UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-183
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HERSHEY FOODS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-0691590
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Crystal A Drive
Hershey, Pennsylvania 17033
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 534-6799
---------------------------
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1 par value - 106,282,866 shares, as of July 31, 2000. Class B
Common Stock, $1 par value - 30,443,358 shares, as of July 31, 2000.
Exhibit Index - Page 16
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
July 2, July 4,
2000 1999
----------- ----------
<S> <C> <C>
Net Sales $ 836,204 $ 853,239
---------- ----------
Costs and Expenses:
Cost of sales 502,070 512,796
Selling, marketing and administrative 250,722 241,371
---------- ----------
Total costs and expenses 752,792 754,167
---------- ----------
Income before Interest and Income Taxes 83,412 99,072
Interest expense, net 17,843 17,015
---------- ----------
Income before Income Taxes 65,569 82,057
Provision for income taxes 25,573 32,002
---------- ----------
Net Income $ 39,996 $ 50,055
========== ==========
Net Income Per Share - Basic $ .29 $ .36
========== ==========
Net Income Per Share - Diluted $ .29 $ .35
========== ==========
Average Shares Outstanding - Basic 137,415 140,001
========== ==========
Average Shares Outstanding - Diluted 138,532 141,338
========== ==========
Cash Dividends Paid per Share:
Common Stock $ .260 $ .2400
========== ==========
Class B Common Stock $ .235 $ .2175
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
<TABLE>
<CAPTION>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
For the Six Months Ended
-----------------------------
July 2, July 4,
2000 1999
------------- -------------
<S> <C> <C>
Net Sales $ 1,829,319 $ 1,798,391
------------- --------------
Costs and Expenses:
Cost of sales 1,107,167 1,074,960
Selling, marketing and administrative 504,522 508,125
Gain on sale of business --- (243,785)
------------- --------------
Total costs and expenses 1,611,689 1,339,300
------------- --------------
Income before Interest and Income Taxes 217,630 459,091
Interest expense, net 35,373 35,455
------------- --------------
Income before Income Taxes 182,257 423,636
Provision for income taxes 71,081 148,911
------------- --------------
Net Income $ 111,176 $ 274,725
============= ==============
Net Income Per Share - Basic $ .81 $ 1.95
============= ==============
Net Income Per Share - Diluted $ .80 $ 1.93
============= ==============
Average Shares Outstanding - Basic 137,930 140,918
============= ==============
Average Shares Outstanding - Diluted 138,870 142,339
============= ==============
Cash Dividends Paid per Share:
Common Stock $ .52 $ .480
============= ==============
Class B Common Stock $ .47 $ .435
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
JULY 2, 2000 AND DECEMBER 31, 1999
(in thousands of dollars)
ASSETS 2000 1999
-------------- -----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 35,200 $ 118,078
Accounts receivable - trade 261,281 352,750
Inventories 730,611 602,202
Deferred income taxes 83,300 80,303
Prepaid expenses and other 118,556 126,647
------------ ------------
Total current assets 1,228,948 1,279,980
------------ ------------
Property, Plant and Equipment, at cost 2,620,698 2,572,268
Less - accumulated depreciation and amortization (1,113,180) (1,061,808)
------------ ------------
Net property, plant and equipment 1,507,518 1,510,460
------------ ------------
Intangibles Resulting from Business Acquisitions 441,668 450,165
Other Assets 102,802 106,047
------------ ------------
Total assets $ 3,280,936 $ 3,346,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 132,099 $ 136,567
Accrued liabilities 276,808 292,497
Accrued income taxes 17,284 72,159
Short-term debt 277,396 209,166
Current portion of long-term debt 547 2,440
