10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2001

Commission File Number 1-4171

KELLOGG COMPANY

(Exact Name of Registrant as Specified in its Charter)

Delaware	38-0710690
State of Incorporation	I.R.S. Employer Identification No.

One Kellogg Square

Battle Creek, Michigan 49016-3599

(Address of Principal Executive Offices)

Registrant’s Telephone Number: (616) 961-2000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $0.25 par value per share	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The aggregate market value of the common stock held by non-affiliates of the registrant (assuming only for purposes of this computation that the W.K. Kellogg Foundation Trust, directors and executive officers may be affiliates) was $9,400,548,687 as determined by the March 4, 2002, closing price of $34.00 for one share of common stock, as reported for the New York Stock Exchange — Composite Transactions.

As of March 4, 2002, 407,680,563 shares of the common stock of the registrant were issued and outstanding.

Portions of the registrant’s Annual Report to Share Owners for the fiscal year ended December 31, 2001, are incorporated by reference into Part I, II, and Part IV of this Report.

Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission for the Annual Meeting of Share Owners to be held April 26, 2002, are incorporated by reference into Part III of this Report.

TABLE OF CONTENTS

Agreement between the Company and Michael Teale

2002 Employee Stock Purchase Plan

Executive Stock Purchase Plan

Senior Executive Annual Incentive Plan

Company's Annual Report to Shareowners

Domestic & Foreign Subsidiaries of the Company

Consent of PricewaterhouseCoopers LLP

Powers of Attorney

PART I

Item 1. Business

      The Company. Kellogg Company, incorporated in Delaware in 1922, and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods.

      Kellogg Company acquired Keebler Foods Company in a transaction valued at $4.56 billion, which closed on March 26, 2001. In connection with the acquisition, Kellogg Company paid approximately $3.86 billion in cash and assumed $696 million of debt, with $560 million of the assumed debt being refinanced on the acquisition date.

      The address of the principal business office of Kellogg Company is One Kellogg Square, P.O. Box 3599, Battle Creek, Michigan Creek 49016-3599. Unless otherwise specified or indicated by the context, the term “Company” as used in this report means Kellogg Company, its divisions and subsidiaries.

      Financial Information About Segments. The information called for by this Item is incorporated herein by reference from Note 14 to the Consolidated Financial Statements on page 42 of the Company’s Annual Report.

      Principal Products. The principal products of the Company are ready-to-eat cereals and convenience foods, such as cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones. These products were, as of December 31, 2001, manufactured in 19 countries and distributed in more than 160 countries. The Company’s cereal products are generally marketed under the Kellogg’s name and are sold principally to the grocery trade through direct sales forces for resale to consumers. The Company uses broker and distribution arrangements for certain products. It also generally uses these, or similar arrangements, in less-developed market areas or in those market areas outside of its focus.

      The Company also markets cookies, crackers, and other convenience foods of its Keebler Foods Company subsidiary under other brands such as Kellogg’s, Keebler, Cheez-It, Murray, and Famous Amos, and manufactures private label cookies, crackers, and other products. These branded products are generally marketed to supermarkets in the United States through a direct store door (DSD) delivery system, although other distribution methods are also used. The Company also markets some of its other convenience foods products in the United States through this DSD system.

      Additional information pertaining to the relative sales of the Company’s products for the years 1999 through 2001 is found in Note 14 to the Consolidated Financial Statements on page 42 of the Company’s Annual Report.

      Raw Materials. Agricultural commodities are the principal raw materials used in the Company’s products. Cartonboard, corrugated, and plastic are the principal packaging materials used by the Company. World supplies and prices of such commodities (which include such packaging materials) are constantly monitored, as are government trade policies. The cost of such commodities may fluctuate widely due to government policy and regulation, weather conditions, or other unforeseen circumstances. Continuous efforts are made to maintain and improve the quality and supply of such commodities for purposes of the Company’s short-term and long-term requirements.

      The principal ingredients in the products produced by the Company in the United States include corn grits, oats, rice, cocoa, soybeans and soybean derivatives, various fruits, sweeteners, wheat, and wheat derivatives. These commodities are purchased principally from sources in the United States. In producing convenience foods products, the Company may use flour, shortening, sweeteners, dairy products, eggs, fruit, chocolate, and other filling ingredients, which ingredients are obtained from various sources.

      The Company both enters into long-term contracts for the commodities described in this section and purchases these items on the open market, depending on the Company’s view of possible price fluctuations, supply levels, and the Company’s relative negotiating power. While the cost of these commodities may increase over time, the Company believes that it will be able to purchase an adequate supply of these items as needed. The Company also uses commodity futures and options to hedge some of its costs.

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      Raw materials and packaging needed for internationally based operations are available in adequate supply and are sometimes imported from countries other than those where used in manufacture.

      Cereal processing ovens at major domestic and international facilities are regularly fueled by natural gas or propane, commodities obtained from local utilities or other local suppliers. Short-term standby propane storage exists at several plants for use in the event of interruption in natural gas supplies. Oil may also be used to fuel certain operations at various plants in the event of natural gas shortages or when its use presents economic advantages. In addition, considerable amounts of diesel fuel are used in connection with the distribution of the Company’s products.

      Trademarks and Technology. Generally, the Company’s products are marketed under trademarks it owns. The Company’s principal trademarks are its housemarks, brand names, slogans, and designs related to cereals and convenience foods manufactured and marketed by the Company as well as licensed uses of these marks on various goods. These trademarks include Kellogg’s for cereals and convenience foods and other products of the Company, and the brand names of certain ready-to-eat cereals, including All-Bran, Apple Jacks, Bran Buds, Complete Bran Flakes, Complete Wheat Flakes, Cocoa Rice Krispies, Choco Krispies, Common Sense, Corn Pops, Cruncheroos, Kellogg’s Corn Flakes, Cracklin’ Oat Bran, Crispix, Froot Loops, Kellogg’s Frosted Flakes, Frosted Mini-Wheats, Just Right, Kellogg’s Low Fat Granola, Nut & Honey Crunch, Nut & Honey Crunch O’s, Mueslix, Nutri-Grain, Product 19, Two Scoops Raisin Bran, Rice Krispies, Raisin Bran Crunch, Smacks, Smart Start, Special K, Special K Red Berries, and Kellogg’s Honey Crunch Corn Flakes in the United States and elsewhere; Zucaritas, Choco Zucaritas, Sucrilhos, Sucrilhos Chocolate, Sucrilhos Banana, Vector, Musli, and Choco Krispis for cereals in Latin America; Vive in Canada; Choco Pops, Chocos, Frosties, Muslix, Fruit ’n’ Fibre, Kellogg’s Crunchy Nut Corn Flakes, Kellogg’s Crunchy Nut Red Corn Flakes, Honey Nut Loops, Kellogg’s Extra, Sustain, Mueslix, Country Store, Ricicles, Smacks, Start, Smacks Choco Tresor, Pops, and Optima for cereals in Europe; and Cerola, Sultana Bran, Supercharged, Chex, Frosties, Goldies, Rice Bubbles, Kellogg’s Iron Man Food, and Bebig for cereals in Asia and Australia. Additional Company trademarks are the names of certain combinations of Kellogg’s ready-to-eat cereals, including Handi-Pak, Snack-Pak, Snack-A-Longs, Fun Pak, Jumbo, and Variety Pak. Other Company brand names include Kellogg’s Corn Flake Crumbs; Croutettes for herb season stuffing mix; Kuadri Krispies, Zucaritas, Special K, and Crusli for cereal bars, Keloketas for cookies and Kaos for snacks in Mexico; Pop-Tarts Pastry Swirls for toaster danish; Pop-Tarts and Pop-Tarts Snak-Stix for toaster pastries; Eggo, Special K, Waf-fulls, and Nutri-Grain for frozen waffles and pancakes; Toaster Muffin Delights for toaster muffins; Rice Krispies Treats for baked snacks and convenience foods; Nutri-Grain and Nutri-Grain Twists for convenience foods in the United States and elsewhere; K-Time, Rice Bubbles, Day Dawn, Be Natural, Sunibrite and LCMs for convenience foods in Asia and Australia; Komplete for biscuits; Nutri-Grain Squares, Nutri-Grain Elevenses, and Rice Krispies Squares for convenience foods in Europe; Winders for fruit snacks in the United Kingdom; Kellogg’s Krave for refueling snack bars; Kashi for certain cereals, nutrition bars, and mixes; Vector for meal replacement products; and Morningstar Farms, Loma Linda, Natural Touch, and Worthington for certain meat and dairy alternatives.

      The Company also markets convenience foods under trademarks and tradenames which include Keebler, Cheez-It, E. L. Fudge, Murray, Famous Amos, Austin, Ready Crust, Chips Deluxe, Club, Fudge Shoppe, Hi-Ho, Hydrox, Sunshine, Munch’Ems, Sandies, Soft Batch, Toasteds, Town House, Vienna Fingers, Wheatables, and Zesta. A subsidiary of the Keebler Foods subsidiary is also the exclusive licensee of the Carr’s brand name in the United States.

      Company trademarks also include logos and depictions of certain animated characters in conjunction with the Company’s products, including Snap!Crackle!Pop! for Rice Krispies cereals and Rice Krispies Treats convenience foods; Tony the Tiger for Kellogg’s Frosted Flakes, Zucaritas, Sucrilhos and Frosties cereals and convenience foods; Ernie Elf for cookies; the Hollow Tree logo for certain convenience foods; Toucan Sam for Froot Loops; Dig ’Em for Smacks; Coco Monkey for Cocoa Krispies; Cornelius for Kellogg’s Corn Flakes; Melvin the elephant for certain cereal and convenience foods; Chocos the Bear and Kobi the Bear for certain cereal products and Eet & Ern for an internet-based consumer promotional program.

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      The slogans The Best To You Each Morning, The Original and Best, They’re Gr-r-reat!, and Eat it For Breakfast, Eat it For Life, used in connection with the Company’s ready-to-eat cereals, along with L’ Eggo my Eggo, used in connection with the Company’s frozen waffles and pancakes, and Elfin Magic used by the Keebler Foods subsidiary in connection with convenience food products are also important Company trademarks.

      The trademarks listed above, among others, when taken as a whole, are important to the Company’s business. Certain individual trademarks are also important to the Company’s business. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use.

      The Company considers that, taken as a whole, the rights under its various patents, which expire from time to time, are a valuable asset, but the Company does not believe that its businesses are materially dependent on any single patent or group of related patents. The Company’s activities under licenses or other franchises or concessions which it holds are not believed to be material.

      Seasonality. Demand for the Company’s products has generally been approximately level throughout the year, although some of the Company’s private label convenience foods generally have stronger demand in the first quarter and the Company’s other convenience foods have a bias for stronger demand in the second half of the year.

      Working Capital. Although terms vary around the world, in the United States the Company generally has required payment for goods sold 11 days subsequent to the date of invoice, generally with a 2% or 1% discount allowed for payment within ten days. Receipts from goods sold, supplemented as required by borrowings, provide for the Company’s payment of dividends, capital expansion, and for other operating expenses and working capital needs.

      Customers. Historically, the Company has not been dependent on any single customer or a few customers for a material part of its sales. However, the Company’s largest customer, Wal-Mart Stores, Inc. and its subsidiaries, accounted for approximately 11% of consolidated net sales during 2001, comprised principally of sales within the United States. Correspondingly, at December 31, 2001, approximately 7% of the Company’s consolidated receivables balance and 11% of the Company’s U.S. receivables balance was comprised of amounts owed by Wal-Mart Stores, Inc. and its subsidiaries. During 2001, the Company’s top five customers, collectively, accounted for approximately 18% of both the Company’s consolidated and U.S. net sales. There has been significant worldwide consolidation in the grocery industry in recent years and the Company believes that this trend is likely to continue. Although the loss of any large customer for an extended length of time could negatively impact the Company’s sales and profits, the Company does not anticipate that this will occur to a significant extent due to the consumer demand for the Company’s products and the Company’s relationships with its customers. Products of the Company have been generally sold through its own sales forces and through broker and distributor arrangements and have been generally resold to consumers in retail stores, restaurants, and other food service establishments.

      Backlog. For the most part, orders are filled within a few days of receipt and are subject to cancellation at any time prior to shipment. The backlog of any unfilled orders at December 31, 2001, and December 31, 2000, was not material to the Company.

      Competition. The Company has experienced, and expects to continue to experience, intense competition for sales of all of its principal products in its major product categories, both domestically and internationally. The Company’s products compete with advertised and branded products of a similar nature as well as unadvertised and private label products, which are typically distributed at lower prices, and generally with other food products with different characteristics. Principal methods and factors of competition include new product introductions, product quality, composition and nutritional value, price, advertising, and promotion.

      Research and Development. Research to support and expand the use of the Company’s existing products and to develop new food products is carried on at the W.K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, and at other locations around the world. The Company’s expenditures for research

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and development were approximately $110.2 million in 2001, $118.4 million in 2000, and $104.1 million in 1999.

      Regulation. The Company’s activities are subject to regulation by various government agencies, including the Food and Drug Administration, Department of Agriculture, Federal Trade Commission, and Department of Commerce in the United States, and various state and local agencies, as well as similar agencies outside of the United States.

      Environmental Matters. The Company’s facilities are subject to various foreign, federal, state, and local laws and regulations regarding the discharge of material into the environment and the protection of the environment in other ways. The Company is not a party to any material proceedings arising under these regulations. The Company believes that compliance with existing environmental laws and regulations will not materially affect the consolidated financial condition or the competitive position of the Company. The Company is currently in substantial compliance with all material environmental regulations affecting the Company and its properties.

      Employees. At December 31, 2001, the Company had approximately 26,424 employees.

      Financial Information About Geographic Areas. The information called for by this Item is incorporated herein by reference from Note 14 to the Consolidated Financial Statements on page 42 of the Company’s Annual Report.

      Forward-Looking Statements. This Report contains, or incorporates by reference, “forward-looking statements” with projections concerning, among other things, the Company’s strategy and plans; integration activities, costs and savings related to the Keebler acquisition; cash outlays and savings related to restructuring actions; the impact of accounting changes; our ability to meet interest and debt principal repayment obligations; effective income tax rate; amortization expense; cash flow; property addition expenditures; and interest expense. Forward-looking statements include predictions of future results or activities and may contain the words “expect,” “believe,” “will,” “will deliver,” “anticipate,” “project,” “should,” or words or phrases of similar meaning. For example, forward-looking statements are found in this Item 1 and in several sections of Management’s Discussion and Analysis incorporated by reference. The Company’s actual results or activities may differ materially from these predictions. In particular, future results or activities could be affected by factors related to the Keebler acquisition, including integration problems, failures to achieve synergies, unanticipated liabilities, and the substantial amount of indebtedness incurred to finance the acquisition, which could, among other things, hinder the Company’s ability to adjust rapidly to changing market conditions, make the Company more vulnerable in the event of a downturn, and place the Company at a competitive disadvantage in relation to less-leveraged competitors. The Company’s future results could be affected by a variety of other factors, including competitive conditions in our markets and categories and their impact; pricing and promotional and marketing spending levels and/or incremental pricing actions by the Company or others and their effect on actual volumes and product mix; the effectiveness of advertising and marketing spending or programs; the success of new product introductions; the levels of spending on system initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs; the availability of and interest rates on short-term financing; changes in consumer preferences; commodity price and labor cost fluctuations; expenditures necessary to carry out restructuring initiatives and savings derived therefrom; U.S. and foreign economic conditions, including foreign currency exchange rate fluctuations; changes in statutory tax and other laws; business disruption from terrorist acts or a nation’s response to them; U.S. and foreign regulations; and other items. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

Item 2. Properties

      The Company’s corporate headquarters and principal research and development facilities are located in Battle Creek, Michigan.

      The Company operated, as of December 31, 2001, manufacturing plants and warehouses totaling more than 17 million (17,000,000) square feet of building area in the United States and other countries. The

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Company’s plants have been designed and constructed to meet its specific production requirements, and the Company periodically invests money for capital and technological improvements. At the time of its selection, each location was considered to be favorable, based on the location of markets, sources of raw materials, availability of suitable labor, transportation facilities, location of other Company plants producing similar products, and other factors. Manufacturing facilities of the Company in the United States include four cereal plants and warehouses located in Battle Creek, Michigan; Lancaster, Pennsylvania; Memphis, Tennessee; and Omaha, Nebraska. The Company’s United States convenience foods plants are located in San Jose, California; Athens, Atlanta, Augusta, Columbus, Macon, and Rome, Georgia; Chicago and Des Plaines, Illinois; Kansas City, Kansas; Florence, Louisville, and Pikeville, Kentucky; Grand Rapids, Michigan; Blue Anchor, New Jersey; Cary and Charlotte, North Carolina; Cincinnati, Fremont, Worthington, and Zanesville, Ohio; Marietta, Oklahoma; Muncy, Pennsylvania; and Cleveland and Rossville, Tennessee.

      Outside the United States, the Company had, as of December 31, 2001, additional manufacturing locations, some with warehousing facilities, in Argentina, Australia, Brazil, Canada, China, Colombia, Ecuador, Germany, Great Britain, Guatemala, India, Japan, Mexico, South Africa, South Korea, Spain, Thailand, and Venezuela.

      The principal properties of the Company, including its major office facilities, generally are owned by the Company, although some manufacturing facilities are leased, and no owned property is subject to any major lien or other encumbrance. Distribution facilities and offices of non-plant locations typically are leased. In general, the Company considers its facilities, taken as a whole, to be suitable, adequate, and of sufficient capacity for its current operations.

Item 3. Legal Proceedings

      The Company is not a party to any pending legal proceedings which could reasonably be expected to have a material adverse effect on the Company on a consolidated basis, nor are any of the Company’s properties or subsidiaries subject to any such proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

      Not applicable.

Item 4A. Executive Officers of the Registrant

      The names, ages as of February 28, 2002, and positions of the executive officers of the Company are listed below together with their business experience. Executive officers are generally elected annually by the Board of Directors at the meeting immediately prior to the Annual Meeting of Share Owners.

Carlos M. Gutierrez

Chairman of the Board, President and Chief Executive Officer 48

      Mr. Gutierrez has been Chairman of the Board since April 2000, and President and Chief Executive Officer since April 1999. Mr. Gutierrez joined Kellogg de Mexico in 1975. He was appointed Executive Vice President and President, Kellogg Asia-Pacific in 1994, and Executive Vice President — Business Development in 1996. In 1998, Mr. Gutierrez was named President and Chief Operating Officer.

Sam K. Reed

Vice Chairman 55

      Mr. Reed has been Vice Chairman of the Company’s Board of Directors since March 2001. Mr. Reed previously was the President and Chief Executive Officer and a Director of Keebler Foods Company since January 1996. Mr. Reed has 27 years of experience in the snack and baking industries.

A. D. David Mackay

Executive Vice President and President, Kellogg USA 46

      Mr. Mackay joined Kellogg Australia in 1985 and held several positions with Kellogg USA and Kellogg Australia and New Zealand before leaving Kellogg in 1992. He rejoined Kellogg Australia in 1998 as managing director and was appointed managing director of Kellogg United Kingdom and Republic of Ireland

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late in 1998. He was named Senior Vice President and President, Kellogg USA in July 2000 and Executive Vice President in November 2000.

Alan F. Harris

Executive Vice President and President, Kellogg International 47

      Mr. Harris joined Kellogg Company of Great Britain Limited in 1984. In 1994, he was promoted to Executive Vice President — Marketing and Sales, Kellogg USA. Mr. Harris was promoted to Executive Vice President and President, Kellogg Latin America in 1997. He was appointed Executive Vice President and President, Kellogg Europe in March 1999 and was named to his current position in October 2000.

