1998 Annual Report --
Contents || Corporate ListingsNotes to Consolidated Financial Statements
Note 1 Accounting policies
Consolidation
The consolidated financial statements include the accounts of Kellogg Company and its majority-owned subsidiaries. Intercompany balances and transactions are eliminated.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
Cash and cash equivalents
Highly liquid temporary investments with original maturities of less than three months are considered to be cash equivalents. The carrying amount approximates fair value.
Inventories
Inventories are valued at the lower of cost (principally average) or market.
Property
Fixed assets are recorded at cost and depreciated over estimated useful lives using straight-line methods for financial reporting and accelerated methods for tax reporting. Cost includes an amount of interest associated with significant capital projects.
Goodwill and other intangible assets
Intangible assets are amortized principally on a straight-line basis over the estimated periods benefited, generally 40 years for goodwill and periods ranging from 5 to 40 years for other intangible assets. The realizability of goodwill and other intangibles is evaluated periodically when events or circumstances indicate a possible inability to recover the carrying amount. Evaluation is based on various analyses, including cash flow and profitability projections.
Advertising
The costs of advertising are generally expensed as incurred.
Recently adopted pronouncements
In 1998, the Company adopted several statements issued by the Financial Accounting Standards Board (FASB). In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS) #130 "Reporting Comprehensive Income," which requires companies to disclose all items recognized under accounting standards as components of comprehensive income. In June 1997, the FASB issued SFAS #131 "Disclosures about Segments of an Enterprise and Related Information," which requires certain information to be reported about operating segments consistent with management's internal view of the Company. In February 1998, the FASB issued SFAS #132 "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises and standardizes disclosures for pension and other postretirement benefit plans.
On November 20, 1997, the Emerging Issues Task Force (EITF) of the FASB reached a consensus in EITF Issue 97-13 that the costs of business process reengineering activities are to be expensed as incurred. This consensus also applies to business process reengineering activities that are part of an information technology project. Beginning in 1996, the Company has undertaken an Enterprise Business Applications (EBA) initiative that combines design and installation of business processes and software packages to achieve global best practices. Under the EBA initiative, the Company had capitalized certain external costs associated with business process reengineering activities as part of the software asset. EITF Issue 97-13 prescribes that previously capitalized business process reengineering costs should be expensed and reported as a cumulative effect of a change in accounting principle. Accordingly, for the fourth quarter of 1997, the Company reported a charge of $18.0 million (net of tax benefit of $7.7 million) or $.04 per share for write-off of business process reengineering costs. Such costs were expensed as incurred during 1998 and the fourth quarter of 1997 and were insignificant.
Recently issued pronouncements
In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AcSEC) issued Statement of Position
(SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on the classification of software project costs between expense and capital. During April 1998, AcSEC also issued SOP 98-5 "Reporting on Costs of Start-up Activities." 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 effective for fiscal years beginning after December 15, 1998. 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, if material. Management intends to adopt SOP 98-1 and SOP 98-5 effective January 1, 1999.
In June 1998, the FASB issued 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. SFAS #133 is effective for fiscal years beginning after June 15, 1999. Management intends to adopt the provisions of SFAS #133 effective January 1, 2000.
The impact of adoption of these pronouncements on the Company's financial results is not expected to be significant.
Common stock split
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 the Consolidated Statement of Earnings and Notes to Consolidated Financial Statements have been retroactively restated to reflect the stock split.
Stock compensation
The Company follows Accounting Principles Board Opinion (APB) #25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options and other stock-based compensation. Under APB #25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. As permitted, the Company has elected to adopt the disclosure provisions only of SFAS #123, "Accounting for Stock-Based Compensation". (Refer to Note 7 for further information.)
Net 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. Weighted average shares outstanding, in millions, were 407.8, 414.1, and 424.9 for 1998, 1997, and 1996, respectively. 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 common shares are principally comprised of employee stock options issued by the Company and had an insignificant impact on the computation of diluted net earnings per share during the periods presented. Weighted average shares outstanding, in millions, for purposes of computing diluted net earnings per share were 408.6, 415.2, and 426.4 for 1998, 1997, and 1996, respectively.
Comprehensive income
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 consists solely of net earnings and foreign currency translation adjustments pursuant to SFAS #52, "Foreign Currency Translation," as follows:
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2 Acquisition
On December 16, 1996, the Company purchased certain assets and liabilities of the Lender's Bagels business from Kraft Foods, Inc. for $466 million in cash, including related acquisition costs. The acquisition was accounted for as a purchase. The results of Lender's operations from the date of the acquisition to December 31, 1996, were not significant. The acquisition was initially financed through commercial paper borrowings that were replaced with long-term debt in January 1997. Intangible assets included in the allocation of purchase price consisted of goodwill and trademarks of $329 million and non-compete covenants of $20 million. The goodwill and trademarks are being amortized over 40 years and the non-compete covenants are being amortized over 5 years.
