UVA-F-1409HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Hershey’s chocolate. Like baseball and apple pie, it was an American icon. So when Hershey’s largest shareholder proposed selling the company in early 2002, the residents of Hershey, Pennsylvania, the state attorney general, legislators, and current and former Hershey employees reacted with alarm. For them, the idea of selling the “Great American Chocolate Bar” was an insult to a beloved American institution and a threat to the principles on which Milton Hershey had built his company. Unlike most large corporations, Hershey Foods’ majority shareholder was not a corporate raider, institutional investor, or multinational, but rather the Hershey Trust Company, which owned 77% of its voting stock. The trust had been endowed by a gift, in 1918, by Milton Hershey himself, with the objective of supporting the Milton Hershey School, an institution for orphans in Hershey, Pennsylvania. Nevertheless, in March 2002, the Hershey Trust’s board of trustees decided that the school would be better served if its holdings were less concentrated in Hershey stock. Therefore, the Hershey Trust announced its decision to sell its entire stake in Hershey Foods, which effectively put the corporation up for sale. Six months after making its decision to explore a potential sale, the board of the Hershey Trust Company was examining two serious offers: a joint bid from Cadbury Schweppes PLC and Nestlé S.A. and an independent bid from the Wm. Wrigley Jr. Company. The primary question for the board’s 17 members was whether Hershey had been accurately valued by the bidders and, if so, whether the economic value created through the deal was consistent with their obligation to safeguard Hershey’s legacy of community involvement. The Confectionary Industry In 2001, the U.S. confectionary industry was worth $24 billion. Chocolate products accounted for 55% of that market; gum, 12%; and nonchocolate candy, 32%. The consumption of all confectionery had stagnated in the United States during the past four years, and the This case was prepared by Sean Carr (MBA ’03) and Gustavo Rodriguez (MBA ’03), under the supervision of Professors Kenneth M. Eades, Chris Muscarella (Penn State University), and Samuel C. Weaver (Lehigh University). It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of 2004 by the University of Virginia Darden School Foundation, an administrative situation. Copyright Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 11/06. -2- UVA-F-1409 consumption of chocolate, in particular, had declined during the previous year. Despite the disappointing trend in the U.S. market, several factors had helped a few key industry players grow during this period: Developing innovative products with high consumer appeal and price per pound Identifying and acquiring target companies to execute expansion strategies Developing operations and/or distribution systems in new countries With a market share of 30%, Hershey led the U.S. market for candy and gum in 2001, followed by M&M Mars, Inc. (Masterfoods Corp.) at 17.1%, Wm. Wrigley Jr. Co. at 6.6%, and Nestlé at 6.5%. The other players sharing the remaining 40% of the market included Cadbury Schweppes, World’s Finest Chocolate, Inc., and Tootsie Roll Industries, Inc. With its aggressive introduction of new products, Wrigley posted a 12.3% growth in revenues over the previous year. Wrigley, the largest producer of chewing gum in the world, had recently introduced Wrigley Eclipse Flash Strips, which accounted for some of the company’s impressive performance and moved it from fourth to third place in U.S. rankings. Nestlé showed 6.5% sales growth, and Mars and Hershey each showed 1.4% growth. Milton Snavely Hershey: Entrepreneur Milton Snavely Hershey was born to a German-Mennonite family in south-central Pennsylvania, on September 13, 1857, shortly before the outbreak of the American Civil War. In his youth, Hershey was a poor student, and after transferring among seven different schools, he dropped out before reaching the fourth grade. As a young adult, Hershey developed an interest in becoming a confectioner, and in 1886, he opened the Lancaster Caramel Company in Lancaster, Pennsylvania, which specialized in caramels made with fresh milk. Because he believed there would be great demand for affordable, mass-produced chocolate, Hershey sold his caramel business for $1 million in 1900, but retained the firm’s chocolate-making machines. Attracted by central Pennsylvania’s ample supplies of water, dairy farms, and hard-working immigrants, Hershey used the proceeds from the sale to purchase 1,200 acres of farmland and to break ground for the Hershey factory on March 2, 1903. Upon its completion, in December 1904, Hershey had built the largest chocolate factory in the world, and the Hershey Chocolate Company was born. Hershey, Pennsylvania: From Factory to Company to Town Hershey enjoyed making money, but he “wanted it used for a purpose of enduring good.” (A sign on