preceding the date of grant. Starting in 1997, options granted to the
senior executive group have a two-year vesting requirement similar to that
already applicable to the non-senior management group receiving options. This
approach is designed as an incentive for future performance by the creation of
stockholder value over the long-term since the benefit of the stock options
cannot be realized unless stock price appreciation occurs.
In 1998, Mr. Wolfe received options to purchase 42,000 shares of Common
Stock with an exercise price of $61.50 per share and 15,000 shares of Common
Stock with an exercise price of $63.6875, the closing market price on the day
preceding the grants.
Policy Regarding Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986 (the "Code") provides
that publicly-held companies may be limited in deducting certain compensation
in excess of $1 million paid to the chief executive officer and the four other
most highly-compensated officers. The Committee has considered the effect of
Section 162(m) of the Code on the Corporation's executive compensation program
to develop its policy with respect to the deductibility of the Corporation's
executive compensation. It is the Committee's position that in administering
the "performance based" portion of the Corporation's executive compensation
program, it will attempt to comply with the requirements of Section 162(m).
However, the Committee believes that it needs to retain the flexibility to
exercise its judgment in assessing an executive's performance and that the
total compensation system for executive officers should be managed in
accordance with the objectives outlined in the "Executive Compensation
Philosophy" section of this report and in the best overall interest of the
Corporation's stockholders. Should compliance with Section 162(m) conflict
with the "Executive Compensation Philosophy" or with what the Committee
believes to be in the best interest of the stockholders, the Committee will
act in accordance with the Philosophy and in the best interest of the
stockholders, notwithstanding the effect of such action on deductibility for
any given year. However, to assure that the Corporation does not lose
deductions for compensation paid, the Committee has adopted a deferral policy
requiring the executive to defer receipt of any compensation in excess of $1
million that is not deductible in any given year to the year in which such
compensation would be deductible by the Corporation.
15
<PAGE>
Conclusion
In 1998, as in previous years, a substantial portion of the Corporation's
executive compensation consisted of performance-based variable elements. In
the case of Mr. Wolfe, approximately 71% of his 1998 total compensation
consisted of performance-based variable elements, without including stock
options in the computation. The Committee intends to continue the policy of
linking executive compensation to corporate performance and returns to
stockholders.
SUBMITTED BY THE COMPENSATION AND EXECUTIVE ORGANIZATION
COMMITTEE OF THE CORPORATION'S BOARD OF DIRECTORS:
Robert H. Campbell, Chairman C. McCollister Evarts, M.D. Mackey J. McDonald
Vincent A. Sarni
16
<PAGE>
Summary of Cash and Certain Other Compensation
The following table shows for the fiscal years ending December 31, 1998,
1997 and 1996 the cash compensation paid by the Corporation, as well as
certain other compensation paid or accrued for those years, to each of the
five most highly-compensated executive officers of the Corporation.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
- -----------------------------------------------------------------------------------------
Stock
Name and Option LTIP(/3/) All Other(/4/)
Principal Position Year Salary(/1/) Bonus(/2/) Awards Payouts Compensation
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 1998 $735,000 $359,944 57,000 $1,456,946 $ 4,000
Chairman and Chief 1997 660,000 778,750 47,500 1,770,640 4,000
Executive Officer 1996 610,000 787,815 61,000 685,588 3,750
- -----------------------------------------------------------------------------------------
J. P. Viviano 1998 $590,000 $230,642 35,950 $ 996,858 $ 4,000
Vice Chairman 1997 530,000 610,051 32,250 1,211,077 4,000
of the Board(/5/) 1996 490,000 533,691 41,500 462,282 3,750
- -----------------------------------------------------------------------------------------
M. F. Pasquale 1998 $360,000 $152,280 21,300 $ 613,451 $ 4,000
Senior Vice 1997 340,000 248,710 19,650 761,467 4,000
President, Confectionery 1996 317,500 254,722 25,500 378,827 3,750
and Grocery(/6/)
- -----------------------------------------------------------------------------------------
W. F. Christ 1998 $303,000 $118,135 15,350 $ 412,162 $54,000(/7/)
Senior Vice President, 1997 281,000 281,787 13,100 495,412 4,000
Chief Financial Officer 1996 263,000 237,765 17,000 245,992 3,750
and Treasurer
- -----------------------------------------------------------------------------------------
J. F. Carr 1998 $236,500 $140,624 8,200 $ 277,970 $ 4,000
Vice President, Research 1997 222,500 196,032 9,200 339,449 4,000
Services and Special 1996 202,000 168,596 11,600 162,354 3,750
Operations(/8/)
</TABLE>
--------
(/1/) This column includes amounts deferred pursuant to Section 401(k) of the
Internal Revenue Code that were contributed by the executive officer to
ESSIOP.
(/2/) This column represents annual cash incentive awards (paid out or
deferred) attributable to services rendered for that year.
(/3/) This column reports the cash value earned in PSU payouts during each of
the last three fiscal years at the end of the following three
performance cycles: 1996-98, 1995-97 and 1994-96 under the KEIP which
were paid or deferred in the fiscal year immediately following the last
year of the respective three-year cycle.
(/4/) This column includes the Corporation's matching contributions to the
individual's ESSIOP account for 1998, 1997 and 1996.
(/5/) During 1998 Mr. Viviano was President and Chief Operating Officer of
the Corporation.
(/6/) During 1998 Mr. Pasquale was President, Hershey Chocolate North
America.
(/7/) Includes a special award approved by the Board of Directors.
(/8/) During 1998 Mr. Carr was President, Hershey Pasta and Grocery Group.
17
<PAGE>
Long-Term Incentive Program--Stock Options
The following table contains information concerning the grant of stock
options under the Key Employee Incentive Plan to the five most highly-
compensated executive officers of the Corporation as of the end of the last
fiscal year:
Option Grants for the Year-Ended December 31, 1998
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Stock
Individual Grants Option Term
- --------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(/1/) 1998(/2/) ($/Sh)(/3/) Date 5%(/4/) 10%(/4/)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 42,000 $61.50 1/19/08 $1,624,435 $4,116,637
15,000 3.3% $63.6875 2/03/08 600,791 1,522,522
- --------------------------------------------------------------------------------------------------------
J. P. Viviano 27,950 $61.50 1/19/08 1,081,023 2,739,524
8,000 2.1% $63.6875 2/03/08 320,422 812,012
- --------------------------------------------------------------------------------------------------------
M. F. Pasquale 15,300 $61.50 1/19/08 591,758 1,499,632
6,000 1.2% $63.6875 2/03/08 240,316 609,009
- --------------------------------------------------------------------------------------------------------
W. F. Christ 12,350 $61.50 1/19/08 477,661 1,210,487
3,000 * $63.6875 2/03/08 120,158 304,504
- --------------------------------------------------------------------------------------------------------
J. F. Carr 7,200 $61.50 1/19/08 278,475 705,709
1,000 * $63.6875 2/03/08 40,053 101,501
- --------------------------------------------------------------------------------------------------------
All Stockholders(/5/) N/A N/A N/A N/A $5,527,504,241 $14,007,781,006
</TABLE>
- --------
*Less than one percent
(/1/) All stock options listed in this column are subject to a two-year
vesting period and have a ten-year term. The stock options having a
$61.50 exercise price were granted on January 19, 1998 and stock
options having a $63.6875 price were granted on February 3, 1998 and
were granted at a price not less than 100% of the fair market value of
the Common Stock on the date of grant determined as the closing price
on the business day immediately preceding the date the stock options
were granted. All stock options expire at the end of the stock option
holder's employment, except in the case of a stock option held by an
employee whose employment ends due to retirement, total disability or
death, in which instance the employee or his estate may exercise the
stock option within five years of the date of retirement, total
disability or death (three years for options granted prior to 1997).
(/2/) In 1998, 501 employees were granted a total of 1,739,050 stock options.
(/3/) The exercise price may be paid in cash, shares of Common Stock valued
at the fair market value on the date of exercise, or pursuant to a
cashless exercise procedure under which the stock option holder
provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Corporation, out of the sales
proceeds, an amount equal to the exercise price plus all applicable
withholding taxes.
(/4/) The dollar amounts under these columns for all the individuals are the
result of annual appreciation rates for the term of the options (10
years) as required by the Securities and Exchange Commission, and,
therefore, are not intended to forecast possible future appreciation,
if any, of the price of the Common Stock.
18
<PAGE>
(/5/) For "All Stockholders," the potential realizable value on 142,914,431
shares, the number of outstanding shares of Common Stock and Class B
Stock on January 19, 1998, is based on a $61.50 per share price and on
February 3, 1998, is based on a $63.6875 per share price (the exercise
prices of the 1998 options). The value of the Common Stock and Class B
Stock at $61.50 per share was $8,789,237,507 and at $63.6875 per share
was $9,101,862,824. If the calculation was based on the share price on
February 3, 1998 of $63.6875 the potential realizable value for all
stockholders of a 5% appreciation would be $5,724,112,624 and at 10%
appreciation would be $14,506,025,249. The amounts listed under these
columns for "All Stockholders" are the result of annual appreciation
rates for a period of ten years from January 19, 1998 through January
19, 2008 and February 3, 1998 through February 3, 2008. The amounts are
not intended to forecast possible future appreciation, if any, of the
price of the Common Stock.
The following table sets forth information with respect to the named
executives concerning the exercise of stock options during the last fiscal
year and unexercised stock options held as of the end of the fiscal year:
Aggregated Option Exercises in Year-Ended December 31, 1998
and Year-End Option Values
<TABLE>
<CAPTION>
Securities
Underlying
Number of Value of
Unexercised Unexercised
Options at Options at
Shares 12/31/98 (#)(/1/) 12/31/98 ($)(/1/)
- --------------------------------------------------------------------------------------
Acquired on Value Realized Exer- Unexer- Exer- Unexer-
Name Exercise (#)(/1/) ($) cisable cisable cisable cisable
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 0 $ 0 209,500 104,500 7,420,906 869,031
- --------------------------------------------------------------------------------------
J. P. Viviano 35,000 $1,633,363 140,400 68,200 4,960,700 589,638
- --------------------------------------------------------------------------------------
M. F. Pasquale 0 0 89,600 40,950 3,177,775 358,078
- --------------------------------------------------------------------------------------
W. F. Christ 0 0 63,700 28,450 2,278,919 240,197
- --------------------------------------------------------------------------------------
J. F. Carr 0 0 47,600 17,400 1,717,950 167,675
</TABLE>
- --------
(/1/) All of the stock options were granted under the Key Employee Incentive
Plan. The fair market value of the Common Stock on December 31, 1998,
the last trading day of the Corporation's fiscal year, was $62.1875.
19
<PAGE>
Long-Term Incentive Program--Performance Stock Units
The following table provides information concerning performance stock unit
grants made to the five most highly-compensated executive officers of the
Corporation during the last fiscal year under the long-term incentive program
portion of the Key Employee Incentive Plan. Payments made under the program
for the three-year performance cycle ending December 31, 1998 are reported in
the Summary Compensation Table.
Long-Term Incentive Program
Performance Stock Unit Awards in Year-Ended December 31, 1998
<TABLE>
<CAPTION>
Performance
Number of or Other
Shares, Units Period Until Estimated Future Payouts
or Other Maturation ------------------------
Name Rights(/1/) or Payout Threshold (#)(/2/) Target (#)(/3/) Maximum (#)(/4/)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
K. L. Wolfe 10,500 3 years 875 10,500 15,750
- ------------------------------------------------------------------------------------------------
J. P. Viviano 7,000 3 years 583 7,000 10,500
- ------------------------------------------------------------------------------------------------
M. F. Pasquale 3,850 3 years 321 3,850 5,775
- ------------------------------------------------------------------------------------------------
W. F. Christ 3,100 3 years 258 3,100 4,650
- ------------------------------------------------------------------------------------------------
J. F. Carr 1,800 3 years 150 1,800 2,700
</TABLE>
- --------
(/1/) The PSUs reported in this table were granted on January 19, 1998 for
the cycle commencing January 1, 1998 and ending December 31, 2000.
