UNITED STATES
Annual Report Pursuant to Section 13 or 15(d)of the
Securities Exchange Act of 1934
Commission File Number 1-183
Registrant, State of Incorporation,
Address and Telephone Number
FORM 10-K
HERSHEY FOODS CORPORATION
100 Crystal A Drive
I.R.S. Employer Identification Number 23-0691590
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| Common Stock, one dollar par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock, one dollar par value
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes | X | No |__|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 - K or any amendment to this Form 10 - K. |__ |
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of a specified date within 60 days prior to the date of filing.
Common Stock, one dollar par value — $5,814,108,373 as of February 27, 2003.
Class B Common Stock, one dollar par value — $7,565,445 as of February 27, 2003. While the Class B Common Stock is not listed for public trading on any exchange or market system, shares of that class are convertible into shares of Common Stock at any time on a share-for-share basis. The market value indicated is calculated based on the closing price of the Common Stock on the New York Stock Exchange on February 27, 2003.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date.
Common Stock, one dollar par value — 102,132,277 shares, as of February 27, 2003.
Class B Common Stock, one dollar par value — 30,422,308 shares, as of February 27, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
The Corporation’s Annual Report to Stockholders for the year ended December 31, 2002 is included as Appendix A to the Corporation’s Proxy Statement for the Corporation’s 2003 Annual Meeting of Stockholders (the “Proxy Statement”) and is incorporated by reference into Part II and filed as Exhibit 13 hereto. Portions of the Proxy Statement are incorporated by reference herein into Part III.
Hershey Foods Corporation and its subsidiaries (the “Corporation”) are engaged in the manufacture, distribution and sale of confectionery and grocery products. The Corporation was organized under the laws of the State of Delaware on October 24, 1927, as a successor to a business founded in 1894 by Milton S. Hershey.
In June 2002, the Corporation completed the sale of a group of the Corporation’s non-chocolate confectionery candy brands to Farley’s & Sathers Candy Company, Inc. for $12.0 million in cash as part of its business realignment initiatives. Included in the transaction were the HEIDE, JUJYFRUITS, WUNDERBEANS and AMAZIN’ FRUIT trademarked confectionery brands as well as the rights to sell CHUCKLES branded products, under license.
The Corporation’s principal product groups include: confectionery products sold in the form of bar goods, bagged items and boxed items; and grocery products in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings and beverages. The Corporation believes it is a leader in many of these product groups in the United States, Canada and Mexico. Operating profit margins vary considerably among individual products and brands. Generally, such margins on confectionery products are greater than those on grocery products.
The Corporation manufactures confectionery products in a variety of packaged forms and markets them under more than 50 brands. The different packaged forms include various arrangements of the same bar products, such as boxes, trays and bags, as well as a variety of different sizes and weights of the same bar products, such as snack size, standard, king size, large and giant bars. Among the principal confectionery products in the United States are: HERSHEY’S COOKIES ‘N’ CREME candy bars, HERSHEY’S HUGS chocolates, HERSHEY’S KISSES chocolates, HERSHEY’S KISSES chocolates with almonds, HERSHEY’S chocolate bars, HERSHEY’S chocolate bars with almonds, HERSHEY’S MINIATURES chocolate bars, HERSHEY’S NUGGETS chocolates, COOL BLAST mints, FAST BREAK candy bars, ICE BREAKERS mints and chewing gum, JOLLY RANCHER candy, KIT KAT and KIT KAT BIG KAT wafer bars, KRACKEL chocolate bars, MR. GOODBAR chocolate bars, REESE’S NUTRAGEOUS candy bars, REESE’S peanut butter cups, REESE’S PIECES candies, REESESTICKS wafer bars, SPECIAL DARK chocolate bars and SYMPHONY chocolate bars. Other confectionery products include: HERSHEY’S BITES candies, HERSHEY’S classic caramels, ALMOND JOY candy bars, BREATH SAVERS mints, BUBBLE YUM bubble gum, CARAMELLO candy bars, CAREFREE, CAREFREE KOOLERZ and FRUIT STRIPE chewing gums, GOOD & PLENTY candy, HEATH toffee bars, MILK DUDS candy, MOUNDS candy bars, PAYDAY candy bars, POT OF GOLD boxed chocolates, RAIN-BLO gumballs, ROLO caramels in milk chocolate, SKOR toffee bars, SUPER BUBBLE bubble gum, TASTETATIONS candy, TWIZZLERS candy, WHATCHAMACALLIT candy bars, WHOPPERS malted milk balls, YORK peppermint pattie candy, 5TH AVENUE candy bars and ZERO candy bars.
The Corporation also manufactures and/or markets grocery products in the baking, beverage, peanut butter and toppings categories. Principal products in the United States include HERSHEY’S, REESE’S and HEATH baking pieces, HERSHEY’S chocolate milk mix, HERSHEY’S cocoa, HERSHEY’S CHOCOLATE SHOPPE ice cream toppings, HERSHEY’S HOT COCOA COLLECTION hot cocoa mix, HERSHEY’S syrup and REESE’S peanut butter. HERSHEY’S chocolate and strawberry flavored milks are produced and sold under license by various dairies throughout the United States, using milk mixes manufactured by the Corporation. Baking and various other products are produced and sold under the HERSHEY’S and REESE’S brand names by third parties that have been granted licenses by the Corporation to use these trademarks.