his office wall read: Business Is a Matter of Human Service.) Influenced by utopian “manufacturing communities” of the time, Milton Hershey decided to surround his business and . Hershey refused to lay off any local employees. During Milton Hershey’s lifetime. which acquired the company’s 65. sewer. owing to increased regulation. Hershey Estates divested its electric. the ballroom torn down. as a revenue generator. Milton Hershey reorganized and refinanced his company. he launched a series of massive building projects that resulted in the construction of most of Hershey’s major buildings. Pennsylvania. See Exhibit 1 for a list of Hershey Estates’ enterprises. but operated at a financial loss. and the Hershey Chocolate Corporation headquarters. In fact. with tree-lined streets whose names evoked the exotic lands of the cocoa bean. competition for financing. utilities. an amusement park. the pool filled in. Hershey Estates served the town well.-3- UVA-F-1409 enterprise with a model town. and the cemetery. creating three new entities: Hershey Chocolate Corporation. The lumberyard and creamery were also sold. Pennsylvania. Caracas. Milton Hershey’s dedication to his employees and the residents of the town was steadfast. Later. and public buildings. pressure grew to reduce Hershey Chocolate’s involvement in the town. including the telephone company. the lavish Hotel Hershey. including Trinidad. was renamed Hershey. after years of benign neglect. Hershey Stadium. which acquired all the chocolate properties Hershey Corporation. and the community center turned over to Hershey Foods for office space. the Hershey Chocolate Company played an ever-larger role in the lives of Hershey’s citizens. Hershey mapped out a village. Hershey Estates was renamed Hershey Entertainment and Resorts Company (HERCO). between 1929 and 1939. despite a 50% drop in sales. and Ceylon (Sri Lanka). The development of Hershey. which continued the work of the Hershey Improvement Company Through Hershey Estates. Milton Hershey relied on profits from the company’s Cuban sugar operations to provide the capital for his many construction projects. sewers. Following financial difficulties in 1920. By 1927. which built a complete infrastructure. In the pastures surrounding his new factory. a department store. the village of Derry Church. Hershey Estates began to focus on Hersheypark. including roads. followed the ebb and flow of the company’s fortunes. Instead. Following Hershey’s death. In 1906. a division of Hershey Chocolate. and a poor business climate. the hospital. after 1927. at 19 East Chocolate Avenue. and telephone utilities. the Hershey Sports Arena. and approved a five-year plan to revitalize it. houses.000 acres of sugar-cane fields and eight sugar-processing plants in Cuba Hershey Estates. Milton Hershey created the Hershey Improvement Company. During the Great Depression. the high school. profit for the Estates division was never a primary consideration. In 1970. water. In the 1960s. Hershey Estates had a hand in more than 30 nonchocolate interests. in 1945. including the Hershey Community Center. Moreover. By the end of World War II. See Exhibit 2 for a description of HERCO’s businesses.000. Hershey was producing 24 million units of Field Ration D a week. According to the deed of trust. Kitty. By 1921. In 1918. clothing. . which included housing. Hershey Foods’ board. the school’s managers and the trust’s board comprised the same 17 individuals. the Hershey Trust Company had had a controlling interest in every major Hershey entity. The plain milk-chocolate bar and the milk-chocolate bar with almonds were the bread and butter of the Hershey Chocolate Company. the unschooled Milton Hershey created a residence and school for homeless boys. making it one of the largest educational endowments in the United States. See Exhibit 4 for a comparison of private educational endowments. Hershey’s sales had soared to $20 million. for the most part. food. three years after his wife’s death.300 students. had grown from its initial bequest of $60 million to approximately $5.400-acre campus.-4- UVA-F-1409 committed itself to managing Hershey’s entertainment properties. By 2002. Ever since the bequest. With this recipe. and with a continuity of streamlined output that held down costs. and taste “just a little better than a boiled potato. The requirements for the bar were that it should weigh about four ounces. Hershey Foods Corporation Milton Hershey learned that the secret of mass production for his chocolate lay in the manufacture of huge quantities of one item. the trustee was responsible for managing the trust’s considerable endowment and for reporting to the school’s managers. The Hersheys designated the newly created Hershey Trust Company as the sole trustee for the school.” The result was the Field Ration D. Hershey had generated sales of $5 million by 1911. administered by the Hershey Trust Company. more than eight times the company’s firstyear revenues. and provided instruction