-----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, KPJszNTBEa8RhMO8QTs7OcUmeLse4ooBtg/au4LE79nkpYkRz+NZkWD3iN1p1SjC gXpWutBi4BCJYDHhHUKnVg== 0000950124-99-003132.txt : 19990513 0000950124-99-003132.hdr.sgml : 19990513 ACCESSION NUMBER: 0000950124-99-003132 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: SEC FILE NUMBER: 001-04171 FILM NUMBER: 99618536 BUSINESS ADDRESS: STREET 1: ONE KELLOGG SQ STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016-3599 BUSINESS PHONE: 6169612000 MAIL ADDRESS: STREET 1: ONE KELLOGG SQUARE STREET 2: P O BOX 3599 CITY: BATTLE CREEK STATE: MI ZIP: 49016-3599 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 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 April 30, 1999 - 405,119,760 shares 2 KELLOGG COMPANY INDEX PART I - Financial Information Page Item 1: Consolidated Balance Sheet - March 31, 1999, and December 31, 1998 2 Consolidated Statement of Earnings - three months ended March 31, 1999, and 1998 3 Consolidated Statement of Cash Flows - three months ended March 31, 1999, and 1998 4 Notes to Consolidated Financial Statements 5-8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 PART II - Other Information Item 4: Submission of Matters to a Vote of Security Holders 16 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18 3 CONSOLIDATED BALANCE SHEET
=========================================================================================================================== KELLOGG COMPANY AND SUBSIDIARIES MARCH 31, December 31, (millions, except per share data) 1999 1998 (unaudited) * - --------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $140.4 $136.4 Accounts receivable, net 724.0 693.0 Inventories: Raw materials and supplies 143.0 133.3 Finished goods and materials in process 330.6 318.1 Other current assets 236.5 215.7 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,574.5 1,496.5 PROPERTY, net of accumulated depreciation of $2,380.4 and $2,358.0 2,844.5 2,888.8 OTHER ASSETS 672.0 666.2 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $5,091.0 $5,051.5 =========================================================================================================================== CURRENT LIABILITIES Current maturities of long-term debt $2.8 $1.1 Notes payable 624.1 620.4 Accounts payable 397.8 386.9 Income taxes 61.3 69.4 Other current liabilities 676.1 640.7 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,762.1 1,718.5 LONG-TERM DEBT 1,611.2 1,614.5 NONPENSION POSTRETIREMENT BENEFITS 435.5 435.2 DEFERRED INCOME TAXES AND OTHER LIABILITIES 398.7 393.5 SHAREHOLDERS' EQUITY Common stock, $.25 par value 103.8 103.8 Capital in excess of par value 107.4 105.0 Retained earnings 1,391.2 1,367.7 Treasury stock, at cost (394.3) (394.3) Accumulated other comprehensive income (324.6) (292.4) - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 883.5 889.8 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,091.0 $5,051.5 ===========================================================================================================================
*Condensed from audited financial statements. Refer to Notes to Consolidated Financial Statements. 2 4
CONSOLIDATED STATEMENT OF EARNINGS (Results are unaudited) ============================================================================================================ KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31, (millions, except per share data) 1999 1998 - ------------------------------------------------------------------------------------------------------------ NET SALES $1,745.3 $1,642.9 - ------------------------------------------------------------------------------------------------------------ Cost of goods sold 836.4 781.8 Selling and administrative expense 649.4 562.3 Non-recurring charges 36.8 - - ------------------------------------------------------------------------------------------------------------ OPERATING PROFIT 222.7 298.8 - ------------------------------------------------------------------------------------------------------------ Interest expense 29.0 29.1 Other income (expense), net (2.7) 0.4 - ------------------------------------------------------------------------------------------------------------ EARNINGS BEFORE INCOME TAXES 191.0 270.1 Income taxes 72.2 99.4 - ------------------------------------------------------------------------------------------------------------ NET EARNINGS $118.8 $170.7 ============================================================================================================ NET EARNINGS PER SHARE (BASIC AND DILUTED) $.29 $.42 DIVIDENDS PER SHARE $.235 $.225 AVERAGE SHARES OUTSTANDING 405.0 410.2 - ------------------------------------------------------------------------------------------------------------
Refer to Notes to Consolidated Financial Statements. 3 5
CONSOLIDATED STATEMENT OF CASH FLOWS (Results are unaudited) ============================================================================================================================== KELLOGG COMPANY AND SUBSIDIARIES Three months ended March 31, (millions) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net earnings $118.8 $170.7 Items in net earnings not requiring cash: Depreciation and amortization 68.0 67.3 Deferred income taxes 10.8 1.7 Non-recurring charges, net of cash paid 29.7 - Other 16.4 10.5 Postretirement benefit plan contributions (33.0) (23.5) Changes in operating assets and liabilities (61.0) (88.2) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 149.7 138.5 - ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Additions to properties (55.6) (79.7) Other 6.8 (3.4) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (48.8) (83.1) - ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net issuances (reductions) of notes payable 3.7 (318.5) Issuances of long-term debt - 400.0 Reductions of long-term debt (1.4) (2.6) Net issuances of common stock 2.4 13.7 Common stock repurchases - (61.3) Cash dividends (95.3) (92.4) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (90.6) (61.1) - ------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash (6.3) (2.3) - ------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 4.0 (8.0) Cash and cash equivalents at beginning of period 136.4 173.2 - ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $140.4 $165.2 ==============================================================================================================================
Refer to Notes to Consolidated Financial Statements. 4 6 Notes to Consolidated Financial Statements for the three months ended March 31, 1999 (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 22 to 32 of the Company's 1998 Annual Report. Except as discussed below, the accounting policies used in preparing these financial statements are the same as those summarized in the Company's 1998 Annual Report. Certain amounts for 1998 have been reclassified to conform with current period classifications. Effective January 1, 1999, the Company adopted two Statements of Position (SOP) issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" provides guidance on the classification of software project costs between expense and capital. SOP 98-5 "Reporting on Costs of Start-up Activities" 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. SOP 98-1 has been applied on a prospective basis from January 1, 1999. The initial application of SOP 98-5 was to be reported as a cumulative effect of a change in accounting principle, if material. The adoption of these SOPs did not have a significant impact on the Company's financial results during the quarter ended March 31, 1999. The results of operations for the three months ended March 31, 1999, are not necessarily indicative of the results to be expected for other interim periods or the full year. 2. Earnings per share Basic net earnings per share is determined by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is similarly determined, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential common shares are principally comprised of employee stock options issued by the Company and had an insignificant impact on earnings per share during the periods presented. Basic net earnings per share is reconciled to diluted net earnings per share as follows (in millions, except per share data):
Average Net Net shares earnings earnings outstanding per share --------------------------------------- 1999 Basic $118.8 405.0 $.29 Dilutive employee stock options - .7 - ------------------------------------- Diluted $118.8 405.7 $.29 ===================================== 1998 Basic $170.7 410.2 $.42 Dilutive employee stock options - 1.1 - ------------------------------------- Diluted $170.7 411.3 $.42 =====================================