Principal products in Canada include CHIPITS chocolate chips, GLOSETTE chocolate-covered raisins, peanuts and almonds, OH HENRY! candy bars, POT OF GOLD boxed chocolates, REESE PEANUT BUTTER CUPS candy and TWIZZLERS candy. The Corporation also manufactures, imports, markets, sells and distributes chocolate products in Mexico under the HERSHEY’S brand name.
The Corporation has license agreements with several companies to manufacture and/or sell products worldwide. Among the more significant are agreements with affiliated companies of Cadbury Schweppes p.l.c. to manufacture and/or market and distribute YORK, PETER PAUL ALMOND JOY and PETER PAUL MOUNDS confectionery products worldwide as well as CADBURY and CARAMELLO confectionery products in the United States. The Corporation’s rights under these agreements are extendible on a long-term basis at the Corporation’s option. The license for CADBURY and CARAMELLO products is subject to a minimum sales requirement that the Corporation exceeded in 2002. The Corporation also has an agreement with Societe des Produits Nestle SA, which licenses the
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Corporation to manufacture and distribute KIT KAT and ROLO confectionery products in the United States. The Corporation’s rights under this agreement are extendible on a long-term basis at the Corporation’s option, subject to certain conditions, including minimum unit volume sales. In 2002, the minimum volume requirements were exceeded. The Corporation has an agreement with an affiliate of Huhtamäki Oy (“Huhtamaki”) pursuant to which it licenses the use of certain trademarks, including GOOD & PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and WHOPPERS for confectionery products worldwide. The Corporation’s rights under this agreement are extendible on a long-term basis at the Corporation’s option.
The Corporation’s products are sold primarily to grocery wholesalers, chain grocery stores, candy distributors, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, concessionaires and food distributors by full-time sales representatives, food brokers and part-time retail sales merchandisers throughout the United States, Canada and Mexico. The Corporation believes its products are sold in over 2 million retail outlets in North America. In 2002, sales to Wal-Mart Stores, Inc. and subsidiaries amounted to approximately 21 percent of the Corporation’s total net sales.
The Corporation manufactures, imports, markets, sells and distributes chocolate products in Brazil under the HERSHEY’S brand name. Additional products in Brazil include IO-IO hazelnut crème items and chocolate and confectionery products sold under the VISCONTI brand name. In China, Japan, Korea and the Philippines, the Corporation imports and/or markets selected confectionery and grocery products. The Corporation also markets confectionery and grocery products in over 90 countries worldwide.
The Corporation’s marketing strategy is based upon the consistently superior quality of its products, mass distribution and the best possible consumer value in terms of price and weight. In addition, the Corporation devotes considerable resources to the identification, development, testing, manufacturing and marketing of new products. The Corporation utilizes a variety of promotional programs for customers and advertising and promotional programs for consumers. The Corporation employs promotional programs at various times during the year to stimulate sales of certain products. Confectionery and grocery seasonal and holiday-related sales have typically been highest during the third and fourth quarters of the year.
The Corporation recognizes that the mass distribution of its confectionery and grocery products is an important element in maintaining sales growth and providing service to its customers. The Corporation attempts to meet the changing demands of its customers by planning optimum stock levels and reasonable delivery times consistent with achievement of efficiencies in distribution. To achieve these objectives, the Corporation has developed a distribution network from its manufacturing plants, distribution centers and field warehouses strategically located throughout the United States, Canada and Mexico. The Corporation uses a combination of public and contract carriers to deliver its products from the distribution points to its customers. In conjunction with sales and marketing efforts, the distribution system has been instrumental in the effective promotion of new, as well as established, products on both national and regional scales.
From time to time, the Corporation has changed the prices and weights of its products to accommodate changes in manufacturing costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. The Corporation implemented an increase in the wholesale price of its domestic standard size, king size, variety pack, 6-pack and 10-pack lines effective January 1, 2003. The standard size increase was approximately 11 percent. The effect of all the increases translates into an approximate 3 percent increase over the entire domestic product line. The last standard candy bar price increase was implemented by the Corporation in December 1995.
The most significant raw material used in the production of the Corporation’s chocolate products is cocoa beans. This commodity is imported principally from Far Eastern, West African and South American equatorial regions. West Africa accounts for approximately 70 percent of the world’s crop. Cocoa beans are not uniform, and the various grades and varieties reflect the diverse agricultural practices and natural conditions found in the many growing areas. The Corporation buys a mix of cocoa beans and cocoa products to meet its manufacturing requirements.
The table below sets forth annual average cocoa prices as well as the highest and lowest monthly averages for each of the calendar years indicated. The prices are the monthly average of the quotations at noon of the three active futures trading contracts closest to maturity on the New York Board of Trade. Because of the Corporation’s forward purchasing practices discussed below, and premium prices paid for certain varieties of cocoa beans, these average futures contract prices are not necessarily indicative of the Corporation’s average cost of cocoa beans or cocoa products.
