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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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)
- --------------------------------------------------------------------------------
(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:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF HERSHEY FOODS CORPORATION]
Proxy Statement and
1999 Annual Report to Stockholders
Letter to Stockholders
Notice of 2000 Annual Meeting and Proxy Statement
1999 Annual Report to Stockholders
. Management's Discussion and Analysis
. Consolidated Financial Statements
Other Stockholder Information
March 13, 2000
To Our Stockholders:
There is no doubt that 1999 was a most difficult and disappointing year for
Hershey Foods Corporation. While the year got off to a slow start due to
excessive retail inventories, we fully expected a strong finish in the second
half of the year. Instead, the implementation of the final phase of the
Corporation's enterprise-wide information system created problems in the areas
of customer service, warehousing and order fulfillment. These difficulties were
exacerbated by our growth in recent years which had resulted in shipping
capacity constraints. As a result, Hershey's sales and earnings fell well short
of expectations for the year.
Entering the new year, we continued to work diligently to resolve these
issues, and great progress has been made thus far. Moreover, our logistics
capabilities will be further enhanced when the new Eastern Distribution Center,
located near Hershey, begins operations in mid-2000.
Financial Results
Since we divested the pasta business in January 1999, we thought it would be
useful to provide certain financial information excluding the results of the
pasta business from both 1998 and 1999 as well as the 1998 results of our
former Russian business which we exited in June 1998. On this basis,
consolidated net sales for 1999 were $3,941,654,000, down 2.8 percent from
$4,055,925,000 in 1998, and earnings before interest and taxes declined by 8.7
percent.
There is some good news, however, despite the problems we experienced in
1999. In fact, the underlying capabilities of our business, including brand
strength, innovation and category management, have helped sustain us with our
customers and consumers throughout this difficult period. This year we are
providing an online annual report (www.hersheys.com) to tell you this story in
more detail.
Category Strength
A bright spot throughout 1999 was the vibrancy of the U.S. confectionery
market, with retail sales growing at a rate of
<PAGE>
approximately four percent, substantially above the average growth rate of the
packaged food group in general. Despite our shipping problems and slower-than-
anticipated factory sales in the second half of the year, the retail dollar
sales of Hershey's brands increased at a rate greater than the category for
1999 as a whole, leading to market share gains for the Corporation.
Also, it should be noted that Hershey Canada and Hershey Mexico achieved
excellent results for 1999. Hershey Canada produced solid sales and earnings
growth led by good performance of core chocolate brands and the introduction
of REESESTICKS bars in the Canadian market. In addition, the Canadian dollar
strengthened, yielding a favorable exchange rate which had a positive impact
on Canadian results in U.S. dollar terms. Hershey Mexico had an excellent
1999, achieving outstanding sales and earnings growth. Leading performers in
this market were HERSHEY'S chocolate drink box, HERSHEY'S KISSES chocolates,
HERSHEY'S KISSES with almonds, HERSHEY'S milk chocolate bar, and JOLLY RANCHER
candies.
Hershey International enjoyed excellent sales growth as our Asian markets
recovered during 1999, and we invested aggressively in new market development,
especially in South America. We expect our international business to continue
to grow at an accelerated rate. However, the investment required to develop
new markets will lead to little, if any, income contribution from this
division for the next several years.
In addition, HERSHEY'S CHOCOLATE WORLD visitors center had an outstanding
year, due in part to the success of its catalogue sales via the Internet.
These sales grew almost ten-fold, albeit off a very small base. We are
investigating uses of the Internet to create other sales opportunities through
enhanced communication with customers (especially smaller retailers), as well
as through more direct contact with consumers.
Hershey's Strong Brand Franchise
The strong retail performance of our brands during 1999 stems from the
strength of Hershey's brand franchise with the American consumer. Consistently
high-quality products that deliver great taste and excellent consumer value
are the foundation of this franchise, which now is more than a century old.
Combining these elements with creative marketing, selling and merchandising
activities, including executing new products and line extensions, forms a
business model through which Hershey contributes to superior growth for the
entire category. However, we need to restore our supply chain management
process to its pre-1999 levels to fully restore this performance model.
Retail Consolidation
An important concern for investors in recent years has been the performance
of consumer goods companies such as Hershey Foods in the face of the retail
trade's continuing consolidation. There is no doubt that on a short-term
basis, retail consolidation, especially in the drug store and grocery store
areas, causes some disruption of product flow to customers and, ultimately, to
consumers. Warehouse and store closings occur, taking inventory out of the
system and creating short-term volume challenges for manufacturers.
In the longer term, however, we feel consolidation could actually benefit
Hershey. The acquirers, generally speaking, have a better appreciation of the
confectionery category's ability to deliver superior returns as a result of
good margins and high turnover rates. However, it also is true that the large
retailers will continue to pressure manufacturers for more efficiencies,
reduced costs and increased promotional funding. As we see it, there are
several keys to operating successfully in this environment:
ii
<PAGE>
. Strong Brands
First, we believe that strong brands, constantly nurtured through excellent
quality and value, and by innovative merchandising and advertising programs,
are the key. The consumer will demand familiar and highly regarded brands, and
private label products will find it difficult to establish a beachhead if we
are able to maintain a disciplined approach to pricing by keeping our costs
low and our products affordable. Thanks to the strengths of our brands,
Hershey is the leader by a considerable margin in the United States
confectionery market, the largest and most profitable market in the world.
Moreover, we have widened the lead over our nearest competitor over the past
ten years and fully expect to maintain and enhance our position in the future.
. Innovation
We also believe those manufacturers creating truly new products meeting
specific consumer needs will have a distinct advantage over their competitors
and will be valuable partners for retailers. A major portion of confectionery
is purchased on impulse, and innovation creates excitement for the
confectionery category, feeding into this impulse nature very nicely.
Hershey's creative thematic merchandising also feeds the excitement and
triggers the impulse mechanism.
Hershey has had an excellent run of successful new product introductions
during the 90s, and almost every new product introduced within that period is
still in our line-up. This excellent batting average enables our customers to
have confidence that our new products will deliver incremental sales.
The new HERSHEY'S BITES line proved to be an unqualified success during
1999, greatly exceeding our initial expectations for the product when launched
in December 1998. This high-quality entry in the unwrapped, bite-sized
chocolate candy category originally consisted of four flavors: HERSHEY'S milk
chocolate with almonds, REESE'S peanut butter, HERSHEY'S COOKIES 'N' CREME,
and ALMOND JOY coconut and almond. A fifth flavor, YORK peppermint, was
introduced in December 1999. While we were under-represented in this category
prior to the introduction of the BITES line, Hershey's entries now enjoy a
nice position in a category which grew over 50 percent in 1999.
REESESTICKS bars were introduced in February 1998 and proved so successful
that demand exceeded our ability to produce all the usual packtypes. New
production equipment was installed during 1999, enabling us to fully develop
the potential of this excellent brand. Additional packtypes also helped offset
some of the sales decline which normally follows a product's introductory year
when the supply chain must be filled with sufficient inventory to support a
national introduction.
In mid-January 1999, we introduced JOLLY RANCHER lollipops which capitalize
on JOLLY RANCHER candies' strongest attribute: long-lasting, intense fruit
flavor. The lollipops come in three flavors: cherry, apple and watermelon, and
they have done very well in their first year of distribution. On a related
note, JOLLY RANCHER celebrated its 50th anniversary during 1999, a tribute to
the excellent quality of this brand. Since acquiring this business three years
ago, we have built on the brand's equity by extending the line with JOLLY
RANCHER JOLLY BEANS jelly beans, JOLLY RANCHER gummies candy, JOLLY RANCHER
JOLLY JELLIES candy, JOLLY RANCHER bubble gum and, now, JOLLY RANCHER
lollipops.
. Category Management
Another requisite during this period of retail consolidation is key customer
account focus with intense category management. This category manager
approach, where we are the category captains for many of the major accounts in
the U.S. market, is a distinct competitive advantage for the Corporation. By
partnering with our customers, we help them maximize the profitability of
their confectionery space by providing the data and tactics which create sales
growth for the whole category at a superior rate. With our well-trained sales
teams applying the best analytical and managerial talent to the large retail
market innovators, we are able to drive both category and Hershey sales.
Finally,
iii
<PAGE>
we intend to use integrated information and category account profitability
analysis along with efficient logistics to be an even better provider of
first-class service to our customers.
. Supply Chain Management
The fourth pillar of retail consolidation well-being is supply chain
management. Obviously, several circumstances have had an adverse effect on our
supply chain execution capability. First, our overall internal growth has been
significant, especially in terms of new product items. Second, the December
1996 Leaf acquisition increased our product base by 30 percent on an item
basis, even though we discontinued almost half of the Leaf items because they
did not meet our profit objectives. Third, the complexity of our thematic
merchandising efforts created an added burden for our distribution system.
During 1998, all of this began to make itself apparent, and our distribution
system came under stress. We began to experience certain inefficiencies and
related higher costs. We have worked to reduce the complexity of our business
and achieved some success during 1999. Until we get the new Eastern
Distribution Center on line in mid-2000, however, we will not have this
situation fully resolved to our satisfaction.
At the same time, we have experienced the well-publicized problems
associated with the implementation of the final phase of our enterprise-wide
information system. While this has been a painful process for us and for our
customers, we should remember that the system is designed to make Hershey more
competitive through lower costs, better customer service, and increased sales.
It has not been the easiest journey, but we still expect to arrive at our
intended destination.
Pasta Divestiture
An extremely important event for Hershey Foods in 1999 was the divestiture
of our pasta business. We received $450 million and retained a minority
interest in the business in a transaction which generated an after-tax gain of
$1.17 per share-diluted. The cash proceeds were used to reduce debt and
repurchase Common Stock shares. While this divestiture was somewhat dilutive
on a continuing operations basis in 1999, we believe that we can generate a
better return for our stockholders over the longer term by focusing resources
on our confectionery and related grocery businesses.
Share Repurchase
During the course of the year, the Corporation repurchased 5.5 million
shares for a total of $318 million. At the end of 1999, there remained $24
million of repurchase authorization which the Corporation has fully utilized
this year. The Board of Directors has authorized a new program of $200 million
to be implemented upon the conclusion of the current program.
Dividend Increase
Quarterly dividends were increased in August 1999 from $.24 per share to
$.26 per share, an increase of 8.3 percent. This increase represented the 25th
annual dividend increase on the Common Stock.
Management Changes
As part of a planned management transition process, Joseph P. Viviano, Vice
Chairman of the Corporation and a member of the Board of Directors, retired on
March 1, 2000. A 40-year veteran with Hershey Foods, he has been a key
contributor to our success. Joe initially ran our pasta business, taking it to
a position of industry leadership. Moving to our chocolate and confectionery
business, he
iv
<PAGE>
accomplished the identical results, a tribute to his management skills and
competence. He successfully served as President and Chief Operating Officer
prior to his election as Vice Chairman. We will miss his experienced advice
and counsel. Please refer to our online annual report for a more complete
review of Joe's career at Hershey.
Michael V. Wells, Vice President, Logistics, will retire on April 1, 2000.
He was key in designing and building the Corporation's logistics operation
over the past 25 years, and his knowledge and experience in this area will be
sorely missed.
In October 1999, Marcella Arline, formerly Director, Quality and Regulatory
Compliance, was promoted to Vice President, Quality and Regulatory Compliance.
She is responsible for product quality and safety, environmental and
regulatory compliance, and nutrition affairs.
Effective January 1, 2000, the Corporation restructured its U.S. marketing
organization to be more effectively aligned with the sales organization, and
positioned better to prioritize, coordinate and implement activities in the
brand equity and new product areas. Michael H. Holmes, formerly Vice President
and General Manager, Chocolate, became Vice President, U.S. Marketing, with
responsibility for all marketing activities in the United States. Reporting to
Holmes are six marketing units, each headed by a marketing vice president.
Michael F. Pasquale, formerly Senior Vice President, Confectionery and
Grocery, was named Executive Vice President and Chief Operating Officer,
Hershey Foods Corporation, effective February 9, 2000. Mike was responsible
for the Corporation's confectionery, grocery and international businesses as
well as its research and development activities and now assumes additional
responsibility for Hershey Foods' operations and manufacturing shared
services. He also serves on the Corporation's Board of Directors. His
leadership and broad experience will be especially valuable as we work to
return Hershey Foods to its historical performance levels and to more
profitable growth.
Looking to the Future
We certainly did not expect the problems we experienced with the
implementation of our new enterprise-wide information system. However, the
Corporation's employees did an excellent job responding to the problems once
they appeared. Hershey employees responded with the same dedication and
professionalism they have always demonstrated, and for this we express our
heartfelt appreciation.
Time will give us perspective. As we resolve our problems, the frustrations
will fade. In their place will be a solid appreciation of the benefits being
realized through our new enterprise-wide information system. We will be a
stronger, more competitive company for having come through this experience.
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief
Executive Officer
v
<PAGE>
2000 Annual Meeting of Stockholders
. 2:00 p.m., April 25, 2000 (doors open at 1:00 p.m.)
. Hershey Theatre, 15 East Caracas Avenue
. Map on back cover
. Refreshments and product sample available at HERSHEY'S CHOCOLATE
WORLD visitors center from 9:00 a.m. to 6:00 p.m.
. Product sample and 25% discount on selected items at HERSHEY'S
CHOCOLATE WORLD given in exchange for coupon provided to registered
stockholders on bottom half of proxy card
. Vote by telephone or mark, sign and date the proxy card and mail it
promptly
. Bring admission ticket from bottom half of your proxy card for
admission to the Annual Meeting
. If your shares are held by a broker, bank or other nominee, obtain a
letter from broker, bank or nominee, or bring your most recent
account statement showing ownership of Hershey stock on February 28,
2000, to gain admission to the Annual Meeting and to receive
HERSHEY'S CHOCOLATE WORLD discount and product sample.
----------------
Safe Harbor Statement
Please refer to the Safe Harbor Statement on page A-10 for information about
factors which could cause future results to differ materially from forward-
looking statements, expectations and assumptions expressed or implied in this
publication.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS................................... 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
1999 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...................................... 24
Annual Report on Form 10-K and Annual Report to Stockholders............... 24
APPENDIX A
ANNUAL REPORT TO STOCKHOLDERS.............................................. A-1
Management's Discussion and Analysis....................................... A-1
Consolidated Financial Statements.......................................... A-11
Notes to Consolidated Financial Statements................................. A-15
Responsibility for Financial Statements.................................... A-31
Report of Independent Public Accountants................................... A-32
Eleven-Year Consolidated Financial Summary................................. A-33
APPENDIX B
OTHER STOCKHOLDER INFORMATION.............................................. B-1
</TABLE>
<PAGE>
Notice of Annual Meeting
and
Proxy Statement
<PAGE>
[LOGO OF HERSHEY FOODS CORPORATION]
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
on
April 25, 2000
----------------
The Annual Meeting of Stockholders of HERSHEY FOODS CORPORATION will be held
at 2:00 p.m. on April 25, 2000 at the Hershey Theatre, 15 East Caracas Avenue,
Hershey, Pennsylvania 17033 for the following purposes:
(1) To elect ten directors;
(2) To approve the appointment of Arthur Andersen LLP as the Corporation's
independent public accountants for 2000; 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 February 28, 2000 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 13, 2000
Please follow the instructions on the enclosed proxy card for voting by
telephone whether or not you plan to attend the meeting in person, or if you
prefer, kindly mark, sign and date the enclosed proxy card and return it
promptly in the enclosed, postage-paid envelope.