------------ ------------
Total current liabilities 704,134 712,829
Long-term Debt 877,942 878,213
Other Long-term Liabilities 322,504 330,938
Deferred Income Taxes 315,766 326,045
------------ ------------
Total liabilities 2,220,346 2,248,025
------------ ------------
Stockholders' Equity:
Preferred Stock, shares issued:
none in 2000 and 1999 --- ---
Common Stock, shares issued:
149,507,514 in 2000 and 149,506,964 in 1999 149,507 149,507
Class B Common Stock, shares issued:
30,443,358 in 2000 and 30,443,908 in 1999 30,443 30,443
Additional paid-in capital 25,667 30,079
Unearned ESOP compensation (20,757) (22,354)
Retained earnings 2,554,333 2,513,275
Treasury-Common Stock shares at cost:
43,145,248 in 2000 and 41,491,253 in 1999 (1,623,909) (1,552,708)
Accumulated other comprehensive loss (54,694) (49,615)
------------ ------------
Total stockholders' equity 1,060,590 1,098,627
------------ ------------
Total liabilities and stockholders' equity $ 3,280,936 $ 3,346,652
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
<TABLE>
<CAPTION>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Six Months Ended
---------------------------
July 2, July 4,
2000 1999
--------- ---------
Cash Flows Provided from (Used by) Operating Activities
<S> <C> <C>
Net Income $111,176 $274,725
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 86,897 79,821
Deferred income taxes (13,276) (9,476)
Gain on sale of business, net of tax of $78,769 --- (165,016)
Changes in assets and liabilities, net of effects from
business divestiture:
Accounts receivable - trade 91,469 142,848
Inventories (128,409) (188,778)
Accounts payable (4,468) (38,163)
Other assets and liabilities (69,998) (107,357)
-------- ---------
Net Cash Flows Provided from (Used by) Operating Activities 73,391 (11,396)
-------- ---------
Cash Flows Provided from (Used by) Investing Activities
Capital additions (61,989) (55,282)
Capitalized software additions (2,974) (17,814)
Proceeds from divestiture --- 450,000
Other, net (6,719) 2,589
-------- ---------
Net Cash Flows (Used by) Provided from Investing Activities (71,682) 379,493
-------- ---------
Cash Flows Provided from (Used by) Financing Activities
Net increase (decrease) in short-term debt 68,230 (74,052)
Long-term borrowings 102 1,685
Repayment of long-term debt (2,345) (110)
Cash dividends paid (70,118) (66,076)
Exercise of stock options 4,708 15,135
Incentive plan transactions (12,049) ---
Repurchase of Common Stock (73,115) (251,954)
-------- ---------
Net Cash Flows (Used by) Financing Activities (84,587) (375,372)
-------- ---------
(Decrease) in Cash and Cash Equivalents (82,878) (7,275)
Cash and Cash Equivalents, beginning of period 118,078 39,024
-------- ---------
Cash and Cash Equivalents, end of period $ 35,200 $ 31,749
======== =========
----------------------------------
Interest Paid $ 38,081 $ 36,186
======== ========
Income Taxes Paid $137,596 $120,125
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of the Corporation and its subsidiaries after elimination
of intercompany accounts and transactions. These statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended July 2, 2000,
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. For more information, refer to the
consolidated financial statements and footnotes included in the
Corporation's 1999 Annual Report on Form 10-K.
2. INTEREST EXPENSE
Interest expense, net consisted of the following:
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
July 2, 2000 July 4, 1999
------------ ------------
(in thousands of dollars)
<S> <C> <C>
Interest expense $ 37,908 $ 38,194
Interest income (2,534) (1,525)
Capitalized interest (1) (1,214)
---------- ----------
Interest expense, net $ 35,373 $ 35,455
========== ==========
</TABLE>
6
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3. NET INCOME PER SHARE
A total of 43,145,248 shares were held as Treasury Stock as of
July 2, 2000.
