Appendix A
Consolidated Financial Statements and Management's Discussion and Analysis
Page
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Management's Discussion and Analysis....................................... A-1
Consolidated Financial Statements.......................................... A-12
Notes to Consolidated Financial Statements................................. A-16
Responsibility for Financial Statements.................................... A-33
Report of Independent Public Accountants................................... A-34
Eleven-Year Consolidated Financial Summary................................. A-35
HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved record sales and income levels in 1998, following a
record performance in 1997. Results over the two-year period reflected a
strategic acquisition and several divestitures, along with a significant
contribution from the introduction of new confectionery products and solid
growth from existing confectionery and grocery brands. Sales increases during
the period were offset somewhat by lower sales of pasta products, a higher level
of confectionery unsalables and the impact of currency exchange rates in the
Canadian and Mexican markets.
Net sales during the two-year period increased at a compound annual rate of 5%
and net income also increased at a compound annual rate of 5%, excluding the
loss on disposal of businesses in 1996. The increase in net income over the
period reflected the growth in sales, partially offset by lower gross margin and
higher selling, marketing and administrative expenses.
The following acquisition and divestitures occurred during the period:
. December 1996--The acquisition from an affiliate of Huhtamaki Oy (Huhtamaki),
the international foods company based in Finland, of Huhtamaki's Leaf North
America (Leaf) confectionery operations for $437.2 million, plus the
assumption of $17.0 million in debt. In addition, the parties entered into a
trademark and technology license agreement under which the Corporation will
manufacture and/or market and distribute in North, Central and South America
Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH, JOLLY
RANCHER, MILK DUDS, PAYDAY and WHOPPERS.
. December 1998--The announcement that the Corporation had signed a definitive
agreement providing for the sale of a 94% majority interest of its U.S. pasta
business to New World Pasta, LLC. The transaction was completed in January
1999 and included the AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT 'N FLUFFY,
MRS. WEISS, P&R, RONZONI, SAN GIORGIO and SKINNER pasta brands along with six
manufacturing plants. In the first quarter of 1999, the Corporation received
cash proceeds of $450.0 million, retained a 6% minority interest and recorded
an after-tax gain of approximately $165.0 million or $1.13 per share--diluted
as a result of the transaction.
. December 1996--The sale to Huhtamaki of the outstanding shares of Gubor
Holding GmbH (Gubor) and Sperlari S.r.l. (Sperlari). Gubor manufactures and
markets high-quality assorted pralines and seasonal chocolate products in
Germany, and Sperlari manufactures and markets various confectionery and
grocery products in Italy. The sale resulted in an after-tax loss of $35.4
million, since no tax benefit associated with the transaction was recorded.
Combined net sales for Gubor and Sperlari were $216.6 million in 1996.
. January 1996--The sale of the assets of Hershey Canada, Inc.'s PLANTERS nut
(Planters) business to Johnvince Foods Group and the LIFE SAVERS and BREATH
SAVERS hard candy and BEECH-NUT cough drops (Life Savers) business to Beta
Brands Inc. Both transactions were part of a restructuring program announced
by the Corporation in late 1994.
Net Sales
Net sales rose $133.4 million or 3% in 1998 and $312.9 million in 1997, an
increase of 8%. The increase in 1998 was primarily a result of incremental sales
from the introduction of new confectionery products and increased sales volume
for existing confectionery and grocery products in North America. These
increases were offset somewhat by a decline in sales in the Corporation's Asian
and Russian markets and the impact of currency exchange rates in the Canadian
and Mexican markets, in addition to higher levels of confectionery unsalables
and lower sales of pasta products. The increase in
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1997 was primarily due to incremental sales from the Leaf acquisition, increased
sales of existing confectionery items and the introduction of new confectionery
products. These increases were offset somewhat by lower sales resulting from the
divestiture of the Gubor and Sperlari businesses and a decline in sales of pasta
and grocery products.
Costs and Expenses
Cost of sales as a percent of net sales increased from 57.7% in 1996 to 57.9%
in 1997, and to 59.2% in 1998. The decrease in gross margin in 1998 was
principally the result of higher costs for certain major raw materials,
primarily milk and cocoa, labor and overhead, higher shipping and distribution
costs and the mix of non-chocolate and chocolate confectionery items sold in
1998 compared to 1997. These cost increases were partially offset by lower costs
for certain raw materials and improved manufacturing efficiencies, including
significant improvements in plants acquired with the Leaf business. The decrease
in gross margin in 1997 was primarily the result of the lower margin associated
with the Leaf business and higher costs associated with certain new products and
seasonal items, partially offset by lower costs for certain major raw materials,
primarily milk and semolina, and the favorable impact of the Gubor and Sperlari
divestitures.
Selling, marketing and administrative costs decreased by 1% in 1998, as
reduced marketing expenses for existing brands, lower selling expenses in
international markets and lower administrative expenses were only partially
offset by higher marketing expenses associated with the introduction of new
products. Selling, marketing and administrative expenses increased by 5% in
1997, as a result of incremental expenses associated with the Leaf business and
increased marketing expenses related to the introduction of new products,
partially offset by decreases resulting from the Gubor and Sperlari divestitures
and reduced marketing spending for existing brands.
Interest Expense, Net
Net interest expense in 1998 exceeded the prior year by $9.4 million,
primarily as a result of increased borrowings associated with the purchase of
Common Stock from the Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School (Milton Hershey School Trust), partially offset by lower
interest expense reflecting reduced average short-term borrowings.
Net interest expense in 1997 was $28.2 million above prior year, primarily as
a result of incremental borrowings associated with the Leaf acquisition and the
purchase of Common Stock from the Milton Hershey School Trust. Fixed interest
expense increased as a result of the issuance of $150 million of 6.95% Notes due
2007 in March 1997 and $150 million of 6.95% Notes due 2012 and $250 million of
7.2% Debentures due 2027 in August 1997.
Provision for Income Taxes
The Corporation's effective income tax rate was 43.1%, 39.3% and 38.8% in
1996, 1997 and 1998, respectively. The rate decreased from 39.3% in 1997 to
38.8% in 1998 primarily due to changes in the mix of the Corporation's income
among various tax jurisdictions. The rate decreased in 1997 compared to 1996
primarily due to the lack of any tax benefit associated with the 1996 loss on
disposal of businesses and the lower 1997 effective state income tax rate.
Net Income
Net income increased $4.6 million or 1% in 1998, following an increase of
$63.1 million or 23% in 1997. Excluding the loss on the disposal of the Gubor
and Sperlari businesses in 1996, 1997 income increased $27.7 million or 9%. Net
income as a percent of net sales was 7.7% in 1998, 7.8% in 1997 and 6.8% in
1996. Income as a percent of net sales excluding the loss on the sale of the
Gubor and Sperlari businesses was 7.7% in 1996.
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FINANCIAL POSITION
The Corporation's financial position remained strong during 1998. The
capitalization ratio (total short-term and long-term debt as a percent of
stockholders' equity, short-term and long-term debt) was 54% as of December 31,
1998, and 60% as of December 31, 1997. The higher capitalization ratio in 1997
primarily reflected the additional borrowings to finance the purchase of Common
Stock and the related decrease in stockholders' equity as a result of the
additional treasury stock. The ratio of current assets to current liabilities
was 1.4:1 as of December 31, 1998, and 1.3:1 as of December 31, 1997.
Assets
Total assets increased $112.9 million or 3% as of December 31, 1998, primarily
as a result of increases in accounts receivable and other current and
non-current assets.
Current assets increased by $99.2 million or 10% reflecting increased accounts
receivable and higher prepaid expenses and other current assets. The increase in
accounts receivable was primarily the result of the timing and payment terms
associated with sales occurring toward the end of the year and the increase in
prepaid expenses and other current assets was principally associated with
commodities transactions. These increases were offset somewhat by lower deferred
income taxes and reduced inventory levels.
Property, plant and equipment was slightly lower than the prior year as
capital additions of $161.3 million were more than offset by depreciation
expense of $138.5 million and the retirement and translation of fixed assets of
$23.0 million. The increase in other non-current assets was primarily associated
with the capitalization of software.
Liabilities
Total liabilities decreased by $76.6 million or 3% as of December 31, 1998,
primarily due to a decrease in debt and lower accrued liabilities, partially
offset by higher deferred income taxes. The increase in short-term debt of
$113.5 million reflected the reclassification of commercial paper borrowings of
$150.0 million which were classified as long-term debt as of December 31, 1997,
partially offset by a reduction in short-term borrowings of $36.5 million in
1998. As of December 31, 1997, $150.0 million of commercial paper borrowings
were reclassified as long-term debt in accordance with the Corporation's intent
and ability to refinance such obligations on a long-term basis. A similar
reclassification was not recorded as of December 31, 1998, because the
Corporation intends to reduce commercial paper borrowings during 1999. Accrued
liabilities decreased by $77.1 million primarily reflecting commodities
transactions and reduced accruals for marketing programs and integration costs
related to the Leaf acquisition.
Stockholders' Equity
Total stockholders' equity increased by 22% in 1998, as net income exceeded
dividends paid. Total stockholders' equity has increased at a compound annual
rate of less than 1% over the past ten years reflecting the $1.3 billion of
Common Stock repurchased since 1993.
Capital Structure
The Corporation has two classes of stock outstanding, Common Stock and Class B
Common Stock (Class B Stock). Holders of the Common Stock and the Class B Stock
generally vote together without regard to class on matters submitted to
stockholders, including the election of directors, with the Common Stock having
one vote per share and the Class B Stock having ten votes per share. However,
the Common Stock, voting separately as a class, is entitled to elect one-sixth
of the Board of Directors. With respect to dividend rights, the Common Stock is
entitled to cash dividends 10% higher than those declared and paid on the Class
B Stock.
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LIQUIDITY
Historically, the Corporation's major source of financing has been cash
generated from operations. The Corporation's income and, consequently, cash
provided from operations during the year are affected by seasonal sales
patterns, the timing of new product introductions, business acquisitions and
divestitures, and price increases. Chocolate, confectionery and grocery seasonal
and holiday-related sales have typically been highest during the third and
fourth quarters of the year, representing the principal seasonal effect.
Generally, seasonal working capital needs peak during the summer months and have
been met by issuing commercial paper.
Over the past three years, cash requirements for share repurchases, capital
expenditures, capitalized software additions, business acquisitions and dividend
payments exceeded cash provided from operating activities and proceeds from
business divestitures by $449.5 million. Total debt, including debt assumed,
increased during the period by $454.4 million. Cash and cash equivalents
increased by $6.7 million during the period.
The Corporation anticipates that capital expenditures will be in the range of
$150 million to $170 million per annum during the next several years as a result
of continued modernization of existing facilities and capacity expansion to
support new products and line extensions. As of December 31, 1998, the
Corporation's principal capital commitments included manufacturing capacity
expansion and modernization.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13, 1996,
to stockholders of record August 23, 1996. The split was effected as a stock
dividend by distributing one additional share for each share held. Unless
otherwise indicated, all shares and per share information have been restated to
reflect the stock split.
Under share repurchase programs which began in 1993, a total of 9,861,119
shares of Common Stock have been repurchased for approximately $287.5 million.
Of the shares repurchased, 528,000 shares were retired, 529,498 shares were
reissued to satisfy stock options obligations and the remaining 8,803,621 shares
were held as Treasury Stock as of December 31, 1998. Additionally, the
Corporation has purchased a total of 28,000,536 shares of its Common Stock to be
held as Treasury Stock from the Milton Hershey School Trust for $1.0 billion. As
of December 31, 1998, a total of 36,804,157 shares were held as Treasury Stock
and $112.5 million remained available for repurchases of Common Stock under a
program approved by the Corporation's Board of Directors in February 1996. In
February 1999, the Corporation purchased approximately 2.0 million shares,
completing the 1996 repurchase program. Also in February, the Corporation's
Board of Directors approved an additional share repurchase program authorizing
the repurchase of up to $230 million of the Corporation's Common Stock of which
$100.0 million was used to purchase approximately 1.6 million shares of Common
Stock from the Milton Hershey School Trust.