<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 ("Annual Meeting") which will be held at 2:00 p.m.,
Tuesday, April 25, 2000 at the Hershey Theatre, 15 East Caracas Avenue,
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 13, 2000. The Corporation's principal executive offices are
located at 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810.
Shares represented by properly voted proxies received by the Corporation at
or prior to the Annual 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 2000. As to any other business which may
properly come before the Annual Meeting, the persons named on the proxy card
will vote according to their best judgment.
Proposal No. 1--ELECTION OF DIRECTORS
Ten directors are to be elected at the Annual 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. Joseph P. Viviano, formerly Vice Chairman
of the Board and a director, retired from the Board on March 1, 2000. Pursuant
to the Corporation's Restated Certificate of Incorporation, as amended
("Certificate"), and By-Laws, one-sixth of the directors, which equates
presently 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. Allan Z. Loren and
Mackey J. McDonald have been nominated by the Board of Directors for the two
positions to be elected separately by the Common Stock. The remaining eight
individuals listed have been nominated by the Board of Directors for the eight
positions to be elected by the holders of the Common Stock and the
Corporation's Class B Common Stock, one dollar par value ("Class B Stock"),
voting together without regard to class. The eight 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.
WILLIAM H. ALEXANDER, age 58, is Administrator of the Family
Business Program, The Wharton School of the University of
Pennsylvania, Philadelphia, Pennsylvania. Previously, he was
with H. B. Alexander Enterprises, Inc. where he held a number
of management positions, including Vice President and General
Manager, President and Chairman. A Hershey Foods director
since 1995, he is a member of the Audit Committee and the
Committee on Directors and Corporate Governance.
[PHOTO]
2
<PAGE>
ROBERT H. CAMPBELL, age 62, is Chairman of the Board and
Chief Executive Officer, Sunoco, Inc., Philadelphia,
Pennsylvania, a petroleum refiner and marketer. He has been
Chief Executive Officer since 1991, Chairman of the Board
since 1992 and has been a Director of Sunoco, Inc. since
1988. He is a director of CIGNA Corporation. A Hershey Foods
director since 1995, he chairs the Compensation and Executive
Organization Committee.
[PHOTO]
----------------
DR. C. McCOLLISTER EVARTS, age 68, is Chief Executive
Officer, The Milton S. Hershey Medical Center; Senior Vice
President for Health Affairs and Dean, and Professor of
Orthopaedics and Rehabilitation, The Pennsylvania State
University, College of Medicine, Hershey, Pennsylvania. He
was formerly 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]
----------------
BONNIE GUITON HILL, age 58, is President and Chief Executive
Officer of The Times Mirror Foundation; Vice President of The
Times Mirror Company, a news and information company; and
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. She is a director of AK Steel Corporation, The Home
Depot, Inc. and Niagara Mohawk Power Corporation. A Hershey
Foods director since 1993, she is a member of the Committee
on Directors and Corporate Governance.
[PHOTO]
----------------
JOHN C. JAMISON, age 65, is Chairman of the Board, Mallardee
Associates, a privately-held corporate financial services
firm, Williamsburg, Virginia. A Hershey Foods director since
1974, he chairs the Audit Committee and is a member of the
Compensation and Executive Organization Committee.
[PHOTO]
3
<PAGE>
ALLAN Z. LOREN, age 61, is Executive Vice President and Chief
Information Officer of American Express Company, New York, a
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. He is a director of
Reynolds & Reynolds and the Venator Group. A Hershey Foods
director since 1999, he is a member of the Audit Committee.
He has been nominated for election by the Common Stock as a
class.
[PHOTO]
----------------
MACKEY J. McDONALD, age 53, is Chairman of the Board, Chief
Executive Officer and President of VF Corporation,
Greensboro, North Carolina, an international apparel company.
He was elected Chairman of the Board of VF Corporation in
1998. He has been Chief Executive Officer since 1996 and
President since 1993. He is 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]
----------------
MICHAEL F. PASQUALE, age 52, is Executive Vice President and
Chief Operating Officer, Hershey Foods Corporation. He served
as President, Hershey Chocolate North America, from 1995
through 1998 and Senior Vice President, Confectionery and
Grocery, Hershey Foods Corporation, in 1999. He is a director
of Minerals Technologies, Inc. A director of the Corporation
since 1999, he serves as a member of the Executive Committee.
[PHOTO]
----------------
JOHN M. PIETRUSKI, age 67, is Chairman of the Board of Texas
Biotechnology Corporation, Houston, Texas, a pharmaceutical
research and development company. He is a director of GPU,
Inc., Lincoln National Corporation, and Professional
Detailing Inc. A Hershey Foods director since 1987, he chairs
the Committee on Directors and Corporate Governance.
[PHOTO]
4
<PAGE>
KENNETH L. WOLFE, age 61, is Chairman of the Board and Chief
Executive Officer, Hershey Foods Corporation. He was elected
President and Chief Operating Officer in 1985 and has served
in his current positions since 1994. He is a director of
Bausch & Lomb Inc., Carpenter Technology Corporation, and
GPU, Inc. 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.
[PHOTO]
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: 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, the Board from time to time establishes
committees of limited duration for special purposes.
Audit Committee 4 meetings in 1999
Members: John C. Jamison (Chair)
William H. Alexander
Allan Z. Loren
Mackey J. McDonald
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 1 meeting in 1999
Members: John M. Pietruski (Chair)
William H. Alexander
Bonnie Guiton Hill
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 Hershey Foods Corporation, Attn: Secretary,
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 7 meetings in 1999
Members: Robert H. Campbell (Chair)
C. McCollister Evarts, M.D.
John C. Jamison
Mackey J. McDonald
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 ("Incentive Plan");
Establishes target-award levels and makes awards
under the Annual Incentive Program and the Long-
Term Incentive Program of the Incentive Plan;
Administers the Incentive Plan, the Employee
Benefits Protection Plans, 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 9 meetings in 1999
Members: Kenneth L. Wolfe (Chair)
Michael F. Pasquale
Joseph P. Viviano
Responsibilities: Reviews and recommends to the full Board for
approval major capital projects and expenditures;
and
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 and 1 special meeting of the Board of
Directors during 1999. No director attended less than 83% 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 1999. Average attendance for all of these meetings equaled 96%.
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 his or her retirement as a director.
All directors are reimbursed for reasonable travel and other out-of-pocket
expenses incurred in connection with attendance at Board and committee
meetings and for minor incidental expenses incurred in connection with
performance of directors' services. The Chair of the Compensation and
Executive Organization Committee is also compensated for attendance at the
Annual Meeting if the Annual Meeting does not coincide with a scheduled Board
meeting. 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. Eight current directors and eleven retired directors
(including Mr. Viviano, who retired on March 1, 2000) 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 $800,000 because of their shorter
length of service as directors, and Messrs. Loren and Pasquale who became
directors after 1996.
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 for the
Corporation for the year ending December 31, 2000. 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 Annual 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 Annual
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 February 28, 2000, the record
date for the Annual Meeting, there were outstanding 107,798,756 shares of
Common Stock and 30,443,908 shares of Class B Stock, all of which are entitled
to be voted. Holders of record of the Corporation's Common Stock on February
28, 2000 will be entitled to cast one vote for each share held, and holders of
record of the Class B Stock on February 28, 2000 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 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 February 28, 2000, 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 Trust and Hershey Trust Company are as indicated in
the section entitled "Description of the Milton Hershey School Trust and
Hershey Trust Company."
<TABLE>
<CAPTION>
Deferred
Common Perform. Percent of Class B Percent of
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
Founders Hall
Hershey, PA
17033(/4/) 12,276,671 11.4% 30,306,006 99.5%
Hershey Trust Company
100 Mansion Road
Hershey, PA
17033(/4/)
- -------------------------------------------------------------------------------------------------
Hershey Trust
Company(/4/) 648,877 **
- -------------------------------------------------------------------------------------------------
W. H. Alexander*(/5/) 2,746 2,593 **
- -------------------------------------------------------------------------------------------------
R. H. Campbell* 1,075 4,714 **
- -------------------------------------------------------------------------------------------------
W. F. Christ 32,973 24,919 **
- -------------------------------------------------------------------------------------------------
C. M. Evarts, M.D.* 670 2,426 **
- -------------------------------------------------------------------------------------------------
B. Guiton Hill*(/6/) 1,209 1,845 **
- -------------------------------------------------------------------------------------------------
J. C. Jamison* 10,800 4,898 **
- -------------------------------------------------------------------------------------------------
A. Z. Loren* 100 865 **
- -------------------------------------------------------------------------------------------------
M. J. McDonald* 400 2,251 **
- -------------------------------------------------------------------------------------------------
M. F. Pasquale* 58,796 8,404 **
- -------------------------------------------------------------------------------------------------
J. M. Pietruski* 4,800 4,865 **
- -------------------------------------------------------------------------------------------------
R. M. Reese 44,523 16,243 **
- -------------------------------------------------------------------------------------------------
J. P. Viviano* 95,853 30,126 **
- -------------------------------------------------------------------------------------------------
K. L. Wolfe* 133,422 10,026 **
- -------------------------------------------------------------------------------------------------
All directors and
executive officers as
a group
(16 persons) 399,758 24,457 105,423 **
</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 February 28, 2000:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
W. F. Christ....................... 77,750
M. F. Pasquale..................... 130,550
R. M. Reese........................ 57,800
J. P. Viviano...................... 208,600
K. L. Wolfe........................ 215,700
Executive Officers as a Group...... 755,950
</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 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 1,200 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
(the "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 107,798,756 votes, or
11.4%, 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 412,237,836
votes, or 76.5%, entitled to be cast by the holders of the Common Stock and
the Class B Stock voting together on matters to be voted on without regard to
class.
Hershey Trust Company is a state-chartered trust company and holds 371,877
shares of the Corporation's Common Stock in its capacity as institutional
fiduciary for 63 estates and trusts unrelated to the Milton Hershey School
Trust. 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 12,925,548 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
10
<PAGE>
Common Stock at any time on a share-for-share basis. In the event the Milton
Hershey School Trust ceases to hold more than 50% of the outstanding shares of
the Class B Stock and at least 15% of the total outstanding shares of both the
Common Stock and Class B Stock, all shares of the Class B Stock will
automatically be converted into shares of the Common Stock on a share-for-
share basis. The Corporation's Certificate requires the approval of the Milton
Hershey School Trust prior to the Corporation issuing shares of Common Stock
or undertaking any other action which would cause the Milton Hershey School
Trust to cease having voting control of the Corporation.
All of the outstanding shares of Hershey Trust Company are owned by the
Milton Hershey School Trust. The members of the Board of Managers of Milton
Hershey School are appointed by and from the Board of Directors of Hershey
Trust Company. There are 17 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 C. McCollister Evarts, M.D., who are directors of the
Corporation, and Kenneth L. Wolfe, who is 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.
1999 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 and performance 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 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 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
industrial companies, some of which are from the food industry. In the
11
<PAGE>
performance graph on page 21, the Corporation's performance is compared to the
Standard and Poor's Food Group Index. The peer group considered relevant for
the Corporation's compensation comparison purposes does not include all of the
companies in the Food Group Index as compensation data on all such companies
is not readily available. Also, the peer group includes some companies that
are not in the Food Group Index because the Corporation selects those
companies it believes to be 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."
In 1998, the Committee took several actions to adjust a shortfall in the
long-term portion of the Corporation's executive compensation program versus
competitive peer group companies. The survey results reviewed by the Committee
in January 1999 showed that the shortfall had been remedied and that long-term
incentive grants and aggregate total compensation for 1999 were again in line
with the Corporation's targets versus competitive peer group companies.
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 and long-term business goals. To ensure proper balance in the
achievement of these business goals, the incentive program places greater
dollars at risk in long-term incentives compared to short-term incentives. The
long-term incentive program is designed especially 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
those individuals whose compensation is detailed in this Proxy Statement. This
is designed to ensure consistency throughout the executive compensation
program.
The Committee's policies with respect to each of the elements of the
executive compensation program, including the basis for the compensation
awarded to Mr. Wolfe, are discussed below. While the elements of compensation
are described separately below, the Committee considers the total compensation
package afforded by the Corporation when determining each component of the
executive officer's compensation, including pension benefits, supplemental
retirement benefits, insurance, and other benefits.
Base Salaries
Base salaries for new executive officers are determined initially by
evaluating the responsibilities of the position held, the experience of the
individual, and salaries paid in the competitive marketplace
12
<PAGE>
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 their
positions 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 1999, 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 1998. The Committee also considered Mr. Wolfe's
relative position in his salary grade. Based on these factors, the Committee
in 1999 increased Mr. Wolfe's salary based on the Corporation's 1998
performance by $40,000, a 5.4% increase. In January 2000, Mr. Wolfe received
no annual increase in his salary, based on the Committee's review of the
Corporation's 1999 performance.
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 1999
were based on financial measures including earnings per share, economic value
added, free cash flow, and certain productivity objectives, including a $100
million cost savings objective. For executive officers at the business unit
and shared service level, the performance objectives for 1999 were varying
combinations of consolidated earnings per share, economic value added, free
cash flow, corporate productivity objectives, business unit contribution
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 individual
performance score in relationship to the corporate or business unit scores.
The range of the target percentages of base salary used in 1999 for annual
cash incentive awards for executive officers was 35% 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 a minimum
rate of return which average total invested capital must earn before any
awards are paid. This is designed with the stockholders' interests in mind
13
<PAGE>
by assuring the Corporation achieves certain profitability levels before any
executive is granted an annual incentive award.
In 1999, corporate-level participants in the AIP (which included Mr. Wolfe)
did not achieve the corporate performance objectives set for earnings per
share and economic value added and only partially achieved performance
objectives for free cash flow and corporate productivity measures. Based on
these results, Mr. Wolfe declined his 1999 annual cash incentive award.