In accordance with Financial Accounting Standards No. 128 "Earnings Per
Share," Basic and Diluted Earnings per Share are computed based on the
weighted average number of shares of the Common Stock and the Class B
Stock outstanding as follows:
<TABLE>
<CAPTION>
For the Three Months Ended July 2, 2000 July 4, 1999
-----------------------------------------------------------------------------------------------------------------------------------
In thousands except per share amounts
<S> <C> <C>
Net Income $ 39,996 $ 50,055
============ ===========
Weighted average shares-basic 137,415 140,001
Effect of dilutive securities:
Employee stock options 1,105 1,279
Performance and restricted stock units 12 58
------------ -----------
Weighted average shares -diluted 138,532 141,338
============ ===========
Net income per share - basic $ 0.29 $ 0.36
============ ===========
Net income per share -diluted $ 0.29 $ 0.35
============ ===========
For the Six Months Ended July 2, 2000 July 4, 1999
-----------------------------------------------------------------------------------------------------------------------------------
In thousands except per share amounts
Net Income $ 111,176 $ 274,725
============ ===========
Weighted average shares-basic 137,930 140,918
Effect of dilutive securities:
Employee stock options 929 1,363
Performance and restricted stock units 11 58
------------ -----------
Weighted average shares -diluted 138,870 142,339
============ ===========
Net income per share - basic $ 0.81 $ 1.95
============ ===========
Net income per share -diluted $ 0.80 $ 1.93
============ ===========
</TABLE>
For the quarter and six months ended July 2, 2000, employee stock options for
1,800,100 shares and 5,534,550 shares, respectively, were anti-dilutive and were
excluded from the earnings per share calculation.
For the quarter and six months ended July 4, 1999, employee stock options for
1,933,700 shares were anti-dilutive and were excluded from the earnings per
share calculation.
7
<PAGE>
4. COMPREHENSIVE INCOME
Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
For the Three Months Ended July 2, 2000 July 4, 1999
-----------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Net Income $ 39,996 $ 50,055
Other comprehensive income:
Foreign currency translation adjustments (5,685) 4,289
------------ -----------
Comprehensive income $ 34,311 $ 54,344
============ ===========
For the Six Months Ended July 2, 2000 July 4, 1999
-----------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars
Net Income $ 111,176 $ 274,725
Other comprehensive income:
Foreign currency translation adjustments (5,079) 9,285
------------ -----------
Comprehensive income $ 106,097 $ 284,010
============ ===========
</TABLE>
5. INVENTORIES
The majority of inventories are valued under the last-in, first-out
(LIFO) method. The remaining inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. Inventories were as follows:
<TABLE>
<CAPTION>
July 2, 2000 December 31, 1999
------------ -----------------
(in thousands of dollars)
<S> <C> <C>
Raw materials $ 279,250 $ 270,711
Goods in process 56,072 49,412
Finished goods 441,284 365,575
----------- -----------
Inventories at FIFO 776,606 685,698
Adjustment to LIFO (45,995) (83,496)
----------- -----------
Total inventories $ 730,611 $ 602,202
=========== ===========
</TABLE>
6. LONG-TERM DEBT
In August 1997, the Corporation filed a Form S-3 Registration Statement
under which it could offer, on a delayed or continuous basis, up to
$500 million of additional debt securities. As of July 2, 2000, $250
million of debt securities remained available for issuance under the
August 1997 Registration Statement.
7. 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 July 2, 2000 and December 31, 1999,
because of the relatively short maturity of these instruments. The
carrying value of long-term debt, including the current portion, was
$878.5 million as of July 2, 2000, compared to a fair value of $859.4
million, based on quoted market prices for the same or similar debt
issues.
8
<PAGE>
As of July 2, 2000, the Corporation had foreign exchange forward
contracts maturing in 2000 and 2001 to purchase $46.6 million in
foreign currency, primarily British sterling, and to sell $25.3 million
in foreign currency, primarily Canadian dollars and Japanese yen, at
contracted forward rates.
