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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 1-4171
KELLOGG COMPANY
State of Incorporation--Delaware IRS Employer Identification No.38-0710690
One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599
Registrant's telephone number: 616-961-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Common Stock outstanding July 31, 1998 - 407,075,398 shares
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KELLOGG COMPANY
INDEX
<TABLE>
<CAPTION>
PART I - Financial Information Page
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Item 1:
Consolidated Balance Sheet - June 30, 1998, and December 31, 1997 2
Consolidated Statement of Earnings - three and six months ended
June 30, 1998 and 1997 3
Consolidated Statement of Cash Flows - six months ended
June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-6
Item 2:
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-13
PART II - Other Information
Item 4:
Submission of Matters to a Vote of Security Holders 14-15
Item 6:
Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
============================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES JUNE 30, December 31,
(millions, except per share data) 1998 1997
(unaudited) *
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $192.6 $173.2
Accounts receivable, net 675.5 587.5
Inventories:
Raw materials and supplies 137.4 135.0
Finished goods and materials in process 310.5 299.3
Other current assets 230.4 272.7
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,546.4 1,467.7
PROPERTY, net of accumulated depreciation
of $2,245.9 and $2,207.3 2,812.7 2,773.3
OTHER ASSETS 648.6 636.6
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,007.7 $4,877.6
=============================================================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt $204.1 $211.2
Notes payable 541.4 368.6
Accounts payable 374.0 328.0
Income taxes 54.0 30.5
Other current liabilities 633.0 719.0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,806.5 1,657.3
LONG-TERM DEBT 1,414.0 1,415.4
NONPENSION POSTRETIREMENT BENEFITS 437.1 444.1
DEFERRED INCOME TAXES AND OTHER LIABILITIES 357.5 363.3
SHAREHOLDERS' EQUITY
Common stock, $.25 par value 103.8 103.7
Capital in excess of par value 104.0 92.6
Retained earnings 1,369.9 1,240.4
Treasury stock, at cost (283.6) (157.3)
Accumulated other comprehensive income (301.5) (281.9)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 992.6 997.5
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,007.7 $4,877.6
=============================================================================================================================
*Condensed from audited financial statements.
</TABLE>
Refer to Notes to Consolidated Financial Statements
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited)
=============================================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Three months ended June 30, Six months ended June 30,
(millions, except per share data) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
NET SALES $1,713.5 $1,719.7 $3,356.4 $3,408.6
- -----------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 819.6 810.8 1,601.4 1,638.8
Selling and administrative expense 649.3 617.5 1,211.6 1,201.2
Non-recurring charges -- 12.2 -- 12.2
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING PROFIT 244.6 279.2 543.4 556.4
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense 29.0 27.0 58.1 52.4
Other income (expense), net 4.5 2.0 4.9 2.2
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 220.1 254.2 490.2 506.2
Income taxes 76.9 90.6 176.3 182.0
- -----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $143.2 $163.6 $313.9 $324.2
=============================================================================================================================
NET EARNINGS PER SHARE (BASIC AND DILUTED) $.35 $.39 $.77 $.78
DIVIDENDS PER SHARE $.225 $.210 $.450 $.420
AVERAGE SHARES OUTSTANDING 408.9 414.7 409.6 416.3
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Refer to Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
======================================================================================================
KELLOGG COMPANY AND SUBSIDIARIES Six months ended June 30,
(millions) 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $313.9 $324.2
Items in net earnings not requiring cash:
Depreciation and amortization 135.3 140.7
Deferred income taxes 38.5 2.6
Non-recurring charges, net of cash paid --- 1.4
Other 10.4 0.6
Postretirement benefit plan contributions (47.8) (83.3)
Changes in operating assets and liabilities (107.6) 28.1
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 342.7 414.3
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties (173.4) (131.9)
Acquisitions of businesses (20.4) ---
Other 6.4 (8.0)
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (187.4) (139.9)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net reductions of notes payable (227.2) (395.2)
Issuances of long-term debt 400.0 500.0
Reductions of long-term debt (7.8) (6.7)
Net issuances of common stock 13.3 20.1
Common stock repurchases (128.0) (250.4)
Cash dividends (184.4) (174.8)
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (134.1) (307.0)
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1.8) (8.0)
- -------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 19.4 (40.6)
Cash and cash equivalents at beginning of period 173.2 243.8
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $192.6 $203.2
=======================================================================================================
</TABLE>
Refer to Notes to Consolidated Financial Statements
4
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Notes to Consolidated Financial Statements
for the six months ended June 30, 1998 (Unaudited)
1. Accounting policies
The unaudited interim financial information included herein reflects the
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations, financial position, and cash flows for the periods presented. Such
interim information should be read in conjunction with the financial statements
and notes thereto contained on pages 23 to 32 of the Company's 1997 Annual
Report. The accounting policies used in preparing these financial statements are
the same as those summarized in the Company's 1997 Annual Report. Certain
amounts for 1997 have been reclassified to conform with current period
classifications.
