ITEM 1. BUSINESS
The Company. Kellogg Company, incorporated in Delaware in 1922, and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and other grain-based convenience food products on a worldwide basis. The address of the principal business office of Kellogg Company is One Kellogg Square, P.O. Box 3599, Battle Creek, Michigan 49016-3599. Unless otherwise indicated by the context, the term "Company" as used in this report means Kellogg Company, its divisions and subsidiaries.
Financial Information About Segments. The information called for by this Item is incorporated herein by reference from Note 13 to the Consolidated Financial Statements on pages 31 and 32 of the Company's Annual Report.
Principal Products. The principal products of the Company are ready-to-eat cereals and other convenience food products which are manufactured in 20 countries and distributed in more than 160 countries. The Company's products are generally marketed under the KELLOGG'S(R) name and are sold principally to the grocery trade through direct sales forces for resale to consumers. The Company uses broker and distribution arrangements for certain products as well as in less developed market areas. Additional information pertaining to the relative sales of ready-to-eat cereals and the Company's other convenience food products is found in Note 13 to the Consolidated Financial Statements on pages 31 and 32 of the Company's Annual Report.
Other Convenience Food Products. In the United States and Canada, in addition to ready-to-eat cereals, the Company produces and distributes toaster pastries, bagels, frozen waffles, crispy marshmallow squares, and cereal bars. The Company also markets these and other convenience food products in various locations throughout the world.
Raw Materials. Agricultural commodities are the principal raw materials used in the Company's products. World supplies and prices of such commodities are constantly monitored, as are government trade policies. The cost of raw materials may fluctuate widely due to government policy and regulation, weather conditions, or other unforeseen circumstances. Continuous efforts are made to maintain and improve the qualities and supplies of raw materials for purposes of the Company's short-term and long-term requirements.
The principal ingredients in the products produced by the Company in the United States include corn grits, oats, rice, various fruits, sweeteners, wheat, and wheat derivatives. Ingredients are purchased principally from sources in the United States. In producing toaster pastries, bagels, frozen waffles, and cereal bars, the Company may use flour, shortening, sweeteners, dairy products, eggs, fruit, and other filling ingredients, which ingredients are obtained from various sources. Although the Company enters into some long-term contracts, the bulk of such raw materials are purchased on the open market. While the cost of raw materials may increase over time, the Company believes that it will be able to purchase an adequate supply of such raw materials as needed. The Company also uses commodity futures and options to hedge some of its raw material costs. Refer to Note 11 to the Consolidated Financial Statements contained in the Company's Annual Report on page 30.
Raw materials and packaging needed for internationally based operations are available in adequate supply and are sometimes imported from countries other than those where used in manufacture.
Cereal processing ovens at major domestic and international facilities are regularly fueled by natural gas or propane obtained from local utilities or other local suppliers. Short-term standby propane storage exists at several plants for use in the event of interruption in natural gas supplies. Additionally, oil may be used to fuel certain plant operations in the event of natural gas shortages at various plants or when its use presents economic advantages.
Trademarks and Technology. Generally, the Company's products are marketed under trademarks owned by the Company. The Company's principal trademarks are its housemark, brand names, slogans, and designs related to cereals and other convenience food products manufactured and marketed by the Company. These
trademarks include Kellogg's(R), for cereals and other products of the Company and the brand names of certain ready-to-eat cereals, including All-Bran(R), Kellogg's Squares(TM), Apple Jacks(R), Apple Raisin Crisp(R), Apple Cinnamon Rice Krispies(R), Bran Buds(R), Complete(R) Bran Flakes, Cocoa Krispies(R), Common Sense(R), Cruncheroos(R), Kellogg's Corn Flakes(R), Cracklin' Oat Bran(R), Kellogg's(R) Cinnamon Mini-Buns, Crispix(R), Double Dip Crunch(R), Froot Loops(R), Kellogg's Frosted Bran(R), Kellogg's Frosted Flakes(R), Frosted Krispies(R), Frosted Mini-Wheats(R), Fruitful Bran(R), Fruity Marshmallow Krispies(R), Just Right(R), Kellogg's(R) Low Fat Granola, Nut & Honey Crunch(R), Nut & Honey Crunch O's(TM), Muesli(R), Nutri-Grain(R), Corn Pops(R), Product 19(R), Kellogg's(R) Two Scoops(R) Raisin Bran, Rice Krispies(R), Rice Krispies Treats(R), Smacks(R), Smart Start(R), Special K(R), Kellogg's Cocoa Frosted Flakes(TM), Razzle Dazzle Rice Krispies(TM), and Kellogg's(R) Honey Crunch Corn Flakes(TM). Additional Company trademarks are the names of certain combinations of Kellogg's(R) ready-to-eat cereals, including Breakfast Mates(TM), Handi-Pak(R), Snack-Pak(R), Fun Pak(R), Jumbo(R) and Variety(R) Pak. Other Company brand names include Kellogg's(R) Corn Flake Crumbs; Croutettes(R) for herb season stuffing mix; Kellogg's(R) Nutri-Grain(R) for cereal bars; Pop-Tarts Pastry Swirls(TM) for toaster danish; Pop-Tarts(R) for toaster pastries; Eggo(R), Special K(R) and Nutri-Grain(R) for frozen waffles; Lender's(R) for Bagels; and Rice Krispies Treats(TM) for crispy marshmallow squares.