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. As of July 2, 2000, the fair
value of foreign exchange forward 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. In October 1999, the Corporation entered into an
interest rate swap agreement to effectively convert $200 million of
6.7% Notes Due 2005 (Notes) to variable rate debt. The interest rate
swap agreement is cancelable at the sole discretion of the counterparty
effective April 2, 2001. At the same time, the Corporation entered into
forward interest rate agreements to fix the interest rate on the Notes
at 5.8% through April 2, 2001. Subsequently, if the counterparty
chooses not to cancel the agreement, the interest rate on the Notes
would be variable based on the London Interbank Offered Rate until
expiration on October 1, 2005.
Any interest rate differential on interest rate swaps and forward
agreements is recognized as an adjustment to interest expense over the
term of each agreement. As of July 2, 2000, the fair value of interest
rate swaps and forward agreements approximated the contract value. The
Corporation's risk related to swaps and forward agreements is limited
to the cost of replacing such agreements at prevailing market rates.
8. 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,
2000, 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 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 contracts, foreign exchange forward contracts and interest rate
swaps and forward agreements.
The Corporation anticipates the adoption of SFAS No. 133 as of January
1, 2001. As of July 2, 2000, net deferred losses on derivatives of
approximately $39.6 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. The
9
<PAGE>
adoption of SFAS No. 133 is not expected to have a material impact on
the Corporation's results of operations.
9. SHARE REPURCHASES
In October 1999, the Corporation's Board of Directors approved a share
repurchase program authorizing the repurchase of up to $200 million of
the Corporation's Common Stock. Under this program, a total of
1,100,847 shares of Common Stock was purchased during the first six
months of 2000. As of July 2, 2000, a total of 43,145,248 shares was
held as Treasury Stock and $151.3 million remained available for
repurchases of Common Stock under the repurchase program approved in
October.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations - Second Quarter 2000 vs. Second Quarter 1999
-------------------------------------------------------------------
Consolidated net sales for the second quarter decreased from $853.2 million in
1999 to $836.2 million in 2000, a decrease of 2% from the prior year. The lower
sales primarily reflected a decline in sales of core confectionery and grocery
products, offset partially by incremental sales from the introduction of new
confectionery products, and lower returns, discounts, and allowances. In 2000,
certain international distributor allowances were netted against sales instead
of being reported in selling, marketing and administrative expenses as in 1999.
The second quarter of 1999 included approximately $25 million in net sales,
shifted from the third quarter, as part of a controlled advance purchase program
intended to reduce disruptions during the final phase of the implementation of
an enterprise-wide information system last year.
The consolidated gross margin increased from 39.9% in 1999 to 40.0% in 2000.
Gross margin in 1999 would have been .3 percentage point lower if certain
international distributor allowances were reclassified and reported as discussed
above for 2000. The increase in gross margin reflected decreased costs for
certain major raw materials, primarily cocoa, as well as lower returns,
discounts, and allowances. The impact of these items was partially offset by:
higher transportation costs; higher warehousing costs related to increasing
storage and shipping capacity for the peak shipping season, including the
start-up of the new Eastern and Southeastern Distribution Centers; and increased
costs for the disposal of obsolete packaging and aged inventory. In addition,
manufacturing costs and depreciation expense were higher as a percentage of
sales compared to the prior year, also reducing gross margin.
Selling, marketing and administrative expenses increased by 4% in 2000,
primarily reflecting increased marketing expenditures for the introduction of
new products and international exports, and higher software amortization costs.
Net interest expense in the second quarter of 2000 was $.8 million above the
comparable period of 1999, primarily reflecting lower capitalized interest as
fewer construction projects qualified for interest capitalization in 2000.
The second quarter effective income tax rate was 39.0% in 2000 and 1999.
Results of Operations - First Six Months 2000 vs. First Six Months 1999
-----------------------------------------------------------------------
Consolidated net sales for the first six months of 2000 increased by $30.9
million or 2%. The higher sales primarily reflected an increase in sales of core
confectionery and grocery products in North America, incremental sales from the
introduction of new confectionery products, and lower returns, discounts, and
allowances. In 2000, certain international distributor allowances were netted
against sales instead of being reported in selling, marketing and administrative
expenses as in 1999. The first six months of 1999 included $29.3 million in net
sales related to the Corporation's pasta business, which was divested in January
1999.