The unaudited pro forma combined historical results, as if the Lender's Bagels business had been acquired at the beginning of fiscal 1996, are estimated to be net sales of $6.87 billion, net earnings of $524.3 million, and net earnings per share of $1.23. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the fiscal period presented, nor are they necessarily indicative of future consolidated results.
Note 3 Non-recurring charges
Operating profit for 1998 includes non-recurring charges of $70.5 million ($46.3 million after tax or $.12 per share) for streamlining initiatives.
Operating profit for 1997 includes non-recurring charges of $184.1 million ($140.5 million after tax or $.34 per share), comprised of $161.1 million for streamlining initiatives and $23.0 million for asset impairment losses.
Operating profit for 1996 includes non-recurring charges of $136.1 million ($97.8 million after tax or $.23 per share), comprised of $121.1 million for streamlining initiatives and $15.0 million for potential settlement of certain litigation.
Streamlining initiatives
From 1995 to the present, management has commenced major productivity and operational streamlining initiatives in an effort to optimize the Company's cost structure. The incremental costs of these programs have been reported throughout 1995-1998 as non-recurring charges.
The 1998 streamlining charges relate primarily to an overhead activity analysis that resulted in the elimination of approximately 550 employees and 240 contractors from the Company's headquarters and North American operations through a combination of involuntary early retirement and severance programs. The charges consist mainly of employee retirement and separation benefits, outplacement services, associated consulting and other related costs. Cash outlays for the 1998 charges during 1998 were $8 million, with the remainder to be spent during 1999. Total cash outlays during 1998 for all streamlining initiatives were approximately $47 million.
The 1997 charges for streamlining initiatives relate principally to management's plan to optimize the Company's pan-European operations, as well as ongoing productivity programs in the United States and Australia. A major component of the pan-European initiatives was the late-1997 closing of plants and separation of employees in Riga, Latvia; Svendborg, Denmark; and Verola, Italy. Approximately 50% of the total 1997 streamlining charges consist of manufacturing asset write-downs, with the balance comprised of current and anticipated cash outlays for employee separation benefits, equipment removal, production redeployment, associated management consulting, and similar costs. Total cash outlays during 1997 for streamlining initiatives were approximately $85 million.
The 1996 charges for streamlining initiatives result from management's actions to consolidate and reorganize operations in the United States, Europe, and other international locations. Cash outlays for streamlining initiatives were approximately $120 million in 1996. All streamlining programs commenced since 1995, including the aforementioned 1998 initiatives, are expected to result in the elimination of approximately 3,500 employee positions by the end of 1999, with approximately 95% of this reduction already achieved.
The components of the streamlining charges, as well as reserve balances remaining at December 31, 1998, 1997, and 1996, were:
Other
In addition to the non-recurring charges reported for streamlining initiatives, the Company incurred charges for the following unusual items:
- During 1997, asset impairment losses of $23.0 million, which resulted from evaluation of the Company's ability to recover components of its investments in the emerging markets of Asia-Pacific.
- During 1996, a provision of $15.0 million for the potential settlement of certain litigation.
1999 events
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 result
are not yet known.
Note 4 Other income and expense
Other income and expense includes non-operating items such as interest income, foreign exchange gains and losses, and charitable donations.
Other expense for 1996 includes a charge of $35.0 million ($22.3 million after tax or $.05 per share) for a contribution to the Kellogg's Corporate Citizenship Fund, a private trust established for charitable donations. This contribution is expected to satisfy the charitable-giving plans of this trust through the year 2000.
Note 5 Leases
Operating leases are generally for equipment and warehouse space. Rent expense on all operating leases was $36.5 million in 1998, $38.6 million in 1997, and $37.9 million in 1996. At December 31, 1998, future minimum annual rental commitments under non-cancelable operating leases totaled $62 million consisting of (in millions): 1999-$16; 2000-$12; 2001-$9; 2002-$8; 2003-$6; 2004 and beyond-$11.