The results of operations for the three and six months ended June 30, 1998, are
not necessarily indicative of the results to be expected for other interim
periods or the full year.
2. Earnings per share
Basic net earnings per share is determined by dividing net earnings by the
weighted average number of common shares outstanding during the period.
Diluted net earnings per share is similarly determined except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been
issued. Dilutive potential shares are principally comprised of employee stock
options issued by the Company and had an insignificant impact on earnings per
share during the periods presented.
On August 1, 1997, the Company's Board of Directors approved a 2-for-1 stock
split to shareholders of record at the close of business August 8, 1997,
effective August 22, 1997, and also authorized retirement of 105.3 million
common shares (pre-split) held in treasury. All per share and shares outstanding
data in this filing have been retroactively restated to reflect the stock split.
3. Debt
On February 4, 1998, the Company issued $400 million of three-year 5.75% fixed
rate U.S. Dollar Notes. These Notes were issued under an existing "shelf
registration" with the Securities and Exchange Commission, and 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. Concurrent with this issuance, the Company entered into a $400 million
notional, three-year fixed-to-floating interest rate swap, indexed to the
Federal Reserve AA composite rate on 30-day commercial paper.
5
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As of June 30, 1998, current maturities of long-term debt primarily consisted of
$200 million of five-year notes due October 1998. Management currently intends
to replace these notes with new long-term debt issuances as of the maturity date
and, as of June 30, 1998, had entered into interest rate hedges to effectively
fix the U.S. Treasury rate pricing on approximately three-quarters of the future
issuance. Future increases in the notional amount of interest rate hedges will
be evaluated based on market conditions existing prior to the maturity date of
the notes.
At year-end 1997, the Company had $775.1 million of short-term lines of credit.
During the first half of 1998, the Company reduced this amount by $175 million.
4. Changes in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by or distributions to shareholders. For the Company, comprehensive
income for all periods presented consisted solely of net earnings and foreign
currency translation adjustments pursuant to SFAS No. 52, "Foreign Currency
Translation," as follows (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $143.2 $163.6 $313.9 $324.2
Other comprehensive income (loss):
Foreign currency translation adjustments (23.4) (5.1) (19.4) (50.2)
Related tax effect (.1) (.2) (.2) (2.1)
------ ------ ------ ------
(23.5) (5.3) (19.6) (52.3)
------ ------ ------ ------
Total comprehensive income $119.7 $158.3 $294.3 $271.9
====== ====== ====== ======
</TABLE>
5. Non-recurring charges
Operating profit for the three and six months ended June 30, 1997, includes
non-recurring charges of $12.2 million ($8.0 million after tax or $.02 per
share). These charges primarily relate to ongoing productivity and operational
streamlining initiatives in the U.S., Europe, and other international locations,
and are comprised principally of expenditures for employee severance, training
and relocation; associated management consulting; and production redeployment.
6
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KELLOGG COMPANY
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Kellogg Company operates in a single industry - manufacturing and marketing
grain-based convenience food products, including ready-to-eat cereal, toaster
pastries, frozen waffles, cereal bars, and bagels, throughout the world. 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 pre-packaged bagel categories.
During the quarter ended June 30, 1998, the Company experienced a decline in
earnings with volume and sales approximating the prior-year results. Management
believes the Company's results were impacted by a continuation of extremely
competitive conditions in major markets and the Company's significant investment
in marketing activities, innovation, and other initiatives.