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| 1998 | 1999 | 2000 | 2001 | 2002 | |||||||||||||
| Annual Average................. | 72.7 | 48.8 | 37.9 | 47.1 | 76.9 | ||||||||||||
| High................................ | 78.3 | 62.7 | 40.1 | 57.9 | 96.7 | ||||||||||||
| Low................................. | 65.5 | 39.6 | 34.4 | 41.5 | 60.3 |
Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics
Cocoa market prices rose sharply during 2002 and this increase accelerated following a rebellion in the world’s largest cocoa producing country, the Ivory Coast. Continued civil unrest in the Ivory Coast could result in further cocoa price increases. The Corporation’s costs during 2003 and beyond 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. The Corporation’s costs for cocoa will increase substantially in 2004; however, the Corporation expects to achieve its long-term goals for growth and profitability by a combination of possible price increases and/or product weight changes, improved sales mix, supply chain cost reductions and strict control of other costs to offset potential cost increases and respond to changes in the competitive environment.
The Farm Security and Rural Investment Act of 2002, which is a six-year farm bill, impacts the prices of sugar, corn, peanuts and milk because it sets price support levels for these commodities.
The price of sugar, the Corporation’s second most important commodity for its domestic chocolate and confectionery products, is subject to price supports under the above referenced farm legislation. Due to import quotas and duties imposed to support the price of sugar established by that legislation, sugar prices paid by United States users are currently substantially higher than prices on the world sugar market. The average wholesale list price of refined sugar, F.O.B. Northeast, has remained in a range of 25 ¢ to 32 ¢ per pound for the past ten years. U.S. peanut prices declined approximately 25 percent during the fourth quarter of 2002 due to a decrease in price support levels. Almond prices remained near normal levels throughout 2002. Milk prices decreased in 2002 as a result of increasing milk production. The Corporation believes that the supply of raw materials is adequate to meet its manufacturing requirements.
The Corporation attempts to minimize the effect of future price fluctuations related to the purchase of its major 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, fuel oil 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 material requirements. 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 flexibility in sourcing these raw materials and energy requirements. Fuel oil futures contracts are used to minimize price fluctuations associated with the Corporation’s transportation costs. 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 primary effect on liquidity from using futures contracts is associated with margin requirements for futures contracts related to cocoa, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products. Cash outflows and inflows result from original margins which are “good faith deposits” established by futures exchanges to ensure that market participants will meet their contractual financial obligations. Additionally, variation margin payments and receipts are required when the value of open positions is adjusted to reflect daily price movements. The magnitude of such cash inflows and outflows is dependent upon price coverage levels and the volatility of the markets. Cash flows related to margin requirements were significant during 2002 as a result of unusual volatility in market prices, but historically, have not been material to the Corporation’s total working capital requirements.
The Corporation manages the purchase of forward and futures contracts by developing and monitoring procurement strategies for each of its major commodities. These procurement strategies, including the use of futures contracts to hedge the pricing of cocoa, sugar, corn sweeteners, natural gas, transportation costs and certain dairy products, are directly linked to the overall planning and management of the Corporation’s business, since the cost of raw materials, energy and transportation accounts for a significant portion of cost of sales. Procurement strategies with regard to cocoa, sugar and other major raw material requirements, energy requirements and transportation costs are developed by the analysis of fundamentals, including weather and crop analysis, other imbalances between supply and demand, currency exchange rates, political unrest in producing countries and speculative influences, and by discussions with market analysts,
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brokers and dealers. Procurement strategies are determined, implemented and monitored on a regular basis by senior management. Procurement activities for all major commodities are also reported to the Board of Directors on a regular basis.
Many of the Corporation’s brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace. However, these brands are sold in highly competitive markets and compete with many other multinational, national, regional and local firms, some of which have resources in excess of those available to the Corporation.
The Corporation owns various registered and unregistered trademarks and service marks, and has rights under licenses to use various trademarks that are of material importance to the Corporation’s business.
The Corporation manufactures primarily for stock and fills customer orders from finished goods inventories. While at any given time there may be some backlog of orders, such backlog is not material in respect to total annual sales, nor are the changes from time to time significant, aside from the third quarter of 1999 when a significant backlog of orders resulted from customer service and order fulfillment problems encountered during the start-up of new business systems and processes.
The Corporation engages in a variety of research activities. These principally involve development of new products, improvement in the quality of existing products, improvement and modernization of production processes, and the development and implementation of new technologies to enhance the quality and value of both current and proposed product lines. Information concerning the Corporation’s research and development expense is contained in Note 1 of the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, which information is incorporated herein by reference and filed as Exhibit 13 hereto.
The Corporation’s domestic plants are subject to inspection by the Food and Drug Administration and various other governmental agencies, and its products must comply with regulations under the Federal Food, Drug and Cosmetic Act and with various comparable state statutes regulating the manufacturing and marketing of food products.
In the past the Corporation has made investments based on compliance with environmental laws and regulations. Such expenditures have not been material with respect to the Corporation’s capital expenditures, earnings or competitive position.