5 7 3. 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 the periods presented consists solely of net earnings and foreign currency translation adjustments pursuant to SFAS No. 52, "Foreign Currency Translation," as follows (in millions):
Three months ended March 31, 1999 1998 ---- ---- Net earnings $118.8 $170.7 Other comprehensive income (loss): Foreign currency translation adjustment (32.2) 4.0 Related tax effect - (.1) ------------------------- (32.2) 3.9 ------------------------- Total comprehensive income $86.6 $174.6 =========================
4. Debt Notes payable primarily consist of commercial paper borrowings in the United States and borrowings under a $200 million revolving credit agreement in Europe with several international banks. At March 31, 1999, outstanding borrowings under the revolving credit agreement were $129.6 million with an effective interest rate of 5.45%. U.S. borrowings at March 31, 1999, were $411.3 million with an effective interest rate of 4.86%. Associated with the U.S. borrowings, the Company holds a $225 million notional, fixed interest rate cap which expires in September 2001. 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 March 31, 1999, the rate was 4.84%. Long-term debt primarily consists of fixed rate issuances of U.S. and Euro Dollar Notes, including $200 million due in 2005, $500 million due in 2004, and $900 million due in 2001. The amount due in 2001 includes $400 million in Notes which 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. Associated with several of these long-term debt issuances, the Company has entered into fixed-to-floating interest rate swaps, generally expiring in conjunction with the debt issuances, and indexed to either the three-month London Interbank Offered Rate (LIBOR) or the Federal Reserve AA Composite Rate on 30-day commercial paper. One of the swap agreements, with a notional value of $225 million, will expire if three-month LIBOR falls to 4.71% or below. At March 31, 1999, three-month LIBOR was 4.97%. The total notional amount of all interest rate swaps at March 31, 1999, was $825 million, unchanged from December 31, 1998. 6 8 5. Non-recurring charges Operating profit for the quarter ended March 31, 1999, includes non-recurring charges of $36.8 million ($25.6 million after tax or $.07 per share), related to ongoing overhead activity analysis and other workforce reduction initiatives around the world. During 1998, management commenced an overhead activity analysis in North America to better align the Company's work activities to its growth strategy. The process includes evaluating work performed by employees as well as consulting and other external services. During the first quarter of 1999, this analysis was extended to Europe and Latin America. The charges reported during the first quarter of 1999 were principally comprised of employee retirement and separation benefits, expenditures for employee and office relocation, and other related costs. Overhead activity analysis and other new initiatives undertaken during the quarter in Europe, Latin America, and Asia-Pacific are expected to eliminate or restructure approximately 350 employee positions by the end of the year and generate approximately $25 million in pre-tax savings by 2000. Cash outlays for all streamlining initiatives during the quarter, including those continuing from prior years, was approximately $30 million. Cash outlays for all previously announced initiatives are expected to be $40-$50 million during the remainder of 1999. The components of the streamlining charges, as well as reserve balance changes, during the three months ended March 31, 1999, were (in millions):
Employee retirement & severance Asset Asset Other benefits (a) write-offs removal costs Total ---------------------------------------------------------------------------- Remaining reserve at December 31, 1998 $39.6 $ - $11.9 $ - $51.5 1999 streamlining charges (a) 26.8 2.2 1.8 6.0 36.8 Amounts utilized during 1999 (26.4) (2.2) (5.0) (6.0) (39.6) Remaining reserve at --------------------------------------------------------------------------- March 31, 1999 $40.0 $ - $8.7 $ - $48.7 ===========================================================================
(a) Includes approximately $3.8 and $.4 of pension and postretirement health care special termination benefits, respectively. 7 9 6. 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. Intercompany transactions between reportable operating segments were insignificant in the periods presented. Operating segment data is presented below (in millions):
Three months ended March 31, 1999 1998 ----------------------------- Net sales North America $1,128.4 $1,043.4 Europe 388.8 387.4 Asia-Pacific 97.6 91.3 Latin America 128.4 120.8 Corporate and other 2.1 - ---------------------------- Consolidated $1,745.3 $1,642.9 ============================ Operating profit excluding non-recurring charges North America $232.0 $252.5 Europe 41.3 46.0 Asia-Pacific 12.8 12.8 Latin America 30.7 30.2 Corporate and other (57.3) (42.7) ---------------------------- Consolidated 259.5 298.8 Non-recurring charges (36.8) - --------------------------- Operating profit as reported $222.7 $298.8 ===========================
8 10 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 is a leading manufacturer and marketer of 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. During the first quarter of 1999, the Company reported strong growth in global volume and sales. Primarily due to a difficult comparison with the prior year, the Company experienced a decline in net earnings versus the first quarter of 1998, a period in which the Company's level of marketing spending was not competitive. For the quarter ended March 31, 1999, Kellogg Company reported net earnings and earnings per share of $118.8 million and $.29, respectively, compared to 1998 net earnings of $170.7 million and net earnings per share of $.42. (All earnings per share presented represent both basic and diluted earnings per share.) During the current quarter, the Company reported non-recurring charges of $36.8 million ($25.6 million after tax or $.07 per share), related to ongoing overhead activity analysis and other workforce reduction initiatives around the world. These charges have been excluded from all applicable amounts presented below for purposes of comparison between years. Excluding non-recurring charges, the Company reported first quarter 1999 net earnings per share of $.36, a 14% decrease from the prior-year result of $.42. The year-over-year decline in earnings per share primarily resulted from increased marketing expenditures, partially offset by net sales growth and a $.01 per share benefit from prior-year share repurchase. The Company achieved the following volume growth during the first quarter of 1999:
CHANGE - ---------------------------------------------------------------------------------------- North America +8.7% Europe +6.1% Asia-Pacific +12.9% Latin America +12.1% - ---------------------------------------------------------------------------------------- Consolidated +8.7% ======================================================================================== ======================================================================================== CHANGE - ---------------------------------------------------------------------------------------- Global cereal +7.4% Global convenience foods +12.5% - ---------------------------------------------------------------------------------------- Consolidated +8.7% ========================================================================================
9 11 The North America volume growth was driven by increases in both cereal and convenience food shipments, buoyed by increased promotional activity, improved performance in the mass-merchandising channel, and new products. Outside North America, convenience foods volumes significantly exceeded the prior year in all operating segments due to continued product roll-out. In Europe, cereal volume benefited from price reductions and trade promotional programs. Asia-Pacific cereal shipments were driven by strong volume in the Australian market. Despite tenuous economic conditions in the region, Latin America achieved solid cereal volume growth during the quarter, led by a strong performance in Mexico. Consolidated net sales increased 6.2% versus the prior year, primarily due to volume gains, partially offset by trade spending and a negative foreign currency impact of 1.7%. On an operating segment basis, net sales versus the prior year were:
- ------------------------------------------------------------------------------------------------------------------------- NORTH ASIA- LATIN AMERICA EUROPE PACIFIC AMERICA CONSOLIDATED - ---------------------------------------------------------------------------------------------------------------------- Business +8.6% +.8% +8.9% +21.6% +7.9% Foreign currency impact -.5% -.5% -2.1% -15.3% -1.7% - ---------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE +8.1% +.3% +6.8% +6.3% +6.2% - ----------------------------------------------------------------------------------------------------------------------
Net sales by major product group were:
- ---------------------------------------------------------------------------------------- 1999 1998 CHANGE - ---------------------------------------------------------------------------------------- Global cereal $1,330.3 $1,266.3 +5.1% Global convenience foods 415.0 376.6 +10.2% - ---------------------------------------------------------------------------------------- CONSOLIDATED $1,745.3 $1,642.9 +6.2% - ----------------------------------------------------------------------------------------
First quarter margin performance was:
- ---------------------------------------------------------------------------------------- 1999 1998 CHANGE - ---------------------------------------------------------------------------------------- Gross margin 52.1% 52.4% - .3% SGA% (a) -37.2% -34.2% -3.0% - ---------------------------------------------------------------------------------------- Operating margin 14.9% 18.2% -3.3% - ----------------------------------------------------------------------------------------
(a) Selling, general and administrative expense as a percentage of net sales. The decrease in operating margin primarily reflects increased spending on promotional activities in the Company's major markets during the quarter. This level of spending is consistent with management's strategy to drive growth through increased marketing investment in the Company's seven largest cereal markets, as well as supporting the accelerated introduction of new convenience food products around the world. In comparison, the level of marketing spending during the first quarter of 1998 was significantly lower and not competitive with category activity in major markets. Operating profit for the quarter ended March 31, 1999, included non-recurring charges of $36.8 million ($25.6 million after tax or $.07 per share), related to ongoing overhead activity analysis and other workforce reduction initiatives around the world. During 1998, management commenced an overhead activity analysis in North America to better align the Company's work activities to its growth strategy. The process includes evaluating work performed by employees as well as consulting and other external services. During the first quarter of 1999, this analysis was extended to Europe and Latin America. 10 12 The charges reported during the first quarter of 1999 were principally comprised of employee retirement and separation benefits, expenditures for employee and office relocation, and other related costs. Overhead activity analysis and other new initiatives undertaken during the quarter in Europe, Latin America, and Asia-Pacific are expected to eliminate or restructure approximately 350 employee positions by the end of the year and generate approximately $25 million in pre-tax savings by 2000. Cash outlays for all streamlining initiatives during the quarter, including those continuing from prior years, was approximately $30 million. Cash outlays for all previously announced initiatives are expected to be $40-$50 million during the remainder of 1999. The Company's streamlining initiatives will continue throughout 1999. The combination of initiatives commenced during the first quarter of 1999 and other ongoing cost-reduction programs is expected to result in more than $50 million in incremental savings for the full year 1999. 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, final negotiation of third party contract buy-outs, actual expenditures for facility closures, implementation of cost-reduction programs currently in the planning stages, and other items. Operating profit (loss) on an operating segment basis was:
- ------------------------------------------------------------------------------------------------------------------------- (millions) NORTH ASIA- LATIN CORPORATE CONSOLI- AMERICA EUROPE PACIFIC AMERICA AND OTHER DATED - ------------------------------------------------------------------------------------------------------------------------- 1999 operating profit (loss) $227.3 $25.6 $6.8 $29.0 ($66.0) $222.7 Non-recurring charges 4.7 15.7 6.0 1.7 8.7 36.8 - ------------------------------------------------------------------------------------------------------------------------- 1999 OPERATING PROFIT (LOSS) EXCLUDING 232.0 41.3 12.8 30.7 (57.3) 259.5 NON-RECURRING CHARGES 1998 OPERATING PROFIT (LOSS) $252.5 $46.0 $12.8 $30.2 ($42.7) $298.8 - ------------------------------------------------------------------------------------------------------------------------- % change - 1999 vs. 1998 Business -7.7% -8.2% +3.8% +12.2% -34.2% -11.5% Foreign currency impact -.4% -2.0% -3.7% -10.5% -- -1.7% - ------------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE -8.1% -10.2% +.1% +1.7% -34.2% -13.2% - -------------------------------------------------------------------------------------------------------------------------
Gross interest expense, prior to amounts capitalized, was $31.4 million, up slightly from the prior-year amount of $30.5 million, primarily due to a year-over-year increase in total debt of $164 million. Excluding the impact of non-recurring charges, the effective income tax rate for the quarter was 36.6%, comparable to the prior-year rate of 36.8%. The effective income tax rate based on reported earnings for the quarter was 37.8%. The higher reported rate (as compared to the rate excluding the impact of non-recurring charges) primarily relates to certain non-recurring charges for which no tax benefit was provided, based on management's assessment of the likelihood of recovering such benefit in future years. 11 13 LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong during the first quarter of 1999. 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. The Company continues to maintain a Prime-1 rating on its commercial paper. Net cash provided by operating activities was $149.7 million during the quarter, increased from $138.5 million in 1998, as a favorable variance in working capital movements offset the impact of lower earnings. At March 31, 1999, the ratio of current assets to current liabilities was .9, unchanged from December 31, 1998. Net cash used in investing activities was $48.8 million, down from $83.1 million in 1998. The reduction was primarily due to property additions, which decreased from $79.7 million in the first quarter of 1998 to $55.6 million in 1999. Net cash used in financing activities was $90.6 million, primarily related to dividend payments of $95.3 million, partially offset by a net increase in total debt of $2.3 million. The Company's first quarter 1999 per share dividend payment was $.235, a 4.4% increase over the prior-year payment of $.225. Management is authorized by the Company's Board of Directors to repurchase up to $149.4 million in shares of the Company's common stock during 1999. There were no repurchases during the first quarter of 1999. Notes payable primarily consist of commercial paper borrowings in the United States and borrowings under a $200 million revolving credit agreement in Europe with several international banks. At March 31, 1999, outstanding borrowings under the revolving credit agreement were $129.6 million with an effective interest rate of 5.45%. U.S. borrowings at March 31, 1999, were $411.3 million with an effective interest rate of 4.86%. Associated with the U.S. borrowings, the Company holds a $225 million notional, fixed interest rate cap which expires in September 2001. 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 March 31, 1999, the rate was 4.84%. Long-term debt primarily consists of fixed rate issuances of U.S. and Euro Dollar Notes, including $200 million due in 2005, $500 million due in 2004, and $900 million due in 2001. The amount due 2001 includes $400 million in Notes which 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. Associated with several of these long-term debt issuances, the Company has entered into fixed-to-floating interest rate swaps, generally expiring in conjunction with the debt issuances and indexed to either three-month LIBOR or the Federal Reserve AA Composite Rate on 30-day commercial paper. One of the swap agreements, with a notional value of $225 million, will expire if three-month LIBOR falls to 4.71% or below. At March 31, 1999, three-month LIBOR was 4.97%. The total notional amount of all interest rate swaps at March 31, 1999, was $825 million, unchanged from December 31, 1998. 