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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
|X| OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
|_| SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ..... TO .....
REGISTRANT, STATE OF INCORPORATION,
ADDRESS AND TELEPHONE NUMBER
----------------------------
HERSHEY FOODS CORPORATION
COMMISSION I.R.S. EMPLOYER
FILE NO. (A DELAWARE CORPORATION) IDENTIFICATION NO.
-------- 100 CRYSTAL A DRIVE -----------------
1-183 HERSHEY, PENNSYLVANIA 17033 23-0691590
(717) 534-6799
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
TITLE OF EACH CLASS which registered
------------------- ------------------------
Common Stock, one dollar par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Class B Common Stock, one dollar par value
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of a specified date within 60 days prior to the date of
filing.
Common Stock, one dollar par value -- $5,935,504,658 as of March 1, 1999.
Class B Common Stock, one dollar par value -- $8,718,311 as of March 1, 1999.
While the Class B Common Stock is not listed for public trading on any
exchange or market system, shares of that class are convertible into shares
of Common Stock at any time on a share-for-share basis. The market value
indicated is calculated based on the closing price of the Common Stock on the
New York Stock Exchange on March 1, 1999.
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 -- 109,262,899 shares, as of March 1,
1999.
Class B Common Stock, one dollar par value -- 30,446,908 shares, as of March
1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The Corporation's Consolidated Financial Statements and Management's
Discussion and Analysis for the year ended December 31, 1998 are included in
Appendix A to the Corporation's Proxy Statement for the Corporation's 1999
Annual Meeting of Stockholders and are incorporated by reference into Part II
and are filed as Exhibit 13 hereto. Portions of the Proxy Statement are
incorporated by reference herein into Part III.
PART I
ITEM 1.BUSINESS
Hershey Foods Corporation and its subsidiaries (the "Corporation") are
engaged in the manufacture, distribution and sale of consumer food products. The
Corporation produces and distributes a broad line of chocolate and non-chocolate
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 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. The Corporation retained a 6% minority interest in the business.
The Corporation's principal product groups include: chocolate and
non-chocolate confectionery products sold in the form of bar goods, bagged items
and boxed items; and grocery products in the form of baking ingredients,
chocolate drink mixes, peanut butter, dessert toppings and beverages. The
Corporation believes it is a major factor in these product groups in North
America. Operating profit margins vary considerably among individual products
and brands. Generally, such margins on chocolate and non-chocolate confectionery
products are greater than those on certain other grocery products.
In North America, the Corporation manufactures chocolate and non-chocolate
confectionery products in a variety of packaged forms and markets them under
more than 50 brands. The different packaged forms include various arrangements
of the same bar products, such as boxes, trays and bags, as well as a variety of
different sizes and weights of the same bar product, such as snack size,
standard, king size, large and giant bars. Among the principal chocolate and
non-chocolate confectionery products in the United States are: HERSHEY'S BITES
candies, HERSHEY'S classic caramels, HERSHEY'S COOKIES 'N' CREME chocolate bars,
HERSHEY'S HUGS chocolates, HERSHEY'S KISSES chocolates, HERSHEY'S KISSES WITH
ALMONDS chocolates, HERSHEY'S milk chocolate bars, HERSHEY'S milk chocolate bars
with almonds, HERSHEY'S MINIATURES chocolate bars, HERSHEY'S NUGGETS chocolates,
AMAZIN' FRUIT gummy bears fruit candy, CARAMELLO candy bars, GOOD & PLENTY
candy, HEATH toffee bar, JOLLY RANCHER candy, KIT KAT wafer bars, LUDEN'S throat
drops, MILK DUDS chocolate covered caramels, MR. GOODBAR milk chocolate bars
with peanuts, NIBS candy, PAYDAY peanut caramel bar, PETER PAUL ALMOND JOY candy
bars, PETER PAUL MOUNDS candy bars, RAIN-BLO and SUPER BUBBLE gum, REESE'S
NUTRAGEOUS candy bars, REESE'S peanut butter cups, REESE'S PIECES candies,
REESESTICKS wafer bars, ROLO caramels in milk chocolate, SIXLETS candies, SKOR
toffee bars, SYMPHONY milk chocolate bars, SWEET ESCAPES candy bars,
TASTETATIONS candy, TWIZZLERS candy, WHATCHAMACALLIT candy bars, WHOPPERS malted
milk balls, YORK peppermint pattie candy, 5TH AVENUE candy bars and ZERO candy
bars. Principal products in Canada include CHIPITS chocolate chips, GLOSETTE
chocolate-covered raisins, peanuts and almonds, OH HENRY! candy bars, POT OF
GOLD boxed chocolates, REESE PEANUT BUTTER CUPS candy, and TWIZZLERS candy. The
Corporation also manufactures, imports, markets, sells and distributes chocolate
products in Mexico under the HERSHEY'S brand name.