For the second quarter of 1998, Kellogg Company reported net earnings and
earnings per share of $143.2 million and $.35, respectively, compared to 1997
net earnings of $163.6 million and net earnings per share of $.39. June 1998
year-to-date net earnings and earnings per share were $313.9 million and $.77,
respectively, versus prior-year amounts of $324.2 million and $.78. (All per
share amounts reflect the 2-for-1 stock split effective August 22, 1997. All
earnings per share presented represent both basic and diluted earnings per
share.)
During the prior-year quarter and year-to-date periods, the Company reported
non-recurring charges of $12.2 million ($8.0 million after tax or $.02 per
share) related to productivity and operational streamlining initiatives.
Excluding these charges, comparable 1997 net earnings and earnings per share
were $171.6 million and $.41 for the quarter, and $332.2 million and $.80 for
the year-to-date period. For purposes of comparison between years, these charges
have been excluded from all applicable amounts presented below.
The year-to-date decrease in net earnings per share of 3.8% or $.03 resulted
from $.03 of business decline and $.01 of unfavorable foreign currency
movements, partially offset by $.01 from the effect of common stock repurchases.
The business decline was primarily volume related, with higher marketing,
research, and administrative costs also contributing to the decline.
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The Company reported the following volume results during the 1998 second quarter
and June year-to-date periods versus the comparable prior-year periods:
<TABLE>
<CAPTION>
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Volume % change vs. Prior year QUARTER YEAR-TO-DATE
-----------------------------------------------------------------------------------------
<S> <C> <C>
Global cereal -.4% - 3.1%
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U.S. cereal -5.6% -8.1%
-----------------------------------------------------------------------------------------
Global total -.1% -3.0%
=========================================================================================
</TABLE>
During the quarter, the decline in U.S. cereal volume offset record results in
the Company's Latin American region. Cereal volume results in the Company's
European and Asia-Pacific regions were approximately even with the prior year.
Other convenience foods volume grew slightly during the quarter, as strong
double-digit growth in international markets offset declines in U.S. sales of
Lender's Bagels and Eggo Waffles.
Consolidated net sales decreased .4% and 1.5%, respectively, for the quarter and
year-to-date periods. Foreign currency movements negatively impacted net sales
by approximately 2% in each of these periods.
Margin performance for the second quarter and year-to-date periods was:
<TABLE>
<CAPTION>
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QUARTER YEAR-TO-DATE
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1998 1997 CHANGE 1998 1997 CHANGE
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<S> <C> <C> <C> <C> <C> <C>
GROSS MARGIN 52.2% 52.9% -.7% 52.3% 51.9% +.4%
------------------------------------------------------------------------------------------------------------------
SGA%(a) 37.9% 36.0% -1.9% 36.1% 35.2% -.9%
------------------------------------------------------------------------------------------------------------------
Operating margin 14.3% 16.9% -2.6% 16.2% 16.7% -.5%
==================================================================================================================
</TABLE>
(a) Selling, general, and administrative expense as a percentage of net sales
Gross margin performance for the second quarter of 1998 was negatively impacted
by the effect of lower volumes in major markets, partially offset by favorable
pricing and mix movements. The SGA% was higher versus the prior year, primarily
due to significant marketing investment and increased spending on research and
development, technology, and process reengineering initiatives.
For the quarter, gross interest expense, prior to amounts capitalized, was $30.7
million, up 5% from the prior-year amount of $29.3 million, due to higher
average debt levels, partially offset by a slightly lower effective interest
rate during the quarter. Year-to-date gross interest expense was $61.2 million
versus $56.7 million in the prior year.
The effective income tax rate was reduced by utilization of certain tax benefit
carryforwards during the quarter. As a result, the second quarter rate was down
8
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slightly versus the prior year, but comparable to 1997 on a June year-to-date
basis:
<TABLE>
<CAPTION>
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QUARTER YEAR-TO-DATE
------------------------------------------------------------------------------------------------------------------
1998 1997 CHANGE 1998 1997 CHANGE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Effective tax rate 34.9% 35.6% -.7% 36.0% 35.9% +.1%
==================================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong during the quarter. A strong
cash flow, combined with a program of issuing commercial paper and maintaining
worldwide credit facilities, provides adequate liquidity to meet the Company's
operational needs.