12 14 The ratio of total debt to market capitalization at March 31, 1999, was 17%, up from 16% at December 31, 1998, primarily due to a slightly lower stock price since year-end. YEAR 2000 The Company established a global program in 1997 to address the millennium date change issue (the inability of certain computer software, hardware, and other equipment with embedded computer chips to properly process two-digit year-date codes after 1999). The program is structured to address all date-related risks to the Company's business in four major categories: information technology systems, embedded technology systems, suppliers, and customers. In the information technology and embedded systems categories, the inventories and detailed assessments are complete. As of the end of the first quarter of 1999, remediation was 90% complete and testing was 75% complete. Remediation and testing are on schedule with planned completion by June 30, 1999, for business critical and important systems. The Company is spending approximately $70 million during 1998 and 1999 to become Year 2000 compliant. On a global basis, spending through March 31, 1999, was consistent with the overall percentage of program completion of approximately 80%. These amounts do not include the effect of other planned system initiatives that will contribute to the Year 2000 compliance effort. Management believes that to the extent these other planned system initiatives impact the Year 2000 project, they will be completed as scheduled by mid-1999. The Company is continuing a contingency planning process started in 1998 designed to mitigate business risks due to unexpected date-related issues across all key business units worldwide. The testing results for information technology and embedded systems are being coupled with risk assessments of the Company's suppliers, customers, and other internal initiatives, and incorporated into this contingency planning process. As of March 31, 1999, contingency plans had been identified for the Company's greatest business risks, and their implementation was being planned in each of the Company's four operating segments of North America, Europe, Asia-Pacific, and Latin America. While management believes that the estimated cost of becoming Year 2000 compliant is not significant to the Company's financial results, failure to complete all the work in a timely manner could result in material financial risk. While management expects all planned work to be completed, there can be no guarantee that all systems will be in compliance by the year 2000, that the systems of other companies and government agencies on which the Company relies will be converted in a timely manner, or that contingency planning will be able to fully address all potential interruptions. Therefore, date-related issues could cause delays in the Company's ability to produce or ship its products, process transactions, or otherwise conduct business in any of its markets. 13 15 EURO CONVERSION On January 1, 1999, eleven European countries (Germany, France, Spain, Italy, Ireland, Portugal, Finland, Luxembourg, Belgium, Austria, and the Netherlands) implemented a single currency zone, the Economic and Monetary Union (EMU). The new currency, the Euro, has become the official currency of the participating countries. Those countries' financial markets and banking systems are quoting financial and treasury data in Euros from January 1, 1999. The Euro will exist alongside the old national currencies during a transition period from January 1, 1999, to January 1, 2002. During this period, entities within participating countries must complete changes which enable them to transact in the Euro. National currencies will be withdrawn no later than July 1, 2002. This transition to the Euro currency will involve changing budgetary, accounting, pricing, costing, and fiscal systems in companies and public administrations, as well as the simultaneous handling of parallel currencies and conversion of legacy data. During the first quarter of 1999, the Euro currency has demonstrated varied levels of stability, and needs to be observed over a longer period before conclusions can be drawn on the currency's long-term viability. In early 1998, management formed a task force to monitor EMU developments, evaluate the impact of the Euro conversion on the Company's operations, and develop and execute action plans, as necessary. The task force has completed a full EMU impact assessment identifying company-wide, cross-functional effects of the Euro. Required business strategy, system, and process changes within the Company's European region are under way with certain markets already Euro compliant. Many of these changes will be made in conjunction with other significant technology initiatives currently under way, and will be completed in accordance with the Company's timetable for transacting with its suppliers and customers in the Euro. Results of management's customer analysis indicate that the Company will be invoicing larger customers in the Euro beginning in 2001. The Company's suppliers are generally prepared to transact in the Euro at any time; the Company plans to commence Euro-denominated transactions with suppliers in 2002. The Company's Euro program consists of two phases. Phase I aims to provide the business with the capability to recognize the Euro as a foreign currency for customer order-taking, invoice processing, and vendor payment purposes. The Company expects to complete the necessary changes to order management and related financial systems prior to 2001. Management believes the project timetable is on target to meet this date. In Phase II, the more significant portion of the program, all business systems (for example, raw materials management, manufacturing, warehousing, human resource systems) will be reviewed and modified, as necessary, to handle the Euro as a functional currency. Legally, this capability must exist in Company business units operating in EMU member countries from January 1, 2002. Manufacturing and operational systems are currently being analyzed and modified in order to comply with the legal timetable. This change does not represent any currency exposure as the national currency exchange rates were fixed in relation to the Euro on January 1, 1999. 14 16 Although management currently believes the Company will be able to accommodate any required changes in its operations, there can be no assurance that the Company, its customers, suppliers, financial service providers, or government agencies will meet all of the Euro currency requirements on a timely basis. This is, in part, because new requirements may emerge from individual national governments at later stages. Such failure to complete the necessary work could result in material financial risk. FULL-YEAR OUTLOOK Management is not aware of any adverse trends that would materially affect the Company's strong financial position. Should suitable investment opportunities or working capital needs arise that would require additional financing, management believes 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. Based on the expectation of cereal volume growth, and strong results from product innovation and the continued global roll-out of convenience foods, management believes the Company is well-positioned to deliver sales and earnings growth for the full year 1999. The Company will continue to identify and pursue streamlining and productivity initiatives to optimize its cost structure. The Company continues to review strategies related to the Lender's Bagels business, given its performance since acquisition. Based on a business update completed during the first quarter of 1999, the Company has evaluated the recoverability of Lender's long-lived assets as of March 31, 1999. Although this evaluation has not resulted in recognition of an impairment loss, management continues to assess the profitability realized or likely to be realized by the Lender's Bagels business, and is reviewing various strategies including possible divestiture. Changes in management strategy regarding the Lender's Bagels business could impact the projected cash flows used to evaluate the carrying value of long-lived assets. A change that results in recognition of an impairment loss would require the Company to reduce the carrying value of long-lived assets to fair market value, which management believes is less than the carrying value. The carrying value of Lender's Bagels business long-lived assets, including intangible assets, as of March 31, 1999, was $427 million. Additional expectations for 1999 include a gross profit margin of 51-52%, an SGA% of 36-37%, an effective income tax rate of 36-37%, and capital spending of approximately $270 million. The foregoing projections concerning volume growth, profitability, and capital spending, as well as financial impacts of strategies concerning the Lender's Bagels business are forward-looking statements that involve risks and uncertainties. Actual 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 success of new product introductions; the levels of spending on system initiatives, properties, business opportunities, continued streamlining initiatives, and other general and administrative costs; raw material price and labor cost fluctuations; foreign currency exchange rate fluctuations; changes in statutory tax law; interest rates available on short-term financing; and other items. 