The Corporation manufactures and markets a line of grocery products in the
baking, beverage, peanut butter and toppings categories. Principal products in
the United States include HERSHEY'S, REESE'S AND HEATH baking pieces, HERSHEY'S
drink boxes, HERSHEY'S chocolate milk mix, HERSHEY'S cocoa, HERSHEY'S CHOCOLATE
SHOPPE ice cream toppings, HERSHEY'S HOT COCOA COLLECTION hot cocoa mix,
HERSHEY'S syrup and REESE'S peanut butter. HERSHEY'S chocolate milk is produced
and sold under license by certain independent dairies throughout the United
States, using a chocolate milk mix manufactured by the Corporation. Baking and
various other products are produced and sold under the HERSHEY'S and REESE'S
brand names by third parties who have been granted licenses by the Corporation
to use these trademarks.
1
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 1998, sales to Wal-Mart Stores, Inc. and Subsidiaries amounted
to approximately 14% of the Corporation's total net sales.
In Japan, China and the Philippines, the Corporation imports and/or markets
selected confectionery and grocery products. The Corporation also markets
chocolate and non-chocolate confectionery products in over 90 countries
worldwide.
The Corporation's marketing strategy is based upon the consistently superior
quality of its products, mass distribution and the best possible consumer value
in terms of price and weight. In addition, the Corporation devotes considerable
resources to the identification, development, testing, manufacturing and
marketing of new products. The Corporation utilizes a variety of promotional
programs for customers and advertising and promotional programs for consumers.
The Corporation employs promotional programs at various times during the year to
stimulate sales of certain products. Chocolate and non-chocolate confectionery
and grocery seasonal and holiday-related sales have typically been highest
during the third and fourth quarters of the year.
The Corporation recognizes that the mass distribution of its consumer food
products is an important element in maintaining sales growth and providing
service to its customers. The Corporation attempts to meet the changing demands
of its customers by planning optimum stock levels and reasonable delivery times
consistent with achievement of efficiencies in distribution. To achieve these
objectives, the Corporation has developed a distribution network from its
manufacturing plants, distribution centers and field warehouses strategically
located throughout the United States, Canada and Mexico. The Corporation uses a
combination of public and contract carriers to deliver its products from the
distribution points to its customers. In conjunction with sales and marketing
efforts, the distribution system has been instrumental in the effective
promotion of new, as well as established, products on both national and regional
scales.
From time to time, the Corporation has changed the prices and weights of its
products to accommodate changes in manufacturing costs, the competitive
environment and profit objectives, while at the same time maintaining consumer
value. The last standard candy bar price increase was implemented by the
Corporation in December 1995, resulting in a wholesale price increase of
approximately 11% on its standard and king-size candy bars sold in the United
States.
The most significant raw material used in the production of the Corporation's
chocolate products is cocoa beans. This commodity is imported principally from
West African, South American and Far Eastern equatorial regions. West Africa
accounts for approximately 65% of the world's crop. Cocoa beans are not uniform,
and the various grades and varieties reflect the diverse agricultural practices
and natural conditions found in the many growing areas. The Corporation buys a
mix of cocoa beans to meet its manufacturing requirements.
The table below sets forth annual average cocoa prices as well as the highest
and lowest monthly averages for each of the calendar years indicated. The prices
are the monthly average of the quotations at noon of the three active futures
trading contracts closest to maturity on the New York Coffee, Sugar and Cocoa
Exchange. Because of the Corporation's forward purchasing practices discussed
below, and premium prices paid for certain varieties of cocoa beans, these
average futures contract prices are not necessarily indicative of the
Corporation's average cost of cocoa beans or cocoa products.