Janet Langford Kelly

Executive Vice President — Corporate Development and Administration, General Counsel

and Secretary 44

      Ms. Kelly joined Kellogg Company as Executive Vice President — Corporate Development, General Counsel and Secretary in September 1999, and became Executive Vice President — Corporate Development and Administration, General Counsel and Secretary in April 2001. Prior to joining Kellogg Company, Ms. Kelly served as Senior Vice President, Secretary and General Counsel for Sara Lee Corporation. Before joining Sara Lee, Ms. Kelly was a partner at the law firm of Sidley & Austin.

King T. Pouw

Executive Vice President — Operations and Technology 50

      Mr. Pouw joined the Company in 1978. In 1995, he was appointed Director, Operations and Technology, Latin America and, in 1998, he was appointed Vice President, Global Supply Chain, Operations Effectiveness. In March 1999, he was promoted to Supply Chain Director, Europe and later to Vice President, Supply Chain, Europe. He was appointed Senior Vice President — Operations in November 2000 and was appointed to his current position in December 2001.

John A. Bryant

Senior Vice President and Chief Financial Officer 36

      Mr. Bryant joined Kellogg Company in March 1998, working in support of the global strategic planning process. He later served as Vice President — Kellogg North America Strategy Development/ Business Understanding and, in October 1998, was named Vice President — Financial Planning, Cereal. In 2000, Mr. Bryant also served as Vice President, Trade Marketing and as a member of the sales leadership team for Kellogg USA. He was appointed Senior Vice President and Chief Financial Officer, Kellogg USA, in August 2000 and was appointed to his current position in February 2002. Before joining Kellogg Company, Mr. Bryant held a leadership position with Lion Nathan Australia, Australia’s largest beverages company, where he was Planning Director from 1997 to 1998.

Jeffrey M. Boromisa

Vice President, Corporate Controller 46

      Mr. Boromisa joined Kellogg Company in 1981 as a senior auditor. He served in various financial positions until he was named Vice President — Purchasing of Kellogg North America in 1997. In November 1999, Mr. Boromisa was promoted to Vice President and Corporate Controller of Kellogg Company.

PART II

Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters

      The information called for by this Item is set forth on page 41 of the Company’s Annual Report in Note 13 to the Consolidated Financial Statements of the Company, which is incorporated by reference into Item 8 of this Report.

Item 6. Selected Financial Data

      The information called for by this Item is incorporated herein by reference from the chart entitled “Selected Financial Data” on page 26 of the Company’s Annual Report. Such information should be read in

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conjunction with the Consolidated Financial Statements of the Company and Notes thereto included in Item 8 of this Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The information called for by this Item is incorporated herein by reference from pages 17 through 45 of the Company’s Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

      The information called for by this Item is incorporated herein by reference from pages 44 and 45 of the Company’s Annual Report.

Item 8. Financial Statements and Supplementary Data

      The information called for by this Item is incorporated herein by reference from pages 27 through 45 of the Company’s Annual Report. Supplementary quarterly financial data, also incorporated herein by reference, is set forth in Note 13 to the Consolidated Financial Statements on page 41 of the Company’s Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

PART III

Item 10. Directors and Executive Officers of the Registrant

      Directors — Refer to the information in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission for the Annual Meeting of Share Owners to be held on April 26, 2002 (the “Proxy Statement”), under the caption “Election of Directors,” which information is incorporated herein by reference.

      Executive Officers of the Registrant — Refer to “Executive Officers of the Registrant” under Item 4A at pages 6 and 7 of this Report.

      For information concerning Section 16(a) of the Securities Exchange Act of 1934, refer to the information under the caption “Security Ownership — Section 16(a) Beneficial Ownership Reporting Compliance” of the Proxy Statement, which information is incorporated herein by reference.

Item 11. Executive Compensation

      Refer to the information under the captions “Executive Compensation” and “About the Board of Directors — Non-Employee Director Compensation and Benefits” of the Proxy Statement, which is incorporated herein by reference. See also the information under the caption “Report of the Compensation Committee on Executive Compensation” of the Proxy Statement, which information is not incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      Refer to the information under the captions “Security Ownership — Five Percent Holders” and “Security Ownership — Officer and Director Stock Ownership” of the Proxy Statement, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

      None.

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PART IV

Item 14. Exhibits, Consolidated Financial Statements and Schedules, and Reports on Form 8-K

      The following Consolidated Financial Statements and related Notes, together with the Report thereon of PricewaterhouseCoopers LLP dated January 25, 2002, appearing on pages 27 through 45 of the Company’s Annual Report to Share Owners for the fiscal year ended December 31, 2001, are incorporated herein by reference:

      (a)1. Consolidated Financial Statements

      Consolidated Statement of Earnings for the years ended December 31, 2001, 2000, and 1999.

      Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2001, 2000, and 1999.

      Consolidated Balance Sheet at December 31, 2001 and 2000.

      Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000, and 1999.

      Notes to Consolidated Financial Statements.

      (a)2. Consolidated Financial Statement Schedule

      The Financial Schedule and related Report of Independent Accountants filed as part of this Report are as follows:

	Page
Schedule II — Valuation Reserves		10
Report of Independent Accountants		11

      This Consolidated Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report to Share Owners for the fiscal year ended December 31, 2001.

      All other financial statement schedules are omitted because they are not applicable.

      (a)3. Exhibits required to be filed by Item 601 of Regulation S-K

      The information called for by this Item is incorporated herein by reference from the Exhibit Index on pages 14 through 16 of this Report.

      (b) Reports on Form 8-K

      None

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Schedule II — Valuation Reserves (in millions)

		2001			2000			1999
Accounts Receivable — Allowance for Doubtful Accounts:
	Balance at January 1	$	8.6		$	8.6		$	12.9
	Acquisition adjustment		5.9			—			—
	Additions charged to expense		4.1			1.8			0.6
	Doubtful accounts charged to reserve		(2.8	)		(1.5	)		(4.2	)
	Currency translation adjustments		(0.3	)		(0.3	)		(0.7	)
	Balance at December 31	$	15.5		$	8.6		$	8.6
Deferred Income Tax Asset Valuation Allowance:
	Balance at January 1	$	36.1		$	61.8		$	68.6
	Additions charged to income tax expense		5.2			3.3			15.6
	Deductions credited to income tax expense		(4.6	)		(29.0	)		(22.4	)
	Balance at December 31	$	36.7		$	36.1		$	61.8

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Report of Independent Accountants on Financial Statement Schedules

To the Board of Directors

of Kellogg Company

      Our audits of the consolidated financial statements referred to in our report dated January 25, 2002, appearing in the 2001 Annual Report to Shareholders of Kellogg Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Battle Creek, Michigan

January 25, 2002

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 25th day of March 2002.

KELLOGG COMPANY

By:  /s/ CARLOS M. GUTIERREZ

Carlos M. Gutierrez

Chairman of the Board, President and

Chief Executive Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Capacity	Date
/s/ CARLOS M. GUTIERREZ Carlos M. Gutierrez	Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)		March 25, 2002
/s/ JOHN A. BRYANT John A. Bryant	Senior Vice President and Chief Financial Officer (Principal Financial Officer)		March 25, 2002
/s/ JEFFREY M. BOROMISA Jeffrey M. Boromisa	Vice President and Corporate Controller (Principal Accounting Officer)		March 25, 2002
* Benjamin S. Carson Sr.	Director
* John T. Dillon	Director
* Claudio X. Gonzalez	Director
* Gordon Gund	Director
* James M. Jenness	Director
* Dorothy A. Johnson	Director

12

Name	Capacity	Date
* L. Daniel Jorndt	Director
* Ann McLaughlin Korologos	Director
* William D. Perez	Director
* Sam K. Reed	Director
* William C. Richardson	Director
* John L. Zabriskie	Director
*By: /s/ JANET LANGFORD KELLY Janet Langford Kelly As Attorney-in-Fact			March 25, 2002

13

EXHIBIT INDEX

			Electronic(E),
			Paper(P) or
			Incorp. By
Exhibit No.		Description	Ref. (IBRF)
	2.01	Agreement and Plan of Restructuring and Merger dated as of October 26, 2000 between Flowers Industries, Inc., Kellogg Company and Kansas Merger Subsidiary, Inc., incorporated by reference to Exhibit 2.02 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000, Commission file number 1-4171.		IBRF
	2.02	Agreement and Plan of Merger dated as of October 26, 2000 between Keebler Foods Company, Kellogg Company and FK Acquisition Corporation, incorporated by reference to Exhibit 2.03 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000, Commission file number 1-4171.		IBRF
	3.01	Amended Restated Certificate of Incorporation of Kellogg Company, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8, file number 333-56536.		IBRF
	3.02	Bylaws of Kellogg Company, as amended, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8, file number 333-56536.		IBRF
	4.01	Fiscal Agency Agreement dated as of January 29, 1997, between the Company and Citibank, N.A., Fiscal Agent, incorporated by reference to Exhibit 4.01 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.		IBRF
	4.02	Form of 6 5/8% Note due 2004 related to the Fiscal Agency Agreement described in Exhibit 4.01 above, incorporated by reference to Exhibit 4.02 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.		IBRF
	4.03	Indenture dated August 1, 1993, between the Company and Harris Trust and Savings Bank, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3, Commission file number 33-49875.		IBRF
	4.04	Form of Kellogg Company 4 7/8% Note Due 2005, incorporated by reference to Exhibit 4.06 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, Commission file number 1-4171.		IBRF
	4.05	Indenture and Supplemental Indenture dated March 15 and March 29, 2001, respectively, between Kellogg Company and BNY Midwest Trust Company, including the forms of 5.50% note due 2003, 6.00% note due 2006, 6.60% note due 2011 and 7.45% Debenture due 2031, incorporated by reference to Exhibit 4.01 and 4.02 to the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2001, Commission file number 1-4171.		IBRF
	10.01	Kellogg Company Excess Benefit Retirement Plan, incorporated by reference to Exhibit 10.01 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1983, Commission file number 1-4171.*		IBRF
	10.02	Kellogg Company Supplemental Retirement Plan, incorporated by reference to Exhibit 10.05 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission file number 1-4171.*		IBRF

14

			Electronic(E),
			Paper(P) or
			Incorp. By
Exhibit No.		Description	Ref. (IBRF)
	10.03	Kellogg Company Supplemental Savings and Investment Plan, incorporated by reference to Exhibit 10.03 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission file number 1-4171.*		IBRF
	10.04	Kellogg Company International Retirement Plan, incorporated by reference to Exhibit 10.05 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.*		IBRF
	10.05	Kellogg Company Executive Survivor Income Plan, incorporated by reference to Exhibit 10.06 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1985, Commission file number 1-4171.*		IBRF
	10.06	Kellogg Company Key Executive Benefits Plan, incorporated by reference to Exhibit 10.09 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission file number 1-4171.*		IBRF
	10.07	Kellogg Company Key Employee Long Term Incentive Plan, incorporated by reference to Exhibit 10.08 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.*		IBRF
	10.08	Deferred Compensation Plan for Non-Employee Directors, incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission file number 1-4171.*		IBRF
	10.09	Kellogg Company Senior Executive Officer Performance Bonus Plan, incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission file number 1-4171.*		IBRF
	10.10	Kellogg Company 2000 Non-Employee Director Stock Plan, incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8, file number 333-56536.*		IBRF
	10.11	Kellogg Company 2001 Long-Term Incentive Plan, incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8, file number 333-56542.*		IBRF
	10.12	Kellogg Company Bonus Replacement Stock Option Plan, incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.*		IBRF
	10.13	Kellogg Company Executive Compensation Deferral Plan, incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission file number 1-4171.*		IBRF
	10.14	Agreement between the Company and Janet Langford Kelly dated August 30, 1999, incorporated by reference to Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 1999, Commission file number 1-4171.*		IBRF
	10.15	Agreement between the Company and Thomas Webb dated December 30, 1999, incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, Commission file number 1-4171.*		IBRF
	10.16	Agreement between the Company and Alan F. Harris, incorporated by reference to Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000, Commission file number 1-4171.*		IBRF

15

			Electronic(E),
			Paper(P) or
			Incorp. By
Exhibit No.		Description	Ref. (IBRF)
	10.17	Additional Agreement between the Company and Alan F. Harris, incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, Commission file number 1-4171.		IBRF
	10.18	Agreement between the Company and David Mackay, incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, Commission file number 1-4171.*		IBRF
	10.19	Agreement between the Company and Carlos M. Gutierrez, incorporated by reference to Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2000, Commission file number 1-4171.*		IBRF
	10.20	Agreement between the Company and Sam Reed, incorporated by reference to Exhibits 10.01 and 10.02 to the Company’s Quarterly Report in Form 10-Q for the quarter ended March 31, 2001, Commission file number 1-4171.*		IBRF
	10.21	Stock Option Agreement between the Company and James Jenness, incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8, file number 333-56536.*		IBRF
	10.22	Agreement between the Company and other executives, incorporated by reference to Exhibit 10.05 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, Commission file number 1-4171.*		IBRF
	10.23	Agreement between the Company and Michael Teale.*		E
	10.24	Kellogg Company 2002 Employee Stock Purchase Plan.*		E
	10.25	Kellogg Company Executive Stock Purchase Plan.*		E
	10.26	Kellogg Company Senior Executive Annual Incentive Plan.*		E
	13.01	Pages 17 through 45 of the Company’s Annual Report to Share Owners for the fiscal year ended December 31, 2001.		E
	21.01	Domestic and Foreign Subsidiaries of the Company.		E
	23.01	Consent of PricewaterhouseCoopers LLP.		E
	24.01	Powers of Attorney authorizing Janet Langford Kelly to execute the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, on behalf of the Board of Directors, and each of them.		E

*  A management contract or compensatory plan required to be filed with this Report.

      The Company agrees to furnish to the Securities and Exchange Commission, upon its request, a copy of any instrument defining the rights of holders of long-term debt of the Company and its Subsidiaries and any of its unconsolidated Subsidiaries for which Financial Statements are required to be filed.

      The Company will furnish any of its share owners a copy of any of the above Exhibits not included herein upon the written request of such share owner and the payment to the Company of the reasonable expenses incurred by the Company in furnishing such copy or copies.