As of December 31, 2002, the Corporation had approximately 13,700 full-time and 1,700 part-time employees, of whom approximately 5,600 were covered by collective bargaining agreements. A reduction of approximately 500 full-time employees occurred during 2002 as a result of a voluntary work force reduction program. A collective bargaining agreement covering approximately 3,000 employees at two of the Corporation’s principal plants in Hershey, Pennsylvania expired in November 2001. On February 27, 2002, the employees voted not to ratify a new contract offer, despite recommendations by their union negotiating committee and executive board to approve the new contract. On April 17, 2002, the employees voted again not to ratify an amended contract offer following the rejection of that offer by the union negotiating committee. The Corporation and union representatives continued negotiations with the assistance of a federal mediator, but no settlement was reached and the employees went on strike beginning April 26, 2002. The strike ended on June 6, 2002, when the employees voted to ratify a new contract, with employees returning to work beginning on June 8, 2002. The work stoppage did not have a material impact on the Corporation’s results of operations for 2002. The Corporation considers its employee relations to be good.
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Information concerning the Corporation’s geographic segments is contained in Note 18 of the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, which information is incorporated herein by reference and filed as Exhibit 13 hereto.
The Corporation makes its periodic and current reports electronically available, free of charge, on its Internet site as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission. You may access this information at the Corporation’s Internet site (http://www.hersheys.com).
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 that, 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 “intend,” “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; customer and consumer response to selling price increases; changes in governmental laws and regulations, including taxes; market demand for new and existing products; changes in raw material and other costs; pension cost factors, such as actuarial assumptions and employee retirement decisions; and the Corporation’s ability to implement improvements to and reduce costs associated with the Corporation’s supply chain.
The following is a list of the Corporation’s principal manufacturing properties. The Corporation owns each of these properties.
UNITED STATES
| Hershey, Pennsylvania - confectionery and grocery products (3 principal plants) |
| Lancaster, Pennsylvania - confectionery products |
| Oakdale, California - confectionery and grocery products |
| Robinson, Illinois - confectionery and grocery products |
| Stuarts Draft, Virginia - confectionery and grocery products |
CANADA
| Smiths Falls, Ontario - confectionery and grocery products |
In addition to the locations indicated above, the Corporation owns or leases several other properties used for manufacturing confectionery and grocery products and for sales, distribution and administrative functions.
The Corporation’s plants are efficient and well maintained. These plants generally have adequate capacity and can accommodate seasonal demands, changing product mixes and certain additional growth. The largest plants are located in Hershey, Pennsylvania. Many additions and improvements have been made to these facilities over the years and the plants’ manufacturing equipment includes equipment of the latest type and technology.
In January 1999, the Corporation received a Notice of Proposed Deficiency (Notice) from the Internal Revenue Service (IRS) related to the years 1989 through 1996. The Notice pertained to the Corporate Owned Life Insurance (COLI) program that was implemented by the Corporation in 1989. The IRS disallowed the interest expense deductions associated with the underlying life insurance policies. The total deficiency of $61.2 million, including interest, was paid to the IRS in September 2000 to eliminate further accruing of interest. Effective October 1, 2001, the Corporation negotiated a settlement with the IRS regarding the Notice. The resulting Closing Agreement with the IRS limited the COLI interest expense deductions for all applicable tax years and resulted in the surrender of all insurance
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policies, thereby ending the COLI program. The settlement is a complete resolution of all federal and state tax aspects of this program. The Corporation has no other material pending legal proceedings, other than ordinary routine litigation incidental to its business.
Not applicable.
Information concerning the principal United States trading market for, market prices of and dividends on the Corporation’s Common Stock and Class B Common Stock, and the approximate number of stockholders, may be found in the section entitled “Market Prices and Dividends” on page A-20 of the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, incorporated herein by reference and filed as Exhibit 13 hereto.
The following information, for the five years ended December 31, 2002, found in the section entitled “Six-Year Consolidated Financial Summary” on page A-59 of the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, is incorporated herein by reference and filed as Exhibit 13 hereto: Net Sales; Net Income; Earnings Per Share - Basic and - Diluted; Dividends Paid on Common Stock (and related Per Share amounts); Dividends Paid on Class B Common Stock (and related Per Share amounts); Long-term Portion of Debt; and Total Assets.
The section entitled “Management’s Discussion and Analysis,” found on pages A-1 through A-22 of the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, is incorporated herein by reference and filed as Exhibit 13 hereto.
The following audited consolidated financial statements of the Corporation and its subsidiaries are found at the indicated pages in the Corporation’s Annual Report to Stockholders included as Appendix A to the Proxy Statement, and such financial statements, along with the Independent Auditors’ Report thereon, are incorporated herein by reference and filed as Exhibit 13 hereto.
None.
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The names, ages, positions held with the Corporation, periods of service as a director, principal occupations, business experience and other directorships of nominees for director of the Corporation are set forth in the section “Election of Directors” in the Proxy Statement. This information is incorporated herein by reference.
