HERSHEY'S HISTORY

A study of Hershey foods reveals a company that is thriving and has great potential for growth, in the highly competitive and internationally significant field of confectionery. It is a company facing fierce rivals and also many opportunities that can be capitalized on with the right strategic plan and innovative marketing and new products. And it is a company with a rich history that started with one man's Cinderella story of success as an American coming from humble beginnings to start a chocolate empire. That man is Milton S. Hershey. The products that bear Hershey's name represent an ongoing dedication to quality and value - a commitment established by Hershey Food's founder. In the early 1900s, Milton Hershey made one of the great American fortunes through dogged persistence and the courage to pursue a dream. Milton Hershey was born on September 13, 1857, in a farmhouse near the Central Pennsylvania village of Derry Church. He was a descendant of people who had come to Pennsylvania from Switzerland and Germany in the 1700s. Raised as a Mennonite, he attended school only through the fourth grade before his father, Henry Hershey, put him to work as a printer's apprentice in Gap, PA.

When it became apparent his talents did not lie in printing, he went on to become an apprentice to a Lancaster, PA, candy-maker. In 1876 at the age of 18, he opened his own candy shop in Philadelphia. The business failed after six years. The next stop was Denver, Colorado, where he accepted a job with a local caramel manufacturer. There, he learned that superior results could be achieved when fresh milk was used in the caramel-making process.

Hershey moved on to Chicago in 1883, then to New Orleans and later to New York City - attempting to establish his own candy business in each location. He returned to Lancaster, PA, in 1886. After raising the necessary capital, he began the business that established his reputation as a candy-maker - the Lancaster Caramel Company.

Mr. Hershey became fascinated with German chocolate-making machinery at an exhibit at the Chicago International Exposition in 1893. He bought the equipment for his Lancaster caramel business. In addition to chocolate coatings, Mr. Hershey made breakfast cocoa, sweet chocolate and baking chocolate.

In 1900, Mr. Hershey sold the Lancaster Caramel Company for $1 million. However, he retained the chocolate manufacturing equipment and the rights to manufacture chocolate, believing a large market existed for affordable confections that could be mass-produced. He returned to Derry Church, and located his operation in the heart of Pennsylvania's dairy country, where he could obtain the large supplies of fresh milk needed to make fine milk chocolate. In 1903, with money earned from his caramel business, he began to build what is now the world's largest chocolate manufacturing plant. It opened in 1905, and Mr. Hershey's great contribution to the American food industry had begun-the mass production of milk chocolate.

The chocolate business continued to thrive under Mr. Hershey's guidance, as did the community he established around it. Banks, department stores, schools, parks, churches, golf courses, zoos and even a trolley system (to bring in workers from nearby towns) were all built in rapid succession. Although the town was well established by its 10th anniversary in 1913, Mr. Hershey started a second building boom in the 1930s. During the Depression, he kept men at work constructing a grand hotel, a community building, a sport arena, and a new office building for the chocolate factory.

Mr. Hershey's belief that an individual is morally obligated to share the fruits of success with others resulted in significant contributions to society. Together with his wife, Catherine, he established the Hershey Industrial School in 1909, now called Milton Hershey School. Saddened because they had no children of their own, the Hersheys were anxious to put their growing fortune to good use. And three years after Mrs. Hershey died in 1918, Mr. Hershey gave his entire fortune to the school. 1

The 10,000-acre school currently serves 1,050 boys and girls of ages 4-18 socially needy families of diverse backgrounds. The goal is to prepare its graduates to enter the work force and continue their education. Through the Hershey Trust Company, the school owns 31.4% of Hershey Food Common Stock classes outstanding, controls 76% of the corporation's voting shares, and is a direct beneficiary of Hershey Foods' success.

"The School expects to bring in nearly 500 additional students, to increase the student population up to 1,500 on the 1,400-acre central campus in Derry Township. Phased in over several years, this 44 percent enrollment increase will require completion of five new buildings currently under construction, as well as additional staffing throughout the School and construction of additional student homes over subsequent years. The new buildings include a middle school, a high school and a nearby performance gymnasium, a learning resource center, and a visual arts center, all with the latest technology" 1

Milton Hershey was both a dreamer and a builder. He had the genius to develop his chocolate business in the right place at the right time. His personal convictions about the obligations of wealth and the quality of life in the town he founded have made the company, community and school a living legacy.

Hershey Foods Mission Statement

Our mission is to be a focused food company in North America and selected international markets and a leader in every aspect of our business. Our goal is to enhance our #1 position in the North American confectionery market, be the leader in U.S. chocolate-related grocery products, and to build leadership positions in selected international markets.

Hershey Foods Corporate Philosophy

In seeking to balance our desire for profitable growth with the obligations which we have to various other constituencies, we shall strive to:

1.Protect and enhance the corporation's high level of ethics and conduct.
2.Maintain a strong "people" orientation and demonstrate care for every employee.
3.Attract and hold customers and consumers with products and services of consistently superior quality and value.
4.Sustain a strong results orientation coupled with a prudent approach to business.

There is no doubt that 1999 was a most difficult and disappointing year for Hershey Foods Corporation. While the year got off to a slow start due to excessive retail inventories, we fully expected a strong finish in the second half of the year. Instead, the implementation of the final phase of the Corporation's enterprise-wide information system created problems in the areas of customer service, warehousing and order fulfillment. These difficulties were exacerbated by our growth in recent years which had resulted in shipping capacity constraints. As a result, Hershey's sales and earnings fell well short of expectations for the year.

Entering the new year, we continued to work diligently to resolve these issues, and great progress has been made thus far. Moreover, our logistics capabilities will be further enhanced when the new Eastern Distribution Center, located near Hershey, begins operations in mid-2000.

Major Product Groups

Hershey Foods has been making quality chocolate products for more that 100 years. It is the leading North American manufacturer of chocolate, confectionery and chocolate-related grocery products. As of 1998 Hershey has added more products to their line of chocolate, most recently "Bites" chocolate candies. Reese's Crunch Cookie Cups were introduced in 1997. Hershey's Sweet Escapes brand was introduced in two flavors-Sweet Escapes crispy caramel fudge bars, and sweet escapes crunchy peanut butter bars. Hershey's mini-Kisses semi-sweet baking pieces were also introduced that year. And last Hershey's classic caramels were introduced in two flavors: traditional caramel and chocolate crème filled. During 1998, ReeseSticks wafer bars were introduced, and Jolly Rancher Jolly Jellies candies were introduced in two flavor varieties-Tart 'N' Tangy and Sweet 'N' Fruity. The operations of Hershey Foods Corporation are concentrated mainly in three divisions. Hershey Chocolate North America is the nation's leading domestic producer of chocolate and non-confectionery products. Hershey International oversees the corporation's international interests and exports to over 90 countries worldwide. Hershey Pasta and Grocery Groups, was for over thirty years the leading domestic manufacturer of dry pasta and chocolate-related grocery products. On January 28, 1999, Hershey Foods Corporation and New World Pasta announced the purchase of Hershey's U.S pasta business by New World has been completed. As a result of the transaction, Hershey received $450 million in cash and retained a minority interest in the business.

Hershey's most popular confectionery plant is located in Hershey, Pennsylvania. This plant is widely known for its tourist attraction, where they have the opportunity to see how the product is made. They also have souvenirs and samples of the product. They also in branching out have gone global with a factory in Mexico to help with distribution in their country. They have a wide range of products and they are a known household name for candies, syrups, and baking products.

As a diverse company, they also have continued to grow their East Coast restaurant chain Friendly's, which specializes in a homey atmosphere. This division gives them a chance to be up close and personal with the community, and it may be a marketing advantage for them to be close and able to monitor changes in trends of the population. What this basically means is that in the economy there are changes in cycles and trends that must be tracked and by being close to the people they have more of an opportunity to utilize there resources. Employee survey or customer comment cards or just advertisement may do this.

In 1979, Hershey Foods purchased Friendly's. In this purchase they left the two companies separate and continued to expand the Friendly's chain. In the restaurant division Friendly's has made a name for itself east of the Mississippi River. They are not associated with Hershey's where the public is concerned, instead they have their own brand of sweet's that are stocked in over 6000 grocery chains on the east coast. They are also available for franchise that will continue to make the company grow and use dollars from franchisee owners rather than the company. The Friendly's company undergoes thorough evaluation of the applicant before they agree to the franchise. It would not be suprising if the company denied many applicants who would not meet the standards they are looking for. Also, an initial payment of 5,000 is required before they will begin the process, generally after the passing of the initial interview. Friendly's has a way of doing business and the consumers know that and it keeps them returning for quality food at moderate prices.

*Available only in Canada Chocolate:

United States Almond Joy candy bar, Cadbury's chocolate bars, Cadbury's Creme Eggs candy, Cadbury's Mini Eggs candy, Caramello candy bar, 5th Avenue candy bar, Heath toffee bar, Hershey's Bites candies, Hershey's Cookies 'n' Crème candy bar, Hershey's Hugs chocolates, Hershey's Kisses chocolates,Hershey's Kisses With Almonds chocolates, Hershey's milk chocolate bar, Hershey's milk chocolate bar with almonds, Hershey's Miniatures chocolate bars, Hershey's Nuggets chocolates, Hershey's Pot of Gold chocolates, Hershey's Sweet Escapes candy bars, Kit Kat wafer bar, Krackel chocolate bar, Milk Duds candy, Mounds candy bar, Mr. Goodbar chocolate bar Reese's crunchy cookie cups, Reese's NutRageous candy bar, Reese's peanut butter cups, ReeseSticks wafer bars, Rolo caramels in milk chocolate, Skor toffee bar, Special Dark chocolate bar, Symphony milk chocolate bars, Whatchamacallit candy bar, Whoppers malted milk balls,York peppermint patties Non Chocolate: Amazin' Fruit gummy bears, Amazin' Fruit Super Fruits candy, Chuckles candy,Good & Plenty candy,Good 'n Fruity candy, Heide gummy bears, Heide jujubes, Hershey's classic caramels, Hershey's jellybeans, Jolly Rancher bubble gum, Jolly Rancher candy, Jolly Rancher gummies, Jolly Rancher lollipops, Jolly Rancher Jolly Jellies candy, Jolly Rancher Jolly Beans jellybeans. Jujyfruits candy, Luden's throat drops, Nibs candy, PayDay peanut caramel bar, Rain-Blo gumballs,Reese's Pieces candy, Sixlets candy, Sour Dudes candy, Super Bubble bubble gum, TasteTations candy, Twizzlers candy, Twizzlers Pull-n-Peel candy, Wunderbeans jellybeans, Zagnut candy bar, Zero candy bar.

Grocery Products: Heath toffee baking chips, Hershey's baking chocolate, Hershey's baking chips, Hershey's chocolate drink, Hershey's chocolate milk mix, Hershey's Chocolate Shoppe ice cream toppings, Hershey's cocoa, Hershey's fat-free sundae syrups, Hershey's food service products, Hershey's Goodnight Hugs hot cocoa mixes, Hershey's Goodnight Kisses hot cocoa mixes, Hershey's Hot Cocoa Collection hot cocoa mixes, Hershey's syrup, Mounds coconut flakes, Reese's baking chips, Reese's peanut butter.

Mexico: Chocolate Confectionery: Almond Joy candy bar, Hershey's Bites Cookies 'n' Creme candy, Hershey's chocolate covered almonds, Hershey's Cookies 'n' Crème candy bar, Hershey's extra creamy milk chocolate candy bar, Hershey's extra creamy milk chocolate with almonds candy bar, Hershey's Giant Kiss chocolates, Hershey's Giant Kiss With Almonds chocolates, Hershey's Hugs chocolates, Hershey's Kisses chocolates, Hershey's Kisses With Almonds chocolates, Hershey's milk chocolate bar, Hershey's milk chocolate bar with almonds,Hershey's milk chocolate bar with hazelnuts, Hershey's Mini Kisses chocolates, Hershey's Miniatures chocolate bars,Hershey's
Nuggets Cookies 'n' Creme candy, Krackel chocolate bar, PayDay peanut caramel bar, Reese's crunchy cookie cups, Reese's NutRageous candy bar, Reese's peanut butter cups, ReeseSticks wafer bars, York peppermint patties Grocery Products Hershey's chocolate chips, Hershey's chocolate drink, Hershey's chocolate milk mix, Hershey's cocoa, Hershey's strawberry drink, Hershey's syrup 3

Hershey's has a good grip on their market places and they have a name that everyone in America knows. They have chosen a market that is diverse and heavily prevalent in the country. Hershey's has not chosen to go global with all of their market's and this is a smart move by them. They have kept their restaurants in the states and moved their candies to the international market. This keeps them from risks of overseas markets. Company wide they keep an open mind when it comes to listening to what the customer wants and making sure that the customer will return.

Hershey Chocolate North America

The division produces and markets many favorite American brands. Principal brands include Almond Joy and Mounds candy bars, Cadbury Crème Eggs, Hershey's milk chocolate and milk chocolate with almond bars, Hershey's Nuggets chocolates, Hershey's Kisses and Hershey's Hugs Chocolates, Kit Kat wafer bar, Reese's NutRageous candy bar, Reese's Peanut butter cups, Sweet Escapes, TasteTations, Twizzlers candy, York Peppermint Patties, Caramillo candy bar, Hershey's Cookies 'n' Crème candy bar, Hershey's Goodnight Hugs, Hot cocoa mixes.

Additional brands include Jolly Rancher, Jujyfruits candy, Milk Duds candies, PayDay Peanut caramel bar, Pot of Gold boxed chocolates, Whoppers malted milk balls and Wunderbeans jellybeans. Key Canadian brands include Brown Cow, Strawberry Cow milk modifiers, Chipits chocolate chips, Eat-More candy, Glosette chocolate covered raisins, Pot of Gold boxed chocolates, Reese Peanut Butter Cups candy and Twizzlers candy. In Mexico, chocolate products are produced and marketed under the Hershey's brand name. In addition, some of the division's products manufactured in the United States are sold in Mexico.

In December 1995, Hershey Foods increased the wholesale price of the standard candy bar and king size line in the United States by 11%. This was the first price increased in this line in almost five years. Although the predictable volume reductions associated with such a price increase, they were more than offset by significant growth in the seasonal candy business, new product introductions, and strong marketing programs.

August of 1996, Hershey Foods initiated two new chocolate and confectionery capital projects-one for the expansion of the Stuarts Draft, Virginia facility and the other for new production equipment at their Naugatuck, Connecticut facility. In addition, Hershey Foods increased production capacity both for core and new products and continued to modernize the existing plants.