Note 6 Debt
Notes payable consist of commercial paper borrowings in the United States at the highest credit rating available, borrowings against a revolving credit agreement in Europe and, to a lesser extent, bank loans of foreign subsidiaries at competitive market rates. U.S. borrowings at December 31, 1998, were $423.3 million with an effective interest rate of 5.2%. U.S. borrowings at December 31, 1997 (including $400 million classified in long-term debt, as discussed in (d) below), were $744.2 million with an effective interest rate of 5.7%. Associated with these borrowings, during September 1997, the Company purchased a $225 million notional, four-year fixed interest rate cap. Under the terms of the cap, if the Federal Reserve AA composite rate on 30-day commercial paper increases to 6.33%, the Company will pay this fixed rate on $225 million of its commercial paper borrowings. If the rate increases to 7.68% or above, the cap will expire. As of year-end 1998, the rate was 4.90%.
In December 1998, the Company entered into a $200 million, three-year revolving credit agreement with several international banks. At December 31, 1998, outstanding borrowings under this agreement were $148.5 million with an effective interest rate of 5.5%. Additionally, the Company has entered into financing arrangements which provide for the sale of future foreign currency revenues. As of December 31, 1998, the Company had committed to borrowings during 1999 in the cumulative principle amount of approximately $280 million. No borrowings were outstanding under these arrangements at December 31, 1998 or 1997. At December 31, 1998, the Company had $715.9 million of total short-term lines of credit, of which $543.6 million were unused and available for borrowing on an unsecured basis.
Long-term debt at year-end consisted of:
(a) In October 1998, the Company issued $200 of seven-year 4.875% fixed rate U.S. Dollar Notes to replace maturing long-term debt. The Company entered into a series of interest rate hedges throughout 1998 to effectively fix the interest rate prior to issuance. The effect of the hedges, when combined with original issue discounts, resulted in an effective interest rate on this debt of 6.07%.
(b) In January 1997, the Company issued $500 of seven-year 6.625% fixed rate Euro Dollar Notes. In conjunction with this issuance, the Company settled $500 notional amount of interest rate forward swap agreements, which effectively fixed the interest rate on the debt at 6.354%. Associated with this debt, during September 1997, the Company entered into a $225 notional, 41Ú2-year fixed-to-floating interest rate swap, indexed to the three-month London Interbank Offered Rate (LIBOR). Under the terms of this swap, if three-month LIBOR decreases to 4.71% or below, the swap will expire. At year-end 1998, three-month LIBOR was 5.07%.
(c) In August 1997, the Company issued $500 of four-year 6.125% Euro Dollar Notes. In conjunction with this issuance, the Company settled $400 notional amount of interest rate forward swap agreements which effectively fixed the interest rate on the debt at 6.4%. Associated with this debt, during September 1997, the Company entered into a $200 notional, four-year fixed-to-floating interest rate swap, indexed to three-month LIBOR.
(d) At December 31, 1997, $400 of the Company's commercial paper was classified as long-term, based on the Company's intent and ability to refinance as evidenced by an issuance of $400 of three-year 5.75% fixed rate U.S. Dollar Notes on February 4, 1998. 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. As a result of this option, the effective interest rate on the three-year Notes is 5.23%. Concurrent with this issuance, the Company entered into a $400 notional, three-year fixed-to-floating interest rate swap, indexed to the Federal Reserve AA Composite Rate on 30-day commercial paper.
(e) In October 1993, the Company issued $200 of five-year 6.25% Euro Canadian Dollar Notes which were swapped into 4.629% fixed rate U.S. Dollar obligations for the duration of the five-year term.
Scheduled principal repayments on long-term debt are (in millions): 1999-$1; 2000-$6; 2001-$900; 2002-$5; 2003-$2; 2004 and beyond-$702.
Interest paid was (in millions): 1998-$113; 1997-$85; 1996-$67. Interest expense capitalized as part of the construction cost of fixed assets was (in millions): 1998-$7.8; 1997-$9.6; 1996-$3.8.
Note 7 Stock options
The Key Employee Long-Term Incentive Plan provides for benefits to be awarded to executive-level employees in the form of stock options, performance shares, performance units, incentive stock options, restricted stock grants, and other stock-based awards. Options granted under this plan generally vest over two years and, prior to September 1997, vested at the date of grant. The Bonus Replacement Stock Option Plan allows certain key executives to receive stock options that generally vest immediately in lieu of part or all of their respective bonus. Options granted under this plan are issued from the Key Employee Long-Term Incentive Plan. The Kellogg Employee Stock Ownership Plan is designed to offer stock and other incentive awards based on Company performance to employees who are not eligible to participate in the Key Employee Long-Term Incentive Plan. Options awarded under the Kellogg Employee Stock Ownership Plan are subject to graded vesting over a five-year period. Under these plans (the "stock option plans"), options are granted with exercise prices equal to the fair market value of the Company's common stock at the time of grant, exercisable for a 10-year period following the date of grant, subject to vesting rules.