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under a Form S-3 Registration Statement which was declared effective in November
1993. Proceeds from the debt issuance were used to repay a portion of the
commercial paper borrowings associated with the Leaf acquisition.
In August 1997, the Corporation filed another Form S-3 Registration Statement
under which it could offer, on a delayed or continuous basis, up to $500 million
of additional debt securities. Also in August 1997, the Corporation issued $150
million of 6.95% Notes due 2012 and $250 million of 7.2% Debentures due 2027
under the November 1993 and August 1997 Registration Statements. Proceeds from
the debt issuance were used to repay a portion of the short-term borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust. As of December 31, 1998, $250 million of debt securities remained
available for issuance under the August 1997 Registration
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Statement. Proceeds from any offering of the $250 million of debt securities
available under the shelf registration may be used for general corporate
requirements which include reducing existing commercial paper borrowings,
financing capital additions, and funding future business acquisitions and
working capital requirements.
In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million with options to increase borrowings by $1.0 billion with the concurrence
of the banks. Lines of credit previously maintained by the Corporation were
significantly reduced when the credit facility agreements became effective. Of
the total committed credit facility, $200 million was for a renewable 364-day
term and $400 million was effective for a five-year term. In December 1998, the
short-term credit facility agreement was renewed for a total of $177 million.
The long-term committed credit facility agreement was amended and renewed in
December 1997 and will expire in December 2002. The credit facilities may be
used to fund general corporate requirements, to support commercial paper
borrowings and, in certain instances, to finance future business acquisitions.
The Corporation also had lines of credit with domestic and international
commercial banks of $23.0 million and $20.7 million as of December 31, 1998 and
1997, respectively.
Cash Flow Activities
Cash provided from operating activities totaled $1.4 billion during the past
three years. Over this period, cash used by or provided from accounts receivable
and inventories has tended to fluctuate as a result of sales during December and
inventory management practices. The change in cash required for or provided from
other assets and liabilities between the years was primarily related to
commodities transactions, the timing of payments for accrued liabilities,
including income taxes, and variations in the funding status of pension plans.
Investing activities included capital additions and business acquisitions and
divestitures. Capital additions during the past three years included the
purchase of manufacturing equipment, and expansion and modernization of existing
facilities. In 1996, the Leaf business was acquired, and the Gubor, Sperlari,
Planters and Life Savers businesses were sold. Cash used for the Leaf
acquisition represented the purchase price paid and consisted of the current
assets, property, plant and equipment, intangibles and other assets acquired,
net of liabilities assumed.
Financing activities included debt borrowings and repayments, payment of
dividends, the exercise of stock options, incentive plan transactions and the
repurchase of Common Stock. During the past three years, short-term borrowings
in the form of commercial paper or bank borrowings were used to fund seasonal
working capital requirements, business acquisitions, share repurchase programs
and purchases of Common Stock from the Milton Hershey School Trust. The proceeds
from the issuance of long-term debt were used to reduce short-term borrowings.
During the past three years, a total of 11,909,849 shares of Common Stock has
been repurchased for $589.9 million. Cash requirements for incentive plan
transactions were $103.2 million during the past three years, partially offset
by cash received from the exercise of stock options of $55.8 million.
ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
The Corporation utilizes certain derivative instruments, including interest
rate swaps, foreign currency forward exchange contracts and commodity futures
and options contracts, to manage interest rate, currency exchange rate and
commodity market price risk exposures. The interest rate swaps and foreign
currency contracts are entered into for periods consistent with related
underlying exposures and do not constitute positions independent of those
exposures. Commodity futures and options contracts are entered into for varying
periods and are intended and effective as hedges of anticipated
A-5
raw material purchases. The Corporation does not hold or issue derivative
instruments for trading purposes and is not a party to any instruments with
leverage or prepayment features. In entering into these contracts, the
Corporation has assumed the risk which might arise from the possible inability
of counterparties to meet the terms of their contracts. The Corporation does not
expect any losses as a result of counterparty defaults.
The information below summarizes the Corporation's market risks associated
with long-term debt and derivative instruments outstanding as of December 31,
1998. This information should be read in conjunction with Note 1, Note 5, Note
7, and Note 8 to the Consolidated Financial Statements.
Long-Term Debt
The table below presents the principal cash flows and related interest rates
by maturity date for long-term debt as of December 31, 1998. The fair value of
long-term debt was determined based upon quoted market prices for the same or
similar debt issues.
Maturity Date
-----------------------------------------------------
(In thousands of dollars except for rates)
There- Fair
1999 2000 2001 2002 2003 after Total Value
---- ------ ---- ---- ------- -------- -------- ----------
Long-term Debt $89 $2,203 $203 $194 $17,133 $859,370 $879,192 $1,002,275
Fixed Rate 2.0% 6.4% 2.0% 2.0% 4.4% 7.2% 7.1%
Interest Rate Swaps
In order to minimize its financing costs and to manage interest rate exposure,
the Corporation, from time to time, enters into interest rate swap agreements to
effectively convert a portion of its floating rate debt, principally commercial
paper borrowings or bank loans with an original maturity of three months or
less, to fixed rate debt. As of December 31, 1998 and 1997, the Corporation had
agreements outstanding with an aggregate notional amount of $75.0 million and
$150.0 million with maturities through September 1999 and September 1998,
respectively. As of December 31, 1998 and 1997, interest rates payable were at a
weighted average fixed rate of 6.3%. As of December 31, 1998 and 1997, interest
rates receivable of 5.2% and 5.7%, respectively, were based on 30-day commercial
paper composite rates. Any interest rate differential on interest rate swaps is
recognized as an adjustment to interest expense over the term of each agreement.
The Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at prevailing market rates. The potential loss in fair
value of interest rate swaps resulting from a hypothetical near-term adverse
change in market rates of ten percent was not material as of December 31, 1998
and 1997.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward contracts to hedge
transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies, and
to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments. In accordance with Statement
of Financial Accounting Standards No. 52 "Foreign Currency Translation," these
contracts meet the conditions for hedge accounting treatment and accordingly,
gains and losses are deferred and accounted for as part of the underlying
transactions. Gains and losses on terminated derivatives designated as hedges
are accounted for as part of the originally hedged transaction. Gains and losses
on derivatives designated as hedges of items which mature, are sold or
terminated, are recorded currently in income.
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As of December 31, 1998, the Corporation had foreign exchange forward
contracts maturing in 1999 and 2000 to purchase $10.5 million in foreign
currency, primarily British sterling and Dutch gilders, and to sell $9.6 million
in Japanese yen at contracted forward rates.
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
The fair value of foreign exchange forward contracts was estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences. As of December 31, 1998 and 1997, the fair
value of foreign exchange forward contracts approximated the contract value. The
potential loss in fair value of foreign exchange forward contracts resulting
from a hypothetical near-term adverse change in market rates of ten percent was
not material as of December 31, 1998 and 1997.
Foreign Exchange Options
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished goods
generally covering 3 to 24 months, the Corporation, from time to time, also
purchases foreign exchange options which permit, but do not require, the
Corporation to exchange foreign currencies at a future date with another party
at a contracted exchange rate. Foreign exchange options are intended and
effective as hedges of anticipated transactions. Accordingly, gains and losses
are deferred and accounted for as part of the underlying transactions. Gains and
losses on options designated as hedges of anticipated transactions which are no
longer likely to occur are recorded currently in income.
As of December 31, 1998, no foreign exchange options were outstanding. As of
December 31, 1997, the Corporation had purchased foreign exchange options of
$3.6 million maturing in 1998, related to Swiss francs. The fair value of
foreign exchange options is estimated using active market quotations. As of
December 31, 1997, the fair value of foreign exchange options approximated the
contract value. The potential loss in fair value of foreign exchange options
contracts resulting from a hypothetical near-term adverse change in market rates
of ten percent was not material as of December 31, 1997.
Commodity Price Risk Management
The Corporation's most significant raw materials include cocoa, sugar, milk,
peanuts and almonds. The Corporation attempts to minimize the effect of future
price fluctuations related to the purchase of these raw materials primarily
through forward purchasing to cover future manufacturing requirements, generally
for periods from 3 to 24 months. With regard to cocoa, sugar, corn sweeteners,
natural gas and certain dairy products, price risks are also managed by entering
into futures and options contracts. At the present time, active futures and
options contracts are not available for use in pricing the Corporation's other
major raw materials. Futures contracts are used in combination with forward
purchasing of cocoa, sugar, corn sweetener, natural gas and certain dairy
product requirements principally to take advantage of market fluctuations which
provide more favorable pricing opportunities and to increase diversity or
flexibility in sourcing these raw materials and energy requirements. The
Corporation's commodity procurement practices are intended to reduce the risk of
future price increases, but also may potentially limit the ability to benefit
from possible price decreases.
The cost of cocoa beans and the prices for the related commodity futures
contracts historically have been subject to wide fluctuations attributable to a
variety of factors, including the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates and speculative
influences. Cocoa prices have risen since 1992 due to demand exceeding
production. Recently, prices have declined somewhat as the economic difficulties
in eastern Europe, particularly
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Russia and Southeast Asia, have negatively impacted demand. During 1999, these
negative demand influences could continue to keep cocoa futures prices
contained. The Corporation's costs during 1999 will not necessarily reflect
market price fluctuations because of its forward purchasing practices, premiums
and discounts reflective of relative values, varying delivery times, and supply
and demand for specific varieties and grades of cocoa beans.
Commodities Futures and Options Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural
gas and certain dairy products for anticipated manufacturing requirements, the
Corporation enters into commodities futures and options contracts as deemed
appropriate to reduce the effect of price fluctuations. In accordance with
Statement of Financial Accounting Standards No. 80 "Accounting for Futures
Contracts," these futures and options contracts meet the hedge criteria and are
accounted for as hedges. Accordingly, gains and losses are deferred and
recognized in cost of sales as part of the product cost. Gains and losses on
futures and options designated as hedges of anticipated purchases which are no
longer likely to occur are recorded currently in income.
Exchange traded futures contracts are used to fix the price of physical
forward purchase contracts. Cash transfers reflecting changes in the value of
futures contracts are made on a daily basis and are included in other current
assets or accrued liabilities on the consolidated balance sheets. Such cash
transfers will be offset by higher or lower cash requirements for payment of
invoice prices of raw materials and energy requirements in the future. Futures
being held in excess of the amount required to fix the price of unpriced
physical forward contracts are effective as hedges of anticipated purchases.
The following sensitivity analysis reflects the market risk of the Corporation
to a hypothetical adverse market price movement of ten percent, based on the
Corporation's net commodity positions at four dates spaced equally throughout
the year. The Corporation's net commodity positions consist of the excess of
futures contracts held over unpriced physical forward contracts for the same
commodities, relating to cocoa, sugar, corn sweeteners and natural gas.
Inventories, priced forward contracts and estimated anticipated purchases not
yet contracted for were not included in the sensitivity analysis calculations. A
loss is defined, for purposes of determining market risk, as the potential
decrease in fair value or the opportunity cost resulting from the hypothetical
adverse price movement. The fair values of net commodity positions were based
upon quoted market prices or estimated future prices including estimated
carrying costs corresponding with the future delivery period.
