-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LAMvUorj1neqiM10Z2gcUNbWukaJW7VArnUlGgxUlbmWxvtOR1UKFsQUSOoiAIHB k73MDu0pFR2WrhJbsCGQBg== 0000950124-97-004196.txt : 19970813 0000950124-97-004196.hdr.sgml : 19970813 ACCESSION NUMBER: 0000950124-97-004196 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLOGG CO CENTRAL INDEX KEY: 0000055067 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 380710690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04171 FILM NUMBER: 97656861 BUSINESS ADDRESS: STREET 1: ONE KELLOGG SQ STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016 BUSINESS PHONE: 6169612000 MAIL ADDRESS: STREET 1: ONE KELLOGG SQUARE STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016 10-Q 1 10-Q 1 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, 1997 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, 1997 - 206,347,543 shares 2 KELLOGG COMPANY INDEX
Page ---- PART I - Financial Information Item 1: Consolidated Balance Sheet - June 30, 1997 and December 31, 1996 2 Consolidated Statement of Earnings - three and six months ended June 30, 1997 and 1996 3 Consolidated Statement of Cash Flows - six months ended June 30, 1997 and 1996 4 Notes to Consolidated Financial Statements 5-7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 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
1 3 CONSOLIDATED BALANCE SHEET ======================================================================
KELLOGG COMPANY AND SUBSIDIARIES JUNE 30, December 31, (millions) 1997 1996 (unaudited) * - ---------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 203.2 $ 243.8 Accounts receivable, net 630.8 592.3 Inventories: Raw materials and supplies 140.9 135.2 Finished goods and materials in process 308.2 289.7 Other current assets 322.3 267.6 - ---------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,605.4 1,528.6 PROPERTY, net of accumulated depreciation of $2,159.3 and $2,087.2 2,878.8 2,932.9 OTHER ASSETS 606.6 588.5 - ---------------------------------------------------------------------- TOTAL ASSETS $5,090.8 $5,050.0 ====================================================================== CURRENT LIABILITIES Current maturities of long-term debt $1.4 $501.2 Notes payable 757.4 652.6 Accounts payable 324.5 335.2 Income taxes 76.3 50.5 Accrued liabilities 756.8 659.5 - ---------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,916.4 2,199.0 LONG-TERM DEBT 1,220.0 726.7 NONPENSION POSTRETIREMENT BENEFITS 447.0 494.2 DEFERRED INCOME TAXES AND OTHER LIABILITIES 358.2 347.7 SHAREHOLDERS' EQUITY Common stock, $.25 par value 78.0 77.9 Capital in excess of par value 143.7 123.9 Retained earnings 4,299.7 4,150.3 Treasury stock, at cost (3,153.6) (2,903.4) Currency translation adjustment (218.6) (166.3) - ---------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,149.2 1,282.4 - ---------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,090.8 $5,050.0 ====================================================================== *Condensed from audited financial statements.
See accompanying notes to consolidated financial statements. 2 4
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) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ NET SALES $ 1,719.7 $ 1,651.4 $ 3,408.6 $ 3,437.3 - ------------------------------------------------------------------------------------------------------------------ Cost of goods sold 810.8 775.2 1,638.8 1,565.6 Selling and administrative expense 617.5 708.5 1,201.2 1,355.7 Non-recurring charges 12.2 26.1 12.2 35.6 - ------------------------------------------------------------------------------------------------------------------ OPERATING PROFIT 279.2 141.6 556.4 480.4 - ------------------------------------------------------------------------------------------------------------------ Interest expense 27.0 16.1 52.4 29.8 Other income (expense), net 2.0 0.3 2.2 0.7 - ------------------------------------------------------------------------------------------------------------------ EARNINGS BEFORE INCOME TAXES 254.2 125.8 506.2 451.3 Income taxes 90.6 47.7 182.0 167.1 - ------------------------------------------------------------------------------------------------------------------ NET EARNINGS $ 163.6 $ 78.1 $ 324.2 $ 284.2 - ------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE $ .79 $ .37 $ 1.56 $ 1.33 PROFORMA EARNINGS PER SHARE, AFTER STOCK SPLIT $ .39 $ .18 $ .78 $ .66 DIVIDENDS PER SHARE $ .42 $ .39 $ .84 $ .78 AVERAGE SHARES OUTSTANDING 207.3 212.7 208.1 213.9 - ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 3 5 CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited)
KELLOGG COMPANY AND SUBSIDIARIES Six months ended June 30, (millions) 1997 1996 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 324.2 $ 284.2 Items in net earnings not requiring (providing) cash: Depreciation and amortization 140.7 126.0 Deferred income taxes 2.6 (0.5) Non-recurring charges, net of cash paid 1.4 6.4 Other 0.6 35.2 Postretirement benefit plan contributions (83.3) (54.8) Changes in operating assets and liabilities 28.1 (87.6) - ------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 414.3 308.9 - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to properties (131.9) (109.2) Other (8.0) 3.9 - ------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (139.9) (105.3) - ------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net (retirements) issuances of notes payable (395.2) 349.2 Issuance of long-term debt 500.0 - Reductions of long-term debt (6.7) (3.1) Issuances of common stock 20.1 - Common stock repurchases (250.4) (356.3) Cash dividends (174.8) (166.7) Other - 7.3 - ------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (307.0) (169.6) - ------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (8.0) (1.6) - ------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (40.6) 32.4 Cash and cash equivalents at beginning of period 243.8 221.9 - ------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $203.2 $254.3 ===========================================================================================
Refer to accompanying notes to consolidated financial statements. 4 6 Notes to Consolidated Financial Statements for the six months ended June 30, 1997 (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 14 to 28 of the Company's 1996 Annual Report. The accounting policies used in preparing these financial statements are the same as those summarized in the Company's 1996 Annual Report. The results of operations for the three and six months ended June 30, 1997, are not necessarily indicative of the results to be expected for other interim periods or the full year. 2. Derivative Financial and Commodity Instruments In January 1997, the SEC issued new rules requiring expanded disclosure for "market risk-sensitive" financial instruments. These rules will be fully effective for the Company's annual financial statements for the year ended December 31, 1997. As required for this interim filing, specific information on the Company's accounting policies with regard to activities in derivative financial and commodity instruments is provided below. The Company uses derivative financial instruments only for the purpose of hedging currency, price, and interest rate exposures which exist as a part of its ongoing business operations. The Company, as a matter of policy, does not engage in trading or speculative transactions. 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. Accordingly, changes in market values of hedge instruments must be highly correlated with changes in market values of underlying hedged items both at inception of the hedge and over the life of the hedge 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. The Company uses forward contracts to reduce fluctuations in foreign currency cash flows related to third party raw material purchases, intercompany product shipments, and intercompany loans. Foreign currency contracts are marked-to-market with net amounts due to or from counter parties recorded in accounts receivable or payable. For contracts hedging firm commitments, mark-to-market gains and losses are deferred and recognized as an adjustment to the basis of the transaction. For all other contracts, mark-to-market gains and losses are recognized currently in other income or expense, generally offsetting gains and losses from underlying hedged transactions. The Company also uses forward contracts to reduce fluctuations in the value of foreign currency investments in subsidiaries. These contracts are accounted for as described above, except that mark-to-market adjustments are recorded in the cumulative translation adjustment component of shareholders' equity. The Company uses currency and interest rate swaps, including forward swaps, to reduce interest rate volatility and funding costs associated with certain debt issues. Interest rate forward swaps are marked-to-market with net 5 7 amounts due to or from counter parties 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 swaps entered into concurrently with the debt issue, the interest or currency differential to be paid or received on the swap is recognized in the statement of earnings as incurred, as a component of interest expense. If a swap 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 Company uses commodity futures and options to reduce fluctuations in raw material costs. 