15 17 KELLOGG COMPANY PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders There were no submissions of matters to a vote of security holders during the quarter for which the report is filed. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.01 - Agreement between the Company and D. W. Thomason dated March 1, 1999. 10.02 - Agreement between the Company and J. Groot dated December 17, 1998. 10.03 - Agreement between the Company and J. D. Cook dated January 26, 1999. 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. 16 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/ A. Taylor ------------------------------- A. Taylor Principal Accounting Officer;* Vice President - Corporate Controller Date: May 12, 1999 *Also duly authorized to sign on behalf of the registrant. 17 19 KELLOGG COMPANY EXHIBIT INDEX Electronic (E) Paper (P) Incorp. By Exhibit No. Description Ref. (IBRF) - ----------- ----------- ----------- 10.01 Agreement between the Company and E D. W. Thomason dated March 1,1999. 10.02 Agreement between the Company and E J. Groot dated December 17, 1998. 10.03 Agreement between the Company and E J. D. Cook dated January 26, 1999. 27.01 Financial Data Schedule E 18 EX-10.1 2 AGMT B/W THE CO. & D.W. THOMASON DATED MAR 1, 1999 1 EXHIBIT 10.01 LEAVE OF ABSENCE AND SEVERANCE AGREEMENT ---------------------------------------- (PRESENTED: FEBRUARY 24, 1999) This Leave of Absence and Severance Agreement hereafter, (the "Agreement") is made and entered into as of March 1, 1999, by, and between Kellogg Company, a Delaware corporation ("the Company"), and Donald W. Thomason an individual ("Employee"). PURPOSE - ------- The purpose of this Leave of Absence and Severance Agreement is to set forth the arrangements with respect to Employee's resignation as an officer of the Company, and its subsidiaries, divisions and affiliates, and related matters, effective August 1, 1999. As of that date, Employee is relieved of all his titles, duties, responsibilities, and authority as an officer and otherwise with respect to the Company. TERMS AND CONDITIONS - -------------------- A. As more fully provided herein below, the salary continuation payments described herein are in consideration of Employee's release of any and all cause or causes of action he has, has had, or may have against the Company and also in consideration of Employee's agreement not to compete. Commencing March 1, 1999 and continuing through April 30, 1999, Employee shall receive his regularly scheduled salary payments. Commencing May 1, 1999 and ending July 31, 1999, (i.e., last day worked), Employee will receive salary continuation payments of $265,867 (two hundred sixty-five thousand, eight hundred sixty-seven dollars) per month. On August 1, 1999 Employee shall receive a residual severance payment of $259,896.69 (two hundred fifty-nine thousand, eight hundred ninety-six dollars and sixty-nine cents). Commencing August 1, 1999, Employee shall begin receiving retirement benefits from the Kellogg Company tax qualified, Excess Benefit and Supplemental Retirement Plans, estimated today to be $348,552.16 (three hundred forty-eight thousand, five hundred fifty-two dollars and sixteen cents) per year as determined by single life annuity amounts. The amounts payable to Employee under this Agreement are in lieu of any amounts which may be payable to Employee for termination pay, including but not limited to, any prior agreement and/or standard severance (i.e., one week per year of service) policy. Employee expressly waives any right to request a lump sum payment option for any portion of his annual pension benefits in excess of $75,000 (seventy-five thousand dollars) per year. Usual and customary withholding for tax purposes will be withheld from all monthly salary continuation payments and from any other payments made to Employee, to the extent required by law. All tax liability, with respect to any and all payments or services received by Employee under this Agreement (other than employer withholding and Page 1 of 7 2 employer payroll taxes), will be Employee's responsibility. It is understood that the monthly salary continuation payments as provided in this Agreement shall continue to be made to Employee whether or not Employee secures new employment subject to the non-compete provision of this Agreement. B. Within sixty (60) days of the last day worked (i.e., July 31, 1999), the Company will pay to Employee that sum which is equivalent to all unused, earned, accrued prorated vacation of Employee as of the last day worked. Employee shall not be entitled to any future vacation pay accruals from and after the last day worked. C. Employee will be eligible to participate in the Second Restated Kellogg Company Salaried Savings and Investment Plan, subject to the terms and provisions thereof, including any amendment or alteration thereof after the date of this Leave of Absence and Severance Agreement, throughout Employee's leave of absence. Usual and customary withholding for personal designated deductions, including participation in such Savings Plan, will be withheld throughout Employee's leave of absence. D. Employee's right to exercise nonqualified stock options that Employee received pursuant to the Company 1982 Stock Option, the 1991 Key Employee Long-Term Incentive Plan, and the Kellogg Company Bonus Replacement Stock Option Plan, will be administered in accordance with and be subject to the respective provisions of those Plans, and shall continue so long as Employee is employed by the Company and for such period of time as provided by such Plans upon Employee's retirement. The ability to utilize the accelerated ownership feature of the Plans shall continue through August 15, 1999. E. The Company will continue Employee's coverage under the existing Company Executive Survivor Income Plan, based upon Employee's compensation rate defined under this Agreement for the purposes of the Plan as $726,090 (seven hundred twenty-six thousand and ninety dollars). F. Group Term Insurance coverage provided during this leave of absence shall be calculated by using a base pay amount of $470,000 (four hundred seventy thousand dollars). G. Employee hereby irrevocably elects to retire August 1, 1999 and shall be eligible for pension benefits through Kellogg Company Salaried Pension Plan, the Kellogg Company Excess Benefit or Supplemental Retirement Plan as amended by the February 10, 1998 Participation Agreement (collectively the "Pension Plans"). Employee will be eligible for annual pension benefits based upon Employee's highest consecutive three-year earnings during his last ten years of employment with the Company, i.e., average pay for 1997 - 1999 equals $726,090 (seven hundred twenty-six thousand and ninety dollars). At the time Employee elects to begin receiving such benefits, he should contact the Employee Benefits Department of the Company. Page 2 of 7 3 H. Except as otherwise provided herein, benefits for Employee and his eligible dependents, as outlined in "A Guide To Your Medical/Mental/Prescription Drug Benefits" effective 1995, and under the Executive Income Survivor Plan, subject to the respective terms and provisions thereof, including any amendment or alteration thereof after the date of this Agreement, will be continued for Employee as an "employee", (i.e., or on leave of absence) and, to the extent provided in such plans, upon Employee's retirement. However, prior to his retirement, at such time as Employee is eligible for coverage by the health plan of another employer, such health insurance shall be deemed the primary health insurance coverage for Employee and his eligible dependents. Employee shall remain eligible for a Company paid physical at Mayo Clinic, currently scheduled for September 1999. I. The Company will pay for financial planning and/or tax advice