For purposes of determining the number of grants, the value of each PSU
is based on the average of the daily closing prices of the Common Stock
on the New York Stock Exchange as reported in The Wall Street Journal for
the December preceding the new three-year performance cycle.
The final value of the award is determined based upon three factors. The
first is the number of PSUs awarded at the commencement of the three-year
cycle. The second factor relates to the performance score as measured
against predetermined earnings per share, economic value added and
cumulative free cash flow objectives for the 1998-00 three-year cycle.
The performance scoring can range from a minimum of 0% to a maximum of
150% achievement. The third factor involves the value per unit which is
determined at the conclusion of the three-year cycle.
(/2/) This column lists the number of shares of Common Stock, the value of
which would be payable to the named executives at the threshold
achievement level of 8 1/3%. If the achievement level at the end of the
three-year cycle is less than this threshold, no payments are made.
(/3/) This column lists the number of shares of Common Stock, the value of
which would be payable to the named executives at the target, or 100%
achievement level.
(/4/) This column lists the number of shares of Common Stock, the value of
which would be payable to the named executives at the 150% achievement
level.
20
<PAGE>
Performance Graph
The following graph compares the Corporation's cumulative total stockholder
return (Common Stock price appreciation plus dividends, on a reinvested basis)
over the last five fiscal years with the Standard and Poor's 500 Index and the
Standard and Poor's Food Industry Group Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
HERSHEY FOODS CORPORATION, S&P 500 INDEX & S&P FOOD GROUP INDEX
---------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
- ---------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------
HERSHEY $100 $108 $149 $204 $293 $299
S&P $100 $111 $153 $189 $251 $323
S&P FOOD $100 $103 $131 $155 $222 $240
- ---------------------------------------------------------------------------
*Total return assumes reinvestment of dividends.
Assumes $100 invested on 12/31/93 in Hershey Common Stock, S&P 500 Index
and Food Group Index.
Benefit Protection Arrangements
In August 1994, the Corporation entered into severance agreements
("Severance Agreements") with the five executive officers named in the Summary
Compensation Table and other key management personnel. The terms of these
Severance Agreements are consistent with the practices followed by other major
public corporations in the U.S. and provide that in the event the executive's
employment with the Corporation is terminated without "cause" within two years
after a "change in control" of the Corporation, the executive is entitled to
certain severance payments and benefits. A "change in control" is defined to
include an event in which the Milton Hershey School Trust no longer holds
voting control of the Corporation and another party acquires 25% or more of
the combined voting power or common equity of the Corporation. Under the terms
of the Severance Agreements, upon the executive's termination after a change
in control as described above, and in order to assist the executive in
transitioning to new employment, the executive generally would be entitled to
receive in a lump sum three times the executive's base salary and annual
incentive bonus. The executive would also be entitled to continuation of
health benefits for such period and reimbursement for federal excise taxes
payable (but not for income taxes payable). The executive would also become
vested in benefits under existing compensation and benefit programs (including
those described in this Executive Compensation section) and would generally be
paid such benefits at the time of any such change in control.
21
<PAGE>
The Milton Hershey School Trust has indicated to the Corporation that it
intends to maintain voting control of the Corporation and therefore it is
unlikely that the Severance Agreements would be utilized. The Milton Hershey
School Trust has also indicated that it, however, accepts the position of the
Corporation's Board of Directors that such arrangements are part of the usual
and ordinary compensation packages at major public companies and are important
to the Corporation's ability to attract and retain key employees.
Pension Plans
Executive officers are eligible to receive pension benefits payable under
the Corporation's qualified defined benefit pension plan ("Pension Plan"), as
well as the nonqualified supplemental executive retirement plan that provides
benefits in excess of those that may be provided under plans (such as the
Pension Plan) that are subject to limitations under the Internal Revenue Code.
The combined benefit paid to a participant pursuant to these plans is equal to
55% of that individual's final average compensation. Final average
compensation is determined by adding the participant's three years' average of
base salary and five years' average annual cash incentive award. The combined
amounts paid under the two plans are reduced by any applicable Social Security
benefits received, by a specified percentage for each month that retirement
occurs before age 60, and by a specified percentage for each year that
retirement occurs prior to the individual completing 15 years of service with
the Corporation.
The final average compensation and the estimated credited years of service
as of December 31, 1998, respectively, for each of the named executive
officers are: K. L. Wolfe, $1,224,584, 29.8 years; J. P. Viviano, $936,405,
30.7 years; M. F. Pasquale, $538,762, 19.4 years; W. F. Christ, $482,672, 28.2
years; and J. F. Carr, $366,680, 24.8 years.
VOTING OF PROXIES
A proxy may be revoked at any time before it is voted at the meeting by
submitting to the Secretary of the Corporation a written notice revoking it,
by a duly-executed proxy bearing a later date, by a telephone vote cast at a
later date, or by voting by ballot at the meeting. Shares held for each
participant in the Corporation's Automatic Dividend Reinvestment Service Plan
or the Corporation's Employee Savings Stock Investment and Ownership Plan
("ESSIOP") will be voted by the plan trustee as directed by the participant's
proxy. If an Automatic Dividend Reinvestment Service Plan participant does not
return a proxy, the participant's shares in the plan will not be voted. If an
ESSIOP participant does not return a proxy, that participant's shares will be
voted by the plan trustee in the same proportion as the final aggregate votes
of plan participants actually voting on the matter.
SOLICITATION OF PROXIES
The cost of preparing, assembling and mailing this proxy soliciting material
and Notice of Annual Meeting of Stockholders will be paid by the Corporation.
The Corporation has retained ChaseMellon Shareholder Services to assist in
soliciting proxies for a fee of $4,750 plus reimbursement of reasonable out-
of-pocket expenses. Additional solicitation by mail, telephone, telecopier or
by personal solicitation may be done by directors, officers and regular
employees of the Corporation, for which they will receive no additional
compensation. Brokerage houses and other nominees, fiduciaries and custodians
nominally holding shares of the Corporation's stock as of the record date will
be requested to forward proxy soliciting material to the beneficial owners of
such shares and will be reimbursed by the Corporation for their reasonable
expenses.
22
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Corporation's executive officers, directors and 10% stockholders are
required under the Securities Exchange Act of 1934 to file with the Securities
and Exchange Commission and the New York Stock Exchange reports of ownership
and changes in ownership in their holdings of the Corporation's stock. Copies
of these reports must also be furnished to the Corporation. Based on an
examination of these reports and on written representations provided to the
Corporation, all such reports have been timely filed, except that
inadvertently a report was not timely filed in connection with one disposition
of the Corporation's Common Stock by Mr. David W. Tacka, Corporate Controller
and Chief Accounting Officer.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1998 the Corporation and its subsidiaries had a number of
transactions with the Milton Hershey School, with the Milton Hershey School
Trust, and with companies owned by the Milton Hershey School Trust, involving
the purchase or sale of goods and services. These latter transactions were
primarily with Hershey Entertainment & Resorts, an entertainment and resort
company based in Hershey, Pennsylvania, and wholly-owned by the Milton Hershey
School Trust.
The aggregate value of sales made during 1998 by the Corporation and its
subsidiaries to the Milton Hershey School, the Milton Hershey School Trust,
and companies owned by the Milton Hershey School Trust, amounted to
approximately $850,000. During the year, the Corporation purchased goods and
services from these entities in the amount of approximately $2,200,000. These
transactions were on terms that the Corporation believes to be no less
favorable to the Corporation than those which could have been obtained from
other purchasers or vendors.
OTHER BUSINESS
It is not expected that any business other than that set forth in the Notice
of Annual Meeting of Stockholders and more specifically described in this
Proxy Statement will be brought before the meeting. However, if any other
business should properly come before the meeting, it is the intention of the
persons named on the enclosed proxy card to vote the signed proxies received
by them in accordance with their best judgment on such business and any
matters dealing with the conduct of the meeting.
STOCKHOLDER PROPOSALS AND NOMINATIONS
In accordance with the Corporation's By-Laws, stockholders (other than those
holding 25% of the outstanding votes entitled to be cast) who do not submit
proposals for inclusion in the Proxy Statement but who intend to present a
proposal, nomination for director or other business for consideration at any
meeting of stockholders, including any Annual Meeting, are required to notify
the Secretary of the Corporation of their proposal or nomination and provide
other information in advance of such meeting.
The 2000 Annual Meeting of Stockholders will be held on April 25, 2000. To
be eligible for inclusion in the Corporation's Proxy Statement for the 2000
Annual Meeting of Stockholders, stockholder proposals must be received by the
Corporation by November 15, 1999.
23
<PAGE>
In accordance with the Corporation's By-Laws, stockholders (other than those
holding 25% of the outstanding votes entitled to be cast) who do not submit
proposals for inclusion in the Proxy Statement but who intend to present a
proposal, nomination for director or other business for consideration at any
meeting of stockholders, including any Annual Meeting, are required to notify
the Secretary of the Corporation of their proposal or nomination and provide
other information in advance of such meeting. Stockholders interested in
making proposals at the 2000 Annual Meeting should submit their name and
address, their shareholdings, a brief description of the proposal, and any
financial or other interest they have in such proposal to the Corporation no
later than February 25, 2000.
In addition, the Corporation's By-Laws require that a stockholder wishing to
make a nomination for director at the 2000 Annual Meeting, who does not submit
the nomination for inclusion in the Proxy Statement for such meeting, must
submit the following information to the Corporation no later than February 25,
2000: name and address, a representation that the stockholder is a holder of
record and intends to attend such meeting, a description of any arrangement
between the stockholder and the individual planned to be nominated, the
nominee's name, address and biographical information, and the consent of the
nominee.
All notices for stockholder proposals and director nominations should be
sent to the attention of the Secretary of the Corporation at 100 Crystal A
Drive, Hershey, Pennsylvania 17033-0810.
SUMMARY ANNUAL REPORT AND FORM 10-K
The Corporation will provide without charge to each beneficial owner of its
Common Stock and Class B Common Stock, upon such stockholder's request, a copy
(without exhibits) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange
Commission. Requests for copies should be addressed to Hershey Foods
Corporation, Investor Relations Department, 100 Crystal A Drive, Hershey, PA
17033-0810.
A copy of the Corporation's Summary Annual Report to Stockholders for the
year ended December 31, 1998 accompanies this Proxy Statement. Appendix A to
this Proxy Statement containing the Consolidated Financial Statements and
Management's Discussion and Analysis comprises a portion of that report. The
Summary Annual Report, the Appendix and the Annual Report on Form 10-K are not
part of the Corporation's proxy solicitation materials.
By order of the Board of Directors,
Robert M. Reese
Senior Vice President,
General Counsel and
Secretary
March 15, 1999
Stockholders who desire to have their stock voted at the meeting are
requested to either (1) mark, sign, and date the enclosed proxy card and
return it promptly in the enclosed postage-paid envelope or (2) follow the
telephone voting instructions on the enclosed proxy card. Stockholders may
revoke their proxies at any time prior to the meeting and stockholders who are
present at the meeting may revoke their proxies and vote, if they so desire,
in person.
24
<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-33
Report of Independent Public Accountants................................... A-34
Eleven-Year Consolidated Financial Summary................................. A-35
</TABLE>
<PAGE>
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved record sales and income levels in 1998, following a
record performance in 1997. Results over the two-year period reflected a
strategic acquisition and several divestitures, along with a significant
contribution from the introduction of new confectionery products and solid
growth from existing confectionery and grocery brands. Sales increases during
the period were offset somewhat by lower sales of pasta products, a higher
level of confectionery unsalables and the impact of currency exchange rates in
the Canadian and Mexican markets.
Net sales during the two-year period increased at a compound annual rate of
5% and net income also increased at a compound annual rate of 5%, excluding
the loss on disposal of businesses in 1996. The increase in net income over
the period reflected the growth in sales, partially offset by lower gross
margin and higher selling, marketing and administrative expenses.