Company trademarks also include depictions of certain animated characters in conjunction with the Company's products, including Snap!(R)Crackle!(R)Pop!(R)for Kellogg's(R) Frosted Krispies(R), Fruity Marshmallow Krispies(R), Razzle Dazzle Rice Krispies(TM), and Rice Krispies(R); Tony the Tiger(TM) for Kellogg's Frosted Flakes(R) and Kellogg's Cocoa Frosted Flakes(TM); Toucan Sam(R)for Froot Loops(R); Dig 'Em!(R) for Smacks(R); Coco(TM) for Cocoa Krispies(R); and Cornelius(R) and Corny(TM) for Kellogg's Corn Flakes(R).
The slogans "The Best To You Each Morning"(R), "The Original and Best(R)," and "They're Gr-r-reat!"(R), used in connection with the Company's ready-to-eat cereals, are also important Company trademarks. The Company's use of the advertising themes "Better Breakfast"(TM), "Get A Taste For The Healthy Life"(TM), and "Cereal...Eat It For Life"(TM) represent part of its effort to establish throughout the United States and the world the concept of a nutritious breakfast.
The Company considers that, taken as a whole, the rights under its various patents, which expire from time to time, are a valuable asset, but the Company does not believe that its businesses are materially dependent on any single patent or group of related patents. The Company's activities under licenses or other franchises or concessions are not material.
Seasonality. Demand for the Company's products is approximately level throughout the year.
Working Capital. Although terms vary around the world, in the United States the Company generally requires payment for goods sold eleven days subsequent to the date of invoice, with a 2% discount allowed for payment within ten days. Receipts from goods sold, supplemented as required by borrowings, provide for the Company's payment of dividends, capital expansion, and for other operating expenses and working capital needs.
Customers. The Company is not dependent on any single customer or a few customers for a material part of its sales. Products of the Company are sold through its own sales forces and through broker and distributor arrangements and are generally resold to consumers in retail stores, restaurants, and other food service establishments.
Backlog. For the most part, orders are filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders at any particular time is not material to the Company.
Competition. 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 of competition include new product introductions, product quality, composition and nutritional value, price, advertising, and promotion.
Research and Development. Research to support and expand the use of the Company's existing products and to develop new food products is carried on at the W.K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, and at other locations around the world. The Company's expenditures for research and development were approximately $121.9 million in 1998, $106.1 million in 1997, and $84.3 million in 1996.
Environmental Matters. The Company's facilities are subject to various foreign, federal, state, and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The Company is not a party to any material proceedings arising under these regulations. The Company believes that compliance with existing environmental laws and regulations will not materially affect the financial condition or the competitive position of the Company. The Company is currently in substantial compliance with all material environmental regulations affecting the Company and its properties.
Employees. At December 31, 1998, the Company had 14,498 employees.
Financial Information About Geographic Areas. The information called for by this Item is incorporated herein by reference from Note 13 to the Consolidated Financial Statements on pages 31 and 32 of the Company's Annual Report.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal research and development facilities are located in Battle Creek, Michigan.
The Company operates manufacturing plants and warehouses totaling more than ten million (10,000,000) square feet of building area in the United States and other countries. The Company's plants have been designed and constructed to meet its specific production requirements, and the Company periodically invests money for capital and technological improvements. At the time of its selection, each location was considered to be favorable, based on the location of markets, sources of raw materials, availability of suitable labor, transportation facilities, location of other Company plants producing similar products, and other factors. Manufacturing facilities of the Company in the United States include four cereal plants and warehouses located in Battle Creek, Michigan; Lancaster, Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska. The Company's other convenience foods plants are located in San Jose, California; New Haven, Connecticut; West Haven, Connecticut; Atlanta, Georgia; Mattoon, Illinois; Pikeville, Kentucky; Blue Anchor, New Jersey; West Seneca, New York; Muncy, Pennsylvania; and Rossville, Tennessee.