For the years ended
December 31, 1998 1997
---------------------------------------------------------------------------
In millions of dollars Market Risk Market Risk
(Hypothetical (Hypothetical
Fair Value 10% Change) Fair Value 10% Change)
-------------------------------------------------
Highest long position $134.9 $13.5 $210.8 $21.1
Lowest long position 45.6 4.6 39.6 4.0
Average position (long) 76.3 7.6 96.2 9.6
Sensitivity analysis disclosures represent forward-looking statements which
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those presently anticipated or projected. The
important factors that could affect the sensitivity analysis disclosures include
significant increases or decreases in market prices reflecting fluctuations
attributable to the effect of weather on crop yield, other imbalances between
supply and demand, currency exchange rates, political unrest in producing
countries and speculative influences in addition to changes in the Corporation's
hedging strategies.
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MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$129.0 million in 1998 and $121.5 million in 1997. The annual dividend rate on
the Common Stock was $.96 per share, an increase of 9% over the 1997 rate of
$.88 per share. The 1998 dividend represented the 24th consecutive year of
Common Stock dividend increases.
On February 10, 1999, the Corporation's Board of Directors declared a
quarterly dividend of $.24 per share of Common Stock payable on March 15, 1999,
to stockholders of record as of February 24, 1999. It is the Corporation's 277th
consecutive Common Stock dividend. A quarterly dividend of $.2175 per share of
Class B Stock also was declared.
Hershey Foods Corporation's Common Stock is listed and traded principally on
the New York Stock Exchange (NYSE) under the ticker symbol "HSY." Approximately
79.0 million shares of the Corporation's Common Stock were traded during 1998.
The Class B Stock is not publicly traded.
The closing price of the Common Stock on December 31, 1998, was $62 3/16.
There were 44,364 stockholders of record of the Common Stock and the Class B
Stock as of December 31, 1998.
The following table shows the dividends paid per share of Common Stock and
Class B Stock and the price range of the Common Stock for each quarter of the
past two years:
Dividends Paid Common Stock
Per Share Price Range*
-------------- -------------------
Common Class B
Stock Stock High Low
------ ------- --------- ---------
1998
1st Quarter $ .22 $ .2000 $73 3/8 $59 11/16
2nd Quarter .22 .2000 76 3/8 67 3/16
3rd Quarter .24 .2175 72 5/16 60 1/2
4th Quarter .24 .2175 75 13/16 60 3/4
----- -------
Total $ .92 $ .8350
===== =======
1997
1st Quarter $ .20 $ .1800 $52 7/8 $42 1/8
2nd Quarter .20 .1800 58 5/8 48 3/8
3rd Quarter .22 .2000 59 15/16 51 7/8
4th Quarter .22 .2000 63 7/8 50 5/8
----- -------
Total $ .84 $ .7600
===== =======
- --------
*NYSE-Composite Quotations for Common Stock by calendar quarter.
RETURN MEASURES
Operating Return on Average Stockholders' Equity
The Corporation's operating return on average stockholders' equity was 36.0%
in 1998. Over the most recent five-year period, the return has ranged from 18.5%
in 1994 to 36.0% in 1998. For the purpose of calculating operating return on
average stockholders' equity, earnings is defined as net income, excluding the
after-tax restructuring activities in 1994 and 1995, and the after-tax loss on
the disposal of businesses in 1996.
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Operating Return on Average Invested Capital
The Corporation's operating return on average invested capital was 17.4% in
1998. Over the most recent five-year period, the return has ranged from 15.6% in
1994 to 17.8% in 1996. Average invested capital consists of the annual average
of beginning and ending balances of long-term debt, deferred income taxes and
stockholders' equity. For the purpose of calculating operating return on average
invested capital, earnings is defined as net income, excluding the after-tax
restructuring activities in 1994 and 1995, the after-tax loss on disposal of
businesses in 1996, and the after-tax effect of interest on long-term debt.
YEAR 2000 ISSUES
Year 2000 issues associated with information systems relate to the way dates
are recorded and computed in many computer systems. These year 2000 issues could
have an impact upon the Corporation's information technology (IT) and non-IT
systems. Non-IT systems include embedded technology such as microcontrollers
which are integral to the operation of most machinery and equipment.
Additionally, year 2000 issues could have a similar impact on the Corporation's
major business partners, including both customers and suppliers. While it is not
currently possible to estimate the total impact of a failure of either the
Corporation or its major business partners or suppliers to complete their year
2000 remediation in a timely manner, the Corporation has determined that it
could suffer significant adverse financial consequences as a result of such
failure.
Awareness and assessment of year 2000 issues regarding major business
applications software and other significant IT systems began in 1990. A formal
program to address year 2000 issues associated with IT systems was established
in late 1995. In early 1998, a team was established with representatives from
all major functional areas of the Corporation which assumed overall
responsibility for ensuring that remediation of both IT and non-IT systems will
be completed in time to prevent material adverse consequences to the
Corporation's business, operations or financial condition. The Corporation
expects that remediation of these systems will be essentially completed by the
third quarter of 1999.
In late 1996, the Corporation approved a project to implement an enterprise-
wide integrated information system to improve process efficiencies in all of the
major functional areas of the Corporation, enabling the Corporation to provide
better service to its customers. This system will replace most of the
transaction systems and applications supporting operations of the Corporation.
In addition to improving efficiency and customer service, another benefit of
this system is that it is year 2000 compliant and will address year 2000 issues
for approximately 80% of the Corporation's business applications software. As of
December 31, 1998, approximately $62.1 million of capitalized software and
hardware and $6.9 million of expenses have been incurred for this project. As of
December 31, 1998, spending for implementation of this system was approximately
65% complete, with full implementation expected by the third quarter of 1999.
Total commitments for this system and subsequently identified enhancements are
expected to be approximately $110 million which will be financed with cash
provided from operations and short-term borrowings.
The Corporation's mainframe, network and desktop hardware and software have
recently been upgraded and are substantially year 2000 compliant. The
Corporation is in the process of remediating year 2000 compliance issues
associated with legacy information systems not being replaced by the integrated
information system project, including process automation and factory management
systems. During late 1998, the Corporation undertook an extensive review of its
year 2000 remediation program. As a result of this review, the Corporation has
undertaken additional testing to confirm its year 2000 compliance, but is
otherwise maintaining its current program of remediation. As of December 31,
1998, remediation of both IT and non-IT systems was approximately 60% complete,
reflecting the latest estimate of testing and work requirements to be performed.
The total cost of remediation of IT and non-IT systems is expected to be in the
range of $6.0 million to $8.0 million.
A-10
The Corporation is also in the process of assessing year 2000 remediation
issues relating to its major business partners. All of the Corporation's major
customers have been contacted regarding year 2000 issues related to electronic
data interchange. The Corporation is also in the process of contacting its major
suppliers of ingredients, packaging, facilities, logistics and financial
services with regard to year 2000 issues. Because of the uncertainties
associated with assessing the ability of major business partners to complete the
remediation of their systems in time to prevent operational difficulties, the
Corporation will continue to contact and/or visit major customers and suppliers
to gain assurances that no significant adverse consequences will result due to
their failure to complete remediation of their systems.
Year 2000 remediation, conversion, validation and implementation is continuing
and, at the present time, it is expected that remediation to both the
Corporation's IT and non-IT systems and those of major business partners will be
completed in time to prevent material adverse consequences to the Corporation's
business, operations or financial condition. However, contingency plans are
being developed, including possible increases in raw material and finished goods
inventory levels, and the identification of alternate vendors and suppliers.
Additional contingency plans, to the extent feasible, will be developed for any
potential failures resulting from year 2000 issues.
FORWARD LOOKING INFORMATION
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Many of the forward- looking
statements contained in this document may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential" among others. Factors which could cause
results to differ include, but are not limited to: changes in the confectionery
and grocery business environment, including actions of competitors and changes
in consumer preferences; changes in governmental laws and regulations, including
income taxes; market demand for new and existing products; and raw material
pricing.
Based upon preliminary information, potential financial results for the first
quarter of 1999 may not compare favorably to the prior year's first quarter. Net
sales are expected to be lower than in the prior year primarily reflecting the
divestiture of the Corporation's pasta business in January 1999. Additionally,
the timing of sales for seasonal and promoted items may result in lower
confectionery and grocery sales compared to the first quarter of 1998. The
divestiture of the Corporation's pasta business, higher amortization of
capitalized software associated with the enterprise-wide integrated information
system and an emphasis on expanding the distribution of the Corporation's
products in new international markets will make the earnings comparison more
difficult, considering a very strong first quarter of 1998.
A-11
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
In thousands of dollars except per share amounts
Net Sales $ 4,435,615 $ 4,302,236 $ 3,989,308
----------- ----------- -----------
Costs and Expenses:
Cost of sales 2,625,057 2,488,896 2,302,089
Selling, marketing and administrative 1,167,895 1,183,130 1,124,087
Loss on disposal of businesses -- -- 35,352
----------- ----------- -----------
Total costs and expenses 3,792,952 3,672,026 3,461,528
----------- ----------- -----------
Income before Interest and Income Taxes 642,663 630,210 527,780
Interest expense, net 85,657 76,255 48,043
----------- ----------- -----------
Income before Income Taxes 557,006 553,955 479,737
Provision for income taxes 216,118 217,704 206,551
----------- ----------- -----------
Net Income $ 340,888 $ 336,251 $ 273,186
=========== =========== ===========
Net Income Per Share--Basic $ 2.38 $ 2.25 $ 1.77
=========== =========== ===========
Net Income Per Share--Diluted $ 2.34 $ 2.23 $ 1.75
=========== =========== ===========
Cash Dividends Paid Per Share:
Common Stock $ .920 $ .840 $ .760
Class B Common Stock .835 .760 .685
The notes to consolidated financial statements are an integral part of these
statements.
A-12
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
- ------------------------------------------------------------------------------
In thousands of dollars
ASSETS
Current Assets:
Cash and cash equivalents $ 39,024 $ 54,237
Accounts receivable--trade 451,324 360,831
Inventories 493,249 505,525
Deferred income taxes 58,505 84,024
Prepaid expenses and other 91,864 30,197
----------- -----------
Total current assets 1,133,966 1,034,814
Property, Plant and Equipment, Net 1,648,058 1,648,237
Intangibles Resulting from Business Acquisitions 530,464 551,849
Other Assets 91,610 56,336
----------- -----------
Total assets $ 3,404,098 $ 3,291,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 156,937 $ 146,932
Accrued liabilities 294,415 371,545
Accrued income taxes 17,475 19,692
Short-term debt 345,908 232,451
Current portion of long-term debt 89 25,095
----------- -----------
Total current liabilities 814,824 795,715
Long-term Debt 879,103 1,029,136
Other Long-term Liabilities 346,769 346,500
Deferred Income Taxes 321,101 267,079
----------- -----------
Total liabilities 2,361,797 2,438,430
----------- -----------
Stockholders' Equity:
Preferred Stock, shares issued: none in 1998 and
1997 -- --
Common Stock, shares issued: 149,502,964 in 1998
and 149,484,964 in 1997 149,503 149,485
Class B Common Stock, shares issued: 30,447,908 in
1998 and 30,465,908 in 1997 30,447 30,465
Additional paid-in capital 29,995 33,852
Unearned ESOP compensation (25,548) (28,741)
Retained earnings 2,189,693 1,977,849
Treasury--Common Stock shares, at cost: 36,804,157
in 1998 and 37,018,566 in 1997 (1,267,422) (1,267,861)
Accumulated other comprehensive loss (64,367) (42,243)
----------- -----------
Total stockholders' equity 1,042,301 852,806
----------- -----------
Total liabilities and stockholders' equity $ 3,404,098 $ 3,291,236
=========== ===========
The notes to consolidated financial statements are an integral part of these
balance sheets.