The following acquisition 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 1998--The announcement that the Corporation had signed a definitive
agreement providing for the sale of a 94% majority interest of its U.S.
pasta business to New World Pasta, LLC. The transaction was completed in
January 1999 and included the AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT
'N FLUFFY, MRS. WEISS, P&R, RONZONI, SAN GIORGIO and SKINNER pasta brands
along with six manufacturing plants. In the first quarter of 1999, the
Corporation received cash proceeds of $450.0 million, retained a 6% minority
interest and recorded an after-tax gain of approximately $165.0 million or
$1.13 per share--diluted as a result of the transaction.
. 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 in 1996.
. January 1996--The sale of the assets of Hershey Canada, Inc.'s PLANTERS nut
(Planters) business to Johnvince Foods Group and the 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.
Net Sales
Net sales rose $133.4 million or 3% in 1998 and $312.9 million in 1997, an
increase of 8%. The increase in 1998 was primarily a result of incremental
sales from the introduction of new confectionery products and increased sales
volume for existing confectionery and grocery products in North America. These
increases were offset somewhat by a decline in sales in the Corporation's
Asian and Russian markets and the impact of currency exchange rates in the
Canadian and Mexican markets, in addition to higher levels of confectionery
unsalables and lower sales of pasta products. The increase in
A-1
<PAGE>
1997 was primarily due to incremental sales from the Leaf acquisition,
increased sales of existing 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.
Costs and Expenses
Cost of sales as a percent of net sales increased from 57.7% in 1996 to
57.9% in 1997, and to 59.2% in 1998. The decrease in gross margin in 1998 was
principally the result of higher costs for certain major raw materials,
primarily milk and cocoa, labor and overhead, higher shipping and distribution
costs and the mix of non-chocolate and chocolate confectionery items sold in
1998 compared to 1997. These cost increases were partially offset by lower
costs for certain raw materials and improved manufacturing efficiencies,
including significant improvements in plants acquired with the Leaf business.
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.
Selling, marketing and administrative costs decreased by 1% in 1998, as
reduced marketing expenses for existing brands, lower selling expenses in
international markets and lower administrative expenses were only partially
offset by higher marketing expenses associated with the introduction of new
products. 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.
Interest Expense, Net
Net interest expense in 1998 exceeded the prior year by $9.4 million,
primarily as a result of increased borrowings associated with the purchase of
Common Stock from the Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School (Milton Hershey School Trust), partially offset by lower
interest expense reflecting reduced average short-term borrowings.
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 Milton Hershey School Trust. Fixed
interest expense increased as a result of the issuance of $150 million of
6.95% Notes due 2007 in March 1997 and $150 million of 6.95% Notes due 2012
and $250 million of 7.2% Debentures due 2027 in August 1997.
Provision for Income Taxes
The Corporation's effective income tax rate was 43.1%, 39.3% and 38.8% in
1996, 1997 and 1998, respectively. The rate decreased from 39.3% in 1997 to
38.8% in 1998 primarily due to changes in the mix of the Corporation's income
among various tax jurisdictions. 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.
Net Income
Net income increased $4.6 million or 1% in 1998, following an increase of
$63.1 million or 23% in 1997. Excluding the loss on the disposal of the Gubor
and Sperlari businesses in 1996, 1997 income increased $27.7 million or 9%.
Net income as a percent of net sales was 7.7% in 1998, 7.8% in 1997 and 6.8%
in 1996. Income as a percent of net sales excluding the loss on the sale of
the Gubor and Sperlari businesses was 7.7% in 1996.
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<PAGE>
FINANCIAL POSITION
The Corporation's financial position remained strong during 1998. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 54% as of December
31, 1998, and 60% as of December 31, 1997. 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 1.4:1 as of December 31, 1998, and 1.3:1 as of December 31,
1997.
Assets
Total assets increased $112.9 million or 3% as of December 31, 1998,
primarily as a result of increases in accounts receivable and other current
and non-current assets.
Current assets increased by $99.2 million or 10% reflecting increased
accounts receivable and higher prepaid expenses and other current assets. The
increase in accounts receivable was primarily the result of the timing and
payment terms associated with sales occurring toward the end of the year and
the increase in prepaid expenses and other current assets was principally
associated with commodities transactions. These increases were offset somewhat
by lower deferred income taxes and reduced inventory levels.
Property, plant and equipment was slightly lower than the prior year as
capital additions of $161.3 million were more than offset by depreciation
expense of $138.5 million and the retirement and translation of fixed assets
of $23.0 million. The increase in other non-current assets was primarily
associated with the capitalization of software.
Liabilities
Total liabilities decreased by $76.6 million or 3% as of December 31, 1998,
primarily due to a decrease in debt and lower accrued liabilities, partially
offset by higher deferred income taxes. The increase in short-term debt of
$113.5 million reflected the reclassification of commercial paper borrowings
of $150.0 million which were classified as long-term debt as of December 31,
1997, partially offset by a reduction in short-term borrowings of $36.5
million in 1998. As of December 31, 1997, $150.0 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 similar reclassification was not recorded as of December 31, 1998,
because the Corporation intends to reduce commercial paper borrowings during
1999. Accrued liabilities decreased by $77.1 million primarily reflecting
commodities transactions and reduced accruals for marketing programs and
integration costs related to the Leaf acquisition.
Stockholders' Equity
Total stockholders' equity increased by 22% in 1998, as net income exceeded
dividends paid. 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.
A-3
<PAGE>
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
expenditures, capitalized software additions, business acquisitions and
dividend payments exceeded cash provided from operating activities and
proceeds from business divestitures by $449.5 million. Total debt, including
debt assumed, increased during the period by $454.4 million. Cash and cash
equivalents increased by $6.7 million during the period.
The Corporation anticipates that capital expenditures will be in the range
of $150 million to $170 million per annum during the next several years as a
result of continued modernization of existing facilities and capacity
expansion to support new products and line extensions. As of December 31,
1998, the Corporation's principal capital commitments included manufacturing
capacity expansion and modernization.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13,
1996, to stockholders of record 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 9,861,119
shares of Common Stock have been repurchased for approximately $287.5 million.
Of the shares repurchased, 528,000 shares were retired, 529,498 shares were
reissued to satisfy stock options obligations and the remaining 8,803,621
shares were held as Treasury Stock as of December 31, 1998. Additionally, the
Corporation has purchased a total of 28,000,536 shares of its Common Stock to
be held as Treasury Stock from the Milton Hershey School Trust for $1.0
billion. As of December 31, 1998, a total of 36,804,157 shares were held as
Treasury Stock and $112.5 million remained available for repurchases of Common
Stock under a program approved by the Corporation's Board of Directors in
February 1996. In February 1999, the Corporation purchased approximately 2.0
million shares, completing the 1996 repurchase program. Also in February, the
Corporation's Board of Directors approved an additional share repurchase
program authorizing the repurchase of up to $230 million of the Corporation's
Common Stock of which $100.0 million was used to purchase approximately 1.6
million shares of Common Stock from the Milton Hershey School Trust.
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under a Form S-3 Registration Statement which was declared effective in
November 1993. 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 6.95% Notes due 2012 and $250 million of
7.2% Debentures due 2027 under the November 1993 and August 1997 Registration
Statements. Proceeds from the debt issuance were used to repay a portion of
the short-term borrowings associated with the purchase of Common Stock from
the Milton Hershey School Trust. As of December 31, 1998, $250 million of debt
securities remained available for issuance under the August 1997 Registration
A-4
<PAGE>
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 was for
a renewable 364-day term and $400 million was effective for a five-year term.
In December 1998, the short-term credit facility agreement was renewed for a
total of $177 million. The long-term committed credit facility agreement was
amended and renewed in December 1997 and will expire in December 2002. The
credit facilities may be used to fund general corporate requirements, to
support commercial paper borrowings and, in certain instances, to finance
future business acquisitions. The Corporation also had lines of credit with
domestic and international commercial banks of $23.0 million and $20.7 million
as of December 31, 1998 and 1997, respectively.
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, and variations in the funding status of
pension plans.
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. In 1996, the Leaf business was acquired, and the Gubor,
Sperlari, Planters and Life Savers businesses were sold. Cash used for the
Leaf acquisition 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 long-term debt were used to reduce short-term
borrowings. During the past three years, a total of 11,909,849 shares of
Common Stock has been repurchased for $589.9 million. Cash requirements for
incentive plan transactions were $103.2 million during the past three years,
partially offset by cash received from the exercise of stock options of $55.8
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
A-5
<PAGE>
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,
1998. 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, 1998. 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
1999 2000 2001 2002 2003 after Total Value
---- ------ ---- ---- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt $89 $2,203 $203 $194 $17,133 $859,370 $879,192 $1,002,275
Fixed Rate 2.0% 6.4% 2.0% 2.0% 4.4% 7.2% 7.1%
</TABLE>
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, 1998
and 1997, the Corporation had agreements outstanding with an aggregate
notional amount of $75.0 million and $150.0 million with maturities through
September 1999 and September 1998, respectively. As of December 31, 1998 and
1997, interest rates payable were at a weighted average fixed rate of 6.3%. As
of December 31, 1998 and 1997, interest rates receivable of 5.2% and 5.7%,
respectively, were based on 30-day commercial paper composite rates. Any
interest rate differential on interest rate swaps is recognized as an
adjustment to interest expense over the term of each agreement. The
Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at 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, 1998 and 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.
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As of December 31, 1998, the Corporation had foreign exchange forward
contracts maturing in 1999 and 2000 to purchase $10.5 million in foreign
currency, primarily British sterling and Dutch gilders, and to sell $9.6
million in Japanese yen at contracted forward rates.
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.
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, 1998 and 1997, 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, 1998 and 1997.
Foreign Exchange Options
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, 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
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, 1998, no foreign exchange options were outstanding. As of
December 31, 1997, the Corporation had purchased foreign exchange options of
$3.6 million maturing in 1998, related to Swiss francs. 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 and almonds. The Corporation attempts to minimize the effect of future
price fluctuations related to the purchase of these raw materials primarily
through forward purchasing to cover future manufacturing requirements,
generally for periods from 3 to 24 months. With regard to cocoa, sugar, corn
sweeteners, natural gas and certain dairy products, price risks are also
managed by entering into futures 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, natural
gas and certain dairy product 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 risen since 1992 due to demand exceeding
production. Recently, prices have declined somewhat as the economic
difficulties in eastern Europe, particularly
A-7
<PAGE>
Russia and Southeast Asia, have negatively impacted demand. During 1999, these
negative demand influences could continue to keep cocoa futures prices
contained. The Corporation's costs during 1999 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, natural
gas and certain dairy products 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 to fix the price of unpriced
physical forward contracts are effective as hedges of anticipated purchases.
The following sensitivity analysis reflects the market risk of the
Corporation to a hypothetical adverse market price movement of ten percent,
based on the Corporation's net commodity positions at four dates spaced
equally throughout the year. The Corporation's net commodity positions consist
of the excess of futures contracts held over unpriced physical forward
contracts for the same commodities, relating to cocoa, sugar, corn sweeteners
and natural gas. Inventories, priced forward contracts and estimated
anticipated purchases not yet contracted for were not included in the
sensitivity analysis calculations. A loss is defined, for purposes of
determining market risk, as the potential decrease in fair value or the
opportunity cost resulting from the hypothetical adverse price movement. The
fair values of net commodity positions were based upon quoted market prices or
estimated future prices including estimated carrying costs corresponding with
the future delivery period.
<TABLE>
<CAPTION>
For the years ended
December 31, 1998 1997
---------------------------------------------------------------------------
In millions of dollars Market Risk Market Risk
(Hypothetical (Hypothetical
Fair Value 10% Change) Fair Value 10% Change)
-------------------------------------------------
<S> <C> <C> <C> <C>
Highest long position $134.9 $13.5 $210.8 $21.1
Lowest long position 45.6 4.6 39.6 4.0
Average position (long) 76.3 7.6 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.
A-8
<PAGE>
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$129.0 million in 1998 and $121.5 million in 1997. The annual dividend rate on
the Common Stock was $.96 per share, an increase of 9% over the 1997 rate of
$.88 per share. The 1998 dividend represented the 24th consecutive year of
Common Stock dividend increases.