Long-Term Incentive Program--Performance Stock Units
Performance stock units ("PSUs") were contingently granted in January 1999
under the Incentive Plan to members of the Corporation's senior executive
group most in a position to affect the Corporation's long-term results (a
combined total of 23 individuals in 1999). PSU grants are based upon a
percentage of the executive's annual salary. PSUs are granted every year and
are earned based upon 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 shares of Common 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, specific
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 is 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 1999 was five times his base salary.
In January 1997, each eligible member of the senior executive group was
granted PSUs having a value at the time of grant equal to a percentage of his
or her annual salary. This percentage was determined by the Committee based on
the recommendation of senior management and competitive survey information.
The performance objectives established for the grant for earnings per share
and return on net assets were not achieved and the performance objective for
cumulative free cash flow was partially achieved for the period ended December
31, 1999. Accordingly, Mr. Wolfe's award was valued at $92,746 based on the
December 1999 average market value of the PSUs from the 1997 grant.
The table in this Proxy Statement, entitled "Long-Term Incentive Program
Performance Stock Unit Awards in Year-Ended December 31, 1999," provides
additional information regarding PSU 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 the holder to purchase during a
specified time period a fixed number of shares of Common Stock at a set price.
14
<PAGE>
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.
Beginning with stock options granted after 1995, employees desiring to
receive cash upon exercise through a same-day purchase and sale transaction
must first meet certain minimum stockholding requirements. 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 1999 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, stock 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 1999, Mr. Wolfe received options to purchase 42,150 shares of Common
Stock with an exercise price of $59.4375 per share, the closing market price
on the day preceding the grant.
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 1999, as in previous years, a substantial portion of the Corporation's
executive compensation consisted of performance-based variable elements. 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, Chair C. McCollister Evarts, M.D. John C. Jamison Mackey J.
McDonald
16
<PAGE>
Summary of Cash and Certain Other Compensation
The following table shows for the fiscal years ended December 31, 1999,
1998, and 1997 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 1999 $775,000 $ 0 42,150 $ 92,746 $ 4,000
Chairman and Chief 1998 735,000 359,944 57,000 1,456,946 4,000
Executive Officer 1997 660,000 778,750 47,500 1,770,640 4,000
- ----------------------------------------------------------------------------------------
J. P. Viviano 1999 $600,000 $ 44,220 27,050 $ 62,758 $ 4,000
Vice Chairman 1998 590,000 230,642 35,950 996,858 4,000
of the Board 1997 530,000 610,051 32,250 1,211,077 4,000
- ----------------------------------------------------------------------------------------
M. F. Pasquale(/5/) 1999 $400,000 $ 27,554 17,400 $ 38,181 $ 4,000
Executive Vice 1998 360,000 152,280 21,300 613,451 4,000
President and Chief 1997 340,000 248,710 19,650 761,467 4,000
Operating Officer
- ----------------------------------------------------------------------------------------
W. F. Christ 1999 $331,250 $ 22,864 12,650 $ 25,719 $ 4,000
Senior Vice President, 1998 303,000 118,135 15,350 412,162 54,000(/6/)
Chief Financial Officer 1997 281,000 281,787 13,100 495,412 4,000
and Treasurer
- ----------------------------------------------------------------------------------------
R. M. Reese 1999 $278,000 $ 18,104 8,200 $ 18,321 $ 4,000
Senior Vice President, 1998 258,000 79,048 7,400 287,555 4,000
General Counsel 1997 238,000 189,273 9,300 321,101 4,000
and Secretary
</TABLE>
- --------
(/1/) This column includes amounts deferred pursuant to Section 401(k) of the
Internal Revenue Code that were contributed by the executive officer to
the Corporation's Employee Savings Stock Investment and Ownership Plan
("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: 1997-99, 1996-98, and 1995-97 under the Incentive
Plan 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 1999, 1998, and 1997.
(/5/) During 1999, Mr. Pasquale was Senior Vice President, Confectionery and
Grocery, of the Corporation.
(/6/) Includes a special award approved by the Board of Directors.
17
<PAGE>
Long-Term Incentive Program--Stock Options
The following table contains information concerning the grant of stock
options under the 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, 1999
<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/) 1999(/2/) ($/Sh)(/3/) Date 5%(/4/)(/6/) 10%(/4/)(/6/)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
K. L. Wolfe 42,150 21.3% $ 59.4375 1/13/09 $ 1,575,564 $ 3,992,788
- --------------------------------------------------------------------------------------------------------
J. P. Viviano 27,050 13.7% 59.4375 1/13/09 1,011,127 2,562,394
- --------------------------------------------------------------------------------------------------------
M. F. Pasquale 17,400 8.8% 59.4375 1/13/09 650,411 1,648,268
- --------------------------------------------------------------------------------------------------------
W. F. Christ 12,650 6.4% 59.4375 1/13/09 472,856 1,198,310
- --------------------------------------------------------------------------------------------------------
R. M. Reese 8,200 4.2% 59.4375 1/13/09 306,515 776,770
- --------------------------------------------------------------------------------------------------------
All Stockholders(/5/) N/A N/A N/A N/A $5,353,620,614 $13,567,125,755
</TABLE>
- --------
(/1/) All stock options listed in this column are subject to a two-year
vesting period and have a ten-year term. All stock options were granted
on January 14, 1999 at a price of $59.4375, which equates to 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) or, if sooner, upon expiration of the ten-year term of
the stock options.
(/2/) In 1999, 26 employees were granted a total of 197,450 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.
(/5/) For "All Stockholders," the potential realizable value on 143,221,815
shares, the number of outstanding shares of Common Stock and Class B
Stock on January 14, 1999, is based on a $59.4375 per share price (the
exercise price of the 1999 options). The value of the Common Stock and
Class B Stock at $59.4375 per share was $8,512,746,629. The amounts
listed under these columns for "All Stockholders" are the result of
annual appreciation rates for a period of ten years from January 14,
1999 through and including January 13, 2009. The amounts are not
intended to forecast possible future appreciation, if any, of the price
of the Common Stock.
18
<PAGE>
(/6/) As of February 28, 2000, the market price of the Common Stock was
$44.125, or $15.3125 less than the exercise price of $59.4375 for the
1999 options. If this reduction in market price is taken into account in
computing the assumed annual rates of stock price appreciation of 5% and
10%, respectively, from February 28, 2000 through January 13, 2009 (the
expiration date of the 1999 options), the potential realizable value of
the options for each of the named executive officers and for all
stockholders would be as follows: At 5%--K. L. Wolfe $379,976, J. P.
Viviano $243,852, M. F. Pasquale $156,859, W. F. Christ $114,038, R. M.
Reese $73,922, All Stockholders $1,291,124,257; At 10%--K. L. Wolfe
$1,880,183, J. P. Viviano $1,206,618, M. F. Pasquale $776,161, W. F.
Christ $564,278, R. M. Reese $365,777, All Stockholders $6,388,687,176.
These amounts are not intended to forecast possible future appreciation,
if any, of the price of the Common Stock.
The following table sets forth information with respect to the five most
highly-compensated executive officers concerning the exercise of stock options
during the last fiscal year and unexercised stock options held as of the end
of the fiscal year:
Aggregated Option Exercises in Year-Ended December 31, 1999
and Year-End Option Values
<TABLE>
<CAPTION>
Securities Underlying Value of
Number of Unexercised Unexercised
Options at Options at
Shares 12/31/99 (#)(/1/) 12/31/99 ($)(/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 98,300 $3,525,208 158,700 99,150 $2,183,556 $ 0
- ---------------------------------------------------------------------------------------------
J. P. Viviano 0 0 172,650 63,000 2,984,534 0
- ---------------------------------------------------------------------------------------------
M. F. Pasquale 0 0 109,250 38,700 1,913,897 0
- ---------------------------------------------------------------------------------------------
W. F. Christ 14,400 529,388 62,400 28,000 1,028,175 0
- ---------------------------------------------------------------------------------------------
R. M. Reese 9,200 312,225 50,400 15,600 897,781 0
</TABLE>
- --------
(/1/) All of the stock options were granted under the Incentive Plan. The fair
market value of the Common Stock on December 31, 1999, the last trading
day of the Corporation's fiscal year, was $47.4375.
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 Incentive Plan. Payments made under the program for the three-
year performance cycle ending December 31, 1999 are reported in the Summary
Compensation Table.
Long-Term Incentive Program
Performance Stock Unit Awards in Year-Ended December 31, 1999
<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 10,550 3 years 879 10,550 15,825
- ------------------------------------------------------------------------------------------------
J. P. Viviano 6,750 3 years 562 6,750 10,125
- ------------------------------------------------------------------------------------------------
M. F. Pasquale 4,350 3 years 362 4,350 6,525
- ------------------------------------------------------------------------------------------------
W. F. Christ 3,150 3 years 262 3,150 4,725
- ------------------------------------------------------------------------------------------------
R. M. Reese 2,050 3 years 171 2,050 3,075
</TABLE>
- --------
(/1/) The PSUs reported in this table were granted on January 14, 1999 for the
cycle commencing January 1, 1999 and ending December 31, 2001.
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 1999-2001 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.
[LINE GRAPH]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
HERSHEY FOODS CORPORATION, S&P 500 INDEX AND S&P FOOD GROUP INDEX
- ------------------------------------------------------------------------------
[GRAPH]
Hershey Foods S&P 500 S&P Food Group
1994 $100 $100 $100
1995 138 138 127
1996 189 169 151
1997 271 225 216
1998 276 290 234
1999 214 351 184
* Total return assumes reinvestment of dividends.
Assumes $100 invested on 12/31/94 in Hershey Common Stock, S&P 500 Index and
S&P Food Group Index.
Benefit Protection Arrangements
The Corporation provides an Executive Benefits Protection Plan ("Benefits
Protection Plan") for the five executive officers named in the Summary
Compensation Table and other key management personnel. The Benefits Protection
Plan replaces severance agreements previously entered into with these
individuals. The terms of the Benefits Protection Plan are consistent with the
practices followed by other major public corporations in the U.S. and
generally provide that in the event the executive's employment with the
Corporation terminates 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 Benefits Protection Plan, 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, AIP bonus and PSU payout. The executive would also be
entitled to continuation of health benefits for a period of three years 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 the Executive
Compensation section) and would generally be paid such benefits at the time of
the executive's termination from a grantor trust to be established and funded
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 Benefits Protection Plan 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 year average of
base salary and five year average AIP bonus. 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 credited years of service as of
December 31, 1999, respectively, for each of the named executive officers are:
K. L. Wolfe, $1,279,584, 30.8 years; J. P. Viviano, $973,072, 31.7 years; M.
F. Pasquale, $566,262, 20.4 years; W. F. Christ, $498,061, 29.2 years; and R.
M. Reese, $384,374, 20.4 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 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 solicitation
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 reports were not timely filed in connection with one purchase of
100 shares of the Corporation's Common Stock by a director, William H.
Alexander, in November 1999, and one purchase of 100 shares of the
Corporation's Common Stock by the wife of Kenneth L. Wolfe, Chairman and Chief
Executive Officer of the Corporation, in December 1996.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
During 1999 the Corporation and its subsidiaries had a number of
transactions with Milton Hershey School, the Milton Hershey School Trust, and
companies owned by the Milton Hershey School Trust, involving the purchase or
sale of goods and services. These transactions were primarily with Hershey
Entertainment & Resorts Company, based in Hershey, Pennsylvania, and wholly-
owned by the Milton Hershey School Trust.
The aggregate value of sales made during 1999 by the Corporation and its
subsidiaries to Milton Hershey School, the Milton Hershey School Trust, and
companies owned by the Milton Hershey School Trust, amounted to approximately
$950,000. During the same year, the Corporation purchased goods and services
from these entities in the amount of approximately $1,600,000. 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.
From time to time the Corporation also makes purchases of real property in
the Hershey area from the Milton Hershey School Trust and from Hershey
Entertainment & Resorts Company, which have substantial real estate holdings
in the area. These transactions are made on terms that the Corporation
believes are as favorable to it as would be available to other purchasers. In
July 1999, the Corporation acquired approximately 94 acres of land near
Hershey, Pennsylvania, from the Milton Hershey School Trust at a purchase
price of $1,797,500. The purchase price was the fair market value of the land
as determined by two independent appraisers, one representing the seller and
the other representing the buyer. The site was acquired for construction and
development of a new warehouse and distribution facility which the Corporation
will lease.
OTHER BUSINESS
As of February 25, 2000, the Corporation had received no proposal,
nomination for director or other business submitted in accordance with its By-
Laws for consideration at the Annual Meeting, and therefore, 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 Annual Meeting. However, if any other
business should properly come before the Annual 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 Annual Meeting.
23
<PAGE>
STOCKHOLDER PROPOSALS AND NOMINATIONS
The 2001 Annual Meeting of Stockholders will be held on April 24, 2001. To
be eligible for inclusion in the Corporation's Proxy Statement for the 2001
Annual Meeting of Stockholders, stockholder proposals must be received by the
Corporation by November 13, 2000.
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 by the Corporation's By-Laws 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 2001 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 earlier than
December 28, 2000 and no later than January 29, 2001.
In addition, the Corporation's By-Laws require that a stockholder wishing to
make a nomination for director at the 2001 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 earlier than December
28, 2000 and no later than January 29, 2001: 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 Hershey Foods Corporation, Attn: Secretary, 100 Crystal A Drive,
Hershey, Pennsylvania 17033-0810.
ANNUAL REPORT ON FORM 10-K AND ANNUAL REPORT TO STOCKHOLDERS
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, 1999 filed with the Securities and Exchange
Commission. Requests for copies should be addressed to Hershey Foods
Corporation, Attn: Investor Relations Department, 100 Crystal A Drive,
Hershey, Pennsylvania 17033-0810.
Appendix A to this Proxy Statement contains the Annual Report to
Stockholders, including Management's Discussion and Analysis and the
Consolidated Financial Statements, and Appendix B contains other investor
information. Appendix A, Appendix B and the Annual Report on Form 10-K are not
part of the Corporation's proxy solicitation materials.
By order of the Board of Directors,
Robert M. Reese
Senior Vice President,
General Counsel and
Secretary
March 13, 2000
Stockholders who desire to have their stock voted at the meeting are
requested to either (1) follow the telephone voting instructions on the
enclosed proxy card or (2) mark, sign, and date the enclosed proxy card and
return it promptly in the enclosed, postage-paid envelope. Stockholders may
revoke their proxies at any time prior to the meeting and stockholders who are
present at the meeting may revoke their proxies and vote, if they so desire,
in person.