A-13
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
In thousands of dollars
Cash Flows Provided from (Used by)
Operating Activities
Net income $ 340,888 $ 336,251 $ 273,186
Adjustments to reconcile net income to net
cash provided from operations:
Depreciation and amortization 158,161 152,750 133,476
Deferred income taxes 82,241 16,915 22,863
Loss on disposal of businesses -- -- 35,352
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade (90,493) (68,479) 5,159
Inventories 12,276 (33,538) (41,038)
Accounts payable 10,005 12,967 14,032
Other assets and liabilities (124,118) 85,074 15,120
Other, net 745 4,018 5,593
--------- --------- ---------
Net Cash Provided from Operating Activities 389,705 505,958 463,743
--------- --------- ---------
Cash Flows Provided from (Used by)
Investing Activities
Capital additions (161,328) (172,939) (159,433)
Capitalized software additions (42,859) (29,100) --
Business acquisitions -- -- (437,195)
Proceeds from divestitures -- -- 149,222
Other, net 9,284 21,368 9,333
--------- --------- ---------
Net Cash (Used by) Investing Activities (194,903) (180,671) (438,073)
--------- --------- ---------
Cash Flows Provided from (Used by)
Financing Activities
Net change in short-term borrowings partially
classified as long-term debt (36,543) (217,018) 210,929
Long-term borrowings -- 550,000 --
Repayment of long-term debt (25,187) (15,588) (3,103)
Cash dividends paid (129,044) (121,546) (114,763)
Exercise of stock options 19,368 14,397 22,049
Incentive plan transactions (22,458) (35,063) (45,634)
Repurchase of Common Stock (16,151) (507,654) (66,072)
--------- --------- ---------
Net Cash (Used by) Provided from Financing
Activities (210,015) (332,472) 3,406
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (15,213) (7,185) 29,076
Cash and Cash Equivalents as of January 1 54,237 61,422 32,346
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 39,024 $ 54,237 $ 61,422
========= ========= =========
Interest Paid $ 89,001 $ 64,937 $ 52,143
Income Taxes Paid 123,970 181,377 180,347
The notes to consolidated financial statements are an integral part of these
statements.
A-14
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Class B Additional Unearned Treasury Other Total
Preferred Common Common Paid-in ESOP Retained Common Comprehensive Stockholders'
Stock Stock Stock Capital Compensation Earnings Stock Loss Equity
- ---------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars
Balance as of
January 1, 1996 $-- $ 74,734 $15,241 $47,732 $(35,128) $1,694,696 $ (685,076) $(29,240) $ 1,082,959
-----------
Comprehensive
income (loss)
Net income 273,186 273,186
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (3,635) (3,635)
-----------
Comprehensive
income 269,551
Dividends:
Common Stock,
$.76 per share (93,884) (93,884)
Class B Common
Stock, $.685
per share (20,879) (20,879)
Two-for-one
stock split 74,736 15,239 (89,975) --
Conversion of
Class B Common
Stock into
Common Stock 2 (2) --
Incentive plan
transactions (426) (426)
Exercise of
stock options (5,391) (8,547) (13,938)
Employee stock
ownership trust
transactions 517 3,193 3,710
Repurchase of
Common Stock (66,072) (66,072)
---- -------- ------- ------- -------- ---------- ----------- -------- -----------
Balance as of
December 31,
1996 -- 149,472 30,478 42,432 (31,935) 1,763,144 (759,695) (32,875) 1,161,021
-----------
Comprehensive
income (loss)
Net income 336,251 336,251
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (9,368) (9,368)
-----------
Comprehensive
income 326,883
Dividends:
Common Stock,
$.84 per share (98,390) (98,390)
Class B Common
Stock, $.76 per
share (23,156) (23,156)
Conversion of
Class B Common
Stock into
Common Stock 13 (13) --
Incentive plan
transactions (879) (879)
Exercise of
stock options (8,200) (512) (8,712)
Employee stock
ownership trust
transactions 499 3,194 3,693
Repurchase of
Common Stock (507,654) (507,654)
---- -------- ------- ------- -------- ---------- ----------- -------- -----------
Balance as of
December 31,
1997 -- 149,485 30,465 33,852 (28,741) 1,977,849 (1,267,861) (42,243) 852,806
-----------
Comprehensive
income (loss)
Net income 340,888 340,888
Other
comprehensive
income (loss):
Foreign currency
translation
adjustments (18,073) (18,073)
Minimum pension
liability
adjustments, net
of tax benefit (4,051) (4,051)
-----------
Comprehensive
income 318,764
Dividends:
Common Stock,
$.92 per share (103,616) (103,616)
Class B Common
Stock, $.835
per share (25,428) (25,428)
Conversion of
Class B Common
Stock into
Common Stock 18 (18) --
Incentive Plan
transactions (985) (985)
Exercise of
stock options (3,375) 16,590 13,215
Employee stock
ownership trust
transactions 503 3,193 3,696
Repurchase of
Common Stock (16,151) (16,151)
---- -------- ------- ------- -------- ---------- ----------- -------- -----------
Balance as of
December 31,
1998 $-- $149,503 $30,447 $29,995 $(25,548) $2,189,693 $(1,267,422) $(64,367) $ 1,042,301
==== ======== ======= ======= ======== ========== =========== ======== ===========
The notes to consolidated financial statements are an integral part of these
statements.
A-15
HERSHEY FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies employed by the Corporation are discussed
below and in other notes to the consolidated financial statements. Certain
reclassifications have been made to prior year amounts to conform to the 1998
presentation. Unless otherwise indicated, all shares and per share information
have been restated for the two-for-one stock split effective September 13, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries after elimination of intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates, particularly for accounts
receivable and certain current and long-term liabilities.
Cash Equivalents
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
Commodities Futures and Options Contracts
In connection with the purchasing of cocoa, sugar, corn sweeteners, natural
gas and certain dairy products for anticipated manufacturing requirements, the
Corporation enters into commodities futures and options contracts as deemed
appropriate to reduce the effect of price fluctuations. In accordance with
Statement of Financial Accounting Standards No. 80 "Accounting for Futures
Contracts," these futures and options contracts meet the hedge criteria and are
accounted for as hedges. Accordingly, gains and losses are deferred and
recognized in cost of sales as part of the product cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment is computed using the straight-line method over the
estimated useful lives.
Intangibles Resulting from Business Acquisitions
Intangible assets resulting from business acquisitions principally consist of
the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill was $508.0 million and $527.6 million
as of December 31, 1998 and 1997, respectively. Goodwill is amortized on a
straight-line basis over 40 years. Other intangible assets are amortized on a
straight-line basis over the estimated useful lives. The Corporation
periodically evaluates whether events or circumstances have occurred indicating
that the carrying amount of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Corporation uses an estimate of the acquired business' undiscounted future cash
flows compared to the related carrying amount of net assets, including goodwill,
to determine if an impairment loss should be recognized.
A-16
Accumulated amortization of intangible assets resulting from business
acquisitions was $132.3 million and $116.5 million as of December 31, 1998 and
1997, respectively.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No.
130 is effective for the Corporation's 1998 financial statements.
Results of operations for foreign entities are translated using the average
exchange rates during the period. For foreign entities, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the balance
sheet date. Resulting translation adjustments are recorded as a component of
other comprehensive income (loss), "Foreign Currency Translation Adjustments."
A minimum pension liability adjustment is required when the actuarial present
value of accumulated pension plan benefits exceeds plan assets and accrued
pension liabilities, less allowable intangible assets. Minimum pension liability
adjustments, net of income taxes, are recorded as a component of other
comprehensive income (loss), "Minimum Pension Liability Adjustments."
Comprehensive income (loss) is reported on the Consolidated Statements of
Stockholders' Equity and accumulated other comprehensive (loss) is reported on
the Consolidated Balance Sheets.
Foreign Exchange Contracts
The Corporation enters into foreign exchange forward and options contracts to
hedge transactions primarily related to firm commitments to purchase equipment,
certain raw materials and finished goods denominated in foreign currencies, and
to hedge payment of intercompany transactions with its non-domestic
subsidiaries. These contracts reduce currency risk from exchange rate movements.
Foreign exchange forward contracts are intended and effective as hedges of
firm, identifiable, foreign currency commitments and foreign exchange options
contracts meet required hedge criteria for anticipated transactions.
Accordingly, gains and losses are deferred and accounted for as part of the
underlying transactions. Gains and losses on terminated derivatives designated
as hedges are accounted for as part of the originally hedged transaction. Gains
and losses on derivatives designated as hedges of items which mature, are sold
or terminated, or of anticipated transactions which are no longer likely to
occur, are recorded currently in income. In entering into these contracts the
Corporation has assumed the risk which might arise from the possible inability
of counterparties to meet the terms of their contracts. The Corporation does not
expect any losses as a result of counterparty defaults.
License Agreements
The Corporation has entered into license agreements under which it has access
to certain trademarks and proprietary technology, and manufactures and/or
markets and distributes certain products. The rights under these agreements are
extendible on a long-term basis at the Corporation's option subject to certain
conditions, including minimum sales levels, which the Corporation has met.
License fees and royalties, payable under the terms of the agreements, are
expensed as incurred.
A-17
Research and Development
The Corporation expenses research and development costs as incurred. Research
and development expense was $28.6 million, $27.5 million and $26.1 million in
1998, 1997 and 1996, respectively.
Advertising
The Corporation expenses advertising costs as incurred. Advertising expense
was $187.5 million, $202.4 million and $174.2 million in 1998, 1997 and 1996,
respectively. Prepaid advertising as of December 31, 1998 and 1997, was $12.1
million and $2.0 million, respectively.
Computer Software
In 1997, the Corporation began capitalizing certain costs of computer software
developed or obtained for internal use. The amount capitalized as of December
31, 1998 and 1997, was $69.3 million and $29.1 million, respectively. If such
costs were capitalized in prior years, the effect would not have been material.
Software assets are classified as other non-current assets and are amortized
over periods up to five years. Accumulated amortization of capitalized software
was $2.8 million and $.2 million as of December 31, 1998 and 1997, respectively.
2. ACQUISITION AND DIVESTITURES
In December 1996, the Corporation acquired from an affiliate of Huhtamaki Oy
(Huhtamaki), the international foods company based in Finland, Huhtamaki's Leaf
North America (Leaf) confectionery operations for $437.2 million, plus the
assumption of $17.0 million in debt. In addition, the parties entered into a
trademark and technology license agreement under which the Corporation will
manufacture and/or market and distribute in North, Central and South America
Huhtamaki's confectionery brands including GOOD & PLENTY, HEATH, JOLLY RANCHER,
MILK DUDS, PAYDAY and WHOPPERS. Leaf's principal manufacturing facilities are
located in Denver, Colorado; Memphis, Tennessee; and Robinson, Illinois.
In accordance with the purchase method of accounting, the purchase price of
the Leaf acquisition was allocated on a preliminary basis to the underlying
assets and liabilities at the date of acquisition based on their estimated
respective fair values, which were revised and finalized by the anniversary date
of the acquisition. Total liabilities assumed, including debt, were $138.0
million in 1996. Results subsequent to the date of the acquisition are included
in the consolidated financial statements.