provided to Employee, up to $10,000 for the 1999 tax year. Employee's predetermined allowance for such advice for the tax year 1998 remains unchanged. J. Employee will be eligible for outplacement assistance, at the Company's expense, not to exceed $60,000, by an outplacement agency mutually agreeable upon by Employee and Company. K. In further consideration of the foregoing, Employee agrees that, for the respective Restricted Periods (as hereinafter defined), Employee shall not: (i) directly or indirectly, accept any employment, consult for or with, or otherwise provide or perform any services of any nature to, for or on behalf of any person, firm, partnership, corporation or other business or entity that manufactures, produces, distributes, sells or markets any of the Products (as herein below defined) in the Geographic Area (as hereinafter defined), including, but not limited to, General Mills, Kraft/Post, Quaker, Nabisco, Pepsi/Frito Lay, Warner-Lambert, M&M/Mars, Pillsbury /Grand Met, Malto Meal, Ralcorp Cereal, and /or any private label cereal company and/or (ii) directly or indirectly, permit any business firm which Employee, individually or jointly with others may own, manage, operate, or control, to engage in the manufacture, production, distribution, sale or marketing of any of the Products in the Geographic Area. For purposes of this non-compete provision, the term "Products" shall mean ready-to-eat cereal products, toaster pastries, cereal bars, granola bars, frozen waffles, crispy marshmallow squares, bagels, and any other similar grain-based convenience food. For purposes of this non-compete provision, the term "Geographic Area" shall mean any country in the world where the Company (including any subsidiary, division or affiliate thereof) manufactures, produces, distributes, sells or markets any of the Products at any time during the applicable Restricted Period (as defined below). For purposes of this paragraph, the Restricted Period with respect to the Products shall be two (2) years from the date of this Agreement. Page 3 of 7 4 L. As a result of this extension of salary and benefits eligibility, the Company, its subsidiaries, divisions and affiliates (including the directors, officers and employees of any of them) shall have no further obligations of any kind or nature to Employee, including, without limitation, obligations for any termination, severance or vacation pay, bonus, etc., except as specifically provided herein and except as may be provided under the applicable eligible Company benefit plans in accordance with their terms. M. Employee further agrees to and shall return to the Company no later than his last day worked, without limitation, all files, documents, correspondence, memoranda, customer and client lists, prospect lists, subscription lists, contracts, pricing policies, operational methods, marketing plans or strategies, product development techniques or plans, business acquisition plans, employee records, technical processes, designs and design projects, inventions, research project presentations, proposals, quotations, data, notes, records, photographic slides, chromes, photographs, posters, manuals, brochures, internal publications, books, films, drawings, videos, sketches, plans, outlines, computer disks, computer files, work plans, specifications, credit cards, keys (including elevator, pass, building and door keys), identification cards, and any other documents, writings and materials that Employee came to possess or otherwise acquire as a result of and/or in connection with the Company. Should Employee later find any Company property in his possession, Employee agrees to immediately return it. N. Employee agrees that he will not divulge any/all proprietary and/or confidential business information, except to the extent required pursuant to a legal subpoena or a legal proceeding. O. Employee agrees to conduct himself in a manner that reflects positively on the Company. Similarly, the Company agrees to conduct itself in a manner that reflects positively on Employee. Employee agrees to cooperate truthfully and fully with the Company in connection with any and all existing or future investigations or litigation of any nature brought against it or its affiliates involving events which occurred during his employment with the Company. Employee agrees to notify the Company immediately if subpoenaed or asked to appear as a witness in any matter related to the Company or its affiliates. The Company will reimburse Employee for reasonable out-of-pocket expenses and, if approved in advance, attorneys' fees incurred as a result of such cooperation. Nothing herein shall prevent Employee from communicating with or participating in any government investigation. P. Employee has carefully read this Leave of Absence and Severance Agreement and understands its contents. Employee recognizes that he will have no further job responsibilities at Kellogg Company. Page 4 of 7 5 Q. Employee has been advised to seek legal counsel to understand its full force and effect. Employee has been given the opportunity to consult with a lawyer. R. On behalf of Employee, his relatives, executors and administrators, Employee irrevocably and unconditionally releases, waives and forever discharges the Company, its owners, stockholders, affiliates, subsidiaries, agents, directors, officers, employees, representatives, insurance carriers, attorneys, advisors, and their predecessors, successors, heirs, executors, administrators and assigns (collectively "Releasees") from any and all claims, demands and causes of action he has or may claim to have arising from or relating in any way to his employment, leave of absence, or separation of employment. This includes, but is not limited to, all claims under the Age Discrimination in Employment Act of 1967 (as amended), Title VII of the Civil Rights Act of 1964, as amended, Section 1981 of the Civil Rights Act of 1986, as amended, the Civil Rights Act of 1991, the Elliott-Larsen Civil Rights Act and any other employment discrimination laws, the Family Medical Leave Act of 1993, the Rehabilitation Act of 1993, the Equal Pay Act of 1963, the Uniform Services Employment and Reemployment Rights Act of 1964, ERISA, Americans with Disabilities Act, the Workers Adjustment and Retraining Notification Act (WARN), and any common law or other federal, state or local law or ordinance. Employee agrees that this Leave of Absence and Severance Agreement is intended to and shall preclude any claim that his separation was in retaliation for exercising any right to which Employee is entitled under the provisions of an employee benefit plan, or for the purpose of interfering with the attainment of any right to which Employee may become entitled under such a plan or under the Employee Retirement Income Security Act of 1974, as amended, in violation of Section 510 of ERISA, 29 USC Sec. 1140, except as specifically altered and/or modified by the Leave of Absence and Severance Agreement. Nothing in the Agreement shall be construed as barring any other claims under Section 502 ERISA. Employee agrees he has not filed any charges, claims, or lawsuits against the Company involving any aspect of his employment that have not been terminated as of the date of this Agreement. If Employee has filed any charges, claims, or lawsuits against the Company, Employee agrees to seek immediate dismissal with prejudice and provide written confirmation immediately (i.e., court order, and/or agency determination) as a condition to receiving any benefits under this Agreement. Employee additionally waives and releases any right he may have to recover in any lawsuit or proceeding brought by him, an administrative agency, or any other person on his behalf or which includes him in any class. If Employee breaches any portion of this Release of Claims, Employee acknowledges that he will be liable for all expenses, including costs and reasonable attorney's fees incurred by any entity released in defending the lawsuit or claim, regardless of the outcome. Page 5 of 7 6 S. Employee accepts the terms and conditions of the Agreement knowingly and voluntarily. T. Employee agrees and acknowledges that the consideration (severance pay and benefits) described in this Agreement is in full settlement of any and all such aforementioned claims, demands and causes of action he has or may have. U. The Company agrees to indemnify, hold and save harmless Employee from and against any and all claims, liens, demands, damages, liability, actions, causes of action, settlement costs, and approved attorney's fees and expenses sustained or asserted against Employee arising out of, resulting from, or attributable to Employee's conduct