The consolidated gross margin decreased from 40.2% in 1999 to 39.5% in 2000.
Gross margin in 1999 benefited .8 percentage point from the inclusion in cost of
sales of a one-time $12.5 million gain from revisions to the Corporation's
retiree medical plan, and results of the pasta business. The gain was net of
additional costs for supplemental retirement contributions into the Employee
Savings Stock Investment and Ownership Plan. Excluding results of the pasta
business and the one-time gain in 1999, the increase in gross margin reflected
decreased costs for certain major raw materials, primarily cocoa, as well as
lower returns, discounts, and allowances. The impact of these items was
substantially offset by: higher transportation costs; higher warehousing costs
11
<PAGE>
related to increasing storage and shipping capacity and increased storage and
handling rates; and increased costs for the disposal of obsolete packaging and
aged inventory.
Selling, marketing and administrative expenses decreased by 1% in 2000,
primarily reflecting the divestiture of the pasta business and the inclusion in
2000 of a one-time gain of $7.3 million arising from the exchange of certain
corporate aircraft. Increased marketing expenditures for the introduction of new
products and international exports as well as higher software amortization costs
substantially offset these items.
Net interest expense was $.1 million below the comparable period of 1999,
primarily as a result of the interest rate swap and forward agreements entered
into in October 1999 and higher interest income. An increase in short-term
interest expense, related to higher borrowing rates and increased short-term
borrowings, and lower capitalized interest substantially offset these items.
Excluding the provision for income taxes associated with the gain on the sale of
the Corporation's pasta business, the effective income tax rate was 39.0% in
2000 and 1999.
Net income for the first six months of 2000 of $111.2 million was 60% below
the prior year and net income per share - diluted of $.80 per share was $1.13
below the prior year. Prior year net income included an after tax gain of $165.0
million, or $1.16 per share - diluted, on the sale of the Corporation's pasta
business.
Liquidity and Capital Resources
-------------------------------
Historically, the Corporation's major source of financing has been cash
generated from operations. Domestic seasonal working capital needs, which
typically peak during the summer months, generally have been met by issuing
commercial paper. During the first six months of 2000, the Corporation's cash
and cash equivalents decreased by $82.9 million. Cash and cash equivalents on
hand at the beginning of the period, cash provided from operations and
short-term borrowings were sufficient to repurchase $73.1 million of the
Corporation's Common Stock, pay cash dividends of $70.1 million, and finance
capital expenditures and capitalized software additions of $65.0 million.
The ratio of current assets to current liabilities was 1.7:1 as of July 2, 2000,
and 1.8:1 as of December 31, 1999. The Corporation's capitalization ratio (total
short-term and long-term debt as a percentage of stockholders' equity,
short-term and long-term debt) was 52% as of July 2, 2000, and 50% as of
December 31, 1999.
As of July 2, 2000, the Corporation maintained a committed credit facility
agreement with a syndicate of banks in the amount of $500.0 million which could
be borrowed directly or used to support the issuance of commercial paper. The
Corporation has the option to increase the credit facility by $1.0 billion with
the concurrence of the banks. The Corporation also had lines of credit with
domestic and international commercial banks in the amount of $24.4 million and
$25.0 million, respectively, as of July 2, 2000 and December 31, 1999.
In March 1997, the Corporation issued $150 million of 6.95% Notes under a
November 1993 Registration Statement. In August 1997, the Corporation issued
$150 million of Notes and $250 million of Debentures under the November 1993 and
August 1997 Registration Statements. As of July 2, 2000, $250 million of debt
securities remained available for issuance under the August 1997 Registration
Statement. Proceeds from any offering of the $250 million of debt securities
available under the shelf registration may be used
12
<PAGE>
for general corporate requirements, which include reducing existing commercial
paper borrowings, financing capital additions, and funding future business
acquisitions and working capital requirements.