from kindergarten through the 12 th grade. who lived on the school’s 1. See Exhibit 3 for an organizational chart. Annual spending per student was $96. Milton Hershey’s Commitment: The Milton Hershey School In 1909. standardized in design. at the suggestion of his wife.4 billion. the Milton Hershey School (MHS) admitted both boys and girls without regard to race. be able to withstand high temperatures. the quartermaster of the United States Army asked the Hershey Chocolate Corporation to develop a military-ration bar that could meet the needs of soldiers in the field. including thousands of acres of land and all his stock in the Hershey Chocolate Company. and medical care. an independent entity with only one of its nine members also serving on the trust’s board. the childless Milton Hershey bequeathed his entire personal fortune to the Milton Hershey School. however. was. MHS enrolled 1. In 1937. MHS’s endowment. however. In all. did not diminish the strength of his business. During the 1960s. only 58. the Hershey Chocolate Corporation was winning millions of loyal consumers. in 1990. as well as a place in American history. with annualized returns of 17. including San Giorgio Macaroni. the primary beneficiary of the trust’s endowment. in 2002. however. both the composition and the size of Hershey Trust’s board of directors had changed (see Exhibits 5 and 6). More than three billion units of Field Ration D bars were made between 1940 and 1945.4%. Beginning in the 1990s. and the composition of the board had shifted toward education professionals. Reese Candy Company. In 1963. the company had changed its strategy again and sold its U. Hershey’s passing. This move began a string of acquisitions by Hershey that would continue for the next 25 years. remained that of serving the interests of the Milton Hershey School.6% of the endowment comprised Hershey Foods’ shares. Albertsons. Hershey diversified by acquiring several major pasta manufacturers. Milton S. and various public-sector leaders. In particular. The endowment had grown from Milton Hershey’s original gift of $60 million of Hershey stock to its current level of $5. B. by 2002. By 1951. for $450 million plus equity. on October 13. Hershey Foods repurchased $1. and were distributed to soldiers around the world. Target. By 2002. According to Money magazine. LLC. Shortly after the end of World War II.S. By the 1980s. . the company had become the largest pasta manufacturer in the United States.. The Hershey Trust Company Considers a Sale Over the years. Other major Hershey customers included Kmart. the trust’s board had expanded from 10 members.. Hershey died at age 88. makers of Reese’s Peanut Butter Cups. and CVS. Hershey School alumni. Its largest customer was WalMart. the concentration in Hershey shares had been reduced through a sharerepurchase program by Hershey Foods. 1945. while other confectioners were forced to limit or even cease production during the war. to 17 members. pasta business. however.-5- UVA-F-1409 And so. which represented 17% of the company’s total sales. Inc. Hershey remained the number-one candy maker in the United States. The board’s mandate. Inc. the Hershey Pasta Group. sales had reached $183 million. and Delmonico Foods. and by 1962. with sales comprising roughly 80% chocolate and 20% nonchocolate foods. Sales outside the United States accounted for 10% of total revenues. sales had grown to $154 million. Hershey Foods’ stock ranked as the 28th-best performer of the last 30 years. Inc. to New World Pasta. the Hershey Chocolate Corporation undertook its first major acquisition when it purchased the H.4 billion. By 1999.2 billion of its own shares so that. This diversification away from chocolate products led to a change in the company’s name to Hershey Foods Corporation in 1984. a delegation from the trust told the chairman and CEO of Hershey Foods Corporation. Hershey’s stock had shown variable performance. Vowler. however. Lenny. Hershey’s stock price soared from $63 to $79 per share.8% per year (see Exhibit 7). In the ensuing weeks. Richard H.S. J. Robert Hillier. 1 . a day that would become known by those opposed to the sale as Black Thursday. rumors swirled about potential bidders.. Hershey Foods ranked as the 28th-best-performing stock of the past 30 years.A. The trust’s board.” Following the March board meeting. In 1984. and asked for time to make a counterproposal. Therefore.2 Despite the overall strong investment performance of the trust and its gradual diversification away from Hershey shares. who also sat on the board of Hershey Foods. But Lenny opposed the idea of a sale. The board believed that a sale of the trust’s entire stake in Hershey Foods would garner a higher premium than if its shares were sold piecemeal. Hershey Foods introduced “super voting stock” (10 votes per share) for the trust. the class B common stock received a 10% lower dividend than the regular common stock. the Coca-Cola Company. equities and fixed-income and international securities to provide more “straight lines of return and not the volatility of one stock. the trust planned to invest the profits from the sale in a variety of U. Following news of the announcement. Nestlé S. during a meeting in March 2002. president and CEO of the Hershey Trust Company. On July 25. Cadbury Schweppes PLC. According to Robert C. by early 2002 there was an increasing concern among board members that the trust was compromising its fiduciary responsibility by concentrating a disproportionate amount of the endowment fund in the shares of Hershey Foods Corporation.