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 an adjustment to the basis of the underlying hedged raw material purchase. The cash flows related to derivative financial instruments are classified in the statement of cash flows in a manner consistent with those of the transactions being hedged. 3. 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 $.04 per share). Operating profit for the three months ended June 30, 1996, includes non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per share), and for the six month period, $35.6 million ($23.0 million after tax or $.11 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. 4. Earnings per share Earnings per share are based on the weighted average shares outstanding as presented. The potential dilution of earnings per share from the exercise of stock options is not material. 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. The proforma effect of applying the stock split is presented in the Consolidated Statement of Earnings. 5. Long-term Debt On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed rate Euro Dollar Notes. In conjunction with this issuance, the Company settled $500 million notional amount of interest rate forward swap agreements, which effectively fixed the interest rate on the debt at 6.354%. The primary purpose of this debt issuance was to finance the December 1996 acquisition of the Lender's Bagels business. The remainder of long-term debt outstanding at quarter-end consisted principally of $200 million of three-year notes issued in 1994, $200 million of five-year notes issued in 1993, and $300 million of five-year notes issued in 1992. 6 8 The $200 million of three-year notes and the $300 million of five-year notes will mature during the third quarter of 1997. To replace these maturing notes, the Company issued $500 million of four-year 6.125% Euro Dollar Notes on August 5, 1997. In conjunction with this issuance, the Company settled $400 million notional amount of interest rate forward swap agreements which effectively fixed the interest rate on the debt at 6.4%. The $500 million of current maturities were classified as long-term debt as of June 30, 1997. 7 9 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 holds a 40% annualized share of the global ready-to-eat cereal market. In North America, the Company is the market leader in the toaster pastry, cereal/granola bar, frozen waffle, and pre-packaged bagel categories. For the second quarter of 1997, Kellogg Company reported net earnings of $163.6 million and net earnings per share of $.79, compared to 1996 net earnings of $78.1 million and net earnings per share of $.37. For the June year-to-date period, the Company reported net earnings of $324.2 million and net earnings per share of $1.56, compared to 1996 net earnings of $284.2 million and net earnings per share of $1.33. During the current and prior-year periods, the Company reported non-recurring charges related to productivity and operational streamlining initiatives which have been excluded from all applicable amounts presented below for purposes of comparison between years. Refer to the section below on streamlining initiatives for more information. Excluding non-recurring charges, the Company reported second quarter 1997 net earnings per share of $.83, compared to $.45 in the second quarter of 1996, a period during which results were significantly impacted by unfavorable competitive conditions in the Company's U.S. and United Kingdom cereal markets. On a year-to-date basis, net earnings per share were $1.60, an 11.1% increase over the prior-year results of $1.44. The year-over-year increase in net earnings per share of $.16 was derived from $.09 of business growth, $.04 of common stock repurchases, and $.03 in favorable tax rate movements. The business growth was principally attributable to cereal volume growth in all four of the Company's global operating regions, continued double-digit growth in other convenience foods volume, and reductions in manufacturing and marketing costs. The Company achieved the following volume growth results for the 1997 second quarter and June year-to-date periods: 8 10 ========================================================= VOLUME CATEGORY QUARTER YEAR-TO- DATE ========================================================= Global Cereal 5.5% 3.0% --------------------------------------------------------- U.S. Cereal 6.6% 2.3% --------------------------------------------------------- Global Total 14.1% 12.2% --------------------------------------------------------- Global Total excluding Lender's* 7.8% 5.2% ========================================================= * Lender's Bagels business acquired in December 1996. For the quarter, the significant increase in U.S. cereal volume more than offset a decline in Canada, resulting in net growth within the Company's North American region. The Company's European region achieved record quarterly volume levels, buoyed by a return to growth in the United Kingdom cereal market. Volume declines in Australia were more than offset by strong increases in other markets within the Company's Asia-Pacific region. The Company's Latin American region experienced double-digit growth for the quarter. The Company's other convenience foods business achieved strong double-digit growth for both the quarter and year-to-date periods. For the quarter, consolidated net sales increased 4.1%, with the favorable volume impact being partially offset by unfavorable pricing, product mix, and foreign currency movements. On a year-to-date basis, these unfavorable factors more than offset the favorable volume impact, resulting in a .8% decrease in consolidated net sales. The unfavorable pricing impact primarily relates to reductions implemented by the Company during the second quarter of 1996, averaging 19% on brands comprising approximately two-thirds of its U.S. cereal business. Excluding the Lender's business, consolidated net sales increased 1.5% for the quarter and decreased 3.6% on a year-to-date basis. Margin performance for the quarter and year-to-date periods was:
=========================================================================================== SECOND QUARTER YEAR-TO-DATE =========================================================================================== FAVORABLE FAVORABLE 1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE) CHANGE CHANGE =========================================================================================== Gross Margin 52.9% 53.1% (.2%) 51.9% 54.5% (2.6%) - ------------------------------------------------------------------------------------------- SGA%* 35.9% 42.9% 7.0% 35.2% 39.4% 4.2% - ------------------------------------------------------------------------------------------- Operating Margin 16.9% 10.2% 6.7% 16.7% 15.0% 1.7% - ------------------------------------------------------------------------------------------- Net Margin 10.0% 5.7% 4.3% 9.7% 8.9% .8% ===========================================================================================