Outside the United States, the Company has additional manufacturing locations, some with warehousing facilities, in Argentina, Australia, Brazil, Canada, China, Colombia, Ecuador, Germany, Great Britain, Guatemala, India, Japan, Malaysia, Mexico, South Africa, South Korea, Spain, Thailand, and Venezuela.
The principal properties of the Company, including its major office facilities, are held in fee and none is subject to any major encumbrance. Distribution centers and offices of non-plant locations typically are leased. The Company considers its facilities generally suitable, adequate, and of sufficient capacity for its current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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 are any of the Company's properties or subsidiaries subject to any such proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages as of February 28, 1999, and positions of the executive officers of the Company are listed below together with their business experience. Executive officers are elected annually by the Board of Directors at the meeting immediately following the Annual Meeting of Stockholders.
Arnold G. Langbo Chairman of the Board and Chief Executive Officer.............................61 Mr. Langbo has been employed by the 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. Mr. Langbo retained his positions as Chairman of the Board and Chief Executive Officer.
Carlos M. Gutierrez President and Chief Operating Officer.........................................45 Mr. Gutierrez joined Kellogg de Mexico in 1975. In 1993, Mr. Gutierrez was promoted to Executive Vice President, Kellogg USA Inc. and General Manager, Kellogg USA Cereal Division. He was appointed Executive Vice President and President, Kellogg Asia-Pacific in 1994, and Executive Vice President - Business Development in 1996. In June of 1998, Mr. Gutierrez was named President and Chief Operating Officer.
John D. Cook Executive Vice President, President, Kellogg North America....................45 Mr. Cook joined Kellogg Company as Executive Vice President, President, Kellogg North America in February of 1999. From 1988 to 1999 Mr. Cook was a director with McKinsey and Company, Inc., a leading corporate strategy group.
Jean-Louis Gourbin Executive Vice President, President, Kellogg Europe...........................51 Mr. Gourbin joined Kellogg France in 1983. He was promoted to President and CEO - Kellogg Canada Inc. in 1990. In 1995, he was named Managing Director - Kellogg (Aust.) Pty. Ltd. Mr. Gourbin was appointed Executive Vice President and President, Kellogg Asia-Pacific in 1996. Mr. Gourbin was appointed President, Kellogg Europe in September of 1998.
Jacobus Groot Executive Vice President, President, Kellogg Asia Pacific.....................48 Mr. Groot joined Kellogg Company as Executive Vice President, President, Kellogg Asia Pacific in January of 1999. Prior to joining Kellogg Company, Mr. Groot was employed by The Procter and Gamble Company for 17 years. His most recent position was Group Vice President (President-Asia, North, and President, Paper Products-Asia, Procter and Gamble Asia), a position he held since 1995.
Alan F. Harris Executive Vice President, President, Kellogg Latin America....................44 Mr. Harris joined Kellogg Company of Great Britain Limited in 1984. In 1993, he was appointed President, Kellogg Canada Inc. In 1994, he was promoted to Executive Vice President - Marketing and Sales - Kellogg USA Inc. Mr. Harris was promoted to Executive Vice President and President, Kellogg Latin America in 1997.
John R. Hinton Executive Vice President - Administration and Chief Financial Officer.........53 Mr. Hinton joined the Company as Assistant to the Vice President - Finance in 1979. He was appointed Executive Vice President - Financial Administration and Treasurer for Kellogg USA Inc. in 1993. In 1995, Mr. Hinton was named Senior Vice President - Administration and Chief Financial Officer. In 1997, Mr. Hinton was named Executive Vice President - Administration and Chief Financial Officer
Donald W. Thomason Executive Vice President - Services and Technology............................55 Mr. Thomason has been employed by the Company since 1966. He was named Executive Vice President - Services and Technology in 1990.
Donna J. Banks Senior Vice President - Research and Development..............................42 Dr. Banks joined the Company in 1983. In 1991, she was promoted to Vice President - Research and Development Dr. Banks became Senior Vice President - Research and Development in 1997.
Richard M. Clark Senior Vice President, General Counsel and Secretary..........................61 Mr. Clark joined the Company as Senior Vice President, General Counsel and Secretary in 1989.
Robert L. Creviston Senior Vice President - Human Resources.......................................57 Mr. Creviston joined the Company as Vice President - Employee Relations in 1982. He was named Senior Vice President - Human Resources in 1991.
Jay W. Shreiner Senior Vice President.........................................................49 Mr. Shreiner joined the Company as Assistant Treasurer in 1983. He was named Vice President - Information Services in 1990 and Senior Vice President and Chief Information Officer in 1995. In January of 1999, Mr. Shreiner accepted an interim assignment as Chief Financial Officer of Kellogg Europe.