Had the acquisition of Leaf occurred at the beginning of 1996, pro forma
consolidated results would have been as follows:
For the year ended December 31, 1996
--------------------------------------------------------------
In thousands of dollars except per share amounts (unaudited)
Net sales $4,473,950
Net income 234,000
Net income per share--Basic 1.52
Net income per share--Diluted 1.50
The pro forma results are based on historical financial information provided
by Huhtamaki, including a business restructuring charge recorded by Huhtamaki
in 1996, and adjusted to give effect to certain costs and expenses, including
fees under the trademark and technology license agreement, goodwill
amortization, interest expense and income taxes which would have been incurred
by the Corporation if it had owned and operated the Leaf confectionery
business throughout 1996. These
A-18
results are not necessarily reflective of the actual results which would have
occurred if the acquisition had been completed at the beginning of the year, nor
are they necessarily indicative of future combined financial results.
In December 1998, the Corporation announced that it had signed a definitive
agreement providing for the sale of a 94% majority interest of its U.S. pasta
business to New World Pasta, LLC. The transaction was completed in January 1999,
and included the AMERICAN BEAUTY, IDEAL BY SAN GIORGIO, LIGHT 'N FLUFFY, MRS.
WEISS, P&R, RONZONI, SAN GIORGIO and SKINNER pasta brands, along with six
manufacturing plants. In the first quarter of 1999, the Corporation received
cash proceeds of $450.0 million, retained a 6% minority interest and recorded an
after-tax gain of approximately $165.0 million or $1.13 per share--diluted as a
result of the transaction. Net sales for the pasta business were $373.1 million,
$386.2 million and $407.4 million for 1998, 1997 and 1996, respectively. Net
income for the pasta business was $25.9 million, $25.2 million and $18.7 million
for 1998, 1997 and 1996, respectively.
In December 1996, the Corporation completed the sale to Huhtamaki of the
outstanding shares of Gubor Holding GmbH (Gubor) and Sperlari S.r.l. (Sperlari).
Gubor manufactures and markets high-quality assorted pralines and seasonal
chocolate products in Germany and Sperlari manufactures and markets various
confectionery and grocery products in Italy. The total proceeds from the sale of
the Gubor and Sperlari businesses were $121.7 million. The transaction resulted
in an after-tax loss of $35.4 million since no tax benefit associated with the
transaction was recorded. Combined net sales for Gubor and Sperlari were $216.6
million in 1996. The sale of Gubor and Sperlari allowed the Corporation to place
additional focus on its North American markets and improve financial returns.
In January 1996, the Corporation completed the sale of the assets of Hershey
Canada, Inc.'s PLANTERS nut (Planters) business to Johnvince Foods Group and the
LIFE SAVERS and BREATH SAVERS hard candy and BEECH-NUT cough drops (Life Savers)
business to Beta Brands Inc. Both transactions were part of a restructuring
program announced by the Corporation in late 1994.
3. RENTAL AND LEASE COMMITMENTS
Rent expense was $39.6 million, $31.8 million and $25.3 million for 1998, 1997
and 1996, respectively. Rent expense pertains to all operating leases, which
were principally related to certain administrative buildings, distribution
facilities and transportation equipment. Future minimum rental payments under
non-cancelable operating leases with a remaining term in excess of one year as
of December 31, 1998, were: 1999, $13.3 million; 2000, $13.0 million; 2001,
$12.7 million; 2002, $12.2 million; 2003, $9.3 million; 2004 and beyond, $46.8
million.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be implemented as of the beginning of any fiscal quarter after
issuance. Retroactive application is not permitted. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded
A-19
in hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997. Changes in accounting methods will be required for derivative
instruments utilized by the Corporation to hedge commodity price, foreign
currency exchange rate and interest rate risks. Such derivatives include
commodity futures and options contracts, foreign exchange forward and options
contracts and interest rate swaps.
The Corporation anticipates the adoption of SFAS No. 133 as of January 1,
2000. As of December 31, 1998, net deferred losses on derivatives of
approximately $16.5 million after tax would have been reported as a component of
other comprehensive loss and classified as accumulated other comprehensive loss
on the consolidated balance sheets upon adoption of SFAS No. 133.
5. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value as of December 31, 1998 and 1997, because of the
relatively short maturity of these instruments. The carrying value of long-term
debt, including the current portion, was $879.2 million as of December 31, 1998,
compared to a fair value of $1.0 billion based on quoted market prices for the
same or similar debt issues. The carrying value of long-term debt, including the
current portion, was $904.2 million as of December 31, 1997, compared to a fair
value of $961.0 million.
As of December 31, 1998, the Corporation had foreign exchange forward
contracts maturing in 1999 and 2000 to purchase $10.5 million in foreign
currency, primarily British sterling and Dutch gilders, and to sell $9.6 million
in Japanese yen at contracted forward rates.
As of December 31, 1997, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $19.2 million in foreign
currency, primarily British sterling, and to sell $16.7 million in foreign
currency, primarily Japanese yen and Canadian dollars, at contracted forward
rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished goods
generally covering 3 to 24 months, the Corporation, from time to time, also
purchases foreign exchange options which permit, but do not require, the
Corporation to exchange foreign currencies at a future date with another party
at a contracted exchange rate. No options were outstanding as of December 31,
1998. As of December 31, 1997, the Corporation had purchased foreign exchange
options of $3.6 million, related to Swiss francs.
The fair value of foreign exchange forward contracts is estimated by obtaining
quotes for future contracts with similar terms, adjusted where necessary for
maturity differences, and the fair value of foreign exchange options is
estimated using active market quotations. As of December 31, 1998 and 1997, the
fair value of foreign exchange forward and options contracts approximated the
contract value. The Corporation does not hold or issue financial instruments for
trading purposes.
In order to minimize its financing costs and to manage interest rate exposure,
the Corporation, from time to time, enters into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1998 and 1997, the Corporation had agreements outstanding with
an aggregate notional amount of $75.0 million and $150.0 million with maturities
through September 1999 and September 1998, respectively. As of December 31, 1998
and 1997, interest rates payable were at a weighted average fixed rate of 6.3%.
As of December 31, 1998 and 1997, interest rates receivable of 5.2% and 5.7%,
respectively, were based on 30-day commercial paper composite rates. Any
interest rate differential on interest rate swaps is recognized as an adjustment
to interest expense over the term of each agreement. The Corporation's risk
related to swap agreements is limited to the cost of replacing such agreements
at prevailing market rates.
A-20
6. INTEREST EXPENSE
Interest expense, net consisted of the following:
For the years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
In thousands of dollars
Long-term debt and lease obligations $67,538 $48,737 $30,818
Short-term debt 23,657 32,284 22,752
Capitalized interest (2,547) (1,883) (1,534)
------- ------- -------
Interest expense, gross 88,648 79,138 52,036
Interest income (2,991) (2,883) (3,993)
------- ------- -------
Interest expense, net $85,657 $76,255 $48,043
======= ======= =======
7. SHORT-TERM DEBT
Generally, the Corporation's short-term borrowings are in the form of
commercial paper or bank loans with an original maturity of three months or
less. In December 1995, the Corporation entered into committed credit facility
agreements with a syndicate of banks under which it could borrow up to $600
million, with options to increase borrowings by $1.0 billion with the
concurrence of the banks. Of the total committed credit facility, $200 million
was for a renewable 364-day term and $400 million was effective for a five-year
term. In December 1998, the short-term credit facility agreement was renewed for
a total of $177 million. The long-term credit facility agreement was amended and
renewed in December 1997 and will expire in December 2002. The credit facilities
may be used to fund general corporate requirements, to support commercial paper
borrowings and, in certain instances, to finance future business acquisitions.
As of December 31, 1997, $150.0 million of commercial paper borrowings were
reclassified as long-term debt in accordance with the Corporation's intent and
ability to refinance such obligations on a long-term basis. A similar
reclassification was not recorded as of December 31, 1998, because the
Corporation intends to reduce commercial paper borrowings during 1999.
The Corporation also maintains lines of credit arrangements with domestic and
international commercial banks, under which it could borrow in various
currencies up to approximately $23.0 million and $20.7 million as of December
31, 1998 and 1997, respectively, at the lending banks' prime commercial interest
rates or lower. The Corporation had combined domestic commercial paper
borrowings, including the portion classified as long-term debt as of December
31, 1997, and short-term foreign bank loans against its credit facilities and
lines of credit of $345.9 million as of December 31, 1998, and $382.5 million as
of December 31, 1997. The weighted average interest rates on short-term
borrowings outstanding as of December 31, 1998 and 1997, were 5.2% and 5.7%,
respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee during 1998 was less than .1% per annum of the
commitment. The Corporation's credit facility agreements contain a financial
covenant which requires that a specified interest and fixed charge ratio be
maintained. These agreements are also subject to other representations and
covenants which do not materially restrict the Corporation's activities. The
Corporation is in compliance with all covenants included in the credit facility
agreements. There were no significant compensating balance agreements which
legally restricted these funds.
As a result of maintaining a consolidated cash management system, the
Corporation maintains overdraft positions at certain banks. Such overdrafts,
which were included in accounts payable, were $57.0 million and $30.7 million as
of December 31, 1998 and 1997, respectively.
A-21
8. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31, 1998 1997
- -----------------------------------------------------------------------------
In thousands of dollars
Commercial Paper at interest rates ranging from 5.64% to
6.55% $ -- $ 150,000
Medium-term Notes, 8.875% due 1998 -- 25,000
6.7% Notes due 2005 200,000 200,000
6.95% Notes due 2007 150,000 150,000
6.95% Notes due 2012 150,000 150,000
8.8% Debentures due 2021 100,000 100,000
7.2% Debentures due 2027 250,000 250,000
Other obligations, net of unamortized debt discount 29,192 29,231
-------- ----------
Total long-term debt 879,192 1,054,231
Less--current portion 89 25,095
-------- ----------
Long-term portion $879,103 $1,029,136
======== ==========
As of December 31, 1997, $150.0 million of commercial paper borrowings were
reclassified as long-term debt. A similar reclassification was not recorded as
of December 31, 1998, because the Corporation intends to reduce commercial paper
borrowings during 1999.
In March 1997, the Corporation issued $150 million of 6.95% Notes due 2007
under the November 1993 Form S-3 Registration Statement. Proceeds from the debt
issuance were used to repay a portion of the commercial paper borrowings
associated with the Leaf acquisition.
In August 1997, the Corporation issued $150 million of 6.95% Notes due 2012
and $250 million of 7.2% Debentures due 2027 under the November 1993 and August
1997 Registration Statements. Proceeds from the debt issuance were used to repay
a portion of the short-term borrowings associated with the purchase of Common
Stock from the Milton Hershey School Trust.
Aggregate annual maturities during the next five years are: 1999, $.1 million;
2000, $2.2 million; 2001, $.2 million; 2002, $.2 million; and 2003, $17.1
million. The Corporation's debt is principally unsecured and of equal priority.
None of the debt is convertible into stock of the Corporation. The Corporation
is in compliance with all covenants included in the related debt agreements.