16 EX-10.23 3 k67850ex10-23.txt AGREEMENT BETWEEN THE COMPANY AND MICHAEL TEALE EXHIBIT 10.23 SEVERANCE AGREEMENT (PRESENTED: MARCH 9, 2001) This Severance Agreement hereafter, (the "Agreement") is made and entered into as of March 31, 2001, by and between Kellogg Company, a Delaware corporation ("the Company") and Michael J. Teale, an individual ("Employee"). PURPOSE The purpose of this 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 MARCH 16, 2001. 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. Employee shall receive a lump sum severance payment in the amount of $834,000 (eight hundred thirty four thousand dollars) payable within 60 days of retirement. Commencing March 16, 2001 (or as soon as administratively possible), Employee shall begin receiving retirement benefits from the Kellogg Company tax qualified, Excess Benefit and Supplemental Retirement Plans, estimated today to be $373,000 (three hundred, seventy three thousand dollars) 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 has the right to request a lump sum payment option for any portion of his annual non-qualified pension benefits. Usual and customary withholding for tax purposes will be withheld from your lump sum severance 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 employer payroll taxes), will be Employee's responsibility. Employee agrees not to receive or make an election to receive any of the pension benefits he earned while working for the Company in the United Kingdom. The Employee also agrees to sign any documents presented by the U.K. pension plan trustees transferring benefits from the U.K. pension plan to the U.S. plan. Further, if the Page 1 of 7 Employee does, at a future date, elect to receive pension benefits from the U.K. pension plan, the value of those benefits will be deducted from future pension payments to the extent permitted by law or from other payments from Company benefit plans, including the Executive Survivor Income Plan. B. Employee shall also receive a prorated bonus in the amount of $67,800 [sixty seven, thousand eight hundred dollars), payable within 60 days of his retirement date for performance year 2001, C. Within sixty (60) days of the last day worked (i.e., March 16, 2001), 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. 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 and the 2001 Long-Term Incentive Plan and will be administered in accordance with and be subject to the respective provisions of those Plans and Option Agreements, and shall continue for such period of time as provided by such Plans and Option Agreements upon Employee's retirement. The ability to utilize the accelerated ownership feature of the Plans shall continue through March 16, 2001. 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 at $2,271,000 (two million, two hundred, seventy one thousand dollars). F. Employee hereby irrevocably elects to retire March 16, 2001 and shall be eligible for pension benefits through Kellogg Company Salaried Pension Plan, the Kellogg Company Excess Benefit or Supplemental Retirement Plan [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. At the time Employee elects to begin receiving such benefits, he should contact the Employee Benefits Department of the Company. G. 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 to the extent provided in such plans, upon Employee's retirement. Page 2 of 7 H. Company will pay for financial planning and/or tax advice provided to Employee, up to $10,000 (ten thousand dollars) for the 2001 tax year. I. In further consideration of the foregoing, Employee agrees that, for the respective Restricted Periods (as hereafter 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 J. As a result of the lump sum payments, 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. K. 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, Page 3 of 7 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. L. 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. M. 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, attorney's fees incurred as a result of such cooperation. Nothing herein shall prevent Employee from communicating with or participating in any government investigation. N. Employee has carefully read this Severance Agreement and understands its contents. Employee recognizes that he will have no further job responsibilities at Kellogg Company. O. Employee has been advised to seek legal council to understand its full force and effect. Employee has been given the opportunity to consult with a lawyer. P. 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 "Releases") 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-Larson 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 Page 4 of 7 Reemployment Rights Act of 1964, ERISA, Americans and 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 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 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. Q. Employee accepts the terms and conditions of the Agreement knowingly and voluntarily. R. 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. S. 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 Page 5 of 7 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. T. Employee understands and agrees that signing this 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. U. 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. V. Employee signs this 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. W. 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. X. Employee understands that this 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 adhered and/or modified by this Severance Agreement. Y. Employee also understands that the Company is not obligated to offer employment to him now or in the future. Z. Employee understands that the Nondisclosure Confidentiality Agreement that he signed shall remain in full force and effect indefinitely. AA. 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. BB. Employee agrees that if any provision of this Severance Agreement is invalid or unenforceable by a court of law, it will not effect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. Page 6 of 7 CC. 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. DD. For purposes of any construction or interpretation of this Severance Agreement, all terms and provisions thereof shall be deemed to have been mutually drafted by both of the parties. EE. Employee acknowledges and agrees that this is the entire 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. By: /s/ Carlos M. Gutierrez /s/ Michael J. Teale ------------------------------ -------------------------------- Carlos M. Gutierrez Michael J. Teale Chairman of the Board, President and Chief Executive Officer March 16, 2001 December 6th 2001 - ------------------ -------------------- Date Date Page 7 of 7 EX-10.24 4 k67850ex10-24.txt 2002 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.24 KELLOGG COMPANY 2002 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. Kellogg Company (the "Company") has established this Kellogg Company 2002 Employee Stock Purchase Plan (the "Plan") to encourage and enable its eligible employees and the eligible employees of its Subsidiaries to acquire the Company's Common Stock, and to align more closely the interests of those individuals and the Company's share owners. The Company intends that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. 2. Definitions. Unless the context clearly indicates otherwise, for purposes of the Plan, the following terms shall have the following meanings: (a) "Board" means the Board of Directors of Kellogg Company, as constituted from time to time. (b) "Beneficiary" means (i) the person designated by the Participant to receive benefits under a Company-sponsored and Company-paid life insurance program, if any, or (ii) the Participant's estate. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Compensation Committee of the Board. (e) "Common Stock" means the Common Stock, par value $0.25 per share, of the Company or any security of the Company issued by the Company in substitution or exchange therefor. (f) "Company" means Kellogg Company, a Delaware corporation, or any successor corporation to Kellogg Company. (g) "Compensation" means with respect to a Participant, the portion of the Participant's base salary, commissions or wages paid to the Participant during the applicable payroll period. (h) "Custodian" means the individual or organization appointed by the Plan Administrator to maintain custody of Participants' payroll deductions, purchase Common Stock under the Plan, and allocate Common Stock among Participants. (i) "Designated Subsidiary" means any Subsidiary that the Board has designated from time to time, in its sole discretion, as eligible to participate in the Plan. (j) "Disability" means disability as determined by the Committee in accordance with standards and procedures similar to those under the long-term disability plan of the Company or Designated Subsidiary, if any, or if the Participant is then a party to an effective employment agreement with the Company or Designated Subsidiary that defines disability, "Disability" means disability as defined in the Participant's then effective employment agreement. Subject to the first sentence of this paragraph, at any time that the Company or Designated Subsidiary does not maintain a long-term disability plan, "Disability" shall mean any physical or mental disability that is determined to be total and permanent by a physician selected in good faith by the Company or Designated Subsidiary. (k) "Effective Date" means July 1, 2002. (l) "Eligible Employee" means each Employee of the Company or a Designated Subsidiary. Notwithstanding the foregoing, any Employee who is covered by a collective bargaining agreement and whose decision not to participate in the Plan was the subject of good faith negotiations between the Company or a Designated Subsidiary and a labor organization will not be eligible to participate in the Plan, unless the decision not to participate in the Plan is revoked by the labor organization upon reasonable notice to the Company. (m) "Employee" means each and every person employed by the Company or a Designated Subsidiary, and whom the Company or Designated Subsidiary classifies as a common law employee; provided that, only individuals who are paid as common law employees from the payroll of the Company or a Designated Subsidiary shall be deemed to be Employees for purposes of the Plan. For purposes of this definition of Employee, and notwithstanding any other provisions of the Plan to the contrary, individuals who are not classified by the Company or by a Designated Subsidiary, in its discretion, as employees under Code Section 3121(d) (including, but not limited to, individuals classified by the Company or a Designated Subsidiary as independent contractors and non-employee consultants) and individuals who are classified by the Company or by a Designated Subsidiary, in its discretion, as employees of any entity other than the Company or a Designated Subsidiary, do not meet the definition of Employee and are ineligible for benefits under the Plan, even if the classification by the Company or Designated Subsidiary is later determined to be erroneous, or is retroactively revised. In the event the classification of an individual who is excluded from the definition of Employee under the preceding sentence is determined to be erroneous or is retroactively revised, the individual shall nonetheless continue to be excluded from the definition of Employee and shall be ineligible for benefits for all periods prior to the date the Company or Designated Subsidiary determines its classification of the individual is erroneous or should be revised. (n) "Exchange Act" means the Securities Exchange Act of 1934, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto. -2- (o) "Fair Market Value" means, with respect to any date, the closing price per share on the New York Stock Exchange Composite Transactions Tape on such date, provided that if there shall be no sales of shares reported on such date, the Fair Market Value of a share on such date shall be deemed to be equal to the closing price per share on such Composite Tape for the last preceding date on which sales of shares were reported. (p) "Offering Date" means the first day of a Purchase Period, each January 1, April 1, July 1 and October 1. (q) "Option" means an option to purchase shares of Common Stock under the Plan, pursuant to the terms and conditions thereof. (r) "Participant" means an Eligible Employee who is participating in the Plan pursuant to Section 4. (s) "Plan" means the Kellogg Company 2002 Employee Stock Purchase Plan, as set forth herein, as in effect, and as amended from time to time (together with any rules and regulations promulgated by the Committee with respect thereto). (t) "Plan Account" means an account maintained by the Plan Administrator for each Participant to which the Participant's payroll deductions are credited, against which funds used to purchase shares of Common Stock are charged, and to which shares of Common Stock purchased are credited. (u) "Plan Administrator" means such other person or persons, including a committee, as the Committee may appoint to administer the Plan. (v) "Purchase Date" means, except as provided in Sections 13 and 18, the last day of a Purchase Period, each March 31, June 30, September 30 and December 31. (w) "Purchase Period" means each calendar quarter. (x) "Purchase Price" means, with respect to each Purchase Period, the lesser of 85% of the Fair Market Value of Common Stock on the Offering Date, and 85% of the Fair Market Value of a share of Common Stock on the Purchase Date. (y) "Retirement" means the voluntary retirement by the Participant from active employment with the Company and its Designated Subsidiaries on or after the attainment of early or normal retirement age under the pension or retirement plan sponsored by the Company or Designated Subsidiary in which he or she participates, or any other age with the consent of the Company or Designated Subsidiary. -3- (z) "Subsidiary" means any corporation, domestic or foreign, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Notwithstanding the foregoing, the term "Subsidiary" shall include a limited liability company that is disregarded as an entity separate from a Subsidiary. 3. Stock Subject to the Plan. Subject to Section 14, the aggregate number of shares of Common Stock that may be sold under the Plan is 2,500,000. Shares of Common Stock to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by the Company (in the open-market or in private transactions) and that are being held as treasury shares, or a combination thereof. 4. Participation in the Plan. Each Eligible Employee may participate in the Plan effective as of any Offering Date, by completing and delivering a payroll deduction authorization to the Plan Administrator at least 20 days in advance of the applicable Offering Date in the manner specified by the Plan Administrator. The Offering Date as of which an Eligible Employee commences or recommences participation in the Plan, and each Offering Date as of which an Eligible Employee renews his or her authorization under paragraph (a), is an Offering Date with respect to that Eligible Employee. A Participant's payroll deductions under the Plan shall commence on his or her initial Offering Date, and shall continue, subject to paragraph (a), until the Eligible Employee terminates participation in the Plan, is no longer an Eligible Employee, or the Plan is terminated. (a) A Participant's payroll deduction authorization shall be automatically renewed effective on the Offering Date following the conclusion of his or her initial Purchase Period and each subsequent Purchase Period, unless the Participant otherwise notifies the Plan Administrator in the manner specified by the Plan Administrator at least 20 days in advance of such date. (b) Notwithstanding the foregoing, an Eligible Employee shall not be granted an Option on any Offering Date if such Eligible Employee, immediately after the Option is granted, owns stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. For purposes of this paragraph (b), the rules of Code Section 424(d) shall apply in determining the stock ownership of an individual, and stock that an Eligible Employee may purchase under outstanding options shall be treated as stock owned by the Eligible Employee. (c) Notwithstanding the foregoing, an Eligible Employee shall not be permitted to elect participation in the Plan for the next two full Purchase Periods immediately following his or her sale, transfer (including transfer to a different brokerage account or withdrawal from the Participant's Plan Account), or other disposition of Common Stock that was acquired within one year of the Purchase Date applicable to that Common Stock. -4- 5. Payroll Deductions. An Eligible Employee may participate in the Plan only through payroll deductions. After-tax payroll deductions shall be made from the Compensation paid to each Participant for each Purchase Period in such whole percentage from 1% to 10% as the Participant shall authorize in his or her election form. No Eligible Employee may be granted an Option that permits his or her rights to purchase Common Stock under the Plan, and any other stock purchase plan of the Company or any Subsidiary that is qualified under Code Section 423, to accrue at a rate that exceeds $25,000 of Fair Market Value of such stock (determined on the Offering Date of such Option) for each calendar year of the Company in which the Option is outstanding at any time. 6. Changes in Payroll Deductions. A Participant may not increase or decrease the amount of his or her payroll deductions during a Purchase Period. A Participant may change his or her payroll deductions effective as of a subsequent Purchase Period by notifying the Plan Administrator in the manner specified by the Plan Administrator at least 20 days in advance of the next Offering Date. 7. Termination of Participation in Plan. (a) A Participant may, for any reason and at any time prior to each Purchase Date, voluntarily terminate participation in the Plan by notifying the appropriate payroll office in the time and manner specified by the Plan Administrator. Such Participant's payroll deductions under the Plan shall cease as soon as practicable following delivery of such notice. If the former Participant remains employed by the Company or any Designated Subsidiary after termination of his or her participation in the Plan, any payroll deductions credited to such Participant's Plan Account may be used to purchase shares of Common Stock on the next Purchase Date or refunded, without interest, to the Participant, at the election of the Participant. An Eligible Employee whose participation in the Plan is terminated may rejoin the Plan no earlier than the beginning of the Purchase Period next following his or her withdrawal, by delivering a new payroll deduction authorization in accordance with Section 4. (b) A Participant's participation in the Plan shall terminate upon termination of his or her employment with the Company and its Designated Subsidiaries, or termination of status as an Eligible Employee, for any reason. If a former Participant is no longer employed by the Company or any Designated Subsidiary, any payroll deductions credited to his or her Plan Account shall be paid to the former Participant in cash, without interest, as soon as practicable following his or her termination of employment. If the Company or a Designated Subsidiary terminated the Participant's employment without cause (as determined in good faith by the Company or Designated Subsidiary), the Participant's termination was due to death, Disability or Retirement, or the former Participant remains employed by the Company or any Designated Subsidiary after termination of his or her participation in the Plan, any payroll deductions credited to such Participant's Plan Account may be used to purchase shares of Common Stock on the next Purchase Date or refunded, without interest, to the Participant, at the election of the Participant (or, in the event of the Participant's death or Disability, the Participant's Beneficiary). -5- 8. Purchase of Shares. (a) On each Offering Date, each Participant shall be deemed to have been granted an Option. In no event will a Participant be deemed to have been granted more than one Option during any Purchase Period. (b) On the Purchase Date of a Purchase Period, each Participant shall be deemed, without any further action, to have purchased that number of whole and fractional shares of Common Stock determined by dividing the balance in the Participant's Plan Account on the Purchase Date by the Purchase Price. (Fractional shares will be calculated to the third decimal place.) Any amount remaining in the Participant's Plan Account shall be carried forward to the next Purchase Date unless the Plan Account is closed. Except as provided in Sections 13 and 18, in no event may a Participant purchase shares of Common Stock prior to the Purchase Date of a Purchase Period. (c) As soon as practicable after each Purchase Date, a statement shall be delivered to each Participant that shall include the number of shares of Common Stock purchased on the Purchase Date on behalf of such Participant under the Plan. (d) As of the Purchase Date of each Purchase Period, the Common Stock purchased by each Participant shall be considered to be issued and outstanding to his or her credit as a bookkeeping entry maintained by the Custodian in the Participant's Plan Account. Subject to the restrictions of Section 4(c) above, a stock certificate for shares of Common Stock credited to a Participant's Plan Account shall be issued upon request of the Participant at any time. Stock certificates under the Plan shall be issued, at the election of the Participant, in the Participant's name or in his or her name and the name of another person as joint tenants with right of survivorship or as tenants in common. A cash payment shall be made for any fraction of a share in such Plan Account, if necessary to close the Plan Account. 9. Rights as a Share Owner. A Participant shall not be treated as the owner of Common Stock until the Purchase Date of such stock under the Plan. As of the Purchase Date a Participant shall be treated as the record owner of his or her shares purchased on such date pursuant to the Plan. Unless the Participant elects otherwise in the time and manner specified by the Plan Administrator, any dividends paid in respect of Common Stock purchased by a Participant under the Plan and credited to his or her Plan Account will be reinvested in Common Stock in accordance with procedures established by the Company. 10. Rights Not Transferable. Rights under the Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. No rights or payroll deductions of a Participant shall be subject to execution, attachment, levy, garnishment or similar process. 11. Application of Funds. All funds of Participants received or held by the Company under the Plan before purchase of the shares of Common Stock shall be held by the Company without liability for interest or other increment. -6- 12. Administration of the Plan. The Plan shall be administered by the Plan Administrator. The Plan Administrator shall have authority to make rules and regulations for the administration of the Plan, and its interpretations and decisions with regard to the Plan and such rules and regulations shall be final and conclusive. It is intended that the Plan shall at all times meet the requirements of Code Section 423, if applicable, and the Plan Administrator shall, to the extent possible, interpret the provision of the Plan so as to carry out such intent. 13. Change of Control Provisions. (a) Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control, each Option outstanding under the Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of such successor corporation. If the successor corporation refuses or is unable to assume or substitute for outstanding Options, each Purchase Period then in progress shall be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as of which date any Purchase Period then in progress will terminate. The New Purchase Date shall be on or immediately before the effective time of the Change in Control, and the Plan Administrator shall notify each Participant in writing, at least 10 days before the New Purchase Date, that the Purchase Date for his or her Option has been changed to the New Purchase Date, and that the Participant's Option will be exercised automatically on the New Purchase Date unless the Participant has withdrawn from the Purchase Period before the New Purchase Date, as provided in Section 7. (b) For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition after the Effective Date by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company or approved by the Incumbent Board (as defined below), (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, (4) any acquisition by an underwriter temporarily holding Company securities pursuant to an offering of such securities, or (5) any acquisition pursuant to a transaction that complies with clauses (1), (2) and (3) of subsection (iii) of this Section 13; or -7- (ii) A change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 13, that any individual who becomes a member of the Board subsequent to the Effective Date, whose election, or nomination for election by the Company's share owners, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso), either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) Consummation of a reorganization, merger or consolidation (or similar transaction), a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity ("Corporate Transaction"); in each case, unless immediately following such Corporate Transaction (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such Corporate Transaction) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors, except to the extent that such ownership existed prior to the Corporate Transaction, and (3) individuals who were members of the Incumbent Board at the time of the Board's approval of the execution of the initial agreement providing for such Corporate Transaction will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or -8- (iv) The approval by the share owners of the Company of a complete liquidation or dissolution of the Company. 14. Adjustments in Case of Changes Affecting Shares. In the event of any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, Change in Control or exchange of Common Stock or other securities of the Company, or other corporate transaction or event that affects the Common Stock: (a) the number of shares of Common Stock approved for the Plan shall be increased or decreased proportionately, and (b) the Board may determine, in its sole discretion, that an adjustment is necessary or appropriate in order to prevent dilution or enlargement of benefits or potential benefits intended to be made available under the Plan. 15. No Corporate Action Restriction. The existence of the Plan and/or the Options granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the Company's share owners to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the Company's or any Subsidiary's capital structure or its business, (b) any merger, consolidation or change in the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the Company's or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Company or any Subsidiary. No Participant, Employee, beneficiary or any other person shall have any claim against any member of the Board or the Committee, the Company or any Subsidiary, or any employees, officers, share owners or agents of the Company or any Subsidiary, as a result of any such action. 16. Notices. All notices or other communications by an Employee or Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 17. Amendments to the Plan. The Committee may, at any time, or from time to time, amend or modify the Plan; provided, however, that no amendment shall be made increasing or decreasing the number of shares authorized for the Plan (other than as provided in Section 14), and that, except to conform the Plan to the requirements of the Code, no amendment shall be made that would cause the Plan to fail to meet the applicable requirements of Code Section 423. 18. Termination of Plan. The Plan shall terminate upon the earlier of (a) the fifth anniversary of the Effective Date, (b) the date no more shares of Common Stock remain to be purchased under the Plan, or (c) the termination of the Plan by the Board as specified below. The Board may terminate the Plan as of any date. The date of termination of the Plan shall be deemed a Purchase Date. If on such Purchase Date Participants in the aggregate have Options to purchase more shares of Common Stock than are available for purchase under the Plan, each Participant shall be eligible to purchase a reduced number of shares of Common Stock on a pro rata basis, and any excess payroll deductions shall be returned to Participants, without interest, all as provided by rules and regulations adopted by the Plan Administrator. -9- 19. Costs. All costs and expenses incurred in administering the Plan shall be paid by the Company. Any costs or expenses of selling shares of Company Stock acquired pursuant to the Plan shall be borne by the holder thereof. 20. Governmental Regulations. The Company's obligation to sell and deliver its Common Stock pursuant to the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such stock. Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, state securities laws, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 21. Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the United States of America and, to the extent not inconsistent therewith, by the laws of the State of Delaware, without reference to the principles of conflict of laws thereof. This Plan is not to be subject to the Employee Retirement Income Security Act of 1974, as amended, but is intended to comply with Code Section 423. Accordingly, the provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. Any provisions required to be set forth in this Plan by such Code section are hereby included as fully as if set forth in the Plan in full. Any titles and headings herein are for reference purposes only, and shall in no way limit, define or otherwise affect the meaning, construction or interpretation of any provisions of the Plan. 22. Effect on Employment. The provisions of this Plan shall not affect the right of the Company or any Designated Subsidiary or any Participant to terminate the Participant's employment with the Company or any Designated Subsidiary. 23. Withholding. The Company reserves the right to withhold from stock or cash distributed to a Participant any amounts that it is required by law to withhold. 