Year-to-date, net cash provided by operating activities was $342.7 million,
compared to $414.3 million in 1997, with the decrease due principally to
decreased earnings and unfavorable working capital movements, partially offset
by lower benefit plan contributions. The unfavorable working capital movements
were due primarily to increases in accounts receivable and reduced promotion
liabilities. The ratio of current assets to current liabilities was .9 at June
30, 1998, consistent with the ratio at December 31, 1997.
Net cash used in investing activities was $187.4 million, comprised principally
of $173.4 million in property additions.
Net cash used in financing activities was $134.1 million, related primarily to
common stock repurchases and dividend payments, partially offset by a net
increase in total debt of $165.0 million. The Company's year-to-date per-share
dividend payment was $.45, a 7.1% increase over the prior-year payment of $.42.
Under existing plans authorized by the Company's Board of Directors, management
spent $128.0 million during the June 1998 year-to-date period to repurchase 3.0
million shares of the Company's common stock at an average price of $43 per
share. The remaining repurchase authorization, which extends through December
31, 1998, was $261.1 million at June 30, 1998.
Notes payable consist principally of commercial paper borrowings in the United
States. To reduce short-term borrowings, on February 4, 1998, the Company issued
$400 million of three-year 5.75% fixed rate U.S. Dollar Notes. Accordingly, an
equivalent amount of commercial paper borrowings was classified as long-term
debt in the December 31, 1997, balance sheet. These Notes were issued under an
existing "shelf registration" with the Securities and
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Exchange Commission, and 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. Concurrent with this issuance, the Company
entered into a $400 million notional, three-year fixed-to-floating interest rate
swap, indexed to the Federal Reserve AA composite rate on 30-day commercial
paper.
At year-end 1997, the Company had available $775.1 million of short-term lines
of credit. During the first half of 1998, the Company reduced this amount by
$175 million.
As of June 30, 1998, current maturities of long-term debt consisted primarily of
$200 million of five-year notes due October 1998. Management currently intends
to replace these notes with new long-term debt issuances as of the maturity date
and, as of June 30, 1998, had entered into interest rate hedges to effectively
fix the U.S. Treasury rate pricing on approximately 75% of the future issuance.
Future increases in the notional amount of interest rate hedges will be
evaluated based on market conditions existing prior to the maturity date of the
notes.
Other long-term debt at June 30, 1998, consisted principally of $500 million of
seven-year notes due 2004 and $500 million of four-year notes due 2001.
The ratio of total debt to market capitalization at June 30, 1998, was 14%, up
from 10% at December 31, 1997, due principally to a decrease in the market price
of the Company's stock since that date.
FULL-YEAR OUTLOOK
Management is not aware of any adverse trends that would materially affect the
Company's strong financial position. Should suitable investment opportunities or
working capital needs arise that would require additional financing, management
believes the Company's strong credit rating, balance sheet, and earnings history
provide a base for obtaining additional financial resources at competitive rates
and terms.
Management believes the competitive environment experienced in the first half of
1998 will continue in the Company's major markets during the remainder of the
year. In response to these conditions, the Company will continue with
competitive levels of marketing spending during the balance of the year.
Additionally, to deliver superior long-term profitability and shareholder value,
the Company will accelerate its plan to strategically invest in brand-building
marketing activities, research and development, technology, and process
reengineering initiatives. Primarily as a result of these actions, management
believes the Company's full-year 1998 net earnings per share could decline by up
to 15% versus the prior year amount of $1.70 (excluding non-recurring charges).
However, management
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remains committed to long-term growth in both volume and earnings per share,
derived from the continued benefits of product innovation, cost structure
optimization, and the global introduction of new convenience foods.
As a result of the acceleration of its strategic investment plan, the Company's
full-year 1998 gross margin and SGA% will be difficult to predict, and the
operating profit margin could be reduced by 1%-2% versus the prior year.