COCOA FUTURES CONTRACT PRICES
(CENTS PER POUND)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Annual Average..... 59.1 61.2 62.1 70.0 72.7
High............... 66.1 64.1 64.4 77.2 78.3
Low................ 51.3 58.3 57.4 59.1 65.5
Source: International Cocoa Organization Quarterly Bulletin of Cocoa
Statistics
2
The Federal Agricultural and Improvement Reform Act of 1996, which is a
seven-year farm bill, impacts the prices of sugar, peanuts and milk because it
sets price support levels for these commodities.
The price of sugar, the Corporation's second most important commodity for its
domestic chocolate and confectionery products, is subject to price supports
under the above referenced farm legislation. Due to import quotas and duties
imposed to support the price of sugar established by that legislation, sugar
prices paid by United States users are currently substantially higher than
prices on the world sugar market. The average wholesale list price of refined
sugar, F.O.B. Northeast, has remained relatively stable in a range of $.28 to
$.35 per pound for the past ten years.
Peanut prices remained near recent historical levels throughout 1998.
Dairy prices reached historic highs in 1998, reflecting generally poor
weather which adversely affected production and strong demand for cheese and
butter.
Almond prices remained at relatively high levels throughout 1998 as a result
of poor weather in California and Europe.
The Corporation attempts to minimize the effect of price fluctuations related
to the purchase of its major raw materials primarily through the forward
purchasing of such commodities to cover future manufacturing requirements
generally for periods ranging from 3 to 24 months. With regard to cocoa, sugar,
corn sweeteners, natural gas and certain dairy products, price risks are also
managed by entering into futures and options contracts. At the present time,
active futures and options contracts are not available for use in pricing the
Corporation's other major raw materials. Futures contracts are used in
combination with forward purchasing of cocoa, sugar, corn sweetener, natural gas
and certain dairy product requirements principally to take advantage of market
fluctuations which provide more favorable pricing opportunities and to increase
diversity or flexibility in sourcing these raw materials. The Corporation's
commodity procurement practices are intended to reduce the risk of future price
increases, but also may potentially limit the Corporation's ability to benefit
from possible price decreases.
The primary effect on liquidity from using futures contracts is associated
with margin requirements for futures contracts related to cocoa, sugar, corn
sweeteners, natural gas 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. Historically, cash
flows related to margin requirements have not been material to the Corporation's
total working capital requirements.
The Corporation manages the purchase of forward and futures contracts by
developing and monitoring procurement strategies for each of its major
commodities. These procurement strategies, including the use of futures
contracts to hedge the pricing of cocoa, sugar, corn sweeteners, natural gas and
certain dairy products are directly linked to the overall planning and
management of the Corporation's business, since the cost of raw materials
accounts for a significant portion of the cost of finished goods. Procurement
strategies with regard to cocoa, sugar and other major raw material requirements
are developed by the analysis of fundamentals, including weather and crop
analysis, and by discussions with market analysts, brokers and dealers.
Procurement strategies are determined, implemented and monitored on a regular
basis by senior management. Procurement activities for all major commodities are
also reported to the Board of Directors on a regular basis.
The Corporation has license agreements with several companies to manufacture
and/or sell products worldwide. Among the more significant are agreements with
affiliated companies of Cadbury Schweppes p.l.c. to manufacture and/or market
and distribute YORK, PETER PAUL ALMOND JOY and PETER PAUL MOUNDS confectionery
products worldwide as well as CADBURY and CARAMELLO confectionery products in
the United States. The Corporation's rights under these agreements are
extendible on a long-term basis at the Corporation's option. The license for
CADBURY and CARAMELLO products is subject to a minimum sales requirement which
the Corporation exceeded in 1998. The Corporation also has an agreement with
Societe des Produits Nestle SA, which licenses the Corporation to manufacture
and distribute KIT KAT and ROLO confectionery products in the United States. The
Corporation's rights under this agreement are extendible on a long-term basis at
the Corporation's option, subject to certain conditions, including minimum unit
volume sales. In 1998, the minimum volume requirements were exceeded. The
Corporation has an agreement with an affiliate of Huhtamaki Oy (Huhtamaki)
pursuant to which it licenses the use of certain trademarks, including GOOD &
PLENTY, HEATH, JOLLY RANCHER, MILK DUDS, PAYDAY and WHOPPERS confectionery
products in the North, Central and South American regions. The Corporation's
rights under this agreement are extendible on a long-term basis at the
Corporation's option.