24. Other Company Benefit and Compensation Programs. For purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Company or any Designated Subsidiary (a) any amounts deducted from a Participant's Compensation pursuant to the Participant's payroll deduction election under Section 4 shall be deemed a part of a Participant's compensation, and (b) payments and other benefits received by a Participant under an Option shall not be deemed a part of a Participant's compensation, unless expressly provided in such other plans or arrangements, or except where the Board expressly determines in writing. The existence of the Plan notwithstanding, the -10- Company or any Designated Subsidiary may adopt such other compensation plans or programs and additional compensation arrangements as it deems necessary to attract, retain and motivate employees. 25. Effective Date. The Plan shall become effective July 1, 2002, provided that the Company's share owners approve it within 12 months after the date the Plan was adopted by the Board. -11- EX-10.25 5 k67850ex10-25.txt EXECUTIVE STOCK PURCHASE PLAN EXHIBIT 10.25 KELLOGG COMPANY EXECUTIVE STOCK PURCHASE PLAN 1. Purpose. Kellogg Company (the "Company") has established this Kellogg Company Executive Stock Purchase Plan (the "Plan") to encourage and enable certain eligible employees of the Company and its Subsidiaries to acquire the Company's Common Stock, and to align more closely the interests of those individuals and the Company's share owners. 2. Definitions. Unless the context clearly indicates otherwise, for purposes of the Plan, the following terms shall have the following meanings: (a) "Award Date" means the date on which a Participant would have first received payment of his or her Bonus but for his or her election to purchase shares of Common Stock in accordance with the provisions of Section 4. (b) "Board" means the Board of Directors of Kellogg Company, as constituted from time to time. (c) "Bonus" means with respect to a Participant, the after-tax portion of any incentive compensation payable to the Participant under the Company's annual bonus plan for the applicable Plan Year. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means the Compensation Committee of the Board. (f) "Common Stock" means the Common Stock, par value $0.25 per share, of the Company or any security of the Company issued by the Company in substitution or exchange therefor. (g) "Company" means Kellogg Company, a Delaware corporation, or any successor corporation to Kellogg Company. (h) "Effective Date" means February 22, 2002. (i) "Eligible Employee" means each employee of the Company or a Subsidiary designated from time to time by the Committee or the Chief Executive Officer as an Eligible Employee; provided, however, that the class of Eligible Employees shall be limited to individuals who are members of a select group of management or highly compensated employees. (j) "Exchange Act" means the Securities Exchange Act of 1934, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto. (k) "Fair Market Value" means, with respect to any date, the closing price per share on the New York Stock Exchange Composite Transactions Tape on such date, provided that if there shall be no sales of shares reported on such date, the Fair Market Value of a share on such date shall be deemed to be equal to the closing price per share on such Composite Tape for the last preceding date on which sales of shares were reported. (l) "Participant" means an Eligible Employee who is participating in the Plan pursuant to Section 4. (m) "Plan" means the Kellogg Company Executive Stock Purchase Plan, as set forth herein, as in effect, and as amended from time to time (together with any rules and regulations promulgated by the Plan Administrator with respect thereto). (n) "Plan Administrator" means such other person or persons, including a committee, as the Committee may appoint to administer the Plan. (o) "Plan Year" means the calendar year. (p) "Purchase Date" means, except as provided in Section 17, the 31st trading day following the Award Date. (q) "Purchase Price" means, with respect to each Purchase Period, the average Fair Market Value of a share of Common Stock measured over the 30-trading day period commencing on the Award Date. (r) "Subsidiary" means any corporation, domestic or foreign, other than the Company, in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Notwithstanding the foregoing, the term "Subsidiary" shall include a limited liability company that is disregarded as an entity separate from a Subsidiary. 3. Stock Subject to the Plan. Subject to Section 13, the aggregate number of shares of Common Stock that may be sold under the Plan is 500,000. Shares of Common Stock to be issued under the Plan shall be issued shares that have been reacquired by the Company (in the open-market or in private transactions) and that are being held as treasury shares. 4. Participation in the Plan. Each Eligible Employee may participate in the Plan effective as of any Award Date, by completing and delivering a payroll deduction authorization to the Plan Administrator at least 7 days in advance of the applicable Award Date in the manner specified by the Plan Administrator. A Participant's payroll deduction authorization shall only be effective for the Bonus to be received for the applicable Plan Year. 5. Payroll Deductions. An Eligible Employee may participate in the Plan only through payroll deductions. After-tax payroll deductions shall be made from the Bonus -2- otherwise payable to each Participant for the Plan Year in such whole percentage from 1% to 100% as the Participant shall authorize in his or her payroll deduction authorization. 6. Changes in Payroll Deductions. Once the payroll deduction authorization has been received by the Plan Administrator, the Participant may not increase or decrease the amount of his or her payroll deduction authorization for the applicable Plan Year. 7. Termination of Participation in Plan. (a) Once the payroll deduction authorization has been received by the Plan Administrator, the Participant may not voluntarily terminate participation in the Plan with respect to the applicable Plan Year. (b) A Participant's participation in the Plan shall terminate upon termination of his or her employment with the Company and its Subsidiaries, or termination of status as an Eligible Employee, for any reason. If a former Participant is no longer employed by the Company or any Subsidiary, the Participant's accrued but unpaid Bonus, if any, shall be paid to the former Participant in cash, without interest, as soon as practicable following his or her termination of employment. 8. Purchase of Shares. (a) On each Purchase Date, each Participant shall be deemed, without any further action, to have purchased that number of whole shares of Common Stock determined by dividing the dollar value of the Participant's Bonus subject to his or her payroll deduction authorization for the applicable Plan Year by the Purchase Price. Except as provided in Section 17, in no event may a Participant purchase shares of Common Stock prior to the Purchase Date in any Plan Year. (b) A stock certificate for whole shares of Common Stock purchased by each Participant shall be issued as soon as practicable after each Purchase Date. Stock certificates under the Plan shall be issued, at the election of the Participant, in the Participant's name or in the Participant's name and the name of another person as joint tenants with right of survivorship or as tenants in common. A cash payment shall be made to a Participant, without interest, for any fraction of a share, if necessary. (c) Each stock certificate evidencing whole shares of Common Stock purchased by a Participant will be stamped or otherwise imprinted with such legend as the Board requires. (d) If on any Purchase Date Participants in the aggregate have elected to purchase more shares of Common Stock than are available for purchase under the Plan, each Participant shall be eligible to purchase a reduced number of shares of Common Stock on a pro rata basis, and any excess accrued but unpaid Bonus subject to his or her payroll deduction authorization shall be returned to the Participant, without interest, all as provided by rules and regulations adopted by the Plan Administrator. -3- 9. Rights as a Share Owner. A Participant shall not be treated as the owner of Common Stock until the Purchase Date of such Common Stock under the Plan. As of the Purchase Date a Participant shall be treated as the record owner of his or her shares purchased on such date pursuant to the Plan. 10. Rights Not Transferable; Restrictions on Transfers of Shares. Rights under the Plan are not transferable by a Participant other than by will or the laws of descent and distribution, and are exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. No rights or payroll deductions of a Participant shall be subject to execution, attachment, levy, garnishment or similar process. The shares of Common Stock received under this Plan must be held for at least six months following the Purchase Date. 11. Application of Funds. All funds of Participants received or held by the Company under the Plan before purchase of the shares of Common Stock shall be held by the Company without liability for interest or other increment. 12. Administration of the Plan. The Plan shall be administered by the Plan Administrator. The Plan Administrator shall have authority to make rules and regulations for the administration of the Plan, and its interpretations and decisions with regard to the Plan and such rules and regulations shall be final and conclusive. 13. Adjustments in Case of Changes Affecting Shares. In the event of any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, exchange of Common Stock or other securities of the Company, or other corporate transaction or event that affects the Common Stock: (a) the number of shares of Common Stock approved for the Plan shall be increased or decreased proportionately, and (b) the Board may determine, in its sole discretion, that an adjustment is necessary or appropriate in order to prevent dilution or enlargement of benefits or potential benefits intended to be made available under the Plan. 14. No Corporate Action Restriction. The existence of the Plan and/or the rights granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the Company's share owners to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the Company's or any Subsidiary's capital structure or its business, (b) any merger, consolidation or change in the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the Company's or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Company or any Subsidiary. No Participant, Eligible Employee, beneficiary or any other person shall have any claim against any member of the Board or the Committee, the Plan Administrator, the Company, any Subsidiary or any employees, officers, share owners or agents of the Company or any Subsidiary, as a result of any such action. -4- 15. Notices. All notices or other communications by an Eligible Employee or Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 16. Amendments to the Plan. The Committee may, at any time, or from time to time, amend or modify the Plan. 17. Termination of Plan. The Plan shall terminate upon the earliest of (a) the fifth anniversary of the Effective Date, (b) the date no more shares of Common Stock remain to be purchased under the Plan, and (c) the termination of the Plan by the Board as specified below. The Board may terminate the Plan as of any date. A Participant's accrued but unpaid Bonus, if any, shall be paid to the Participant in cash, without interest, as soon as practicable following the termination of the Plan. 18. Costs. All costs and expenses incurred in administering the Plan shall be paid by the Company. Any costs or expenses of selling shares of Company Stock acquired pursuant to the Plan shall be borne by the holder thereof. 19. Governmental Regulations. The Company's obligation to sell and deliver its Common Stock pursuant to the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such stock. Shares shall not be issued unless the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, state securities laws, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the purchase of Common Stock under the Plan, the Company may require the person purchasing such Common Stock to represent and warrant at the time of any such purchase that the shares of Common Stock are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 20. Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the United States of America and, to the extent not inconsistent therewith, by the laws of the State of Delaware, without reference to the principles of conflict of laws thereof. This Plan is not to be subject to the Employee Retirement Income Security Act of 1974, as amended. Any titles and headings herein are for reference purposes only, and shall in no way limit, define or otherwise affect the meaning, construction or interpretation of any provisions of the Plan. 21. Effect on Employment. The provisions of this Plan shall not affect the right of the Company, any Subsidiary or any Participant to terminate the Participant's employment with the Company or any Subsidiary. -5- 22. Withholding. The Company reserves the right to withhold from stock or cash distributed to a Participant any amounts that it is required by law to withhold. 23. Other Company Benefit and Compensation Programs. For purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Company or any Subsidiary (a) any amounts deducted from a Participant's Bonus pursuant to the Participant's payroll deduction authorization under Section 4 shall be deemed a part of a Participant's compensation, and (b) payments and other benefits received by a Participant under the Plan shall not be deemed a part of a Participant's compensation, unless expressly provided in such other plans or arrangements, or except where the Board expressly determines in writing. The existence of the Plan notwithstanding, the Company or any Subsidiary may adopt such other compensation plans or programs and additional compensation arrangements as it deems necessary to attract, retain and motivate employees. 24. Effective Date. The Plan shall become effective on the Effective Date. -6- EX-10.26 6 k67850ex10-26.txt SENIOR EXECUTIVE ANNUAL INCENTIVE PLAN EXHIBIT 10.26 KELLOGG COMPANY SENIOR EXECUTIVE ANNUAL INCENTIVE PLAN SECTION 1 Establishment and Purpose Kellogg Company (the "Company") hereby establishes the "Kellogg Company Senior Executive Annual Incentive Plan" (the "Plan"). The Plan will be submitted to the stockholders of the Company for approval at the 2002 Annual Meeting of Stockholders of the Company scheduled to be held on April 26, 2002, and will be effective retroactively to January 1, 2002 (the "Effective Date"). The purposes of the Plan are to motivate selected senior executives toward achievement of performance goals; encourage teamwork in various segments of the Company; and reward performance with cash bonuses that vary in relation to the achievement of the preestablished performance goals. The Plan replaces the Kellogg Company Senior Executive Officer Performance Bonus Plan, which has expired. SECTION 2 Eligibility The individuals who are assigned one or more of the following titles by the Company are eligible to participate in the Plan, as determined and selected by the Committee (as defined in Section 3 hereof): (i) Chairman, Vice Chairman, Kellogg Company Chief Executive Officer, or Kellogg Company President; (ii) Kellogg Company Executive Vice President; or (iii) Kellogg Company Senior Vice President. Each individual selected for participation will be known as a "Participant". SECTION 3 Administration The Plan will be administered by the Compensation Committee of the Company's Board of Directors (the "Board"), or such other committee as the Board may from time to time select (the "Committee"). The Committee will at all times be composed of two or more members of the Board, each of whom qualifies as an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section 162(m)"). Except as limited by law or the Company's Amended and/or Restated Certificate of Incorporation or Bylaws, and subject to the provisions herein, the Committee will have full power and authority, to the fullest extent required to comply with Section 162(m), to select Participants (as defined in Section 2 hereof); determine the size of bonus awards; determine the terms, conditions, restrictions and other provisions of bonus awards, including the establishment of the Performance Goals (as defined in Section 4 hereof); interpret the Plan; establish, amend or rescind guidelines, rules and regulations for the Plan's administration; review and certify the achievement of Performance Goals; and, subject to Section 9 hereof and the restrictions under Section 162(m), amend the terms and conditions of the Plan, including outstanding Award Opportunities (as defined in Section 4 hereof). Further, the Committee will make all other determinations which may be necessary or advisable for the administration and operation of the Plan. Except as to the extent prohibited by applicable law, the Committee may delegate all or any portion of its responsibilities and powers granted under the Plan to such other person or entity it deems appropriate, including, but not limited to, senior management of the Company. Any such delegation may be revoked by the Committee at any time. All determinations and decisions of the Committee arising under the Plan will be final, binding and conclusive upon all parties. By accepting any benefits under the Plan, each Participant, and each person claiming under or through such Participant, will be conclusively deemed to have indicated acceptance and ratification of, and consent to, all provisions of the Plan and any determination or decision under the Plan by the Company, the Board or the Committee. SECTION 4 Participation and Performance Goals The Committee will have the authority to select Participants (as defined in Section 2 hereof) for cash bonus awards under the Plan for each Measurement Period and the financial and other performance criteria ("Performance Goals") upon which such awards will be based. For purposes of the Plan, the term "Measurement Period" means the period of one fiscal year, unless an alternate period (such as a portion of a fiscal year or multiple fiscal years) is otherwise selected and established in writing by the Committee at the time the Performance Goal is established. No later than the earlier of ninety (90) days after the commencement of the applicable Measurement Period or the completion of 25% of such Measurement Period, the Committee will, in its discretion, determine the Participants for such Measurement Period and establish the Performance Goals applicable to each Participant's award. Performance Goals need not be the same for all Participants. The Performance Goals may be based on any one or more of the following measures (or the relative change for any such measure): the Company's earnings per share, return on equity, return on assets, return on invested capital, growth in sales and earnings, net sales, cash flow, discounted cash flow, cumulative cash flow, operating profits, pre-tax profits, post-tax profits, consolidated net income, unit sales volume, economic value added, costs, production, unit production volume, improvements in financial ratings, regulatory compliance, achievement of balance sheet or income statement objectives, market share and total return to stockholders (including both the market value of the Company's stock and dividends thereon) and the extent to which strategic and business plan goals are met. With respect to each Participant, the Committee will establish ranges of Performance Goals which correspond to various levels of cash bonus amounts ("Award Opportunities") for the Measurement Period. Each range of Performance Goals will include a level of performance at which one hundred percent (100%) of the targeted bonus award ("Target Bonus Award") may be earned. In addition, each range of Performance Goals will include levels of performance above and below the one hundred percent (100%) performance level. The Committee may establish minimum levels of Performance Goal achievement, below which no bonus payment will be made to the Participant. Once established, Performance Goals and Award Opportunities may be adjusted during the Measurement Period only to mitigate the unbudgeted 2 impact of unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time such Performance Goals and Award Opportunities were established. SECTION 5 Final Bonus Award Determination Awards are based on the achievement of the preestablished Performance Goals. After the Performance Goals are established as described in Section 4 hereof, the Committee will align the achievement of the Performance Goals with Award Opportunities, such that the level of achievement of the Performance Goals at the end of the Measurement Period will determine the Participant's actual annual bonus award ("Final Bonus Award"). Final Bonus Awards may vary above or below the Target Bonus Award, based on the level of achievement of the preestablished Performance Goals. Negative discretion may be used by the Committee to reduce the Final Bonus Award. In no event, however, will an exercise of negative discretion to reduce the Final Bonus Award of a Participant have the effect of increasing the amount of a Final Bonus Award otherwise payable to any other Participant. SECTION 6 Final Bonus Award Limit The total of all Final Bonus Awards payable to Participants for performance in any Measurement Period will not under any circumstances exceed one percent (1%) of the Net Income of the Company (the "Maximum Bonus Awards Pool") for such period. For purposes of the Plan, the term "Net Income" means the income from continuing operations of the Company and its subsidiaries, as determined on a consolidated basis in accordance with generally accepted accounting principles, adjusted to exclude the following: (i) all restructuring and disposition-related charges or credits for the fiscal year, net of related tax effect; and (ii) incremental and non-recurring integration costs and other financial impacts, net of tax, related to the business operations of an entity acquired by the Company. The maximum Final Bonus Award any Participant can receive for performance in any Measurement Period is three million dollars ($3,000,000). In the event that the total of all Final Bonus Awards payable to Participants should exceed the Maximum Bonus Awards Pool as specified above, the Final Bonus Award of each Participant will be proportionately reduced such that the total of all such Final Bonus Awards paid is equal to the Maximum Bonus Awards Pool. SECTION 7 Payment of Awards If the Performance Goals established by the Committee are satisfied and upon written certification by the Committee that the Performance Goals have been satisfied, payment will be made in cash as soon as practicable in accordance with the terms of the award, unless the Committee determines in its sole discretion to reduce or eliminate Final Bonus Award 3 determinations for any or all Participants, based upon any objective or subjective criteria it deems appropriate. There is no obligation for uniformity of treatment of Participants under the Plan. SECTION 8 Termination of Employment Each Participant must remain employed with the Company or a subsidiary through the last day of the Measurement Period to be considered for a Final Bonus Award; provided, however, in the event of a Participant's death, disability or retirement (as defined in the Kellogg Company Salaried Pension Plan or any other retirement plan of the Company or a subsidiary in which the individual participates) during the Measurement Period, the Participant's bonus award will based on the portion of the Measurement Period in which the Participant was employed, computed as determined by the Committee. In the event that a Participant's employment is terminated for any reason other than death, disability or retirement, the Participant's rights to a Final Bonus Award will be forfeited; provided, however, the Committee may, in its sole discretion, pay a prorated bonus award to the Participant for the portion of the Measurement Period in which the Participant was employed, computed as determined by the Committee. In the event that a Participant's employment with the Company or a subsidiary terminates for any reason after the completion of the Measurement Period but prior to the actual payment of the cash bonus, the balance of any bonus which remains unpaid at the time of such termination will be payable to the Participant, or forfeited by the Participant, in accordance with the terms of the award granted by the Committee. SECTION 9 Amendment and Termination The Board and the Committee each has the right to amend or terminate the Plan at any time and in any respect, except that, unless otherwise determined by the Board or the Committee, no amendment may be made without stockholder approval if, and to the extent that, such approval would be required to comply with any applicable provisions of Section 162(m). Similarly, no amendment or termination of the Plan may alter or impair the rights of any Participant pursuant to an outstanding award without the consent of the Participant. This Plan will expire on December 31, 2006, unless terminated earlier by the Board or the Committee. No further awards will be made under the Plan after termination, but termination will not affect the rights of any Participant under any award made prior to termination. SECTION 10 Miscellaneous Bonus payments will be made from the general funds of the Company and no special or separate fund will be established or other segregation of assets made to assure payment. No Participant or other person will have under any circumstances any interest in any particular property or assets of the Company. The Plan will be governed by and construed in 4 accordance with the laws of the State of Delaware, without regard to its principles of conflict of laws. Neither the establishment of this Plan nor the payment of any award hereunder nor any action of the Company, the Board or the Committee with respect to this Plan will be held or construed to confer upon any Participant any legal right to be continued in the employ of the Company or to receive any particular rate of cash compensation other than pursuant to the terms of this Plan and the determination of the Committee, and the Company expressly reserves the right to discharge any Participant whenever the interest of the Company may so permit or require without liability to the Company, the Board or the Committee, except as to any rights which may be expressly conferred upon a Participant under this Plan. The adoption of this Plan will not affect any other compensation plans in effect for the Company or any subsidiary or affiliate of the Company, nor will the Plan preclude the Company or any subsidiary or affiliate thereof from establishing any other forms of incentive or other compensation for the Participants. 5 EX-13.01 7 k67850ex13-01.txt COMPANY'S ANNUAL REPORT TO SHAREOWNERS EXHIBIT 13.01 TABLE OF CONTENTS Management's Discussion and Analysis................................... 17 Selected Financial Data................................................ 26 Consolidated Financial Statements...................................... 27 Notes to Consolidated Financial Statements............................. 30 Report of Independent Accountants...................................... 43 Supplemental Financial Information..................................... 44 MANAGEMENT'S DISCUSSION AND ANALYSIS KELLOGG COMPANY AND SUBSIDIARIES RESULTS OF OPERATIONS OVERVIEW Kellogg Company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones. Kellogg products are manufactured in 19 countries and marketed in more than 160 countries around the world. The Company is managed in two major divisions - the United States and International - with International further delineated into Europe, Latin America, Canada, Australia, and Asia. This organizational structure is the basis of the operating segment data presented in this report. During the first quarter of 2001, we completed our acquisition of Keebler Foods Company (the "Keebler acquisition"), making Kellogg Company a leader in the U.S. cookie and cracker categories. Primarily as a result of the Keebler contribution, 2001 net sales and operating profit increased significantly. Despite these increases, net earnings and earnings per share were down versus the prior year, due primarily to increased interest and tax expense related to the Keebler acquisition. We believe that these results reflect, in part, the significant amount of change which occurred at our company during 2001 and somewhat mask the progress we made in positioning our business for sustainable growth in 2002 and beyond. During 2001, we achieved three primary goals. First, we restored our competitiveness in the U.S. cereal category, as evidenced by our improved dollar share. Second, we increased our gross margin through pricing and mix improvements, which will help fund further marketing investment. Finally, our internal measure of "cash flow" (net cash provided from operating activities less expenditures for property additions) was the highest in our company's history. In 2000, we achieved growth in net earnings and earnings per share, excluding charges, despite softness in our U.S. convenience foods business, higher energy prices and interest rates, weak foreign currencies, and inventory write-offs in Southeast Asia. We were able to more than offset these factors through manufacturing efficiencies, reduced advertising and overhead expenses, and recognition of benefits related to U.S. tax credits. During 1999, we increased sales and achieved double-digit growth in net earnings and earnings per share, excluding charges. Volume gains in our Latin America, Australia, and Asia cereal markets; continued expansion of our global convenience foods business; and cost savings from ongoing streamlining and efficiency initiatives contributed significantly to these results. The following items have been excluded from all applicable amounts presented in the "Results of operations" section for purposes of comparison among historical, current, and future periods: - - Subsequent to the acquisition of Keebler, we have incurred costs and experienced other financial impacts related to integration of the Keebler business, which reduced sales and operating profit during 2001. - - During 1999, 2000, and 2001, we reported restructuring charges in operating profit related to our "focus and align" strategy and other streamlining initiatives around the world. - - During 1999, we reported net disposition-related charges in earnings before income taxes attributable primarily to our sale of the Lender's Bagels business. - - During 2001, net earnings included an extraordinary loss related to extinguishment of long-term debt and a charge for the cumulative effect of an accounting change. Reported results are reconciled to comparable results, as follows:

====================================================================================================== Net earnings (millions) Change vs. prior year - ------------------------------------------------------------------------------------------------------ 2001 2000 1999 2001 2000 - ------------------------------------------------------------------------------------------------------ Reported consolidated results $473.6 $587.7 $338.3 -19.4% +73.7% Integration impact 46.2 -- -- Restructuring charges, net of credits 20.5 64.2 156.4 Disposition-related charges -- -- 111.5 Extraordinary loss 7.4 -- -- Cumulative effect of accounting change 1.0 -- -- - ------------------------------------------------------------------------------------------------------ Comparable consolidated results $548.7 $651.9 $606.2 -15.8% +7.5% ======================================================================================================

====================================================================================================== Net earnings per share Change vs. prior year - ------------------------------------------------------------------------------------------------------ 2001 2000 1999 2001 2000 - ------------------------------------------------------------------------------------------------------ Reported diluted net earnings per share $1.16 $1.45 $ .83 -20.0% +74.7% Dilution impact .01 -- -- - ------------------------------------------------------------------------------------------------------ Reported basic net earnings per share $1.17 $1.45 $ .83 Integration impact .11 -- -- Restructuring charges, net of credits .05 .16 .40 Disposition-related charges -- -- .27 Extraordinary loss .02 -- -- Cumulative effect of accounting change -- -- -- - ------------------------------------------------------------------------------------------------------ Comparable consolidated results $1.35 $1.61 $1.50 -16.1% +7.3% ======================================================================================================

For 2001, the decrease in comparable earnings per share of $.26 was primarily the result of $.34 from incremental interest expense, $.18 from incremental amortization expense, $.17 from a higher effective tax rate, and $.07 from unfavorable foreign currency movements. This was offset by $.50 from business growth, which includes the results of the Keebler business. 17 For 2000, the increase in comparable earnings per share of $.11 consisted of $.02 from business growth and $.11 from favorable tax-rate movements, partially offset by $.02 from unfavorable foreign currency movements. NET SALES AND OPERATING PROFIT 2001 COMPARED TO 2000 The following tables provide an analysis of net sales and operating profit performance for 2001 versus 2000:

======================================================================================================================== Other United Latin operating Consoli- (dollars in millions) States Europe America (d) Corporate dated - ------------------------------------------------------------------------------------------------------------------------ 2001 NET SALES $6,129.0 $1,363.1 $652.7 $708.5 -- $8,853.3 2000 NET SALES $4,067.4 $1,463.4 $626.7 $776.7 $20.5 $6,954.7 - ------------------------------------------------------------------------------------------------------------------------ % change - 2001 vs. 2000: Volume +.9% -6.8% +1.8% -1.7% -- -1.3% Pricing/mix -.7% +4.6% +3.1% -- -- +1.2% Integration impact (a) -.4% -- -- -- -- -.3% Acquisitions & dispositions (b) +50.9% -- -- +.6% -- +29.9% Foreign currency impact -- -4.7% -.7% -7.7% -- -2.2% - ------------------------------------------------------------------------------------------------------------------------ TOTAL CHANGE +50.7% -6.9% +4.2% -8.8% -- +27.3% ========================================================================================================================

======================================================================================================================== Other United Latin operating Consoli- (dollars in millions) States Europe America (d) Corporate dated - ------------------------------------------------------------------------------------------------------------------------ 2001 operating profit $825.1 $245.8 $170.7 $101.6 ($175.3) $1,167.9 2001 restructuring charges (c) 29.5 (.2) (.1) 1.4 2.7 33.3 Keebler amortization expense 90.4 -- -- -- -- 90.4 - ------------------------------------------------------------------------------------------------------------------------ 2001 OPERATING PROFIT EXCLUDING RESTRUCTURING CHARGES AND KEEBLER AMORTIZATION EXPENSE $945.0 $245.6 $170.6 $103.0 ($172.6) $1,291.6 - ------------------------------------------------------------------------------------------------------------------------ 2000 operating profit $744.2 $208.5 $146.5 $ 60.5 ($169.9) $ 989.8 2000 restructuring charges (c) 2.0 26.7 14.6 28.7 14.5 86.5 - ------------------------------------------------------------------------------------------------------------------------ 2000 OPERATING PROFIT EXCLUDING RESTRUCTURING CHARGES $746.2 $235.2 $161.1 $ 89.2 ($155.4) $1,076.3 - ------------------------------------------------------------------------------------------------------------------------ % change - 2001 vs. 2000: Comparable business -5.1% +9.9% +5.3% +24.6% +7.1% +2.5% Integration impact (a) -9.0% -- -- -- -5.0% -6.9% Acquisitions & dispositions (b) +40.7% -- -- +.5% -- +28.2% Foreign currency impact -- -5.5% +.6% -9.6% -13.2% -3.8% - ------------------------------------------------------------------------------------------------------------------------ TOTAL CHANGE +26.6% +4.4% +5.9% +15.5% -11.1% +20.0% ========================================================================================================================

(a) Trade inventory reductions, asset write-offs, accelerated depreciation expense, and incremental costs related to integration of Keebler business. Refer to "Keebler acquisition" section, pages 20-21, for further information. (b) Includes results for applicable portion of the year from Keebler Foods Company, acquired in March 2001; Kashi Company, acquired in June 2000; and The Healthy Snack People business, an Australian convenience foods operation, acquired in July 2000. (c) Refer to "Restructuring charges" section, pages 20-21, for further information. (d) Includes Canada, Australia, and Asia. On a comparable business basis, consolidated net sales for 2001 were essentially flat (volume decline of 1.3% partially offset by pricing/mix improvement of 1.2%), as a 4% increase in U.S. cereal sales to the retail channel was offset by declines in U.S. snack sales and in all international segments except Latin America and Canada. The decline in U.S. snack sales was due primarily to our product rationalization initiative and postponed innovation and marketing support during the integration of this business into the Keebler direct store door (DSD) delivery system. The decline in international sales was driven by the discontinuation of our private-label program in Germany and continued cereal category softness in the United Kingdom and Australia. On a comparable business basis, consolidated operating profit for 2001 was up 2.5%. Increased profitability in international businesses offset the impact of the comparable sales declines discussed above, as well as the impact of increased marketing investment in the U.S. cereal business and additional sales force hiring and training costs in the United States. The impact of Keebler integration activities ("integration impact") reduced growth in consolidated operating profit by approximately 7% during 2001. This integration impact consisted primarily of 1) the sales and gross profit effect of lowering trade inventories to transfer our snack foods to Keebler's DSD system, 2) direct costs for employee incentive and retention programs, employee separation and relocation benefits, and consulting contracts, and 3) impairment and accelerated depreciation of software assets being abandoned due to the conversion of our U.S. business to the SAP system. We estimate that these activities reduced net sales by $17.8 million, increased cost of goods sold by $5.6 million, and increased selling, general, and administrative expense by $51.0 million, for a total 2001 operating profit reduction of $74.4 million. The inclusion of the Keebler business in consolidated results increased our net sales by approximately 29% and operating profit (excluding Keebler amortization expense and restructuring charges) by approximately 28% versus the prior year. Assuming we had owned Keebler during the comparable prior-year period, 2001 consolidated net sales (excluding foreign currency and integration impacts) would have been approximately even with the prior year. Similarly, operating profit (excluding Keebler amortization expense, restructuring charges, foreign currency, and integration impacts) would have increased approximately 4%. Keebler's net sales for full-year 2001 (excluding Kellogg snacks integrated into the DSD system) decreased approximately 1% versus the prior year, primarily as a result of our product rationalization initiative, exit of various non-strategic custom manufacturing contracts, and postponement of new product introductions during the integration process. 18 2000 COMPARED TO 1999 The following tables provide an analysis of net sales and operating profit performance for 2000 versus 1999:

===================================================================================================================== Other United Latin operating Consoli- (dollars in millions) States Europe America (c) Corporate dated - --------------------------------------------------------------------------------------------------------------------- 2000 NET SALES $4,067.4 $1,463.4 $626.7 $776.7 $20.5 $6,954.7 1999 NET SALES $4,014.1 $1,614.4 $567.0 $788.8 (.1) $6,984.2 - --------------------------------------------------------------------------------------------------------------------- % change - 2000 vs. 1999: Volume +.3% -.8% +7.7% +1.4% -- +.9% Pricing/mix -.6% +1.4% +4.7% -.4% -- +.2% Acquisitions & dispositions (a) +1.6% -- -- +.5% -- +1.0% Foreign currency impact -- -10.0% -1.9% -3.0% -- -2.5% - --------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE +1.3% -9.4% +10.5% -1.5% -- -.4% =====================================================================================================================

===================================================================================================================== Other United Latin operating Consoli- (dollars in millions) States Europe America (c) Corporate dated - --------------------------------------------------------------------------------------------------------------------- 2000 operating profit $744.2 $208.5 $146.5 $60.5 ($169.9) $ 989.8 2000 restructuring charges (b) 2.0 26.7 14.6 28.7 14.5 86.5 - --------------------------------------------------------------------------------------------------------------------- 2000 OPERATING PROFIT EXCLUDING RESTRUCTURING CHARGES $746.2 $235.2 $161.1 $89.2 ($155.4) $1,076.3 - --------------------------------------------------------------------------------------------------------------------- 1999 operating profit $605.1 $201.7 $139.6 $89.1 ($206.7) $ 828.8 1999 restructuring charges (b) 197.9 22.4 1.7 4.6 18.0 244.6 - --------------------------------------------------------------------------------------------------------------------- 1999 OPERATING PROFIT EXCLUDING RESTRUCTURING CHARGES $803.0 $224.1 $141.3 $93.7 ($188.7) $1,073.4 - --------------------------------------------------------------------------------------------------------------------- % change - 2000 vs. 1999: Comparable business -5.9% +14.0% +16.0% -1.8% +6.8% +1.8% Acquisitions & dispositions (a) -1.2% -- -- +1.1% -- -.9% Foreign currency impact -- -9.1% -2.0% -4.1% +10.9% -.6% - --------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE -7.1% +4.9% +14.0% -4.8% +17.7% +.3% =====================================================================================================================

(a) Includes results for applicable portion of the year from Kashi Company, acquired in June 2000, the Healthy Snack People business, an Australian convenience foods operation, acquired in July 2000; Worthington Foods, Inc., acquired in November 1999; and the Lenders Bagels business, divested in November 1999. (b) Refer to "Restructuring charges" section, pages 20-21, for further information. (c) Includes Canada, Australia, and Asia. For 2000, the comparable business sales decline in the United States was .3% (favorable volume of .3% less unfavorable pricing/mix impact of .6%) versus a comparable business operating profit decline of 5.9%. The operating profit decline was attributable primarily to increased production, distribution, and promotional expenditures for convenience foods products, and higher energy costs. In Europe, operating efficiencies and a decline in marketing expense resulted in comparable business growth in operating profit of 14.0%, building on a sales increase of .6% (unfavorable volume of .8% offset by favorable pricing/mix of 1.4%). In Latin America, comparable business sales growth of 12.4% (favorable volume of 7.7% plus favorable pricing/mix of 4.7%) combined with operating efficiencies resulted in comparable business operating profit growth of 16.0%. In other operating segments, comparable business operating profit declined 1.8%, despite a sales increase of 1.0% (favorable volume of 1.4% less unfavorable pricing/mix impact of .4%). Contributing significantly to this operating profit decline was approximately $14 million in aged inventory write-offs and related expenses in Southeast Asia as management initiated restructuring actions to refocus certain Asian markets on sustainable growth. MARGIN PERFORMANCE Margin performance (excluding restructuring charges and 2001 integration impact) was:

================================================================================ Change vs. prior year (pts) - -------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 - -------------------------------------------------------------------------------- Gross margin 53.5% 52.2% 52.4% +1.3 -.2 - -------------------------------------------------------------------------------- SGA% as reported (a) 39.1% 36.7% 37.0% Keebler amortization impact -1.0% -- -- - -------------------------------------------------------------------------------- SGA% excluding Keebler amortization 38.1% 36.7% 37.0% -1.4 +.3 - -------------------------------------------------------------------------------- Operating margin excluding Keebler amortization 15.4% 15.5% 15.4% -.1 +.1 ================================================================================

(a) Selling, general, and administrative expense as a percentage of net sales. For 2001, the gross margin improvement was attributable to sales of higher-margin Keebler products, cereal price increases in the United States and Europe, and efforts to improve our global sales mix. The gross margin improvement was offset by an increase in SGA%, resulting in an operating margin comparable to the prior year. The higher SGA% was attributable principally to expenditures for marketing programs, U.S. sales force expansion, and improved employee performance incentives. For 2000, the gross margin was relatively flat versus the prior year, as higher costs of production for Worthington and other new products, aged inventory write-offs in Southeast Asia, and increased energy costs offset productivity gains and lower employee benefit costs. The decrease in SGA% versus the prior year was due primarily to reduced advertising and overhead expenses. INTEREST EXPENSE For 2001, gross interest expense, prior to amounts capitalized, increased significantly versus the prior year, due primarily to interest expense on debt issued late in the first quarter to finance the Keebler acquisition. (Refer to the "Liquidity and capital resources" section beginning on page 23 for further information.) For 2000, gross interest expense was up versus the prior year, due primarily to an increase in short-term interest rates.

================================================================================ (dollars in millions) Change vs. prior year - -------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 - -------------------------------------------------------------------------------- Reported interest expense $351.5 $137.5 $118.8 Amounts capitalized 2.9 5.6 8.4 - -------------------------------------------------------------------------------- Gross interest expense $354.4 $143.1 $127.2 +147.7% +12.5% ================================================================================

Primarily as a result of the full-year impact of Keebler acquisition related debt, we expect reported 2002 interest expense to increase by approximately $60 million versus the 2001 level. 19 INCOME TAXES For 2001, the consolidated effective tax rate increased significantly over the prior year, primarily as a result of the impact of the Keebler acquisition on nondeductible goodwill and the level of U.S. tax on 2001 foreign subsidiary earnings. Additionally, the 2000 effective tax rate was unusually low, due to the recognition of $33 million in tax credits. Of these credits, $9 million was recorded based on completing studies with respect to U.S. research and experimentation credits for prior years. The remaining $24 million related primarily to utilization of U.S. foreign tax credit carryforwards. Reduced statutory rates in the United Kingdom, Australia, and Germany also contributed to the lower effective income tax rate in 2000 as compared to 1999. As a result of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002 (refer to "Significant accounting policies" section beginning on page 24), goodwill amortization expense - and the resulting impact on the effective income tax rate - will be eliminated in post-2001 years. Thus, we expect the 2002 effective income tax rate to return to historical levels of approximately 37%.

================================================================================ Effective income tax rate Change vs. prior year (pts) - -------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 - -------------------------------------------------------------------------------- Comparable (a) 40.0% 31.7% 36.2% +8.3 -4.5 - -------------------------------------------------------------------------------- As reported 40.1% 32.3% 37.0% +7.8 -4.7 ================================================================================

(a) Excludes restructuring and disposition-related charges. Refer to sections beginning on pages 20 and 22. The variance in the reported rates (as compared to the rates excluding the impact of restructuring and disposition-related charges) relates primarily to the disposition of nondeductible goodwill in 1999 and certain restructuring charges in all years for which no tax benefit was provided, based on management's assessment of the likelihood of recovering such benefit in future years. OTHER INCOME (EXPENSE), NET Other income (expense), net includes non-operating items such as interest income, foreign exchange gains and losses, charitable donations, and gains on asset sales. Other income (expense), net for 2000 includes a credit of approximately $12 million related to the 1999 sale of the Lender's Bagels business. The total amount consists of approximately $9 million for disposal of assets associated with the business which were not purchased by Aurora Foods Inc. (refer to "Dispositions" section on page 22) and approximately $3 million for final working capital settlement with Aurora. RESTRUCTURING CHARGES During the past several years, we have commenced major productivity and operational streamlining initiatives in an effort to optimize the Company's cost structure and align resources with our growth strategy. The incremental costs of these programs have been reported during these years as restructuring charges. Specifically, during 2000, we adopted a "focus and align" strategy that emphasizes a stricter prioritization for resource allocation to the United States and our other core markets. In conjunction with this strategy, the Company was reorganized from four operating areas into two divisions - U.S. and International. As a result, we initiated restructuring actions around the world to support this strategy and organization, including staff reductions in our global supply chain and innovation organization, rationalization of international convenience foods capacity, and restructuring of various non-core markets to improve return on investment. These initiatives resulted in restructuring charges during both 2000 and 2001. For the periods presented, operating profit includes restructuring charges for streamlining initiatives, as follows:

================================================================================ (millions, except per share data) 2001 2000 1999 - -------------------------------------------------------------------------------- Restructuring charges $48.3 $86.5 $244.6 Credits for reserve adjustments (15.0) -- -- - -------------------------------------------------------------------------------- Net charges $33.3 $86.5 $244.6 - -------------------------------------------------------------------------------- After-tax impact $20.5 $64.2 $156.4 - -------------------------------------------------------------------------------- Net earnings per share impact $ .05 $ .16 $ .40 ================================================================================

The 2001 charges of $48.3 million are related to preparing Kellogg for the Keebler integration and continued actions supporting our focus and align strategy. Specific initiatives included a headcount reduction of about 30 in our U.S. and global management, rationalization of product offerings and other actions to combine the Kellogg and Keebler logistics systems, and further reductions in convenience foods capacity in Southeast Asia. Approximately two-thirds of the charges were comprised of asset write-offs with the remainder consisting of employee separation benefits and other cash costs. As a result of actions during 2000 and 2001 related to our focus and align strategy, in 2001 we realized approximately $45 million from cost reductions and elimination of operating losses. Savings from Keebler integration-related initiatives have contributed to the total estimate of acquisition-related synergies (refer to "Keebler acquisition" section beginning on page 21). The 2001 credits of $15.0 million result from adjustments to various restructuring and asset disposal reserves. With numerous multi-year streamlining initiatives nearing completion in late 2001, we conducted an assessment of post-2001 reserve needs, resulting in net reductions of $8.8 million for cash outlays and $6.2 million for asset disposals. (Asset disposal reserves are reported within Property, net, on the Consolidated Balance Sheet.) The reduction in cash outlays relates primarily to lower-than-anticipated employee severance and asset removal expenditures, and higher-than-anticipated asset sale proceeds. 20 The 2000 charges of $86.5 million consist of $65.2 million for actions supporting our focus and align strategy and $21.3 million for a supply chain efficiency initiative in Europe. Approximately one-half of the charges for the focus and align program were comprised of asset write-offs with the remainder consisting primarily of cash costs associated with involuntary employee separation programs. Approximately 500 salaried and hourly positions were eliminated, primarily during the fourth quarter of 2000. The charges for the European supply chain program were comprised principally of voluntary employee retirement and separation benefits. This program resulted in hourly and salaried headcount reductions totaling 190 during 2000 and generated approximately $13 million in annual pretax savings in 2001. The 1999 charges consist of $193.2 million for closing the South Operations portion of the Company's Battle Creek, Michigan, cereal plant; $32.7 million for workforce reduction initiatives around the world; and $18.7 million, primarily for manufacturing equipment write-offs related to previously closed or impaired facilities in various locations. Approximately one-half of the charges for the South Operations closing were comprised of asset write-offs, with the remainder consisting primarily of cash costs for employee retirement and separation benefits, equipment removal, and building demolition. Approximately 525 hourly and salaried positions at the Battle Creek plant were eliminated by the end of the first quarter of 2000 through a combination of voluntary and involuntary separation programs. These actions resulted in annual pretax savings of approximately $30 million in 2000 and a further $10 million in 2001, for a total 2001 benefit of $40 million. The charges for workforce reduction initiatives were comprised principally of employee retirement and separation benefit costs for elimination of approximately 325 employee positions in Europe, Latin America, Australia, and Asia during 1999. These initiatives generated approximately $15 million of pretax savings during 1999, and a further $10 million in pretax savings in 2000, for a total 2000 benefit of $25 million. Incremental pretax savings achieved from all streamlining initiatives (except those associated with the Keebler integration) by year, and the relative impact on captions within the Consolidated Statement of Earnings, are:

================================================================================ Relative impact on --------------------------------- Incremental Cost of (dollars in millions) pretax savings goods sold SGA(a) - -------------------------------------------------------------------------------- 1999 $125 10% 90% 2000 50 80% 20% 2001 75 50% 50% ================================================================================

(a) Selling, general, and administrative expense. Total cash outlays incurred or expected for streamlining initiatives by year are:

================================================================================ (millions) - -------------------------------------------------------------------------------- 1999 $69 2000 68 2001 35 2002 expected 10 ================================================================================

As a result of the Keebler acquisition, we assumed $14.9 million of reserves for severance and facility closures related to Keebler's ongoing restructuring and acquisition-related synergy initiatives. Approximately $5 million of those reserves were utilized in 2001, with the remainder being attributable primarily to noncancelable lease obligations extending through 2006. Refer to Note 3 within Notes to Consolidated Financial Statements for information on the components of the restructuring charges by initiative, as well as reserve balances remaining at December 31, 2001, 2000, and 1999. KEEBLER ACQUISITION On March 26, 2001, we completed our acquisition of Keebler Foods Company ("Keebler") in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Keebler, headquartered in Elmhurst, Illinois, ranks second in the United States in the cookie and cracker categories and has the third largest food direct store door (DSD) delivery system in the United States. Under the purchase agreement, we paid $42 in cash for each common share of Keebler or approximately $3.65 billion, including $66 million of related acquisition costs. We also assumed $208 million in obligations to cash out employee and director stock options, resulting in a total cash outlay for Keebler stock of approximately $3.86 billion. Additionally, we assumed $696 million of Keebler debt, bringing the total value of the transaction to $4.56 billion. Of the debt assumed, $560 million was refinanced on the acquisition date. The acquisition was accounted for under the purchase method and was financed through a combination of short-term and long-term debt. The assets and liabilities of the acquired business were included in the consolidated balance sheet as of March 31, 2001. For purposes of consolidated reporting during 2001, Keebler's interim results of operations were reported for the periods ended March 24, 2001, June 16, 2001, October 6, 2001, and December 29, 2001. Therefore, Keebler results from the date of acquisition to June 16, 2001, were included in the Company's second quarter 2001 results. Related to this acquisition, we recorded $90.4 million of intangible amortization expense during 2001 ($76.5 million after tax) and would have recorded approximately $121 million ($102 million after tax) in 2002. As a result of our adoption of SFAS No. 142 on January 1, 2002 (refer to "Significant accounting policies" section beginning on page 24), this amortization expense will be eliminated in post-2001 years. 21 As of December 31, 2001, the purchase price allocation included $92.9 million of liabilities related to our plans to exit certain activities and operations of the acquired company ("exit liabilities"), comprised of Keebler employee severance and relocation, contract cancellation, and facility closure costs (refer to Note 2 within Notes to Consolidated Financial Statements for further information). Cash outlays related to these exit plans were $28 million in 2001 and are projected to be approximately $54 million in 2002, with the remaining amounts spent principally during 2003. Exit plans implemented thus far include separation of approximately 90 Keebler administrative employees and the closing of a bakery in Denver, Colorado, eliminating approximately 440 employee positions. During June 2001, the Company communicated plans to transfer portions of Keebler's Grand Rapids, Michigan, bakery production to other plants in the United States during the next 12 months. As a result, approximately 140 employee positions have been eliminated, primarily through a voluntary retirement program. During October 2001, the Company communicated plans to consolidate and expand Keebler's ice cream cone production operation in Chicago, Illinois, which will result in the closure of one facility at this location during 2002. As discussed in the "Results of operations" section on page 18, during 2001 we incurred integration-related costs for consolidation of Kellogg and Keebler employee organizations, computer systems, manufacturing capacity, and distribution systems. We also recognized impairment losses and accelerated depreciation on software assets being abandoned due to the conversion of our U.S. business to the SAP system. Additionally, during the second quarter of 2001, sales and operating profit were impacted negatively by a reduction in trade inventories preceding the transfer of our snack foods to Keebler's DSD system. These financial impacts reduced 2001 operating profit by $74.4 million. While the 2002 operating profit impact of continuing integration activity is currently expected to be insignificant, actual results will depend on various factors, primarily the timing of completion of planned supply chain and information technology initiatives. These activities and other actions are expected to result in Keebler-related pretax annual cost savings of approximately $170 million by 2003, with supply chain initiatives expected to generate the bulk of these savings. OTHER ACQUISITIONS During 2000, we paid cash for several business acquisitions. In January, we purchased certain assets and liabilities of the Mondo Baking Company Division of Southeastern Mills, Inc., a convenience foods manufacturing operation, for approximately $93 million, including related acquisition costs. In June, we acquired the outstanding stock of Kashi Company, a U.S. natural foods company, for approximately $33 million, including related acquisition costs. In July, we purchased certain assets and liabilities of The Healthy Snack People business, an Australian convenience foods operation, for approximately $12 million, including related acquisition costs. In November 1999, we purchased the outstanding common stock of Worthington Foods, Inc. for approximately $300 million in cash, including related acquisition costs. Additionally, we assumed approximately $50 million of Worthington debt, bringing the total value of the acquisition to $350 million. Worthington Foods, Inc. is a leader in the manufacturing and marketing of soy protein-based meat alternatives and other healthful foods. DISPOSITIONS During November 1999, we sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, we recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during 2000. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximated $9 million. This amount was recorded as a credit to other income (expense), net during 2000. During July 1999, we sold our 51% interest in a United Kingdom corn milling operation to Cargill Inc., which owned the remaining 49%. As a result of this sale, we recorded a pretax gain of $10.4 million ($7.8 million after tax or $.02 per share). In total, we recorded net disposition-related charges of $168.5 million ($111.5 million after tax or $.27 per share) during 1999. 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. The Euro existed alongside the old national currencies during a transition period from January 1, 1999, to January 1, 2002. During this period, entities within participating countries were required to complete changes that enable them to transact in the Euro. In early 1998, we formed a task force to monitor EMU developments, evaluate the impact of the Euro conversion on our operations, and develop and execute action plans, as necessary. Required business strategy, system, and process changes within our European region have been successfully completed, and business is being transacted in Euros with all relevant suppliers and customers. As a result of our successful implementation of Euro-based processes, internal business risks previously faced by our company have been substantially eliminated. However, we will continue to face external 22 marketplace risk throughout 2002 related to potential competitor and supplier pricing actions, and possible changes in customer and consumer purchasing behavior. Additionally, the Euro has weakened against the U.S. Dollar and British Pound since introduction and needs to be observed over a longer time period before conclusions can be drawn on the currency's long-term strength. LIQUIDITY AND CAPITAL RESOURCES For 2001, net cash provided by operating activities was $1.13 billion, up $251.1 million from the prior-year amount of $880.9 million. The increase was due primarily to favorable core working capital (trade receivables, inventory, and trade payables) trends, with average core working capital representing 8.3% of net sales, versus the year-ago level of 10.3%. Due to the factors discussed above, our measure of 2001 full-year "cash flow" (net cash provided from operating activities less expenditures for property additions) of $855.5 million increased significantly from the 2000 level of $650.0 million. We expect 2002 "cash flow" to be less than the 2001 level, reduced in part, by cash outlays related to Keebler exit plans (refer to "Keebler acquisition" section beginning on page 21), increased employee performance incentive payments, increased interest payments, and a slowing in the pace of further core working capital improvements. Net cash used in investing activities was $4.14 billion, up from $379.3 million in 2000, as a result of the Keebler acquisition. Expenditures for property additions were $276.5 million, which represented 3.1% of net sales compared with 3.3% in 2000. We believe full-year 2002 expenditures will be slightly less than the 2001 level. Net cash provided by financing activities was $3.04 billion, related primarily to issuance of $4.6 billion of long-term debt instruments to finance the Keebler acquisition, net of $1.6 billion of long-term debt retirements. The debt retirements consisted primarily of $400 million of Extendable Notes due February 2001, $500 million of Euro Dollar Notes due August 2001, and $676.2 million of Notes previously held by Keebler Foods Company. In February 2001, we paid holders $11.6 million (in addition to the principal amount and accrued interest) to extinguish $400 million of Extendable Notes prior to the extension date. Thus, during the first quarter of 2001, we reported an extraordinary loss, net of tax, of $7.4 million. On March 29, 2001, we issued $4.6 billion of long-term debt instruments primarily to finance the Keebler acquisition. Initially, these instruments were privately placed, or sold outside the United States, in reliance on exemptions from registration under the Securities Act of 1933, as amended (the "1933 Act"). We then exchanged new debt securities for these initial debt instruments, with the new debt securities being substantially identical in all respects to the initial debt instruments, except for being registered under the 1933 Act. In conjunction with this issuance, we settled $1.9 billion notional amount of forward-starting interest rate swaps for approximately $88 million in cash. The swaps effectively fixed a portion of the interest rate on an equivalent amount of debt prior to issuance. The swaps were designated as cash flow hedges pursuant to SFAS No. 133 (refer to Note 12 within Notes to Consolidated Financial Statements for further information). As a result, the loss on settlement (net of tax benefit) of $56 million was recorded in other comprehensive income, and is being amortized to interest expense over periods of 5 to 30 years. As a result of this amortization expense, as well as discount on the debt, the overall effective interest rate on the total $4.6 billion long-term debt issuance was approximately 6.75% during 2001. In November 2001, a subsidiary of the Company issued $375 million of five-year 4.49% fixed rate U.S. Dollar Notes to replace other maturing debt. These Notes are guaranteed by the Company and mature $75 million per year over the five-year term. These Notes, which were privately placed, contain standard warranties, events of default, and covenants. They also require the maintenance of a specified amount of consolidated net worth and a specified consolidated interest expense coverage ratio, and limit capital lease obligations and subsidiary debt. In conjunction with this issuance, the subsidiary of the Company entered into a $375 million notional US$ / Pound Sterling currency swap, which effectively converted this debt into a 5.302% fixed rate Pound Sterling obligation for the duration of the five-year term. In order to provide additional short-term liquidity in connection with the Keebler acquisition, we entered into a 364-Day Credit Agreement, which was renewed in January 2002, and a Five-Year Credit Agreement, which expires in January 2006. The 364-day agreement permits the Company or certain subsidiaries to borrow up to $950 million. The five-year agreement permits the Company or certain subsidiaries to borrow up to $1.15 billion (or certain amounts in foreign currencies). These agreements require the maintenance of a specified amount of consolidated net worth and a specified consolidated interest expense coverage ratio, and limit capital lease obligations and subsidiary debt. These credit facilities were unused at December 31, 2001. Our company has no material off-balance sheet financing arrangements or transactions with structured finance or special purpose entities. Our off-balance sheet commitments are generally limited to future payments under noncancelable operating leases totaling $268 million at December 31, 2001 (refer to Note 6 within Notes to Consolidated Financal Statements for further information). In addition, our Keebler subsidiary is guarantor on approximately $13 million of loans for approximately 400 independent contractors for the purchase of DSD route franchises. Despite the substantial amount of debt incurred to finance the Keebler acquisition, we believe that we will be able to meet our interest and principal repayment obligations and maintain our debt covenants for the foreseeable future, while still meeting our operational needs through our strong cash flow, our program of issuing commercial paper, and maintaining credit facilities on a global basis. 23 The Company's significant long-term debt issues do not contain acceleration of maturity clauses that are dependent on credit ratings. A change in the Company's credit ratings could limit its access to the U.S. commercial paper market and/or increase the cost of refinancing long-term debt in the future. However, even under these circumstances, the Company would continue to have access to its aforementioned credit facilities which are in amounts sufficient to cover the outstanding commercial paper balance and debt principal repayments through 2003. In October 2001, we filed a registration statement with the SEC, which subsequently became effective and allows Kellogg Company and certain business trusts to issue $2.0 billion of debt or equity securities from time to time. SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial Statements. Our critical accounting policies, which require significant judgments and estimates, are generally limited to those governing the amount and timing of recognition of consumer promotional expenditures and the assessment of the carrying value of intangible assets including goodwill under SFAS No. 121 for the periods presented. Our promotional activities are conducted either through the retail trade or directly with consumers and involve in-store displays; feature price discounts on our products; consumer coupons, contests, and loyalty programs; and similar activities. The costs of these activities are generally recognized at the time the related revenue is recorded, which normally precedes the actual cash expenditure. The recognition of these costs therefore requires management judgment regarding the volume of promotional offers that will be redeemed by either the retail trade or consumer. These estimates are made using various techniques including historical data on performance of similar promotional programs. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in management estimate in a subsequent period. However, as the Company's total promotional expenditures represented nearly 25% of 2001 net sales, the likelihood exists of materially different reported results if different assumptions or conditions were to prevail. Our assessment of the carrying value of intangible assets including goodwill is based upon our projection of future cash flows associated with these assets. Projections of future cash flows are dependent upon management estimates of future results. These estimates are made using various techniques including historical data, current and anticipated market conditions, management plans, and values realized by other consumer product companies in merger or sale transactions. At December 31, 2001, intangible assets, net, were $5.1 billion. Following is a discussion of recently issued pronouncements that will affect our Company beginning in 2002. REVENUE MEASUREMENT Beginning January 1, 2002, we have applied the consensus reached by the Emerging Issues Task Force of the FASB in Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." Under this consensus, generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. Non-cash consideration is to be classified as a cost of sales. Upon application of this consensus, prior-period financial statements should be reclassified to comply with this guidance. This guidance is applicable to Kellogg Company in several ways. First, it applies to payments we make to our customers (the retail trade) primarily for conducting consumer promotional activities, such as in-store display and feature price discounts on our products. Second, it applies to discount coupons and other cash redemption offers that we provide directly to consumers at the point of sale. Third, it applies to promotional items such as toys that are inserted in or attached to our product packages ("package inserts"). Consistent with industry practice, we had historically classified these items as promotional expenditures within selling, general, and administrative expense (SGA), and had generally recognized the cost as the related revenue was earned. As a result of applying this consensus, we will reclassify promotional payments to our customers and the cost of consumer coupons and other cash redemption offers from SGA to net sales. We will reclassify the cost of package inserts from SGA to cost of goods sold. We believe that consolidated net sales could be reduced up to 15% in 2002, with approximately 95% of this impact reflected in the U.S. operating segment. Consolidated cost of goods sold could be increased by approximately 1.5%. SGA will be reduced correspondingly such that net earnings will not be affected. Restated consolidated and total U.S. net sales for 1997-2001 are as follows:

================================================================================ Consolidated U.S. operating segment ----------------------- -------------------------- (millions) Original Restated Original Restated - -------------------------------------------------------------------------------- 2001 $8,853.3 $7,548.4 $6,129.0 $4,889.4 2000 6,954.7 6,086.7 4,067.4 3,263.6 1999 6,984.2 6,156.5 4,014.1 3,247.5 1998 6,762.1 6,110.5 3,858.0 3,256.6 1997 6,830.1 6,282.9 3,922.2 3,427.1 ================================================================================

BUSINESS COMBINATIONS We adopted SFAS No. 141 "Business Combinations" on July 1, 2001, and SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. Both of these standards provide guidance on how companies account for acquired businesses and related disclosure issues. Chief among the provisions of these standards are 1) elimination of the "pooling of interest" method for transactions initiated after June 30, 2001, 2) elimination of amortization of goodwill and "indefinite-lived" intangible assets effective for Kellogg Company on January 1, 2002, 24 and 3) annual impairment testing and potential loss recognition for goodwill and non-amortized intangible assets, also effective for the Company on January 1, 2002. Goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit, including goodwill allocated to it. If carrying value exceeds fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between carrying value and implied fair value of goodwill, which is determined in the same manner as the amount of goodwill recognized in a business combination. Impairment testing for non-amortized intangibles requires a comparison between the fair value and carrying value of the intangible asset. If carrying value exceeds fair value, the intangible is considered impaired and is reduced to fair value. Transitional impairment tests of goodwill and non-amortized intangibles are also performed upon adoption of SFAS No. 142, with any recognized impairment loss reported as the cumulative effect of an accounting change in the first period of adoption. We have completed these transitional tests and will not be recognizing any impairment losses upon adoption of SFAS No. 142. Regarding the elimination of goodwill and indefinite-lived intangible amortization, this change will be made prospectively upon adoption of SFAS No. 142 on January 1, 2002. Prior-period financial results will not be restated. However, comparative earnings information for prior periods will be disclosed. Substantially all of our total after-tax amortization expense will be eliminated under these new guidelines. Before impact of these new standards, total after-tax amortization expense in 2002 would have been approximately $110-$115 million. ACCOUNTING FOR LONG-LIVED ASSETS We adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-lived Assets" on January 1, 2002. This Standard will generally be effective for the Company on a prospective basis. SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. Significant changes include 1) establishing criteria beyond those previously specified in existing literature for determining when a long-lived asset is held for sale, and 2) requiring that the depreciable life of a long-lived asset to be abandoned is revised. These provisions could be expected to have the general effect of reducing or delaying recognition of future impairment losses on assets to be disposed, offset by higher depreciation expense during the remaining holding period. However, we do not expect the adoption of this standard to have a significant impact on our 2002 financial results. SFAS No. 144 also broadens the presentation of discontinued operations to include a component of an entity (rather than only a segment of a business). FORWARD-LOOKING STATEMENTS Our Management's Discussion and Analysis contains "forward-looking statements" with projections concerning, among other things, our strategy and plans; integration activities, costs, and savings related to the Keebler acquisition; cash outlays and savings related to restructuring actions; the impact of accounting changes; our ability to meet interest and debt principal repayment obligations; effective income tax rate; amortization expense; cash flow; property addition expenditures; and interest expense. Forward-looking statements include predictions of future results or activities and may contain the words "expect," "believe," "will," "will deliver," "anticipate," "project," "should," or words or phrases of similar meaning. Our actual results or activities may differ materially from these predictions. In particular, future results or activities could be affected by factors related to the Keebler acquisition, including integration problems, failures to achieve savings, unanticipated liabilities, and the substantial amount of debt incurred to finance the acquisition, which could, among other things, hinder our ability to adjust rapidly to changing market conditions, make us more vulnerable in the event of a downturn, and place us at a competitive disadvantage relative to less-leveraged competitors. In addition, our future results could be affected by a variety of other factors, including: - - competitive conditions in our markets; - - marketing spending levels and pricing actions of competitors; - - the impact of competitive conditions, marketing spending, and/or incremental pricing actions on actual volumes and product mix; - - effectiveness of advertising and marketing spending or programs; - - the success of new product introductions; - - the availability of and interest rates on short-term financing; - - the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs; - - commodity price and labor cost fluctuations; - - changes in consumer preferences; - - changes in U.S. or foreign regulations affecting the food industry; - - expenditures necessary to carry out restructuring initiatives and savings derived from these initiatives; - - U.S. and foreign economic conditions, including currency rate fluctuations; and, - - business disruption from terrorist acts or our nation's response to them. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to publicly update them. 25 KELLOGG COMPANY AND SUBSIDIARIES SELECTED FINANCIAL DATA (millions, except per share data and number of employees)