On February 10, 1999, the Corporation's Board of Directors declared a
quarterly dividend of $.24 per share of Common Stock payable on March 15,
1999, to stockholders of record as of February 24, 1999. It is the
Corporation's 277th consecutive Common Stock dividend. A quarterly dividend of
$.2175 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 79.0 million shares of the Corporation's Common Stock were
traded during 1998. The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1998, was $62 3/16.
There were 44,364 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1998.
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>
1998
1st Quarter $ .22 $ .2000 $73 3/8 $59 11/16
2nd Quarter .22 .2000 76 3/8 67 3/16
3rd Quarter .24 .2175 72 5/16 60 1/2
4th Quarter .24 .2175 75 13/16 60 3/4
----- -------
Total $ .92 $ .8350
===== =======
1997
1st Quarter $ .20 $ .1800 $52 7/8 $42 1/8
2nd Quarter .20 .1800 58 5/8 48 3/8
3rd Quarter .22 .2000 59 15/16 51 7/8
4th Quarter .22 .2000 63 7/8 50 5/8
----- -------
Total $ .84 $ .7600
===== =======
</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 36.0%
in 1998. Over the most recent five-year period, the return has ranged from
18.5% in 1994 to 36.0% in 1998. For the purpose of calculating operating
return on average stockholders' equity, earnings is defined as net income,
excluding the after-tax restructuring activities in 1994 and 1995, and the
after-tax loss on the disposal of businesses in 1996.
A-9
<PAGE>
Operating Return on Average Invested Capital
The Corporation's operating return on average invested capital was 17.4% in
1998. Over the most recent five-year period, the return has ranged from 15.6%
in 1994 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 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.
YEAR 2000 ISSUES
Year 2000 issues associated with information systems relate to the way dates
are recorded and computed in many computer systems. These year 2000 issues
could have an impact upon the Corporation's information technology (IT) and
non-IT systems. Non-IT systems include embedded technology such as
microcontrollers which are integral to the operation of most machinery and
equipment. Additionally, year 2000 issues could have a similar impact on the
Corporation's major business partners, including both customers and suppliers.
While it is not currently possible to estimate the total impact of a failure
of either the Corporation or its major business partners or suppliers to
complete their year 2000 remediation in a timely manner, the Corporation has
determined that it could suffer significant adverse financial consequences as
a result of such failure.
Awareness and assessment of year 2000 issues regarding major business
applications software and other significant IT systems began in 1990. A formal
program to address year 2000 issues associated with IT systems was established
in late 1995. In early 1998, a team was established with representatives from
all major functional areas of the Corporation which assumed overall
responsibility for ensuring that remediation of both IT and non-IT systems
will be completed in time to prevent material adverse consequences to the
Corporation's business, operations or financial condition. The Corporation
expects that remediation of these systems will be essentially completed by the
third quarter of 1999.
In late 1996, the Corporation approved a project to implement an enterprise-
wide integrated information system to improve process efficiencies in all of
the major functional areas of the Corporation, enabling the Corporation to
provide better service to its customers. This system will replace most of the
transaction systems and applications supporting operations of the Corporation.
In addition to improving efficiency and customer service, another benefit of
this system is that it is year 2000 compliant and will address year 2000
issues for approximately 80% of the Corporation's business applications
software. As of December 31, 1998, approximately $62.1 million of capitalized
software and hardware and $6.9 million of expenses have been incurred for this
project. As of December 31, 1998, spending for implementation of this system
was approximately 65% complete, with full implementation expected by the third
quarter of 1999. Total commitments for this system and subsequently identified
enhancements are expected to be approximately $110 million which will be
financed with cash provided from operations and short-term borrowings.
The Corporation's mainframe, network and desktop hardware and software have
recently been upgraded and are substantially year 2000 compliant. The
Corporation is in the process of remediating year 2000 compliance issues
associated with legacy information systems not being replaced by the
integrated information system project, including process automation and
factory management systems. During late 1998, the Corporation undertook an
extensive review of its year 2000 remediation program. As a result of this
review, the Corporation has undertaken additional testing to confirm its year
2000 compliance, but is otherwise maintaining its current program of
remediation. As of December 31, 1998, remediation of both IT and non-IT
systems was approximately 60% complete, reflecting the latest estimate of
testing and work requirements to be performed. The total cost of remediation
of IT and non-IT systems is expected to be in the range of $6.0 million to
$8.0 million.
A-10
<PAGE>
The Corporation is also in the process of assessing year 2000 remediation
issues relating to its major business partners. All of the Corporation's major
customers have been contacted regarding year 2000 issues related to electronic
data interchange. The Corporation is also in the process of contacting its
major suppliers of ingredients, packaging, facilities, logistics and financial
services with regard to year 2000 issues. Because of the uncertainties
associated with assessing the ability of major business partners to complete
the remediation of their systems in time to prevent operational difficulties,
the Corporation will continue to contact and/or visit major customers and
suppliers to gain assurances that no significant adverse consequences will
result due to their failure to complete remediation of their systems.
Year 2000 remediation, conversion, validation and implementation is
continuing and, at the present time, it is expected that remediation to both
the Corporation's IT and non-IT systems and those of major business partners
will be completed in time to prevent material adverse consequences to the
Corporation's business, operations or financial condition. However,
contingency plans are being developed, including possible increases in raw
material and finished goods inventory levels, and the identification of
alternate vendors and suppliers. Additional contingency plans, to the extent
feasible, will be developed for any potential failures resulting from year
2000 issues.
FORWARD LOOKING INFORMATION
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Corporation notes the following factors which, among others, could
cause future results to differ materially from the forward-looking statements,
expectations and assumptions expressed or implied herein. Many of the forward-
looking statements contained in this document may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential" among others. Factors which could
cause results to differ include, but are not limited to: changes in the
confectionery and grocery business environment, including actions of
competitors and changes in consumer preferences; changes in governmental laws
and regulations, including income taxes; market demand for new and existing
products; and raw material pricing.
Based upon preliminary information, potential financial results for the
first quarter of 1999 may not compare favorably to the prior year's first
quarter. Net sales are expected to be lower than in the prior year primarily
reflecting the divestiture of the Corporation's pasta business in January
1999. Additionally, the timing of sales for seasonal and promoted items may
result in lower confectionery and grocery sales compared to the first quarter
of 1998. The divestiture of the Corporation's pasta business, higher
amortization of capitalized software associated with the enterprise-wide
integrated information system and an emphasis on expanding the distribution of
the Corporation's products in new international markets will make the earnings
comparison more difficult, considering a very strong first quarter of 1998.
A-11
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
In thousands of dollars except per share amounts
<S> <C> <C> <C>
Net Sales $ 4,435,615 $ 4,302,236 $ 3,989,308
----------- ----------- -----------
Costs and Expenses:
Cost of sales 2,625,057 2,488,896 2,302,089
Selling, marketing and administrative 1,167,895 1,183,130 1,124,087
Loss on disposal of businesses -- -- 35,352
----------- ----------- -----------
Total costs and expenses 3,792,952 3,672,026 3,461,528
----------- ----------- -----------
Income before Interest and Income Taxes 642,663 630,210 527,780
Interest expense, net 85,657 76,255 48,043
----------- ----------- -----------
Income before Income Taxes 557,006 553,955 479,737
Provision for income taxes 216,118 217,704 206,551
----------- ----------- -----------
Net Income $ 340,888 $ 336,251 $ 273,186
=========== =========== ===========
Net Income Per Share--Basic $ 2.38 $ 2.25 $ 1.77
=========== =========== ===========
Net Income Per Share--Diluted $ 2.34 $ 2.23 $ 1.75
=========== =========== ===========
Cash Dividends Paid Per Share:
Common Stock $ .920 $ .840 $ .760
Class B Common Stock .835 .760 .685
</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, 1998 1997
- ------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 39,024 $ 54,237
Accounts receivable--trade 451,324 360,831
Inventories 493,249 505,525
Deferred income taxes 58,505 84,024
Prepaid expenses and other 91,864 30,197
----------- -----------
Total current assets 1,133,966 1,034,814
Property, Plant and Equipment, Net 1,648,058 1,648,237
Intangibles Resulting from Business Acquisitions 530,464 551,849
Other Assets 91,610 56,336
----------- -----------
Total assets $ 3,404,098 $ 3,291,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 156,937 $ 146,932
Accrued liabilities 294,415 371,545
Accrued income taxes 17,475 19,692
Short-term debt 345,908 232,451
Current portion of long-term debt 89 25,095
----------- -----------
Total current liabilities 814,824 795,715
Long-term Debt 879,103 1,029,136
Other Long-term Liabilities 346,769 346,500
Deferred Income Taxes 321,101 267,079
----------- -----------
Total liabilities 2,361,797 2,438,430
----------- -----------
Stockholders' Equity:
Preferred Stock, shares issued: none in 1998 and
1997 -- --
Common Stock, shares issued: 149,502,964 in 1998
and 149,484,964 in 1997 149,503 149,485
Class B Common Stock, shares issued: 30,447,908 in
1998 and 30,465,908 in 1997 30,447 30,465
Additional paid-in capital 29,995 33,852
Unearned ESOP compensation (25,548) (28,741)
Retained earnings 2,189,693 1,977,849
Treasury--Common Stock shares, at cost: 36,804,157
in 1998 and 37,018,566 in 1997 (1,267,422) (1,267,861)
Accumulated other comprehensive loss (64,367) (42,243)
----------- -----------
Total stockholders' equity 1,042,301 852,806
----------- -----------
Total liabilities and stockholders' equity $ 3,404,098 $ 3,291,236
=========== ===========
</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, 1998 1997 1996
- --------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Cash Flows Provided from (Used by)
Operating Activities
Net income $ 340,888 $ 336,251 $ 273,186
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 158,161 152,750 133,476
Deferred income taxes 82,241 16,915 22,863
Loss on disposal of businesses -- -- 35,352
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade (90,493) (68,479) 5,159
Inventories 12,276 (33,538) (41,038)
Accounts payable 10,005 12,967 14,032
Other assets and liabilities (124,118) 85,074 15,120
Other, net 745 4,018 5,593
--------- --------- ---------
Net Cash Provided from Operating Activities 389,705 505,958 463,743
--------- --------- ---------
Cash Flows Provided from (Used by)
Investing Activities
Capital additions (161,328) (172,939) (159,433)
Capitalized software additions (42,859) (29,100) --
Business acquisitions -- -- (437,195)
Proceeds from divestitures -- -- 149,222
Other, net 9,284 21,368 9,333
--------- --------- ---------
Net Cash (Used by) Investing Activities (194,903) (180,671) (438,073)
--------- --------- ---------
Cash Flows Provided from (Used by)
Financing Activities
Net change in short-term borrowings partially
classified as long-term debt (36,543) (217,018) 210,929
Long-term borrowings -- 550,000 --
Repayment of long-term debt (25,187) (15,588) (3,103)
Cash dividends paid (129,044) (121,546) (114,763)
Exercise of stock options 19,368 14,397 22,049
Incentive plan transactions (22,458) (35,063) (45,634)
Repurchase of Common Stock (16,151) (507,654) (66,072)
--------- --------- ---------
Net Cash (Used by) Provided from Financing
Activities (210,015) (332,472) 3,406
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (15,213) (7,185) 29,076
Cash and Cash Equivalents as of January 1 54,237 61,422 32,346
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 39,024 $ 54,237 $ 61,422
========= ========= =========
Interest Paid $ 89,001 $ 64,937 $ 52,143
Income Taxes Paid 123,970 181,377 180,347
</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>
Accumulated
Class B Additional Unearned Treasury Other Total
Preferred Common Common Paid-in ESOP Retained Common Comprehensive Stockholders'
Stock Stock Stock Capital Compensation Earnings Stock Loss Equity
- ---------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1996 $-- $ 74,734 $15,241 $47,732 $(35,128) $1,694,696 $ (685,076) $(29,240) $ 1,082,959
-----------
Comprehensive
income (loss)
Net income 273,186 273,186
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (3,635) (3,635)
-----------
Comprehensive
income 269,551
Dividends:
Common Stock,
$.76 per share (93,884) (93,884)
Class B Common
Stock, $.685
per share (20,879) (20,879)
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 (31,935) 1,763,144 (759,695) (32,875) 1,161,021
-----------
Comprehensive
income (loss)
Net income 336,251 336,251
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (9,368) (9,368)
-----------
Comprehensive
income 326,883
Dividends:
Common Stock,
$.84 per share (98,390) (98,390)
Class B Common
Stock, $.76 per
share (23,156) (23,156)
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 (28,741) 1,977,849 (1,267,861) (42,243) 852,806
-----------
Comprehensive
income (loss)
Net income 340,888 340,888
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (18,073) (18,073)
Minimum pension
liability
adjustments, net
of tax benefit (4,051) (4,051)
-----------
Comprehensive
income 318,764
Dividends:
Common Stock,
$.92 per share (103,616) (103,616)
Class B Common
Stock, $.835
per share (25,428) (25,428)
Conversion of
Class B Common
Stock into
Common Stock 18 (18) --
Incentive Plan
transactions (985) (985)
Exercise of
stock options (3,375) 16,590 13,215
Employee stock
ownership trust
transactions 503 3,193 3,696
Repurchase of
Common Stock (16,151) (16,151)
---- -------- ------- ------- -------- ---------- ----------- -------- -----------
Balance as of
December 31,
1998 $-- $149,503 $30,447 $29,995 $(25,548) $2,189,693 $(1,267,422) $(64,367) $ 1,042,301
==== ======== ======= ======= ======== ========== =========== ======== ===========
</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 1998
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, natural
gas and certain dairy products 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 $508.0 million and $527.6 million
as of December 31, 1998 and 1997, 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 $132.3 million and $116.5 million as of December 31, 1998 and
1997, respectively.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
130 is effective for the Corporation's 1998 financial statements.