24
<PAGE>
Appendix A
Annual Report to Stockholders
<PAGE>
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation's sales decreased in 1999, following a record performance in
1998. During the two-year period, net sales decreased at a compound annual
rate of 4%. The sales decrease reflected the divestiture of the Corporation's
pasta business in January 1999 and reduced 1999 shipments in the United States
of confectionery and grocery products, which more than offset higher sales for
core confectionery and grocery brands in 1998. The reduction in shipments
resulted primarily from difficulties in order fulfillment (customer service,
warehousing, and shipping) encountered since the start-up of a new integrated
information system and new business processes during the third quarter of
1999. The sales decrease was partially offset by incremental sales from the
introduction of new confectionery products, and to a lessor extent, sales
increases in the Canadian and Mexican markets.
The Corporation's income increased in 1999 reflecting the gain on the sale
of the Corporation's pasta business. Excluding the $165.0 million after-tax
gain on the sale of the pasta business, net income decreased in 1999 following
a record performance in 1998. During the two-year period, net income decreased
at a compound annual rate of 6%. The decrease in net income reflected the
divestiture of the pasta business and sales decline in 1999, and a lower gross
margin over the two-year period, partly the result of higher costs associated
with the order fulfillment difficulties noted above. These items were
partially offset by lower levels of selling and marketing, administrative and
interest expenses.
The following divestiture occurred during the period:
. January 1999--The completion of the sale of a 94% majority interest of the
Corporation's U.S. pasta business to New World Pasta, LLC. The transaction
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 a gain of approximately $243.8 million before tax, $165.0 million
or $1.17 per share--diluted after tax, as a result of the transaction.
Net Sales
Net sales decreased $464.7 million or 10% in 1999 following an increase in
1998 of $133.4 million or 3%. The decrease in 1999 was primarily a result of
the divestiture of the Corporation's pasta business, resulting in a sales
reduction of $343.8 million, and sales decreases in the United States of core
confectionery and grocery products. Sales of confectionery and grocery
products declined in the first quarter of 1999 primarily as a result of the
December 1998 buy-in on promotions of regular count and vending items. Sales
decreases in the third and fourth quarters were primarily the result of
problems encountered since the July start-up of new business systems and
processes. These sales declines were partially offset by incremental sales
from the introduction of new confectionery products, increased export sales in
international markets and sales increases in the Corporation's Canadian and
Mexican markets. The increase in 1998 was primarily a result of incremental
sales from the introduction of new confectionery products and increased sales
volume for core 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.
Costs and Expenses
Cost of sales as a percent of net sales increased from 57.9% in 1997 to
59.2% in 1998, and to 59.3% in 1999. The decrease in gross margin in 1999
reflected lower profitability resulting from the mix of confectionery items
sold in 1999 compared with sales during 1998, primarily related to lower sales
of
A-1
<PAGE>
the more profitable standard bars. Higher freight and distribution costs,
reflecting increased costs related to the implementation of new business
systems and processes and distribution center capacity constraints, and higher
depreciation expense as a percent of sales, also contributed to the lower
gross margin. These cost increases were offset partially by selling price
increases in the Corporation's Canadian and Mexican markets and decreased
costs for packaging materials and certain raw materials. 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 confectionery business in December 1996, from an
affiliate of Huhtamaki Oy.
Selling, marketing and administrative expenses decreased by 9% in 1999,
reflecting lower expenses resulting from the divestiture of the pasta
business, reduced marketing expenses for core confectionery brands and lower
administrative expenses. These decreases were offset partially by increased
spending associated with the introduction of new products and international
exports, in addition to higher amortization expense for capitalized software.
Excluding the divestiture of the pasta business, advertising and promotion
expense was essentially equal to the prior year as a percent of sales.
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.
During the first quarter of 1999, the Corporation changed its retiree
medical plan to eliminate coverage for all eligible hourly employees under age
45, to be replaced by annual contributions into the Employee Savings Stock
Investment and Ownership Plan (ESSIOP). The change applied primarily to U.S.
hourly employees working in Pennsylvania. This change resulted in the
recognition of a $15.4 million pre-tax gain in 1999, excluding contributions
to the ESSIOP. Effective December 1998, all U.S. full-time salaried employees,
and all non-union hourly plant employees working outside Hershey, Pennsylvania
under age 45 were eligible for the ESSIOP contributions, resulting in the
recognition of a $13.0 million pre-tax gain in 1998.
Interest Expense, Net
Net interest expense in 1999 was $11.4 million below the prior year,
primarily as a result of lower short-term interest expense as a portion of the
proceeds from the sale of the pasta business and positive cash flow was used
to reduce short-term borrowings. 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.
Provision for Income Taxes
The Corporation's effective income tax rate was 39.3%, 38.8% and 36.8% in
1997, 1998 and 1999, respectively. Excluding the provision for income taxes
associated with the gain on the sale of the pasta business, the effective
income tax rate was 39.0% in 1999. 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.
Net Income
Net income increased $119.4 million in 1999, reflecting an after-tax gain of
$165.0 million on the sale of the Corporation's pasta business. Excluding the
gain, net income decreased $45.6 million or 13%
A-2
<PAGE>
in 1999, following an increase of $4.6 million or 1% in 1998. Excluding the
gain on the sale of the pasta business, net income as a percent of net sales
was 7.4% in 1999, 7.7% in 1998 and 7.8% in 1997.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1999. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 50% as of December
31, 1999 and 54% as of December 31, 1998. The ratio of current assets to
current liabilities was 1.8:1 as of December 31, 1999, and 1.4:1 as of
December 31, 1998. The lower capitalization ratio as of December 31, 1999, and
the higher ratio of current assets to current liabilities primarily reflected
the use of a portion of the proceeds from the sale of the pasta business to
reduce short-term borrowings.
Assets
Total assets decreased $57.4 million or 2% as of December 31, 1999,
primarily as a result of the divestiture of the pasta business and lower
accounts receivable, substantially offset by increases in inventories and cash
and cash equivalents.
Current assets increased by $146.0 million or 13% reflecting increased
inventories, cash and cash equivalents, prepaid expenses and other current
assets. An increase in inventories of $109.0 million primarily reflected
higher raw material and finished goods inventories. The increase in cash and
cash equivalents resulted from higher cash collections from customers in
December compared to the prior year and year 2000 contingency plans. A
decrease in accounts receivable reflected lower sales and increased
collections from customers in December, as well as a reduction of accounts
receivable with extended payment terms as of December 31, 1999.
As of December 31, 1999, accounts receivable included increased deductions
from customer invoices and higher past due amounts as compared to the prior
year. These increases were primarily the result of shipping, billing and
processing difficulties encountered during the third and fourth quarters
associated with the July start-up of the new integrated information system and
new business processes. The Corporation has made substantial progress in
resolving these problems, clearing open deductions and collecting past due
receivables.
Property, plant and equipment was lower than the prior year primarily due to
the divestiture of the pasta business and depreciation expense of $135.6
million, partially offset by capital additions of $115.4 million. The increase
in other non-current assets was primarily associated with the capitalization
of software.
Liabilities
Total liabilities decreased by $113.8 million or 5% as of December 31, 1999,
primarily reflecting a reduction of short-term borrowings and the divestiture
of the pasta business, partially offset by an increase in accrued income
taxes. The decrease in short-term debt of $136.7 million resulted from the use
of a portion of the proceeds from the sale of the pasta business and positive
cash flow to repay commercial paper borrowings. The increase in accrued income
taxes of $54.7 million primarily reflected the income tax provision on the
gain on sale of the pasta business.
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
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<PAGE>
Common Stock having one vote per share and the Class B Stock having ten votes
per share. However, the Common Stock, voting separately as a class, is
entitled to elect one-sixth of the Board of Directors. With respect to
dividend rights, the Common Stock is entitled to cash dividends 10% higher
than those declared and paid on the Class B Stock.
LIQUIDITY
Historically, the Corporation's major source of financing has been cash
generated from operations. The Corporation's income and, consequently, cash
provided from operations during the year are affected by seasonal sales
patterns, the timing of new product introductions, business acquisitions and
divestitures, and price increases. Chocolate, confectionery and grocery
seasonal and holiday-related sales have typically been highest during the
third and fourth quarters of the year, representing the principal seasonal
effect. Generally, seasonal working capital needs peak during the summer
months and have been met by issuing commercial paper.
Over the past three years, cash requirements for share repurchases, capital
expenditures, capitalized software additions and dividend payments exceeded
cash provided from operating activities and proceeds from the sale of the
pasta business by $102.9 million. Total debt, including debt assumed,
increased during the period by $119.6 million. Cash and cash equivalents
increased by $56.7 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,
1999, the Corporation's principal capital commitments included manufacturing
capacity expansion, modernization and efficiency improvements.
In January 1999, the Corporation implemented the first phase of an
enterprise-wide integrated information system in the United States. The first
phase of system implementation included new business systems and processes
related to purchasing, accounts payable, fixed assets, the general ledger,
production reporting, and tracking of plant inventories. The start-up of the
second phase of system implementation began in July 1999 and included systems
and processes in the areas of sales order and billing, transportation planning
and management, electronic data interchange communications with warehouses,
finished goods inventories, accounts receivable and tracking of marketing
promotions. As of December 31, 1999, approximately $98.8 million of
capitalized software and hardware and $13.2 million of expenses were incurred
for the enterprise-wide information system and related projects. Total
commitments for these systems are expected to be approximately $115 million to
$120 million, including incremental costs to resolve problems encountered with
new business systems and processes. These expenditures were 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 first phase of the distribution center is expected to open in the second
quarter of 2000.
During 1999, 5,478,379 shares of Common Stock were repurchased for $318.0
million under share repurchase programs, including 1,579,779 shares purchased
from the Milton Hershey School Trust for $100.0 million. Under share
repurchase programs which began in 1993, a total of 15,339,498 shares of
A-4
<PAGE>
Common Stock have been repurchased for approximately $605.6 million. Of the
shares repurchased, 528,000 shares were retired, 1,320,781 shares were
reissued to satisfy stock options obligations, Supplemental Retirement
Contributions and employee stock ownership trust (ESOP) obligations and the
remaining 13,490,717 shares were held as Treasury Stock as of December 31,
1999. 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, 1999, a total of 41,491,253
shares were held as Treasury Stock and $24.4 million remained available for
repurchases of Common Stock under the program approved by the Corporation's
Board of Directors in February 1999. In October 1999, the Corporation's Board
of Directors approved an additional share repurchase program authorizing the
repurchase of up to $200 million of the Corporation's Common Stock.
In March 1997, the Corporation issued $150 million of 6.95% Notes under a
November 1993 Form S-3 Registration Statement. 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, 1999,
$250 million of debt securities remained available for issuance under the
August 1997 Registration Statement. Proceeds from any offering of the $250
million of debt securities available under the shelf registration may be used
for general corporate requirements which include reducing existing commercial
paper borrowings, financing capital additions and share repurchases, and
funding future business acquisitions and working capital requirements.
As of December 31, 1999, 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. In December 1999, the short-term
credit facility agreement was renewed for a total of $200 million and the
long-term committed credit facility agreement remained in effect for $300
million, expiring 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
$25.0 million and $23.0 million as of December 31, 1999 and 1998,
respectively.
Cash Flow Activities
Cash provided from operating activities totaled $1.2 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 a business divestiture.
Capital additions during the past three years included the purchase of
manufacturing equipment, and expansion and modernization of existing
facilities. In 1999, the Corporation's pasta business was sold for $450
million in cash.
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
A-5
<PAGE>
fund seasonal working capital requirements, 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 15,802,718 shares of Common Stock have
been repurchased for $841.8 million, including 11,480,769 shares purchased
from the Milton Hershey School Trust for $600.0 million. Cash requirements for
incentive plan transactions were $57.5 million during the past three years,
substantially offset by cash received from the exercise of stock options of
$52.6 million. Cash used by incentive plan transactions in 1997 and 1998
reflected purchases of the Corporation's Common Stock in the open market to
repurchase Common Stock issued for stock options exercises. Beginning in early
1998, shares of treasury stock were reissued for stock options exercises.
ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
The Corporation utilizes certain derivative instruments, including interest
rate swaps and forward agreements, foreign currency forward exchange contracts
and commodity futures contracts, to manage interest rate, currency exchange
rate and commodity market price risk exposures. The interest rate swaps and
forward agreements, 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 contracts are
entered into for varying periods and are intended and effective as hedges of
anticipated raw material purchases. The Corporation does not hold or issue
derivative instruments for trading purposes and is not a party to any
instruments with leverage or prepayment features. In entering into these
contracts, the Corporation has assumed the risk which might arise from the
possible inability of counterparties to meet the terms of their contracts. The
Corporation does not expect any losses as a result of counterparty defaults.
The information below summarizes the Corporation's market risks associated
with long-term debt and derivative instruments outstanding as of December 31,
1999. 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, 1999. 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
2000 2001 2002 2003 2004 after Total Value
------ ---- ---- ------- ---- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt $2,440 $712 $838 $17,133 $136 $859,394 $880,653 $856,856
Fixed Rate 6.4% 2.0% 2.0% 4.4% 2.0% 7.2% 7.1%
</TABLE>
Interest Rate Swaps and Forward Agreements
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 (LIBOR) until expiration on October 1, 2005.
A-6
<PAGE>
As of December 31, 1998, the Corporation had agreements outstanding with an
aggregate notional amount of $75.0 million maturing in September 1999 to
effectively convert a portion of its floating rate commercial paper borrowings
to fixed rate debt. As of December 31, 1998, interest rates payable were at a
weighted average fixed rate of 6.3% and interest rates receivable averaging
5.2% were based on 30-day commercial paper composite rates. 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. The
Corporation's risk related to interest rate swap and forward agreements is
limited to the cost of replacing such agreements at prevailing market rates.
The potential loss in fair value of interest rate swaps and forward agreements
resulting from a hypothetical near-term adverse change in market rates of ten
percent was not material as of December 31, 1999 and 1998.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward contracts to hedge
transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies,
and to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate
movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments. In accordance with Statement
of Financial Accounting Standards No. 52, Foreign Currency Translation, these
contracts meet the conditions for hedge accounting treatment and accordingly,
gains and losses are deferred and accounted for as part of the underlying
transactions. Gains and losses on terminated derivatives designated as hedges
are accounted for as part of the originally hedged transaction. Gains and
losses on derivatives designated as hedges of items which mature, are sold or
terminated, are recorded currently in income.
As of December 31, 1999, the Corporation had foreign exchange forward
contracts maturing in 2000 and 2001 to purchase $18.0 million in foreign
currency, primarily euros and British sterling, and to sell $31.2 million in
foreign currency, primarily Canadian dollars and Japanese yen, at contracted
forward rates.
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.
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, 1999 and 1998, 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, 1999 and 1998.
