Kellogg`s Company
Objective: Our goal in composing a financial
statement is to construct the most
comprehensive, thorough document possible,
in order to attract investors and to
confirm that we have taken the time to
explore as many potential issues for your
business as may arise. Summary of
findings: Our level of cereal marketing
investment early in 1998 was not
sufficient in the face of extremely competitive
market conditions. This
situation hurt our volume performance for much of the
year and, combined with
other issues in markets around the world, led to a
decline in both sales and
earnings. Nonetheless, we continue to have the utmost
confidence in the
future of our grain-based businesses, and we are fully
committed to return to
both top-line and bottom-line growth. Appendix # 1-
Market Research
Description of firm and its management: Kellogg's products are
manufactured
in 20 countries on 6 Continents and distributed in more than 160
countries.
Mr. Langbo has been employed by the Kellogg's Company since 1956. He
was
named President and Chief Operating Officer in 1990 and became Chairman
of
the Board and Chief Executive Officer in 1992. In June of 1998, Mr. Carlos
M.
Gutierrez was named President and Chief Operating Officer. The
competitive
environment: The Company has experienced intense competition for
sales of all of
its principal products in its major markets, both
domestically and
internationally. The Company's products compete with
advertised and branded
products of a similar nature as well as unadvertised
and private label products,
which are typically distributed at lower prices,
and generally with other food
products with different characteristics.
Principal methods and factors for
competition include new product
introductions, product quality, composition, and
nutritional value, price,
advertising and promotion. Economic climate and
outlook: Although our 1998
business results were below our performance
expectation, it was a year in
which we put in place key elements of a stronger
foundation for future
growth. This included investments in new product
development and a complete
overhaul of our corporate headquarters and North
American organizational
structure. Should suitable investment opportunities of
working capital needs
arise that would require additional financing; management
believes that the
Company's strong credit rating, balance sheet and earnings
history provide a
base for obtaining additional financial resources at
competitive rates and
terms. Based on the expectation of cereal volume growth,
and strong results
from product innovation and the continued global rollout of
convenience
foods, management believes the Company is well positioned to deliver
sales
and earnings growth for the full year of 2000. Litigation: The Company is
not
a party to any pending legal proceedings, which, if decided adversely,
would
be material to the Company on a consolidated basis, nor is any of the
Company's
properties or subsidiaries subject to any such proceedings.
Appendix #
2-Financial Forecasts Financial overview: Kellogg Company
manufactures and
markets ready-to-eat cereal and other grain-based
convenience food products,
including toaster pastries, frozen waffles, cereal
bars, and bagels throughout
the world. Principal markets for these products
include the United States and
Great Britain. Operations are managed via
four major geographic areas, North
America, Europe, Asia-Pacific and
Latin America-which is the basis of the
Company's reportable operating
segment information. The Company leads the global
ready-to-eat cereal
category with an estimated 38% annualized share of worldwide
volume.
Additionally, the Company is the North American market leader in the
toaster
pastry, cereal/granola bar, frozen waffle and per-packaged bagel
categories.
During 1998, the Company realized declines in earnings per share
both with
and without unusual items. The Company experienced significant
competitive
pressure combined with category softness in its major ready-to-eat
cereal
markets, to which it responded by accelerating investment in long-term
growth
strategies, in clouding product development, technology and
efficiency
initiatives. Short-term liquidity: Net cash provided by operating
activities was
$719.7 million during 1998, compared to $879.8 million in
1997, with the
decrease due principally to lower earnings and unfavorable
working capital
movements. The ratio of current assets to current liabilities
was .9 at December
31, 1998 and 1997. Capital structure and long-term
solvency: Long-term debt
consists primarily of fixed rate issuances of U.S.
and Euro Dollar Notes,
including $900 million due in 2001, $500 million due
in 2004, and $200 million
due in 2005. The amount due in 2001 includes $400
million in Notes, which
provide an option to holders to extend the
obligation. For an additional four
years at a predetermined interest rate of
5.63% plus the Company's then-current
credit spread. The increase in
operating margin for the quarter primarily
reflects manufacturing
efficiencies in the U.S. business and reduced overhead
spending as a result
of streamlining initiatives in North American and corporate
operations. The
year-to-date operating margin was flat versus the prior year as
increased
spending on promotional activities offset the benefits discussed
above. This
level of spending is consistent with management's strategy to drive
growth
through increased marketing investment in the Company's established
cereal
markets, as well as supporting the accelerated introduction of
new
convenience food products around the world. Market measures: The Company
is
exposed to certain market risks, which exist as a part of its ongoing
business
operations and uses derivative financial and commodity instruments,
where
appropriate, to manage these risks. The Company, as a matter for
policy, does
not engage in trading or speculative transaction. Investment
potential: We are
pleased to report that the Kellogg Company dividend rose in
1998 for the 42nd
consecutive year, with an increase of 5 cents per share to
$.92. In 1999
Kellogg's is well positioned to deliver double-digit
earnings per share growth
(excluding restructuring and disposition-related
charges). We also continued our
program of purchasing Kellogg share, with
1998 purchases totaling $239.7
million. It is currently offering 80,000 new
stock options. Outlook, Summary,
and Conclusions Outlook for performance,
earnings projection: The Company's
streamlining initiatives will continue
throughout 1999. The aforementioned
overhead activity analysis will be
extended to Europe and Latin America during
the first half of 1999.
Management believes these initiatives will result in the
elimination of
several hundred-employee positions, requiring separation benefit
costs to be
incurred. Since the number of employees affected, their job
functions, and
their locations have not yet been identified. The costs that may
have
resulted are not known yet. Investment potential: We are pleased to
report
that the Kellogg Company dividend rose in 1998 for the 42nd
consecutive year,
with an increase of 5 cents per share to $.92. We also
continued our program of
purchasing Kellogg share, with 1998 purchases
totaling $239.7 million. Credit
assessment: counter parties on derivative
financial and commodity contracts
expose The Company to credit loss in the
event of nonperformance. This credit
loss is limited to the cost for
replacing these contracts at current market
rates. Management believes that
the probability of such loss is remote. Summary
and conclusion: The seeking
out, training, and retention of a diverse, highly
talented workforce is
central to Kellogg Company's commitment to be a
results-oriented organization
ready for the challenges for the future and
focused on creating value for
you, our shareowners.