Hershey International

Hershey Foods was a late comer to the international market. They did not start hitting the international market till the 1990's. Hershey International today oversees the corporation's international interests and exports exports Hershey's branded confectionery and grocery products to over 90 countries worldwide. It also manufactures and markets chocolate and confectionery products in Germany under the Gubor brand; in Italy under the Sperlari, Dondi, Scaramellini and other brands; and in Japan and Russia under the Hershey's brand. Hershey's branded products also are manufactured and sold in various other markets through licensing arrangements. Among well known candies and confectionery goods that Hershey produces, these are some of the other licensed goods within the international division: Hershey's almond ice cream bar, Hershey's extra creamy ice cream bar, Hershey's chocolate drink, Hershey's chocolate pudding, Hershey's chocolate ice bar and Hershey's Krackel ice cream bar.

Hershey has made licensing agreements with partners in South Korea, Japan, the Philippines, and Taiwan. In Japan, Hershey's Kisses milk chocolates are the division's major confectionery product. This division continues to have strong brand franchise in South Korea. The Philippines is one of the strongest markets outside North America, where the division competes successfully in the domestic retail market and duty-free business.

Hershey International competes in the non-chocolate confectionery category in Italy, the praline segment in Germany and operates chocolate and other confectionery businesses in Japan and Russia. Selected Hershey's products have been introduced into the Chinese market. The division also develops products designed specifically to meet the needs of international consumers, such as Hershey's extra creamy milk chocolate.

1995 was a year of expansion for Hershey International, with the opening of representative offices in Shanghai and Moscow. Hershey International entered 17 new export markets in 1995, and product offerings outside the United States were expanded with the introduction of Hershey's creamy caramel bar, four flavors of Hershey's cookies and four Amazin' Fruit non-chocolate confectionery items.
During 1997, Hershey International achieved solid sales growth and was significantly more profitable than in previous years. Compared with 1996, however, the division's 1997 sales were substantially lower as a result of the divestiture of Gubor Schokoladen and Sperlari Srl., the European businesses, in late 1996. During 1998, Hershey expects to invest significant resources to enhance the growth of their international businesses.

International Operations

Hershey's brand confectionery and grocery products are enjoyed around the world. Hershey Foods exports to more than sixty countries through various subsidiaries and licensing agreements. Hershey company acquired the licensing right to Leaf North America's confections from a Finland company on December of 1996. Hershey Foods Corporation acquires the United States operations of Leaf Inc. Brands which include: Good & Plenty candy, Heath toffee bar, Jolly Rancher candy, Milk Duds chocolate covered caramels, PayDay peanut caramel bar, Whoppers malted milk balls, and Super Bubble and Rainblo bubble gum. The business in China is proceeding according to plan, and Hershey. Licensing programs with partners through the Far East continue to perform well. This expresses Hershey's ambitious plans to increase its market share. The three new products combined are estimated to constitute $250 million in combined annual sales.

The NAFTA agreement between Canada, the US and Mexico has allowed Hershey's to increase market share. Currently, Hershey holds about 30% of the Canadian chocolate market and 7% of the sugar confectionery market. Hershey rank second in both Canadian and Mexican chocolate sales. Hershey Japan sells and distributes selected chocolates in the Japanese market. Hershey also has licensing agreement with Snow Brand Milk Products Co., Ltd. in Sapporo, Japan, which provides Hershey with a larger market share.

Following disappointing sales in the European market for chocolate products, Hershey North America planned an alternative strategy to gain market share, selling pasta. The sale of the pasta division shows they need another strategy for Europe. They may wish to redirect their efforts to sell products outside Europe, since the market is stronger in Japan and Latin America. They may also wish to compete with European made candies being sold in the United States by taking on competitors, i.e., by producing popular gummy candy and sour gummy lines.

Hershey Pasta held the number one share position in the U.S. branded dry pasta category until the sale of the pasta division this year. Its regional approach to marketing has been instrumental in gaining and maintaining this leadership position. The U.S. retail pasta industry experienced a volume decline in 1997.

For Hershey Grocery Group includes; baking chocolate, baking chips, chocolate drink, chocolate milk mix, chocolate Shoppe ice cream toppings, syrup, hot cocoa mix, fat-free sundae syrups, Peter Paul Mounds coconut flakes, baking chips, and Reese's peanut butter. This division holds the leadership position in the chocolate syrup and unsweetened cocoa categories in the United States. New chocolate-related grocery product introductions, a solid baking season, and the licensing of the corporation's trademarks to other grocery manufacturers contributed significantly to the division's growth.

Hershey's Confectionery

Hershey's continues their quest to become the number one chocolate manufacturer in the industry. There has been bitter legal and marketing fights, palace intrigue, and personality clashes that dominate Hershey and Mars - and the candy industry as a whole. The retail sales value of candy hit $28 billion last year, and Mars and Hershey together control three quarters of the candy rack. M&Ms by Mars produce more dollars than Camel cigarettes, and Hershey's Reese's Peanut Butter Cups outsell Ivory Soap. And it is an intensely competitive business, complete with cloak and dagger intrigue and industry spies. "Hershey and other candy companies say they can't be too cautious. After all, it's not as if they can patent a new candy bar. They must protect themselves from outsiders - and from their own employees. It is for this reason that no one in the industry will openly discuss new products - even those that have already hit the shelves, for fear they might spill a tasty trade secret. Marketing plans are handled with similar care: Disseminated to only a handful of people, they are treated like top-secret Defense Department documents.
Hershey's plans are marked "Strictly Confidential" in bold red ink, and they're shredded almost as soon as they're printed to avoid potential leaks. Recipes, too, are closely guarded. Tucked inside alarmed safes, they are shared only on a need-to-know basis. That way, workers on the manufacturing line can never reveal exactly how the candies are made. In fact, the manufacturing process itself is the most prized secret of all." 2

Due to fierce competition, Hershey's has stopped conducting factory tours to protect manufacturing techniques.

Hershey's has tried to improve their products by using different packaging strategies. Hershey's makes its first venture into the lollipop market with the national introduction of Jolly Rancher lollipops in January 1999. These individually wrapped lollipops have the unique square shape and long-lasting, intense fruit flavor for which Jolly Rancher candies are famous for. They are available in three flavors - cherry, apple and watermelon.

Valentine's Day is the most popular holiday that means sales for the chocolate industry. 35 million heart-shaped boxes of chocolate are sold for Valentine's Day.
This year, Hershey's' packaged individually wrapped packages of chocolate with a combination of Hershey's Kisses and Hershey's Hugs chocolates for the Valentine's occasion. It states that it is a perfect way to say "Happy Valentine's Day!" The front of each package contains "to" and "from" spaces to personalize the gift. These Friendship Exchange bars are additions that include Reese's Pieces candy, Kit Kat bars, Jolly Rancher Jolly Beans, and Hershey's milk chocolate bars with the Valentine - theme.

Hershey's Pasta

Hershey's Food Corporation and New World Pasta, LLC, announced that they have signed a definitive agreement providing for the acquisition of Hershey's US pasta business by New World. As a result of the transaction, Hershey gets $450 million in cash and will retain a minority interest in the business. The principals of New World include c. Mickey Skinner, retired President, Hershey's Pasta Group; Miller Milling Company; and Joseph Littlejohn & Levy Fund III. The transaction is to include the American Beauty, Ideal by San Giorgio, Light 'n fluffy, P&R, Mrs. Weiss, Ronzoni, San Giorgio and Skinner pasta brands, along with six manufacturing plants. In 1997, combined sales for Hershey's pasta business were approximately $400 million.

"Hershey Foods has been involved in the pasta business since 1966. Over the years, this business has provided profitable growth and good cash flow for the corporation and today enjoys the leadership position in the US branded dry pasta category. However, after a thorough review of our strategic direction, we have concluded that we can generate a better return for our shareholders by focusing our resources on our confectionery and related grocery and foodservice businesses," said Kenneth L. Wolfe, Chairman and Chief Executive Officer of Hershey Foods."

New World has indicated that it plans to locate the headquarters for the pasta business in the Central Pennsylvania area. As part of the transaction, Hershey and New World have agreed that all of the current pasta employees will be offered employment by New World. The transaction is subject to any necessary regulatory approvals and is expected to close by the end of January 1999.

Research and Development

The Hershey Food Corporation has invested heavily into research and development in order to stay on top of the confectionery industry. The completion of a $7.4 million research center in 1979 and the reorganization of the company's research and development attest to Hershey's commitment to excellence. Included in the facility are offices, laboratories, a library, test kitchen, auditorium, animal testing facilities, and a pilot plant. The research and development office of Hershey's Food Corporation consists of four groups. The research group focuses on vegetable fat chemistry, chocolate flavor research, and raw materials research. The three subgroups of the research group include an analytical research group; which has compiled one of the largest data banks on the nutritional content of chocolate and cocoa. A microbiological team to assess cocoa bean microbiology and a nutrition group that addresses basic cocoa nutrition issues.

The changing habits, desires, and lifestyles of consumers have led to a global revolution in the food industry. Today's consumers expect high quality, low prices and instant delivery of their goods. This creates a major challenge for the Food Service companies trying to satisfy these needs.

The implementation of R&D programs is based on focusing on the following areas:

Food Technology Research group's efforts have focused on (1) product and process development from local and imported raw materials; (2) production efficiency through mechanization/automation; (3) development of techniques for the production of high quality food products; (4) development of technology for effective post-harvest system. This group also focuses on nutrition research projects, on subjects like tooth decay, acne, chocolate allergies, and nutrition.

The Biotechnology Research group focuses its effort on molecular/cellular manipulation for desired characteristics in plant, livestock and microorganism of economic interest, and in development of new biological products and processes. This group has the responsibility to develop processes to minimize the creation of waste, as well as to recycle materials and to dispose all remaining waste through safe and responsible methods. The Biotechnology Research group participates with government and others in creating responsible laws, regulations and policies to help safeguard the environment.

The Engineering group is mainly responsible for assisting capital programs, and it also provides some engineering skills for moving new products into production. This group is also responsible in developing packaging and shipping materials which are safe and which minimizes environmental impacts.

The Equipment Design and Developing group provides support for producing new products and improving existing manufacturing systems. This group is responsible for the mechanization/automation of food processing, and for the design of special methods and devices unique to Hershey's products and conditions.

The company's R&D efforts have paid important dividends. Whatchamacallit and Reese's Pieces are two successful products that were developed by the company, and their success has encouraged further research. A significant technological breakthrough was the development of a peanut-butter-flavored ingredient that reduces dependence on high-priced cacao beans.

Hershey continues to heavily invest in its R&D division. R&D can redesign and improve existing products to ensure consistently high levels of quality and performance. Re-engineering improves the flavor, color, texture, and overall integrity of the products - the key criteria by which customers evaluate the quality of food service operations.

Watchamacallit and Reese's pieces are two successful products, which were developed by Hershey's research and development teams. Hershey's development of a peanut butter flavored ingredient was a great achievement for their research and development group. Reese's pieces got a huge boost when Mars said no to Steven Spielberg years ago, and so E.T.'s favorite candy became the new Reese's pieces, for that 'out of this world' taste, instead of M & M's. Hershey's future research and development will focus in on creating new alternative ingredients, as to reduce operations depending on raw imported commodities such as sugar, cocoa, and almonds.

Distribution

Sales and growth can only be achieved through an adequate distribution system. Hershey's distribution success lies on the location of their production warehouses, and in the sheer number of their task force. As to date, Hershey has warehouses scattered nationwide and throughout Puerto Rico and Canada as well as in east Asia and joint ventures in South America. Hershey's has at their disposal, a line of privately owned trucks, but they also employ public and contract carriers to move their products from manufacturing plants to field warehouses and retailers, where they would eventually reach consumers.

Hershey's Chocolate products are sold mainly to wholesalers and vendors. However, with the introduction of Sweet Escapes, a low-fat chocolate bar, Hershey's has managed to sell directly to retailers. With more products in great demand from consumers, Hershey hopes to distribute more of its products directly to retailers so as to save costs and to cut out the middleman.

International distributions are handled by Hershey's International subdivision. In order to distribute to eastern countries, Hershey's is in the process of building a distribution plant in India where large quantities of goods can be made, manufactured, and shipped all in one location. The creation of such a plant also reduces shipping and transportation costs, as well as reduces manufacturing costs due to product spoilage or unnecessary turnover.

Advertising

Hershey Food Corporation did not advertise its products for the first 66 years of its incorporation. According to Milton Hershey, "Give them quality and that's the best kind of advertising in the world." By the 1970's, the Hershey Corporation could no longer rest on its laurels. Hershey had lost much of its market share to its main rival; Mars incorporated, because it had refused to advertise intensely nationwide.

Today, much has changed. Hershey is one of the confectionery industry's most successful advertisers in terms of total dollars spent. Along with an increase in advertisement spending, Hershey joined forces with major motion picture companies to associate movies with their chocolate bars. Pictures of movies such as Jurassic Park: The Lost World, Godzilla, and even Small Soldiers have been used as chocolate wrappers on their most successful milk chocolate bars. Hershey's winning affiliations with the NFL, NASCAR racing, and the NCAA have also raked in giant profits for Hershey.

Highly creative eye-popping designs and new products for different markets are being pushed and tested by company executives everyday. Furthermore, the acquisition of the Leaf North American Confectionery business made Hershey complete in terms of total product line. By acquiring and assimilating Leaf, Hershey was able to command control of Leaf's well known candies and confections, such as Jolly Rancher, Milk Duds, Whoppers, and Payday.

Hershey hopes to expand production and advertising on the Leaf brand and is looking to extend Leaf's product line. The combination of Hershey's well-known chocolates, and Leaf's popularity is yet another winning combination for the Hershey Food Corporation.

The company should capitalize on the acquisition of these products. A possible marketing strategy would include launching ice cream products for summer, like 'Whoppers' malted milk ice cream and Jolly Rancher sherbet bars. Hershey could take advantage of the slow baking season by offering summer dessert products building on the name recognition of the Leaf and Hershey brands. Another idea is for upscale ice cream, like Haagen-Daaz or Ben and Jerry's ice cream with chunks of Reese's peanut butter cups and York peppermint patties.

Pricing

The pricing decision at Hershey Corporation is very critical. The primary factor involved with Hershey' s pricing decision lies with the volatility of the raw materials for which Hershey's uses to manufactures its goods and confections. Milk, sugar, almonds, and cocoa are all raw commodities, which fluctuate with differing conditions.