Additional expectations for 1998 include an effective income tax rate of
35%-36%, capital spending of $400 million, common stock repurchase activity of
up to $390 million, and an increase in interest expense of 10%.
To address the millennium date change issue (the inability of certain computer
software, hardware, and other equipment with embedded computer chips to properly
process two-digit year-date codes after 1999), the Company formed a global task
force to perform a risk assessment, and develop and execute action plans, as
necessary. The Company's Year 2000 program encompasses information technology
(IT), non-IT (embedded technology such as microcontrollers), and Year 2000 risk
assessments of our major vendors and customers. The global risk assessment of IT
and non-IT has been completed. The risk assessments of our major vendors and
customers will be completed by December 1998. Remediation and testing activities
for critical business operations are under way, with remediation scheduled for
completion by December 1998, and testing scheduled for completion by March 1999.
Remediation and testing of non-critical business operations will continue, as
necessary, throughout 1999. Management currently believes that the total cost of
becoming Year 2000 compliant will not be significant to the Company's financial
results, partly due to other significant systems initiatives currently under
way. While the Company believes all necessary work will be completed, there can
be no guarantee that all systems will be in compliance by the year 2000 or that
the systems of other companies and government agencies on which the Company
relies will be converted in a timely manner. Such failure to complete the
necessary work by the year 2000 could cause delays in the Company's ability to
produce or ship its products, process transactions, or otherwise conduct
business in any of its markets, resulting in material financial risk. To
identify and reduce such risk, formal contingency planning is under way,
including extensive preparation for conducting business by manual or alternate
means within each of the Company's business units.
On January 1, 1999, eleven European countries will implement a single currency
zone, the European Monetary Union (EMU). The new currency, the Euro, will
eventually replace the national currencies that exist in the participating
countries. During the transition period of January 1, 1999-2002, entities within
participating countries must commence changes, which enable them to transact in
the Euro. National currencies will be withdrawn no later than July 1, 2002. This
transition to the Euro currency will involve changing budgetary, accounting, and
fiscal systems in companies and public administrations, as well as the
simultaneous handling of parallel currencies and conversion of legacy data.
Uncertainty exists
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as to the effects the Euro currency will have on the marketplace. Management has
formed a task force to monitor EMU developments, evaluate the impact of the Euro
conversion on the Company's operations, and develop and execute action plans, as
necessary. Documentation of required system and process changes within the
Company's European region is in process. In conjunction with other significant
technology initiatives currently under way, management intends to complete
initial system and process changes by year-end 1998. The Company will begin to
transact in the Euro with selected customers and vendors beginning in 1999 and
will continue to implement changes during the transition period in response to
business needs. Although Management currently believes the Company will be able
to accommodate any required changes in its operations without significant cost,
there can be no assurance that the Company, its customers, vendors, financial
service providers, or government agencies will meet all of the Euro currency
requirements on a timely basis. Such failure to complete the necessary work
could result in material financial risk.
In March 1998, the Accounting Standards Executive Committee of the AICPA (AcSEC)
issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." During April 1998, AcSEC also
issued SOP 98-5 "Reporting on the Costs of Start-up Activities." SOP 98-1
provides guidance on the classification of software project costs between
expense and capital. SOP 98-5 prescribes that the costs of opening a new
facility, commencing business in a new market, or similar start-up activities
must be expensed as incurred. Both of these pronouncements are generally
effective for financial statements for fiscal years beginning after December 15,
1998, with earlier adoption encouraged. SOP 98-1 is to be applied on a
prospective basis to costs incurred on or after the date of adoption. The
initial application of SOP 98-5 is to be reported as a cumulative effect of a
change in accounting principle. Management intends to adopt the provisions of
both pronouncements in the Company's first quarter 1999 financial statements.