The Key Employee Long-Term Incentive Plan contains an accelerated ownership feature ("AOF"). An AOF option is granted when Company stock is surrendered to pay the exercise price of a stock option. The holder of the option is granted an AOF option for the number of shares surrendered. For all AOF options, the original expiration date is not changed but the options vest immediately.
As permitted by SFAS #123 "Accounting for Stock-Based Compensation," the Company has elected to account for the stock option plans under APB #25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for these plans.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for the stock option plans been determined based on the fair value at the grant date consistent with SFAS #123, the Company's net earnings and earnings per share are estimated as follows:
Under the Key Employee Long-Term Incentive Plan, options for 9.8 million and 13.2 million shares were available for grant at December 31, 1998 and 1997, respectively. Under the Kellogg Employee Stock Ownership Plan, options for 6.0 million and 6.9 million shares were available for grant at December 31, 1998 and 1997, respectively. Transactions under these plans were:
Employee stock options outstanding and exercisable under these plans as of December 31, 1998, were:
Note 8 Pension benefits
The Company has a number of U.S. and foreign pension plans to provide retirement benefits for its employees. Benefits for salaried employees are generally based on salary and years of service, while union employee benefits are generally a negotiated amount for each year of service. Plan funding strategies are influenced by tax regulations. Plan assets consist primarily of equity securities with smaller holdings of bonds, real estate, and other investments. Investment in Company common stock represented 2.4% and 4.2% of consolidated plan assets at December 31, 1998 and 1997, respectively.
The components of pension expense were:
The worldwide weighted average actuarial assumptions were:
The aggregate change in projected benefit obligation, change in plan assets, and funded status were:
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were, in millions, $104.6, $84.5, and $8.3, respectively, as of December 31, 1998, and $87.1, $69.1, and $15.4, respectively, as of December 31, 1997.
All gains and losses, other than curtailment losses and special termination benefits, are recognized over the average remaining service period of active plan participants. Curtailment losses and special termination benefits recognized in 1998 and 1996 relate to operational workforce reduction initiatives undertaken during these years and are recorded as a component of non-recurring charges. (Refer to Note 3 for further information.)
Certain of the Company's subsidiaries sponsor 401(k) or similar savings plans for active employees. Expense related to these plans was (in millions): 1998-$16; 1997-$16; 1996-$17.
Note 9 Nonpension postretirement benefits
Certain of the Company's North American subsidiaries provide health care and other benefits to substantially all retired employees, their covered dependents, and beneficiaries. Generally, employees are eligible for these benefits when one of the following service/age requirements is met: 30 years and any age; 20 years and age 55; 5 years and age 62. Plan assets consist primarily of equity securities with smaller holdings of bonds.
Components of postretirement benefit expense were:
The worldwide weighted average actuarial assumptions were:
The aggregate change in accumulated postretirement benefit obligation, change in plan assets, and funded status were:
The assumed health care cost trend rate was 7.0% for 1998, decreasing gradually to 4.2% by the year 2003 and remaining at that level thereafter. These trend rates reflect the Company's prior experience and management's expectation that future rates will decline. A one percentage point change in assumed health care cost trend rates would have the following effects:
All gains and losses, other than curtailment losses and special termination benefits, are recognized over the average remaining service period of active plan participants. Curtailment losses and special termination benefits recognized in 1998 and 1996 relate to operational workforce reduction initiatives undertaken during these years and are recorded as a component of non-recurring charges. (Refer to Note 3 for further information.) Since December 1996, the Company has contributed to a voluntary employee benefit association (VEBA) trust for funding of its nonpension postretirement benefit obligations.
Note 10 Income taxes
Earnings before income taxes and cumulative effect of accounting change, and the provision for U.S. federal, state, and foreign taxes on these earnings, were:
The difference between the U.S. federal statutory tax rate and the Company's effective rate was:
The 1998 and 1997 increases in valuation allowances on deferred tax assets and corresponding impacts on the effective income tax rate, as presented above, primarily result from management's assessment of the Company's ability to utilize certain operating loss and tax credit carryforwards. Total tax benefits of carryforwards at year-end 1998 and 1997 were $55.1 million and $30.4 million, respectively, and principally expire after five years.
The deferred tax assets and liabilities included in the balance sheet at year-end were:
At December 31, 1998, foreign subsidiary earnings of $1.2 billion were considered permanently invested in those businesses. Accordingly, U.S. income taxes have not been provided on these earnings. Foreign withholding taxes of approximately $75 million would be payable upon remittance of these earnings. Subject to certain limitations, the withholding taxes would then be available for use as credits against the U.S. tax liability.