-6- UVA-F-1409 The trust’s large holding amounted to 31% of Hershey Foods’ common shares and 77% of the stockholders’ votes. and PepsiCo. Among the names to emerge were the William Wrigley Jr. Hershey Foods would also help the trust sell the remainder of its shares over the next three to five years. In May. To compensate for the superior voting rights.1 During the past 16 years. the decision to sell was tantamount to putting Hershey Foods Corporation on the block. 2002. but had significantly outperformed Standard & Poor’s 500-stock index by an average of 6. With the exception of Hershey and a select group of other firms. its special voting stock reverted to common. the trust’s board voted 15–2 to “explore a potential sale” of its holdings in Hershey Foods. rejected the plan on the ground that the 10% premium was insufficient. therefore. Kraft Foods. the trust made public its decision to sell its portion of the outstanding shares of Hershey Foods Corporation. Lenny presented a stock-buyback offer to the head of the trust’s investment committee. 2 According to Money magazine. which consolidated its majority ownership of Hershey Foods Corporation. Company. If the trust’s stake in Hershey Foods ever dropped below 15%. to begin the process of finding suitable bidders for the company. the New York Stock Exchange did not allow companies to maintain dual classes of common stock. The plan called for Hershey Foods to purchase half of the trust’s shares at a 10% premium. the public. and literally the worldwide experts they have hired as well?” Jerry Pappert. . 3 The attorney general. local businesses.” During the injunction hearings. gathering 6. Many residents of Hershey. the attorney general sought an injunction to stop the sale altogether. an American icon and the paternalistic benefactor of a town. whose population of 22. On August 24. Pennsylvania. .).400 included 6. It ties the hands of the Trustees with regard to its single largest asset. Representative James Sensenbrenner (R-Wis. produced a groundswell of opposition by employees.200 Hershey employees. chairman of the House Judiciary Committee. the attorney general filed a petition asking that any sale of Hershey Foods be subject to approval by the Dauphin County Orphan’s Court. .-7Swift reaction UVA-F-1409 The prospect of a sale of Hershey Foods. Who in the courtroom has not read in the paper what happens in today’s economy when you invest too heavily in a single stock?” Judge James Gardner Collins: “What makes the attorney general’s office better financial managers than the board of the Hershey Trust. including Richard Zimmermann. . deputy attorney general: “Because we’re managing different clients. .friendsofhershey. was a Republican candidate for governor of Pennsylvania at the time. were concerned that the legacy of Hershey’s involvement in the community would be compromised and many jobs might be lost. and politicians who feared Hershey would become part of someone else’s global empire. and Bruce McKinney. whose office oversaw trusts and charities in the state. The controversy over the proposed sale of Hershey Foods became increasingly public as protests by company employees and retirees and Milton Hershey School alumni came to the attention of Pennsylvania’s attorney general. and we have an opportunity and a duty under law to make sure that the ultimate beneficiary of the trust. former CEO of HERCO. former CEO of Hershey Foods. . is not harmed. several former Hershey Foods executives testified against the sale.3 The issues underlying the controversy emerged during the ensuing court proceedings: Jack Stover. On August 12. Mike Fisher. www.500 signatures of people opposed to the sale. asked the Federal Trade Commission to scrutinize carefully any antitrust implications of the potential sale of Hershey Foods. . lawyer for the Hershey Trust Company: “[The injunction] causes irreparable harm to us. which had jurisdiction over charitable trusts. Community leaders organized rallies and developed a Web site. We’re managing the interests of the public.org. 5-billion joint bid from Nestlé S. while working as a salesman for his family’s soap factory. the Wrigley family owned about 35% of the company and controlled 60% of its voting shares. including the following: Big Red (1975) Orbit. To achieve this mission. Company The world’s largest maker of chewing gum had been based in Chicago since 1892.5-billion bid from the Wm. the