The impact of adoption on the Company's financial results is not expected to be
significant.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS #133) "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, requiring recognition of the
fair value of all derivatives as assets or liabilities on the balance sheet. If
defined conditions are met, a derivative may be designated as a hedge of certain
underlying exposures. This designation determines the timing of recognition and
classification of periodic changes in the fair value of the derivative. SFAS
#133 is generally effective for financial statements for fiscal years beginning
after June, 15, 1999, with earlier application permitted as of the beginning of
any fiscal quarter subsequent to June 17, 1998. As of the initial application of
this Statement, all derivative instruments must be presented at fair value on
the balance sheet, and any necessary adjustments are generally to be reflected
in
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<PAGE> 14
either earnings or comprehensive income as a cumulative effect of a change in
accounting principle. 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. Management is
currently evaluating the impact of this standard on the Company's financial
results, including the potential for early adoption.
The foregoing discussion of full-year 1998 strategic actions and expected
financial results are forward-looking statements that involve risks and
uncertainties. Specific forward-looking projections include expectations about
competitive conditions and required levels of marketing spending; execution of
management's strategic investment plan and the resultant impact on 1998 margin
performance and profitability; levels of capital spending and common stock
repurchase activity; and execution of the Company's plans for becoming Year 2000
and EMU compliant. Actual results may differ materially due to the impact of
competitive conditions, marketing spending, new product introductions, and/or
incremental pricing actions on actual volumes and product mix; the levels of
spending on research and development, system initiatives, properties, business
opportunities, continued streamlining initiatives, and other general and
administrative functions; raw material price and labor cost fluctuations;
foreign currency exchange rate fluctuations; changes in statutory tax law;
interest rates available on short-term financing; the impact of stock market
conditions on common stock repurchase activity; and other items.
13
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KELLOGG COMPANY
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on April
24, 1998.
Represented at the Meeting either in person or by proxy, were
375,951,477 voting shares, of a total 410,813,655 voting
shares outstanding. The matters voted upon at the Meeting are
described in (c) below.
(c)(i) To elect five (5) directors to serve for three-year (3)
terms expiring at the 2001 Annual Meeting of Stockholders or
until their respective successors are elected and qualified,
namely:
Benjamin S. Carson
Votes for Election - 371,721,702
Votes Withheld - 4,229,775
Gordon Gund
Votes for Election - 373,558,099
Votes Withheld - 2,393,378
Dorothy A. Johnson
Votes for Election - 373,248,828
Votes Withheld - 2,702,649
William E. LaMothe
Votes for Election - 373,482,475
Votes Withheld - 2,469,002
Ann McLaughlin
Votes for Election - 373,435,618
Votes Withheld - 2,515,859
and to elect one (1) director to serve for a two-year term
expiring at the 2000 Annual Meeting of Stockholders, or until
a successor is elected and qualified, namely:
14
<PAGE> 16
Carleton S. Fiorina
Votes for Election - 371,758,484
Votes Withheld - 4,192,993
There were no votes against, abstentions, or broker non-votes
with respect to the election of any nominee named above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.01- Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
15
<PAGE> 17
KELLOGG COMPANY
SIGNATURES
Pursuant to the requirements 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.
KELLOGG COMPANY
/s/ J. R. Hinton
-------------------------------
J.R. Hinton
Principal Financial Officer;
Executive Vice President - Administration
/s/ A. Taylor
-------------------------------
A. Taylor
Principal Accounting Officer;
Vice President and Corporate Controller
Date: August 12, 1998
16
<PAGE> 18
KELLOGG COMPANY
EXHIBIT INDEX
Number Description
- ------ -----------
27.01 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KELLOGG
COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 192,600
<SECURITIES> 0
<RECEIVABLES> 684,100
<ALLOWANCES> (8,600)
<INVENTORY> 447,900
<CURRENT-ASSETS> 1,546,400
<PP&E> 5,058,600
<DEPRECIATION> (2,245,900)
<TOTAL-ASSETS> 5,007,700
<CURRENT-LIABILITIES> 1,806,500
<BONDS> 1,414,000
0
0
<COMMON> 103,800
<OTHER-SE> 888,800
<TOTAL-LIABILITY-AND-EQUITY> 5,007,700
<SALES> 3,356,400
<TOTAL-REVENUES> 3,356,400
<CGS> 1,601,400
<TOTAL-COSTS> 1,601,400
<OTHER-EXPENSES> 1,206,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,100
<INCOME-PRETAX> 490,200
<INCOME-TAX> 176,300
<INCOME-CONTINUING> 313,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313,900
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