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 contracts. At the present time, active
futures 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
A-7
<PAGE>
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, political
unrest in producing countries and speculative influences. Cocoa prices have
declined recently as additional production, spurred by higher prices of the
mid 1990's, has come on stream and as the economic difficulties in eastern
Europe, particularly Russia, and Southeast Asia, have negatively impacted
demand. During 2000, these negative demand influences could continue to keep
cocoa futures prices contained. The Corporation's costs during 2000 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 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 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 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 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, 1999 1998
-------------------------------------------------------------------
In millions of dollars Market Risk Market Risk
Fair (Hypothetical Fair (Hypothetical
Value 10% Change) Value 10% Change)
<S> <C> <C> <C> <C>
---------------------------------
Highest long position $147.7 $14.8 $134.9 $13.5
Lowest long position 54.3 5.4 45.6 4.6
Average position (long) 111.0 11.1 76.3 7.6
</TABLE>
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<PAGE>
Sensitivity analysis disclosures represent forward-looking statements which
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those presently anticipated or projected. The
important factors that could affect the sensitivity analysis disclosures
include significant increases or decreases in market prices reflecting
fluctuations attributable to the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates, political
unrest in producing countries and speculative influences in addition to
changes in the Corporation's hedging strategies.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$136.7 million in 1999 and $129.0 million in 1998. The annual dividend rate on
the Common Stock was $1.04 per share, an increase of 8% over the 1998 rate of
$.96 per share. The 1999 dividend represented the 25th consecutive year of
Common Stock dividend increases.
On February 9, 2000, the Corporation's Board of Directors declared a
quarterly dividend of $.26 per share of Common Stock payable on March 15,
2000, to stockholders of record as of February 25, 2000. It is the
Corporation's 281st consecutive Common Stock dividend. A quarterly dividend of
$.235 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 128.6 million shares of the Corporation's Common Stock were
traded during 1999. The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1999, was $47 7/16.
There were 43,265 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1999.
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>
1999
1st Quarter $ .24 $ .2175 $64 7/8 $54 1/8
2nd Quarter .24 .2175 59 1/2 48 13/16
3rd Quarter .26 .2350 61 7/16 48 1/2
4th Quarter .26 .2350 54 3/16 45 3/4
------ -------
Total $ 1.00 $ .9050
====== =======
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
====== =======
</TABLE>
- --------
* NYSE-Composite Quotations for Common Stock by calendar quarter.
A-9
<PAGE>
RETURN MEASURES
Operating Return on Average Stockholders' Equity
The Corporation's operating return on average stockholders' equity was 27.6%
in 1999. Over the most recent five-year period, the return has ranged from
22.2% in 1995 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 1995, the after-tax loss
on the disposal of businesses in 1996 and the after-tax gain on the sale of
the pasta business in 1999.
Operating Return on Average Invested Capital
The Corporation's operating return on average invested capital was 14.8% in
1999. Over the most recent five-year period, the return has ranged from 17.8%
in 1996 to 14.8% in 1999. 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 1995, the after-tax loss
on disposal of businesses in 1996, the after-tax gain on the sale of the pasta
business in 1999, and the after-tax effect of interest on long-term debt.
YEAR 2000 ISSUES
The Corporation completed its year 2000 testing and remediation programs in
the third quarter of 1999. No significant year 2000 problems have been
encountered with the Corporation's information technology (IT) and non-IT
systems. The total cost of testing and remediation of the Corporation's IT and
non-IT systems not being replaced by the integrated information system project
was approximately $6.0 million.
The Corporation also assessed 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 also contacted all of its major suppliers of ingredients,
packaging, facilities, logistics and financial services with regard to year
2000 issues. No significant year 2000 problems have been encountered with the
Corporation's major business partners.
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 taxes; market demand for new and existing
products; raw material pricing; 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.
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<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------
In thousands of dollars except per
share amounts
<S> <C> <C> <C>
Net Sales $3,970,924 $4,435,615 $4,302,236
---------- ---------- ----------
Costs and Expenses:
Cost of sales 2,354,724 2,625,057 2,488,896
Selling, marketing and administrative 1,057,840 1,167,895 1,183,130
Gain on sale of business (243,785) -- --
---------- ---------- ----------
Total costs and expenses 3,168,779 3,792,952 3,672,026
---------- ---------- ----------
Income before Interest and Income Taxes 802,145 642,663 630,210
Interest expense, net 74,271 85,657 76,255
---------- ---------- ----------
Income before Income Taxes 727,874 557,006 553,955
Provision for income taxes 267,564 216,118 217,704
---------- ---------- ----------
Net Income $ 460,310 $ 340,888 $ 336,251
========== ========== ==========
Net Income Per Share--Basic $ 3.29 $ 2.38 $ 2.25
========== ========== ==========
Net Income Per Share--Diluted $ 3.26 $ 2.34 $ 2.23
========== ========== ==========
Cash Dividends Paid Per Share:
Common Stock $ 1.00 $ .920 $ .840
Class B Common Stock .905 .835 .760
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-11
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 118,078 $ 39,024
Accounts receivable--trade 352,750 451,324
Inventories 602,202 493,249
Deferred income taxes 80,303 58,505
Prepaid expenses and other 126,647 91,864
----------- -----------
Total current assets 1,279,980 1,133,966
Property, Plant and Equipment, Net 1,510,460 1,648,058
Intangibles Resulting from Business Acquisitions 450,165 530,464
Other Assets 106,047 91,610
----------- -----------
Total assets $ 3,346,652 $ 3,404,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 136,567 $ 156,937
Accrued liabilities 292,497 294,415
Accrued income taxes 72,159 17,475
Short-term debt 209,166 345,908
Current portion of long-term debt 2,440 89
----------- -----------
Total current liabilities 712,829 814,824
Long-term Debt 878,213 879,103
Other Long-term Liabilities 330,938 346,769
Deferred Income Taxes 326,045 321,101
----------- -----------
Total liabilities 2,248,025 2,361,797
----------- -----------
Stockholders' Equity:
Preferred Stock, shares issued: none in 1999 and
1998 -- --
Common Stock, shares issued: 149,506,964 in 1999
and 149,502,964 in 1998 149,507 149,503
Class B Common Stock, shares issued: 30,443,908 in
1999 and 30,447,908 in 1998 30,443 30,447
Additional paid-in capital 30,079 29,995
Unearned ESOP compensation (22,354) (25,548)
Retained earnings 2,513,275 2,189,693
Treasury--Common Stock shares, at cost: 41,491,253
in 1999 and 36,804,157 in 1998 (1,552,708) (1,267,422)
Accumulated other comprehensive loss (49,615) (64,367)
----------- -----------
Total stockholders' equity 1,098,627 1,042,301
----------- -----------
Total liabilities and stockholders' equity $ 3,346,652 $ 3,404,098
=========== ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
balance sheets.
A-12
<PAGE>
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Cash Flows Provided from (Used by)
Operating Activities
Net income $ 460,310 $ 340,888 $ 336,251
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 163,308 158,161 152,750
Deferred income taxes (8,336) 82,241 16,915
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 77,918 (90,493) (68,479)
Inventories (136,535) 12,276 (33,538)
Accounts payable (8,742) 10,005 12,967
Other assets and liabilities (55,224) (124,118) 85,074
Other, net -- 745 4,018
--------- --------- ---------
Net Cash Provided from Operating Activities 327,683 389,705 505,958
--------- --------- ---------
Cash Flows Provided from (Used by)
Investing Activities
Capital additions (115,448) (161,328) (172,939)
Capitalized software additions (25,394) (42,859) (29,100)
Proceeds from divestiture 450,000 -- --
Other, net 13,526 9,284 21,368
--------- --------- ---------
Net Cash Provided from (Used by) Investing
Activities 322,684 (194,903) (180,671)
--------- --------- ---------
Cash Flows Provided from (Used by)
Financing Activities
Net change in short-term borrowings (136,742) (36,543) (217,018)
Long-term borrowings 1,696 -- 550,000
Repayment of long-term debt (393) (25,187) (15,588)
Cash dividends paid (136,728) (129,044) (121,546)
Exercise of stock options 18,878 19,368 14,397
Incentive plan transactions -- (22,458) (35,063)
Repurchase of Common Stock (318,024) (16,151) (507,654)
--------- --------- ---------
Net Cash (Used by) Financing Activities (571,313) (210,015) (332,472)
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents 79,054 (15,213) (7,185)
Cash and Cash Equivalents as of January 1 39,024 54,237 61,422
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 118,078 $ 39,024 $ 54,237
========= ========= =========
Interest Paid $ 77,049 $ 89,001 $ 64,937
Income Taxes Paid 218,665 123,970 181,377
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-13
<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 Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------------------
In thousands of
dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1997 $ -- $ 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
-----------
Comprehensive
income (loss)
Net income 460,310 460,310
Other
comprehensive
income (loss):
Foreign
currency
translation
adjustments 10,701 10,701
Minimum pension
liability
adjustments,
net of tax
benefit 4,051 4,051
-----------
Comprehensive
income 475,062
Dividends:
Common Stock,
$1.00 per share (109,175) (109,175)
Class B Common
Stock, $.905
per share (27,553) (27,553)
Conversion of
Class B Common
Stock into
Common Stock 4 (4) --
Incentive plan
transactions 2 2
Exercise of
stock options (458) 32,738 32,280
Employee stock
ownership
trust/benefits
transactions 540 3,194 3,734
Repurchase of
Common Stock (318,024) (318,024)
---- --------- -------- -------- --------- ----------- ------------ --------- -----------
Balance as of
December 31,
1999 $-- $ 149,507 $ 30,443 $ 30,079 $ (22,354) $ 2,513,275 $ (1,552,708) $ (49,615) $ 1,098,627
==== ========= ======== ======== ========= =========== ============ ========= ===========
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
A-14
<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 1999
presentation.
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.
Revenue Recognition
Sales are recorded at the time products are shipped and risk of loss is
transferred.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
Commodities Futures 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 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 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 designated as hedges of
anticipated purchases which are no longer likely to occur are recorded in
income currently.
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 $431.7 million and $508.0 million
as of December 31, 1999 and 1998, respectively. The decrease in goodwill
primarily reflected the divestiture of the Corporation's pasta business in
January 1999.
A-15
<PAGE>
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.
Accumulated amortization of intangible assets resulting from business
acquisitions was $121.6 million and $132.3 million as of December 31, 1999 and
1998, respectively. The decrease in accumulated amortization reflected the
divestiture of the Corporation's pasta business in January 1999.
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.
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, net
of tax benefit."
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 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. 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. 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.
A-16
<PAGE>
License Agreements
The Corporation has entered into license agreements under which it has
access to certain trademarks and proprietary technology, and manufactures
and/or markets and distributes certain products. The rights under these
agreements are extendible on a long-term basis at the Corporation's option
subject to certain conditions, including minimum sales levels, which the
Corporation has met. License fees and royalties, payable under the terms of
the agreements, are expensed as incurred.
Research and Development
The Corporation expenses research and development costs as incurred.
Research and development expense was $26.7 million, $28.6 million and $27.5
million in 1999, 1998 and 1997, respectively.
Advertising
The Corporation expenses advertising costs as incurred. Advertising expense
was $164.9 million, $187.5 million and $202.4 million in 1999, 1998 and 1997,
respectively. Prepaid advertising as of December 31, 1999 and 1998, was $5.8
million and $12.1 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, 1999 and 1998, was $82.2 million and $69.3 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 $15.1 million and $2.8 million as of December 31,
1999 and 1998, respectively.
2.DIVESTITURE
In January 1999, the Corporation completed the sale of a 94% majority
interest of its U.S. pasta business to New World Pasta, LLC. The transaction
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
a gain of approximately $243.8 million before tax, $165.0 million or $1.17 per
share--diluted after tax, as a result of the transaction. Net sales for the
pasta business were $29.3 million, $373.1 million, and $386.2 million for
1999, 1998 and 1997, respectively. Net income for the pasta business was $1.5
million, $25.9 million and $25.2 million for 1999, 1998 and 1997,
respectively.
3.RENTAL AND LEASE COMMITMENTS
Rent expense was $45.5 million, $39.6 million and $31.8 million for 1999,
1998 and 1997, respectively. Rent expense pertains to all operating leases,
which were principally related to certain administrative buildings,
distribution facilities and transportation equipment. 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 first phase
of the distribution center is expected to open in the second quarter of 2000.
Future minimum rental payments under non-cancelable
A-17
<PAGE>
operating leases with a remaining term in excess of one year as of December
31, 1999, were: 2000, $18.5 million; 2001, $19.7 million; 2002, $18.9 million;
2003, $18.3 million; 2004, $18.1 million; 2005 and beyond, $42.9 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, 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 currently include, but are not limited to, 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 December 31, 1999, net deferred losses on derivatives of
approximately $38.2 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
adoption of SFAS No. 133 is not expected to have a material impact on the
Corporation's results of operations.
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, 1999 and 1998, because of the
relatively short maturity of these instruments. The carrying value of long-
term debt, including the current portion, was $880.7 million as of December
31, 1999, compared to a fair value of $856.9 million based on quoted market
prices for the same or similar debt issues. The carrying value of long-term
debt, including the current portion, was $879.2 million as of December 31,
1998, compared to a fair value of approximately $1.0 billion.
As of December 31, 1999, the Corporation had foreign exchange forward
contracts maturing in 2000 and 2001 to purchase $18.0 million in foreign
currency, primarily euros and British sterling, and to sell $31.2 million in
foreign currency, primarily Canadian dollars and Japanese yen, at contracted
forward rates.
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.
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 December 31, 1999 and 1998, the fair
value of foreign exchange forward contracts approximated the contract value.
The Corporation does not hold or issue financial instruments for trading
purposes.
A-18
<PAGE>
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 (LIBOR) until expiration on October 1, 2005.
As of December 31, 1998, the Corporation had agreements outstanding with an
aggregate notional amount of $75.0 million maturing in September 1999 to
effectively convert a portion of its floating rate commercial paper borrowings
to fixed rate debt. As of December 31, 1998, interest rates payable were at a
weighted average fixed rate of 6.3% and interest rates receivable averaging
5.2% were based on 30-day commercial paper composite rates. 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. The
Corporation's risk related to interest rate swap and forward agreements is
limited to the cost of replacing such agreements at prevailing market rates.
6.INTEREST EXPENSE
Interest expense, net consisted of the following:
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Long-term debt and lease obligations $66,323 $67,538 $48,737
Short-term debt 12,191 23,657 32,284
Capitalized interest (1,214) (2,547) (1,883)
------- ------- -------
Interest expense, gross 77,300 88,648 79,138
Interest income (3,029) (2,991) (2,883)
------- ------- -------
Interest expense, net $74,271 $85,657 $76,255
======= ======= =======
</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. As of December 31, 1999, 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. In December 1999, the short-term
credit facility agreement was renewed for a total of $200 million and the
long-term committed credit facility agreement remained in effect for $300
million, expiring 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 maintains lines of credit arrangements with domestic
and international commercial banks, under which it could borrow in various
currencies up to approximately $25.0 million and $23.0 million as of December
31, 1999 and 1998, respectively, at the lending banks' prime commercial
interest rates or lower.