* Selling, general, and administrative expense as a percentage of net sales 9 11 Gross margin performance was consistent with net sales movements and was benefitted by year-over-year operational cost-savings. The significant improvement in SGA% primarily reflects reduced advertising and promotional spending in the U.S. market, in line with the Company's integrated pricing strategy. Additionally, the first half of 1996 included a relatively high level of spending related to the Company's 90th Anniversary promotional programs, implementation costs associated with pricing actions, and competitive conditions in the U.S. cereal market. The year-over-year improvement in net margin was less than the improvement in operating margin, principally due to higher interest expense, partially offset by favorable income tax rate movements. The higher interest expense results from increased debt levels to fund the Lender's Bagels business acquisition and the Company's common stock repurchase program. The lower effective tax rate is primarily due to favorable audit and other adjustments in several jurisdictions. Information on interest expense and tax rates is presented below:
================================================================================================= SECOND QUARTER YEAR-TO-DATE ================================================================================================= FAVORABLE FAVORABLE 1997 1996 (UNFAVORABLE) 1997 1996 (UNFAVORABLE) CHANGE CHANGE ================================================================================================= INTEREST EXPENSE (MILLIONS): - ------------------------------------------------------------------------------------------------- As Reported $ 27.0 $ 16.1 $52.4 $29.8 - ------------------------------------------------------------------------------------------------- Capitalized 2.3 .7 4.3 1.4 - ------------------------------------------------------------------------------------------------- Gross $29.3 $16.8 ($12.5) $56.7 $31.2 ($25.5) - ------------------------------------------------------------------------------------------------- ================================================================================================= EFFECTIVE INCOME TAX RATE 35.6% 37.5% 1.9% 35.9% 36.9% 1.0% =================================================================================================
Liquidity and capital resources The Company's financial condition remained strong throughout the first half of 1997. 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 $414.3 million, compared to the prior year level of $308.9 million, with the increase due principally to higher earnings and favorable working capital movements. The ratio of current assets to current liabilities was .8 at June 30, 1997, as compared to .7 at December 31, 1996. 10 12 Net cash used in investing activities was $139.9 million, principally comprised of $131.9 million in capital spending. Net cash used in financing activities was $307.0 million, primarily related to common stock repurchases of $250.4 million and dividend payments of $174.8 million, partially offset by a net increase in total debt of $98.1 million. On a year-to-date basis, dividends paid per share of common stock increased 8% over the prior year. Under existing plans authorized by the Company's Board of Directors, management spent $250.4 million during the first half of 1997 to repurchase 3.5 million shares of the Company's common stock at an average price of $71 per share. The open repurchase authorization as of June 30, 1997, was $164.7 million. 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. The proforma impact of this split on net earnings per share is presented in the Consolidated Statement of Earnings. On January 29, 1997, the Company issued $500 million of seven-year 6.625% fixed rate Euro Dollar Notes. In conjunction with this issuance, the Company settled $500 million notional amount of interest rate forward swap agreements which effectively fixed the interest rate on the debt at 6.354%. The primary purpose of this debt issuance was to finance the December 1996 acquisition of the Lender's Bagels business. The remainder of long-term debt outstanding at quarter-end consisted principally of $200 million of three-year notes issued in 1994, $200 million of five-year notes issued in 1993, and $300 million of five-year notes issued in 1992. The $200 million of three-year notes and the $300 million of five-year notes will mature during the third quarter of 1997. To replace these maturing notes, the Company issued $500 million of four-year 6.125% fixed rate Euro Dollar Notes on August 5, 1997. In conjunction with this issuance, the Company settled $400 million notional amount of interest rate forward swap agreements which effectively fixed the interest rate on the debt at 6.4%. The $500 million of current maturities were classified as long-term debt as of June 30, 1997. Short-term debt outstanding at year-end consisted principally of U.S. commercial paper. The ratio of total debt to market capitalization at June 30, 1997, was 11%, down from 14% at December 31, 1996, principally due to an increase in the market price of the Company's stock since that date. At June 30, 1997, the Company had available an unused "shelf registration" of $200 million with the Securities and Exchange Commission to provide for the issuance of debt in the United States. The proceeds of such an offering would be added to the Company's working capital and be available for general corporate purposes. 11 13 On April 15, 1997, the Company entered into standby lines of credit totaling $600 million, with $200 million expiring in 1998 and $400 million expiring in 2002. These lines, which replace $200 million in standby lines of credit outstanding at December 31, 1996, are maintained as security for performance on the Company's commercial paper and are unused. Streamlining Initiatives Beginning in 1995 to the present, management has commenced numerous productivity and operational streamlining initiatives in the U.S., Europe, and other international locations in an effort to optimize the Company's cost structure and move toward a global business model. The consolidation of functions and the rationalization of capacity resulted in elimination of approximately 2,000 employee positions by the end of 1996 and is expected to result in a further reduction of 600 positions by year-end 1997. The costs of these programs have been reported throughout 1995-1997 as 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 $.04 per share). Operating profit for the three months ended June 30, 1996, includes non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per share), and for the six month period, $35.6 million ($23.0 million after tax or $.11 per share). These charges were comprised principally of expenditures for employee severance, training, and relocation; associated management consulting; and production redeployment. From these programs, the Company expects to achieve average annual pre-tax savings of approximately $160 million in 1997 and future years (compared to the base year of 1995). These savings are not necessarily indicative of future incremental earnings due to management's commitment to invest in competitive business strategies, new markets, and growth opportunities. The foregoing discussion of streamlining initiatives contains forward-looking statements regarding headcount reductions, cash requirements, and realizable savings. Actual amounts may vary depending on the final determination of important factors such as identification of specific employees to be separated from pre-determined pools; the impact of attrition on involuntary separation programs; the level of employee participation in out-placement programs, health care, and other separation benefits; actual amounts of asset removal and relocation costs; dates of asset disposal and costs to maintain assets up to the date of disposal; proceeds from asset disposals; final negotiation of third party contract buy-outs; and other items. Full Year Outlook Management believes the Company's implementation of certain pricing measures during 1996 improved the long-term brand value proposition to the consumer, but negatively impacted profitability in the short term, extending through the first quarter of 1997. Based on the results achieved during the second quarter of 1997, combined with the expectation of benefits to be derived from the continued implementation of its global business model, management believes the Company is well-positioned to deliver sales and earnings growth during the remainder of the year. The Company will continue to identify and pursue streamlining and productivity initiatives to optimize its cost structure. 