Today, Hershey's prices on goods are indicative of the total cocoa market. Hershey imports most of its cocoa supply from foreign markets, primarily West Africa and South America. The cocoa market has been stagnant over the past few years due to harsh weather conditions in cocoa producing countries, fungal infestations of cocoa crops, and insect infestations. Hershey Corporation has joined forces with its competitors; namely, Mars, Nestle's, and Cadburys to combat the problem of failed cocoa crops.

Hershey's alliance with its competitors, known as the cocoa conservation group, is beneficial to all parties involved. The group has worked against the use of large plantations in rain forest areas to grow cocoa crops. The use of smaller cocoa farms makes it easier for those crops to be grown under larger trees. By conserving forest space and growing under trees, the smaller plantations increase their chances of growing better cocoa crops.

The prices of sugar have also declined as the prices of cocoa have increased. NAFTA agreements have allowed South American countries to compete with American sugar companies, and Hershey has reaped the benefits. New technologies for creating alternate substitutes for cocoa are still being implemented at Hershey's research and development center. Hershey's strategy of competitively pricing their goods according to what the market dictates looks positive if Hershey continues to implement their present strategies.

Hershey's chocolate and confectionery products are not self-sustained and still rely heavily on suppliers of raw materials. These suppliers may be forced to increase their prices if bad weather or other factors levy the crop. This plays a key role in the marketing and pricing of Hershey products. The three major raw materials that Hershey's has relied on are cacao beans, sugar and milk. The late 1980's was a time of recession in the consuming countries, particularly the United States, so purchases of these raw materials declined. Since most of the foreign suppliers are in third world regions (and depend on selling their supplies to live) the prices of cacao beans and sugar fell until early1993.

Ghana continues to grow more cacao beans than any other country. Much of the forward purchasing by Hershey's of these beans has been caused by drastic fluctuations in the weather condition throughout West Africa, mainly Ghana. The company has not limited itself to one supplier but holds membership to two large international trade associations: the London Cacao Market Association and the Coffee, Sugar, and Cacao Exchange. Since quality remains an inherent part of Hershey Foods Corp. the price of raw materials takes a back seat to consumer demand in determining the price of the product. The prices of the chocolate and confectionery products have increased through the 1990's due to the high consumer demand and good marketing.

Sugar is another major ingredient that is purchased from a foreign country. Brazil holds most of the supply of sugar that Hershey's needs for many of their products. Crop forecasts are made but are often not correct because of different factors including unanticipated weather damage, sanctions or policies set by the producing country and significant changes in foreign currency. The quality of sugar is not too flexible so purchasing from different countries is an option that Hershey's maintains. Although sugar prices have steadily been rising through the decade Hershey's efficiency and strong ability to market their products has offset the change.

The milk used in production is one raw material that is not purchased from foreign sources. This does not mean that the price of milk stays the same, rather at times changes more drastically than the other materials. The supply of milk often becomes the key determinant in the pricing strategy of Hershey's since large amounts cannot be purchased at one time. Since pre-purchasing milk is not an option consumer demands for Hershey products are used to budget purchases of this raw material.

The restaurant chain owned by Hershey Foods, Friendly, uses many raw materials in its products so menu prices may change with producer's prices. The predominant price fluctuations are in beef, milk, sugar and corn syrup, which make up the most part of their menu items. A major reason for Friendly Restaurant's slow profitability and unknown name is the lack of compromising higher costs for customer satisfaction.

Hershey's products are also sold to retailers at lower concession costs to help stimulate the demand for them. This technique was initiated in the early 1980's and has continued for almost two decades. When the prices of raw materials drop, as they did during the national recession, Hershey's takes advantage and market their products to retailers and end-use consumers. The overall prices of Hershey's chocolate and confectionery products have risen and dropped mostly with consumer demand trends. These trends have been followed closely throughout the ninety's and are the main source of Hershey's pricing strategy for the new millenium.


YEAR 2000 ISSUES (from company's 10-K report)

Year 2000 issues associated with information systems relate to the way dates are recorded and computed in many computer systems. These year 2000 issues could have an impact upon the Corporation's information technology (IT) and non-IT systems. Non-IT systems include embedded technology such as microcontrollers which are integral to the operation of most machinery and equipment. Additionally, year 2000 issues could have a similar impact on the Corporation's major business partners, including both customers and suppliers. While it is not currently possible to estimate the total impact of a failure of either the Corporation or its major business partners or suppliers to complete their year 2000 remediation in a timely manner, the Corporation has determined that it could suffer significant adverse financial consequences as a result of such failure.
Awareness and assessment of year 2000 issues regarding major business applications software and other significant IT systems began in 1990. A formal program to address year 2000 issues associated with IT systems was established in late 1995. In early 1998, a team was established with representatives from all major functional areas of the Corporation which assumed overall responsibility for ensuring that remediation of both IT and non-IT systems will be completed in time to prevent material adverse consequences to the Corporation's business, operations or financial condition. The Corporation expects that remediation of these systems will be essentially completed by the third quarter of 1999.

In late 1996, the Corporation approved a project to implement an enterprise-wide integrated information system to improve process efficiencies in all of the major functional areas of the Corporation, enabling the Corporation to provide better service to its customers. This system will replace most of the transaction systems and applications supporting operations of the Corporation. In addition to improving efficiency and customer service, another benefit of this system is that it is year 2000 compliant and will address year 2000 issues for approximately 80% of the Corporation's business applications software. As of December 31, 1998, approximately $62.1 million of capitalized software and hardware and $6.9 million of expenses have been incurred for this project. As of December 31, 1998, spending for implementation of this system was approximately 65% complete, with full implementation expected by the third quarter of 1999.

Total commitments for this system and subsequently identified enhancements are expected to be approximately $110 million which will be financed with cash provided from operations and short-term borrowings. The Corporation's mainframe, network and desktop hardware and software have recently been upgraded and are substantially year 2000 compliant. The Corporation is in the process of remediating year 2000 compliance issues associated with legacy information systems not being replaced by the integrated information system project, including process automation and factory management systems. During late 1998, the Corporation undertook an extensive review of its year 2000 remediation program. As a result of this review, the Corporation has undertaken additional testing to confirm its year 2000 compliance, but is otherwise maintaining its current program of remediation. As of December 31, 1998, remediation of both IT and non-IT systems was approximately 60% complete, reflecting the latest estimate of testing and work requirements to be performed. The total cost of remediation of IT and non-IT systems is expected to be in the range of $6.0 million to $8.0 million. The Corporation is also in the process of assessing year 2000 remediation issues relating to its major business partners. All of the Corporation's major customers have been contacted regarding year 2000 issues related to electronic data interchange. The Corporation is also in the process of contacting its major suppliers of ingredients, packaging, facilities, logistics and financial services with regard to year 2000 issues. Because of the uncertainties associated with assessing the ability of major business partners to complete the remediation of their systems in time to prevent operational difficulties, the Corporation will continue to contact and/or visit major customers and suppliers to gain assurances that no significant adverse consequences will result due to their failure to complete remediation of their systems. Year 2000 remediation, conversion, validation and implementation is continuing and, at the present time, it is expected that remediation to both the Corporation's IT and non-IT systems and those of major business partners will be completed in time to prevent material adverse consequences to the Corporation's business, operations or financial condition. However, contingency plans are being developed, including possible increases in raw material and finished goods inventory levels, and the identification of alternate vendors and suppliers. Additional contingency plans, to the extent feasible, will be developed for any potential failures resulting from year 2000 issues.


Strategic Planning

Hershey began to emphasize strategic planning in the late 1970s. During the 1960s and 1980s, Hershey pursued an aggressive strategy of diversification. The name of the Hershey Chocolate Corporation was changed to the Hershey Foods Corporation, and by 1982, Hershey had three major product groups: the chocolate and confectionery group; restaurant operations; and the other food products and service group.

Although Hershey Foods was among the 25 largest food and beverage companies in the United States by 1993, the company was coming under increased competition pressure in the U.S. market as a number of companies introduced their own goods. On the other hand the U.S. market was slowly becoming saturated, so Hershey needed to look for other alternatives to make a reasonable profit, and to enhance the value of their shareholders' investment. One alternative to continued investment in the U.S. market was expansion into international markets.

Many factors have made Mexico a potentially profitable location for U.S. direct investment and trade. Mexico's population of 89.5 million people is approximately one-third as large as that of the United States. This represents a large market for U.S. goods. Because of its geographic proximity to the United States, transportation costs from the United States have been minimal. This has increased the competitiveness of U.S. goods in comparison with European and Asian goods, which must be transported at substantial cost across the Atlantic or Pacific oceans. The passage of the North American Trade Agreement (NAFTA) has resulted in further opportunities.

Recognizing this opportunity Hershey's changed its mission statement: "Our mission is to be a focused food company in North America and selected international markets and a leader in every aspect of our business. Our goal is to enhance our #1 position in the North American confectionery market, be the leader in U.S. chocolate-related grocery products, and to build leadership positions in selected international markets".

To maintain their competitive position and a profitable growth Hershey strategy is to strive to protect and enhance the corporation's high level of ethics and conduct. Another strategy is to maintain a strong "people" orientation and demonstrate care for every employee, and to attract and hold customers and consumers with products and services of consistently superior quality and values.

An important contributor to the corporation's success in 1997 was their continued quest for productivity improvement. Hershey's employees play a critical role in quality enhancement, cost control, customer service and overall productivity improvement.

Another aspect of the evolving Hershey Foods organization is the ongoing implementation of a new enterprise-wide initiative (E21) to significantly enhance the company's information systems and business processes. Hershey believes they can gain a competitive advantage in this area and, to that end, the company is investing approximately $80 million in a new enterprise-wide information system utilizing SAP R/3 software. The process will become fully operation during 1999.

One of the element our Hershey's internal drive for continuous improvement is the adoption of Economic Value Added (EVA) concepts to help measure their performance. During 1997, Hershey's employees learned these concepts and processes were implemented in order to capture the necessary information needed to utilize EVA. Beginning in 1998, EVA was a formal part of the company's compensation program for management, along with two other key measurements - earning per share and free cash flow.

To recognize the significant contribution by all Hershey's employees to the market growth of the corporation, The Board of Directors approved their employees to increase their stake in the corporation, or provide them with an opportunity to become owners for the first time. This gave an even greater incentive for all employees to achieve the corporation's goals, and to maintain and enhance the leadership position, adding value in everything Hershey does and to increase profitability.


1999 Detailed Financials (Management's Discussion and Analysis)

Category Strength

A bright spot throughout 1999 was the vibrancy of the U.S. confectionery market, with retail sales growing at a rate of approximately four percent, substantially above the average growth rate of the packaged food group in general. Despite our shipping problems and slower-than-anticipated factory sales in the second half of the year, the retail dollar sales of Hershey's brands increased at a rate greater than the category for 1999 as a whole, leading to market share gains for the Corporation. Also, it should be noted that Hershey Canada and Hershey Mexico achieved excellent results for 1999. Hershey Canada produced solid sales and earnings growth led by good performance of core chocolate brands and the introduction of ReeseSticks bars in the Canadian market. In addition, the Canadian dollar strengthened, yielding a favorable exchange rate which had a positive impact on Canadian results in U.S. dollar terms. Hershey Mexico had an excellent 1999, achieving outstanding sales and earnings growth. Leading performers in this market were Hershey's chocolate drink box, Hershey's Kisses chocolates, Hershey's Kisses with almonds, Hershey's milk chocolate bar, and Jolly Rancher candies.

Hershey International enjoyed excellent sales growth as our Asian markets recovered during 1999, and we invested aggressively in new market development, especially in South America. We expect our international business to continue to grow at an accelerated rate. However, the investment required to develop new markets will lead to little, if any, income contribution from this division for the next several years.

In addition, Hershey's Chocolate World visitors center had an outstanding year, due in part to the success of its catalogue sales via the Internet. These sales grew almost ten-fold, albeit off a very small base. We are investigating uses of the Internet to create other sales opportunities through enhanced communication with customers (especially smaller retailers), as well as through more direct contact with consumers.

Hershey's Strong Brand Franchise

The strong retail performance of our brands during 1999 stems from the strength of Hershey's brand franchise with the American consumer. Consistently high-quality products that deliver great taste and excellent consumer value are the foundation of this franchise, which now is more than a century old. Combining these elements with creative marketing, selling and merchandising activities, including executing new products and line extensions, forms a business model through which Hershey contributes to superior growth for the entire category. However, we need to restore our supply chain management process to its pre-1999 levels to fully restore this performance model.

Retail Consolidation

An important concern for investors in recent years has been the performance of consumer goods companies such as Hershey Foods in the face of the retail trade's continuing consolidation. There is no doubt that on a short-term basis, retail consolidation, especially in the drug store and grocery store areas, causes some disruption of product flow to customers and, ultimately, to consumers. Warehouse and store closings occur, taking inventory out of the system and creating short-term volume challenges for manufacturers.

In the longer term, however, we feel consolidation could actually benefit Hershey. The acquirers, generally speaking, have a better appreciation of the confectionery category's ability to deliver superior returns as a result of good margins and high turnover rates. However, it also is true that the large retailers will continue to pressure manufacturers for more efficiencies, reduced costs and increased promotional funding. As we see it, there are several keys to operating successfully in this environment:

Strong Brands

First, we believe that strong brands, constantly nurtured through excellent quality and value, and by innovative merchandising and advertising programs, are the key. The consumer will demand familiar and highly regarded brands, and private label products will find it difficult to establish a beachhead if we are able to maintain a disciplined approach to pricing by keeping our costs low and our products affordable. Thanks to the strengths of our brands, Hershey is the leader by a considerable margin in the United States confectionery market, the largest and most profitable market in the world. Moreover, we have widened the lead over our nearest competitor over the past ten years and fully expect to maintain and enhance our position in the future.

Innovation

We also believe those manufacturers creating truly new products meeting specific consumer needs will have a distinct advantage over their competitors and will be valuable partners for retailers. A major portion of confectionery is purchased on impulse, and innovation creates excitement for the confectionery category, feeding into this impulse nature very nicely. Hershey's creative thematic merchandising also feeds the excitement and triggers the impulse mechanism.

Hershey has had an excellent run of successful new product introductions during the 90's, and almost every new product introduced within that period is still in our line-up. This excellent batting average enables our customers to have confidence that our new products will deliver incremental sales.