The Corporation had combined domestic commercial paper borrowings, and
short-term foreign bank loans against its credit facilities and lines of
credit of $209.2 million as of December 31, 1999, and
A-19
<PAGE>
$345.9 million as of December 31, 1998. The weighted average interest rates on
short-term borrowings outstanding as of December 31, 1999 and 1998, were 5.8%
and 5.2%, respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1999 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 $28.3 million and $57.0 million
as of December 31, 1999 and 1998, respectively.
8.LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ----------------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
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 30,653 29,192
-------- --------
Total long-term debt 880,653 879,192
Less--current portion 2,440 89
-------- --------
Long-term portion $878,213 $879,103
======== ========
</TABLE>
In October 1999, the Corporation entered into an interest rate swap
agreement to effectively convert $200 million of 6.7% Notes due 2005 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 LIBOR until expiration on October 1, 2005.
Aggregate annual maturities during the next five years are: 2000, $2.4
million; 2001, $.7 million; 2002, $.8 million; 2003, $17.1 million; and $.1
million in 2004. 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.
A-20
<PAGE>
9. INCOME TAXES
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C>
Current:
Federal $256,054 $119,706 $177,145
State 15,998 10,498 20,252
Foreign 3,848 3,673 3,392
-------- -------- --------
Current provision for income taxes 275,900 133,877 200,789
-------- -------- --------
Deferred:
Federal (23,271) 73,422 9,370
State 16,280 10,568 5,103
Foreign (1,345) (1,749) 2,442
-------- -------- --------
Deferred provision for income taxes (8,336) 82,241 16,915
-------- -------- --------
Total provision for income taxes $267,564 $216,118 $217,704
======== ======== ========
</TABLE>
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Deferred tax assets:
Post-retirement benefit obligations $ 84,305 $ 87,954
Accrued expenses and other reserves 103,232 96,843
Accrued trade promotion reserves 34,708 28,118
Other 23,054 21,530
-------- --------
Total deferred tax assets 245,299 234,445
-------- --------
Deferred tax liabilities:
Depreciation 289,369 308,074
Other 201,672 188,967
-------- --------
Total deferred tax liabilities 491,041 497,041
-------- --------
Net deferred tax liabilities $245,742 $262,596
======== ========
Included in:
Current deferred tax assets, net $ 80,303 $ 58,505
Non-current deferred tax liabilities, net 326,045 321,101
-------- --------
Net deferred tax liabilities $245,742 $262,596
======== ========
</TABLE>
A-21
<PAGE>
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, 1999 1998 1997
- --------------------------------------------------------------------------
<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 2.3 3.0 3.4
Non-deductible acquisition costs .6 .9 .9
Utilization of capital loss carryforwards (.9) -- --
Other, net (.2) (.1) --
---- ---- ----
Effective income tax rate 36.8% 38.8% 39.3%
==== ==== ====
</TABLE>
In January 1999, the Corporation received a Notice of Proposed Deficiency
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 an assessment for the disallowance of interest expense deductions
associated with the underlying life insurance policies. The total impact of
the disallowance was approximately $60.4 million, including interest as of
December 31, 1999. The Corporation may be subject to additional assessments
for federal and state tax and interest payments for years subsequent to 1996.
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.
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.
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-22
<PAGE>
A summary of the changes in benefit obligations and plan assets as of
December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------- --------------------
December 31, 1999 1998 1999 1998
- -------------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C> <C>
Change in benefits obligation
Benefits obligation at beginning of
year $ 692,422 $602,081 $ 251,040 $ 206,695
Service cost 31,050 27,621 3,803 4,452
Interest cost 41,781 41,855 13,813 13,524
Amendments 16,404 (440) (11,092) (17,427)
Actuarial (gain) loss (93,537) 72,944 (32,285) 54,698
Divestiture/Acquisition (8,648) -- -- (1,799)
Other 3,185 (2,440) 222 (228)
Benefits paid (54,947) (49,199) (10,991) (8,875)
--------- -------- --------- ---------
Benefits obligation at end of year 627,710 692,422 214,510 251,040
--------- -------- --------- ---------
Change in plan assets
Fair value of plan assets at
beginning of year 628,041 566,810 -- --
Actual return on plan assets 74,511 91,338 -- --
Divestiture (5,993) -- -- --
Employer contribution 6,253 20,634 10,991 8,875
Other 2,834 (1,542) -- --
Benefits paid (54,947) (49,199) (10,991) (8,875)
--------- -------- --------- ---------
Fair value of plan assets at end of
year 650,699 628,041 -- --
--------- -------- --------- ---------
Funded status 22,989 (64,381) (214,510) (251,040)
Unrecognized transition obligation (308) (91) -- --
Unrecognized prior service cost 49,046 35,854 (24,842) (33,202)
Unrecognized net actuarial (gain)
loss (105,839) 6,164 26,085 59,589
Intangible asset -- (1,261) -- --
Accumulated other comprehensive
income -- (6,750) -- --
Prior service cost recognized due
to curtailment -- -- 17,034 12,991
Unrecognized prior service cost due
to amendment -- -- (11,105) (6,924)
--------- -------- --------- ---------
(Accrued) benefits cost $ (34,112) $(30,465) $(207,338) $(218,586)
========= ======== ========= =========
Weighted-average assumptions
Discount rate 7.5% 6.4% 7.5% 6.4%
Expected long-term rate of return
on assets 9.5 9.5 N/A N/A
Rate of increase in compensation
levels 4.8 4.8 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 2000 and future years.
As of December 31, 1999, 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 $35.0 million,
respectively, with no plan assets.
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 minimum pension liability adjustment is required when the actuarial
present value of accumulated plan benefits exceeds plan assets and accrued
pension liabilities. In 1999, accrued pension
A-23
<PAGE>
liabilities exceeded the actuarial present value of accumulated plan benefits
because the discount rate used to determine the present value of accumulated
benefits increased from 6.4% to 7.5% and a plan amendment shifted benefits
from an unfunded pension plan to a funded plan. Accordingly, a minimum pension
liability adjustment of $4.1 million, initially recorded in other
comprehensive income in 1998, was reversed in 1999, net of deferred income
taxes of $2.7 million.
A summary of the components of net periodic benefits cost for the years
ended December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ------------------
For the years ended December 31, 1999 1998 1999 1998
- ----------------------------------------------------------------------------
In thousands of dollars
<S> <C> <C> <C> <C>
Components of net periodic benefits
cost
Service cost $ 31,050 $ 27,621 $ 3,803 $ 4,452
Interest cost 41,781 41,855 13,813 13,524
Expected return on plan assets (57,836) (53,399) -- --
Amortization of prior service cost 2,956 2,941 (2,293) (2,986)
Recognized net actuarial loss 341 717 1,042 --
Other -- -- 54 9
-------- -------- -------- --------
Corporate sponsored plans 18,292 19,735 16,419 14,999
Multi-employer plans 698 1,571 -- --
Administrative expenses 287 796 -- --
-------- -------- -------- --------
Net periodic benefits cost $ 19,277 $ 22,102 $ 16,419 $ 14,999
======== ======== ======== ========
</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. During the first quarter of 1999, for
all eligible employees under age 45, the Corporation provided 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 $15.4 million pre-tax
gain which is not included above as a component of net periodic benefits
costs. The changes applied primarily to U.S. hourly employees working in
Pennsylvania.
Effective December 1998, all U.S. full-time salaried employees, and all non-
union hourly plant employees working outside Hershey, PA under age 45 were
eligible for the ESSIOP contributions. 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 in 1998.
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 $ 954 $ (829)
Effect on post-retirement benefit
obligation 11,152 (9,999)
</TABLE>
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 1999 and 1998, the ESOP
received a combination of dividends on unallocated shares and contributions
from the
A-24
<PAGE>
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, 1999, the ESOP
held 980,992 allocated shares and 1,114,224 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 1999, 1998 and 1997 was $1.6 million, $1.0 million, and $1.4
million, respectively. Dividends paid on unallocated ESOP shares were $1.2
million in both 1999 and 1998 and $1.3 million in 1997. 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, 1999, 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, 1999 a combined total of 179,950,872
shares of both classes of common stock had been issued of which 138,459,619
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1999.
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 1999, 1998 and 1997, a total of 4,000 shares, 18,000
shares, and 13,000 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 12,929,073 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, 1999, and was entitled to cast approximately 77% of
the total votes of both classes of the Corporation's common stock. The Milton
Hershey School Trust must approve the issuance of shares of Common Stock or
any other action which would result in the Milton Hershey School Trust not
continuing to have voting control of the Corporation.
During 1999, 5,478,379 shares of Common Stock were repurchased for $318.0
million, including 1,579,779 shares of the Corporation's Common Stock
purchased from the Milton Hershey School Trust for $100.0 million. A total of
15,339,498 shares of Common Stock have been repurchased for approximately
$605.6 million under share repurchase programs which were approved by the
Corporation's Board of Director's in 1993, 1996 and 1999. Of the shares
repurchased, 528,000 shares were retired, 1,320,781 shares were reissued to
satisfy stock options obligations, Supplemental Retirement Contributions and
ESOP obligations and the remaining 13,490,717 shares were held as Treasury
Stock as of December 31, 1999. In August 1997, the Corporation purchased
9,900,990 shares of its Common Stock to be held as Treasury Stock from the
Milton Hershey School Trust for $500.0 million and in August 1995, 18,099,546
shares were purchased from the Milton Hershey School Trust for $500.0 million.
A total of 41,491,253 shares were held as Treasury Stock as of December 31,
1999.
A-25
<PAGE>
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>
For the years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------
In thousands except per share amounts
<S> <C> <C> <C>
Net income $460,310 $340,888 $336,251
======== ======== ========
Weighted average shares--basic 140,031 143,446 149,174
Effect of dilutive securities:
Employee stock options 1,260 2,008 1,727
Performance and restricted stock units 9 109 115
-------- -------- --------
Weighted average shares--diluted 141,300 145,563 151,016
======== ======== ========
Net income per share--basic $ 3.29 $ 2.38 $ 2.25
======== ======== ========
Net income per share--diluted $ 3.26 $ 2.34 $ 2.23
======== ======== ========
</TABLE>
For the year ended December 31, 1999, 1.8 million stock options were not
included in the diluted earnings per share calculation because the exercise
price was higher than the average market price of the Common Stock for the
year and therefore, the effect would have been antidilutive.
13.STOCK COMPENSATION PLAN
The long-term portion of the Key Employee Incentive Plan (Incentive Plan),
provides for grants of stock-based compensation awards to senior executives
and key employees of one or more of the following: non-qualified stock options
(fixed stock options), performance stock units, stock appreciation rights and
restricted stock units. The Incentive Plan also provides for the deferral of
performance stock unit awards by participants. As of December 31, 1999, 15.3
million shares were authorized for grants under the long-term portion of the
Incentive Plan.
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 options 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 Incentive Plan 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 Incentive Plan
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, 1999 1998 1997
- ---------------------------------------------------------------------
In thousands of dollars except per share
amounts
<S> <C> <C> <C> <C>
Net income As reported $460,310 $340,888 $336,251
Pro forma 449,986 329,621 330,710
Net income per share--Basic As reported $ 3.29 $ 2.38 $ 2.25
Pro forma 3.21 2.30 2.22
Net income per share--Diluted As reported $ 3.26 $ 2.34 $ 2.23
Pro forma 3.18 2.26 2.19
</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 1999, 1998 and 1997,
A-26
<PAGE>
respectively: dividend yields of 1.4%, 1.6% and 1.9%, expected volatility of
23%, 21% and 20%, risk-free interest rates of 4.9%, 5.9% and 6.2%, and
expected lives of 6.5 years, 6.5 years and 5.7 years.
Fixed Stock Options
The exercise price of each option equals the market price of the
Corporation's Common Stock on the date of grant. Under the Incentive Plan,
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, 1999, 1998, and 1997, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
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 7,665,270 $38.91 6,713,920 $31.73 5,902,220 $27.40
Granted 197,450 $59.24 1,739,050 $61.22 1,485,250 $44.64
Exercised (701,596) $26.80 (751,600) $25.78 (656,350) $21.94
Forfeited (255,200) $52.16 (36,100) $52.61 (17,200) $33.06
--------- --------- ---------
Outstanding at end of
year 6,905,924 $40.23 7,665,270 $38.91 6,713,920 $31.73
========= ========= =========
Options exercisable at
year-end 4,015,624 $29.78 4,480,670 $28.45 3,013,670 $24.38
========= ========= =========
Weighted-average fair
value of options
granted during the year
(per share) $ 17.23 $ 18.30 $ 11.66
========= ========= =========
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1999:
<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 12/31/99 Life in Years Exercise Price 12/31/99 Exercise Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$17 11/16-26 1/2 1,769,674 3.6 $23.86 1,769,674 $23.86
$33 1/16-44 1/2 3,324,050 6.4 $37.64 2,227,650 $34.26
$49 1/8-63 11/16 1,812,200 8.1 $60.96 18,300 $56.25
--------- ---------
$17 11/16-63 11/16 6,905,924 6.1 $40.23 4,015,624 $29.78
========= =========
</TABLE>
Performance Stock Units
Under the long-term portion of the Incentive Plan, each January the
Corporation grants selected executives and other key employees performance
stock units whose vesting is contingent upon the achievement of certain
performance objectives. If at the end of three-year performance cycles,
targets for financial measures of earnings per share, 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 amount (credited to) charged against income for the
performance-based plan was $(1.9) million, $6.6 million and $9.1 million for
1999, 1998, and 1997, respectively. The compensation credit in 1999 resulted
from a partial achievement of the current year
A-27
<PAGE>
cycle objectives, expectation of partially achieving the target objectives for
the 2000 cycle and the lower stock price. The compensation cost associated
with the long-term portion of the Incentive Plan 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, 1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
Shares granted 48,550 48,150 95,250
Weighted-average fair value at date of grant $59.48 $61.54 $45.17
</TABLE>
Deferred performance stock units, deferred directors' fees and accumulated
dividend amounts totaled 383,366 shares as of December 31, 1999.
No stock appreciation rights were outstanding as of December 31, 1999.