3
YEAR 2000 ISSUES
Year 2000 issues associated with information systems relate to the way dates
are recorded and computed in many computer systems. These year 2000 issues could
have an impact upon the Corporation's information technology (IT) and non-IT
systems. Non-IT systems include embedded technology such as microcontrollers
which are integral to the operation of most machinery and equipment.
Additionally, year 2000 issues could have a similar impact on the Corporation's
major business partners, including both customers and suppliers. While it is not
currently possible to estimate the total impact of a failure of either the
Corporation or its major business partners or suppliers to complete their year
2000 remediation in a timely manner, the Corporation has determined that it
could suffer significant adverse financial consequences as a result of such
failure.
Awareness and assessment of year 2000 issues regarding major business
applications software and other significant IT systems began in 1990. A formal
program to address year 2000 issues associated with IT systems was established
in late 1995. In early 1998, a team was established with representatives from
all major functional areas of the Corporation which assumed overall
responsibility for ensuring that remediation of both IT and non-IT systems will
be completed in time to prevent material adverse consequences to the
Corporation's business, operations or financial condition. The Corporation
expects that remediation of these systems will be essentially completed by the
third quarter of 1999.
In late 1996, the Corporation approved a project to implement an
enterprise-wide integrated information system to improve process efficiencies in
all of the major functional areas of the Corporation, enabling the Corporation
to provide better service to its customers. This system will replace most of the
transaction systems and applications supporting operations of the Corporation.
In addition to improving efficiency and customer service, another benefit of
this system is that it is year 2000 compliant and will address year 2000 issues
for approximately 80% of the Corporation's business applications software. As of
December 31, 1998, approximately $62.1 million of capitalized software and
hardware and $6.9 million of expenses have been incurred for this project. As of
December 31, 1998, spending for implementation of this system was approximately
65% complete, with full implementation expected by the third quarter of 1999.
Total commitments for this system and subsequently identified enhancements are
expected to be approximately $110 million which will be financed with cash
provided from operations and short-term borrowings.
The Corporation's mainframe, network and desktop hardware and software have
recently been upgraded and are substantially year 2000 compliant. The
Corporation is in the process of remediating year 2000 compliance issues
associated with legacy information systems not being replaced by the integrated
information system project, including process automation and factory management
systems. During late 1998, the Corporation undertook an extensive review of its
year 2000 remediation program. As a result of this review, the Corporation has
undertaken additional testing to confirm its year 2000 compliance, but is
otherwise maintaining its current program of remediation. As of December 31,
1998, remediation of both IT and non-IT systems was approximately 60% complete,
reflecting the latest estimate of testing and work requirements to be performed.
The total cost of remediation of IT and non-IT systems is expected to be in the
range of $6.0 million to $8.0 million.
The Corporation is also in the process of assessing year 2000 remediation
issues relating to its major business partners. All of the Corporation's major
customers have been contacted regarding year 2000 issues related to electronic
data interchange. The Corporation is also in the process of contacting its major
suppliers of ingredients, packaging, facilities, logistics and financial
services with regard to year 2000 issues. Because of the uncertainties
associated with assessing the ability of major business partners to complete the
remediation of their systems in time to prevent operational difficulties, the
Corporation will continue to contact and/or visit major customers and suppliers
to gain assurances that no significant adverse consequences will result due to
their failure to complete remediation of their systems.
Year 2000 remediation, conversion, validation and implementation is
continuing and, at the present time, it is expected that remediation to both the
Corporation's IT and non-IT systems and those of major business partners will be
completed in time to prevent material adverse consequences to the Corporation's
business, operations or financial condition. However, contingency plans are
being developed, including possible increases in raw material and finished goods
inventory levels, and the identification of alternate vendors and suppliers.
Additional contingency plans, to the extent feasible, will be developed for any
potential failures resulting from year 2000 issues.
COMPETITION
Many of the Corporation's brands enjoy wide consumer acceptance and are among
the leading brands sold in the marketplace. However, these brands are sold in
highly competitive markets and compete with many other multinational, national,
regional and local firms, some of which have resources in excess of those
available to the Corporation.
4
TRADEMARKS
The Corporation owns various registered and unregistered trademarks and
service marks, and has rights under licenses to use various trademarks which are
of material importance to the Corporation's business.