================================================================================================================================= 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING TRENDS Net sales $ 8,853.3 $6,954.7 $6,984.2 $6,762.1 $6,830.1 Gross profit as a % of net sales 53.4% 52.2% 52.4% 51.5% 52.1% Depreciation 331.0 275.6 273.6 261.8 272.0 Amortization 107.6 15.0 14.4 16.3 15.3 Advertising expense 519.2 604.2 674.1 695.3 780.4 R&D expense 110.2 118.4 104.1 121.9 106.1 Operating profit (a) 1,167.9 989.8 828.8 895.1 1,009.1 Operating profit, excluding charges 1,201.2 1,076.3 1,073.4 965.6 1,193.2 Operating profit, excluding charges, as a % of net sales 13.6% 15.5% 15.4% 14.3% 17.5% Interest expense 351.5 137.5 118.8 119.5 108.3 Earnings before extraordinary loss and cumulative effect of accounting change (a) (b): 482.0 587.7 338.3 502.6 564.0 Average shares outstanding (basic) 406.1 405.6 405.2 407.8 414.1 Earnings per share before extraordinary loss and cumulative effect of accounting change (a) (b): Basic 1.19 1.45 .83 1.23 1.36 Diluted 1.18 1.45 .83 1.23 1.36 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOW TRENDS Net cash provided from operating activities $ 1,132.0 $ 880.9 $ 795.2 $ 719.7 $ 879.8 Capital expenditures 276.5 230.9 266.2 373.9 312.4 Net cash provided from operating activities reduced by capital expenditures 855.5 650.0 529.0 345.8 567.4 Net cash used in investing activities (4,143.8) (379.3) (244.2) (398.0) (329.3) Net cash provided from (used in) financing activities 3,040.2 (441.8) (527.6) (358.3) (607.3) Interest coverage ratio (c) 4.7 9.9 11.5 10.4 13.7 - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL STRUCTURE TRENDS Total assets $10,368.6 $4,886.0 $4,808.7 $5,051.5 $4,877.6 Property, net 2,952.8 2,526.9 2,640.9 2,888.8 2,773.3 Short-term debt 595.6 1,386.3 521.5 621.5 579.8 Long-term debt 5,619.0 709.2 1,612.8 1,614.5 1,415.4 Shareholders' equity 871.5 897.5 813.2 889.8 997.5 - --------------------------------------------------------------------------------------------------------------------------------- SHARE PRICE TRENDS Stock price range $ 25-34 $ 21-32 $ 30-42 $ 30-50 $ 32-50 Cash dividends per common share 1.010 .995 .96 .92 .87 - --------------------------------------------------------------------------------------------------------------------------------- Number of employees 26,424 15,196 15,051 14,498 14,339 =================================================================================================================================

(a) Operating profit for 2001 includes restructuring charges, net of credits, of $33.3 ($20.5 after tax or $.05 per share). Operating profit for 2000 includes restructuring charges of $86.5 ($64.2 after tax or $.16 per share). Operating profit for 1999 includes restructuring charges of $244.6 ($156.4 after tax or $.40 per share). Earnings before extraordinary loss and cumulative effect of accounting change for 1999 include disposition- related charges of $168.5 ($111.5 after tax or $.27 per share). Operating profit for 1998 includes restructuring charges of $70.5 ($46.3 after tax or $.12 per share). Operating profit for 1997 includes restructuring charges of $161.1 and asset impairment losses of $23.0 ($140.5 after tax or $.34 per share). Refer to Management's Discussion and Analysis on pages 17-25 and Notes 2 and 3 within Notes to Consolidated Financial Statements for further explanation of charges for years 1999-2001. (b) Earnings before extraordinary loss and cumulative effect of accounting change for 2001 exclude the effect of a charge of $7.4 after tax ($.02 per share) for extinguishment of debt and a charge of $1.0 after tax to adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Earnings before extraordinary loss and cumulative effect of accounting change for 1997 exclude the effect of a charge of $18.0 after tax ($.04 per share) to write off business process reengineering costs in accordance with guidance issued by the Emerging Issues Task Force of the FASB. (c) Interest coverage ratio is calculated based on operating profit excluding charges [refer to note (a)], depreciation, and amortization divided by interest expense. 26 KELLOGG COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS

Year ended December 31, ================================================================================================================ (millions, except per share data) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- NET SALES $8,853.3 $6,954.7 $6,984.2 - --------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold 4,128.5 3,327.0 3,325.1 Selling, general, and administrative expense 3,523.6 2,551.4 2,585.7 Restructuring charges 33.3 86.5 244.6 - ---------------------------------------------------------------------------------------------------------------- OPERATING PROFIT $1,167.9 $ 989.8 $ 828.8 - ---------------------------------------------------------------------------------------------------------------- Interest expense 351.5 137.5 118.8 Disposition-related charges -- -- 168.5 Other income (expense), net (12.3) 15.4 (4.8) - ---------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY LOSS, AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 804.1 $ 867.7 $ 536.7 Income taxes 322.1 280.0 198.4 - ---------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 482.0 $ 587.7 $ 338.3 - ---------------------------------------------------------------------------------------------------------------- Extraordinary loss (net of tax) (7.4) -- -- Cumulative effect of accounting change (net of tax) (1.0) -- -- - ---------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 473.6 $ 587.7 $ 338.3 - ---------------------------------------------------------------------------------------------------------------- PER SHARE AMOUNTS: Earnings before extraordinary loss and cumulative effect of accounting change Basic $ 1.19 $ 1.45 $ .83 Diluted 1.18 1.45 .83 Net earnings Basic 1.17 1.45 .83 Diluted 1.16 1.45 .83 ================================================================================================================

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

==================================================================================================================================== Accumulated Common stock Capital in Treasury stock other Total Total ---------------- excess of Retained ---------------- comprehensive shareholders' comprehensive (millions) shares amount par value earnings shares amount income equity income - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1999 415.3 $103.8 $105.0 $1,367.7 10.3 ($394.3) ($292.4) $ 889.8 Net earnings 338.3 338.3 $ 338.3 Dividends (388.7) (388.7) Other comprehensive income (39.0) (39.0) (39.0) Stock options exercised and other .2 (.5) (.1) (.3) 13.4 12.8 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1999 415.5 $103.8 $104.5 $1,317.2 10.0 ($380.9) ($331.4) $ 813.2 $ 299.3 ----------- Net earnings 587.7 587.7 587.7 Dividends (403.9) (403.9) Other comprehensive income (103.9) (103.9) (103.9) Stock options exercised and other (2.5) (.2) 6.9 4.4 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2000 415.5 $103.8 $102.0 $1,501.0 9.8 ($374.0) ($435.3) $ 897.5 $ 483.8 ----------- Net earnings 473.6 473.6 473.6 Dividends (409.8) (409.9) Other comprehensive income (116.1) (116.1) (116.1) Stock options exercised and other (10.5) (.1) (1.0) 36.9 26.4 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2001 415.5 $103.8 $ 91.5 $1,564.7 8.8 ($337.1) ($551.4) $ 871.5 $ 357.5 ====================================================================================================================================

Refer to Notes to Consolidated Financial Statements. 27 KELLOGG COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET

At December 31, ============================================================================================== (millions, except share data) 2001 2000 - ---------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 231.8 $ 204.4 Accounts receivable, net 762.3 685.3 Inventories 574.5 443.8 Other current assets 333.4 283.6 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS $ 1,902.0 $1,617.1 - ---------------------------------------------------------------------------------------------- PROPERTY, NET 2,952.8 2,526.9 OTHER ASSETS 5,513.8 742.0 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $10,368.6 $4,886.0 ============================================================================================== CURRENT LIABILITIES Current maturities of long-term debt $ 82.3 $ 901.1 Notes payable 513.3 485.2 Accounts payable 577.5 388.2 Other current liabilities 1,034.5 707.8 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES $ 2,207.6 $2,482.3 - ---------------------------------------------------------------------------------------------- LONG-TERM DEBT 5,619.0 709.2 OTHER LIABILITIES 1,670.5 797.0 SHAREHOLDERS' EQUITY Common stock, $.25 par value, 1,000,000,000 shares authorized Issued: 415,451,198 shares in 2001 and 415,451,198 in 2000 103.8 103.8 Capital in excess of par value 91.5 102.0 Retained earnings 1,564.7 1,501.0 Treasury stock at cost: 8,840,028 shares in 2001 and 9,812,543 shares in 2000 (337.1) (374.0) Accumulated other comprehensive income (551.4) (435.3) - ---------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 871.5 $ 897.5 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,368.6 $4,886.0 ==============================================================================================

Refer to Notes to Consolidated Financial Statements. 28 KELLOGG COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended December 31, ================================================================================================================ (millions) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings $ 473.6 $ 587.7 $ 338.3 Items in net earnings not requiring (providing) cash: Depreciation and amortization 438.6 290.6 288.0 Deferred income taxes 71.5 (1.4) (60.5) Restructuring charges, net of cash paid 31.2 62.5 220.1 Disposition-related charges -- -- 168.5 Other (66.0) (1.2) 65.7 Pension and other postretirement benefit contributions (76.3) (84.3) (78.1) Changes in operating assets and liabilities 259.4 27.0 (146.8) - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES $ 1,132.0 $ 880.9 $ 795.2 - ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to properties ($276.5) ($230.9) ($266.2) Acquisitions of businesses (3,858.0) (137.2) (298.2) Dispositions of businesses -- -- 291.2 Property disposals 10.1 4.8 36.6 Other (19.4) (16.0) (7.6) - ---------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ($4,143.8) ($379.3) ($244.2) - ---------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase (reduction) of notes payable, with maturities less than or equal to 90 days ($154.0) $ 290.5 ($410.8) Issuances of notes payable, with maturities greater than 90 days 549.6 3.5 292.1 Reductions of notes payable, with maturities greater than 90 days (365.6) (331.6) (19.0) Issuances of long-term debt 5,001.4 -- -- Reductions of long-term debt (1,608.4) (4.8) (14.1) Net issuances of common stock 26.4 4.5 12.9 Cash dividends (409.8) (403.9) (388.7) Other .6 -- -- - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES $ 3,040.2 ($441.8) ($527.6) - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (1.0) (6.0) (9.2) - ---------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents $ 27.4 $ 53.8 $ 14.2 Cash and cash equivalents at beginning of year 204.4 150.6 136.4 - ---------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 231.8 $ 204.4 $ 150.6 ================================================================================================================

Refer to Notes to Consolidated Financial Statements. 29 KELLOGG COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Kellogg Company and its majority-owned subsidiaries. Intercompany balances and transactions are eliminated. Certain amounts in the prior-year financial statements have been reclassified to conform to the current-year presentation. CASH AND CASH EQUIVALENTS Highly liquid temporary investments with original maturities of less than three months are considered to be cash equivalents. The carrying amount approximates fair value. INVENTORIES Inventories are valued at the lower of cost (principally average) or market. PROPERTY Fixed assets are recorded at cost and depreciated over estimated useful lives using straight-line methods for financial reporting and accelerated methods for tax reporting. Cost includes an amount of interest associated with significant capital projects. GOODWILL AND OTHER INTANGIBLE ASSETS For the periods presented, intangible assets are amortized on a straight-line basis over the estimated periods benefited, generally 40 years for goodwill and periods ranging from 5 to 40 years for other intangible assets. The realizability of goodwill and other intangibles is evaluated periodically when events or circumstances indicate a possible inability to recover the carrying amount. Evaluation is based on undiscounted cash flow projections over the remaining life of the asset. An excess of carrying value over cash flows would result in recognition of an impairment loss. The amount of the loss would be based on the difference between carrying value and fair value of the asset, as measured by market comparables or discounted cash flows in the absence of market data. The Company will be adopting new accounting policies in this area, effective January 1, 2002, as discussed under the "Recently issued pronouncements" caption that follows. REVENUE RECOGNITION The Company recognizes sales upon delivery of its products to customers net of applicable provisions for discounts, returns, and allowances. ADVERTISING The costs of advertising are generally expensed as incurred. STOCK COMPENSATION The Company follows Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options and other stock-based compensation. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. As permitted, the Company has elected to adopt the disclosure provisions only of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Refer to Note 8 for further information. DERIVATIVES AND HEDGING TRANSACTIONS The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001. This statement requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. Upon adoption, the Company reported a charge to earnings of $1.0 million (net of tax benefit of $.6 million) and a charge to other comprehensive income of $14.9 million (net of tax benefit of $8.6 million) in order to recognize the fair value of derivative instruments as either assets or liabilities on the balance sheet. The charge to earnings relates to the component of the derivative instruments' net loss that has been excluded from the assessment of hedge effectiveness. Refer to Note 12 for further information. For periods prior to 2001, the Company accounted for derivatives and hedging transactions in a manner similar to the provisions of SFAS No. 133, except that 1) unrealized gains and losses related to hedges of forecasted transactions were deferred as assets or liabilities rather than in other comprehensive income, and 2) the fair values of certain financial derivatives such as interest rate swaps were carried off-balance sheet. RECENTLY ISSUED PRONOUNCEMENTS REVENUE MEASUREMENT Beginning January 1, 2002, the Company has applied the consensus reached by the Emerging Issues Task Force of the FASB in Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." Under this consensus, generally, cash consideration is to be classified as a reduction of revenue, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. Non-cash consideration is to be classified as a cost of sales. Upon application of this consensus, prior-period financial statements should be reclassified to comply with this guidance. This guidance is applicable to Kellogg Company in several ways. First, it applies to payments made by the Company to its customers (the retail trade) primarily for conducting consumer promotional activities, such as in-store display and feature price discounts on the Company's products. Second, it applies to discount coupons and other cash redemption offers that the Company provides directly to consumers at the point of sale. Third, it applies to promotional items such as toys that the Company inserts in or attaches to its product packages ("package inserts"). Consistent with industry practice, the Company has historically classified these items as promotional expenditures within selling, general, and administrative expense (SGA), and has generally recognized the cost as the related revenue was earned. As a result of applying this consensus, the Company will reclassify promotional payments to its customers and the cost of consumer coupons and other cash redemption offers from SGA to net sales. The Company will reclassify the cost of package inserts from SGA to cost of goods sold. Management believes that consolidated net sales could be reduced up to 15% in 2002, with approximately 95% of this impact reflected in the U.S. operating segment. Consolidated cost of goods sold could be increased by approximately 1.5%. SGA will be reduced correspondingly such that net earnings will not be affected. 30 Restated consolidated and total U.S. net sales for 1997-2001 are as follows:

Consolidated U.S. operating segment - ----------------------------------------------------------------- (millions) Original Restated Original Restated - ----------------------------------------------------------------- 2001 $8,853.3 $7,548.4 $6,129.0 $4,889.4 2000 6,954.7 6,086.7 4,067.4 3,263.6 1999 6,984.2 6,156.5 4,014.1 3,247.5 1998 6,762.1 6,110.5 3,858.0 3,256.6 1997 6,830.1 6,282.9 3,922.2 3,427.1

BUSINESS COMBINATIONS The Company adopted SFAS No. 141 "Business Combinations" on July 1, 2001, and SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. Both of these standards provide guidance on how companies account for acquired businesses and related disclosure issues. Chief among the provisions of these standards are 1) elimination of the "pooling of interest" method for transactions initiated after June 30, 2001, 2) elimination of amortization of goodwill and "indefinite-lived" intangible assets effective for Kellogg Company on January 1, 2002, and 3) annual impairment testing and potential loss recognition for goodwill and non-amortized intangible assets, also effective for the Company on January 1, 2002. Goodwill impairment testing first requires a comparison between the carrying value and fair value of a reporting unit, including goodwill allocated to it. If carrying value exceeds fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between carrying value and implied fair value of goodwill, which is determined in the same manner as the amount of goodwill recognized in a business combination. Impairment testing for non-amortized intangibles requires a comparison between the fair value and carrying value of the intangible asset. If carrying value exceeds fair value, the intangible is considered impaired and is reduced to fair value. Transitional impairment tests of goodwill and non-amortized intangibles are also performed upon adoption of SFAS No. 142, with any recognized impairment loss reported as the cumulative effect of an accounting change in the first period of adoption. The Company has completed these transitional tests and will not be recognizing any impairment losses upon adoption of SFAS No. 142. Regarding the elimination of goodwill and indefinite-lived intangible amortization, this change will be made prospectively upon adoption of SFAS No. 142 on January 1, 2002. Prior-period financial results will not be restated. However, comparative earnings information for prior periods will be disclosed. Substantially all of the Company's total after-tax amortization expense will be eliminated under these new guidelines. Before impact of these new standards, total after-tax amortization expense in 2002 would have been approximately $110-$115 million. ACCOUNTING FOR LONG-LIVED ASSETS The Company adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-lived Assets" on January 1, 2002. This standard will generally be effective for the Company on a prospective basis. SFAS No. 144 clarifies and revises existing guidance on accounting for impairment of plant, property, and equipment, amortized intangibles, and other long-lived assets not specifically addressed in other accounting literature. Significant changes include 1) establishing criteria beyond those previously specified in existing literature for determining when a long-lived asset is held for sale, and 2) requiring that the depreciable life of a long-lived asset to be abandoned is revised. These provisions could be expected to have the general effect of reducing or delaying recognition of future impairment losses on assets to be disposed, offset by higher depreciation expense during the remaining holding period. However, management does not expect the adoption of this standard to have a significant impact on the Company's 2002 financial results. SFAS No. 144 also broadens the presentation of discontinued operations to include a component of an entity (rather than only a segment of a business). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 ACQUISITIONS AND DISPOSITIONS KEEBLER ACQUISITION On March 26, 2001, the Company completed its acquisition of Keebler Foods Company ("Keebler") in a transaction entered into with Keebler and with Flowers Industries, Inc., the majority shareholder of Keebler. Keebler, headquartered in Elmhurst, Illinois, ranks second in the United States in the cookie and cracker categories and has the third largest food direct store door (DSD) delivery system in the United States. Under the purchase agreement, the Company paid $42 in cash for each common share of Keebler or approximately $3.65 billion, including $66 million of related acquisition costs. The Company also assumed $208 million in obligations to cash out employee and director stock options, resulting in a total cash outlay for Keebler stock of approximately $3.86 billion. Additionally, the Company assumed $696 million of Keebler debt, bringing the total value of the transaction to $4.56 billion. Of the debt assumed, $560 million was refinanced on the acquisition date. The acquisition was accounted for under the purchase method and was financed through a combination of short-term and long-term debt. The assets and liabilities of the acquired business were included in the consolidated balance sheet as of March 31, 2001. For purposes of consolidated reporting during 2001, Keebler's interim results of operations were reported for the periods ended March 24, 2001, June 16, 2001, October 6, 2001, and December 29, 2001. Therefore, Keebler results from the date of acquisition to June 16, 2001, were included in the Company's second quarter 2001 results. 31 As of December 31, 2001, the components of intangible assets included in the allocation of purchase price are presented in the following table. During 2001, these intangibles were amortized based on an estimated useful life of 40 years. As a result of the Company's adoption of SFAS No. 142 on January 1, 2002 (refer to Note 1), these intangibles will no longer be amortized after 2001, but will be subject to annual impairment reviews. The process of finalizing valuations of assets and obligations that existed as of the acquisition date is virtually complete. However, management's estimate of "exit liabilities" (discussed below) could change as plans for exit of certain activities and functions of Keebler are refined during the first quarter of 2002, thus impacting the amount of residual goodwill attributable to this acquisition.