The new Hershey's Bites line proved to be an unqualified success during 1999, greatly exceeding our initial expectations for the product when launched in December 1998. This high-quality entry in the unwrapped, bite-sized chocolate candy category originally consisted of four flavors: Hershey's milk chocolate with almonds, Reese's peanut butter, Hershey's Cookies 'n' Creme, and Almond Joy coconut and almond. A fifth flavor, York peppermint, was introduced in December 1999. While we were under- represented in this category prior to the introduction of the Bites line, Hershey's entries now enjoy a nice position in a category which grew over 50 percent in 1999.

ReeseSticks bars were introduced in February 1998 and proved so successful that demand exceeded our ability to produce all the usual packtypes. New production equipment was installed during 1999, enabling us to fully develop the potential of this excellent brand. Additional packtypes also helped offset some of the sales decline which normally follows a product's introductory year when the supply chain must be filled with sufficient inventory to support a national introduction.

In mid-January 1999, we introduced Jolly Rancher lollipops which capitalize on Jolly Rancher candies' strongest attribute: long-lasting, intense fruit flavor. The lollipops come in three flavors: cherry, apple and watermelon, and they have done very well in their first year of distribution. On a related note, Jolly Rancher celebrated its 50th anniversary during 1999, a tribute to the excellent quality of this brand. Since acquiring this business three years ago, we have built on the brand's equity by extending the line with Jolly Rancher Jolly Beans jelly beans, Jolly Rancher gummies candy, Jolly Rancher Jolly Jellies candy, Jolly Rancher bubble gum and, now, Jolly Rancher lollipops.

Category Management

Another requisite during this period of retail consolidation is key customer account focus with intense category management. This category manager approach, where we are the category captains for many of the major accounts in the U.S. market, is a distinct competitive advantage for the Corporation. By partnering with our customers, we help them maximize the profitability of their confectionery space by providing the data and tactics which create sales growth for the whole category at a superior rate. With our well-trained sales teams applying the best analytical and managerial talent to the large retail market innovators, we are able to drive both category and Hershey sales. Finally, we intend to use integrated information and category account profitability analysis along with efficient logistics to be an even better provider of first-class service to our customers.

Supply Chain Management

The fourth pillar of retail consolidation well-being is supply chain management. Obviously, several circumstances have had an adverse effect on our supply chain execution capability. First, our overall internal growth has been significant, especially in terms of new product items. Second, the December 1996 Leaf acquisition increased our product base by 30 percent on an item basis, even though we discontinued almost half of the Leaf items because they did not meet our profit objectives. Third, the complexity of our thematic merchandising efforts created an added burden for our distribution system.

During 1998, all of this began to make itself apparent, and our distribution system came under stress. We began to experience certain inefficiencies, and related higher costs. We have worked to reduce the complexity of our business and achieved some success during 1999. Until we get the new Eastern Distribution Center on line in mid-2000, however, we will not have this situation fully resolved to our satisfaction.

At the same time we have experienced the well-publicized problems associated with the implementation of the final phase of our enterprise-wide information system. While this has been a painful process for us and for our customers, we should remember that the system is designed to make Hershey more competitive through lower costs, better customer service, and increased sales. It has not been the easiest journey, but we still expect to arrive at our intended destination.

Pasta Divestiture

An extremely important event for Hershey Foods in 1999 was the divestiture of our pasta business. We received $450 million and retained a minority interest in the business in a transaction which generated an after-tax gain of $1.17 per share-diluted. The cash proceeds were used to reduce debt and repurchase Common Stock shares. While this divestiture was somewhat dilutive on a continuing operations basis in 1999, we believe that we can generate a better return for our stockholders over the longer term by focusing resources on our confectionery and related grocery businesses.

Share Repurchase

During the course of the year, the Corporation repurchased 5.5 million shares for a total of $318 million. At the end of 1999, there remained $24 million of repurchase authorization which the Corporation has fully utilized this year. The Board of Directors has authorized a new program of $200 million to be implemented upon the conclusion of the current program.

Dividend Increase

Quarterly dividends were increased in August 1999 from $.24 per share to $.26 per share, an increase of 8.3 percent. This increase represented the 25th annual dividend increase on the Common Stock.

Management Changes

As part of a planned management transition process, Joseph P. Viviano, Vice Chairman of the Corporation and a member of the Board of Directors, retired on March 1, 2000. A 40-year veteran with Hershey Foods, he has been a key contributor to our success. Joe initially ran our pasta business, taking it to a position of industry leadership. Moving to our chocolate and confectionery business, he accomplished the identical results, a tribute to his management skills and competence. He successfully served as President and Chief Operating Officer prior to his election as Vice Chairman. We will miss his experienced advice and counsel.

Michael V. Wells, Vice President, Logistics, will retire on April 1, 2000. He was key in designing and building the Corporation's logistics operation over the past 25 years, and his knowledge and experience in this area will be sorely missed.

In October 1999, Marcella Arline, formerly Director, Quality and Regulatory Compliance, was promoted to Vice President, Quality and Regulatory Compliance. She is responsible for product quality and safety, environmental and regulatory compliance, and nutrition affairs.

Effective January 1, 2000, the Corporation restructured its U.S. marketing organization to be more effectively aligned with the sales organization, and positioned better to prioritize, coordinate and implement activities in the brand equity and new product areas. Michael H. Holmes, formerly Vice President and General Manager, Chocolate, became Vice President, U.S. Marketing, with responsibility for all marketing activities in the United States. Reporting to Holmes are six marketing units, each headed by a marketing vice president.

Michael F. Pasquale, formerly Senior Vice President, Confectionery and Grocery, was named Executive Vice President and Chief Operating Officer, Hershey Foods Corporation, effective February 9, 2000. Mike was responsible for the Corporation's confectionery, grocery and international businesses as well as its research and development activities and now assumes additional responsibility for Hershey Foods' operations and manufacturing shared services. He also serves on the Corporation's Board of Directors. His leadership and broad experience will be especially valuable as we work to return Hershey Foods to its historical performance levels and to more profitable growth.

Looking to the Future

We certainly did not expect the problems we experienced with the implementation of our new enterprise- wide information system. However, the Corporation's employees did an excellent job responding to the problems once they appeared. Hershey employees responded with the same dedication and professionalism they have always demonstrated, and for this we express our heartfelt appreciation.

Time will give us perspective. As we resolve our problems, the frustrations will fade. In their place will be a solid appreciation of the benefits being realized through our new enterprise-wide information system. We will be a stronger, more competitive company for having come through this experience.


Hershey Foods Announces Fourth Quarter Results

Sales and earnings for the fourth quarter ended December 31, 2000.

Consolidated net sales for the fourth quarter were $1,194,902,000 compared with $1,105,838,000 for the fourth quarter of 1999. Net income for the fourth quarter of 2000 was $115,962,000, or $.84 per share diluted, compared with $98,007,000, or $.70 per share diluted, for the comparable period in 1999, an EPS increase of 20.0 percent. No operating results from the acquisition of the mint and gum businesses of Nabisco, Inc. were included in the fourth quarter of 2000, as the transaction was completed very late in the year.

For the year 2000, consolidated net sales were $4,220,976,000 compared with $3,970,924,000 for 1999. Net income for 2000 was $334,543,000, or $2.42 per share diluted, compared with $460,310,000, or $3.26 per share diluted, for 1999. In addition to the gain on the sale of the Corporation's pasta business in January 1999, as well as one month's operational results for this business, these results include a gain from changes in the retiree medical program which occurred in the first quarter of 1999, and a $.03 per share one-time gain on the swap of corporate aircraft in the first quarter of 2000. On a pro forma basis, which excludes all of these one-time items, earnings per share for the year 2000 were $2.39 per share diluted versus $2.03 per share diluted for 1999, an increase of 17.7 percent. "We are very pleased with the solid finish, for both sales and earnings, achieved in the fourth quarter of 2000," said Kenneth L. Wolfe, Chairman and Chief Executive Officer.

"As expected, our sales increased at a healthy rate of 8.1 percent, as we experienced a strong Christmas season following an excellent Halloween season. In addition, all other business units achieved solid sales increases. Our corporate-wide information system performed well, and the new Eastern Distribution Center located near Hershey also helped us provide customers with improved service. Hershey's strong brands did the rest, selling through retail channels at an accelerated pace, leading to an increase in market share. For the year, the domestic confectionery category grew by 3.7 percent, as measured by INFOSCAN, and Hershey's retail sales grew at a rate of 4.7 percent.

"Operating income for the fourth quarter increased at a rate significantly higher than sales, as lower commodity and logistics costs, as well as manufacturing efficiencies, more than offset higher marketing and administrative costs. Fewer weighted average shares outstanding also contributed to the earnings per share growth.

"As we look to the year 2001, we expect to achieve solid growth from our core businesses, as well as incremental sales and earnings from our recent acquisition which will strengthen our position in the overall confectionery, gum and mint category. The integration of these businesses is proceeding according to plan. We are continuing to revamp our logistics capabilities in the west and mid-west, which will result in better customer service and lower costs going forward. Altogether, we expect another fine year for Hershey in 2001 as we increase support for our strong brands and provide the best quality products at a good value for both our customers and consumers," Wolfe concluded.

SAFE HARBOR STATEMENT

This release contains statements which are forward-looking. These statements are made based upon current expectations which are subject to risk and uncertainty. Actual results may differ materially from those contained in the forward-looking statements. Factors which could cause results to differ materially 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 taxes; market demand for new and existing products; the Corporation's ability to implement improvements to and reduce costs associated with the corporation's distribution operations; and changes in raw material costs, as discussed in the Corporation's Annual Report on Form 10-K for
1999.

Hershey Foods Corporation
Summary of Consolidated Statements of Income
for the periods ended December 31, 2000 and December 31, 1999
(in thousands of dollars except per share amounts)


Fourth Quarter Twelve Months
2000 1999 2000 1999

Net Sales $1,194,902 $1,105,838 $4,220,976 $3,970,924

Costs and Expenses:
Cost of Sales 667,553 645,722 2,471,151 2,354,724
Selling, Marketing
and Administrative 318,965 281,140 1,127,175 1,057,840
Gain on Sale of Business - - - (243,785)

Total Costs and
Expenses 986,518 926,862 3,598,326 3,168,779

Income Before Interest
and Income Taxes 208,384 178,976 622,650 802,145
Interest Expense, net 19,486 18,309 76,011 74,271

Income Before Income
Taxes 188,898 160,667 546,639 727,874
Provision for Income
Taxes 72,936 62,660 212,096 267,564

Net Income $115,962 $98,007 $334,543 $460,310


Net Income Per Share

Basic $.85 $.71 $2.44 $3.29
Diluted $.84 $.70 $2.42 $3.26


NOTE:
Net Income Per Share - Basic and Diluted have been computed based on the provisions of Statement of Financial Accounting Standards No. 128 Earnings per Share. Basic shares outstanding for the fourth quarter of 2000 were 136,594,000 compared with 138,736,000 for the fourth quarter of 1999. Diluted shares outstanding for the fourth quarter of 2000 were 137,987,000 compared with 139,792,000 for the fourth quarter of 1999. Basic shares outstanding for the twelve months of 2000 were 137,326,000 compared with 140,031,000 for the twelve months of 1999. Diluted shares outstanding for the twelve months of 2000 were 138,365,000 compared with 141,300,000 for the comparable period of 1999. Net income for the twelve months of 1999 includes a one-time, after-tax gain on the
January 1999 sale of the corporation's pasta business of $165,016,000, or $1.17 per share diluted.


Hershey Foods Corporation
Consolidated Balance Sheets
as of December 31, 2000 and December 31, 1999
(in thousands of dollars)


Assets 2000 1999

Cash and Cash Equivalents $31,969 $118,078
Accounts Receivable - Trade (Net) 379,680 352,750
Deferred Income Taxes 76,136 80,303
Inventories 605,173 602,202
Prepaid Expenses and Other 202,390 126,647

Total Current Assets 1,295,348 1,279,980

Net Plant and Property 1,585,388 1,510,460

Intangibles Resulting from Business
Acquisitions 474,448 450,165
Other Assets 92,580 106,047

Total Assets $3,447,764 $3,346,652

Liabilities and Stockholders' Equity

Loans Payable 258,123 211,606
Accounts Payable 149,232 136,567
Accrued Liabilities 358,067 292,497
Taxes Payable 1,479 72,159

Total Current Liabilities 766,901 712,829

Long-Term Debt 877,654 878,213
Other Long-Term Liabilities 327,674 330,938
Deferred Income Taxes 300,499 326,045
Total Liabilities 2,272,728 2,248,025
Total Stockholders' Equity 1,175,036 1,098,627
Total Liabilities and
Stockholders' Equity $3,447,764 $3,346,652


Hershey Foods Corporation
Pro Forma Summary of Consolidated Statements of Income
Excluding One-Time Items for the periods ended December 31, 2000 and December 31, 1999
(in thousands except per share amounts)


Fourth Quarter Twelve Months
2000 1999 (a) 2000 1999 (c)

Net Sales $1,194,902 $1,098,698 $4,220,976 $3,923,311

Costs and Expenses:
Cost of Sales 667,553 645,722 2,471,151 2,351,159(d)
Selling, Marketing
and Administrative 318,965 274,000 1,134,487(b) 1,028,757

Total Costs and
Expenses 986,518 919,722 3,605,638 3,379,916

Income Before Interest
and Income Taxes 208,384 178,976 615,338 543,395
Interest Expense, net 19,486 18,309 76,011 74,271

Income Before Income
Taxes 188,898 160,667 539,327 469,124
Provision for Income
Taxes 72,936 62,660 209,259 182,958

Net Income $115,962 $98,007 $330,068 $286,166


Net Income Per Share

- Basic $.85 $.71 $2.40 $2.04
- Diluted $.84 $.70 $2.39 $2.03


Shares Outstanding

- Basic 136,594 138,736 137,326 140,031

- Diluted 137,987 139,792 138,365 141,300

EBIT $208,384 $178,976 $615,338 $543,395

EBITDA $253,226 $221,617 $791,302 $706,478


(a) Reflects minor reclassification of sales for the international division wherein certain promotional expenditures were netted against sales instead of being classified as selling expenses.


(b) Excludes airplane swap pre-tax gain of $7.3 million recorded in the first quarter of 2000.

(c) Excludes gain on the sale of the corporation's pasta business in

January 1999, as well as one month's operational results for the pasta business. Also, reflects minor reclassification of sales for the international division wherein certain promotional expenditures were netted against sales instead of being classified as selling expenses.