12 14 On April 15, 1997, the Company entered into standby lines of credit totaling $600 million, with $200 million expiring in 1998 and $400 million expiring in 2002. These lines, which replace $200 million in standby lines of credit outstanding at December 31, 1996, are maintained as security for performance on the Company's commercial paper and are unused. Streamlining Initiatives Beginning in 1995 to the present, management has commenced numerous productivity and operational streamlining initiatives in the U.S., Europe, and other international locations in an effort to optimize the Company's cost structure and move toward a global business model. The consolidation of functions and the rationalization of capacity resulted in elimination of approximately 2,000 employee positions by the end of 1996 and is expected to result in a further reduction of 600 positions by year-end 1997. The costs of these programs have been reported throughout 1995-1997 as 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 $.04 per share). Operating profit for the three months ended June 30, 1996, includes non-recurring charges of $26.1 million ($16.9 million after tax or $.08 per share), and for the six month period, $35.6 million ($23.0 million after tax or $.11 per share). These charges were comprised principally of expenditures for employee severance, training, and relocation; associated management consulting; and production redeployment. From these programs, the Company expects to achieve average annual pre-tax savings of approximately $160 million in 1997 and future years (as compared to the base year of 1995). These savings are not necessarily indicative of future incremental earnings due to management's commitment to invest in competitive business strategies, new markets, and growth opportunities. The foregoing discussion of streamlining initiatives contains forward-looking statements regarding headcount reductions, cash requirements, and realizable savings. Actual amounts may vary depending on the final determination of important factors such as identification of specific employees to be separated from pre-determined pools; the impact of attrition on involuntary separation programs; the level of employee participation in out-placement programs, health care, and other separation benefits; actual amounts of asset removal and relocation costs; dates of asset disposal and costs to maintain assets up to the date of disposal; proceeds from asset disposals; final negotiation of third party contract buy-outs; and other items. Full Year Outlook Management believes the Company's implementation of certain pricing measures during 1996 improved the long-term brand value proposition to the consumer, but negatively impacted profitability in the short term, extending through the first quarter of 1997. Based on the results achieved during the second quarter of 1997, combined with the expectation of benefits to be derived from the continued implementation of its global business model, management believes the Company is well-positioned to deliver sales and earnings growth during the remainder of the year. The Company will continue to identify and pursue streamlining and productivity initiatives to optimize its cost structure. 12 15 Additional expectations for 1997 include a gross profit margin of 51-52%, an SG&A% of 34-35%, an effective tax rate of approximately 36%, capital spending of approximately $300 million, and common stock repurchase activity for the full year of approximately $415 million. Management expects total interest expense for 1997 to increase by approximately 70% over 1996 due to higher debt levels. During May 1997, the SEC issued disclosure guidance concerning the "Year 2000 Problem" related to the inability of certain computer software programs to process 2-digit year-date codes ( for example, "00") after December 31, 1999. To address this matter, the Company has formed a global task force which is performing a global risk assessment and formulating an action plan to modify program codes where necessary. Because of significant other systems initiatives currently under way, management believes that the total cost of the Year 2000 plan will not be significant to the Company's financial results. However, management does believe that failure by the Company, its customers, or vendors, to complete the necessary work in a timely manner could result in material financial risk, and is committed to devoting the necessary resources to prevent such a failure. 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 that the Company's strong credit rating, balance sheet, and earnings history provide a base for obtaining additional financial resources at competitive rates and terms. The foregoing projections of volume growth, profitability, capital spending, shareholder dividends, and common stock repurchase activity are forward-looking statements which involve risks and uncertainties. Actual 1997 results may differ materially due to the impact of competitive conditions, marketing spending and/or incremental pricing actions on actual volumes and product mix; the levels of spending on capital, continued streamlining initiatives, and other general and administrative costs; raw material price and labor cost 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 16 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 25, 1997. Represented at the Meeting, either in person or by proxy, were 187,644,448 voting shares, of a total 208,986,548 voting shares outstanding. The matters voted upon at the Meeting are described in (c) below. (c)(i) To elect three (3) directors to serve for three-year (3) terms expiring at the 2000 Annual Meeting of Stockholders or until their respective successors are elected and qualified. All nominees are named below. Arnold G. Langbo Votes for Election - 185,731,291 Votes Withheld - 1,913,157 J. Richard Munro Votes for Election - 185,789,264 Votes Withheld - 1,855,184 Harold A. Poling Votes for Election - 185,735,797 Votes Withheld - 1,908,651 There were no votes against, abstentions, or broker non-votes with respect to the election of any nominee named above. (ii) To approve amendment to the Company's Key Employee Long Term Incentive Plan to put a maximum on the amount of awards that may be granted under the Plan. Votes for Proposal - 182,835,035 Votes Against Proposal - 4,024,446 Votes Abstaining - 784,917 Broker Non-votes - 50 Votes Withheld - 0 14 17 (iii) To approve adoption of the CERES Principles. Votes for Proposal - 12,060,506 Votes Against Proposal - 161,861,106 Votes Abstaining - 4,581,499 Broker Non-votes - 9,141,335 Votes Withheld - 0 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 4.01 - There is no instrument with respect to long-term debt of the Company that involves indebtedness or securities authorized thereunder exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to file a copy of any instrument or agreement defining the rights of holders of long-term debt of the Company upon request of the Securities and Exchange Commission. 10.01- Key Employee Long Term Incentive Plan, as amended. 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 18 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; Senior Vice President - Administration /s/ A. Taylor _______________________________ A. Taylor Principal Accounting Officer; Vice President and Corporate Controller Date: August 12, 1997 16 19 KELLOGG COMPANY EXHIBIT INDEX Number Description 10.01 Key Employee Long Term Incentive Plan, as amended 27.01 Financial Data Schedule 17 EX-10.01 2 EX-10.01 1 EXHIBIT 10.01 KELLOGG COMPANY KEY EMPLOYEE LONG TERM INCENTIVE PLAN ARTICLE I Purpose The purpose of this Key Employee Long Term Incentive Plan (the "Plan") is to enable Kellogg Company (the "Company") to offer key employees of the Company and Designated Subsidiaries (defined below) performance-based stock incentives and other equity interests in the Company and other incentive awards, thereby attracting, retaining and rewarding such key employees, and strengthening the mutuality of interests between key employees and the Company's shareholders. ARTICLE II Definitions For purposes of this Plan, the following terms shall have the following meanings: 2.1 "Award" shall mean any award under this Plan of any Stock Option, Reload Option, Restricted Stock, Performance Shares, Performance Units or Other Stock-Based Award. 2.2 "Board" shall mean the Board of Directors of the Company. 2.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4 "Committee" shall mean the Compensation Committee of the Board consisting of three or more Directors, none of whom shall be eligible to receive any Award pursuant to this Plan. 2.5 "Common Stock" means the Common Stock, $0.25 par value per share, of the Company. 