BACKLOG OF ORDERS
The Corporation manufactures primarily for stock and fills customer orders
from finished goods inventories. While at any given time there may be some
backlog of orders, such backlog is not material in respect to total sales, nor
are the changes from time to time significant.
RESEARCH AND DEVELOPMENT
The Corporation engages in a variety of research activities. These
principally involve development of new products, improvement in the quality of
existing products, improvement and modernization of production processes, and
the development and implementation of new technologies to enhance the quality
and value of both current and proposed product lines.
REGULATION
The Corporation's domestic plants are subject to inspection by the Food and
Drug Administration and various other governmental agencies, and its products
must comply with regulations under the Federal Food, Drug and Cosmetic Act and
with various comparable state statutes regulating the manufacturing and
marketing of food products.
ENVIRONMENTAL CONSIDERATIONS
In the past the Corporation has made investments based on compliance with
environmental laws and regulations. Such expenditures have not been material
with respect to the Corporation's capital expenditures, earnings or competitive
position.
EMPLOYEES
As of December 31, 1998, the Corporation had approximately 14,700 full-time
and 1,500 part-time employees, of whom approximately 6,800 were covered by
collective bargaining agreements. In January 1999, a reduction of approximately
900 full-time and 30 part-time employees resulted from the completion of the
sale of the pasta business. The Corporation considers its employee relations to
be good.
FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Information concerning the Corporation's geographic segments is contained in
Footnote 15 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix A to the Proxy
Statement for its 1999 Annual Meeting of Stockholders (the "Proxy Statement"),
which information is incorporated herein by reference and filed as Exhibit 13
hereto.
SAFE HARBOR STATEMENT
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Many of the forward looking
statements contained in this document may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential" among others. Factors which could cause
results to differ include, but are not limited to: changes in the confectionery
and grocery business environment, including actions of competitors and changes
in consumer preferences; changes in governmental laws and regulations, including
income taxes; market demand for new and existing products; and raw material
pricing.
5
ITEM 2. PROPERTIES
The following is a list of the Corporation's principal manufacturing
properties. The Corporation owns each of these properties.
UNITED STATES
Hershey,Pennsylvania - confectionery and grocery products (3 principal
plants)
Lancaster,Pennsylvania - confectionery products
Oakdale, California confectionery and grocery products
Robinson, Illinois - confectionery and grocery products
Stuarts Draft, Virginia - confectionery and grocery products
CANADA
Smiths Falls, Ontario - confectionery and grocery products
In addition to the locations indicated above, the Corporation owns or leases
several other properties used for manufacturing chocolate and non-chocolate
confectionery 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.
ITEM 3. LEGAL PROCEEDINGS
In January 1999, the Corporation received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1989
through 1996. The most significant issue pertains to the Corporate Owned Life
Insurance (COLI) program which was implemented by the Corporation in 1989. The
IRS proposed the disallowance of interest expense deductions associated with the
underlying life insurance policies. The Corporation believes that it has fully
complied with the tax law as it relates to its COLI program. The Corporation
expects to file a protest of the proposed deficiency with the Appeals section of
the IRS in early 1999 and intends to vigorously defend its position on this
matter. The Corporation has no other material pending legal proceedings, other
than ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information concerning the principal United States trading market for, market
prices of and dividends on the Corporation's Common Stock and Class B Common
Stock, and the approximate number of stockholders, may be found in the section
"Market Prices and Dividends" on page A-9 of the Corporation's Consolidated
Financial Statements and Management's Discussion and Analysis included in
Appendix A to the Proxy Statement which is deemed to be part of the Annual
Report to Stockholders and which information is incorporated herein by reference
and filed as Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The following information, for the five years ended December 31, 1998, found
in the section "Eleven-Year Consolidated Financial Summary" on pages A-35
through A-37 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix A to the Proxy
Statement, is incorporated herein by reference and filed as Exhibit 13 hereto:
Net Sales; Income from Continuing Operations Before Accounting Changes; Income
Per Share from Continuing Operations Before Accounting Changes - Basic
(excluding Notes h, i and j); Dividends Paid on Common Stock (and related Per
Share amounts); Dividends Paid on Class B Common Stock (and related Per Share
amounts); Long-term Portion of Debt; and Total Assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section "Management's Discussion and Analysis," found on pages A-1
through A-11 of the Corporation's Consolidated Financial Statements and
Management's Discussion and Analysis included in Appendix A to the Proxy
Statement, is incorporated herein by reference and filed as Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited consolidated financial statements of the Corporation
and its subsidiaries are found at the indicated pages in the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix A to the Proxy Statement, and such financial statements,
along with the Report of the Independent Public Accountants thereon, are
incorporated herein by reference and filed as Exhibit 13 hereto.