(d) Excludes FAS 106 pre-tax gain on retiree medical benefits of $12.5 million recorded in the first quarter of 1999. SOURCE Hershey Foods Corporation


HERSHEY FOODS CORP (HSY) Quarterly Report (SEC form 10-Q)

Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Third Quarter 2000 vs. Third Quarter 1999
Consolidated net sales for the third quarter increased from $1,066.7 million in 1999 to $1,196.8 million in 2000, an increase of 12% from the prior year. The higher sales primarily reflected an increase in sales of core confectionery and grocery products in the United States, incremental sales from the introduction of new confectionery products, increased international exports, and lower returns, discounts, and allowances. In 2000, certain international distributor allowances were netted against sales instead of being reported in selling, marketing and administrative expenses as in 1999. The consolidated gross margin increased from 40.6% in 1999 to 41.8% in 2000. Gross margin in 1999 would have been .3 percentage points lower if certain international distributor allowances were reclassified and reported as discussed above for 2000. The increase in gross margin reflected decreased costs for certain major raw materials, primarily cocoa, as well as lower returns, discounts, and allowances. The impact of these items was partially offset by higher freight, distribution and warehousing costs. Selling marketing and administrative expenses increased by 13% in 2000, primarily reflecting increased marketing expenditures for core confectionery brands and international exports, higher provisions for incentive compensation reflecting improved operating performance, and increased administrative expenses due to higher staffing levels to support sales and customer service activity in North America and the international export business. Net interest expense in the third quarter of 2000 was $.6 million above the comparable period of 1999, primarily as a result of higher short-term interest expense reflecting increased average short-term borrowings and borrowing rates. The third quarter effective income tax rate decreased from 39.0% in 1999 to 38.8% in 2000. Results of Operations - First Nine Months 2000 vs. First Nine Months 1999 Consolidated net sales for the first nine months of 2000 increased from $2,865.1 million in 1999 to $3,026.1 million in 2000, an increase of $161.0 million or 6% from the prior year. The higher sales primarily reflected an increase in sales of core confectionery and grocery products in North America, incremental sales from the introduction of new confectionery products, increased international exports, and lower returns, discounts, and allowances. In 2000, certain international distributor allowances were netted against sales instead of being reported in selling, marketing and administrative expenses as in 1999. The first nine months of 1999 included $29.3 million in net sales related to the Corporation's pasta business, which was divested in January 1999. The consolidated gross margin was 40.4% in 2000 and 1999. Gross margin in 1999 benefited .5 percentage points from the inclusion in cost of sales of a one-time $12.5 million gain from revisions to the Corporation's retiree medical plan, and results of the pasta business. In addition, gross margin in 1999 would have been .3 percentage points lower if certain international distributor allowances were reclassified and reported as discussed above for 2000. Excluding results of the pasta business and the one-time gain in 1999, the increase in gross margin reflected decreased costs for certain major raw materials, primarily cocoa, as well as lower returns, discounts, and allowances. The impact of these items was offset partially by higher freight, distribution and warehousing costs primarily related to increased fuel costs and expanded warehousing capacity and increased costs related to the disposal of obsolete packaging and aged finished goods inventory. Selling, marketing and administrative expenses increased by 4% in 2000, primarily reflecting: increased marketing expenditures for core confectionery brands, international exports, and the introduction of new products; increased administrative expenses due to higher staffing levels to support sales and customer service activity in North American and international businesses; higher software amortization costs; and higher provisions for incentive compensation reflecting improved operating performance in 2000. The impact of these items was offset partially by the divestiture of the pasta business and the inclusion in administrative expense in 2000 of a one-time gain of $7.3 million arising from the exchange of certain corporate aircraft. Net interest expense was $.6 million above the comparable period of 1999, primarily as a result of higher short-term interest expense related to increased average short-term borrowings and borrowing rates, and lower capitalized interest. The impact of these items was offset partially by lower fixed interest expense as a result of the interest rate swap and forward agreements entered into in October 1999 and higher interest income. Excluding the provision for income taxes associated with the gain on the sale of the Corporation's pasta business, the effective income tax rate decreased from 39.0% in 1999 to 38.9% in 2000. Net income for the first nine months of 2000 of $218.6 million was 40% below the prior year and net income per share - diluted of $1.58 per share was $0.97 below the prior year. Prior year net income included an after-tax gain of $165.0 million, or $1.16 per share - diluted, on the sale of the Corporation's pasta business. Liquidity and Capital Resources Historically, the Corporation's major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by issuing commercial paper. During the first nine months of 2000, the Corporation's cash and cash equivalents decreased by $73.8 million. Cash and cash equivalents on hand at the beginning of the period, cash provided from operations and short-term borrowings were sufficient to repurchase $99.9 million of the Corporation's Common Stock, pay cash dividends of $107.5 million, and finance capital expenditures and capitalized software additions of $104.8 million. The ratio of current assets to current liabilities was 1.6:1 as of October 1, 2000, and 1.8:1 as of December 31, 1999. The Corporation's capitalization ratio (total short-term and long-term debt as a percentage of stockholders' equity, short-term and long-term debt) was 55% as of October 1, 2000, and 50% as of December 31, 1999. As of October 1, 2000, the Corporation maintained a committed credit facility agreement with a syndicate of banks in the amount of $500.0 million which could be borrowed directly or used to support the issuance of commercial paper. The Corporation has the option to increase the credit facility by $1.0 billion with the concurrence of the banks. The Corporation also had lines of credit with domestic and international commercial banks in the amount of $24.4 million and $25.0 million, respectively, as of October 1, 2000 and December 31, 1999. In March 1997, the Corporation issued $150 million of 6.95% Notes under a November 1993 Registration Statement. In August 1997, the Corporation issued $150 million of Notes and $250 million of Debentures under the November 1993 and August 1997 Registration Statements. As of October 1, 2000, $250 million of debt securities remained available for issuance under the August 1997 Registration Statement. Proceeds from any offering of the $250 million of debt securities available under the shelf registration may be used for general corporate requirements, which include reducing existing commercial paper borrowings, financing capital additions, and funding future business acquisitions and working capital requirements. As of October 1, 2000, the Corporation's principal capital commitments included manufacturing capacity expansion, modernization and efficiency improvements. 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. Such expenditures will be financed with cash provided from operations and short-term borrowings. In July 1999, the Corporation entered into an operating lease agreement for the purpose of financing construction of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor paid for construction costs totaling $61.7 million. The lease term is six years, including the construction period. The lease provides for a substantial residual guarantee and includes an option to purchase the facility at original cost. In January 1999, the Corporation received a Notice of Proposed Deficiency (Notice) from the Internal Revenue Service (IRS) related to years 1989 through 1996. The Notice pertained to the Corporate Owned Life Insurance (COLI) program, which was implemented by the Corporation in 1989. The IRS disallowed the interest expense deductions associated with the underlying life insurance policies. The total deficiency of $61.2 million, including interest, was paid to the IRS in September 2000 to eliminate further accruing of interest. The Corporation believes that it has fully complied with the tax law as it relates to its COLI program and will continue to vigorously defend its position on this matter. Subsequent Event In November 2000, the Corporation entered into an agreement with Nabisco, Inc. to acquire Nabisco's intense and breath freshener mints and gum businesses, which had 1999 sales of approximately $270 million. Under the agreement, the Corporation will pay $135 million to acquire the businesses, including Ice Breakers and Breath Savers Cool Blasts intense mints, Breath Savers mints, and Ice Breakers, Care*free, Stick*free, Bubble Yum and Fruit Stripe gums. Also included in the purchase is Nabisco's gum-manufacturing plant in Las Piedras, Puerto Rico. The purchase of these businesses by the Corporation is conditional upon consummation of the acquisition of Nabisco Holdings Corp. by Philip Morris Companies Inc. (which is subject to Federal Trade Commission (FTC) approval) and FTC approval of the sale of these businesses to the Corporation, as well as other customary closing conditions. The parties expect to complete the transaction by the end of the year.

Safe Harbor Statement


The nature of the Corporation's operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Corporation notes the following factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential" among others. Factors which could cause results to differ include, but are not limited to: changes in the confectionery and grocery business environment, including actions of competitors and changes in consumer preferences; changes in governmental laws and regulations, including income and sales taxes; market demand for new and existing products; changes in raw material costs; and the Corporation's ability to implement improvements and to reduce costs associated with the Corporation's customer service, warehousing and order fulfillment processes and systems. Item 3. Quantitative and Qualitative Disclosure About Market Risk The potential loss in fair value of foreign exchange forward contracts and interest rate swaps and forward agreements resulting from a hypothetical near-term adverse change in market rates of ten percent was not material as of October 1, 2000. The market risk resulting from a hypothetical adverse market price movement of ten percent associated with the estimated average fair value of net commodity positions decreased from $11.1 million as of December 31, 1999, to $3.6 million as of October 1, 2000. Market risk represents 10% of the estimated average fair value of net commodity positions at four dates prior to the end of each period.


(2001 News Article) Comfortable On Outlook But Still ``Very Early In The Game''

On a conference call with analysts, Chairman and Chief Executive Kenneth Wolfe said Hershey is comfortable with 2001 earnings estimates of $2.72 a share, but declined to break out forecasts for individual quarters. For the full 2000 year, the company had pro forma earnings, which exclude special items, of $2.39 a diluted share.

``At this stage of the game, we generally feel comfortable about the outlook for the year,'' Wolfe said. ``But this is still very early in the game. ''The acquisition of Nabisco's gum and mint business, completed late last year, is likely to help results, he said, while also expanding Hershey's reach into new categories.

Hershey, which has added new Eastern distribution facilities in the wake of computer problems that hampered holiday results more than a year ago, is also streamlining its logistics systems. It is focusing on improved distribution in its Western and Midwest regions, Wolfe said. A new Southern California distribution facility is expected to begin operating in the summer.

In the quarter, the company had 138.0 million diluted shares outstanding, compared with 139.8 million one year ago, helping to boost per share results. Operating income in the quarter increased at a significantly higher rate than sales, helped by lower commodity and logistics costs, the company said.

For the year, Hershey said retail sales grew at a rate of 4.7 percent, outpacing the 3.7 percent gain in the U.S. confectionary market. The company said its share of candy sold in food, drug and discount stores, which accounts for more than half its business, rose to 26.8 percent from 26.6 percent a year earlier.

A search for a new CEO is continuing, Wolfe said, without providing a specific time-frame for expected completion. In November, Hershey said it was conducting a search to replace Wolfe, who turns 62 in February and is retiring. The company's chief operating officer, Michael Pasquale, resigned in December.

Hershey said that no operating results from the Nabisco acquisition were included in the quarterly results, as the transaction was completed late last year.

On December 15, 2000, Hershey Foods Corporation (the "Corporation") announced that the Corporation has completed the purchase of the intense and breath freshener mints and gum businesses of Nabisco, Inc., for $135 million.

Management Changes

As part of a planned management transition process, Joseph P. Viviano, Vice Chairman of the Corporation and a member of the Board of Directors, retired on March 1, 2000. A 40-year veteran with Hershey Foods, he has been a key contributor to our success. Joe initially ran our pasta business, taking it to a position of industry leadership. Moving to our chocolate and confectionery business, he accomplished the identical results, a tribute to his management skills and competence. He successfully served as President and Chief Operating Officer prior to his election as Vice Chairman. We will miss his experienced advice and counsel. Michael V. Wells, Vice President, Logistics, will retire on April 1, 2000. He was key in designing and building the Corporation's logistics operation over the past 25 years, and his knowledge and experience in this area will be sorely missed.

In October 1999, Marcella Arline, formerly Director, Quality and Regulatory Compliance, was promoted to Vice President, Quality and Regulatory Compliance. She is responsible for product quality and safety, environmental and regulatory compliance, and nutrition affairs.

Effective January 1, 2000, the Corporation restructured its U.S. marketing organization to be more effectively aligned with the sales organization, and positioned better to prioritize, coordinate and implement activities in the brand equity and new product areas. Michael H. Holmes, formerly Vice President and General Manager, Chocolate, became Vice President, U.S. Marketing, with responsibility for all marketing activities in the United States. Reporting to Holmes are six marketing units, each headed by a marketing vice president.

Michael F. Pasquale, formerly Senior Vice President, Confectionery and Grocery, was named Executive Vice President and Chief Operating Officer, Hershey Foods Corporation, effective February 9, 2000. Mike was responsible for the Corporation's confectionery, grocery and international businesses as well as its research and development activities and now assumes additional responsibility for Hershey Foods' operations and manufacturing shared services. He also serves on the Corporation's Board of Directors. His leadership and broad experience will be especially valuable as we work to return Hershey Foods to its historical performance levels and to more profitable growth.

Superior Growth for the Confectionery Category in 1999

Confectionery sales and, indeed, snack food sales as a whole, have been a relatively bright spot in an otherwise bleak retail landscape for packaged food manufacturers in recent years. This trend continued last year. In early 1999, according to Infoscan, confectionery category sales at the retail level rebounded nicely from the slow second-half of 198, posting a four percent gain for the year. This compared with an average annual sales growth for the entire packaged food category of about one percent. Hershey, as in years past, helped drive the confectionery category's growth. "A bright spot throughout 1999 was the act that the U.S. confectionery market remained vibrant, with retail dollar sales substantially above the average growth rate for the packaged food group in general," said Ken Wolfe, Chairman and Chief Executive Officer of Hershey Foods Corporation. "Despite soft Christmas sales and the shipping problems we experienced in the second half of 1999, which did lead to a modest loss of share late in the year, retail dollar sales of our brands increased more than did the category, leading to a market share gain for Hershey Foods in 1999."Both Hershey and the category have benefited from societal changes, as America's increasingly on-the-go lifestyle has created additional opportunities for candy and snack food consumption. Moreover, Hershey's ability to generate consumer excitement through new product development and creative marketing and merchandising programs has breathed additional life into the category's overall performance.