As of July 2, 2000, the Corporation's principal capital commitments included
manufacturing capacity expansion, modernization and efficiency improvements. 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. Such expenditures will be financed with cash
provided from operations and short-term borrowings.
In July 1999, the Corporation entered into an operating lease agreement for an
amount not to exceed $65 million for the purpose of financing construction costs
of a warehouse and distribution facility located on land owned by the
Corporation near Hershey, Pennsylvania. Under the agreement, the lessor pays for
the construction costs and thereafter leases the facility to the Corporation.
The lease term is six years, including the construction period. The lease may be
extended at the Corporation's option for up to four renewal periods of five
years each. The lease provides for a substantial residual guarantee and includes
an option to purchase the facility at original cost.
The potential loss in fair value of foreign exchange forward contracts and
interest rate swaps resulting from a hypothetical near-term adverse change in
market rates of ten percent was not material as of July 2, 2000. The market risk
resulting from a hypothetical adverse market price movement of ten percent
associated with the estimated average fair value of net commodity positions
decreased from $11.1 million as of December 31, 1999, to $8.0 million as of July
2, 2000. Market risk represents 10% of the estimated average fair value of net
commodity positions at four dates prior to the end of each period.
Safe Harbor Statement
---------------------
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Many of the forward-looking
statements contained in this document may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential" among others. Factors which could cause
results to differ include, but are not limited to: changes in the confectionery
and grocery business environment, including actions of competitors and changes
in consumer preferences; changes in governmental laws and regulations, including
income and sales taxes; market demand for new and existing products; raw
material costs; and the Corporation's ability to fully remedy the problems and
avoid the increased costs encountered since implementing changes to the customer
service, warehousing, and order fulfillment processes and systems in the third
quarter of 1999; the ability to restore customer service to historical levels;
the effects service levels and other factors have on future customer demand; and
the ability to complete construction and commence operations of new warehousing
facilities on schedule.
13
<PAGE>
PART II - OTHER INFORMATION
Items 2, 3, 4 and 5 have been omitted as not applicable.
Item 1 - Legal Proceedings
--------------------------
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 Notice pertains to the Corporate Owned Life Insurance (COLI)
program which was implemented by the Corporation in 1989. The IRS proposed an
assessment for the disallowance of interest expense deductions associated with
the underlying life insurance policies. The total impact of the disallowance was
approximately $62.5 million, including interest as of July 2, 2000. The
Corporation may be subject to additional assessments for federal and state tax
and interest payments for years 1997 and 1998. The Corporation believes that it
has fully complied with the tax law as it relates to its COLI program. The
Corporation filed a protest of the proposed deficiency with the Appeals section
of the IRS in April 1999 and continues to vigorously defend its position on this
matter. The Corporation has no other material pending legal proceedings, other
than ordinary routine litigation incidental to its business.
Item 6 - Exhibits and Reports on Form 8-K
-----------------------------------------
a) Exhibits
--------
The following items are attached and incorporated herein by reference:
Exhibit 12 - Statement showing computation of ratio of earnings to
fixed charges for the six months ended July 2, 2000 and July 4, 1999.
Exhibit 27 - Financial Data Schedule for the period ended July 2, 2000
(required for electronic filing only).
b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the three-month period ended
July 2, 2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHEY FOODS CORPORATION
-------------------------
(Registrant)
Date August 9, 2000 /s/ William F. Christ
-------------- ----------------------------------
William F. Christ
Senior Vice President,
Chief Financial Officer and Treasurer
Date August 9, 2000 /s/ David W. Tacka
-------------- ---------------------------------
David W. Tacka
Vice President, Corporate Controller
and Chief Accounting Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule for the period ended July 2, 2000
(required for electronic filing only)
16