Executive Officers of the Corporation as of February 27, 2003
| Name | Age | Positions Held During the Last Five Years | ||||
R. H. Lenny (1) |
51 |
Chairman of the Board, President and Chief Executive Officer (2002); President and Chief Executive Officer (2001) |
||||
M. K. Arline |
50 |
Senior Vice President, Human Resources and Corporate Affairs (2002); Senior Vice President, Human Resources (2002); Vice President, Human Resources (2001); Vice President, Quality and Regulatory Compliance (1999); Director, Quality and Regulatory Compliance (1997) |
||||
F. Cerminara |
54 |
Senior Vice President, Chief Financial Officer (2001); Vice President, Chief Financial Officer and Treasurer (2000); Vice President, Procurement (1994) |
||||
B. H. Snyder |
55 |
General Counsel, Secretary, and Senior Vice President, International (2002); Senior Vice President - Public Affairs, General Counsel and Secretary (2002); Vice President and Assistant General Counsel (2000); Assistant General Counsel (1993) |
||||
D. J. West(2) |
39 |
Senior Vice President, Sales (2002); Senior Vice President, Business Planning and Development (2002); Vice President, Business Planning and Development (2001) |
||||
R. Brace |
59 |
Vice President, Operations and Technology (2002); Vice President, Conversion and Procurement (2000); Senior Vice President, Operations (1999); Vice President, Operations (1997) |
||||
G. F. Davis (3) |
54 |
Vice President, Chief Information Officer (2000) |
||||
D. N. Eshleman |
48 |
Vice President, Strategy and Innovation (2002); Vice President Marketing, Brand Integration (2002); Vice President Marketing, New Products (2000); Vice President Marketing, Grocery Products (1999); Vice President Marketing, Hershey Pasta and Grocery Division (1996) |
||||
D. W. Tacka |
49 |
Vice President, Corporate Controller and Chief Accounting Officer (2000); Corporate Controller and Chief Accounting Officer (1995) |
||||
There are no family relationships among any of the above-named officers of the Corporation.
(1)
Mr. Lenny was elected President and Chief Executive Officer effective March 12,
2001. Prior to joining the Corporation he was Group Vice President, Kraft Foods,
Inc. and President, Nabisco Biscuit and Snacks (2001); President, Nabisco
Biscuit Company (1998).
(2)
Mr. West was elected Vice President, Business Planning and Development effective
May 30, 2001. Prior to joining the Corporation he was Senior Vice President
Finance, Kraft Foods – Nabisco Biscuit, Confectionery and Snacks (2001);
Senior Vice President and Chief Financial Officer, Nabisco Biscuit Company
(1999); Vice President, Strategic Planning, Nabisco Holdings Corporation (1998).
7 (3)
Mr. Davis was elected Vice President, Chief Information Officer effective
December 14, 2000. Prior to joining the Corporation Mr. Davis was Vice President
– Global Infrastructure Services, Computer Sciences Corporation (2000);
Director – Global Infrastructure Services, Computer Sciences Corporation
(1999); Executive Director – Global Infrastructure and Financial Systems,
Pratt and Whitney (1998). Executive Officers are
generally elected each year at the organization meeting of the Board of
Directors in April. Reporting of any
inadvertent late filings under Section 16(a) of the Securities Exchange Act of
1934, as amended, is set forth in the section of the Proxy Statement entitled
“Section 16(a) Beneficial Ownership Reporting Compliance.” This
information is incorporated herein by reference. Information concerning
compensation of each of the named executive officers, including those persons
who held the position of Chief Executive Officer of the Corporation during 2002,
and compensation of directors, is set forth in the sections entitled “2002
Executive Compensation” and “Directors’ Compensation” in the
Proxy Statement. This information is incorporated herein by reference. (a) Information concerning
ownership of the Corporation’s voting securities by certain beneficial
owners, individual nominees for director and by executive officers, including
the Chief Executive Officer and the four most highly compensated executive
officers other than the Chief Executive Officer, is set forth in the section
“Voting Securities” in the Proxy Statement. This information is
incorporated herein by reference. (b) The following table
provides information about the Corporation’s common stock that may be
issued under equity compensation plans as of December 31, 2002: 8 Information concerning
“Certain Relationships and Related Transactions” is set forth in the
section entitled “Certain Transactions and Relationships” in the Proxy
Statement. This information is incorporated herein by reference. As required by Rule 13a-15
under the Securities Exchange Act of 1934 (the “Exchange Act”), within
the 90 days prior to the filing date of this report, the Corporation conducted
an evaluation of the effectiveness of the design and operation of the
Corporation’s disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of the
Corporation’s management, including the Corporation’s Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Corporation’s disclosure controls and procedures are effective. There have
been no significant changes in the Corporation’s internal controls or in
other factors which could significantly affect internal controls subsequent to
the date of the evaluation. Disclosure controls and
procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in the Corporation’s reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the Corporation’s reports filed under the
Exchange Act is accumulated and communicated to management, including the
Corporation’s Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The audited consolidated
financial statements of the Corporation and its subsidiaries and the Report of
Independent Auditors thereon, as required to be filed with this report, are set
forth in Item 8 of this report and are incorporated therein by reference to
specific pages of the Corporation’s Annual Report to Stockholders included
as Appendix A to the Proxy Statement and filed as Exhibit 13 hereto. 9 The following consolidated financial
statement schedule of the Corporation and its subsidiaries for the years ended
December 31, 2002, 2001 and 2000 is filed herewith on the indicated page in
response to Item 15(d):
Schedule II — Valuation and Qualifying Accounts (Page 18) Other schedules have been