1.Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996. (Page A-12)
2.Consolidated Balance Sheets as of December 31, 1998 and 1997.
(Page A-13)
3.Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996. (Page A-14)
4.Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. (Page A-15)
5.Notes to Consolidated Financial Statements (Pages A-16 through
A-32), including "Quarterly Data (Unaudited)." (Page A-32)
6.Report of Independent Public Accountants. (Page A-34)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions held with the Corporation, periods of service as a
director, principal occupations, business experience and other directorships of
nominees for director of the Corporation are set forth in the section "Election
of Directors" in the Proxy Statement. This information is incorporated herein by
reference.
EXECUTIVE OFFICERS OF THE CORPORATION AS OF MARCH 1, 1999
NAME AGE POSITIONS HELD DURING THE LAST FIVE YEARS
---- --- -----------------------------------------
K. L. Wolfe....... 60 Chairman of the Board and Chief Executive Officer
(1993)
J. P. Viviano..... 60 Vice Chairman of the Board (1999); President and
Chief Operating Officer (1993)
M. F. Pasquale.... 51 Senior Vice President, Confectionery and Grocery
(1999); President, Hershey Chocolate North America
(1995); President, Hershey Chocolate U.S.A. (1994)
W. F. Christ ..... 58 Senior Vice President, Chief Financial Officer and
Treasurer (1997); Senior Vice President and Chief
Financial Officer (1994)
R. Brace ........ 55 Senior Vice President, Operations (1999); Vice
President, Operations (1997); Vice President,
Manufacturing, Hershey Chocolate North America
(1995); Vice President, Manufacturing, Hershey
Chocolate U.S.A. (1987)
R. M. Reese ...... 49 Senior Vice President - Public Affairs, General
Counsel and Secretary (1999); Vice President,
General Counsel and Secretary (1995); Vice
President and General Counsel (1992)
J. R. Canavan (1). 51 Vice President, Human Resources (1999)
D. W. Tacka....... 45 Corporate Controller and Chief Accounting Officer
(1995); Vice President, Finance and Administration,
Hershey Pasta Group, part of the former Hershey
Pasta and Grocery Group for which a 94% majority
interest was sold in 1999 (1989)
- ------------------
There are no family relationships among any of the above-named officers of
the Corporation.
(1) Mr. Canavan was elected Vice President, Human Resources effective January
1, 1999. Prior to joining the Corporation he was Vice President, Staffing, IBM
United States Corporation in New York (1998) and Vice President, Human
Resources, IBM North America (1993).
Corporate Officers and Division Presidents are generally elected each year at
the organization meeting of the Board of Directors in April.
Reporting of inadvertent late filings of a Securities and Exchange Commission
Form 4 under Section 16 of the Securities Exchange Act of 1934, as amended, is
set forth in the section of the Proxy Statement "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11 EXECUTIVE COMPENSATION
Information concerning compensation of the five most highly-compensated
executive officers, including the Chairman of the Board and Chief Executive
Officer, of the Corporation individually, and compensation of directors, is set
forth in the sections "1998 Executive Compensation" and "Directors'
Compensation" in the Proxy Statement. This information is incorporated herein by
reference.
8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of the Corporation's voting securities by
certain beneficial owners, individual nominees for director and by management,
including the five most highly-compensated executive officers, is set forth in
the section "Voting Securities" in the Proxy Statement.
This information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning "Certain Relationships and Related Transactions" is
set forth in the section "Certain Transactions and Relationships" in the Proxy
Statement. This information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM 14(a)(1): FINANCIAL STATEMENTS
The audited consolidated financial statements of the Corporation and its
subsidiaries and the Report of Independent Public Accountants thereon, as
required to be filed with this report, are set forth in Item 8 of this report
and are incorporated therein by reference to specific pages of the Corporation's
Consolidated Financial Statements and Management's Discussion and Analysis
included in Appendix A to the Proxy Statement and filed as Exhibit 13 hereto.