9. INCOME TAXES
The provision for income taxes was as follows:
For the years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
In thousands of dollars Current:
Federal $119,706 $177,145 $158,040
State 10,498 20,252 23,288
Foreign 3,673 3,392 2,360
-------- -------- --------
Current provision for income taxes 133,877 200,789 183,688
-------- -------- --------
Deferred:
Federal 73,422 9,370 12,952
State 10,568 5,103 8,134
Foreign (1,749) 2,442 1,777
-------- -------- --------
Deferred provision for income taxes 82,241 16,915 22,863
-------- -------- --------
Total provision for income taxes $216,118 $217,704 $206,551
======== ======== ========
A-22
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
December 31, 1998 1997
- -------------------------------------------------------------
In thousands of dollars Deferred tax assets:
Post-retirement benefit obligations $ 87,954 $ 91,706
Accrued expenses and other reserves 96,843 91,067
Accrued trade promotion reserves 28,118 30,905
Other 21,530 23,234
-------- --------
Total deferred tax assets 234,445 236,912
-------- --------
Deferred tax liabilities:
Depreciation 308,074 302,675
Other 188,967 117,292
-------- --------
Total deferred tax liabilities 497,041 419,967
-------- --------
Net deferred tax liabilities $262,596 $183,055
======== ========
Included in:
Current deferred tax assets, net $ 58,505 $ 84,024
Non-current deferred tax liabilities, net 321,101 267,079
-------- --------
Net deferred tax liabilities $262,596 $183,055
======== ========
The following table reconciles the Federal statutory income tax rate with the
Corporation's effective income tax rate:
For the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits 3.0 3.4 4.7
Non-deductible acquisition costs .9 .9 .6
Loss on disposal of businesses for which no tax benefit was
provided -- -- 2.6
Other, net (.1) -- .2
---- ---- ----
Effective income tax rate 38.8% 39.3% 43.1%
==== ==== ====
In January 1999, the Corporation received a Notice of Proposed Deficiency
(Notice) from the Internal Revenue Service (IRS) related to the years 1989
through 1996. The most significant issue pertains to the Corporate Owned Life
Insurance (COLI) program which was implemented by the Corporation in 1989. The
IRS proposed the disallowance of interest expense deductions associated with the
underlying life insurance policies. The Corporation believes that it has fully
complied with the tax law as it relates to its COLI program. The Corporation
expects to file a protest of the proposed deficiency with the Appeals section of
the IRS in early 1999 and intends to vigorously defend its position on this
matter.
10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Corporation's policy is to fund domestic pension liabilities in accordance
with the minimum and maximum limits imposed by the Employee Retirement Income
Security Act of 1974 and Federal income tax laws, respectively. Non-domestic
pension liabilities are funded in accordance with applicable local laws and
regulations. Plan assets are invested in a broadly diversified portfolio
consisting primarily of domestic and international common stocks and fixed
income securities. Other benefits include health care and life insurance
provided by the Corporation under two post-retirement benefit plans.
A-23
Effective December 31, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pension and Other
Post-Retirement Benefits (SFAS No. 132). The provisions of SFAS No. 132 revise
employers' disclosures about pension and other post-retirement benefit plans.
It does not change the measurement or recognition of these plans.
A summary of the changes in benefit obligations and plan assets as of December
31, 1998 and 1997 is presented below:
Pension Benefits Other Benefits
-------------------- --------------------
December 31, 1998 1997 1998 1997
- -------------------------------------------------------------------------------
In thousands of dollars
Change in benefits obligation
Benefits obligation at beginning
of year $602,081 $503,528 $ 206,695 $ 176,301
Service cost 27,621 26,177 4,452 4,390
Interest cost 41,855 39,385 13,524 13,395
Amendments (440) 9,840 (17,427) 967
Actuarial loss 72,944 32,325 54,698 18,332
Acquisition -- 26,560 (1,799) 1,677
Other (2,440) (1,587) (228) (154)
Benefits paid (49,199) (34,147) (8,875) (8,213)
--------- --------- --------- ---------
Benefits obligation at end of year 692,422 602,081 251,040 206,695
--------- --------- --------- ---------
Change in plan assets
Fair value of plan assets at
beginning of year 566,810 450,426 -- --
Actual return on plan assets 91,338 86,405 -- --
Acquisition -- 38,328 -- --
Employer contribution 20,634 26,855 8,875 8,213
Other (1,542) (1,057) -- --
Benefits paid (49,199) (34,147) (8,875) (8,213)
--------- --------- --------- ---------
Fair value of plan assets at end
of year 628,041 566,810 -- --
--------- --------- --------- ---------
Funded status (64,381) (35,271) (251,040) (206,695)
Unrecognized transition obligation (91) 193 -- --
Unrecognized prior service cost 35,854 39,337 (33,202) (25,685)
Unrecognized net actuarial loss
(gain) 6,164 (27,318) 59,589 4,330
Intangible asset (1,261) (6,336) -- --
Accumulated other comprehensive
income (6,750) -- -- --
Prior service cost recognized due
to curtailment -- -- 12,991 --
Unrecognized prior service cost
due to amendment -- -- (6,924) --
--------- --------- --------- ---------
(Accrued) benefits cost $ (30,465) $ (29,395) $(218,586) $(228,050)
========= ========= ========= =========
Weighted-average assumptions
Discount rate 6.40% 7.00% 6.40% 7.00%
Expected long-term rate of return
on assets 9.50 9.50 N/A N/A
Rate of increase in compensation
levels 4.80 4.80 N/A N/A
For measurement purposes, a 6% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999 and future years.
The Corporation's acquisition of the Leaf business in 1996 included its
pension plan. The Leaf pension plan was merged into the Hershey Foods
Corporation Retirement Plan as of December 31, 1997.
As of December 31, 1998, for pension plans with accumulated benefit
obligations in excess of plan assets, the related projected benefit obligation,
accumulated benefit obligation and the fair value of plan assets were $81.1
million, $66.9 million and $22.7 million, respectively.
A-24
As of December 31, 1997, for pension plans with accumulated benefit
obligations in excess of plan assets, the related projected benefit obligation
and accumulated benefit obligation were $36.4 million and $34.9 million,
respectively. As of December 31, 1997, there were no funded pension plans with
accumulated benefit obligations in excess of plan assets.
A summary of the components of net periodic benefits cost for the years ended
December 31, 1998 and 1997 is presented below:
Pension Benefits Other Benefits
------------------ ----------------
For the years ended December 31, 1998 1997 1998 1997
- -------------------------------------------------------------------------------
In thousands of dollars
Components of net periodic benefits cost
Service cost $ 27,621 $ 26,177 $ 4,452 $ 4,390
Interest cost 41,855 39,385 13,524 13,395
Expected return on plan assets (53,399) (42,700) -- --
Amortization of prior service cost 2,941 190 (2,986) (2,252)
Recognized net actuarial loss (gain) 717 (1,652) -- --
Other -- -- 9 6
-------- -------- ------- -------
Corporate sponsored plans 19,735 21,400 14,999 15,539
Multi-employer plans 1,571 1,627 -- --
Administrative expenses 796 864 -- --
-------- -------- ------- -------
Net periodic benefits cost $ 22,102 $ 23,891 $14,999 $15,539
======== ======== ======= =======
The Corporation has two post-retirement benefit plans. The health care plan is
contributory, with participants' contributions adjusted annually, and the life
insurance plan is non-contributory. Effective December 1998, for all eligible
employees under age 45, the Corporation will provide annual contributions into
the Employee Savings Stock Investment and Ownership Plan (ESSIOP) instead of
providing coverage under the current retiree medical plan. This change resulted
in the immediate recognition of a $13.0 million pre-tax gain which is not
included above as a component of net periodic benefits cost. The changes apply
to all U.S. full-time salaried employees, and all non-union hourly plant
employees working outside of Hershey, PA.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effects:
1 Percentage Point 1 Percentage Point
Increase (Decrease)
- ---------------------------------------------------------------------------
In thousands of dollars
Effect on total service and interest
cost components $ 940 $ (872)
Effect on post-retirement benefit
obligation 12,935 (11,552)
A minimum pension liability adjustment is required when the actuarial present
value of accumulated plan benefits exceeds plan assets and accrued pension
liabilities. In 1998, a minimum liability adjustment of $4.1 million, less
allowable intangible assets, net of a deferred tax benefit of $2.7 million, was
recorded as a component of other comprehensive loss and reported in accumulated
other comprehensive loss as a component of stockholders' equity.
11. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the primary
vehicle for contributions to its existing ESSIOP for participating domestic
salaried and hourly employees. The ESOP was funded by a 15-year 7.75% loan of
$47.9 million from the Corporation. During 1998 and 1997,
A-25
the ESOP received a combination of dividends on unallocated shares and
contributions from the Corporation equal to the amount required to meet its
principal and interest payments under the loan. Simultaneously, the ESOP
allocated to participants 159,176 shares of Common Stock each year. As of
December 31, 1998, the ESOP held 927,863 allocated shares and 1,273,400
unallocated shares. All ESOP shares are considered outstanding for income per
share computations.
The Corporation recognized net compensation expense equal to the shares
allocated multiplied by the original cost of $20 1/16 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to the
ESOP for 1998, 1997 and 1996 was $1.0 million, $1.4 million and $1.8 million,
respectively. Dividends paid on unallocated ESOP shares were $1.2 million in
1998 and $1.3 million in 1997 and 1996. The unearned ESOP compensation balance
in stockholders' equity represented deferred compensation expense to be
recognized by the Corporation in future years as additional shares are allocated
to participants.
12. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1998, the Corporation had 530,000,000 authorized shares of
capital stock. Of this total, 450,000,000 shares were designated as Common
Stock, 75,000,000 shares as Class B Common Stock (Class B Stock), and 5,000,000
shares as Preferred Stock, each class having a par value of one dollar per
share. As of December 31, 1998, a combined total of 179,950,872 shares of both
classes of common stock had been issued of which 143,146,715 shares were
outstanding. No shares of the Preferred Stock were issued or outstanding during
the three-year period ended December 31, 1998.
In August 1996, the Corporation's Board of Directors declared a two-for-one
split of the Common Stock and Class B Common Stock effective September 13, 1996,
to stockholders of record August 23, 1996. The split was effected as a stock
dividend by distributing one additional share for each share held.
Holders of the Common Stock and the Class B Stock generally vote together
without regard to class on matters submitted to stockholders, including the
election of directors, with the Common Stock having one vote per share and the
Class B Stock having ten votes per share. However, the Common Stock, voting
separately as a class, is entitled to elect one-sixth of the Board of Directors.
With respect to dividend rights, the Common Stock is entitled to cash dividends
10% higher than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis at
any time. During 1998, 1997 and 1996, a total of 18,000 shares, 13,000 shares
and 2,000 shares, respectively, of Class B Stock were converted into Common
Stock.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
(Milton Hershey School Trust), as institutional fiduciary for estates and trusts
unrelated to Milton Hershey School, and as direct owner of investment shares,
held a total of 14,531,294 shares of the Common Stock, and as Trustee for the
benefit of Milton Hershey School, held 30,306,006 shares of the Class B Stock as
of December 31, 1998, and was entitled to cast approximately 76% of the total
votes of both classes of the Corporation's common stock. The Milton Hershey
School Trust must approve the issuance of shares of Common Stock or any other
action which would result in the Milton Hershey School Trust not continuing to
have voting control of the Corporation.
A total of 9,861,119 shares of Common Stock have been repurchased for
approximately $287.5 million under share repurchase programs which were approved
by the Corporation's Board of Directors in 1993 and 1996. Of the shares
repurchased, 528,000 shares were retired, 529,498 shares were reissued to
satisfy stock options obligations and the remaining 8,803,621 shares were held
as Treasury Stock as of December 31, 1998. In August 1997, the Corporation
purchased an additional
A-26
9,900,990 shares of its Common Stock to be held as Treasury Stock from the
Milton Hershey School Trust for $500.0 million. This was in addition to the
18,099,546 shares purchased from the Milton Hershey School Trust in August 1995
for $500.0 million. A total of 36,804,157 shares were held as Treasury Stock as
of December 31, 1998.