omitted as not applicable or required, or because information required is shown
in the consolidated financial statements or notes thereto. Financial statements of the
parent corporation only are omitted because the Corporation is primarily an
operating corporation and there are no significant restricted net assets of
consolidated and unconsolidated subsidiaries. The following items are
attached or incorporated by reference in response to Item 15(c): (10) Material contracts 10
Executive Compensation Plans and Management Contracts 11
Broad Based Equity Compensation Plans
(12) Computation of ratio of earnings to fixed charges statement
(13) Annual report to security holders
(21) Subsidiaries of the Registrant
(23) Independent Auditors' Consent
(99) Additional exhibit 12 Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 26 th day of March, 2003. Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Corporation and in the
capacities and on the date indicated. 13 14 I, Richard H. Lenny, certify that: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b)
evaluated the effectiveness of the registrant’s disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and
c)
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
a)
all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
b)
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant's internal controls; and
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
(a)
(b)
(c)
Number of securities
Number of securities to be
remaining available for future
issued upon exercise of
Weighted-average
issuance under equity
outstanding options,
exercise price of outstanding
compensation plans (excluding
Plan Category
warrants, and rights
options, warrants, and rights
securities reflected in column (a)
6,514,229
$52.84
7,608,693
450,333
$54.82
1,193,036
6,964,562
$52.97
8,801,729
(1) Column (a) includes
stock options granted under the stockholder-approved Key Employee Incentive Plan
(KEIP). The securities available for future issuance in column (c) are not
allocated to any specific type of award under the KEIP, but are available
generally for future awards of stock options, performance stock units
(“PSUs”), restricted stock units (“RSUs”) and dividend
equivalent units on RSUs granted under the KEIP.
(2) Column (a) includes
219,633 stock options granted under the Hershey Foods Corporation Broad Based
Stock Option Plan, also referred to as HSY Growth. HSY Growth provided all
eligible employees with a one-time grant of 100 non-qualified stock options that
were granted outside of the KEIP under a separate registration statement. Under
HSY Growth over 1,235,700 stock options were granted on January 7, 1997 with an
exercise price of $44.50, which equates to 100% of the fair market value of the
Corporation’s Common Stock on the date of grant. The stock options vested
at the end of five years and had a maximum term of ten years from the date of
grant. Column (c) includes 1,092,700 HSY Growth stock options remaining
available for future issuance.
Column (a) also includes
230,700 stock options granted to R.H. Lenny outside of the KEIP under a separate
registration statement. All of the options available for issuance under the
registration statement have been granted. The stock options were granted on
March 12, 2001 with an exercise price of $64.65, which equates to 100% of the
fair market value of the Corporation’s 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). The stock options are subject to a
four-year step vesting requirement of 25% per year and have a ten-year term.
Column (c) also includes
100,336 shares remaining available for future issuance under the Directors’
Compensation Plan. The Directors’ Compensation Plan is designed to attract
and retain qualified non-employee directors and to align the interests of
non-employee directors with those of the stockholders by paying a portion of
their compensation in units representing shares of Common Stock. Directors who
are employees of the Corporation receive no remuneration for their services as
directors. RSUs are granted quarterly to each director on the first day of
January, April, July, and October on the basis of the number of shares of Common
Stock, valued at the average closing price on the New York Stock Exchange of the
Common Stock on the last three trading days preceding the grant, equal to
$10,000. While the value of the annual RSU grant is targeted at $40,000, the
actual value of the grant may be higher or lower depending upon the performance
of the Common Stock following the grant dates. A director’s RSUs will vest
and be distributed upon his or her retirement from the Board. Directors may
elect to receive all or a portion of their retainer in cash or Common Stock,
although committee chair fees are paid only in cash. A director may defer
receipt of the retainer and committee chair fees until his or her retirement
from the Board.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 14. CONTROLS AND PROCEDURES
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 15(a)(1):
Financial Statements
Item 15(a)(2):
Financial Statement Schedule
Item 15(a)(3):
Exhibits
(3)
Articles of Incorporation and By-laws
The Corporation’s
Restated Certificate of Incorporation, as amended, is incorporated by reference
from Exhibit 3 to the Corporation’s Quarterly Report on Form 10-Q for the
quarter ended April 3, 1988. The By-laws, as amended and restated as of December
1, 1998, are incorporated by reference from Exhibit 3 to the Corporation’s
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(4)
Instruments defining the
rights of security holders, including indentures
a.
Stockholder Protection Rights
Agreement between Hershey Foods Corporation and
Mellon Investor Services LLC, as Rights Agent, dated December 14, 2000, is
incorporated by reference from Exhibit 4.1 to the Corporation’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
b.
The Corporation has
issued certain long-term debt instruments, no one class of which creates
indebtedness exceeding 10% of the total assets of the Corporation and its
subsidiaries on a consolidated basis. These classes consist of the following:
1) 6.7% Notes due 2005
2) 6.95% Notes due 2007
3) 6.95% Notes due 2012
4) 8.8% Debentures due 2021
5) 7.2% Debentures due 2027
6) Other Obligations
The Corporation will furnish copies of the above debt instruments to the Commission upon request.
a.