during his employment with the Company; provided however, that the Company shall not be liable hereunder to indemnify or hold and save harmless Employee against liability for damages arising during the term of his employment involving willful misconduct, theft, malfeasance, unlawful activity, and/or immorality. Nothing in this provision shall waive any eligible coverage provided in surviving provisions of any applicable Directors and Officers Liability insurance policy. V. Employee understands and agrees that signing this Leave of Absence and Severance Agreement and accepting the consideration for it shall not be deemed or construed as an admission of liability or responsibility at any time for any purpose. Liability for any and all claims is expressly denied by Kellogg Company. W. Employee has disclosed to the Company any information in his possession concerning any conduct involving the Company that Employee has any reason to believe involves any false claims to the United States or is or may be unlawful or violates Company Policy in any respect. X. Employee signs this Leave of Absence and Severance Agreement knowingly and voluntarily with full intent to release the Company, its subsidiaries, affiliates, agents, employees, directors, shareholders and any other parties acting on behalf of the Company. Y. Employee has had at least twenty-one (21) days to consider this Agreement. Employee is aware that he may sign and return the Agreement before the end of twenty-one (21) days. If Employee does so, Employee agrees that his signature was done knowingly and voluntarily, without any improper inducement by the Company. Z. Employee understands that this Leave of Absence and Severance Agreement shall not affect any right to any vested benefits under the terms and provisions of the Company's defined benefit plans in which Employee is eligible and participates, except as specifically altered and/or modified by this Leave of Absence and Severance Agreement. Page 6 of 7 7 AA. Employee also understands that the Company is not obligated to offer employment to him now or in the future. BB. Employee understands that the Nondisclosure Confidentiality Agreement that he signed shall remain in full force and effect indefinitely. CC. Employee understands that if he disavows or revokes this Agreement, or if the Agreement is found to be unenforceable by a court of law in an action initiated by Employee, Employee agrees to immediately pay to Kellogg Company all amounts received, or to authorize the Company to offset this indebtedness from any account he may have. DD. Employee agrees that if any provision of this Leave of Absence and Severance Agreement is invalid or unenforceable by a court of law, it will not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. EE. Employee agrees that the construction, interpretation, and performance of this Agreement shall be governed by the laws of Michigan, including conflict of laws. It is agreed that any controversy, claim or dispute between the parties, directly or indirectly, concerning this Agreement or the breach thereof shall only be resolved in the Circuit Court of Calhoun County, or the United States District Court for the Western District of Michigan, whichever court has jurisdiction over the subject matter thereof, and the parties hereby submit to the jurisdiction of said courts. FF. For purposes of any construction or interpretation of this Leave of Absence and Severance Agreement, all terms and provisions thereof shall be deemed to have been mutually drafted by both of the parties. GG. Employee acknowledges and agrees that this is the entire Leave of Absence and Severance Agreement and the only promises made to him are those contained within this document. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and date first above written in Battle Creek, Michigan. KELLOGG COMPANY By: /s/ Arnold G. Langbo /s/ Donald W. Thomason ------------------------- ------------------------- Arnold G. Langbo Donald W. Thomason Chief Executive Officer March 17, 1999 3/24/99 - ------------------------- ------------------------- Date Date Page 7 of 7 EX-10.2 3 AGMT B/W THE CO. & J. GROOT DATED DEC 17, 1998 1 EXHIBIT 10.02 December 17,1998 Jacobus (Koos) Groot Veermanskade #4 1621 AN HOORN Netherlands Dear Koos: I am pleased to confirm the final offer of employment extended to you by our Senior Vice President Human Resources, Bob Creviston, for the position of Executive Vice President Kellogg Company and President of Asia Pacific. In this capacity, you will report directly to me. The starting salary for this position is U.S. $350.000 per year. Your cash bonus for 1999, payable in the first quarter of 2000, will be based on a target of 60% of base pay. Actual payment is based on a formula which includes three factors; individual, area, and Company performance. The range of payment is from 0 to 150% of target, depending upon achieving goals and objectives. The minimum payment in the first year, assuming you are actively employed, will be 60% of base pay. We have approval from the Compensation Committee of the Board of Directors to grant to you a sign-on stock option grant in the amount of 45,000 shares and an additional 35,000 options as part of our 1999 executive option plan. The strike price of both options will be determined on January 4, 1999 by averaging the high and low stock price for that day. The options vest 50% after one year and the remainder after the second year. You will be eligible for all provisions of the option program to include the accelerated option feature ("AOF"). Detailed material has been sent under separate cover. The material that you already received provides detailed information on our benefit plans however, I thought a quick review might be helpful. The Savings and Investment Plan and the pension plan are especially outstanding. Should you decide to voluntarily invest between 1 and 13 percent of your pay, Kellogg Company will contribute to your Savings and Investment Plan account at a rate of 80% - 80 cents for each dollar you deposit up to 5% of your pay. You will be eligible to start contributing to the Savings and Investment Plan immediately; however, Company contributions will not begin until after you have completed 1 year of service. At the time of withdrawal of funds, we will consider payment of such funds in the most tax effective manner within tax and legal constraints. The pension plan is funded by the Kellogg Company and does not require employee contribution. You begin building service credits on a monthly basis the day you begin employment. The Compensation Committee has approved your enrollment in our Key 2 Mr. Jacobus (Koos) Groot Page 2 December 17,1998 Employee Benefit Plan, which allows us to accrue on a monthly basis over the first 6 1/2 years of employment up to 13 additional years of credited service and for you to receive a lump sum payment, should you leave the Company, for all accrued benefits during the first 5 years of employment. Should you leave the Company after 5 years of employment a portion of the accrued benefit must be paid from the Qualified Retirement Plan and the remaining portion will be available for lump sum distribution. The attachment titled "Kellogg Company Comparison of Retirement Benefits" provides an estimate of the value of the plan. Additional benefits include life insurance, hospital-surgical and major medical insurance, the dental plan, the Salary Continuation Plan in the event of personal illness, local holidays, vacations (we will immediately qualify you for 5 weeks of paid vacation). In addition to the life insurance mentioned above, you will qualify for our Executive Survivor Income Plan which provides an additional death benefit of 3 times the total of your base and bonus. Expatriate benefits will be provided as follows: A Company car, equivalent to a BMW 740, including service, will be provided. The Company will pay for housing to include all utilities except personal telephone. We will assume your current lease, which we understand expires in June, 2000. Housing costs to be off-set by your payment of a housing norm, which is currently calculated at U.S. $41,536 per year. This calculation is tied directly to your compensation level and the ORC table that predicts the amount normally spent for housing in the U.S. Utilizing the ORC table and capping the salary at U.S. $250,000 we will pay a goods and services differential payment currently estimated at U.S. $79,283 per year. This amount is to be adjusted if the index increases or decreases by 5%. We will reimburse you for education expenses for all children through secondary level. Payment will include tuition fees, books, supplies, mandatory fees and Public or school provided transportation, not included are uniforms and elective fees. Home Leave: One round-trip, business class ticket for you and your dependents will be made available to a home location to be designated by you. Downgrading is available should you want to acquire additional trips. Language lessons will be made available as needed by your family. Home "office" equipment will be provided as appropriate. 