Basic and Diluted Earnings per Share were computed based on the weighted
average number of shares of the Common Stock and the Class B Stock outstanding
as follows:
Per-
For the year ended December 31, Income Shares Share
1998 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------
In thousands of dollars except
shares and per share amounts
Net Income per Share--Basic
Net income $340,888 143,446,421 $2.38
=====
Effect of Dilutive Securities
Stock options -- 2,008,355
Performance stock units -- 106,968
Restricted stock units -- 1,238
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $340,888 145,562,982 $2.34
======== =========== =====
Per-
For the year ended December 31, Income Shares Share
1997 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------
In thousands of dollars except
shares and per share amounts
Net Income per Share--Basic
Net income $336,251 149,173,558 $2.25
=====
Effect of Dilutive Securities
Stock options -- 1,726,761
Performance stock units -- 112,649
Restricted stock units -- 3,389
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $336,251 151,016,357 $2.23
======== =========== =====
Per-
For the year ended December 31, Income Shares Share
1996 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------
In thousands of dollars except
shares and per share amounts
Net Income per Share--Basic
Net income $273,186 154,333,549 $1.77
=====
Effect of Dilutive Securities
Stock options -- 1,270,177
Performance stock units -- 84,697
Restricted stock units -- 1,528
-------- -----------
Net Income per Share--Diluted
Net income and assumed conversions $273,186 155,689,951 $1.75
======== =========== =====
A-27
13. STOCK COMPENSATION PLAN
The long-term portion of the Key Employee Incentive Plan (KEIP), provides for
grants of stock-based compensation awards to senior executives and key employees
of one or more of the following: non-qualified stock options (fixed stock
options), performance stock units, stock appreciation rights and restricted
stock units. The KEIP also provides for the deferral of performance stock unit
awards by participants. As of December 31, 1998, 15.3 million shares were
authorized for grants under the long-term portion of the KEIP.
In 1996, the Corporation's Board of Directors approved a world-wide,
broad-based employee stock option program, called HSY Growth. HSY Growth
provides all eligible employees with a one-time grant of 100 non-qualified stock
options. Under HSY Growth, over 1.2 million shares were granted on January 7,
1997.
The Corporation applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
the KEIP and HSY Growth. Accordingly, no compensation cost has been recognized
for its fixed stock option grants. Had compensation cost for the Corporation's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under the KEIP and HSY Growth consistent with the method
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation," the Corporation's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
For the years ended December 31, 1998 1997 1996
-----------------------------------------------------------------------------
In thousands of dollars except per share amounts
Net income As reported $340,888 $336,251 $273,186
Pro forma 329,621 330,710 266,517
Net income per share--
Basic As reported $ 2.38 $ 2.25 $ 1.77
Pro forma 2.30 2.22 1.73
Net income per share--
Diluted As reported $ 2.34 $ 2.23 $ 1.75
Pro forma 2.26 2.19 1.71
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yields of 1.6%, 1.9% and 2.4%, expected volatility of 21%, 20% and 20%, risk-
free interest rates of 5.9%, 6.2% and 5.6%, and expected lives of 6.5, 5.7 and
7.5 years.
A-28
Fixed Stock Options
The exercise price of each option equals the market price of the Corporation's
Common Stock on the date of grant. Under the KEIP, options are granted in
January and generally vest at the end of the second year and have a maximum term
of ten years. Options granted under the HSY Growth program vest at the end of
the fifth year and have a term of ten years.
A summary of the status of the Corporation's fixed stock options as of
December 31, 1998, 1997, and 1996, and changes during the years ending on those
dates is presented below:
1998 1997 1996
-------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------
Outstanding at beginning
of year 6,713,920 $31.73 5,902,220 $27.40 4,435,800 $22.54
Granted 1,739,050 $61.22 1,485,250 $44.64 2,619,200 $33.08
Exercised (751,600) $25.78 (656,350) $21.94 (1,062,980) $20.74
Forfeited (36,100) $52.61 (17,200) $33.06 (89,800) $31.92
--------- --------- ----------
Outstanding at end of
year 7,665,270 $38.91 6,713,920 $31.73 5,902,220 $27.40
========= ========= ==========
Options exercisable at
year-end 4,480,670 $28.45 3,013,670 $24.38 3,670,020 $23.94
========= ========= ==========
Weighted-average fair
value of options
granted during the year
(per share) $ 18.30 $ 11.66 $ 8.70
========= ========= ==========
The increase in the weighted-average fair value of options reflects higher
grant prices and lower dividend yields.
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Exercise Outstanding as Contractual Average Exercisable as of Average
Prices of 12/31/98 Life in Years Exercise Price 12/31/98 Exercise Price
- ------------------------------------------------------------------------------------------------
$17 11/16-26 1/2 2,194,970 4.4 $23.63 2,194,970 $23.63
$33 1/16-44 1/2 3,728,050 7.4 $37.50 2,285,700 $33.07
$56 1/4-63 11/16 1,742,250 9.0 $61.17 --
--------- ---------
$17 11/16-63 11/16 7,665,270 6.9 $38.91 4,480,670 $28.45
========= =========
Performance Stock Units
Under the long-term portion of the KEIP, each January the Corporation grants
selected executives and other key employees performance stock units whose
vesting is contingent upon the achievement of certain performance objectives. If
at the end of three-year performance cycles, targets for financial measures of
earnings per share, economic value added and free cash flow are met, the full
number of shares are awarded to the participants. The performance scores can
range from 0% to 150% of the targeted amounts. The compensation cost charged
against income for the performance-based plan was $6.6 million, $9.1 million and
$5.8 million for 1998, 1997, and 1996, respectively. The
A-29
compensation cost associated with the long-term portion of the KEIP is
recognized ratably over the three-year term based on the year-end market value
of the stock. Performance stock units and restricted stock units granted for
potential future distribution were as follows:
For the years ended December 31, 1998 1997 1996
----------------------------------------------------------------------
Shares granted 48,150 95,250 86,000
Weighted-average fair value at date of grant $ 61.54 $ 45.17 $ 33.56
Deferred performance stock units, deferred directors' fees and accumulated
dividend amounts totaled 373,933 shares as of December 31, 1998.
No stock appreciation rights were outstanding as of December 31, 1998.
14. SUPPLEMENTAL BALANCE SHEET INFORMATION
Accounts Receivable--Trade
In the normal course of business, the Corporation extends credit to customers
which satisfy pre-defined credit criteria. The Corporation believes that it has
little concentration of credit risk due to the diversity of its customer base.
Receivables, as shown on the consolidated balance sheets, were net of allowances
and anticipated discounts of $19.9 million and $15.8 million as of December 31,
1998 and 1997, respectively.
Inventories
The Corporation values the majority of its inventories under the last-in,
first-out (LIFO) method and the remaining inventories at the lower of first-in,
first-out (FIFO) cost or market. LIFO cost of inventories valued using the LIFO
method was $342.9 million and $372.7 million as of December 31, 1998 and 1997,
respectively, and all inventories were stated at amounts that did not exceed
realizable values. Total inventories were as follows:
December 31, 1998 1997
-----------------------------------------------
In thousands of dollars
Raw materials $ 205,111 $ 223,702
Goods in process 38,420 36,015
Finished goods 340,442 334,639
--------- ---------
Inventories at FIFO 583,973 594,356
Adjustment to LIFO (90,724) (88,831)
--------- ---------
Total inventories $ 493,249 $ 505,525
========= =========
A-30
Property, Plant and Equipment
Property, plant and equipment balances included construction in progress of
$96.6 million and $144.0 million as of December 31, 1998 and 1997, respectively.
Major classes of property, plant and equipment were as follows:
December 31, 1998 1997
----------------------------------------------------------------
In thousands of dollars
Land $ 30,871 $ 31,340
Buildings 541,181 540,729
Machinery and equipment 2,130,735 2,015,161
----------- -----------
Property, plant and equipment, gross 2,702,787 2,587,230
Accumulated depreciation (1,054,729) (938,993)
----------- -----------
Property, plant and equipment, net $ 1,648,058 $ 1,648,237
=========== ===========
Accrued Liabilities
Accrued liabilities were as follows:
December 31, 1998 1997
----------------------------------------------------
In thousands of dollars
Payroll and other compensation $ 87,666 $ 92,102
Advertising and promotion 67,916 86,184
Other 138,833 193,259
--------- ---------
Total accrued liabilities $ 294,415 $ 371,545
========= =========
Other Long-term Liabilities
Other long-term liabilities were as follows:
December 31, 1998 1997
-------------------------------------------------------
In thousands of dollars
Accrued post-retirement benefits $ 206,345 $ 216,901
Other 140,424 129,599
--------- ---------
Total other long-term liabilities $ 346,769 $ 346,500
========= =========
15. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the manufacture, distribution and sale of confectionery, grocery
and pasta products. Consolidated net sales represented primarily sales of
confectionery products. The Corporation's principal operations and markets are
located in the United States. The Corporation also manufactures, markets, sells
and distributes confectionery and grocery products in Canada and Mexico, imports
and/or markets selected confectionery and grocery products in Japan, China and
the Philippines, and markets confectionery products in over 90 countries
worldwide.
Net sales and long-lived assets of businesses outside of the United States
were not significant. Sales to Wal-Mart Stores, Inc. and Subsidiaries exceeded
10% of total net sales and amounted to approximately $619.1 million, $529.6
million and $471.3 million in 1998, 1997 and 1996, respectively.
A-31
16. QUARTERLY DATA (Unaudited)
Summary quarterly results were as follows:
Year 1998 First Second Third Fourth
- ---------------------------------------------------------------------------
In thousands of dollars except per share
amounts
Net sales $1,098,076 $880,399 $1,217,237 $1,239,903
Gross profit 445,736 357,684 510,632 496,506
Net income 75,433 47,965 107,533 109,957
Net income per share--Basic .53 .33 .75 .77
Net income per share--Diluted(a) .52 .33 .74 .76
Year 1997 First Second Third Fourth
- ---------------------------------------------------------------------------
In thousands of dollars except per share
amounts
Net sales $1,002,469 $905,729 $1,151,610 $1,242,428
Gross profit 413,188 375,411 479,006 545,735
Net income 68,894 50,564 100,673 116,120
Net income per share--Basic(a) .45 .33 .68 .81
Net income per share--Diluted(a) .45 .33 .67 .80
- --------
(a) Quarterly income per share amounts do not total to the annual amounts due to
changes in weighted average shares outstanding during the year.
A-32
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Hershey Foods Corporation is responsible for the financial statements and
other financial information contained in this report. The Corporation believes
that the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate under the circumstances to reflect in
all material respects the substance of applicable events and transactions. In
preparing the financial statements, it is necessary that management make
informed estimates and judgments. The other financial information in this annual
report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls designed to
provide reasonable assurance that financial records are reliable for purposes of
preparing financial statements and that assets are properly accounted for and
safeguarded. The concept of reasonable assurance is based on the recognition
that the cost of the system must be related to the benefits to be derived. The
Corporation believes its system provides an appropriate balance in this regard.
The Corporation maintains an Internal Audit Department which reviews the
adequacy and tests the application of internal accounting controls.
The financial statements have been audited by Arthur Andersen LLP, independent
public accountants, whose appointment was ratified by stockholder vote at the
stockholders' meeting held on April 28, 1998. Their report expresses an opinion
that the Corporation's financial statements are fairly stated in conformity with
generally accepted accounting principles, and they have indicated to us that
their audit was performed in accordance with generally accepted auditing
standards which are designed to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
The Audit Committee of the Board of Directors of the Corporation, consisting
solely of non-management directors, meets regularly with the independent public
accountants, internal auditors and management to discuss, among other things,
the audit scopes and results. Arthur Andersen LLP and the internal auditors both
have full and free access to the Audit Committee, with and without the presence
of management.