ITEM 14(a)(2): FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule of the Corporation
and its subsidiaries for the years ended December 31, 1998, 1997 and 1996 is
filed herewith on the indicated page in response to Item 14(d):
Schedule II -- Valuation and Qualifying Accounts (Page 15)
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.
ITEM 14(a)(3): EXHIBITS
The following items are attached or incorporated by reference in response to
Item 14(c):
(3) Articles of Incorporation and By-laws
The Corporation's Restated Certificate of Incorporation, as amended, is
incorporated by reference from Exhibit 3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended April 3, 1988. The By-laws, as
amended and restated as of December 1, 1998, are attached hereto as
Exhibit 3.
9
(4) Instruments defining the rights of security holders, including indentures
The Corporation has issued certain long-term debt instruments, no one
class of which creates indebtedness exceeding 10% of the total assets of
the Corporation and its subsidiaries on a consolidated basis. These
classes consist of the following:
a. 6.7% Notes due 2005
b. 6.95% Notes due 2007
c. 6.95% Notes due 2012
d. 8.8% Debentures due 2021
e. 7.2% Debentures due 2027
f. Other Obligations
The Corporation will furnish copies of the above debt instruments to the
Commission upon request.
(10) Material contracts
a. Kit Kat and Rolo License Agreement (the "License Agreement") between
Hershey Foods Corporation and Rowntree Mackintosh Confectionery
Limited is incorporated by reference from Exhibit 10(a) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1980. The License Agreement was amended in 1988 and the
Amendment Agreement is incorporated by reference from Exhibit 19 to
the Corporation's Quarterly Report on Form 10-Q for the quarter ended
July 3, 1988. The License Agreement was assigned by Rowntree
Mackintosh Confectionery Limited to Societe des Produits Nestle SA as
of January 1, 1990. The Assignment Agreement is incorporated by
reference from Exhibit 19 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
b. Peter Paul/York Domestic Trademark & Technology License Agreement
between Hershey Foods Corporation and Cadbury Schweppes Inc. (now CBI
Holdings, Inc.) dated August 25, 1988, is incorporated by reference
from Exhibit 2(a) to the Corporation's Current Report on Form 8-K
dated September 8, 1988. This agreement was assigned by the
Corporation to its wholly owned subsidiary, Homestead, Inc., effective
January 1, 1998.
c. Cadbury Trademark & Technology License Agreement among Hershey Foods
Corporation and Cadbury Schweppes Inc. (now CBI Holdings, Inc.) and
Cadbury Limited dated August 25, 1988, is incorporated by reference
from Exhibit 2(a) to the Corporation's Current Report on Form 8-K
dated September 8, 1988.
d. 364-Day Credit Agreement among Hershey Foods Corporation, the banks,
financial institutions and other institutional lenders listed on the
signature pages thereof, and Citibank, N.A. as administrative agent
bank and Citicorp Securities, Inc. and BA Securities, Inc. as
co-syndication agents, is incorporated by reference from Exhibit 10.1
to the Corporation's Current Report on Form 8-K dated January 29,
1996. The 364-Day Credit Agreement was renewed in late 1998.
e. Five-Year Credit Agreement among Hershey Foods Corporation, the banks,
financial institutions and other institutional lenders listed on the
signature pages thereof, and Citibank, N.A. as administrative agent
bank and Citicorp Securities, Inc. and BA Securities, Inc. as
co-syndication agents, is incorporated by reference from Exhibit 10.2
to the Corporation's Current Report on Form 8-K dated January 29,
1996. The Five-Year Credit Agreement was renewed in late 1997.
f. Trademark and Technology License Agreement between Huhtamaki and
Hershey Foods Corporation dated December 30, 1996, is incorporated by
reference from Exhibit 10 to the Corporation's Current Report on Form
8-K dated February 26, 1997. This agreement was assigned by the
Corporation to its wholly owned subsidiary, Homestead, Inc., effective
January 1, 1997.