Kit Kat and Rolo License
Agreement (the “License Agreement”) between Hershey Foods Corporation
and Rowntree Mackintosh Confectionery Limited is incorporated by reference from
Exhibit 10(a) to the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1980. The License Agreement was amended in 1988
and the Amendment Agreement is incorporated by reference from Exhibit 19 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended July 3,
1988. The License Agreement was assigned by Rowntree Mackintosh Confectionery
Limited to Societe des Produits Nestle SA as of January 1, 1990. The Assignment
Agreement is incorporated by
reference from
Exhibit 19 to the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
b.
Peter Paul/York Domestic Trademark & Technology License
Agreement between Hershey Foods Corporation and Cadbury Schweppes Inc. (now
Cadbury Beverages Delaware, Inc.) dated August 25, 1988, is incorporated by
reference from Exhibit 2(a) to the Corporation's Current Report on Form 8-K
dated September 8, 1988. This agreement was assigned by the Corporation to its
wholly owned subsidiary, Hershey Chocolate & Confectionery Corporation.
c.
Cadbury Trademark &
Technology License Agreement between Hershey Foods Corporation and Cadbury
Limited dated August 25, 1988, is incorporated by reference from Exhibit 2(a) to
the Corporation’s Current Report on Form 8-K dated September 8, 1988.
d.
The Amended and Restated
364-Day Credit Agreement among Hershey Foods Corporation, the banks, financial
institutions and other institutional lenders listed on the signature pages
thereof, and Citibank, N.A. as administrative agent, Bank of America, N.A. as
syndication agent, and Salomon Smith Barney Inc. and Banc America Securities
LLC, as joint lead arrangers and joint book managers, incorporated by reference
from Exhibit 10.1 to the Corporation’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, was amended and renewed as of
November 26, 2002, pursuant to the agreement attached hereto and filed as
Exhibit 10.1.
e.
The Amended and Restated
Five-Year Credit Agreement among Hershey Foods Corporation, the banks, financial
institutions and other institutional lenders listed on the signature pages
thereof, and Citibank, N.A. as administrative agent, Bank of America, N.A. as
syndication agent, and Salomon Smith Barney Inc. and Banc America Securities
LLC, as joint lead arrangers and joint book managers, is incorporated by
reference from Exhibit 10.2 to the Corporation’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2001.
f.
Trademark and Technology
License Agreement between Huhtamaki and Hershey Foods Corporation dated
December 30, 1996, is incorporated by reference from Exhibit 10 to the
Corporation’s Current Report on Form 8-K dated February 26, 1997. This
agreement was assigned by the Corporation to its wholly owned subsidiary,
Hershey Chocolate & Confectionery Corporation. The agreement was amended and
restated in 1999 and the Amended and Restated Trademark and Technology License
Agreement is incorporated by reference from Exhibit 10.2 to the
Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
g.
Hershey Foods
Corporation’s Amended and Restated Key Employee Incentive Plan is
incorporated by reference from Exhibit 10.1 to the Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 29, 2002.
h.
Hershey Foods
Corporation’s Amended and Restated Deferred Compensation Plan is
incorporated by reference from Exhibit 10.2 to the Corporation’s Quarterly
Report on Form 10-Q for the quarter ended September 29, 2002.
i.
Hershey Foods
Corporation’s Amended and Restated Supplemental Executive Retirement Plan
is incorporated by reference from Exhibit 10.3 to the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended September 29, 2002.
j.
Hershey Foods Corporation's Amended and Restated Directors'
Compensation Plan is attached hereto and filed as Exhibit 10.2.
k.
Hershey Foods
Corporation’s Executive Benefits Protection Plan (Group 3A), as amended,
covering certain of its executive officers, is incorporated by reference from
Exhibit 10.4 to the Corporation’s quarterly report on Form 10-Q for the
quarter ended September 29, 2002.
l.
The
Separation Agreement and General Release entered into effective December 6, 2002
between Hershey Foods Corporation and Wynn A. Willard is attached hereto and
filed as Exhibit 10.3.
m.
The
Executive Employment Agreement between Hershey Foods Corporation and Richard H.
Lenny, dated March 12, 2001, is incorporated by reference from Exhibit 10.2 to
the Corporation's Quarterly Report on Form 10-Q for the quarter ended April 1,
2001.
n.
Hershey
Foods Corporation's Broad Based Stock Option Plan, as amended, is attached
hereto and filed as Exhibit 10.4.
A computation of ratio of
earnings to fixed charges for the fiscal years ended December 31, 2002, 2001,
2000, 1999 and 1998 is attached hereto and filed as Exhibit 12.
The Corporation’s
Annual Report to Stockholders is included as Appendix A to the Proxy Statement
and is attached hereto and filed as Exhibit 13.
A list setting forth
subsidiaries of the Corporation is attached hereto and filed as Exhibit 21.
The consent dated March 26, 2003 to the incorporation of reports of the Corporation’s
Independent Auditors is attached hereto and filed as Exhibit 23.
The Certification of Richard H. Lenny, Chief Executive Officer, and
Frank Cerminara, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
accompanies this report and is furnished as Exhibit 99.
Item 15(b):
Reports on Form 8-K
A Current Report on Form
8-K was furnished to the SEC on February 11, 2003, in connection with the
Corporation’s announcement that 2003 pension expense was expected to be $12
million higher than previously disclosed.