2.6 "Designated Subsidiary" shall mean one of such subsidiaries of the Company, 80 percent or more of the voting capital stock of which is owned, directly or indirectly, by the Company, which is designated from time to time by the Board. 2.7 "Disability" shall mean Total Disability as defined in the Company's Long Term Disability Plan. 2.8 "Disinterested Person" shall have the meaning set forth in Rule 16b-3(d)(3) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, or any successor definition adopted by the Commission. 2.9 "Fair Market Value" for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date, 2 the mean between the high and low sales prices of a share of Common Stock as reported for exchange, quoted on an automated quotation system sponsored by a national securities association. 2.10 "Incentive Stock Option" shall mean any Stock Option awarded under this Plan intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. 2.11 "Non-Qualified Stock Option" shall mean any Stock Option awarded under this Plan that is not an Incentive Stock Option. 2.12 "Other Stock-Based Award" shall mean an Award under Article 11 of this Plan that is valued in whole or in part by reference to, or is payable in or otherwise based on, Common Stock. 2.13 "Participant" shall mean an employee to whom an Award has been made pursuant to this Plan. 2.14 "Performance Cycle" shall have the meaning set forth in Section 10.1. 2.15 "Performance Period" shall have the meaning set forth in Section 9.1. 2.16 "Performance Share" shall mean an Award made pursuant to Article 9 of this Plan of the right to receive Common Stock or cash of an equivalent value at the end of a specified performance period. 2.17 "Performance Unit" shall mean an Award made pursuant to Article 10 of this Plan of the right to receive a fixed dollar amount, payable in cash or Common Stock or a combination of both. 2.18 "Reload Option" shall have the meaning set forth in Section 6.5. 2.19 "Restricted Stock" shall mean an Award of shares of Common Stock under this Plan that is subject to restrictions under Article 7. 2.20 "Restriction Period" shall have the meaning set forth in Subsection 7.3(a). 2.21 "Retirement" shall mean termination of employment by an employee who is at least 55 years of age after at least 5 years of employment by the Company and/or a Designated Subsidiary. 2.22 "Stock Option" or "Option" shall mean any option to purchase shares of Common Stock (including Restricted Stock and Performance Share, if the Committee so determines) granted pursuant to Article 6. 2.23 "Termination of employment" shall mean a termination of service for reasons other than a military or personal leave of absence granted by the Company. 2 3 2.24 "Withholding Election" shall have the meaning set forth in Section 13.4. ARTICLE III Administration 3.1 The Committee. The Plan shall be administered and interpreted by the Committee. 3.2 Awards. The Committee shall have full authority to grant, pursuant to the terms of this Plan, to officers and other key employees eligible under Article 5: (i) Stock Options, (ii) Restricted Stock, (iii) Performance Shares, (iv) Performance Units, and (v) Other Stock-Based Awards. In particular, the Committee shall have the authority: (a) to select the officers and other key employees of the Company to whom Stock Options, Restricted Stock, Performance Shares, Performance Units and Other Stock-Based Awards may from time to time be granted hereunder; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, Performance Shares, Performance Units and Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible employees; provided, however, that the maximum number of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, Performance Shares, Performance Units, and Other Stock-Based Awards that may be granted to any one individual in any fiscal year shall not exceed, individually or in the aggregate, Awards to purchase or receive more than one million (1,000,000) shares of common stock; (c) to determine the number of shares of Common Stock to be covered by each such Award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder (including, but not limited to, the share price, any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof, regarding any Stock Option or other Award and the shares of Common Stock relating thereto, based on such factors as the Committee shall determine, in its sole discretion); (e) to determine whether, to what extent and under what circumstances grants of Options and other Awards under this Plan are to operate on a tandem basis and/or in conjunction with or apart from other cash awards made by the Company outside of this Plan; (f) to determine whether and under what circumstances a Stock Option may be settled in cash, Stock, and/or Restricted Stock under Subsection 6.4(k); and (g) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant. 3 4 3.3 Guidelines. Subject to Article 11 hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of this Plan and any Award issued under this Plan (and any agreements relating thereto); and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award granted in the manner and to the extent it shall deem necessary to carry this Plan into effect. Notwithstanding the foregoing, no action of the Committee under this Section 3.3 shall impair the rights of any Participant without the Participant's consent. 3.4 Decisions Final. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan shall be final, binding and conclusive on the Company and all employees and their respective heirs, executors, administrators, successors and assigns. ARTICLE IV Share Limitation 4.1 Shares. The maximum aggregate number of shares of Common Stock which may be issued under this Plan shall not exceed six million (6,000,000) shares (subject to any increase or decrease pursuant to Section 4.2) which may be either authorized and unissued Common Stock or issued Common Stock reacquired by the Company. If any Option granted under this Plan shall expire, terminate or be cancelled for any reason without having been exercised in full, the number of unpurchased shares shall again be available for the purposes of the Plan; provided, however, that if such expired, terminated or cancelled Option shall have been issued in conjunction with another Award, none of such unpurchased shares shall again become available for purposes of this Plan to the extent that the related Award granted under this Plan is exercised. If an Option is exercised using Common Stock already owned by the Participant exercising the Option, the number of shares that shall be treated as issued under the Plan shall be (i) the number of shares issued minus (ii) the number of shares exchanged in satisfaction of the Option Price and the number of shares so exchanged shall be added to the total number of shares of Common Stock available under the Plan. Further, if any shares of Common Stock granted hereunder are forfeited or such Award otherwise terminates without the delivery of such shares upon the lapse of restrictions, the shares subject to such grant, to the extent of such forfeiture or termination, shall again be available under this Plan. 4.2 Changes. In the event of any merger, reorganization, consolidation, recapitalization, dividend (other than a dividend or its equivalent which is credited to a Plan Participant or a regular cash dividend), Stock split, or other change in corporate structure affecting the Common Stock, such substitution or adjustment shall be made in the maximum aggregate number of shares which may be issued under this Plan, in the number and option price of shares subject to outstanding Options granted under this Plan, and in the number of shares subject to other outstanding Awards (including but not limited to Awards of Restricted Stock, Performance Shares, Performance Units and Other Stock-Based Awards) granted under this Plan, as may be determined 4 5 to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any Award shall always be a whole number. ARTICLE V Eligibility 5.1 Senior officers, senior management, and key employees of the Company and its Designated Subsidiaries are eligible to be granted Options and other Awards under this Plan. Eligibility under this Plan shall be determined by the Committee. ARTICLE VI Stock Options 6.1 Options. Stock Options may be granted alone or in addition to other Awards granted under this Plan. Each Stock Option granted under this Plan shall be of one of two types: (i) an Incentive Stock Option or (ii) a Non-Qualified Stock Option. 