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 as a
component of other comprehensive income (loss), "Foreign Currency Translation
Adjustments."
A minimum pension liability adjustment is required when the actuarial
present value of accumulated pension plan benefits exceeds plan assets and
accrued pension liabilities, less allowable intangible assets. Minimum pension
liability adjustments, net of income taxes, are recorded as a component of
other comprehensive income (loss), "Minimum Pension Liability Adjustments."
Comprehensive income (loss) is reported on the Consolidated Statements of
Stockholders' Equity and accumulated other comprehensive (loss) is reported on
the Consolidated Balance Sheets.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward and options contracts
to hedge transactions primarily related to firm commitments to purchase
equipment, certain raw materials and finished goods denominated in foreign
currencies, and to hedge payment of intercompany transactions with its non-
domestic subsidiaries. These contracts reduce currency risk from exchange rate
movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments and foreign exchange options
contracts meet required hedge criteria for anticipated transactions.
Accordingly, gains and losses are deferred and accounted for as part of the
underlying transactions. Gains and losses on terminated derivatives designated
as hedges are accounted for as part of the originally hedged transaction.
Gains and losses on derivatives designated as hedges of items which mature,
are sold or terminated, or of anticipated transactions which are no longer
likely to occur, are recorded currently in income. In entering into these
contracts the Corporation has assumed the risk which might arise from the
possible inability of counterparties to meet the terms of their contracts. The
Corporation does not expect any losses as a result of counterparty defaults.
License Agreements
The Corporation has entered into license agreements under which it has
access to certain trademarks and proprietary technology, and manufactures
and/or markets and distributes certain products. The rights under these
agreements are 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.
A-17
<PAGE>
Research and Development
The Corporation expenses research and development costs as incurred.
Research and development expense was $28.6 million, $27.5 million and $26.1
million in 1998, 1997 and 1996, respectively.
Advertising
The Corporation expenses advertising costs as incurred. Advertising expense
was $187.5 million, $202.4 million and $174.2 million in 1998, 1997 and 1996,
respectively. Prepaid advertising as of December 31, 1998 and 1997, was $12.1
million and $2.0 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, 1998 and 1997, was $69.3 million and $29.1 million, respectively.
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 are
amortized over periods up to five years. Accumulated amortization of
capitalized software was $2.8 million and $.2 million as of December 31, 1998
and 1997, respectively.
2. ACQUISITION 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 accordance with the purchase method of accounting, the purchase price of
the Leaf acquisition was 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 the acquisition. Total liabilities assumed, including debt, were
$138.0 million in 1996. Results subsequent to the date of the 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
A-18
<PAGE>
results are not necessarily reflective of the actual results which would have
occurred if the acquisition had been completed at the beginning of the year,
nor are they necessarily indicative of future combined financial results.
In December 1998, the Corporation announced that it had signed a definitive
agreement providing for the sale of a 94% majority interest of its U.S. pasta
business to New World Pasta, LLC. The transaction was completed in January
1999, and included the AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT 'N FLUFFY,
MRS. WEISS, P&R, RONZONI, SAN GIORGIO and SKINNER pasta brands, along with six
manufacturing plants. In the first quarter of 1999, the Corporation received
cash proceeds of $450.0 million, retained a 6% minority interest and recorded
an after-tax gain of approximately $165.0 million or $1.13 per share--diluted
as a result of the transaction. Net sales for the pasta business were $373.1
million, $386.2 million and $407.4 million for 1998, 1997 and 1996,
respectively. Net income for the pasta business was $25.9 million, $25.2
million and $18.7 million for 1998, 1997 and 1996, respectively.
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 in 1996. The sale of Gubor and Sperlari
allowed the Corporation to place additional focus on its North American
markets and improve financial returns.
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
the 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.
3. RENTAL AND LEASE COMMITMENTS
Rent expense was $39.6 million, $31.8 million and $25.3 million for 1998,
1997 and 1996, 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, 1998, were: 1999, $13.3 million; 2000, $13.0
million; 2001, $12.7 million; 2002, $12.2 million; 2003, $9.3 million; 2004
and beyond, $46.8 million.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be implemented as of the beginning of any fiscal quarter after
issuance. Retroactive application is not permitted. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded
A-19
<PAGE>
in hybrid contracts that were issued, acquired, or substantively modified
after December 31, 1997. Changes in accounting methods will be required for
derivative instruments utilized by the Corporation to hedge commodity price,
foreign currency exchange rate and interest rate risks. Such derivatives
include commodity futures and options contracts, foreign exchange forward and
options contracts and interest rate swaps.
The Corporation anticipates the adoption of SFAS No. 133 as of January 1,
2000. As of December 31, 1998, net deferred losses on derivatives of
approximately $16.5 million after tax would have been reported as a component
of other comprehensive loss and classified as accumulated other comprehensive
loss on the consolidated balance sheets upon adoption of SFAS No. 133.
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, 1998 and 1997, because of the
relatively short maturity of these instruments. The carrying value of long-
term debt, including the current portion, was $879.2 million as of December
31, 1998, compared to a fair value of $1.0 billion based on quoted market
prices for the same or similar debt issues. 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.
As of December 31, 1998, the Corporation had foreign exchange forward
contracts maturing in 1999 and 2000 to purchase $10.5 million in foreign
currency, primarily British sterling and Dutch gilders, and to sell $9.6
million in Japanese yen at contracted forward rates.
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.
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, 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. No options were outstanding as of December 31,
1998. As of December 31, 1997, the Corporation had purchased foreign exchange
options of $3.6 million, related to Swiss francs.
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, 1998
and 1997, 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, 1998 and 1997, the Corporation had agreements
outstanding with an aggregate notional amount of $75.0 million and $150.0
million with maturities through September 1999 and September 1998,
respectively. As of December 31, 1998 and 1997, interest rates payable were at
a weighted average fixed rate of 6.3%. As of December 31, 1998 and 1997,
interest rates receivable of 5.2% and 5.7%, respectively, were based on 30-day
commercial paper composite rates. Any interest rate differential on interest
rate swaps is recognized as an adjustment to interest expense over the term of
each agreement. The Corporation's risk related to swap agreements is limited
to the cost of replacing such agreements at prevailing market rates.
A-20
<PAGE>
6. INTEREST EXPENSE
Interest expense, net consisted of the following:
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Long-term debt and lease obligations $67,538 $48,737 $30,818
Short-term debt 23,657 32,284 22,752
Capitalized interest (2,547) (1,883) (1,534)
------- ------- -------
Interest expense, gross 88,648 79,138 52,036
Interest income (2,991) (2,883) (3,993)
------- ------- -------
Interest expense, net $85,657 $76,255 $48,043
======= ======= =======
</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 $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
was for a renewable 364-day term and $400 million was effective for a five-
year term. In December 1998, the short-term credit facility agreement was
renewed for a total of $177 million. The long-term credit facility agreement
was amended and renewed in December 1997 and will expire in December 2002. The
credit facilities may be used to fund general corporate requirements, to
support commercial paper borrowings and, in certain instances, to finance
future business acquisitions. As of December 31, 1997, $150.0 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 similar reclassification was not recorded as of December
31, 1998, because the Corporation intends to reduce commercial paper
borrowings during 1999.
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 $23.0 million and $20.7 million as of December
31, 1998 and 1997, 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 as of
December 31, 1997, and short-term foreign bank loans against its credit
facilities and lines of credit of $345.9 million as of December 31, 1998, and
$382.5 million as of December 31, 1997. The weighted average interest rates on
short-term borrowings outstanding as of December 31, 1998 and 1997, were 5.2%
and 5.7%, respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1998 was less than .1% 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 $57.0 million and $30.7 million
as of December 31, 1998 and 1997, respectively.
A-21
<PAGE>
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Commercial Paper at interest rates ranging from 5.64% to
6.55% $ -- $ 150,000
Medium-term Notes, 8.875% due 1998 -- 25,000
6.7% Notes due 2005 200,000 200,000
6.95% Notes due 2007 150,000 150,000
6.95% Notes due 2012 150,000 150,000
8.8% Debentures due 2021 100,000 100,000
7.2% Debentures due 2027 250,000 250,000
Other obligations, net of unamortized debt discount 29,192 29,231
-------- ----------
Total long-term debt 879,192 1,054,231
Less--current portion 89 25,095
-------- ----------
Long-term portion $879,103 $1,029,136
======== ==========
</TABLE>
As of December 31, 1997, $150.0 million of commercial paper borrowings were
reclassified as long-term debt. A similar reclassification was not recorded as
of December 31, 1998, because the Corporation intends to reduce commercial
paper borrowings during 1999.
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 are: 1999, $.1
million; 2000, $2.2 million; 2001, $.2 million; 2002, $.2 million; and 2003,
$17.1 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, 1998 1997 1996
- ----------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Current:
Federal $119,706 $177,145 $158,040
State 10,498 20,252 23,288
Foreign 3,673 3,392 2,360
-------- -------- --------
Current provision for income taxes 133,877 200,789 183,688
-------- -------- --------
Deferred:
Federal 73,422 9,370 12,952
State 10,568 5,103 8,134
Foreign (1,749) 2,442 1,777
-------- -------- --------
Deferred provision for income taxes 82,241 16,915 22,863
-------- -------- --------
Total provision for income taxes $216,118 $217,704 $206,551
======== ======== ========
</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, 1998 1997
- -------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Deferred tax assets:
Post-retirement benefit obligations $ 87,954 $ 91,706
Accrued expenses and other reserves 96,843 91,067
Accrued trade promotion reserves 28,118 30,905
Other 21,530 23,234
-------- --------
Total deferred tax assets 234,445 236,912
-------- --------
Deferred tax liabilities:
Depreciation 308,074 302,675
Other 188,967 117,292
-------- --------
Total deferred tax liabilities 497,041 419,967
-------- --------
Net deferred tax liabilities $262,596 $183,055
======== ========
Included in:
Current deferred tax assets, net $ 58,505 $ 84,024
Non-current deferred tax liabilities, net 321,101 267,079
-------- --------
Net deferred tax liabilities $262,596 $183,055
======== ========
</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, 1998 1997 1996
- -------------------------------------------------------------------------------
<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 3.0 3.4 4.7
Non-deductible acquisition costs .9 .9 .6
Loss on disposal of businesses for which no tax benefit was
provided -- -- 2.6
Other, net (.1) -- .2
---- ---- ----
Effective income tax rate 38.8% 39.3% 43.1%
==== ==== ====
</TABLE>
In January 1999, the Corporation received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1989
through 1996. The most significant issue pertains to the Corporate Owned Life
Insurance (COLI) program which was implemented by the Corporation in 1989. The
IRS proposed the disallowance of interest expense deductions associated with
the underlying life insurance policies. The Corporation believes that it has
fully complied with the tax law as it relates to its COLI program. The
Corporation expects to file a protest of the proposed deficiency with the
Appeals section of the IRS in early 1999 and intends to vigorously defend its
position on this matter.