Joseph M. Stewart Senior Vice President - Corporate Affairs.....................................56 Mr. Stewart has been employed by the Company since 1980. He was named Senior Vice President - Corporate Affairs in 1988.
Michael J. Teale Senior Vice President - Global Supply Chain...................................54 Mr. Teale joined Kellogg Company of Great Britain Limited in 1966. He was named Vice President - Cereal Manufacturing of the Company's U.S. Food Products Division in 1990, Senior Vice President - Worldwide Operations and Technology in 1994, and Senior Vice President - Global Supply Chain in February of 1999.
Alan Taylor Vice President - Corporate Controller.........................................47 Mr. Taylor has been employed by the Company since 1982. He served as Director - Finance of Kellogg (Aust.) Pty. Ltd. from 1988 until 1993. He became Controller of the Company in 1993, and was named a Vice President in 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is set forth on page 31 of the Company's Annual Report in Note 12 to the Consolidated Financial Statements of the Company which is incorporated by reference into Item 8 of this Report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this Item is incorporated herein by reference from the chart entitled "Selected Financial Data" on pages 14 and 15 of the Company's Annual Report. Such information should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included in Item 8 of this Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information called for by this Item is incorporated herein by reference from pages 16 through 21 of the Company's Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item is incorporated herein by reference from pages 33 and 34 of the Company's Annual Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is incorporated herein by reference from pages 22 through 32 of the Company's Annual Report. Supplementary quarterly financial data, also incorporated herein by reference, is set forth in Note 12 to the Consolidated Financial Statements on page 31 of the Company's Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors -- Refer to the Company's Proxy Statement dated March 12, 1999, for the Annual Meeting of Stockholders to be held on April 23, 1999, under the caption "Election of Directors" on pages 4 through 6, which information is incorporated herein by reference.
Executive Officers of the Registrant -- Refer to "Executive Officers of the Registrant" under Item 4A at pages 5 through 6 of this Report.
For information concerning Section 16(a) of the Securities Exchange Act of 1934, refer to the Company's Proxy Statement dated March 12, 1999, for the Annual Meeting of Stockholders to be held on April 23, 1999, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" at page 3, which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Refer to the Company's Proxy Statement dated March 12, 1999, for the Annual Meeting of Stockholders to be held on April 23, 1999, under the caption "Executive Compensation" at pages 7 through 11, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Refer to the Company's Proxy Statement dated March 12, 1999, for the Annual Meeting of Stockholders to be held on April 23, 1999, under the caption "Security Ownership" at pages 2 through 3, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
The following Consolidated Financial Statements and related Notes, together with the Report thereon of PricewaterhouseCoopers LLP dated January 29, 1999, appearing on pages 22 through 33 of the Company's
Annual Report to Stockholders for the fiscal year ended December 31, 1998, are incorporated herein by reference:
(A)1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Earnings for the years ended December 31, 1998, 1997, and 1996. Consolidated Statement of Shareholders' Equity for the years ended December 31, 1998, 1997, and 1996. Consolidated Balance Sheet at December 31, 1998 and 1997. Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996. Notes to Consolidated Financial Statements.
(A)2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Financial Schedule and related Report of Independent Accountants filed as part of this Report are as follows:
This Consolidated Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1998.
All other financial statement schedules are omitted because they are not applicable.
(A)3. EXHIBITS
- ------------------------- * A management contract or compensatory plan required to be filed with this Report.
The Company agrees to furnish to the Securities and Exchange Commission, upon its request, a copy of any instrument defining the rights of holders of long-term debt of the Company and its Subsidiaries and any of its unconsolidated Subsidiaries for which Financial Statements are required to be filed.
The Company will furnish any of its stockholders a copy of any of the above Exhibits not included herein upon the written request of such stockholder and the payment to the Company of the reasonable expenses incurred by the Company in furnishing such copy or copies.
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on October 16, 1998, and on December 7, 1998.
SCHEDULE II -- VALUATION RESERVES
(in millions)
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Kellogg Company
Our audits of the consolidated financial statements referred to in our report dated January 29, 1999, appearing in the 1998 Annual Report to Stockholders of Kellogg Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan January 29, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 25th day of March 1999. KELLOGG COMPANY
By: /s/ ARNOLD G. LANGBO
------------------------------------ Arnold G. Langbo Chairman of the Board Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
- ------------------------- * A management contract or compensatory plan required to be filed with this Report.
The Company will furnish any of its stockholders a copy of any of the above Exhibits not included herein upon the written request of such stockholder and the payment to the Company of the reasonable expenses incurred by the Company in furnishing such copy or copies.