company increased its price to seven cents and launched several new products. a sugar-free gum (1977) Hubba Bubba (1978) Extra (1980) Wrigley continued to expand its business by launching operations in Eastern Europe and China (1993). and sold its products in more than 150 countries. became president and CEO. Wrigley Jr. Those objectives include: Boosting our core chewing gum business Expanding business geographically and into new channels Diversifying our product line in “close to home” areas Focusing on innovation in our products. when William Wrigley. Wrigley’s Web site described its business strategy as follows: Wrigley is committed to achieving generational growth and prosperity for our stakeholders. Company and a $10. In 2002. a member of the fourth generation of Wrigleys to lead the company. and business processes . marketing. began offering customers chewing gum. as it faced competitive and economic pressures. With 2001 revenues of $2. he merged his company with one of his suppliers to form the Wm. Company. 2002. In 1999.A. and by 1910. and Cadbury Schweppes PLC. the company still offered its original five-cent price and product line. the final date by which bids could be submitted. After 2000. But by 1971. The Wm. the company focused on testing innovative gums with such attributes as cough suppression and teeth whitening. brand. Wrigley Jr. we are executing against a long-term strategic business plan based on six key objectives.S. Wrigley commanded a 50% share of the global gum market. As late as 1961.-8The Bids: Wrigley and Nestlé–Cadbury Schweppes UVA-F-1409 By September 14. In 1898. Wrigley Jr. the firm’s spearmint gum was the leading U. the Hershey Trust Company board was considering two serious offers: a $12.4 billion. Bill Wrigley. Nearly all its revenues were derived from gum. Quik drink mix (1948). Nestlé S. The Hershey Trust Company would exchange its Hershey shares for cash and shares in the new company. and was hoping to do the same with Hershey’s chocolates. chocolate company Rowntree.0 billion in cash) for 100% of the outstanding shares of Hershey Foods Corporation. After acquiring Ralston Purina. and Alpo pet food. During World War I. management hoped to generate higher sales volumes. the company expanded its product line by acquiring a 49% stake in Gesparal. including Butterfinger. bottled water (Perrier).. and pet food (Ralston Purina) and an important player in the cosmetics industry. Nestlé continued to introduce popular products during the next four decades. the equivalent of $89 per share. Nestlé consolidated its position as the world’s number-one food company. Nestlé S. Wrigley had been successful in selling chewing gum internationally. Nestlé completed several more acquisitions. represented a 42% premium over Hershey’s preannouncement stock price. Switzerland. Through its stake in Alcon. Nestlé had become a leader in coffee (Nescafé). Some analysts speculated that Wrigley management was assuming it could put Hershey products into its product mix and sell them internationally. In the 1970s. Peter Braceck-Letmathe. and one year later merged with the Anglo-Swiss Company. retaining the Nestlé name. was founded in 1843. when Henri Nestlé purchased a factory in Vevey.A. including Nestlé’s Crunch bar (1938). Baby Ruth candies.5 billion ($7. The deal included commitments to the Hershey community. to be renamed Wrigley-Hershey. that made products ranging from nut oils to rum. the company began selling chocolates. Inc. and equipment for ocular surgery. maker of Kit Kat (licensed to Hershey Foods Corporation). Although it was unlikely that Wrigley could achieve significant cost savings. .K. Simultaneously. Company offered $12.A. This offer. named CEO in 1997. the company developed a water-soluble “coffee cube. In the 1990s. divested Nestlé’s noncore businesses such as Contadina tomato products and Libby’s canned-meat products. a holding company that controlled the French cosmetics firm L’Oréal. Wrigley Jr. Nescafé. and Taster’s Choice instant coffee (1966).-9Delivering the highest quality at lowest costs Growing and developing our Wrigley people around the world UVA-F-1409 The Wm. contactlens solutions.” and the idea became one of the company’s most popular products.5 billion in stock and $5. Nestlé also participated in ophthalmic pharmaceuticals. In the 1980s. including assurances of job retention at Hershey Foods’ plants in Derry Township. In 1904. Source Perrier water. in 2001. Nestlé continued its expansion by acquiring the U. Key transactions included the acquisition of Dr. making it the fourth-largest confectioner in the industry. Hawaiian Punch. and Cadbury Group Ltd. In the future. giving birth to one of the biggest players in the candy and soft-drink sectors. capital-efficient. Cadbury Schweppes was the third-largest soft-drink company by sales volume in the world. and growing organically and by acquisition. According to its Web site.” Since the mid-1980s. began a continuous program of worldwide expansion. Both Schweppes Ltd. developing robust and sustainable positions in regional markets. Our four-pillar strategy is based on: Operational performance Product innovation and renovation Product availability Consumer communication Through this strategy. many of Nestlé’s brands were unique to particular countries. Cadbury Schweppes employed more than 41. By 2001. 