"Solid consumer value, built on established brand strengths, is critically important in today's non-inflationary environment," continued Wolfe. "Consumers simply will not accept companies raising prices as a way to generate bottom-line growth. Sales growth must come from volume growth, i.e., selling more items at the same price. This is where Hershey's successful combination of a strong new product development program, creative advertising and merchandising, and its ability to consistently deliver good taste and value have helped solidify its position as the leading confectionery company in North America. "Strong Brands and Top-Notch Customer Service Contribute to Hershey Canada's Success. Outstanding results for several key brands contributed to the overall growth of Hershey Canada's business in 1999. These results were achieved by leveraging unique brand properties, ensuring consumer quality and customer value, and by keeping brands "top-of-mind" with consumers through unique advertising and promotional events. On the brand side...Oh Henry! is the number-one chocolate bar in Canada. A special-edition Honey Roast Oh Henry! was introduced in March 1999 to build upon the success of the popular Oh Henry! brand. Honey Roast Oh Henry! was a hit with consumers and the limited supply left them begging for more. The Reese brand had an incredibly strong year, achieving increased sales and market share. In fact, the Reese peanut butter cup was one of the strongest growing items in the category. Pot of Gold, a Canadian tradition since 1928, continues to lead the market as the country's number-one boxed chocolate brand. It achieved significant growth for the year and was one of the driving forces behind the successful 1999 Christmas program Almondillos, a boxed chocolate item, was re-introduced in 1999. It became the fourth-most-popular Hershey boxed chocolate item after only one year on the market!

The Kisses brand ranks second in Canada's packaged candy segment. Brand awareness has increased in recent years due to an association with figure skating, a popular sport in Canada. Hershey Kisses With Almonds was a key contributor to the overall Kisses brand success in 1999, its first full year on the market.

Hershey Canada nurtures its strong brands by building brand awareness and driving sales through exciting thematic marketing promotions. In fact, this year's Halloween program was so successful that it generated record-breaking sales, making Hershey the share leader in Canada during the 1999 Halloween season.

Hershey Canada's success

Category Management - the process that partners manufacturers and retailers to provide the consumer with the right product in the right place, at the right time - has emerged as an important value-added activity in the Canadian marketplace in recent years. Hershey Canada has worked to increase its Category Management expertise by expanding its knowledge of the confectionery consumer. These efforts have paid off, as Hershey Canada recently obtained the coveted title of Category Captain for all the major retailers in each trade channel in Canada. Category Management is a win-win both for Hershey Canada and its customers. It provides Canadian retailers with an opportunity to secure a sustainable competitive advantage in a very competitive retail environment by helping the retailer to make better category decisions, which ultimately drive sales. Success in the Category Management area also is dependent upon meeting the customer's distribution requirements and, thanks to a new Distribution Centre, which opened in September, Hershey Canada's products are reaching customers faster and more efficiently than ever before.

New enterprise-wide information system

The benefits of this new technology were in up-front capabilities in inventory availability at the customer service level and in the added capabilities in the forecasting, inventory planning and product allocation system. In addition, profitability analysis afforded by the system provided good analytical data to support both the review and understanding of financial results. Most importantly, the new enterprise-wide information system helped break down functional barriers and supported Hershey Canada's transfer to a process-driven organization.

The road ahead

"Each year brings a whole new set of challenges and 2000 is no exception," said Rick Meyers, President and General Manager, Hershey Canada. "As a key player in the highly competitive Canadian confectionery market, I count two critical success factors that have been, and will continue to be, our competitive advantage - the strength of our great brands and the quality of thought and 'can do' attitude of our people.".Hershey Mexico

Hershey Foods entered into a joint venture agreement with Anderson, Clayton & Co., S.A., for the manufacture and sale of chocolate and confectionery products in Mexico in 1969. The new company was called National de Dulces, S.A. de C.V., and produced both chocolate and hard candy products. Originally located in Mexico City, a new plant was built in El Salto (just outside the city of Guadalajara) in 1981. Approximately 10 years later, Hershey Foods acquired a 100 percent-interest in the business and changed the name to Hershey Mexico, S.A. de C.V.

Today, Hershey Mexico is more than just a manufacturing location. It is a business unit with the plant and its principal offices in Guadalajara and field offices and warehouses in Mexico City, Monterrey and Tijuana. Hershey Mexico's modern and efficient Guadalajara Plant produces Hershey's milk chocolate bar, Hershey's milk chocolate bar with almonds, Krackel chocolate bar, Hershey's milk chocolate bar with hazelnuts, Hershey's Cookies 'n' Creme candy bar, Hershey's extra creamy milk chocolate candy bar and Hershey's extra creamy milk chocolate with almonds candy bar. Hershey's Miniatures chocolate bars; Hershey's Kisses chocolates, Hershey's Mini Kisses chocolates, Hershey's chocolate chips; and Hershey's Giant Kiss chocolates and, to a lesser degree, Hershey's Giant Kiss With Almonds chocolates also are produced there.
In addition, Hershey Mexico imports various bulk products such as Hershey's Kisses With Almonds chocolates, Hershey's Hugs chocolates, Almond Joy candy bar, Hershey's Cookies 'n' Creme Nuggets chocolates and Hershey's cocoa from other Hershey plants to be repacked for Mexican sales. Also, a few finished products are imported for domestic sales. They include: Jolly Rancher candy, Hershey's chocolate milk mix, and Hershey's syrup. The Guadalajara Plant achieved record production volumes in 1999 attributed, in part, to the addition of two new lines - Hershey's chocolate drink (for Mexican sales) and Hershey's Cookies 'n' Crème Bites candies (for export to the United States).
"Despite periods of economic instability, results in recent years for Hershey Mexico have been excellent in both sales and income growth and the future remains bright," said Mike Pasquale, Executive Vice President and Chief Operating Officer. "Our efforts in Mexico, as part of an overall North American strategy, have allowed us to achieve tremendous results, but the key has been our outstanding team of people," said Randy Main, Director of Operations/Plant Manager since 1993. "They are proud of the Hershey heritage and have embraced the company's values and philosophies.

Hershey International Moves Forward Aggressively

Hershey International has faced a number of global business challenges over the past several years - devaluation in Brazil, Russia's economic collapse, restructuring in China and the Asian financial crisis - to name a few. Despite these challenges, Hershey International has managed to increase sales opportunities, improve its business position and build market share. Much of this success can be attributed to its strategy of building global brands and focusing on its most promising markets. "About two years ago we decided to concentrate essentially on six global brands - Hershey's Kisses, Nuggets, Cookies 'n' Creme, Hershey's syrup, Pot of Gold and Reese's," said Patrice Le Maire, President, Hershey International. "These brands were selected for their unique selling proposition and their attractiveness to consumers in our markets. We have dedicated most of our marketing and sales efforts toward these global brands and results to-date are very encouraging. "One of our key drivers has been to build distribution and availability of our products, in addition to creating new products and upgrading our packaging. Hershey International's flagship launch for 1999 was Cookies 'n' Crème Kisses. In addition to advertising copy adapted to an international audience, we provided product samples in our strategic markets, enabling us to reach an estimated 20 million consumers."

Today, Hershey International is active in approximately 50 countries, with its primary focus in Latin America, Asia, and the Middle East. Over the past year, it especially has concentrated on building its business in Japan, the Philippines, South Korea, Greater China, Brazil, Venezuela, Israel, Peru and Australia. These countries represent the majority of Hershey International's sales, but, more importantly, its growth opportunities for the future.


The Internet ... A Whole New Way to do Business

Hershey Foods stepped up its e-commerce efforts in 1999 with the establishment of a cross-functional team to explore how the company might utilize the Internet in e-commerce and in brand building. Rick Rocchi, Marketing Manager, Internet, and leader of the team, described the challenge and the opportunity faced by established marketers as the Internet continues to mature. "Clearly, the Internet is creating a tremendous amount of change in a fairly compressed time period as it literally transforms the business landscape. Relationships with existing customers and other business partners are changing as these brick-and-mortar businesses establish their own online presence. New businesses are springing up built entirely around online models. And new ways to sell product continue to appear and to challenge our assumptions about doing business online. "Our immediate challenge is to explore how Hershey Foods might utilize the Internet both in e-commerce and in extending the brand relationship with our consumers. We've had a considerable amount of success with our Hershey's Gift Shop web site. How can we use this experience to explore the next level of selling directly to the consumer? What can we do to marry our traditional marketing tools ... whether advertising, coupons, or the like ... with the Internet? How should we approach branding opportunities on the Internet? And finally, how can we, as the confectionery category leader, assist our customers as they go online? The answers to these questions will help us execute a more focused, coordinated and comprehensive Internet strategy for Hershey Foods." "While no one knows for sure what the commercial potential will be, the Internet and e-commerce are here to stay and Hershey Foods must participate through business-to-business, direct-to-consumer and brand-building opportunities that create value," said Mike Pasquale, Executive Vice President and Chief Operating Officer. "Our Internet team has provided focus in this fast-moving area, helping to ensure that potential business-building and brand awareness opportunities are identified. Now we must move forward to ensure that we have the capability to satisfy the needs of this rapidly growing market segment.

This spring, more resources were devoted to proactively selling and marketing Hershey's product line to on-line retailers ("e-tailers"). These include:
An additional full-time National Accounts Manager to serve as "channel master" for this emerging high-potential class of trade; An additional full-time Category Manager; Identification of an existing Sales Development Manager whose primary responsibility will be e-commerce; and, Identification of existing field sales personnel in each sales region to work with online retailers as "e-tail experts" and to coordinate in-market and home office e-commerce activities.

Last year, 1999, saw the introduction of a new and exciting Hershey's Gift Shop web site (www.hersheygifts.com), a unit of Hershey's Chocolate World visitors center. Launched in April with the help of US internetworking, Inc., an application service provider, the on-line catalog was designed to increase sales of consumer and business-to-business gifts. The results literally were overwhelming as on-line sales volumes soared to 10 times that of the previous year and consumer orders for the 1999 holiday gift-giving season ultimately exceeded inventories for certain items. Don Papson, General Manager, Hershey's Chocolate World, commented, "Hershey's online gift catalog is an excellent example of effective use of the Internet to market and sell Hershey's products through increased brand visibility and consumer awareness. The success it enjoyed in 1999 was simply outstanding. "In fact, it is this opportunity for broader visibility and consumer awareness that made the new gift catalog so successful. "The main advantage of the Internet gift catalog versus the direct mail, printed version is the amount of exposure," said Mark Potts, Project Manager, Hershey Direct. "Now we are able to put the catalog and, really, the concept of a Hershey's gift, in front of a larger and more diverse group of people than ever before." The user-friendly Hershey's Gift Shop web site is colorful and inviting, and includes special VIP Services designed to make shopping a breeze. For example, registered VIP Shoppers have access to Hershey's address book and gift reminder service and, in addition, are eligible to receive exclusive promotions and discounts. Hershey's Gift Shop also has a special section for corporate gift-giving where shoppers may select from a variety of traditional gifts or have Hershey design a custom mould with a company logo. The Distribution List Feature of VIP Services makes it easy for corporate gift givers to send a gift to dozens, or even hundreds, of recipients with a few clicks of the mouse.

The catalog's Postcard Gallery contains free historical and contemporary postcards from "Hershey - The Sweetest Place on Earth" that may be mailed electronically to friends and family. The gallery is a fun-filled feature both for the sender and the receiver and is one of the most popular routes into the site. Hershey's Gift Shop online catalog offers a new selection of seasonal and holiday gifts each month along with the birthday, anniversary and other standard gift items available year-round.

Outstanding Quality Through Excellence
Efforts Yield Big Results for Manufacturing

Hershey Foods operates 19 chocolate and non-chocolate confectionery manufacturing facilities in North America. Thanks to outstanding Quality Through Excellence (QTE) efforts by employees at each of these manufacturing locations, 1999 simply was an outstanding year in terms of cost savings and improved productivity. "Last year was a challenging one for our manufacturing facilities as we engaged our employees in an aggressive effort to reduce costs," said Ken Kwiat, Vice President, Manufacturing. "Thanks to everyone's support of QTE, we ended the year with real productivity increases of nearly eight percent."

QTE - 13 Years and Still Growing

QTE has been in place at Hershey since 1987 and is based on the concept of Total Quality Management. A network of coordinators throughout the corporation spearhead QTE efforts by encouraging employees to "think outside the box" as they explore new methods to increase productivity and decrease costs.

The QTE Executive Award of Excellence, a company-wide Senior Management award, was unveiled in March 1997 as a way to recognize outstanding QTE accomplishments. Entries from around the corporation are judged on the TIP Behaviors (Teamwork, Integrity and Personal Leadership) and the Wow Factor ... that something extra that sets the nomination apart. Gold, silver and bronze medals are awarded in four categories - Innovation and Creativity, Application of Technology, Communications/Best Demonstrated Practices and Continuous Improvement. Each medal recipient group also receives a check to donate to charity.
Additional manufacturing-related milestones in 1999 included - the closure of Hershey's Farmington Plant, Farmington, N.M.

The purchase and commissioning of a 285,000-square-foot manufacturing facility in Pennsburg, Pa., to xpand production of Hershey's Pot of Gold boxed chocolates; and, the sale of Hershey's Savannah plant in Savannah, Ga. Hershey's Moirs Plant in Dartmouth, Nova Scotia, was quickly running out of capacity in recent years as a result of increasing Pot of Gold sales in the U.S. and Canada. Several options were being considered to increase capacity when, in April 1999, Hershey became aware of the availability of the former Cherrydale Farms Plant in Pennsburg, Pa. A quick assessment of the facility showed that the plant had the necessary equipment and systems for the manufacture of boxed chocolates. The sale was finalized in May and Hershey took possession one month later.

Pennsburg plant

Work to recondition the plant began immediately and a start-production date of September was set in order to fill Valentine's 2000 orders. While much of the necessary equipment and systems were in place, a great deal of renovation and upgrade was required to bring the facility up to Hershey standards. A project team was quickly assembled and members deployed to address engineering and systems needs, as well as to focus on the task of recruiting, hiring, orienting, and training an entirely new workforce. Thanks to the team's outstanding effort and dedication to QTE, production deadlines were met.
According to Loris Jarvis, Plant Manager, "Pennsburg's successful start-up was made possible through the dedication and commitment of over 100 plant and shared-service employees. Without the support and cooperation of everyone associated with the project the aggressive time line would not have been met. The effort epitomized teamwork and the true spirit of QTE."

Strength in Brands

Strong brands are the basis of Hershey's leading market position. The company nurtures its brands by maintaining excellent product quality and value, as well as through innovative merchandising, marketing and advertising programs.

A strong brand represents a relationship, established overtime, between the manufacturer and the consumer. This relationship is secured by consistently meeting the consumer's expectations. For example, we have been making Hershey's milk chocolate bars for 100 years. Our consumers trust us to deliver a quality product at a reasonable price time-after-time and, therefore, they know that when they buy a Hershey's bar ... they are going to get a Hershey's bar.