Cash paid for income taxes was (in millions): 1998-$211; 1997-$332; 1996-$281.
Note 11 Financial instruments and credit risk concentration
The fair values of the Company's financial instruments are based on carrying value in the case of short-term items, quoted market prices for derivatives and investments, and, in the case of long-term debt, incremental borrowing rates currently available on loans with similar terms and maturities. The carrying amounts of the Company's cash, cash equivalents, receivables, notes payable, and long-term debt approximate fair value.
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. In general, instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Deferred gains or losses related to any instrument 1) designated but ineffective as a hedge of existing assets, liabilities, or firm commitments, or 2) designated as a hedge of an anticipated transaction which is no longer likely to occur, are recognized immediately in the statement of earnings.
For all derivative financial and commodity instruments held by the Company, changes in fair values of these instruments and the resultant impact on the Company's cash flows and/or earnings would generally be offset by changes in value of underlying exposures. The impact on the Company's results and financial position of holding derivative financial and commodity instruments was insignificant during the periods presented.
Foreign exchange risk
The Company is exposed to fluctuations in foreign currency cash flows primarily related to third party purchases, intercompany product shipments, and intercompany loans. The Company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, the Company is exposed to volatility in the translation of foreign currency earnings to U.S. Dollars.
The Company assesses foreign currency risk based on transactional cash flows and enters into forward contracts and other commitments to sell foreign currency revenues, all of generally less than twelve months duration, to reduce fluctuations in net long or short currency positions. Foreign currency contracts are marked-to-market with net amounts due to or from counterparties recorded in accounts receivable or payable. For contracts hedging firm commitments, mark-to-market gains and losses are deferred and recognized as adjustments to the basis of the transaction. For contracts hedging subsidiary investments, mark-to-market gains and losses are recorded in the accumulated other comprehensive income component of shareholders' equity. For all other contracts, mark-to-market gains and losses are recognized currently in other income or expense. Commitments to sell future foreign currency revenues are accounted for as contingent borrowings.
The notional amounts of open forward contracts were $22.2 million and $143.2 million at December 31, 1998 and 1997, respectively. No borrowings were outstanding under commitments to sell foreign currency revenues at December 31, 1998 or 1997. Refer to Supplemental Financial Information on pages 33 and 34 for further information regarding these contracts.
Interest rate risk
The Company is exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing issuances of variable rate debt. The Company uses interest rate caps, and currency and interest rate swaps, including forward swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions.
Interest rate forward swaps are marked-to-market with net amounts due to or from counterparties recorded in interest receivable or payable. Mark-to-market gains and losses are deferred and recognized over the life of the debt issue as a component of interest expense. For other caps and swaps entered into concurrently with the debt issue, the interest or currency differential to be paid or received on the instrument is recognized in the statement of earnings as incurred, as a component of interest expense. If a position were to be terminated prior to maturity, the gain or loss realized upon termination would be deferred and amortized to interest expense over the remaining term of the underlying debt issue or would be recognized immediately if the underlying debt issue was settled prior to maturity.
The notional amounts of currency and interest rate swaps were $1.05 billion and $875.0 million at December 31, 1998 and 1997, respectively. Refer to Note 6 and Supplemental Financial Information on pages 33 and 34 for further information regarding these swaps.
Price risk
The Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials. The Company uses the combination of long cash positions with vendors, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted purchases over a duration of generally less than one year. Commodity contracts are marked-to-market with net amounts due to or from brokers recorded in accounts receivable or payable. Mark-to-market gains and losses are deferred and recognized as adjustments to the basis of the underlying material purchase.
Credit risk concentration
The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. This credit loss is limited to the cost of replacing these contracts at current market rates. Management believes that the probability of such loss is remote.
Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, and accounts receivable. The Company places its investments in highly rated financial institutions and investment grade short-term debt instruments, and limits the amount of credit exposure to any one entity. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas.
Note 12 Quarterly financial data (unaudited)
The principal market for trading Kellogg shares is the New York Stock Exchange (NYSE). The shares are also traded on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia Stock Exchanges. At year-end 1998, the closing price (on the NYSE) was $34 1/8 and there were 24,634 shareholders of record.
Dividends paid and the quarterly price ranges on the NYSE during the last two years were:
Note 13 Operating segments
The 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 are the basis of the Company's reportable operating segment information disclosed below. The measurement of operating segment results is generally consistent with the presentation of the Consolidated Statement of Earnings and Balance Sheet. Intercompany transactions between reportable operating segments were insignificant in all periods presented.
Supplemental geographic information is provided below for revenues from external customers and long-lived assets:
Note 14 Supplemental financial statement data