38% from Europe. . The combination of our four-pillar strategy and efficiency programmes will deliver market-share growth and margin improvement. Snapple Beverage Group. Cadbury Schweppes’ governing objective was the growth of shareowner value through “focusing on the beverages and confectionary businesses. was as follows: UVA-F-1409 Nestlé’s strategic priorities are focused on delivering shareholder value through the achievement of sustainable. the company planned to expand into specialty nutritional foods and ice cream. Its confectionary products were manufactured in 25 countries and sold in almost 200. Cadbury Schweppes PLC. and profitable long-term growth. With nearly 470 factories in 84 countries. Pepper/Seven-Up. according to its Web site. Nestlé had been able to establish itself as both an international and a local company. Nestlé had been successful at satisfying local tastes with local products. and Kraft Foods’ candy business in France. Cadbury Schweppes PLC In 2002. With bottling and partnership operations in 10 countries and licensing agreements in 21 more. The two companies merged in 1969. acquisitions and divestments had played a key role in Cadbury Schweppes’ expansion plans. had sought new markets since their founding in the nineteenth century. Cadbury Schweppes was a major global player in both the beverage and confectionary industries. The new company.-10Nestlé’s strategy.000 people worldwide. the company derived 45% of its revenues from the Americas. and 12% from Asia. Moreover.5 billion in cash. See Exhibit 9 for Hershey’s historical financials. the board needed to determine the value of Hershey as a stand-alone entity compared with the bids being offered. The licensing arrangement had been negotiated between Rowntree and Hershey prior to Nestlé’s acquisition of Rowntree. An important aspect of the agreement. they expected to reduce costs by consolidating operations and reducing workforces.S. Exhibit 10 for Hershey’s financial forecasts as a stand-alone. On the economic side. however. See Exhibit 8 for a summary of the bidders’ financials.” With new production facilities and distribution capabilities in the United States. sales of its Kit Kat and Rolo brands. however. the board needed to decide whether selling Hershey compromised the board’s original mandate from Milton Hershey. Because the licensing agreement was structured to continue in perpetuity. . The Hershey Trust Company Board Decides In essence. the board faced both an economic and a governance decision. regardless of who won the bidding battle for Hershey. and Exhibit 11 for industry comparables. Nestlé stood to gain the value of the licensing agreement. Therefore. Pennsylvania. was that a change of ownership of Hershey would transfer all rights to the two brands back to Nestlé. Hershey valued the licensing of the two brands at approximately $1 billion. according to the agreement. the bid was complicated by the fact that Nestlé received royalties from Hershey for U.-11- UVA-F-1409 The Nestlé–Cadbury Schweppes offer for Hershey Foods was $10. On the governance side. The deal included a provision making Hershey. this offer represented a significantly lower premium than that offered by Wrigley. the headquarters of Cadbury Schweppes’ operations in the United States and calling it the “chocolate capital of the world. At $75 a share. .-12Exhibit 1 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Businesses Operated by Hershey Estates (1927) Hershey Baking Company Hershey Cemetery Hershey Cold Storage Hershey Community Building Hershey Community Inn Hershey Community Theatre Hershey Country Club Hershey Dairy Hershey Department Store Hershey Electric Company Hershey Experimental Candy Kitchen Hershey Feed and Grain Hershey Farms Hershey Farming Implements Hershey Filling Station Hershey Garage UVA-F-1409 Hershey Greenhouse and Nursery Hershey Hospital Hershey Laundry Hershey Museum Hershey Park Hershey Park Golf Club Hershey Rose Garden Hershey Sewerage Company Hershey Telephone Company Hershey Transit Company Hershey Water Company Hershey Zoo Hotel Hershey Coal Real Estate Source: Hershey Community Archives. GIANT Center. HERSHEY BEARS celebrate their 65th anniversary during the 2002–2003 season. ZOOAMERICA North American Wildlife Park is an 11-acre walk-through zoo located next to HERSHEYPARK.