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 $16.9 million and $19.9 million
as of December 31, 1999 and 1998, 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 $469.2 million and $342.9 million as of December 31, 1999 and
1998, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
-----------------------------------------
In thousands of
dollars
<S> <C> <C>
Raw materials $270,711 $209,963
Goods in process 49,412 44,336
Finished goods 365,575 322,125
-------- --------
Inventories at FIFO 685,698 576,424
Adjustment to LIFO (83,496) (83,175)
-------- --------
Total inventories $602,202 $493,249
======== ========
</TABLE>
A-28
<PAGE>
Property, Plant and Equipment
Property, plant and equipment balances included construction in progress of
$76.6 million and $96.6 million as of December 31, 1999 and 1998,
respectively. Major classes of property, plant and equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
----------------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Land $ 50,830 $ 30,871
Buildings 484,768 541,181
Machinery and equipment 2,036,670 2,130,735
----------- -----------
Property, plant and equipment, gross 2,572,268 2,702,787
Accumulated depreciation (1,061,808) (1,054,729)
----------- -----------
Property, plant and equipment, net $ 1,510,460 $ 1,648,058
=========== ===========
</TABLE>
Accrued Liabilities
Accrued liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
------------------------------------------------------
In thousands of dollars
<S> <C> <C>
Payroll, compensation and benefits $ 98,527 $ 87,666
Advertising and promotion 71,233 67,916
Other 122,737 138,833
-------- --------
Total accrued liabilities $292,497 $294,415
======== ========
</TABLE>
Other Long-term Liabilities
Other long-term liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998
-----------------------------------------------------
In thousands of dollars
<S> <C> <C>
Accrued post-retirement benefits $194,563 $206,345
Other 136,375 140,424
-------- --------
Total other long-term liabilities $330,938 $346,769
======== ========
</TABLE>
15.SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of confectionery and
grocery 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 products in Japan, the
Philippines, Korea and China, 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 $605.3 million, $619.1
million and $529.6 million in 1999, 1998 and 1997, respectively.
A-29
<PAGE>
16.QUARTERLY DATA (Unaudited)
Summary quarterly results were as follows:
<TABLE>
<CAPTION>
Year 1999 First Second Third Fourth
- ------------------------------------------------------------------------------
In thousands of
dollars except per share amounts
<S> <C> <C> <C> <C>
Net sales $ 945,152 $853,239 $1,066,695 $1,105,838
Gross profit 382,988 340,443 432,653 460,116
Net income 224,670(a) 50,055 87,578 98,007
Net income per share--Basic(b) 1.58 .36 .63 .71
Net income per share--Diluted(b) 1.57 .35 .62 .70
<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(b) .52 .33 .74 .76
</TABLE>
- --------
(a) Net income for the first quarter and year 1999 included an after-tax gain
on the sale of the Corporation's pasta business of $165.0 million. Net
income per share was similarly impacted.
(b) Quarterly income per share amounts do not total to the annual amounts due
to changes in weighted average shares outstanding during the year.
A-30
<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 27, 1999. 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-31
<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,
1999 and 1998, and the related consolidated statements of income, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1999, appearing on pages A-11 through A-30. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen
New York, New York
January 28, 2000
A-32
<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 1999 1998 1997
----------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Summary of Operations
Net Sales 5.1 % $ 3,970,924 4,435,615 4,302,236
-------------- --------------- -------------
Cost of Sales 4.9 % $ 2,354,724 2,625,057 2,488,896
Selling, Marketing and
Administrative 4.9 % $ 1,057,840 1,167,895 1,183,130
Non-recurring
Credits/(Charges)(o) $ 243,785 -- --
Interest Expense, Net 13.8 % $ 74,271 85,657 76,255
Provision for Income
Taxes 8.5 % $ 267,564 216,118 217,704
-------------- --------------- -------------
Income from Continuing
Operations Before
Accounting Changes 10.4 % $ 460,310 340,888 336,251
Net Cumulative Effect
of Accounting Changes $ -- -- --
-------------- --------------- -------------
Net Income 10.4 % $ 460,310 340,888 336,251
============== =============== =============
Income Per Share:(a)
From Continuing
Operations Before
Accounting Changes
--Basic 13.2 % $ 3.29(i) 2.38 2.25
--Diluted 13.1 % $ 3.26 2.34 2.23
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted $ -- -- --
Net Income--Basic 13.2 % $ 3.29(i) 2.38 2.25
Net Income--Diluted 13.1 % $ 3.26 2.34 2.23
Weighted Average Shares
Outstanding--Basic(a) 140,031 143,446 149,174
Weighted Average Shares
Outstanding--
Diluted(a) 141,300 145,563 151,016
Dividends Paid on
Common Stock 7.0 % $ 109,175 103,616 98,390
Per Share(a) 10.5 % $ 1.00 .920 .840
Dividends Paid on Class
B Common Stock 10.5 % $ 27,553 25,428 23,156
Per Share(a) 10.5 % $ .905 .835 .760
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.4%(c) 7.7% 7.8%
Depreciation 9.5 % $ 135,574 138,489 135,016
Advertising 3.1 % $ 164,894 187,505 202,408
Promotion 4.4 % $ 395,849 469,709 451,580
Payroll 4.6 % $ 534,854 563,045 524,827
Year-end Position and
Statistics
Capital Additions (3.3)% $ 115,448 161,328 172,939
Total Assets 6.3 % $ 3,346,652 3,404,098 3,291,236
Long-term Portion of
Debt 15.1 % $ 878,213 879,103 1,029,136
Stockholders' Equity (.2)% $ 1,098,627 1,042,301 852,806
Operating Return on
Average Stockholders'
Equity(b) 27.6% 36.0% 33.4%
Operating Return on
Average Invested
Capital(b) 14.8% 17.4% 17.5%
Full-time Employees 13,900 14,700 14,900
Stockholders' Data(a)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 138,460 143,147 142,932
Market Price of Common
Stock at Year-end 10.2 % $ 47 7/16 62 3/16 61 15/16
Range During Year $64 7/8-45 3/4 76 3/8-59 11/16 63 7/8-42 1/8
</TABLE>
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-35.
A-33
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------------- ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net Sales 3,989,308 3,690,667 3,606,271 3,488,249 3,219,805
--------------- ----------- -------------- --------------- --------------
Cost of Sales 2,302,089 2,126,274 2,097,556 1,995,502 1,833,388
Selling, Marketing and
Administrative 1,124,087 1,053,758 1,034,115 1,035,519 958,189
Non-recurring
Credits/(Charges)(o) (35,352) 151 (106,105) 80,642 --
Interest Expense, Net 48,043 44,833 35,357 26,995 27,240
Provision for Income
Taxes 206,551 184,034 148,919 213,642 158,390
--------------- ----------- -------------- --------------- --------------
Income from Continuing
Operations Before
Accounting Changes 273,186 281,919 184,219 297,233 242,598
Net Cumulative Effect
of Accounting Changes -- -- -- (103,908) --
--------------- ----------- -------------- --------------- --------------
Net Income 273,186 281,919 184,219 193,325 242,598
=============== =========== ============== =============== ==============
Income Per Share:(a)
From Continuing
Operations Before
Accounting Changes
--Basic 1.77(j) 1.70(k) 1.06(l) 1.65(m) 1.34
--Diluted 1.75 1.69 1.05 1.65 1.34
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- -- (.58) --
Net Income--Basic 1.77(j) 1.70(k) 1.06(l) 1.07(m) 1.34
Net Income--Diluted 1.75 1.69 1.05 1.07 1.34
Weighted Average Shares
Outstanding--Basic(a) 154,334 166,036 174,367 179,929 180,775
Weighted Average Shares
Outstanding--
Diluted(a) 155,690 166,721 174,740 180,495 181,160
Dividends Paid on
Common Stock 93,884 91,190 89,660 84,711 77,174
Per Share(a) .760 .685 .625 .570 .515
Dividends Paid on Class
B Common Stock 20,879 18,900 17,301 15,788 14,270
Per Share(a) .685 .620 .5675 .5175 .4675
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.7%(d) 7.6% 7.3%(e) 7.4%(f) 7.5%
Depreciation 119,443 119,438 114,821 100,124 84,434
Advertising 174,199 159,200 120,629 130,009 137,631
Promotion 429,208 402,454 419,164 444,546 398,577
Payroll 491,677 461,928 472,997 469,564 433,162
Year-end Position and
Statistics
Capital Additions 159,433 140,626 138,711 211,621 249,795
Total Assets 3,184,796 2,830,623 2,890,981 2,855,091 2,672,909
Long-term Portion of
Debt 655,289 357,034 157,227 165,757 174,273
Stockholders' Equity 1,161,021 1,082,959 1,441,100 1,412,344 1,465,279
Operating Return on
Average Stockholders'
Equity(b) 27.5% 22.2% 18.5% 17.8% 17.3%
Operating Return on
Average Invested
Capital(b) 17.8% 17.1% 15.6% 15.0% 14.4%
Full-time Employees 14,000 13,300 14,000 14,300 13,700
Stockholders' Data(a)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 152,942 154,532 173,470 175,226 180,373
Market Price of Common
Stock at Year-end 43 3/4 32 1/2 24 3/16 24 1/2 23 1/2
Range During Year 51 3/4-31 15/16 33 15/16-24 26 3/4-20 9/16 27 15/16-21 3/4 24 3/16-19 1/8
<CAPTION>
1991 1990 1989
-------------- --------------- ---------------
<S> <C> <C> <C>
Summary of Operations
Net Sales 2,899,165 2,715,609 2,420,988
-------------- --------------- ---------------
Cost of Sales 1,694,404 1,588,360 1,455,612
Selling, Marketing and
Administrative 814,459 776,668 655,040
Non-recurring
Credits/(Charges)(o) -- 35,540 --
Interest Expense, Net 26,845 24,603 20,414
Provision for Income
Taxes 143,929 145,636 118,868
-------------- --------------- ---------------
Income from Continuing
Operations Before
Accounting Changes 219,528 215,882 171,054
Net Cumulative Effect
of Accounting Changes -- -- --
-------------- --------------- ---------------
Net Income 219,528 215,882 171,054
============== =============== ===============
Income Per Share:(a)
From Continuing
Operations Before
Accounting Changes
--Basic 1.21 1.19(n) .95
--Diluted 1.21 1.19 .95
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- --
Net Income--Basic 1.21 1.19(n) .95
Net Income--Diluted 1.21 1.19 .95
Weighted Average Shares
Outstanding--Basic(a) 180,767 180,766 180,824
Weighted Average Shares
Outstanding--
Diluted(a) 181,112 180,987 180,984
Dividends Paid on
Common Stock 70,426 74,161(g) 55,431
Per Share(a) .470 .495(g) .370
Dividends Paid on Class
B Common Stock 12,975 13,596(g) 10,161
Per Share(a) .425 .445(g) .3325
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.6% 7.2%(h) 7.1%
Depreciation 72,735 61,725 54,543
Advertising 117,049 146,297 121,182
Promotion 325,465 315,242 256,237
Payroll 398,661 372,780 340,129
Year-end Position and
Statistics
Capital Additions 226,071 179,408 162,032
Total Assets 2,341,822 2,078,828 1,814,101
Long-term Portion of
Debt 282,933 273,442 216,108
Stockholders' Equity 1,335,251 1,243,537 1,117,050
Operating Return on
Average Stockholders'
Equity(b) 17.0% 16.6% 16.1%
Operating Return on
Average Invested
Capital(b) 13.8% 13.4% 13.2%
Full-time Employees 14,000 12,700 11,800
Stockholders' Data(a)
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 22 3/16 18 3/4 17 15/16
Range During Year 22 1/4-17 9/16 19 13/16-14 1/8 18 7/16-12 3/8
</TABLE>
A-34
<PAGE>
Notes to the Eleven-Year Consolidated Financial Summary
(a) All shares and per share amounts have been adjusted for the two-for-one
stock split effective September 13, 1996.
(b) Operating Return on Average Stockholders' Equity and Operating Return on
Average Invested Capital have been computed using Net Income, excluding
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, the 1996 Loss on Sale of
Businesses, and the 1999 Gain on Sale of Business.
(c) Calculated percent excludes the 1999 Gain on Sale of Business. Including
the gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 11.6%.
(d) 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%.
(e) 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%.
(f) 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%.
(g) 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.
(h) 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%.
(i) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1999 included a $1.18 per share
gain on the sale of the pasta business. 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 $2.11.
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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.
(o) Includes the Gain on Sale of Business in 1999; 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-35
<PAGE>
Appendix B
Other Stockholder Information
<PAGE>
OTHER STOCKHOLDER INFORMATION
INVESTOR INFORMATION
Stockholders
As of December 31, 1999, Hershey Foods Corporation had outstanding
108,015,711 shares of Common Stock and 30,443,908 shares of Class B Common
Stock.
<TABLE>
<CAPTION>
Year-End Common Stock Approximate
and Class B Common Stock Annual Composite
Year Stockholders Trading Volume
------------------------------------------------------------------------------
<S> <C> <C>
1999 43,265 128,557,000
------------------------------------------------------------------------------
1998 44,364 78,955,000
------------------------------------------------------------------------------
1997 44,602 74,781,000
------------------------------------------------------------------------------
1996 42,483 47,002,000
------------------------------------------------------------------------------
1995 38,480 30,498,000
</TABLE>
Stock Market Data
Hershey Foods Corporation's Common Stock is listed and traded principally on
the New York Stock Exchange under the ticker symbol "HSY." Class B Common
Stock is not listed for trading. The stock tables of most financial
publications list the Corporation as "Hershey." Options on the Corporation's
Common Stock are traded on the American Stock Exchange.
Common Stock Profile
<TABLE>
<CAPTION>
Common Stock Price Dividends Paid Per Share
1999 --------------------------------------------------------------------------------------------------
Calendar Quarter High Low Close Common Stock Class B Stock
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1st Quarter $64 7/8 $54 1/8 $56 1/16 $.24 $.2175
-------------------------------------------------------------------------------------------------------------------
2nd Quarter 59 1/2 48 13/16 59 3/8 .24 .2175
-------------------------------------------------------------------------------------------------------------------
3rd Quarter 61 7/16 48 1/2 48 11/16 .26 .235
-------------------------------------------------------------------------------------------------------------------
4th Quarter 54 3/16 45 3/4 47 7/16 .26 .235
</TABLE>
Dividend Policy
Dividends on Hershey Foods Corporation's Common Stock and Class B Common
Stock are declared by the Board of Directors and normally are paid in March,
June, September and December.
The dividend to be paid on the Common Stock on March 15, 2000, will be the
281st consecutive quarterly dividend paid by the Corporation. The dividend
rate has been increased annually for 25 consecutive years. Historically, the
Corporation has targeted approximately one-third of its income from continuing
operations for dividends to stockholders.
B-1
<PAGE>
Investor Services Program
The Corporation, through its agent The Chase Manhattan Bank, offers an
Investor Services Program. Features of the program include the ability to
purchase initial shares of Hershey Foods Corporation Common Stock, as well as
subsequent purchases, directly from our agent; dividend reinvestment on 10
shares or greater; automatic monthly deductions from a bank account for
optional cash purchases; safekeeping of certificates; direct deposit of
dividends; and an IRA option. For more information, contact:
The Chase Manhattan Bank www.chasemellon.com
c/o ChaseMellon Shareholder Services To request enrollment materials,
P.O. Box 3338 please call (800) 842-7629.