10
Executive Compensation Plans
g. The restated Key Employee Incentive Plan is incorporated by reference
from the Corporation's Proxy Statement dated March 17, 1997 filed in
connection with the April 29, 1997 Annual Meeting of Stockholders.
h. Hershey Foods Corporation's Restated Supplemental Executive Retirement
Plan is incorporated by reference from Exhibit 19(ii) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
i. Hershey Foods Corporation's Deferral Plan for Non-Management Directors
is incorporated by reference from Exhibit 10 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992.
j. A form of the Benefit Protection Agreements entered into between the
Corporation and certain of its executive officers is incorporated by
reference from Exhibit 10 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
k. Hershey Foods Corporation's Deferred Compensation Plan is incorporated
by reference from Exhibit 10.3 to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
l. Hershey Foods Directors' Compensation Plan is incorporated by
reference from Exhibit 10 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 28, 1997.
(12) Computation of ratio of earnings to fixed charges statement
A computation of ratio of earnings to fixed charges for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 is filed as Exhibit 12
hereto.
(13) Annual report to security holders
The Corporation's Consolidated Financial Statements and Management's
Discussion and Analysis is included in Appendix A to the Proxy
Statement and is filed as Exhibit 13 hereto.
(21) Subsidiaries of the Registrant
A list setting forth subsidiaries of the Corporation is filed as Exhibit
21 hereto.
(23) Consent of Independent Public Accountants
The consent to the incorporation of reports of the Corporation's
Independent Public Accountants dated January 29, 1999, is filed as
Exhibit 23 hereto.
11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE CORPORATION HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
HERSHEY FOODS CORPORATION
(Registrant)
Date: March 15, 1999 By /s/ W. F. CHRIST
------------------------------------------
(W. F. Christ, Senior Vice President, Chief
Financial Officer and Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Corporation and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
K. L. WOLFE Chief Executive Officer and Director March 15, 1999
---------------------
(K. L. Wolfe )
W. F. CHRIST Chief Financial Officer and Treasurer March 15, 1999
---------------------
(W. F. Christ)
D. W. TACKA Chief Accounting Officer March 15, 1999
---------------------
(D. W. Tacka)
J. P. VIVIANO Director March 15, 1999
---------------------
(J. P. Viviano)
M. F. PASQUALE Director March 15, 1999
---------------------
(M. F. Pasquale)
W. H. ALEXANDER Director March 15, 1999
---------------------
(W. H. Alexander)
R. H. CAMPBELL Director March 15, 1999
---------------------
(R. H. Campbell)
C. M. EVARTS, M.D. Director March 15, 1999
------------------------
(C. M. Evarts, M.D.)
B. GUITON HILL Director March 15, 1999
---------------------
(B. Guiton Hill)
12
SIGNATURE TITLE DATE
--------- ----- ----
J. C. JAMISON Director March 15, 1999
---------------------
(J. C. Jamison)
A. Z. LOREN Director March 15, 1999
--------------------
(A. Z. Loren)
M. J. MCDONALD Director March 15, 1999
---------------------
(M. J. McDonald)
J. M. PIETRUSKI Director March 15, 1999
---------------------
(J. M. Pietruski)
V. A. SARNI Director March 15, 1999
---------------------
(V. A. Sarni)
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Hershey Foods Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Hershey Foods Corporation's Proxy
Statement for its 1999 Annual Meeting of Stockholders incorporated by reference
in this Form 10-K, and have issued our report thereon dated January 29, 1999.
Our audit was made for the purpose of forming an opinion on those financial
statements taken as a whole. The schedule listed on page 9 in Item 14(a)(2) is
the responsibility of the Corporation's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 29, 1999
14
Schedule II
HERSHEY FOODS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands of dollars)
ADDITIONS
---------------------------
Balance at Charged to Charged Deductions Balance
Beginning Costs and to Other from at End
Description of Period Expenses Accounts (a) Reserves of Period
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable - Trade------- $ 15,843 $ 5,540 $ (210) $ (1,232) $ 19,941
======== ========= ========= ========= ========
Year Ended December 31, 1997:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade-------- $ 14,059 $ 2,623 $ 522 $ (1,361) $ 15,843
======== ========= ======== ========= =========
Year Ended December 31, 1996:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Accounts Receivable -Trade-------- $ 14,801 $ 1,238 $ 298 $ (2,278) $ 14,059
======== ======== ======== ========== =========
- -----------------------------------------------------------------------------------------------------------------------------------
(a)Includes recoveries of amounts previously written off.
15