Advantage to having strong brands

For one, strong brands allow us to direct funds toward product quality, advertising and trade promotions, rather than toward price reductions. If you sell products on price only, you are vulnerable to the first product that comes along that is offered at a lower price. On the other hand, people will pay more for a branded product like a Hershey's milk chocolate bar or a Reese's peanut butter cup because of its assurance of quality. To the consumer, value is more than just price, it's what you get for the price.

Disadvantages to having strong brands

The strength of our brands is a definite advantage for Hershey Foods and is the very basis upon which our company is built. In a difficult year like 1999, our strong brands indeed were a blessing. At the same time, they also presented somewhat of a challenge. The blessing is that our brands are so strong and powerful that they are in great demand by our consumers and, consequently, our customers. The flip side is that as we began to experience distribution difficulties related to the implementation of our new business systems and processes, we created a level of disappointment among our customers by not being able to supply them with enough Hershey's products to adequately meet consumer demands.


How to build a brand

Building brands is something that we do very well at Hershey. We use a balanced approach whereby we take all the elements ... consistent taste, consistent packaging, distribution, advertising, promotional events ... into consideration, making the brand bigger and better than it was by itself. Point-of-sale, packaging, advertising - it all works together. Our brands represent Hershey Foods and everything we stand for as a company. We are very conscious of maintaining our image as a wholesome food company and, therefore, we are very careful about with whom or what we associate our products in regard to promotional opportunities or tie-ins.

Brand- building success stories

One brand that has developed beautifully over the years is the Reese's brand. Reese's existed only as a regional brand before we acquired it in 1963. Since then, through our balanced approach to brand building, we have developed it into not only a national brand, but the top confectionery brand in America.

The development of the Twizzlers brand also is a definite success story for Hershey Foods. When we acquired Y&S Candies, Inc.,.in 1977, it was just a company that manufactured licorice. There was no brand association. Through careful management, we have been able to take this product and develop it into the leading licorice brand - Twizzlers.

Views on the value of Hershey's brands

Our number-one priority must be to do everything we can to maintain and enhance Hershey's high-quality brands while they are in our care. ACRI was founded in 1947 as the 'research arm" of the Chocolate Manufacturers Association (CMA). Hershey Foods has been a CMA member since its inception in 1923. ACRI was founded in 1947 as the "research arm" of the Chocolate Manufacturers Association (CMA). Hershey Foods has been a CMA member since its inception in 1923.

Assuring An Adequate Cocoa Supply

In March 1998, cocoa experts from around the world gathered at a conference in Panama to determine the impact of cocoa trees on the ecology of lands adjacent to the tropical rain forest while guaranteeing a profitable cocoa crop well into the future. It was a significant meeting, bringing together industry members and environmental groups to discuss subjects of mutual interest. It was not, however, a new issue and it certainly wasn't held in a crisis atmosphere." Cocoa and cocoa sustainability also were the main topics of discussion at the 50th Anniversary American Cocoa Research Institute (ACRI) meetings held in September 1998 in Trinidad. Cocoa researchers from around the world were gathered to participate in discussion groups, and the outcome of these meetings laid the course for research activities going forward.

Subsequently, in February 1999, ACRI and the International Office of Cocoa, Chocolate and Sugar Confectionery (IOCCC) met in Paris to formalize an effort called the "Sustainable Cocoa Program." Designed as a partnership program with industry, research institutes, governments, donor organizations, the environmental community and growers, its goal is to develop a comprehensive, integrated global approach to cocoa research which will support the development of a sustainable and geographically diverse supply of cocoa within the next 10 years. "Sustainable cocoa farming truly is an international effort," said Carol Knight, Vice President of Scientific Affairs for ACRI. "Everyone involved with the Sustainable Cocoa Program shares a broad vision of the future of cocoa production which includes long-term profitability for the small farmer, environmental preservation and a dependable cocoa bean supply."

This worldwide sustainability effort hopes to achieve its goal by promoting research and farm education to help make cocoa growing a viable enterprise for the small farmer, a critical need since about 85 percent of the world's cocoa is grown on small farms averaging just four acres each. One area targeted by the program is agroecology. Here, efforts include research to better understand the role of shade in cocoa growing, selecting cocoa varieties that adapt and perform well in a sustainable ecosystem and developing reforestation models for cocoa. Another target area involves identifying new or dormant regions in the world for sustainable cocoa growing. Here, the challenge is to offset the increasing concentration among producing countries. For example, approximately 70 percent of the world's cocoa comes from West Africa. The program seeks to establish productive cocoa growing in new regions and countries, which seek to diversify their export crop base and where the economics of cocoa production are appropriate for the grower. Vietnam is a good example.

A third target area for the Sustainable Cocoa Program is to identify and learn from other small-farm economic production models so that best practices can be applied to cocoa growing. For example, cocoa is profitably grown in the Cameroon under shade trees that also produce tropical fruits and oils. Hopefully, the result of this effort will be to lower costs and provide greater income for small farmers growing cocoa.

The fourth area of emphasis and one which is essential to sustainable cocoa growing is to gain a better understanding of how to control diseases and pests. Diseases such as Witches' Broom, Monilia and Phytophthora, and pests such as the Cocoa Pod Borer have a devastating impact on cocoa growing, with crop loss estimates. running over 40 percent in some cases. Key to success in this area will be the identification and effective use of biological control methods and Integrated Pest Management techniques, both of which are ideal for cocoa growing thanks to their low cost and reduced dependence upon agricultural chemicals. None of this will be easy, nor will the results come quickly. However, considerable progress has been made during the past 12 months, laying the framework for a healthier relationship between producers and manufacturers and a truly sustainable cocoa supply for years to come.

Cocoa Sustainability: Supply & Demand

The 20th century has witnessed sustained growth in demand for cocoa, growth, which has been the result of the world's growing appetite for chocolate. Unfortunately, there have been years when cocoa production did not keep pace with the fairly steady upward trend in demand during this period. Supply shortfalls have resulted in periods of higher cocoa prices, which, in turn, stimulated increased plantings, growing production and, once again, falling prices. The impact of these swings in cocoa costs has been significant, both for manufacturers and producers. Producers especially have struggled. High prices in the late 1970s and early 1980s stimulated a significant expansion in plantings in Africa, Latin America and Asia.

Yet subsequent price declines limited the ability of these farmers to effectively care for the cocoa trees and still make a living. The result has been the widespread loss of whole cocoa-planting regions to low prices, pests and disease. Today, principally as a result of these price and production cycles, only three countries - Ivory Coast, Ghana and Indonesia - account for the lion's share of world cocoa supplies.

Driving Sales Through Thematic Merchandising

Hershey's thematic merchandising efforts have been extremely successful in driving sales over the past several years. These efforts include seasonal promotions and special movie tie-ins, along with sports-marketing opportunities such as NASCAR, the NFL, the NCAA Final Four and Major League Baseball.

Thematic merchandising is especially effective when tied to activities or events that are top-of-mind for consumers. For example, Hershey's tie-in with Steven Spielberg's 1997 blockbuster hit, The Lost World, generated tremendous excitement at retail, ultimately resulting in a substantial increase in sales during the smaller summer sales months. One of the challenges of successful thematic merchandising is to effectively manage the complexity associated with special, one-time promotional events of short duration. Movie tie-ins, for example, are inherently risky because they are tied to the success of the film and ordinarily are most effective when it is playing in theaters. To avoid these issues, Hershey developed an extremely successful and cost-effective thematic merchandising promotion for 1999 entitled Hershey - The Sweetest Place on Earth. This national promotion, sponsored by Hershey Foods and Hershey Entertainment & Resorts, offered more than 300 families the chance to sample the flavor of Hershey, Pa., through the Hershey - The Sweetest Place on Earth sweepstakes. Grand Prize winners received a prize package that included a four-day/three-night stay in Hershey for a family of four, passes to Hersheypark, breakfast with the Hershey's product characters, a tour of the world's largest chocolate factory - the Hershey Plant, and golf privileges at The Country Club of Hershey, Pa. A year's supply of Hershey's candy was awarded to first-prize winners and second-prize winners received a five-pound Hershey's milk chocolate bar. "The objective for this promotion was to get our products on display - whether they be packaged candy, loose bars or six-packs - during the second quarter summer period and use Hershey - The Sweetest Place on Earth as a theme to pull it all together," said Al Germann, Vice President - Packtypes and Event Marketing. "We were able to successfully meet this objective, streamline the process and reduce costs by minimizing the custom packaging and graphic changes that typically would have been part of this type of promotion. In this way, we were able to provide retailers with attractive display cases, modules and merchandising pieces in a more efficient and cost-effective manner. "From a customer standpoint, this promotion brought a lot of excitement to the trade through in-store merchandising," said Dave Onorato, Director, Sales Development. "In addition, it created an attractive point-of-sale destination within the store for the consumer which really drives the impulse nature of candy. This promotion definitely proved to be a positive experience for the trade, the consumer and for our sales force, thanks to the power of Hershey's unique selling point Hershey - The Sweetest Place on Earth."

Did You Know?

Hershey Foods created the first seasonal item in 1962 when it began using colored foil to wrap Hershey's Kisses chocolates. The first colors added to the traditional silver were red and green for the Christmas season. This color combination was a big hit with consumers and paved the way for what now is a full line of seasonal items.
Hershey's first movie tie-in occurred in 1982 with Reese's Pieces candy and the motion picture "E.T." As a result of this promotion, Reese's Pieces became one of America's best-known candy products. More recent movie tie-ins include Steven Spielberg's The Lost World and Godzilla. Sports marketing efforts got their start at Hershey in 1991 with a tie-in to Super Bowl XXV. Since this time, sports marketing has grown to include associations with the NFL, NCAA, NASCAR, Major League Baseball, the U.S. Figure
Skating Association and the U.S. Gymnastics Association.

Innovative New Products Contribute to Hershey's Success at Retail

Creating excitement at retail through innovative new product introductions is one of Hershey's primary strengths. This ability to understand consumer needs and wants is especially important in an "impulse" category such as confectionery. "Understanding consumer needs, when combined with the effective utilization of technology to deliver products with great taste, a meaningful point of difference and excellent value, is what makes Hershey a leader in the introduction of new chocolate and confectionery products," said Charles Duncan, Ph.D., Vice President, Research & Development. "Candy is an 'impulse' purchase for consumers. It takes a solid understanding of what will excite consumers at retail to 'pull' them over into a purchase decision." Hershey's new product success also has been a significant driver of the overall confectionery category's performance in recent years. "New products certainly are important for Hershey Foods. However, they are equally important for the health of the confectionery category," said Dennis Eshleman, Vice President, Marketing - New Products. "In fact, our success at being an innovator in the candy aisle is one of the reasons behind the strong performance of the confectionery category when compared with total packaged food."

New for 1999

Hershey's long run of successful new product introductions continued in 1999. Jolly Rancher Lollipops, which capitalize on Jolly Rancher's long-lasting, intense fruit flavor and unique square shape, were introduced in mid-January. Available in three flavors - cherry, green apple and watermelon - Jolly Rancher Lollipops are Hershey's first entry in the lollipop arena, one of the fastest growing segments of the non-chocolate category. Just in time for summer, Hershey added three new ice cream toppings to its full line of delicious fudge toppings, shell toppings, sundae syrups and sprinkles: Hershey's Fudge Cookie Crunch Shell, Heath English Toffee Sundae Syrup and Hershey's Classic Caramels Sundae Syrup. Hershey's Bites added a fifth flavor, York Bites, in December of last year. Also available in four original flavors - Hershey's milk chocolate with almonds, Reese's peanut butter, Hershey's Cookies 'n' Creme and Almond Joy, Bites are the company's first entry in the unwrapped, chocolate bite-sized candy category.

...and Early 2000

A new Hershey's Nuggets flavor - creamy milk chocolate with raisins and almonds -was introduced in January 2000. This pleasing combination of luscious raisins and delicious roasted almonds blended with Hershey's creamy milk chocolate is a delightful addition to the Hershey's Nuggets line which already includes: milk chocolate, milk chocolate with almonds, creamy milk chocolate with toffee and almonds, dark chocolate with almonds, and Cookies 'n' Creme.

Jolly Rancher Candy Company Celebrates 50 Years

The Jolly Rancher Candy Company was founded in Golden, Colo., 50 years ago by Bill and Dorothy Harmsen as a soft ice cream and chocolate candy business. The Harmsen's sold the Golden store two years later in 1951, moving the business to its present location on their ranch in Wheat Ridge, Colo. The Harmsens initially experimented with a variety of candy products. It wasn't long, however, before they began producing a cinnamon taffy stick (Jolly Rancher Fire Stix) in addition to a line of fine-quality chocolates. The Harmsens turned their full attention to "intense fruit flavor" hard candy products as hard candy sales skyrocketed and chocolate candy became more costly to produce. Today, approximately 320 Denver Plant employees make a variety of great-tasting Jolly Rancher "intense fruit flavor" hard candy products in the same ranch-style building first used by the Harmsen family nearly 50 years ago.

Jolly Rancher Fun Facts


Jolly Rancher's hard candy line consists of 24 fruit flavors including the original cinnamon "fire" flavor. Jolly Rancher hard candies are produced in three forms - individually-wrapped, bite-size pieces known as "twist wrap"; the longer, .65-ounce, bar-shaped piece called the "stix bar"; and the 10-piece pack of individually-wrapped, molded square pieces called the "ranch pack."
Currently there are over 100 different Jolly Rancher pack types. The sugar used to make Jolly Rancher products is made from Colorado-grown sugar beets. Each bite-size piece of Jolly Rancher candy contains just 24 calories.

Jolly Rancher Chronology

1949 Jolly Rancher Candy Company founded by Bill and Dorothy Harmsen.
1966 Jolly Rancher sold to Beatrice Foods Company. Bill and Dorothy Harmsen continue to manage day-to-day operations.
1977 Bill Harmsen retires as Jolly Rancher President and son Bob is appointed Jolly Rancher General Manager.
1983 Beatrice Foods sells its confectionery companies to Huhtamaki Oy of Finland which, in turn, establishes Leaf, Inc., headquartered in Lake Forest, Ill.
1996 Hershey Foods acquires Huhtamaki Oy's U.S. confectionery companies (Leaf).

Customer Satisfaction: The Number-One Priority at Hershey Foods

Positive relationships with customers, nurtured over time, have long been the foundation of Hershey's commitment to customer satisfaction. The importance of maintaining excellent customer relationships was especially evident in 1999, when distribution difficulties associated with our new enterprise-wide information system strained these relationships.