South Hackensack, NJ 07606-1938
(800) 851-4216
Stockholder Inquiries
Questions relating to stockholder records, change of ownership, change of
address and dividend payments should be sent to the Corporation's Transfer
Agent, ChaseMellon Shareholder Services, whose address appears below.
Financial Information
Security analysts, investment managers and stockholders should direct
financial information inquiries to the Investor Relations contact listed
below.
1999 Annual Report
As in past years, we have published the 1999 Annual Report to Stockholders,
consisting of Management's Discussion and Analysis and the Consolidated
Financial Statements, as an appendix to the Corporation's Proxy Statement.
While we have eliminated the glossy-style Annual Report (which contained the
Letter to Stockholders now included with this publication), we have added a
number of features to our corporate web site (www.hersheys.com) which provide
information about various aspects of the Corporation's business. We invite you
to visit this site at your leisure.
STOCKHOLDER INFORMATION
Executive Offices Independent Public Accountants
100 Crystal A Drive Arthur Andersen LLP
P. O. Box 810 1345 Avenue of the Americas
Hershey, PA 17033-0810 New York, NY 10105
(717) 534-4000
Investor Relations Contact
James A. Edris
Transfer Agent and Registrar Director, Investor Relations
100 Crystal A Drive
ChaseMellon Shareholder Services P. O. Box 810
L.L.C. Hershey, PA 17033-0810
Overpeck Centre (717) 534-7556
85 Challenger Road Email: [email protected]
Ridgefield Park, NJ 07660
www.chasemellon.com
(800) 851-4216--Domestic Holders Financial Information
(201) 329-8660--Foreign Holders (800) 539-0261
(800) 231-5469--Hearing Impaired www.hersheys.com
B-2
<PAGE>
www.hersheys.com
Hershey Foods Corporation's web site provides access to a wide variety of
information including products, recipes, news releases, a plant tour, and
consumer information. A principal feature of the web site is the Investor
Information section which contains general financial information (i.e.,
Hershey's corporate overview, Mission Statement, product information,
financial fundamentals, and current stock quotes) and archived information
(i.e., historical financial releases, annual reports, dividends and stock
prices). The site also provides analyst presentations for those interested in
a more in-depth review of the Corporation's operations as presented by senior
management to the financial community. Another interesting feature is the
"email alert," which allows users to receive automatic updates informing them
when new items such as calendar events, presentations, dividends, annual
reports and SEC documents are added to the site.
www.chasemellon.com
ChaseMellon Shareholder Services' web site offers tax reporting information;
frequently asked tax questions; Dividend Reinvestment/Direct Stock Purchase
Plan/Direct Deposit of Dividends enrollment materials; stock transfer
instructions; account maintenance functions, such as address changes and Tax
Identification Number changes; duplicate Forms 1099-DIV; account transcripts;
dividend reinvestment statements; and an email address for general shareholder
inquiries: [email protected].
B-3
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
As of March 13, 2000
<S> <C> <C>
Kenneth L. Wolfe John C. Jamison Audit Committee
Chairman of the Board and Chairman of the Board
Chief Executive Officer Mallardee Associates John C. Jamison, Chair
Williamsburg, VA William H. Alexander
William H. Alexander Allan Z. Loren
Administrator Allan Z. Loren Mackey J. McDonald
Family Business Program Executive Vice President and
The Wharton School of the Chief Information Officer Committee on Directors
University of Pennsylvania American Express Company and Corporate Governance
Philadelphia, PA New York, NY
John M. Pietruski, Chair
Robert H. Campbell Mackey J. McDonald William H. Alexander
Chairman of the Board and Chairman of the Board, Bonnie Guiton Hill
Chief Executive Officer Chief Executive Officer and Kenneth L. Wolfe
Sunoco, Inc. President
Philadelphia, PA VF Corporation Compensation and
Greensboro, NC Executive Organization
C. McCollister Evarts, M.D. Committee
Chief Executive Officer Michael F. Pasquale
The Milton S. Hershey Executive Vice President Robert H. Campbell, Chair
Medical Center and Chief Operating Officer C. McCollister Evarts, M.D.
Senior Vice President for John C. Jamison
Health Affairs and Dean John M. Pietruski Mackey J. McDonald
The Pennsylvania State Chairman of the Board
University Texas Biotechnology Executive Committee
College of Medicine Corporation
Hershey, PA Houston, TX Kenneth L. Wolfe, Chair
Michael F. Pasquale
Bonnie Guiton Hill
President and Chief
Executive Officer
The Times Mirror Foundation
Senior Vice President
The Los Angeles Times
Los Angeles, CA
</TABLE>
B-4
<PAGE>
[MAP OF HERSHEY]
[LOGO OF HERSHEY FOODS CORPORATION]
This map will help you find your way to the
Hershey Theatre (located on East Caracas Avenue)
and HERSHEY'S CHOCOLATE WORLD visitors center
(located on Park Blvd.)
Hershey, Pennsylvania
<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 13, 2000, appoints K.L. Wolfe and R.M. Reese and each 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 25, 2000, at the Hershey Theatre, 15
East Caracas Avenue, Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Class B Common Stock represented by this proxy will be voted in
the manner directed herein by the undersigned stockholder(s), who shall be
entitled to ten votes for each such share held. If no direction is made, the
proxy will be voted FOR the election of the eight nominees for Director listed
on the reverse side and FOR the approval of Arthur Andersen LLP as the
Corporation's independent public accountants for 2000.
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. Evarts, M.D.; B. Guiton Hill;
J. C. Jamison; M. F. Pasquale; J. M. Pietruski; 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:
Item 2. Approval of Arthur Andersen LLP as the Corporation's independent public
accountants for 2000.
FOR AGAINST ABSTAIN
--- ------- -------
[ ] [ ] [ ]
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
properly come before the meeting.
Dated:___________________________, 2000 ___________________________
Signature
---------------------------
Signature
Please mark, sign [exactly as name(s) appears above], and date this card and
mail promptly in the postage-paid, return envelope provided. Executors,
administrators, trustees, attorneys, guardians, etc., should so indicate when
signing.
<PAGE>
PROXY
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 13, 2000, appoints K.L. Wolfe and R.M. Reese, and each 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 25, 2000, at the Hershey Theatre,
15 East Caracas Avenue, Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Common Stock represented by this proxy will be voted in the
manner directed herein by the undersigned stockholder(s), who shall be entitled
to one vote for each such share held. If no direction is made, the proxy will
be voted FOR the election of the ten nominees for Director and FOR the approval
of Arthur Andersen LLP as the Corporation's independent public accountants for
2000.
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; K.L. Wolfe.
(Item 1 continued on back)
<PAGE>
[_] FOR all nominees [_] WITHHOLD AUTHORITY to vote for all nominees
To withhold authority to vote for any individual nominee, write that nominee's
name in the space below.
FOR AGAINST ABSTAIN
--- ------- -------
Item 2. Approval of Arthur Andersen LLP as the [_] [_] [_]
Corporation's independent public accountants for
2000.
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
properly come before the meeting.
____________________________________
Signature Date
____________________________________
Signature Date
Please mark, sign [exactly as name(s) appears above], and date this card and
mail promptly in the postage-paid, 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 13, 2000, appoints K.L. Wolfe and R.M. Reese and each 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 25, 2000, at the Hershey Theatre,
15 East Caracas Avenue, Hershey, Pennsylvania, or at any adjournment thereof.
The shares of Common Stock represented by this proxy will be voted in the
manner directed herein by the undersigned stockholder(s), who shall be entitled
to one vote for each such share held. If no direction is made, the proxy will
be voted FOR the election of the ten nominees for Director and FOR the approval
of Arthur Andersen LLP as the Corporation's independent public accountants for
2000. 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
QUICK *** EASY *** IMMEDIATE
Your telephone vote authorizes the named Proxies to vote your shares in the same
manner as if you marked, signed and returned your proxy card.
You will be asked to enter a Control Number which is located in the box in the
lower right-hand corner of the admission ticket on the reverse side.
- --------------------------------------------------------------------------------
OPTION #1: To vote as the Board of Directors recommends on All proposals: press
1.
- --------------------------------------------------------------------------------
When asked, please confirm your vote by pressing 1.
- --------------------------------------------------------------------------------
OPTION #2: If you choose to vote on each proposal separately, press 0. You will
hear these instructions:
- --------------------------------------------------------------------------------
Proposal 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL nominees,
press 9.
To withhold FOR AN INDIVIDUAL nominee, press 0 and listen to the
instructions.
Proposal 2: To vote FOR, press 1; AGAINST press 9; ABSTAIN, press 0.
When asked, please confirm your vote by pressing 1.
- --------------------------------------------------------------------------------
PLEASE DO NOT RETURN THE ABOVE PROXY CARD IF YOU VOTE BY PHONE.
- --------------------------------------------------------------------------------
Call ** Toll Free ** On a Touch Tone Telephone
1-800-840-1208 ANYTIME
There is NO CHARGE to you for this call.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark
your votes
this way
WITHHOLD
FOR all AUTHORITY
FOR all Nominees for all
The Board of Directors recommends a vote Nominees Except* Nominees
"FOR" Items 1 and 2.
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 Directors by
holders of the Common Stock and the Class
B Common Stock voting together 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 K.L. Wolfe.
*Exceptions:
------------------------------
For Against Abstain
Item 2. Approval of Arthur Andersen LLP as [_] [_] [_]
the Corporation's independent public
accountants for 2000.
- --------------------------------------------------------------------------------
In their discretion, the Proxies are If you plan to attend the
authorized to vote for a substitute should Annual Meeting, please mark
any nominee become unavailable for election the Will Attend block.
and upon such other business as may WILL
properly come before the meeting. ATTEND
[_]
Signature(s) Date , 2000
------------------------------------------ ----
Please follow the telephone voting instructions on the reverse side or mark,
sign [exactly as name(s) appears above], and date this card and mail promptly
in the postage-paid, return envelope provided. Executors, administrators,
trustees, attorneys, guardians, etc., should so indicate when signing.
- --------------------------------------------------------------------------------
[COUPON]
- --------------------------------------------------------------------------------
[ADMISSION TICKET]
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[X] Please mark
your votes
this way
The Board of Directors recommends a vote WITHHOLD
"FOR" Items 1 and 2. FOR all AUTHORITY
FOR all Nominees for all
Item 1. Election of 01 A.Z. Loren and Nominees Except* Nominees
02 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: 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 K.L. Wolfe.
For Against Abstain
*Exceptions: [_] [_] [_]
---------------------------------------
Item 2. Approval of Arthur Andersen LLP as
the Corporation's independent public
accountants for 2000.
- --------------------------------------------------------------------------------
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 , 2000
------------------------------------ ---
Please follow the telephone voting instructions below or mark, sign [exactly as
name(s) appears above], and date this card and mail promptly in the postage-
paid, return envelope provided. Executors, administrators, trustees, attorneys,
guardians, etc., should so indicate when signing.
- -------------------------------------------------------------------------------
VOTE BY TELEPHONE
QUICK *** EASY *** IMMEDIATE
Your telephone vote authorizes the named Proxies to vote your shares in the same
manner as if you marked, signed and returned your proxy card.
You will be asked to enter a Control Number which is located in the box in
the lower right-hand corner of this form.
- --------------------------------------------------------------------------------
OPTION #1: To vote as the Board of Directors recommends on ALL proposals:
press 1.
- --------------------------------------------------------------------------------
When asked, please confirm your vote by pressing 1.
- --------------------------------------------------------------------------------
OPTION #2: If you choose to vote on each proposal separately, press 0. You will
hear these instructions:
- --------------------------------------------------------------------------------
Proposal 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL nominees,
press 9.
To withhold FOR AN INDIVIDUAL nominee, press 0 and listen to the
instructions.
Proposal 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.
When asked, please confirm your vote by pressing 1.
- --------------------------------------------------------------------------------
PLEASE DO NOT RETURN THE ABOVE PROXY CARD IF YOU VOTE BY PHONE.
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Call ** Toll Free ** On a Touch Tone Telephone
1-800-840-1208 ANYTIME
There is NO CHARGE to you for this call.
<PAGE>
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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 13, 2000, 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 25, 2000, 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 18, 2000, 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.
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<PAGE>
[LOGO OF HERSHEY FOODS] Hershey Foods Corporation
100 Crystal A Drive
P.O. Box 810
Hershey, PA 17033-0810
Phone: (717) 534-4000
Fax: (717) 534-6760
www.hersheys.com
March 13, 2000
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
In preparation for the 2000 Annual Meeting of Stockholders, I am pleased to
provide to you a proxy card and the Proxy Statement and 1999 Annual Report
to Stockholders. The proxy card and Proxy Statement explain the items upon
which you are voting, and the proxy card also provides instructions on the
two methods available to cast your vote. Voting by telephone is simple,
convenient and immediate, and the instructions on the proxy card will guide
you through that process. If you prefer the more conventional method of
voting, you can mark, sign and return the proxy card in the enclosed,
postage-paid envelope. Your completed card must be received by April 18,
2000 in order to be tallied.
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)
534-4290.
I urge you to have the shares being held for you voted at the Annual
Meeting of Stockholders on April 25, 2000.
Remember, your vote is important. Thank you.
--
Sincerely,
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosures
<PAGE>
[LOGO OF HERSHEY FOODS] Hershey Foods Corporation
100 Crystal A Drive
P.O. Box 810
Hershey, PA 17033-0810
Phone: (717) 534-4000
Fax: (717) 534-6760
www.hersheys.com
March 13, 2000
TO: FELLOW PARTICIPANTS IN HERSHEY'S EMPLOYEE SAVINGS STOCK INVESTMENT AND
OWNERSHIP PLAN (ESSIOP)
I am pleased to provide to you a proxy card which explains the items to be
voted upon at this year's Annual Meeting of Stockholders on April 25, 2000.
The card provides instructions on two methods available to cast your vote.
Voting by telephone is simple, convenient and immediate, and the
instructions on the proxy card will guide you through that process. If you
prefer the more conventional method of voting, you can mark, sign and
return the proxy card in the enclosed, postage-paid envelope. Your
completed card must be received by April 18, 2000 in order to be tallied.
This mailing of the proxy card to ESSIOP participants has been designed to
eliminate the duplicate mailing of the Proxy Statement and Annual Report to
Stockholders 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)
534-4290.
I urge you to have the shares being held for you voted at the Annual
Meeting of Stockholders on April 25, 2000.
Remember, your vote is important. Thank you.
--
Sincerely,
/s/ Kenneth L. Wolfe
Kenneth L. Wolfe
Chairman and Chief Executive Officer
Enclosure