-13Exhibit 2 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE UVA-F-1409 Businesses Operated by Hershey Entertainment and Resorts (2002) HERSHEYPARK. THE STAR PAVILION at HERSHEYPARK Stadium is an open-air amphitheatre seating about 7. It is home to over 200 animals representing five regions of North America. The BEARS is the oldest continuously operating franchise in the American Hockey League. opened in 1907 by Milton S. is now a theme park with more than 60 rides and attractions and daily live entertainment.000 and is home to a wide variety of outdoor concerts and numerous sporting events. Hershey as a picnic and pleasure grounds for his employees. HERSHEYPARK Arena seats 7. .200 for popular rock and alternative artists. HERSHEYPARK Stadium seats up to 30. including the Summer Concert Series.225 and was home to the American Hockey League HERSHEY BEARS until the 2002– 2003 season. They captured their eighth American Hockey League Calder Cup Championship in 1997. when the Bears moved to their new home ice. 000 square feet of meeting. is a chocolate-themed restaurant featuring full-service lunch and dinner. HERSHEY Highmeadow Campground. The Hotel has been recognized with the prestigious AAA Four Diamond Award and is a member of Historic Hotels of America and Preferred Hotels & Resorts. HERSHEY Lodge and Convention Center offers 667 guest rooms and 100. and exhibit space. The Cafe is owned by Hershey Foods Corporation. breakfast bar. banquet. founded in 1905. but is managed by HERSHEY® Resorts. Source: Hershey Entertainment and Resorts Company. features nearly 300 open and shaded campsites on 55 acres of rolling countryside. . BELLA LUNA is a New York Style Italian Deli in Hershey. located off HERSHEYPARK Drive. and banquet space.-14- UVA-F-1409 Exhibit 2 (continued) THE HOTEL HERSHEY. built in 1933 by Milton S. and a covered front porch. Hershey. Pa. HERSHEY‘S CHOCOLATE TOWN CAFE. HERSHEY Nursery. located at Hershey’s Chocolate World.500 square feet of meeting. exhibit. has 234 guest rooms and 23. offers landscape design and maintenance for both commercial and residential properties. Hershey Highmeadow offers 20 log or rustic cabins with electric. microwave. camper refrigerator. . Princeton Univ.259 10.135 5. Vanderbilt Univ. Univ. $18. Univ.160 UVA-F-1409 Source: Voluntary Support of Education Survey (Council for Aid to Education. a subsidiary of RAND. Yale Univ. of Notre Dame Duke Univ.689 3.414 $2. Emory Univ. of Chicago Northwestern Univ.739 8. of Pennsylvania Rice Univ.470 3. Mass. Dartmouth Coll.492 3. Washington Univ. Texas A&M Univ. Cornell Univ.193 2. of Michigan Univ. .250 6.-16Exhibit 4 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Comparison of Private Educational Endowments (in millions of dollars) Harvard Univ.382 3.249 4. Inst.359 8. Stanford Univ. Univ. 2000–01).437 3. Milton Hershey School Columbia Univ.400 4.018 3.884 2.577 2.324 4. of Tech.243 3. Williamsburg. NY Retired Chairman and CEO Sun Company. New York. A. Alexander Construction Company. Pera John F. Florida Vice President and Director NETS Inc. Radnor. John F. Hatt Richard. Zimmerman Kenneth L. University of Pennsylvania. Wallace & Nurick. PA President Hershey Chocolate USA Kenneth V. Director of family business programs at Snider Entrepreneurial Center. Rowland J. Glosser C. PA Retired Vice Chairman of the Board and Executive Officer GE Company Stamford. Mobley Francine I. Wolfe William R. Burlingame Thomas C. McCollister Evarts 1 All Hershey Trust board members also serve on the board of directors of the Milton Hershey School. VA Dean of the School of Business and Industry Florida Agricultural and Mechanical University Tallahassee. (HERCO) Chairman of H. . Alexander Ronald D. Jamison Dr. Jr. Hershey Medical College 1990 Hershey Foods Board of Directors Richard. Pietruski H. and board of directors of The Hershey Bank Managing partner in the Harrisburg law firm of McNees. & Milton Hershey School Board of Managers Chairman and CEO of Hershey Foods Corporation President and Chief Operating Officer Hershey Foods Corporation President of the Milton Hershey School William R. C.-17Exhibit 5 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE UVA-F-1409 Boards of Directors for Hershey Trust and Hershey Foods Corporation (1990) 1990 Hershey Trust Board of Directors Chairman of the Board of Hershey Trust Co. President of Hershey Trust Co Dean. B. Graham John. Fisher Rod J. Neff John. Connecticut President USS a division of USX Corporation Pittsburgh. counsel to all Hershey entities. Penn State Milton S. Robert Sharbaugh Joseph P. PA Dean of the Graduate School of Business Administration College of William and Mary. Executive vice president of the Pennsylvania Medical Society United Way Capital Region (Executive Director Ohio) President. Rineman Juliet C. Wolfe Howard O. Bruce McKinney William H. M. Viviano Chairman and CEO Hershey Foods Corporation Chairman of the Board Hershey Trust Company President and Chief Operating Officer Hershey Foods Corporation Retired Chairman of the Board Carpenter Technology Corporation Reading. Fisher. CEO and chairman of the board of Hershey Entertainment & Resort Co. Sybil C. Hatt Kenneth L. NM Retired Chairman of the Board and CEO Sterling Drug Inc. Wharton School. Zimmerman Kenneth V. A. privately held investment management company