10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
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. Other benefits include health care
and life insurance provided by the Corporation under two post-retirement
benefit plans.
A-23
<PAGE>
Effective December 31, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pension and Other
Post-Retirement Benefits (SFAS No. 132). The provisions of SFAS No. 132 revise
employers' disclosures about pension and other post-retirement benefit plans.
It does not change the measurement or recognition of these plans.
A summary of the changes in benefit obligations and plan assets as of
December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
-------------------- --------------------
December 31, 1998 1997 1998 1997
- -------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C> <C>
Change in benefits obligation
Benefits obligation at beginning
of year $602,081 $503,528 $ 206,695 $ 176,301
Service cost 27,621 26,177 4,452 4,390
Interest cost 41,855 39,385 13,524 13,395
Amendments (440) 9,840 (17,427) 967
Actuarial loss 72,944 32,325 54,698 18,332
Acquisition -- 26,560 (1,799) 1,677
Other (2,440) (1,587) (228) (154)
Benefits paid (49,199) (34,147) (8,875) (8,213)
--------- --------- --------- ---------
Benefits obligation at end of year 692,422 602,081 251,040 206,695
--------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at
beginning of year 566,810 450,426 -- --
Actual return on plan assets 91,338 86,405 -- --
Acquisition -- 38,328 -- --
Employer contribution 20,634 26,855 8,875 8,213
Other (1,542) (1,057) -- --
Benefits paid (49,199) (34,147) (8,875) (8,213)
--------- --------- --------- ---------
Fair value of plan assets at end
of year 628,041 566,810 -- --
--------- --------- --------- ---------
Funded status (64,381) (35,271) (251,040) (206,695)
Unrecognized transition obligation (91) 193 -- --
Unrecognized prior service cost 35,854 39,337 (33,202) (25,685)
Unrecognized net actuarial loss
(gain) 6,164 (27,318) 59,589 4,330
Intangible asset (1,261) (6,336) -- --
Accumulated other comprehensive
income (6,750) -- -- --
Prior service cost recognized due
to curtailment -- -- 12,991 --
Unrecognized prior service cost
due to amendment -- -- (6,924) --
--------- --------- --------- ---------
(Accrued) benefits cost $ (30,465) $ (29,395) $(218,586) $(228,050)
========= ========= ========= =========
Weighted-average assumptions
Discount rate 6.40% 7.00% 6.40% 7.00%
Expected long-term rate of return
on assets 9.50 9.50 N/A N/A
Rate of increase in compensation
levels 4.80 4.80 N/A N/A
</TABLE>
For measurement purposes, a 6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999 and future years.
The Corporation's acquisition of the Leaf business in 1996 included its
pension plan. The Leaf pension plan was merged into the Hershey Foods
Corporation Retirement Plan as of December 31, 1997.
As of December 31, 1998, for pension plans with accumulated benefit
obligations in excess of plan assets, the related projected benefit
obligation, accumulated benefit obligation and the fair value of plan assets
were $81.1 million, $66.9 million and $22.7 million, respectively.
A-24
<PAGE>
As of December 31, 1997, for pension plans with accumulated benefit
obligations in excess of plan assets, the related projected benefit obligation
and accumulated benefit obligation were $36.4 million and $34.9 million,
respectively. As of December 31, 1997, there were no funded pension plans with
accumulated benefit obligations in excess of plan assets.
A summary of the components of net periodic benefits cost for the years
ended December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ----------------
For the years ended December 31, 1998 1997 1998 1997
- -------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C> <C>
Components of net periodic benefits cost
Service cost $ 27,621 $ 26,177 $ 4,452 $ 4,390
Interest cost 41,855 39,385 13,524 13,395
Expected return on plan assets (53,399) (42,700) -- --
Amortization of prior service cost 2,941 190 (2,986) (2,252)
Recognized net actuarial loss (gain) 717 (1,652) -- --
Other -- -- 9 6
-------- -------- ------- -------
Corporate sponsored plans 19,735 21,400 14,999 15,539
Multi-employer plans 1,571 1,627 -- --
Administrative expenses 796 864 -- --
-------- -------- ------- -------
Net periodic benefits cost $ 22,102 $ 23,891 $14,999 $15,539
======== ======== ======= =======
</TABLE>
The Corporation has two post-retirement benefit plans. The health care plan
is contributory, with participants' contributions adjusted annually, and the
life insurance plan is non-contributory. Effective December 1998, for all
eligible employees under age 45, the Corporation will provide annual
contributions into the Employee Savings Stock Investment and Ownership Plan
(ESSIOP) instead of providing coverage under the current retiree medical plan.
This change resulted in the immediate recognition of a $13.0 million pre-tax
gain which is not included above as a component of net periodic benefits cost.
The changes apply to all U.S. full-time salaried employees, and all non-union
hourly plant employees working outside of Hershey, PA.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1 Percentage Point 1 Percentage Point
Increase (Decrease)
- ---------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Effect on total service and interest
cost components $ 940 $ (872)
Effect on post-retirement benefit
obligation 12,935 (11,552)
</TABLE>
A minimum pension liability adjustment is required when the actuarial
present value of accumulated plan benefits exceeds plan assets and accrued
pension liabilities. In 1998, a minimum liability adjustment of $4.1 million,
less allowable intangible assets, net of a deferred tax benefit of $2.7
million, was recorded as a component of other comprehensive loss and reported
in accumulated other comprehensive loss as a component of stockholders'
equity.
11. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the
primary vehicle for contributions to its existing ESSIOP 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 1998 and 1997,
A-25
<PAGE>
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, 1998, the ESOP held 927,863 allocated shares and 1,273,400
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 1998, 1997 and 1996 was $1.0 million, $1.4 million and $1.8
million, respectively. Dividends paid on unallocated ESOP shares were $1.2
million in 1998 and $1.3 million in 1997 and 1996. 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.
12. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1998, 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, 1998, a combined total of 179,950,872
shares of both classes of common stock had been issued of which 143,146,715
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1998.
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 1998, 1997 and 1996, a total of 18,000 shares, 13,000
shares and 2,000 shares, respectively, of Class B Stock were converted into
Common Stock.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
(Milton Hershey School Trust), as institutional fiduciary for estates and
trusts unrelated to Milton Hershey School, and as direct owner of investment
shares, held a total of 14,531,294 shares of the Common Stock, and as Trustee
for the benefit of Milton Hershey School, held 30,306,006 shares of the Class
B Stock as of December 31, 1998, 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 9,861,119 shares of Common Stock have been repurchased for
approximately $287.5 million under share repurchase programs which were
approved by the Corporation's Board of Directors in 1993 and 1996. Of the
shares repurchased, 528,000 shares were retired, 529,498 shares were reissued
to satisfy stock options obligations and the remaining 8,803,621 shares were
held as Treasury Stock as of December 31, 1998. In August 1997, the
Corporation purchased an additional
A-26
<PAGE>
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 purchased from the Milton Hershey School Trust in August
1995 for $500.0 million. A total of 36,804,157 shares were held as Treasury
Stock as of December 31, 1998.
Basic and Diluted Earnings per Share were computed based on the weighted
average number of shares of the Common Stock and the Class B Stock outstanding
as follows:
<TABLE>
<CAPTION>
Per-
For the year ended December 31, Income Shares Share
1998 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------
In thousands of dollars except
shares and per share amounts
<S> <C> <C> <C>
Net Income per Share--Basic
Net income $340,888 143,446,421 $2.38
=====
Effect of Dilutive Securities
Stock options -- 2,008,355
Performance stock units -- 106,968
Restricted stock units -- 1,238
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $340,888 145,562,982 $2.34
======== =========== =====
</TABLE>
<TABLE>
<CAPTION>
Per-
For the year ended December 31, Income Shares Share
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
======== =========== =====
</TABLE>
<TABLE>
<CAPTION>
Per-
For the year ended December 31, Income Shares Share
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>
13. 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, 1998, 15.3 million
shares were authorized for grants under the long-term portion of 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, 1998 1997 1996
-----------------------------------------------------------------------------
In thousands of dollars except per share amounts
<S> <C> <C> <C> <C>
Net income As reported $340,888 $336,251 $273,186
Pro forma 329,621 330,710 266,517
Net income per share--
Basic As reported $ 2.38 $ 2.25 $ 1.77
Pro forma 2.30 2.22 1.73
Net income per share--
Diluted As reported $ 2.34 $ 2.23 $ 1.75
Pro forma 2.26 2.19 1.71
</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 1998, 1997 and 1996, respectively: dividend
yields of 1.6%, 1.9% and 2.4%, expected volatility of 21%, 20% and 20%, risk-
free interest rates of 5.9%, 6.2% and 5.6%, and expected lives of 6.5, 5.7 and
7.5 years.
A-28
<PAGE>
Fixed Stock Options
The exercise price of each option equals the market price of the
Corporation's Common Stock on the date of grant. Under the KEIP, options are
granted in January and generally vest at the end of the second year and have a
maximum 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, 1998, 1997, and 1996, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ---------------------
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 6,713,920 $31.73 5,902,220 $27.40 4,435,800 $22.54
Granted 1,739,050 $61.22 1,485,250 $44.64 2,619,200 $33.08
Exercised (751,600) $25.78 (656,350) $21.94 (1,062,980) $20.74
Forfeited (36,100) $52.61 (17,200) $33.06 (89,800) $31.92
--------- --------- ----------
Outstanding at end of
year 7,665,270 $38.91 6,713,920 $31.73 5,902,220 $27.40
========= ========= ==========
Options exercisable at
year-end 4,480,670 $28.45 3,013,670 $24.38 3,670,020 $23.94
========= ========= ==========
Weighted-average fair
value of options
granted during the year
(per share) $ 18.30 $ 11.66 $ 8.70
========= ========= ==========
</TABLE>
The increase in the weighted-average fair value of options reflects higher
grant prices and lower dividend yields.
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
<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 12/31/98 Life in Years Exercise Price 12/31/98 Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$17 11/16-26 1/2 2,194,970 4.4 $23.63 2,194,970 $23.63
$33 1/16-44 1/2 3,728,050 7.4 $37.50 2,285,700 $33.07
$56 1/4-63 11/16 1,742,250 9.0 $61.17 --
--------- ---------
$17 11/16-63 11/16 7,665,270 6.9 $38.91 4,480,670 $28.45
========= =========
</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, economic value added 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% of the targeted amounts. The compensation cost
charged against income for the performance-based plan was $6.6 million, $9.1
million and $5.8 million for 1998, 1997, and 1996, respectively. The
A-29
<PAGE>
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, 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Shares granted 48,150 95,250 86,000
Weighted-average fair value at date of grant $ 61.54 $ 45.17 $ 33.56
</TABLE>
Deferred performance stock units, deferred directors' fees and accumulated
dividend amounts totaled 373,933 shares as of December 31, 1998.
No stock appreciation rights were outstanding as of December 31, 1998.