6.2 Grants. The Committee shall have the authority to grant to any Participant one or more Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify shall constitute a separate Non-Qualified Stock Option. 6.3 Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Participants affected, to disqualify any Incentive Stock Option under such Section 422. 6.4 Terms of Options. Options granted under this Plan shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Common Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Common Stock at grant if the Stock Option is intended to be an Incentive Stock Option and shall not be less than 85% of the Fair Market Value of the Common Stock at grant if the Stock Option is intended to be a Non-Qualified Stock Option. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the Option is granted, and no Non-Qualified Stock Option shall be exercisable more than ten years and one day after the date the Option is granted. 5 6 (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant; provided, however, that, except as provided in subsections (f) and (g) below and Article 3, unless otherwise determined by the Committee and the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time during the option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price in such form as the Committee may accept. If and to the extent determined by the Committee in its sole discretion at or after grant, payment in full or in part may also be made in the form of Common Stock duly owned by the Participant (and for which the Participant has good title free and clear of any liens and encumbrances) or Restricted Stock, or by reduction in the number of shares issuable upon such exercise based, in each case, on the Fair Market Value of the Stock on the last trading date preceding payment as determined by the Committee (without regard to any forfeiture restrictions applicable to Restricted Stock). No shares of Stock shall be issued until payment, as provided herein, therefor has been made. A Participant shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid for such shares as provided herein, and, if requested, has given the representation described in Section 14.1. Notwithstanding the foregoing, if payment in full or in part has been made in the form of Restricted Stock, an equivalent number of shares of Common Stock issued on exercise of the Option shall be subject to the same restrictions and conditions, and during the remainder of the Restriction Period, applicable to the shares of Restricted Stock surrendered therefor. (e) Non-Transferability of Options. No Stock Option shall be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Participant's lifetime, only by the Participant. (f) Termination by Death. Except for Incentive Stock Options subject to subsection (j) below, if a Participant's employment by the Company or a Designated Subsidiary terminates by reason of death, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant, shall be fully vested and may thereafter be exercised by the legal representative of the estate, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the option term of such Stock Option, whichever period is the shorter. (g) Termination by Reason of Disability. Except for Incentive Stock Options subject to subsection (j) below, if a Participant's employment by the Company or a Designated Subsidiary terminates by reason of Disability, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant, shall be fully vested and may thereafter be exercised by the Participant for a period of five years (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the 6 7 stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Participant dies within such five-year period (or such other period as the Committee shall specify at grant), any unexercised Stock Option held by such Participant shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the option term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. Except for Incentive Stock Options subject to subsection (j) below, if a Participant's employment by the Company or a Designated Subsidiary terminates by reason of Retirement, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant, shall be fully vested and may thereafter be exercised by the Participant for a period of five years (or such other period as the Committee may specify at grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Participant dies within such five-year period, any unexercised Stock Option held by such Participant shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of twelve months from the date of such death or until the expiration of the option term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee at or after grant, if a Participant's employment by the Company terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised for the lesser of three months or the balance of such Stock Option's term if the Participant is involuntarily terminated by the Company without cause. (j) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year under the Plan and/or any other stock option plan of the Company or any subsidiary or parent corporation (within the meaning of Section 425 of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. To the extent (if any) permitted under Section 422 of the Code, or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement, if (i) a Participant's employment with the Company or a Designated Subsidiary is terminated by reason of death, Disability or Retirement and (ii) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under subsections (f), (g) or (h) above, applied without regard to the $100,000 limitation currently contained in Section 422(d) of the Code, is greater than the portion of such Stock Option that is immediately exercisable as 7 8 an "incentive stock option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option. Should any of the foregoing provisions not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend the Plan accordingly, without the necessity of obtaining the approval of the shareholders of the Company. (k) Buyout and Settlement Provisions. The Committee may at any time offer to buy out an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. In addition, if the Option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the Participant's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Performance Shares or Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value of such Performance Shares or Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. 6.5 Reload Options. Without in any way limiting the authority of the Committee to make grants hereunder, and in order to induce officers and other key employees to retain ownership of shares in the Company, the Committee shall have the authority (but not an obligation) to include within any option agreement a provision entitling the optionee to a further option (a "Reload Option") in the event the optionee exercises the option evidenced by the option agreement, in whole or in part, by surrendering other shares of the Company in accordance with this Plan and the terms and conditions of the option agreement. Any such Reload Option shall be for a number of shares equal to the number of surrendered shares, shall become exercisable in the event the purchased shares are held for a minimum period of time established by the Committee, and shall be subject to such other terms and conditions as the Committee may determine. ARTICLE VII Restricted Stock 7.1 Awards of Restricted Stock. Shares of Restricted Stock may be issued either alone or in addition to other Awards granted under the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient (subject to Section 7.2), the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. 8 9 The provisions of Restricted Stock awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years. 7.2 Awards and Certificates. The prospective Participant selected to receive a Restricted Stock Award shall not have any rights with respect to such Award, unless and until such Participant has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions: (a) Purchase Price. The purchase price for shares of Restricted Stock shall be equal to or less than their par value and may be zero. (b) Acceptance. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Stock Award agreement and by paying whatever price (if any) the Committee has designated hereunder. (c) Legend. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of Kellogg Company (the "Company") Key Employee Long Term Incentive Plan and an Agreement entered into between the registered owner and the Company dated __________. Copies of such Plan and Agreement are on file in the offices of the Company, One Kellogg Square, Battle Creek, Michigan 49016-3599". (d) Custody. The Committee may require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Stock covered by such Award. 7.3 Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Plan shall be subject to the following restrictions and conditions: (a) Restriction Period. Subject to the provisions of this Plan and the Award agreement, during a period set by the Committee commencing with the date of such Award (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under this Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine in its sole discretion. 9 10 (b) Rights as Shareholder. Except as provided in this subsection (b) and subsection (a) above, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a holder of shares of Common Stock of the Company including the right to receive any dividends. The Committee, in its sole discretion, as determined at the time of Award, may permit or require the payment of dividends to be deferred. (c) Termination of Employment. Subject to the applicable provisions of the Award agreement and this Article 7, upon termination of a Participant's employment with the Company for any reason during the Restriction Period, all Restricted Shares still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee at or after grant. (d) Hardship. In the event of hardship or other special circumstances of a Participant whose employment with the Company or a Designated Subsidiary is involuntarily terminated (other than for cause), the Committee may, in its sole discretion, waive in whole or in part any or all remaining restrictions with respect to such Participant's shares of Restricted Stock, based on such factors as the Committee may deem appropriate. (e) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant. All legends shall be removed from said certificates at the time of delivery to the Participant. ARTICLE VIII Performance Shares 8.1 Award of Performance Shares. Performance Shares may be awarded either alone or in addition to other Awards granted under this Plan. The Committee shall determine the eligible persons to whom and the time or times at which Performance Shares shall be awarded, the number of Performance Shares to be awarded to any person, the duration of the period (the "Performance Period") during which, and the conditions under which, receipt of the Shares will be deferred, and the other terms and conditions of the Award in addition to those set forth in Section 8.2. The Committee may condition the grant of Performance Shares upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine, in its sole discretion. The provisions of Performance Share Awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years. 8.2 Terms and Conditions. Performance Shares awarded pursuant to this Article 8 shall be subject to the following terms and conditions: 10 11 (a) Non-Transferability. Subject to the provisions of this Plan and the Award agreement referred to in subsection (g) below, Performance Share Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Performance Period. At the expiration of the Performance Period, share certificates or cash of an equivalent value (as the Committee may determine in its sole discretion) shall be delivered to the Participant, or his legal representative, in a number equal to the shares covered by the Performance Share Award. (b) Dividends. Unless otherwise determined by the Committee at the time of Award, amounts equal to any dividends declared during the Performance Period with respect to the number of shares of Common Stock covered by a Performance Share Award will not be paid to the Participant. (c) Termination of Employment. Subject to the provisions of the Award agreement and this Article 8, upon termination of a Participant's employment with the Company for any reason during the Performance Period for a given Award, the Performance Shares in question will vest or be forfeited in accordance with the terms and conditions established by the Committee at or after grant. (d) Accelerated Vesting. Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Performance Share Award and/or waive the deferral limitations for all or any part of such Award. (e) Hardship. In the event of hardship or other special circumstances of a Participant whose employment with the Company or a Designated Subsidiary is involuntarily terminated other than for cause, the Committee may, in its sole discretion, based on such factors as the Committee may deem appropriate, waive in whole or in part any or all of the remaining deferral limitations imposed hereunder with respect to any or all of the Participant's Performance Shares, based on such factors as the Committee deems appropriate. (f) Agreement. Each Award shall be confirmed by, and subject to the terms of, a Performance Share agreement executed by the Company and the Participant. ARTICLE IX Performance Units 9.1 Award of Performance Units. Performance Units may be awarded either alone or in addition to other Awards granted under this Plan. The Committee shall determine the eligible persons to whom and the time or times at which Performance Units shall be awarded, the number of Performance Units to be awarded to any person, the duration of the period (the "Performance Cycle") during which, and the conditions under which, a Participant's right to Performance Units will be vested, the ability of Participants to defer the receipt of payment of such Units, and the other terms and conditions of the Award in addition to those set forth in Section 9.2. 11 12 A Performance Unit shall have a fixed dollar value. The Committee may condition the vesting of Performance Units upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine, in its sole discretion. The provisions of Performance Unit Awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years. 9.2 Terms and Conditions. The Performance Units awarded pursuant to this Article 10 shall be subject to the following terms and conditions: (a) Non-Transferability. Subject to the provisions of this Plan and the Award agreement referred to in subsection (g) below, Performance Unit Awards may not be sold, assigned, transferred, pledged or otherwise encumbered. (b) Vesting. At the expiration of the Performance Cycle, the Committee shall determine the extent to which the performance goals have been achieved, and the percentage of the Performance Units of each Participant that have vested. (c) Payment. Subject to the provisions of this Plan and the Award agreement referred to in subsection (g) below, the vested Performance Units shall be paid to the Participant or his legal representative as soon as practicable after the end of a Performance Cycle. Payment may be made in cash, shares of Common Stock or a combination of both, as determined by the Committee, in its sole discretion. (d) Termination of Employment. Subject to the provisions of the Award agreement and this Article 9, upon termination of a Participant's employment with the Company for any reason during the Performance Cycle for a given Award, the Performance Units in question will vest or be forfeited in accordance with the terms and conditions established by the Committee at or after grant. (e) Accelerated Vesting. Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Performance Unit Award and/or waive the deferral limitations for all or any part of such Award. (f) Hardship. In the event of hardship or other special circumstances of a Participant whose employment with the Company or a Designated Subsidiary is involuntarily terminated (other than for cause), the Committee may, in its sole discretion, based on such factors as the Committee may deem appropriate, waive in whole or in part any or all of the remaining deferral limitations imposed hereunder with respect to any or all of the Participant's Performance Units, based on such factors as the Committee deems appropriate. 