Albuquerque. Beaver. Mallardee Associates Mackey J. Lepley Hershey School Snider Entrepreneurial Center. President and CEO. Managing director. Church Superintendent. St. Chairman and CEO (ret. Lincoln Jon A. Bosia National Corporation Robert H. Jamison Chairman. Rowland Way 2001 Hershey Foods Board of Directors Chairman. Williams & Company Institutional Research & Planning. Coughlan Abbott Laboratories Inc. VF McDonald Corporation Chairman. Robert F. VP Finance and CFO (ret. Chairman and Founder of Hillier FAIA Group (architects) A. A. Pietruski . Texas Biotechnology Corporation John M. Richard H. Chairman. Hackney. Sunoco Campbell Inc. Ph. Jobs for the Future President and CEO.). Former Policy adviser. James the Less Episcopal McDowell. Sr. Lucy D. Vowler Company J. Jr. Jr. The Hillier FAIA Group (architects) Chairman and CEO. Gary P. Morris Williams. Pennington Co-founder. John Gabig. Robert Hillier. University of Alexander Pennsylvania. Rev.-18Exhibit 6 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE UVA-F-1409 Boards of Directors for Hershey Trust and Hershey Foods Corporation (2001) 2001 Hershey Trust Board of Directors President and CEO. Michael W. Hershey Trust Robert C. Wharton School. Chairman of MHS Board of Esq. The Times Bonnie Hill Mirror Foundation John C. Lenny Hershey Foods Corporation J. Puriefoy Public Education Network W. President. President and CEO. Independent education consultant Hilary C. Ohio United Juliet C. Robert Hillier. John S.). Lipsitz. Services Admin Wendy D. Cumberland Anthony J.D. Chairman and Founder. General Esq. Matier Cornell U. Managers President and CEO of Milton William L. Colistra Valley School Dist. President and CEO. William H. DLJ Real Cavanaugh Estate Partners Joan S. Don Cornwell Granite Broadcasting Co. 8% (24.0% (14. .9%) (19.7%) 12.-19Exhibit 7 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Hershey Stock-Price Performance (1986–2001) UVA-F-1409 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Hershey Foods S&P 500 Average Stock Returns* 1997–2001 (5 years) 16.4% (32.7%) Hershey S&P 500 * 1986–2001 (16 years) 18.5%) 9.0% Standard deviation of returns in parentheses. 691 5.730 No debt Nestle Maturity 6/15/2025 Cadbury Schweppes1 Maturity 12/15/2005 Price 100.0 Cadbury Schweppes 0.-20Exhibit 8 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Bidding Companies’ Financial Data Hershey 0.306 Price 125. .569 Yield 4.0 8/19/2002 3.07 119.5 225.0 0.60 BBB 28. dollars.5 502.90% 3.55 A+ 73.28% 5.70 AAA 51. All other bonds denominated in U.73% Price 117.0 UVA-F-1409 Beta Credit rating Stock price 9/17/2002 Shares outstanding (millions) Book value of debt ($ millions) US Treasuries Historical Yield Curve 5 year 10 year 30 year Corporate Bonds1 Hershey Maturity 8/15/2012 2/15/2021 2/15/2027 Wrigley Nestle 0.2 884.37 Yield 4.71 137.5 3.9 1550.9 Wrigley 0.500.557 5.543.70 N/A 49.8 134.38% 4.835 1 Cadbury Schweppes bonds in British sterling.S.05% 9/17/2002 2.39 Yield 5.82% 4.6 19. 3 727.404.-21Exhibit 9 HERSHEY FOODS CORPORATION: BITTER TIMES IN A SWEET PLACE Historical Financial Statements of Hershey Foods Corporation (in millions of dollars) Income Statement Sales Cost of sales Gross profit Selling.0 1999 $ 118.7 156.616.6 2.1 343.6 1.8 642.5 450.8 56.0 465.8 802.5 258.447.5 1.2 1997 $4.3 UVA-F-1409 2000 $4.346.1 74.2 630.7 $ 2000 32.8 505.291.9 267.3 1998 $4.1 (35.3 $3.2 360.5 136.8 2.0 2.5 1.0 1999 $3.1 352.0 1.8 642.5 2001 $4.1 412.2 150.247.8 1998 $ 39.8 879.2 622.147.8 321.488.0 $3.100.5 114.4 $ 133.471.9 1.4 1.1 563.2 1.042.2 986.0 2.5 91.2 2.9 566.749.4 474.2 330.247.0 155.438.3 554.302.5 1.291.7 1.1 315.167.1 $ 156.161.3 655.4 1.6 $3.9 311.346.534. and administrative Operating income Gain (loss) on sale of business Earnings before interest and tax Interest expense Pretax income Income taxes Net income 1996 $3.0 $3.127.1 530.7 206.7 $ 136.183.6 412.813.9 346.2 207.7 $ 336.989.8 85.1 630.1 766.5 267.4 92.1 361.7 $3.2 551.295.023.0 1.7 557.1 346.5 7.1 2.302.137.970.0 451.1 Balance Sheet 1996 Cash and cash equivalents Accounts receivable trade Inventories Other current assets Total current assets Property.4 294.8 878.6 $ 273.8 .3 327.248.4 852. marketing. and equipment.6 $3.354.2 76.6 475.5 795.1 1.0 479.2 224.7 327.0 379.8 $ 149.6 212. net Goodwill Other tangible assets Total assets Accounts payable Accrued liabilities Short-term debt Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes Total liabilities Stockholders’ equity Total liabilities and equity $ 61.2 368.0 817.8 $ 134.0 $3.4) 527.0 546.9 2.0 2.029.1 2.585.9 388.8 1997 $ 54.6 364.2 1.7 605.057.4 $ 207.2 257.468.2 1.648.167.9 391.7 76.0 1.435.1 1.2 2.8 1.1 1.361.056.447.1 159.3 $3.280.625.124.3 1.9 326.7 622.8 1.272.648.7 512.0 217.404.221.3 2.0 361.1 $ 341.1 216.8 48.0 814.2 1.7 1.4 243.2 1.0 30.184.8 602.3 $3. plant.6 $3.184.668.6 $ 460.7 300.134.8 1.2 359.034.6 69.2 1.1 $ 334.4 877.6 712.2 1.5 1.7 1.9 606.2 278.175.3 493.810.0 255.2 106.8 558.510.9 877.7 1.7 211.2 $ 146.2 $3.8 $3.3 2001 $ 134.5 2.601.1 346.687.098.