A Current Report on Form
8-K was furnished to the SEC on January 29, 2003, in connection with the
Corporation’s announcement of sales and earnings for the fourth quarter and
full year ended December 31, 2002.
A Current Report on Form
8-K was furnished to the SEC on January 2, 2003, in connection with the
Corporation’s announcement that J. Robert Hillier resigned from the
Company’s Board of Directors effective December 31, 2002.
A Current Report on Form
8-K was furnished to the SEC on December 12, 2002, in connection with the
Corporation’s announcement (i) that its Board of Directors had approved an
authorization to acquire, from time to time in open market or through privately
negotiated transactions, up to $500 million of the Corporation’s Common
Stock; and (ii) that it had contributed $150 million from free cash flow to its
domestic pension plans in order to improve the funded status of the plans in
view of the weak stock market performance during 2002.
A Current Report on Form
8-K was furnished to the SEC on December 10, 2002, in connection with the
Corporation’s announcement that Wynn A. Willard would resign as Senior Vice President,
Chief Marketing Officer effective December 31, 2002.
A Current Report on Form
8-K was furnished to the SEC on December 9, 2002, in connection with the
Corporation’s announcement that it would hold a meeting with analysts in
Hershey, Pennsylvania on December 13, 2002.
A Current Report on Form
8-K was furnished to the SEC on November 12, 2002, in connection with the
Corporation’s announcement that Richard H. Lenny, Chief Executive Officer
of Hershey Foods Corporation (the “Corporation”) and Frank Cerminara,
Chief Financial Officer of the Corporation, each furnished to the Securities and
Exchange Commission personal certifications pursuant to 18 U.S.C. §1350.
SIGNATURES
HERSHEY FOODS CORPORATION
(Registrant)
By:
/s/ F. CERMINARA
F. Cerminara
Senior Vice President, Chief Financial Officer
Signature
Title
Date
/s/ R. H. LENNY
(R. H. Lenny)
Chief Executive Officer and Director
March 26, 2003
/s/ F. CERMINARA
(F. Cerminara)
Chief Financial Officer
March 26, 2003
/s/ D. W. TACKA
(D. W. Tacka)
Chief Accounting Officer
March 26, 2003
/s/J. A. BOSCIA
(J. A. Boscia)
Director
March 26, 2003
/s/ R. H. CAMPBELL
(R. H. Campbell)
Director
March 26, 2003
/s/ G. P. COUGHLAN
(G. P. Coughlan)
Director
March 26, 2003
/s/ B. G. HILL
(B. G. Hill)
Director
March 26, 2003
/s/ J. C. JAMISON
(J. C. Jamison)
Director
March 26, 2003
Signature
Title
Date
/s/ M. J. MCDONALD
(M. J. McDonald)
Director
March 26, 2003
/s/ J. M. PIETRUSKI
(J. M. Pietruski)
Director
March 26, 2003
CERTIFICATION
Date: March 26, 2003
/s/ RICHARD H. LENNY
Richard H. Lenny
Chief Executive Officer
15
I, Frank Cerminara, certify that:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
Date: March 26, 2003
/s/ FRANK CERMINARA
Frank Cerminara
Chief Financial Officer
16
The Board of Directors and Stockholders
Hershey Foods Corporation:
Under date of January 29, 2003, we reported on the consolidated balance sheet of Hershey Foods Corporation and subsidiaries as of December 31, 2002, and the related consolidated statements of income, cash flows and stockholders’ equity for the year then ended, which are included in Hershey Foods Corporation’s Proxy Statement for its 2003 Annual Meeting of Stockholders incorporated by reference in this Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the schedule listed on page 18 in Item 15(a)(2). This financial statement schedule is the responsibility of the Corporation’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
New York, New York
January 29, 2003
The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. This report applies to supplemental Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2001 and December 31, 2000.
To Hershey Foods Corporation:
We have audited, in
accordance with auditing standards generally accepted in the United States, the
consolidated financial statements included in Hershey Foods Corporation’s
Proxy Statement for its 2002 Annual Meeting of Stockholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated January
22, 2002. Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. The schedule listed on page 15 in Item
14(a)(2) is the responsibility of the Corporation’s management and is
presented for purposes of complying with the Securities and Exchange
Commission’s rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole. /s/ARTHUR ANDERSEN LLP New York, New York 17 Schedule II HERSHEY FOODS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a) Includes recoveries of amounts previously written off. 18
January 22, 2002
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands of dollars)
Additions
Description
Balance at
Beginning
of Period Charged to
Costs and
Expenses Charged
to Other
Accounts (a) Deductions
from
Reserves Balance
at End
of Period
Year Ended December 31,2002:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply:
Accounts Receivable -
Trade
$
15,958
$
6,414
$
3,023
$
(8,871)
$
16,524
Year Ended December 31,2001:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply:
Accounts Receivable -
Trade
$
16,004
$
8,450
$
3,299
$
(11,795)
$
15,958
Year Ended December 31,2000:
Reserves deducted in the consolidated
balance sheet from the assets
to which they apply:
Accounts Receivable -
Trade
$
16,941
$
8,531
$
1,362
$
(10,830)
$
16,004