On the Cutting Edge with the Customer Service Department

Many components make up the total customer satisfaction picture at Hershey Foods: product quality, attractive packaging and displays; a friendly and efficient sales staff; and a department dedicated to customer satisfaction. The Customer Service Department's mission is to consistently perform recurring customer transactions on a timely and error-free basis, reduce cycle times and utilize value-added services to provide superior levels of customer satisfaction. Hershey's network of direct sales representatives and brokers begins the customer service process by presenting products and promotional programs to customers. After establishing a commitment with customers to buy and promote Hershey's products, orders are directed to Hershey's Customer Service Representatives. From there: The Material Control Department looks at demand planning data, establishes inventory levels, and advises Manufacturing regarding how much product to produce. The Distribution Department then moves the finished product from the manufacturing facility to the warehouse or shipping facility and, finally, to the customer.

Sounds simple if this were a perfect world. But it's not. Processing orders with speed and accuracy is a critical part of the Customer Service Representative's job. However, the more challenging part is the problem solving that takes place when, for whatever reason, orders don't go as planned. It is the representative's job to pinpoint and correct the problem to the customer's satisfaction 3/4 ASAP. Another important component of the total customer service picture at Hershey Foods is the Customer Satisfaction Program. "We are very proud of the Customer Satisfaction Program we first introduced in 1992," said Mark VanZandt, Director, Customer Service. "This program allows us to identify new opportunities to support customer growth, build better customer understanding and develop solid working relationships through face-to-face meetings with Customer Service Representatives, the Sales team and other areas within the company. "We have specially trained Customer Satisfaction Account Specialists, each of whom is responsible for specific accounts. To our customers, the Customer Satisfaction Program means 'one-stop shopping,' damage-free, on-time delivery and an overall increase in their level of satisfaction. Any time customers have an order problem they simply call their designated Customer Satisfaction Account Specialist. The Specialist will research the problem and have an answer for the customer as quickly as possible. "The level of relationship that we have with our customers is built upon everything we do and everything we stand for as an organization," said Bernie Banas, Vice President, U.S. National Accounts & Trade Development. "If you look at Hershey's relationships with its customers from a historical perspective even going back as far as Mr. Hershey's time it is evident that our customers always have been and always will be a priority at Hershey Foods. The Customer Service Department and Hershey's Customer Satisfaction Program are outstanding examples of our dedication and commitment to customers. "Now more than ever," continued Banas, "these customer relationships are critical to the success of our company. Although we disappointed our customers in 1999 by not being able to supply them adequately with Hershey's products, they still pulled for us to correct the problem so that we could resume our usual customer service levels. This level of customer support is a credit to the long-standing relationships that we have worked so hard to establish and maintain."

EDCIII - Building for the Future

Rapid internal growth, new product and line extension successes, an increased product base due to the Leaf acquisition and complex thematic merchandising efforts contributed to Hershey's need for a new distribution facility. To address this need, construction began in July 1999 on a 1.2 million square-foot facility near Hershey, Pa. This new Eastern Distribution Center, EDCIII, will complement two existing facilities in central Pennsylvania and will be used for the storage and distribution of finished goods as well as for the assembly of display-ready shippers and merchandising units. When fully operational, this new facility will enable Hershey Foods to realize significant savings related to shipping and distribution costs through more efficient order processing and fulfillment, and a more accurate view of product availability. It is scheduled to begin limited operations in spring 2000 and will employ over 600 people when fully operational.

Marketing and Sales Reorganization

Late 1999 and early 2000 saw the reorganization of Hershey Foods' U.S. Marketing and Sales departments. As explained by Mike Pasquale, Executive Vice President and Chief Operating Officer, these changes are designed to better align these two organizations. "Our U.S. marketing structure of Chocolate, Non-Chocolate, Grocery Products and Special Markets business units has served us well during the past six years," said Pasquale. "However, it no longer is the most effective way to market our products. Our new structure for U.S. help us better prioritize, coordinate and implement activities in our brand equity and new product areas."


U.S. Marketing Reorganization

Effective January 1, 2000, the four existing U.S. Business Units (Chocolate, Non-Chocolate, Grocery Products and Special Markets) were eliminated and replaced by a consolidated U.S. marketing organization. Michael H. Holmes, formerly Vice President and General Manager, Chocolate, became Vice President, U.S. Marketing, and is responsible for all marketing activities in the United States. Reporting to Holmes are six marketing units, each headed by a Vice President, Marketing: R. Brent Thomas, formerly Vice President and General Manager, Non-Chocolate, became Vice President, Marketing - Seasons, and is responsible for all seasonal promotional marketing. Dennis N. Eshleman, formerly Vice President and General Manager, Grocery & Food Service, became Vice President, Marketing - New Products, and is responsible for all U.S. new product activity..Anthony J. Pingitore, formerly Vice President and General Manager, Special Markets, became Vice President, Marketing - Special Channels, and is responsible for Vend, Concession, Fund Raising and Food Service, as well as for Marketing Services. Robert Fisher, formerly Director, Marketing - Chocolate Packtypes and Event Marketing, became Vice President - Brand Equity, and is responsible for all U.S. confectionery and grocery brands. Albert F. Germann, formerly Director, Marketing - Chocolate Seasons and Packaged Candy, became Vice President - Packtypes and Event Marketing, and is responsible for all non-seasonal promotional marketing. William C. Stamey, formerly Director, Marketing - Non-Chocolate, became Vice President, Marketing - Brokered Products, and is responsible for the promotional marketing of all confectionery and grocery brokered items.

Hershey Foods and the Environment

Hershey Foods Corporation is proud of its record of conducting business in a manner that reflects our social responsibility to protect environmental resources. The corporation has developed and implemented a philosophy and a set of environmental principles under which
it's business is conducted: We believe that Hershey Foods Corporation has an obligation to protect and preserve the environment for ourselves, our children and for future generations. We will continue to conduct our business activities in a manner which does not adversely affect the environment and which protects the health and safety of our employees, our consumers and the communities in which we operate.

The following principles help to ensure that our business is conducted in an environmentally sound manner:

1.Operate our facilities in a manner which does not adversely affect the environment and which protects the health and safety of the public and our employees;
2.Produce, package and sell products which are safe and which minimize environmental impacts;
3.Conserve natural resources, minimize the creation of waste, recycle materials and dispose of all remaining waste through safe and responsible methods; and,
4.Participate with government and others in creating responsible laws, regulations and policies to help safeguard the environment.

Many parts of our packaging and shipping materials are recyclable. These include:

Foil
Glass
6-Pack Trays
Folding Cartons
Corrugated Shipping Cases
Plastic containers and lids such as our Hershey's Cocoa

Please check your packaging for the triangular recycle symbol. The number inside the triangle is to be used as a guide in sorting and recycling packaging.

Advertising

"Give them quality, that's the best kind of advertising in the world," said Milton Hershey. In fact, Hershey Foods Corporation did not advertise its products in mass consumer media until 1968. In one sense, though, Mr. Hershey was a great believer in advertising. He used the chocolate factory in Hershey as a promotional opportunity and it attracted millions of visitors over the years.

In 1968, Hershey Foods changed its policy regarding advertising in the mass media for several reasons: Increased competition and consumer advertising in the confectionery, soft drink, ice cream and other snack industries.

Nearly one-half of the people in the United States were then under 25 years of age. Advertising would assist in better acquainting this younger generation with our products.

As new products were developed, it was necessary to achieve mass distribution in a relatively short period to make mass production feasible.

Hershey selected Ogilvy & Mather as the corporation's advertising company and, in 1978, added DDB Needham. Both agencies are still being utilized today.

Hershey's Marketing Philosophy

Our marketing philosophy is to provide products of consistently superior quality that are readily available to all consumers through a strong distribution network. We will give our consumers the best possible product value and will offer a variety of promotional programs. In addition, through advertising, we will communicate product benefits and establish a relationship with consumers.

Our success as a company stems from our ability to meet consumer needs and ever-changing tastes, while continuing to provide value. As a result of this success, five of our brands are consistently found on the industry's list of best-sellers:

Reese's peanut butter cups
Hershey's milk chocolate bar
Hershey's milk chocolate with almonds bar
Hershey's Kisses chocolates
Kit Kat wafer bar

Media Placement

Hershey wants the media environment in which its products are advertised to reflect favorably on its image as a manufacturer of wholesome, quality products. Although Hershey is not attempting to be a corporate censor for the American public, it does wish to encourage programming and publications to maintain high standards of taste. Of particular importance are programs and media directed primarily to youth. Specifically, Hershey avoids programs and publications which contain:

graphic and unnecessary violence
explicit sexual situations
excessive use of vulgarity or profanity
glamorization of drug or alcohol use
sensationalism involving delicate and controversial social subjects


Corporate Contributions

Hershey Foods Corporation remains committed to making significant contributions to the communities in which it operates and to society in general. Cash and product contributions are made to support a variety of worthy causes and non-profit organizations, which support Education, Health & Human Services, Civic & Community initiatives, Arts & Culture and the Environment. Particular emphasis is placed on the needs of communities in which the corporation employs a substantial number of people and on programs and institutions reasonably related to its business purposes and needs, while continuing to consider the broader needs of society.

Sponsorships

National Football League (NFL)
Since 1994, Hershey has been the official candy sponsor of the National Football League. As an NFL sponsor, Hershey has been able to offer in-store sweepstakes for the toughest tickets in town - the NFL Pro Bowl and Super Bowl.

Hershey also sponsors the most successful consumer million dollar kick promotion in sports history - Hershey's Million Dollar Kick at the Pro Bowl in Hawaii. The past two contestants have made the kick and walked away with the money! Locally, Hershey works with the individual NFL teams to offer several unique activities and in-store events.

National Collegiate Athletics Association (NCAA)
Hershey has been an official corporate sponsor of NCAA student-athletes since 1995. Through its partnership with the NCAA, Hershey provides consumers with unique opportunities to attend and experience NCAA championship athletics. In 1998, Hershey offered a national in-store sweepstakes to win "Final Four Tickets for Life" to the NCAA Men's Basketball Championship. Hershey also provides support for the NCAA's youth outreach programs and sponsors community events which provide public access to NCAA championship activities.

Nascar
Hershey is an official sponsor of Bill Elliott Racing and his car, which includes the Reese's logo on the decklid (top of truck) and bottom of the rear quarter panel. Hershey sponsor's three Bill Elliott showcars which travel different routes throughout the country between February and November, making stops at various store locations (one car follows the Nascar race circuit). The sponsorship also includes Bill Elliott appearances at select retail locations throughout the race season, as well as local race-related events. In 1998, Hershey is offering a national, in-store consumer sweepstakes giving entrants a chance to win a meeting with Bill Elliott and trips to two Winston Cup events.

United States Figure Skating
Hershey has been an official sponsor of US Figure Skating for over five years. The sponsorship includes a special "title" event, usually held in April, featuring Hershey's Kisses. These athletes exemplify the result of hard work and dedication to their sport and have contributed a new level of excellence to the sport of figure skating. The sponsorship also includes banners on the rinkboard and tickets are given to retailers who in turn use them for in-store sweepstakes for their consumers.

USA Gymnastics
Hershey has been a proud sponsor of USA Gymnastics for over five years. The sponsorship includes a special "title" event, usually held in January, featuring Reese's peanut butter cups. Hard work and dedication have enabled these athletes to excel in the sport of gymnastics. The sponsorship also includes banners at the events and tickets are given to retailers who in turn use them for in-store sweepstakes for their consumers.

Corporate Governance
CHIEF STRATEGISTS

Management
Kenneth L. Wolfe
Chairman of the Board and Chief Executive Officer
William F. Christ
Executive Vice President and Chief Operating Officer
Frank Cerminara
Vice President, Chief Financial Officer and Treasurer
Robert M. Reese
Senior Vice President - Public Affairs, General Counsel and Secretary
Raymond Brace
Vice President, Conversion & Procurement
John R. Canavan
Vice President, Human Resources
Patrice N. Le Marie
President, Hershey International
Richard E. Meyers
President and General Manager Hershey Canada
Richard E. Bentz
Vice President, Information Technology Integration
Jay F. Carr
Vice President Research Services and Special Operations
Tom Cumpson
Vice President, U.S. Confection Field Sales
George F. Davis
Vice President and Chief Information Officer
Charles L. Duncan, Ph.D.
Vice President - Research and Development
Timothy Dunigan
Vice President, U.S. Broker Sales
Dennis N. Eshleman
Vice President, Marketing - New Products
Robert Fisher
Vice President - Brand Equity
R. Montgomery Garrabrant
Vice President, Financial Services
Albert Germann
Vice President - Packtypes and Event Marketing
David Gloeckler
Vice President, U.S. Special Trade Class Sales
Holly Hassett
Vice President, Government Relations
Michael H. Holmes
Vice President and General Manager, Chocolate
Kenneth B. Kwiat
Vice President, Manufacturing
John Long
Vice President, Corporate Communications
Milton T. Matthews
Vice President, U.S. Sales
Anthony J. Pingitore
Vice President and General Manager, Special Markets
Allen Skinner
Vice President, Corporate Finance and Assistant Treasurer
Burton Snyder
Vice President and Assistant General Counsel
William Stamey
Vice President, Marketing - Brokered Products
David W. Tacka
Vice President, Corporate Controller and Chief Accounting Officer
R. Brent Thomas
Vice President, Marketing, Seasons
Robert L. Woelfing
Vice President, Engineering and Technology


Directors

Kenneth L Wolfe
Chairman and Chief Executive Officer, Hershey Foods Corporation
William H. Alexander
Administrator, Family Business Program, The Wharton School of the University of Pennsylvania, Philadelphia, PA
Robert H. Campbell
Chairman of the Board and Chief Executive Officer (retired), Sunoco, Inc., Philadelphia, PA
C. McCollister Evarts, M.D.
University Professor and Professor of Orthopedics, Chief Executive Officer and
Senior Vice President for Health Affairs and Dean (Emeritus), The Milton S. Hershey Medical Center, Harrisburg, PA
Bonnie Hill
President and Chief Executive Officer, The Times Mirror Foundation, Los Angeles, CA
John C. Jamison
Chairman of the Board, Mallardee Associates, Williamsburg, VA
Mackey J. McDonald
Chairman of the Board, President and Chief Executive Officer, VF
Corporation, Greensboro, NC
John M. Pietruski
Chairman of the Board, Texas Biotechnology Corporation, Houston, TX