14. 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 $19.9 million and $15.8 million
as of December 31, 1998 and 1997, 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 $342.9 million and $372.7 million as of December 31, 1998 and
1997, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------
In thousands of dollars
<S> <C> <C>
Raw materials $ 205,111 $ 223,702
Goods in process 38,420 36,015
Finished goods 340,442 334,639
--------- ---------
Inventories at FIFO 583,973 594,356
Adjustment to LIFO (90,724) (88,831)
--------- ---------
Total inventories $ 493,249 $ 505,525
========= =========
</TABLE>
A-30
<PAGE>
Property, Plant and Equipment
Property, plant and equipment balances included construction in progress of
$96.6 million and $144.0 million as of December 31, 1998 and 1997,
respectively. Major classes of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Land $ 30,871 $ 31,340
Buildings 541,181 540,729
Machinery and equipment 2,130,735 2,015,161
----------- -----------
Property, plant and equipment, gross 2,702,787 2,587,230
Accumulated depreciation (1,054,729) (938,993)
----------- -----------
Property, plant and equipment, net $ 1,648,058 $ 1,648,237
=========== ===========
</TABLE>
Accrued Liabilities
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
----------------------------------------------------
In thousands of dollars
<S> <C> <C>
Payroll and other compensation $ 87,666 $ 92,102
Advertising and promotion 67,916 86,184
Other 138,833 193,259
--------- ---------
Total accrued liabilities $ 294,415 $ 371,545
========= =========
</TABLE>
Other Long-term Liabilities
Other long-term liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Accrued post-retirement benefits $ 206,345 $ 216,901
Other 140,424 129,599
--------- ---------
Total other long-term liabilities $ 346,769 $ 346,500
========= =========
</TABLE>
15. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of confectionery, grocery
and pasta products. Consolidated net sales represented primarily sales of
confectionery products. The Corporation's principal operations and markets are
located in the United States. The Corporation also manufactures, markets,
sells and distributes confectionery and grocery products in Canada and Mexico,
imports and/or markets selected confectionery and grocery products in Japan,
China and the Philippines, and markets confectionery products in over 90
countries worldwide.
Net sales and long-lived assets of businesses outside of the United States
were not significant. Sales to Wal-Mart Stores, Inc. and Subsidiaries exceeded
10% of total net sales and amounted to approximately $619.1 million, $529.6
million and $471.3 million in 1998, 1997 and 1996, respectively.
A-31
<PAGE>
16. QUARTERLY DATA (Unaudited)
Summary quarterly results were as follows:
<TABLE>
<CAPTION>
Year 1998 First Second Third Fourth
- ---------------------------------------------------------------------------
In thousands of dollars except per share
amounts
<S> <C> <C> <C> <C>
Net sales $1,098,076 $880,399 $1,217,237 $1,239,903
Gross profit 445,736 357,684 510,632 496,506
Net income 75,433 47,965 107,533 109,957
Net income per share--Basic .53 .33 .75 .77
Net income per share--Diluted(a) .52 .33 .74 .76
<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
</TABLE>
- --------
(a) Quarterly income per share amounts do not total to the annual amounts due
to changes in weighted average shares outstanding during the year.
A-32
<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 28, 1998. 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 audit 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-33
<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,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, appearing on pages A-12 through A-32. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
New York, New York
January 29, 1999
A-34
<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 1998 1997 1996
----------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Summary of Operations(a)
Net Sales 7.42% $ 4,435,615 4,302,236 3,989,308
---------------- ------------- ---------------
Cost of Sales 7.06% $ 2,625,057 2,488,896 2,302,089
Selling, Marketing and
Administrative 7.33% $ 1,167,895 1,183,130 1,124,087
Non-recurring
Credits/(Charges)(m) $ -- -- (35,352)
Interest Expense, Net 11.08% $ 85,657 76,255 48,043
Income Taxes 8.96% $ 216,118 217,704 206,551
---------------- ------------- ---------------
Income from Continuing
Operations Before
Accounting Changes 8.96% $ 340,888 336,251 273,186
Net Cumulative Effect
of Accounting Changes $ -- -- --
Discontinued Operations $ -- -- --
---------------- ------------- ---------------
Net Income 4.77% $ 340,888 336,251 273,186
================ ============= ===============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 11.52% $ 2.38 2.25 1.77(h)
--Diluted 11.33% $ 2.34 2.23 1.75
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted $ -- -- --
Net Income--Basic 7.27% $ 2.38 2.25 1.77(h)
Net Income--Diluted 7.09% $ 2.34 2.23 1.75
Weighted Average Shares
Outstanding--Basic(b) 143,446 149,174 154,334
Weighted Average Shares
Outstanding--
Diluted(b) 145,563 151,016 155,690
Dividends Paid on
Common Stock 7.68% $ 103,616 98,390 93,884
Per Share(b) 10.80% $ .920 .840 .760
Dividends Paid on Class
B Common Stock 10.83% $ 25,428 23,156 20,879
Per Share(b) 10.87% $ .835 .760 .685
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.7% 7.8% 7.7%(c)
Depreciation 12.22% $ 138,489 135,016 119,443
Advertising 6.59% $ 187,505 202,408 174,199
Promotion 7.39% $ 469,709 451,580 429,208
Payroll 6.55% $ 563,045 524,827 491,677
Year-end Position and
Statistics(a)
Capital Additions 4.72% $ 161,328 172,939 159,433
Total Assets 6.79% $ 3,404,098 3,291,236 3,184,796
Long-term Portion of
Debt 14.20% $ 879,103 1,029,136 655,289
Stockholders' Equity .36% $ 1,042,301 852,806 1,161,021
Operating Return on
Average Stockholders'
Equity 36.0% 33.4% 27.5%
Operating Return on
Average Invested
Capital 17.4% 17.5% 17.8%
Full-time Employees 14,700 14,900 14,000
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 143,147 142,932 152,942
Market Price of Common
Stock at Year-end 16.94% $ 62 3/16 61 15/16 43 3/4
Range During Year $76 3/8-59 11/16 63 7/8-42 1/8 51 3/4-31 15/16
</TABLE>
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-37.
A-35
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Summary of Operations(a)
Net Sales 3,690,667 3,606,271 3,488,249 3,219,805 2,899,165
----------- -------------- --------------- -------------- --------------
Cost of Sales 2,126,274 2,097,556 1,995,502 1,833,388 1,694,404
Selling, Marketing and
Administrative 1,053,758 1,034,115 1,035,519 958,189 814,459
Non-recurring
Credits/(Charges)(m) 151 (106,105) 80,642 -- --
Interest Expense, Net 44,833 35,357 26,995 27,240 26,845
Income Taxes 184,034 148,919 213,642 158,390 143,929
----------- -------------- --------------- -------------- --------------
Income from Continuing
Operations Before
Accounting Changes 281,919 184,219 297,233 242,598 219,528
Net Cumulative Effect
of Accounting Changes -- -- (103,908) -- --
Discontinued Operations -- -- -- -- --
----------- -------------- --------------- -------------- --------------
Net Income 281,919 184,219 193,325 242,598 219,528
=========== ============== =============== ============== ==============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 1.70(i) 1.06 (j) 1.65(k) 1.34 1.21
--Diluted 1.69 1.05 1.65 1.34 1.21
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- (.58) -- --
Net Income--Basic 1.70(i) 1.06 (j) 1.07(k) 1.34 1.21
Net Income--Diluted 1.69 1.05 1.07 1.34 1.21
Weighted Average Shares
Outstanding--Basic(b) 166,036 174,367 179,929 180,775 180,767
Weighted Average Shares
Outstanding--
Diluted(b) 166,721 174,740 180,495 181,160 181,112
Dividends Paid on
Common Stock 91,190 89,660 84,711 77,174 70,426
Per Share(b) .685 .625 .570 .515 .470
Dividends Paid on Class
B Common Stock 18,900 17,301 15,788 14,270 12,975
Per Share(b) .620 .5675 .5175 .4675 .425
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.6% 7.3%(d) 7.4%(e) 7.5% 7.6%
Depreciation 119,438 114,821 100,124 84,434 72,735
Advertising 159,200 120,629 130,009 137,631 117,049
Promotion 402,454 419,164 444,546 398,577 325,465
Payroll 461,928 472,997 469,564 433,162 398,661
Year-end Position and
Statistics(a)
Capital Additions 140,626 138,711 211,621 249,795 226,071
Total Assets 2,830,623 2,890,981 2,855,091 2,672,909 2,341,822
Long-term Portion of
Debt 357,034 157,227 165,757 174,273 282,933
Stockholders' Equity 1,082,959 1,441,100 1,412,344 1,465,279 1,335,251
Operating Return on
Average Stockholders'
Equity 22.2% 18.5% 17.8% 17.3% 17.0%
Operating Return on
Average Invested
Capital 17.1% 15.6% 15.0% 14.4% 13.8%
Full-time Employees 13,300 14,000 14,300 13,700 14,000
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 154,532 173,470 175,226 180,373 180,373
Market Price of Common
Stock at Year-end 32 1/2 24 3/16 24 1/2 23 1/2 22 3/16
Range During Year 33 15/16-24 26 3/4-20 9/16 27 15/16-21 3/4 24 3/16-19 1/8 22 1/4-17 9/16
<PAGE>
<CAPTION>
1990 1989 1988
--------------- -------------- -----------------
<S> <C> <C> <C>
Summary of Operations(a)
Net Sales 2,715,609 2,420,988 2,168,048
--------------- -------------- -----------------
Cost of Sales 1,588,360 1,455,612 1,326,458
Selling, Marketing and
Administrative 776,668 655,040 575,515
Non-recurring
Credits/(Charges)(m) 35,540 -- --
Interest Expense, Net 24,603 20,414 29,954
Income Taxes 145,636 118,868 91,615
--------------- -------------- -----------------
Income from Continuing
Operations Before
Accounting Changes 215,882 171,054 144,506
Net Cumulative Effect
of Accounting Changes -- -- --
Discontinued Operations -- -- 69,443
--------------- -------------- -----------------
Net Income 215,882 171,054 213,949
=============== ============== =================
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 1.19(l) .95 .80
--Diluted 1.19 .95 .80
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- --
Net Income--Basic 1.19(l) .95 1.18
Net Income--Diluted 1.19 .95 1.18
Weighted Average Shares
Outstanding--Basic(b) 180,766 180,824 180,981
Weighted Average Shares
Outstanding--
Diluted(b) 180,987 180,984 181,140
Dividends Paid on
Common Stock 74,161(f) 55,431 49,433
Per Share(b) .495(f) .370 .330
Dividends Paid on Class
B Common Stock 13,596(f) 10,161 9,097
Per Share(b) .445(f) .3325 .2975
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.2%(g) 7.1% 6.7%
Depreciation 61,725 54,543 43,721
Advertising 146,297 121,182 99,082
Promotion 315,242 256,237 230,187
Payroll 372,780 340,129 298,483
Year-end Position and
Statistics(a)
Capital Additions 179,408 162,032 101,682
Total Assets 2,078,828 1,814,101 1,764,665
Long-term Portion of
Debt 273,442 216,108 233,025
Stockholders' Equity 1,243,537 1,117,050 1,005,866
Operating Return on
Average Stockholders'
Equity 16.6% 16.1% 17.5%
Operating Return on
Average Invested
Capital 13.4% 13.2% 13.3%
Full-time Employees 12,700 11,800 12,100
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 180,373 180,373 180,373
Market Price of Common
Stock at Year-end 18 3/4 17 15/16 13
Range During Year 19 13/16-14 1/8 18 7/16-12 3/8 14 5/16-10 15/16
</TABLE>
A-36
<PAGE>
Notes to the Eleven-Year Consolidated Financial Summary
(a) All amounts, with the exception of the Return on Average Stockholders'
Equity and Return on Average Invested Capital, 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) Includes the Loss on Sale of Businesses in 1996; Restructuring Credit in
1995; Restructuring Charge in 1994; Gain on Sale of Investment Interest in
1993 and Restructuring Gain, Net in 1990.
A-37
<PAGE>
[MAP OF HERSHEY APPEARS HERE]
<PAGE>
HERSHEY FOODS CORPORATION
CLASS B COMMON STOCK
This Proxy is solicited on
behalf of the Board of
Directors
The undersigned, having received the Notice of Meeting and Proxy Statement dated
March 15, 1999, appoints K.L. Wolfe, J.P. Viviano, and R.M. Reese and each or
any of them as Proxies, with full power of substitution, to represent and vote
all of the undersigned's shares of the Corporation's Class B Common Stock at the
Annual Meeting of Stockholders to be held at 2:00 P.M., April 27, 1999, at The
Hershey Lodge & Convention Center, West Chocolate Avenue & University Drive,
Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Class B Common Stock represented by this proxy will be voted in
the manner directed herein by the undersigned stockholder(s), who shall be
entitled to ten votes for each such share held. If no direction is made, the
proxy will be voted FOR the election of the nine nominees for Director listed
on the reverse side and FOR the approval of Arthur Andersen LLP as the
Corporation's independent public accountants for 1999.