A-33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Hershey Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hershey Foods
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998, appearing on pages A-12 through A-32. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hershey Foods Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
January 29, 1999
A-34
HERSHEY FOODS CORPORATION
ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
All dollar and share amounts in thousands except
market price and per share statistics
10-Year
Compound
Growth Rate 1998 1997 1996
----------- ---------------- ------------- ---------------
Summary of Operations(a)
Net Sales 7.42% $ 4,435,615 4,302,236 3,989,308
---------------- ------------- ---------------
Cost of Sales 7.06% $ 2,625,057 2,488,896 2,302,089
Selling, Marketing and
Administrative 7.33% $ 1,167,895 1,183,130 1,124,087
Non-recurring
Credits/(Charges)(m) $ -- -- (35,352)
Interest Expense, Net 11.08% $ 85,657 76,255 48,043
Income Taxes 8.96% $ 216,118 217,704 206,551
---------------- ------------- ---------------
Income from Continuing
Operations Before
Accounting Changes 8.96% $ 340,888 336,251 273,186
Net Cumulative Effect
of Accounting Changes $ -- -- --
Discontinued Operations $ -- -- --
---------------- ------------- ---------------
Net Income 4.77% $ 340,888 336,251 273,186
================ ============= ===============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 11.52% $ 2.38 2.25 1.77(h)
--Diluted 11.33% $ 2.34 2.23 1.75
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted $ -- -- --
Net Income--Basic 7.27% $ 2.38 2.25 1.77(h)
Net Income--Diluted 7.09% $ 2.34 2.23 1.75
Weighted Average Shares
Outstanding--Basic(b) 143,446 149,174 154,334
Weighted Average Shares
Outstanding--
Diluted(b) 145,563 151,016 155,690
Dividends Paid on
Common Stock 7.68% $ 103,616 98,390 93,884
Per Share(b) 10.80% $ .920 .840 .760
Dividends Paid on Class
B Common Stock 10.83% $ 25,428 23,156 20,879
Per Share(b) 10.87% $ .835 .760 .685
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.7% 7.8% 7.7%(c)
Depreciation 12.22% $ 138,489 135,016 119,443
Advertising 6.59% $ 187,505 202,408 174,199
Promotion 7.39% $ 469,709 451,580 429,208
Payroll 6.55% $ 563,045 524,827 491,677
Year-end Position and
Statistics(a)
Capital Additions 4.72% $ 161,328 172,939 159,433
Total Assets 6.79% $ 3,404,098 3,291,236 3,184,796
Long-term Portion of
Debt 14.20% $ 879,103 1,029,136 655,289
Stockholders' Equity .36% $ 1,042,301 852,806 1,161,021
Operating Return on
Average Stockholders'
Equity 36.0% 33.4% 27.5%
Operating Return on
Average Invested
Capital 17.4% 17.5% 17.8%
Full-time Employees 14,700 14,900 14,000
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 143,147 142,932 152,942
Market Price of Common
Stock at Year-end 16.94% $ 62 3/16 61 15/16 43 3/4
Range During Year $76 3/8-59 11/16 63 7/8-42 1/8 51 3/4-31 15/16
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-37.
A-35
1995 1994 1993 1992 1991
----------- -------------- --------------- -------------- --------------
Summary of Operations(a)
Net Sales 3,690,667 3,606,271 3,488,249 3,219,805 2,899,165
----------- -------------- --------------- -------------- --------------
Cost of Sales 2,126,274 2,097,556 1,995,502 1,833,388 1,694,404
Selling, Marketing and
Administrative 1,053,758 1,034,115 1,035,519 958,189 814,459
Non-recurring
Credits/(Charges)(m) 151 (106,105) 80,642 -- --
Interest Expense, Net 44,833 35,357 26,995 27,240 26,845
Income Taxes 184,034 148,919 213,642 158,390 143,929
----------- -------------- --------------- -------------- --------------
Income from Continuing
Operations Before
Accounting Changes 281,919 184,219 297,233 242,598 219,528
Net Cumulative Effect
of Accounting Changes -- -- (103,908) -- --
Discontinued Operations -- -- -- -- --
----------- -------------- --------------- -------------- --------------
Net Income 281,919 184,219 193,325 242,598 219,528
=========== ============== =============== ============== ==============
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 1.70(i) 1.06 (j) 1.65(k) 1.34 1.21
--Diluted 1.69 1.05 1.65 1.34 1.21
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- (.58) -- --
Net Income--Basic 1.70(i) 1.06 (j) 1.07(k) 1.34 1.21
Net Income--Diluted 1.69 1.05 1.07 1.34 1.21
Weighted Average Shares
Outstanding--Basic(b) 166,036 174,367 179,929 180,775 180,767
Weighted Average Shares
Outstanding--
Diluted(b) 166,721 174,740 180,495 181,160 181,112
Dividends Paid on
Common Stock 91,190 89,660 84,711 77,174 70,426
Per Share(b) .685 .625 .570 .515 .470
Dividends Paid on Class
B Common Stock 18,900 17,301 15,788 14,270 12,975
Per Share(b) .620 .5675 .5175 .4675 .425
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.6% 7.3%(d) 7.4%(e) 7.5% 7.6%
Depreciation 119,438 114,821 100,124 84,434 72,735
Advertising 159,200 120,629 130,009 137,631 117,049
Promotion 402,454 419,164 444,546 398,577 325,465
Payroll 461,928 472,997 469,564 433,162 398,661
Year-end Position and
Statistics(a)
Capital Additions 140,626 138,711 211,621 249,795 226,071
Total Assets 2,830,623 2,890,981 2,855,091 2,672,909 2,341,822
Long-term Portion of
Debt 357,034 157,227 165,757 174,273 282,933
Stockholders' Equity 1,082,959 1,441,100 1,412,344 1,465,279 1,335,251
Operating Return on
Average Stockholders'
Equity 22.2% 18.5% 17.8% 17.3% 17.0%
Operating Return on
Average Invested
Capital 17.1% 15.6% 15.0% 14.4% 13.8%
Full-time Employees 13,300 14,000 14,300 13,700 14,000
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 154,532 173,470 175,226 180,373 180,373
Market Price of Common
Stock at Year-end 32 1/2 24 3/16 24 1/2 23 1/2 22 3/16
Range During Year 33 15/16-24 26 3/4-20 9/16 27 15/16-21 3/4 24 3/16-19 1/8 22 1/4-17 9/16
1990 1989 1988
--------------- -------------- -----------------
Summary of Operations(a)
Net Sales 2,715,609 2,420,988 2,168,048
--------------- -------------- -----------------
Cost of Sales 1,588,360 1,455,612 1,326,458
Selling, Marketing and
Administrative 776,668 655,040 575,515
Non-recurring
Credits/(Charges)(m) 35,540 -- --
Interest Expense, Net 24,603 20,414 29,954
Income Taxes 145,636 118,868 91,615
--------------- -------------- -----------------
Income from Continuing
Operations Before
Accounting Changes 215,882 171,054 144,506
Net Cumulative Effect
of Accounting Changes -- -- --
Discontinued Operations -- -- 69,443
--------------- -------------- -----------------
Net Income 215,882 171,054 213,949
=============== ============== =================
Income Per Share:(b)
From Continuing
Operations Before
Accounting Changes
--Basic 1.19(l) .95 .80
--Diluted 1.19 .95 .80
Net Cumulative Effect
of Accounting Changes
--Basic and Diluted -- -- --
Net Income--Basic 1.19(l) .95 1.18
Net Income--Diluted 1.19 .95 1.18
Weighted Average Shares
Outstanding--Basic(b) 180,766 180,824 180,981
Weighted Average Shares
Outstanding--
Diluted(b) 180,987 180,984 181,140
Dividends Paid on
Common Stock 74,161(f) 55,431 49,433
Per Share(b) .495(f) .370 .330
Dividends Paid on Class
B Common Stock 13,596(f) 10,161 9,097
Per Share(b) .445(f) .3325 .2975
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net Sales 7.2%(g) 7.1% 6.7%
Depreciation 61,725 54,543 43,721
Advertising 146,297 121,182 99,082
Promotion 315,242 256,237 230,187
Payroll 372,780 340,129 298,483
Year-end Position and
Statistics(a)
Capital Additions 179,408 162,032 101,682
Total Assets 2,078,828 1,814,101 1,764,665
Long-term Portion of
Debt 273,442 216,108 233,025
Stockholders' Equity 1,243,537 1,117,050 1,005,866
Operating Return on
Average Stockholders'
Equity 16.6% 16.1% 17.5%
Operating Return on
Average Invested
Capital 13.4% 13.2% 13.3%
Full-time Employees 12,700 11,800 12,100
Stockholders' Data(b)
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end 180,373 180,373 180,373
Market Price of Common
Stock at Year-end 18 3/4 17 15/16 13
Range During Year 19 13/16-14 1/8 18 7/16-12 3/8 14 5/16-10 15/16
A-36
Notes to the Eleven-Year Consolidated Financial Summary
(a) All amounts, with the exception of the Return on Average Stockholders'
Equity and Return on Average Invested Capital, have been restated for
discontinued operations, where applicable. Operating Return on Average
Stockholders' Equity and Operating Return on Average Invested Capital have
been computed using Net Income, excluding the 1988 gain on disposal included
in Discontinued Operations, the 1993 Net Cumulative Effect of Accounting
Changes, and the after-tax impacts of the 1990 Restructuring Gain, Net, the
1993 Gain on Sale of the Investment Interest in Freia Marabou a.s (Freia),
the 1994 Restructuring Charge, the net 1995 Restructuring Credit and the
1996 Loss on Sale of Businesses.
(b) All shares and per share amounts have been adjusted for the two-for-one
stock split effective September 13, 1996.
(c) Calculated percent excludes the 1996 Loss on Sale of Businesses. Including
the loss, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 6.8%.
(d) Calculated percent excludes the 1994 Restructuring Charge. Including the
charge, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 5.1%.
(e) Calculated percent excludes the 1993 Gain on Sale of Investment Interest in
Freia. Including the gain, Income from Continuing Operations Before
Accounting Changes as a Percent of Net Sales was 8.5%.
(f) Amounts included a special dividend for 1990 of $11.2 million or $.075 per
share of Common Stock and $2.1 million or $.0675 per share of Class B Common
Stock.
(g) Calculated percent excludes the 1990 Restructuring Gain, Net. Including the
gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 7.9%.
(h) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1996 included a $.23 per share
loss on the sale of the Gubor and Sperlari businesses. Excluding the impact
of this loss, Income Per Share from Continuing Operations Before Accounting
Changes--Basic and Net Income Per Share--Basic would have been $2.00.
(i) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1995 included a net $.01 per share
credit associated with adjustments to accrued restructuring reserves.
Excluding the impact of this net credit, Income Per Share from Continuing
Operations Before Accounting Changes--Basic and Net Income Per Share--Basic
would have been $1.69.
(j) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1994 included a $.46 per share
restructuring charge. Excluding the impact of this charge, Income Per Share
from Continuing Operations Before Accounting Changes--Basic and Net Income
Per Share--Basic would have been $1.52.
(k) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1993 included a $.23 per share
gain on the sale of the investment interest in Freia. Excluding the impact
of this gain, Income Per Share from Continuing Operations Before Accounting
Changes--Basic would have been $1.43.
(l) Income Per Share from Continuing Operations Before Accounting Changes--
Basic and Net Income Per Share--Basic for 1990 included an $.11 per share
Restructuring Gain, Net. Excluding the impact of this gain, Income Per Share
from Continuing Operations Before Accounting Changes--Basic and Net Income
Per Share--Basic would have been $1.08.
(m) Includes the Loss on Sale of Businesses in 1996; Restructuring Credit in
1995; Restructuring Charge in 1994; Gain on Sale of Investment Interest in
1993 and Restructuring Gain, Net in 1990.
A-37