3 Mr. Jacobus (Koos) Groot Page 3 December 17,1998 Tax preparation will be provided by PricewaterhouseCoopers for the filing of your Hong Kong taxes. Tax equalization to the U.S. will not occur until such time that you relocate from Hong Kong. Should you relocate in mid tax year and be tax equalized, your net after tax income will reflect consideration for the partial year in Hong Kong. The Company will pay the costs associated with the storage of your goods in Hong Kong. The typical process is for the agent storing your goods to send a bill for the storage charges to Kellogg-Asia Pacific, and Kellogg-Asia Pacific would then remit the payment to the storage agent. If you own a home that should become vacant, and you are making every effort to lease the home, the Company will provide up to 3 months of waiving the housing norm deduction per each 12-month period that it remains vacant. House Refurbishing Allowance: A house refurbishing allowance of $10,000 will be paid to you for expenses incurred in refurbishing your current condo; i.e. painting, etc. You will be eligible for a membership in the Aberdeen Marina Club. The Company will pay for the Class A Corporate Membership (transferable debenture and entrance fee), and you will be responsible for payment of the monthly subscription fee. In the event your employment is terminated for any reason other than malfeasance, theft, or immorality, you will be provided an amount of severance pay equal to 2 years' pay. The pay shall be determined by averaging the prior 2 years' base pay and actual bonus. Any severance pay is conditional upon signing a release and waiver of all claims against Kellogg Company and its subsidiaries. In addition, we will provide one-way tickets for you and your dependents to a location of your choice and move your household goods, both at your domicile and currently in storage to that location. The tickets and moving provision will also apply should you resign your position. You will qualify for the severance portion of this paragraph until you reach age 55, after that date should severance be necessary, the Company will take into consideration all factors related to your employment. In the event of a labor dispute, the laws of the U.S. will apply. As a matter of policy, employment is contingent upon you successfully passing a drug test which is administered at the time of a medical evaluation. You can arrange to have the medical evaluation and drug test done at location of your choice or both can be accomplished during your next visit to Battle Creek. 4 Mr. Jacobus (Koos) Groot Page 4 December 17, 1998 Arny and I are very excited about the potential of having you join the Kellogg organization. I hope you will give serious consideration to our offer. I look forward to hearing from you soon. Sincerely, /s/ Carlos M. Gutierrez Carlos M. Gutierrez /pj Attachment EX-10.3 4 AGMT B/W THE CO. & J.D. COOK DATED JAN 26, 1999 1 EXHIBIT 10.03 January 26, 1999 John D. Cook 240 Chestnut St. Winnetka, IL 60093 Dear John: I am extremely pleased to confirm the verbal offer of employment that we extended to you for the position of Executive Vice-President, Kellogg Company and President, Kellogg North America. You will be located at our Headquarters' office in Battle Creek, MI and report directly to me. Your responsibilities will include providing overall leadership to our North American business unit in the achievement of profitability, revenue, growth, asset-management and organizational development goals. It is my understanding that you have accepted the position and will begin your employment on February 16, 1999. Your starting salary will be $600,000 per year. Your cash bonus for 1999, payable in the first quarter of the year 2000, will be based on a target of 65% of base pay. The normal range of payment is from 0 to 150% of target, depending upon achievement of corporate and individual goals. However, in the first year, assuming you are actively employed, we will guarantee a payment equal to 65% of your base pay. In the month following your employment, we will make a cash payment to you in the amount of $500,000 minus appropriate withholding taxes and, assuming you are employed, an additional payment of $500,000 minus appropriate withholding taxes, will be made in February of 2000. We have approval from the Compensation Committee of the Board of Directors to grant you a sign-on stock option grant to purchase 100,000 shares and an option to purchase an additional 100,000 shares as part of our 1999 executive option plan. The strike price for both options will be your first day of employment by the Kellogg Company. The options vest 50% after one year and the remainder after the second year. You will be eligible for all provisions of the option program to include the accelerated option feature ("AOF"). Details of the "AOF" program are included in the attached material. The pension plan is funded by the Kellogg Company and does not require employee contributions. You begin building service credits on a monthly basis the day you begin employment and you become vested in the plan upon completion of 5 years of service. Benefits are related to the number of years that you work for the Company and your final average pay which includes bonus. 2 John D. Cook Page Two January 26, 1999 Early retirement options, survivor options and disability benefits are provided under the plan. In addition to our pension plan, we have a Savings & Investment Plan that allows you to voluntarily invest between one percent and thirteen percent of your pay. The Kellogg Company will contribute to your account at a rate of 80 percent (80 cents) for each dollar you deposit, up to five percent of your pay. You will be eligible to start contributing to the Savings and Investment Plan immediately; however, Company contributions will not begin until after you have completed one year of service. There are a number of additional benefits that you are entitled to, to include life insurance (1 1/2 times base pay), medical insurance, dental plan, salary continuation plan in the event of personal illness, holidays (14), vacation (we will immediately qualify you for 5 weeks of paid vacation). In addition to the life insurance mentioned above, you will be eligible for our Executive Survivor Income Plan which provides an additional death benefit of 3 times your base and bonus. A financial and tax planning account of $10,000 per year is also available for your use. The packet of material enclosed provides detailed information on all of our benefit plans, details of our relocation program, and all of the forms necessary to place you on the payroll. Should you require additional explanation on any of the plans, please feel free to contact either Bob Creviston (616-961-2409) or Jim Larson (616-660-7164). In the event your employment is terminated for reasons other than malfeasance, theft, or immorality, you will be provided an amount of severance pay equal to two years' pay. The severance pay shall equal the greater of the average of the prior two years' base pay and actual bonus, or two times the salary and target bonus for the year in which the termination occurs. Any severance pay is conditional upon signing a release and waiver of all claims, against the Kellogg Company and its subsidiaries. As a matter of policy, employment is contingent upon your successfully passing a drug test, which can be administered at the time of a medical examination. You can arrange to have the medical evaluation and drug test done in Chicago, or both can be accomplished during your next visit to Battle Creek. 3 John D. Cook Page Three January 26, 1999 Arny and I are very excited about your decision to accept our offer. We are confident that you will immediately provide the leadership necessary to renew growth to the North America business. Sincerely, [SIG] Carlos M. Gutierrez Carlos M. Gutierrez /pj Enclosures EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KELLOGG COMPANY AND SUBSIDIARIES, CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 140400 0 733200 (9200) 473600 1574500 5224900 (2380400) 5091000 1762100 1611200 0 0 103800 779700 5091000 1745300 1745300 836400 836400 688900 0 29000 191000 72200 118800 0 0 0 118800 0.29 0.29
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