This proxy is continued on reverse side.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1 AND 2
Item 1. Election of the following as Directors by holders of the Common Stock
and the Class B Common Stock voting together without regard to class:
W.H. Alexander, R.H. Campbell, C.M. Evans, M.D., B. Guiton Hill, J.C.
Jamison, M.F. Pasquale, J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
[_] FOR all nominees [_] WITHHOLD AUTHORITY for all nominees
To withhold authority to vote for any individual nominee, write the nominee's
name in the space below:
FOR AGAINST ABSTAIN
--- ------- -------
Item 2. Approval of Arthur Andersen LLP as the
Corporation's independent public accountants
for 1999. [_] [_] [_]
In their discretion, the Proxies are authorized to vote for a substitute should
any nominee become unavailable for election and upon such other business as may
come before the meeting.
Dated: , 1999
----------------------- --------------------------------
Signature
--------------------------------
Signature
Please mark, sign [exactly as name(s) appears above], date and mail this card
promptly in the postage-paid, return envelope provided. Executors,
administrators, trustees, attorneys, guardians, etc., should so indicate when
signing.
<PAGE>
P R O X Y
HERSHEY FOODS CORPORATION This Proxy is
Solicited on Behalf
of the Board of
Directors
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 15, 1999, appoints K.L. Wolfe, J.P. Viviano, and R.M. Reese, and
each or any of them as Proxies, with full power of substitution, to represent
and vote all of the undersigned's shares of the Corporation's Common Stock at
the Annual Meeting of Stockholders to be held at 2:00 P.M., April 27, 1999, at
The Hershey Lodge & Convention Center, West Chocolate Avenue & University
Drive, Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Common Stock represented by this proxy will be voted in the
manner directed herein by the undersigned stockholder(s), who shall be entitled
to one vote for each such share held. If no direction is made, the proxy will
be voted FOR the election of the eleven nominees for Director and FOR the
approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1999.
The Board of Directors recommends a vote "FOR" Items 1 and 2.
Item 1. Election of A.Z. Loren and M.J. McDonald as Directors by holders of the
Common Stock voting as a class; and election of the following as Directors
by holders of the Common Stock and the Class B Common Stock voting
together without regard to class: W.H. Alexander, R.H. Campbell, C.M.
Evarts, M.D., B. Guiton Hill, J.C. Jamison, M.F. Pasquale,
J.M. Pietruski, J.P. Viviano, K.L. Wolfe.
(item 1. continued on back)
<PAGE>
[_] FOR all nominees [_] WITHHOLD AUTHORITY to vote for all nominees
To withhold authority to vote for any individual nominee, write that nominee's
name in the space below.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<C> <S> <C> <C> <C>
Item 2. Approval of Arthur Andersen LLP as the [_] [_] [_]
Corporation's independent public accountants for
1999.
</TABLE>
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
____________________________________
Signature Date
____________________________________
Signature Date
Please mark, sign [exactly as name(s) appears above], date and mail this card
promptly in the postage prepaid return envelope provided.
<PAGE>
HERSHEY FOODS CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 15, 1999, appoints K.L. Wolfe, J.P. Viviano and R.M. Reese and each
or any of them as Proxies, with full power of substitution, to represent and
vote all of the undersigned's shares of the Corporation's Common Stock at the
Annual Meeting of Stockholders to be held at 2:00 P.M., April 27, 1999, at The
Hershey Lodge & Convention Center, West Chocolate Avenue & University Drive,
Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Common Stock represented by this proxy will be voted in the
manner directed herein by the undersigned stockholder(s), who shall be entitled
to one vote for each such share held. If no direction is made, the proxy will
be voted FOR the election of the eleven nominees for Director and FOR the
approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1999. Except with regard to voting separately as a class on the
election of Messrs. Loren and McDonald, shares of the Common Stock will vote
together with shares of the Class B Common Stock without regard to class.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE FOLLOW THE TELEPHONE VOTING INSTRUCTIONS OR SIGN ON THE REVERSE SIDE AND
RETURN PROMPTLY.
[VOTE BY TELEPHONE INSTRUCTIONS APPEARS HERE]
<PAGE>
-------------------------------------------------------------------------------
Please mark
your votes
this way
[X]
<TABLE>
<CAPTION>
WITHHOLD
for all AUTHORITY
The Board of Directors recommends a vote "FOR" Items 1 and 2. FOR all Nominees FOR all
Nominees Except* Nominees
<S> <C> <C> <C>
Item 1. Election of 01 A.Z. Loren and 02 M.J. McDonald as Directors by holders [_] [_] [_]
of the Common Stock voting as a class; and election of the following as Direc-
tors by holders of the Common Stock and the Class B Common Stock voting to-
gether without regard to class: 03 W.H. Alexander, 04 R.H. Campbell, 05 C.M.
Evarts, M.D., 06 B. Guiton Hill, 07 J.C. Jamison, 08 M.F. Pasquale, 09
J.M. Pietruski, 10 J.P. Viviano, 11 K.L. Wolfe.
*Exceptions:
---------------------------------------------------- For Against Abstain
Item 2. Approval of Arthur Andersen LLP as the Corporation's independent public [_] [_] [_]
accountants for 1999.
- ----------------------------------------------------------------------------------------------------------------------------
In their discretion, the Proxies are authorized to vote for a substitute should If you plan to attend the Annual
any nominee become unavailable for election and upon such other business as may Meeting, please mark the Will
properly come before the meeting. Attend block.
WILL
ATTEND
[_]
</TABLE>
Signature(s) _________________________________________ Date ____,1999
Please follow the telephone voting instructions on the reverse side or mark,
sign [exactly as name(s) appears above], date and mail this card promptly in
the postage-paid, return envelope provided. Executors, administrators,
trustees, attorneys, guardians, etc., should so indicate when signing.
- --------------------------------------------------------------------------------
[COUPON APPEARS HERE]
- --------------------------------------------------------------------------------
[ADMISSION TICKET APPEARS HERE]
- --------------------------------------------------------------------------------
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - -
HERSHEY FOODS CORPORATION
EMPLOYEE SAVINGS STOCK INVESTMENT AND OWNERSHIP PLAN
This Voting Instruction is Solicited on Behalf of the Board of Directors.
The undersigned, having received the Notice of Meeting and Proxy Statement
dated March 15, 1999, instructs American Express Trust Company*, as Trustee, to
represent and vote all of the shares of Common Stock of Hershey Foods
Corporation which are credited to my account under the above Plan at the Annual
Meeting of Stockholders to be held at 2:00 P.M., April 27, 1999, or at any
adjournment thereof.
The shares of Common Stock represented by this proxy will be voted by the
Trustee in the manner directed. If no direction is given, or is received by the
Trustee after April 20, 1999, the shares in the Employee Savings Stock
Investment and Ownership Plan (ESSIOP) will be voted by the Trustee in the same
proportion as the final aggregate vote of the Plan participants actually voting
on the matter. Except with regard to voting separately as a class on the
election of Messrs. Loren and McDonald, shares of the Common Stock will vote
together with shares of the Class B Common Stock without regard to class.
THIS VOTING INSTRUCTION CARD IS CONTINUED ON THE REVERSE SIDE.
PLEASE FOLLOW THE TELEPHONE VOTING INSTRUCTIONS OR SIGN ON THE REVERSE SIDE AND
RETURN PROMPTLY.
* American Express Trust Company, Trustee, has appointed ChaseMellon
Shareholder Services as agent to tally the vote.
<PAGE>
- --------------------------------------------------------------------------------
Please mark
[X] your votes
this way
<TABLE>
<S> <C> <C> <C>
WITHHOLD
The Board of Directors recommends a vote "FOR" Items 1 and 2. FOR all AUTHORITY
FOR all Nominees for all
Item 1. Election of 01 A.Z. Loren and 02 M.J. McDonald as Directors by holders Nominees Except* Nominees
of the Common Stock voting as a class; and election of the following as Direc- [_] [_] [_]
tors by holders of the Common Stock and the Class B Common Stock voting to-
gether without regard to class: 03 W.H. Alexander, 04 R.H. Campbell, 05 C.M. For Against Abstain
Evarts, M.D., 06 B. Guiton Hill, 07 J.C. Jamison, 08 M.F. Pasquale, 09 [_] [_] [_]
J.M. Pietruski, 10 J.P. Viviano, 11 K.L. Wolfe.
*Exceptions:
---------------------------------------------------
Item 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 1999.
</TABLE>
- --------------------------------------------------------------------------
In its discretion, the Trustee is authorized to vote for a substitute should
any nominee become unavailable for election and upon such other business as may
properly come before the meeting.
Signature(s) ________________________________________ Date____,1999
Please follow the telephone voting instructions below or mark, sign [exactly as
name(s) appears above], date and mail this card promptly in the postage-paid,
return envelope provided. Executors, administrators, trustees, attorneys,
guardians, etc., should so indicate when signing.
- --------------------------------------------------------------------------
[VOTE BY TELEPHONE INSTRUCTIONS APPEARS HERE]
<PAGE>
[LOGO OF HERSHEY FOODS APPEARS HERE] Hershey Foods Corporation
Corporate Headquarters
100 Crystal A Drive
P.O. Box 810
Hershey, PA 17033-0810
March 15, 1999
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a copy of Hershey Foods' 1998 Annual Report
to Stockholders. Also enclosed are a voting instruction card and a Proxy
Statement which explain the items upon which you are voting. Two methods of
voting your shares are available this year. Please see the instructions for
voting by telephone on the enclosed proxy card or sign and return the
enclosed proxy card. Your completed card must be received by April 20, 1999
in order to be tallied. For your convenience in returning the voting card,
a postage-paid envelope is provided. I urge you to take advantage of this
opportunity to have the shares being held for you voted at the Annual
Meeting of Stockholders on April 27, 1999.
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card for ADP for
voting those shares.
If you have any questions, you may call the Law Department at (717)
534-7911.
Remember, your vote is important. Thank you.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosures
<PAGE>
[LOGO OF HERSHEY FOODS Hershey Foods Corporation
APPEARS HERE] Corporate Headquarters
100 Crystal A Drive
P.O. Box 810
Hershey, PA 17033-0810
March 15, 1999
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a voting instruction card and Proxy
Statement which explain the items to be voted upon at this year's Annual
Meeting of Stockholders on April 27, 1999. Two methods of voting your
shares are available this year. Please see the instructions for voting by
telephone on the enclosed proxy card or sign and return the enclosed proxy
card. Your card must be received by April 20, 1999 in order to be tallied.
For your convenience in returning the voting card, a postage-paid envelope
is provided. I urge you to take advantage of this opportunity to have the
shares being held for you voted at the Annual Meeting.
This mailing of the voting instruction card and Proxy Statement to ESSIOP
participants has been designed to eliminate the duplicate mailing of Annual
Reports to those employees who will receive them as registered
stockholders.
Please note that if you own shares through the Hershey Employee Stock
Purchase Plan (HESPP), you will receive a separate proxy card from ADP for
voting those shares.
If you have any questions, you may call the Law Department at (717)
534-7911.
Remember, your vote is important. Thank you.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosures
<PAGE>
[LOGO OF HERSHEY FOODS APPEARS HERE] Hershey Foods Corporation
Corporate Headquarters
100 Crystal A Drive
P.O. Box 810
Hershey, PA 17033-0810
March 15, 1999
TO: HERSHEY EMPLOYEE STOCK PURCHASE PLAN (HESPP) PARTICIPANTS
I am pleased to provide to you a copy of Hershey Foods' 1998 Annual Report
to Stockholders. This mailing of Annual Reports to our HESPP participants
has been designed to eliminate the duplicate mailing of Annual Reports to
those participants who will receive an Annual Report as a result of
participation in another employee plan. Your proxy card for voting your
shares in HESPP along with the Proxy Statement will be arriving shortly,
directly from ADP. Your completed card should be returned in the envelope
ADP provides.
If you have any questions, you may call the Law Department at (717)
534-7911.
Remember, your vote is important. Thank you.
--
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
