Kellogg`s Company Objective: Our goal in composing a financial statement is to construct the mostcomprehensive, thorough document possible, in order to attract investors and toconfirm that we have taken the time to explore as many potential issues for yourbusiness as may arise. Summary of findings: Our level of cereal marketinginvestment early in 1998 was not sufficient in the face of extremely competitivemarket conditions. This situation hurt our volume performance for much of theyear and, combined with other issues in markets around the world, led to adecline in both sales and earnings.
Nonetheless, we continue to have the utmostconfidence in the future of our grain-based businesses, and we are fullycommitted to return to both top-line and bottom-line growth. Appendix # 1-Market Research Description of firm and its management: Kellogg’s products aremanufactured in 20 countries on 6 Continents and distributed in more than 160countries. Mr. Langbo has been employed by thesince 1956. Hewas named President and Chief Operating Officer in 1990 and became Chairman ofthe Board and Chief Executive Officer in 1992. In June of 1998, Mr. Carlos M.Gutierrez was named President and Chief Operating Officer.
The competitiveenvironment: The Company has experienced intense competition for sales of all ofits principal products in its major markets, both domestically andinternationally. The Company’s products compete with advertised and brandedproducts of a similar nature as well as unadvertised and private label products,which are typically distributed at lower prices, and generally with other foodproducts with different characteristics. Principal methods and factors forcompetition include new product introductions, product quality, composition, andnutritional value, price, advertising and promotion. Economic climate andoutlook: Although our 1998 business results were below our performanceexpectation, it was a year in which we put in place key elements of a strongerfoundation for future growth.
This included investments in new productdevelopment and a complete overhaul of our corporate headquarters and NorthAmerican organizational structure. Should suitable investment opportunities ofworking capital needs arise that would require additional financing; managementbelieves that the Company’s strong credit rating, balance sheet and earningshistory provide a base for obtaining additional financial resources atcompetitive rates and terms. Based on the expectation of cereal volume growth,and strong results from product innovation and the continued global rollout ofconvenience foods, management believes the Company is well positioned to deliversales and earnings growth for the full year of 2000. Litigation: The Company isnot a party to any pending legal proceedings, which, if decided adversely, wouldbe material to the Company on a consolidated basis, nor is any of the Company’sproperties or subsidiaries subject to any such proceedings. Appendix #2-Financial Forecasts Financial overview: Kellogg Company manufactures andmarkets ready-to-eat cereal and other grain-based convenience food products,including toaster pastries, frozen waffles, cereal bars, and bagels throughoutthe world. Principal markets for these products include the United States andGreat Britain. Operations are managed via four major geographic areas, NorthAmerica, Europe, Asia-Pacific and Latin America-which is the basis of theCompany’s reportable operating segment information. The Company leads the globalready-to-eat cereal category with an estimated 38% annualized share of worldwidevolume.
Additionally, the Company is the North American market leader in thetoaster pastry, cereal/granola bar, frozen waffle and per-packaged bagelcategories. During 1998, the Company realized declines in earnings per shareboth with and without unusual items. The Company experienced significantcompetitive pressure combined with category softness in its major ready-to-eatcereal markets, to which it responded by accelerating investment in long-termgrowth strategies, in clouding product development, technology and efficiencyinitiatives. Short-term liquidity: Net cash provided by operating activities was$719.7 million during 1998, compared to $879.
8 million in 1997, with thedecrease due principally to lower earnings and unfavorable working capitalmovements. The ratio of current assets to current liabilities was .9 at December31, 1998 and 1997. Capital structure and long-term solvency: Long-term debtconsists 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 milliondue in 2005. The amount due in 2001 includes $400 million in Notes, whichprovide an option to holders to extend the obligation. For an additional fouryears at a predetermined interest rate of 5.
63% plus the Company’s then-currentcredit spread. The increase in operating margin for the quarter primarilyreflects manufacturing efficiencies in the U.S.
business and reduced overheadspending as a result of streamlining initiatives in North American and corporateoperations. The year-to-date operating margin was flat versus the prior year asincreased spending on promotional activities offset the benefits discussedabove. This level of spending is consistent with management’s strategy to drivegrowth through increased marketing investment in the Company’s establishedcereal markets, as well as supporting the accelerated introduction of newconvenience food products around the world. Market measures: The Company isexposed to certain market risks, which exist as a part of its ongoing businessoperations and uses derivative financial and commodity instruments, whereappropriate, to manage these risks. The Company, as a matter for policy, doesnot engage in trading or speculative transaction. Investment potential: We arepleased to report that the Kellogg Company dividend rose in 1998 for the 42ndconsecutive year, with an increase of 5 cents per share to $.92. In 1999Kellogg’s is well positioned to deliver double-digit earnings per share growth(excluding restructuring and disposition-related charges).
We also continued ourprogram of purchasing Kellogg share, with 1998 purchases totaling $239.7million. It is currently offering 80,000 new stock options. Outlook, Summary,and Conclusions Outlook for performance, earnings projection: The Company’sstreamlining initiatives will continue throughout 1999. The aforementionedoverhead activity analysis will be extended to Europe and Latin America duringthe first half of 1999. Management believes these initiatives will result in theelimination of several hundred-employee positions, requiring separation benefitcosts to be incurred. Since the number of employees affected, their jobfunctions, and their locations have not yet been identified.
The costs that mayhave resulted are not known yet. Investment potential: We are pleased to reportthat 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 ofpurchasing Kellogg share, with 1998 purchases totaling $239.7 million. Creditassessment: counter parties on derivative financial and commodity contractsexpose The Company to credit loss in the event of nonperformance.
This creditloss is limited to the cost for replacing these contracts at current marketrates. Management believes that the probability of such loss is remote. Summaryand conclusion: The seeking out, training, and retention of a diverse, highlytalented workforce is central to Kellogg Company’s commitment to be aresults-oriented organization ready for the challenges for the future andfocused on creating value for you, our shareowners.Marketing