12 13 (g) Agreement. Each Award shall be confirmed by, and subject to the terms of, a Performance Unit agreement executed by the Company and the Participant. ARTICLE X Other Stock-Based Awards 10.1 Other Awards. Other Awards of Common Stock and other Awards that are valued in whole or in part by reference to, or are payable in or otherwise based on, Common Stock ("Other Stock-Based Awards"), including, without limitation, Awards valued by reference to subsidiary performance, may be granted either alone or in addition to or in tandem with Stock Options, Restricted Stock, Performance Shares or Performance Units. Subject to the provisions of this Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock to be awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Common Stock under such Awards upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each Participant and such Awards to individual Participants need not be the same in subsequent years. 10.2 Terms and Conditions. Other Stock-Based Awards made pursuant to this Article 10 shall be subject to the following terms and conditions: (a) Non-Transferability. Subject to the provisions of this Plan and the Award agreement referred to in subsection (e) below, shares of Common Stock subject to Awards made under this Article 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (b) Dividends. Unless otherwise determined by the Committee at the time of Award, subject to the provisions of this Plan and the Award agreement, the recipient of an Award under this Article 10 shall be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the number of shares of Common Stock covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion. (c) Vesting. Any Award under this Article 10 and any Common Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award agreement, as determined by the Committee, in its sole discretion. (d) Waiver of Limitation. In the event of the Participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the limitations imposed hereunder (if any) with respect to any or all of an Award under this Article 10. 13 14 (e) Agreement. Each Award under this Article 10 shall be confirmed by, and subject to the terms of, an agreement or other instrument executed by the Company and the Participant. (f) Price. Common Stock issued on a bonus basis under this Article 10 may be issued for no cash consideration; Common Stock purchased pursuant to a purchase right awarded under this Article 10 shall be priced as determined by the Committee. ARTICLE XI Termination or Amendment of the Plan 11.1 Termination or Amendment. The Board may at any time amend, discontinue or terminate this Plan or any part thereof (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Article 13); provided, however, that, unless otherwise required by law, the rights of a Participant with respect to Options or other Awards granted prior to such amendment, discontinuance or termination, may not be impaired without the consent of such Participant and, provided further, without the approval of the Company's stockholders, no amendment may be made which would (i) increase the aggregate number of shares of Common Stock that may be issued under this Plan (except by operation of Section 4.2); (ii) change the definition of employees eligible to receive Stock Awards under this Plan; (iii) decrease the option price of any Stock Option to less than 100% of the Fair Market Value on the date of grant for a Stock Option intended to be an Incentive Stock Option or to 85% of the Fair Market Value on the date of grant for a Stock Option intended to be a Non-Qualified Stock Option; or (iv) extend the maximum option period under Section 6.4 of the Plan. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but, subject to Article 4 above, no such amendment or other action by the Committee shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options having higher option exercise prices. ARTICLE XII Unfunded Plan 12.1 Unfunded Status of Plan. This Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. 14 15 ARTICLE XIII General Provisions 13.1 Legend. The Committee may require each person purchasing shares pursuant to a Stock Option or other Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. In addition to any legend required by this Plan, the certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 13.2 Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 13.3 No Right to Employment. Neither this Plan nor the grant of any Option or other Award hereunder shall give any Participant or other employee any right with respect to continuance of employment by the Company or any subsidiary, nor shall there be a limitation in any way on the right of the Company or any subsidiary by which an employee is employed to terminate his employment at any time. 13.4 Withholding of Taxes. The Company shall have the right to deduct from any payment to be made pursuant to this Plan, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. The Committee may permit any such withholding obligation to be satisfied by reducing the number of shares of Common Stock otherwise deliverable. A person required to file reports under Section 16(a) of the Securities Act of 1933 with respect to securities of the Company may elect to have a sufficient number of shares of Common Stock withheld to fulfill such tax obligations (hereinafter a "Withholding Election") only if the election complies with the following conditions: (x) the Withholding Election shall be subject to the disapproval of the Committee and (y) the Withholding Election is made (i) during the period beginning on the third business day following the date of release for publication of the quarterly or annual summary statements of sales and earnings of the Company and ending on the twelfth business day following such date, (ii) six months before the Stock Award becomes taxable, or (iii) during any other period in which a Withholding Election may be made under the provisions of Rule 16b-3 promulgated pursuant to the Act. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 15 16 13.5 No Assignment of Benefits. No Option, Award or other benefit payable under this Plan shall, except as otherwise specifically provided by law, be subject in any manner to anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, attach, sell, transfer, assign, pledge, encumber or charge any such benefit shall be void, and any such benefit shall not in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such benefit, nor shall it be subject to attachment or legal process for or against such person. 13.6 Listing and Other Conditions. (a) As long as the Common Stock is listed the on New York Stock Exchange or a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to an Option or other Award shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Option or other Award with respect to such shares shall be suspended until such listing has been effected. (b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Option or other Award is or may in the circumstances be unlawful or result in the imposition of excise taxes under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Option or other Award shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful. (c) Upon termination of any period of suspension under this Section 13.6, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option. 13.7 Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws). 13.8 Construction. Wherever any words are used in this Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. 13.9 Liability of Committee. No member of the Board of Directors, no employee of the Company nor the Committee (nor its members) shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in 16 17 circumstances involving his bad faith, gross negligence or fraud, for anything done or omitted to be done by himself. 13.10 Other Benefits. No Award payment under this Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its subsidiaries nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation. 13.11 Costs. The Company shall bear all expenses incurred in administering this Plan, including expenses of issuing Common Stock pursuant to any Awards hereunder. ARTICLE XIV Effective Date of Plan The Plan shall be effective as of its approval by the Company's shareholders. ARTICLE XV Term of Plan No Stock Option, Restricted Stock, Performance Shares, Performance Unit or Other Stock-Based Award shall be granted pursuant to the Plan on or after the tenth anniversary of its approval, but Awards granted prior to such tenth anniversary may extend beyond that date. 17 EX-27.01 3 EX-27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KELLOGG COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 203 0 638 (7) 449 1,605 5,038 (2,159) 5,091 1,916 1,220 0 0 78 1,071 5,091 3,409 3,409 1,639 1,639 1,211 0 52 506 182 324 0 0 0 324 0.79 0.79
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