(millions) - --------------------------------------------------------------- Trademarks and tradenames $1,310.0 Direct store door (DSD) delivery system 590.0 Goodwill 2,918.3 - --------------------------------------------------------------- $4,818.3

As of December 31, 2001, the purchase price allocation included $92.9 million of liabilities related to management's plans to exit certain activities and operations of the acquired company ("exit liabilities"), as presented in the table below. Cash outlays related to these exit plans are projected to be approximately $54 million in 2002, with the remaining amounts spent principally during 2003.

EMPLOYEE LEASE & OTHER FACILITY SEVERANCE EMPLOYEE CONTRACT CLOSURE (MILLIONS) BENEFITS RELOCATION TERMINATION COSTS TOTAL - ----------------------------------------------------------------------------------------------------- Total reserve at March 26, 2001: Original estimate $59.3 $ 8.6 $12.3 $10.4 $90.6 Purchase accounting adjustments 4.4 .5 (2.0) (.6) 2.3 - ----------------------------------------------------------------------------------------------------- Adjusted $63.7 $ 9.1 $10.3 $ 9.8 $92.9 Amounts utilized during 2001 (22.8) (1.8) (1.0) (2.4) (28.0) - ----------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 2001 $40.9 $ 7.3 $ 9.3 $ 7.4 $64.9

Exit plans implemented thus far include separation of approximately 90 Keebler administrative employees and the closing of a bakery in Denver, Colorado, eliminating approximately 440 employee positions. During June 2001, the Company communicated plans to transfer portions of Keebler's Grand Rapids, Michigan, bakery production to other plants in the United States during the next 12 months. As a result, approximately 140 employee positions have been eliminated, primarily through a voluntary retirement program. During October 2001, the Company communicated plans to consolidate and expand Keebler's ice cream cone production operation in Chicago, Illinois, which will result in the closure of one facility at this location during 2002. The following table includes the unaudited pro forma combined results as if Kellogg Company had acquired Keebler Foods Company as of the beginning of either 2001 or 2000, instead of March 26, 2001.

(millions, except per share data) 2001 2000 - ---------------------------------------------------------------------------- Net sales $ 9,500.1 $ 9,650.0 Earnings before extraordinary loss and cumulative effect of accounting change $ 438.1 $ 518.3 Net earnings $ 429.7 $ 518.3 Net earnings per share (basic and diluted) $ 1.06 $ 1.28

The pro forma results include amortization of the intangibles presented above and interest expense on debt assumed issued to finance the purchase. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each of the fiscal periods presented, nor are they necessarily indicative of future consolidated results. OTHER ACQUISITIONS During 2000, the Company paid cash for several business acquisitions. In January, the Company purchased certain assets and liabilities of the Mondo Baking Company Division of Southeastern Mills, Inc., a convenience foods manufacturing operation, for approximately $93 million, including related acquisition costs. In June, the Company acquired the outstanding stock of Kashi Company, a U.S. natural foods company, for approximately $33 million, including related acquisition costs. In July, the Company purchased certain assets and liabilities of The Healthy Snack People business, an Australian convenience foods operation, for approximately $12 million, including related acquisition costs. In November 1999, the Company purchased the outstanding common stock of Worthington Foods, Inc. for approximately $300 million in cash, including related acquisition costs. Additionally, the Company assumed approximately $50 million of Worthington debt, bringing the total value of the acquisition to $350 million. Worthington Foods, Inc. is a leader in the manufacturing and marketing of soy protein-based meat alternatives and other healthful foods. The acquisition was accounted for as a purchase and was financed through short-term borrowings. The purchase price allocation included trademarks and tradenames of $100 million and residual goodwill of $190 million. Through December 31, 2001, these intangibles were amortized based on an estimated useful life of 40 years. As of result of the Company's adoption of SFAS No. 142 on January 1, 2002, (refer to Note 1), these intangibles will no longer be amortized after 2001, but will be subject to annual impairment reviews. The unaudited pro forma combined historical results, as if Worthington Foods, Inc. had been acquired at the beginning of 1999, are estimated to be: net sales-$7,130.1 million; net earnings-$323.6 million; net earnings per share- $.80. The pro forma results include amortization of the intangibles presented above and interest expense on debt assumed issued to finance the purchase. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 1999, nor are they necessarily indicative of future consolidated results. DISPOSITIONS During November 1999, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Lender's business, which were not purchased by Aurora. Disposal of these other assets was completed during 2000. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximated $9 million. This amount was recorded as a credit to other income (expense), net during 2000. 32 During July 1999, the Company sold its 51% interest in a United Kingdom corn milling operation to Cargill Inc., which owned the remaining 49%. As a result of this sale, the Company recorded a pretax gain of $10.4 million ($7.8 million after tax or $.02 per share). In total, the Company recorded net disposition-related charges of $168.5 million ($111.5 million after tax or $.27 per share) during 1999. NOTE 3 RESTRUCTURING CHARGES During the past several years, management has commenced major productivity and operational streamlining initiatives in an effort to optimize the Company's cost structure and align resources with the Company's growth strategy. The incremental costs of these programs have been reported during these years as restructuring charges. Specifically, during 2000, management adopted a "focus and align" strategy that emphasizes a stricter prioritization for resource allocation to the United States and the Company's other core markets. In conjunction with this strategy, the Company was reorganized from four operating areas into two divisions - U.S. and International. As a result, management initiated restructuring actions around the world to support this strategy and organization, including staff reductions in its global supply chain and innovation organization, rationalization of international convenience foods capacity, and restructuring of various non-core markets to improve return on investment. These initiatives resulted in restructuring charges during both 2000 and 2001. For the periods presented, operating profit includes restructuring charges for streamlining initiatives, as follows:

(millions, except per share data) 2001 2000 1999 - ---------------------------------------------------------------------------- Restructuring charges $ 48.3 $ 86.5 $ 244.6 Credits for reserve adjustments (15.0) -- -- - ---------------------------------------------------------------------------- Net charges $ 33.3 $ 86.5 $ 244.6 - ---------------------------------------------------------------------------- After-tax impact $ 20.5 $ 64.2 $ 156.4 - ---------------------------------------------------------------------------- Net earnings per share impact $ .05 $ .16 $ .40

The 2001 charges of $48.3 million are related to preparing Kellogg for the Keebler integration and continued actions supporting the Company's focus and align strategy. Specific initiatives included a headcount reduction of about 30 in U.S. and global Company management, rationalization of product offerings and other actions to combine the Kellogg and Keebler logistics systems, and further reductions in convenience foods capacity in Southeast Asia. Approximately two-thirds of the charges were comprised of asset write-offs with the remainder consisting of employee separation benefits and other cash costs. The 2001 credits of $15.0 million result from adjustments to various restructuring and asset disposal reserves. With numerous multi-year streamlining initiatives nearing completion in late 2001, management conducted an assessment of post-2001 reserve needs, which resulted in net reductions of $8.8 million for cash outlays and $6.2 million for asset disposals. (Asset disposal reserves are reported within Property, net, on the Consolidated Balance Sheet.) The reduction in cash outlays relates primarily to lower-than-anticipated employee severance and asset removal expenditures, and higher-than-anticipated asset sale proceeds. The 2000 charges of $86.5 million consist of $65.2 million for actions supporting the Company's focus and align strategy and $21.3 million for a supply chain efficiency initiative in Europe. Approximately one-half of the charges for the focus and align program were comprised of asset write-offs with the remainder consisting primarily of cash costs associated with involuntary em- ployee separation programs. Approximately 500 salaried and hourly positions were eliminated, primarily during the fourth quarter of 2000. The charges for the European supply chain program were comprised principally of voluntary employee retirement and separation benefits. This program resulted in hourly and salaried headcount reductions totaling 190 during 2000. The 1999 charges consist of $193.2 million for closing the South Operations portion of the Company's Battle Creek, Michigan, cereal plant; $32.7 million for workforce reduction initiatives around the world; and $18.7 million, primarily for manufacturing equipment write-offs related to previously closed or impaired facilities in various locations. Approximately one-half of the charges for the South Operations closing were comprised of asset write-offs, with the remainder consisting primarily of cash costs for employee retirement and separation benefits, equipment removal, and building demolition. Approximately 525 hourly and salaried positions at the Battle Creek plant were eliminated by the end of the first quarter of 2000 through a combination of voluntary and involuntary separation programs. The charges for workforce reduction initiatives were comprised principally of employee retirement and separation benefit costs for elimination of approximately 325 employee positions in Europe, Latin America, Australia, and Asia during 1999. Total cash outlays incurred or expected for streamlining initiatives by year are:

(millions) - -------------------------------- 1999 $69 2000 68 2001 35 2002 expected 10

As a result of the Keebler acquisition, we assumed $14.9 million of reserves for severance and facility closures related to Keebler's ongoing restructuring and acquisition-related synergy initiatives. Approximately $5 million of those reserves were utilized in 2001, with the remainder being attributable primarily to noncancelable lease obligations extending through 2006. The components of the restructuring charges by initiative, as well as reserve balances remaining at December 31, 2001, 2000, and 1999, were:

EMPLOYEE U.S. OPERATIONAL RETIREMENT STREAMLINING AND SEVERANCE ASSET ASSET OTHER (millions) BENEFITS (a) WRITE-OFFS REMOVAL COSTS (c) TOTAL - ---------------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 1998 $ -- $ -- $ 8.5 $ -- $ 8.5 1999 restructuring charges 55.5 108.4 28.2 1.1 193.2 Amounts utilized during 1999 (34.1) (108.4) (8.6) (1.1) (152.2) - ---------------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 1999 $ 21.4 $ -- $ 28.1 $ -- $ 49.5 Amounts utilized during 2000 (20.0) -- (17.4) -- (37.4) - ---------------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 2000 $ 1.4 $ -- $ 10.7 $ -- $ 12.1 2001 restructuring credits (1.1) (1.1) (.8) -- (3.0) Amounts utilized during 2001 (.3) 1.1 (8.2) -- (7.4) - ---------------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 2001 $ -- $ -- $ 1.7 $ -- $ 1.7

33

EMPLOYEE RETIREMENT PAN-EUROPEAN AND REORGANIZATION SEVERANCE ASSET ASSET OTHER (millions) BENEFITS (a) WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1998 (b) $ 1.8 $ -- ($1.4) $ -- $ .4 1999 restructuring charges 10.9 10.9 .6 -- 22.4 Amounts utilized during 1999 (10.0) (10.9) (.4) -- (21.3) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1999 (b) $ 2.7 $ -- ($1.2) $ -- $ 1.5 2000 restructuring charges 19.6 -- -- 1.7 21.3 Amounts utilized during 2000 (21.3) -- 1.2 (1.7) (21.8) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2000 $ 1.0 $ -- $ -- $ -- $ 1.0 Amounts utilized during 2001 (1.0) -- -- -- (1.0) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2001 $ -- $ -- $ -- $ -- $ --

EMPLOYEE RETIREMENT AUSTRALIAN PLANT AND PRODUCTIVITY PROGRAM SEVERANCE ASSET ASSET OTHER (millions) BENEFITS WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1998 $2.6 $ -- $1.6 $ -- $4.2 1999 restructuring charges 1.5 .2 (.4) .1 1.4 Amounts utilized during 1999 (1.0) (.2) (.6) (.1) (1.9) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1999 $3.1 $ -- $ .6 $ -- $3.7 Amounts utilized during 2000 (3.1) -- (.6) -- (3.7) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2000 $ -- $ -- $ -- $ -- $ --

EMPLOYEE NORTH AMERICAN RETIREMENT OVERHEAD ACTIVITY AND ANALYSIS SEVERANCE ASSET ASSET OTHER (millions) BENEFITS (a) WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 1998 $34.4 $ -- $ 2.9 $ -- $37.3 1999 restructuring charges 5.5 -- 1.1 4.5 11.1 Amounts utilized during 1999 (35.7) -- (3.0) (4.5) (43.2) - ------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 1999 $ 4.2 $ -- $ 1.0 $ -- $ 5.2 Amounts utilized during 2000 (3.1) -- (.5) -- (3.6) - ------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 2000 $ 1.1 $ -- $ .5 $ -- $ 1.6 Amounts utilized during 2001 (.8) -- (.3) -- (1.1) - ------------------------------------------------------------------------------------------------- Remaining reserve at December 31, 2001 $ .3 $ -- $ .2 $ -- $ .5

EMPLOYEE RETIREMENT GLOBAL STRATEGY AND REALIGNMENT (d) SEVERANCE ASSET ASSET OTHER (millions) BENEFITS (a) WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------ 2000 restructuring charges $25.7 $29.9 $ 7.3 $ 2.3 $65.2 Amounts utilized during 2000 (5.9) (29.9) (1.6) (2.3) (39.7) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2000 $19.8 $ -- $ 5.7 $ -- $25.5 2001 restructuring charges, net of credits 6.9 28.6 1.0 (.2) 36.3 Amounts utilized during 2001 (20.6) (28.6) (5.1) .2 (54.1) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2001 $ 6.1 $ -- $ 1.6 $ -- $ 7.7

EMPLOYEE RETIREMENT AND ALL OTHER SEVERANCE ASSET ASSET OTHER (millions) BENEFITS WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1998 $ .8 $ -- $ .3 $ -- $ 1.1 1999 restructuring charges 4.8 11.7 -- -- 16.5 Amounts utilized during 1999 (5.6) (11.7) (.3) -- (17.6) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1999 $ -- $ -- $ -- $ -- $ --

EMPLOYEE RETIREMENT AND CONSOLIDATED SEVERANCE ASSET ASSET OTHER (millions) BENEFITS (a) WRITE-OFFS REMOVAL COSTS (c) TOTAL - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1998 $39.6 $ -- $11.9 $ -- $51.5 1999 restructuring charges 78.2 131.2 29.5 5.7 244.6 Amounts utilized during 1999 (86.4) (131.2) (12.9) (5.7) (236.2) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 1999 $31.4 $ -- $28.5 $ -- $59.9 2000 restructuring charges 45.3 29.9 7.3 4.0 86.5 Amounts utilized during 2000 (53.4) (29.9) (18.9) (4.0) (106.2) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2000 $23.3 $ -- $16.9 $ -- $40.2 2001 restructuring charges, net of credits 5.8 27.5 .2 (.2) 33.3 Amounts utilized during 2001 (22.7) (27.5) (13.6) .2 (63.6) - ------------------------------------------------------------------------------------------------ Remaining reserve at December 31, 2001 $ 6.4 $ -- $ 3.5 $ -- $ 9.9

- ----------- (a) Includes net (gains) or losses from pension and postretirement health care curtailment and special termination benefits as follows (Refer to Notes 9 and 10):

2001 2000 1999 - -------------------------------------------------------------- U.S. operational streamlining $-- $ -- $ 32 Pan-European reorganization -- 5 -- North American overhead activity analysis -- -- 4 Global strategy realignment (2) 3 -- - -------------------------------------------------------------- Consolidated ($2) $ 8 $ 36

- ------------ (b) Negative removal reserves in Europe result from netting of anticipated proceeds from asset sales with removal costs. (c) Consist primarily of program-related non-exit costs incurred during the period of the reported charge. (d) Includes initiatives related to preparing Kellogg for the Keebler integration. NOTE 4 OTHER INCOME (EXPENSE), NET Other income (expense), net includes non-operating items such as interest income, foreign exchange gains and losses, charitable donations, and gains on asset sales. Other income (expense), net for 2000 includes a credit of approximately $12 million related to the 1999 sale of the Lender's Bagels business. The total amount consists of approximately $9 million for disposal of assets associated with the business which were not purchased by Aurora Foods Inc. (refer to Note 2) and approximately $3 million for final working capital settlement with Aurora. 34 NOTE 5 EQUITY 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 comprised principally of employee stock options issued by the Company. Basic net earnings per share is reconciled to diluted net earnings per share as follows:

EARNINGS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE AVERAGE NET EFFECT OF SHARES EARNINGS (millions, except per share data) ACCOUNTING CHANGE OUTSTANDING PER SHARE - --------------------------------------------------------------------------------------- 2001 Basic $ 482.0 406.1 $ 1.19 Dilutive employee stock options -- 1.1 (.01) - ------------------------------------------------------------------------------------- Diluted $ 482.0 407.2 $ 1.18 ===================================================================================== 2000 Basic $ 587.7 405.6 $ 1.45 Dilutive employee stock options -- .2 -- - ------------------------------------------------------------------------------------- Diluted $ 587.7 405.8 $ 1.45 ===================================================================================== 1999 Basic $ 338.3 405.2 $ .83 Dilutive employee stock options -- .5 -- - ------------------------------------------------------------------------------------- Diluted $ 338.3 405.7 $ .83 =====================================================================================

COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to shareholders. Comprehensive income for the periods presented consists of net earnings, minimum pension liability adjustments (refer to Note 9), unrealized gains and losses on cash flow hedges pursuant to SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", and foreign currency translation adjustments pursuant to SFAS No. 52 "Foreign Currency Translation" as follows:

TAX PRETAX (EXPENSE) AFTER-TAX (millions) AMOUNT BENEFIT AMOUNT - ------------------------------------------------------------------------------------------- 2001 Net earnings $ 473.6 Other comprehensive income: Foreign currency translation adjustments ($ 60.4) $ -- (60.4) Cash flow hedges: Unrealized gain (loss) on cash flow hedges (86.3) 31.9 (54.4) Reclassification to net earnings 8.8 (3.3) 5.5 Minimum pension liability adjustments (9.8) 3.0 (6.8) - ----------------------------------------------------------------------------------------- ($ 147.7) $ 31.6 (116.1) - ----------------------------------------------------------------------------------------- Total comprehensive income $ 357.5 =========================================================================================

TAX PRETAX (EXPENSE) AFTER-TAX (millions) AMOUNT BENEFIT AMOUNT - ------------------------------------------------------------------------------------------ 2000 Net earnings $ 587.7 Other comprehensive income: Foreign currency translation adjustments ($ 97.4) $ -- (97.4) Minimum pension liability adjustments (10.0) 3.5 (6.5) - ---------------------------------------------------------------------------------------- ($ 107.4) $ 3.5 (103.9) - ---------------------------------------------------------------------------------------- Total comprehensive income $ 483.8 ======================================================================================== 1999 Net earnings $ 338.3 Other comprehensive income: Foreign currency translation adjustments ($ 39.0) $ -- (39.0) - ---------------------------------------------------------------------------------------- Total comprehensive income $ 299.3 ========================================================================================

Accumulated other comprehensive income (loss) at year-end consisted of the following:

(millions) 2001 2000 - ------------------------------------------------------------------------------ Foreign currency translation adjustments ($ 489.2) ($ 428.8) Cash flow hedges-- unrealized net loss (48.9) -- Minimum pension liability adjustments (13.3) (6.5) - ------------------------------------------------------------------------------ Total accumulated other comprehensive income (loss) ($ 551.4) ($ 435.3) ==============================================================================

NOTE 6 LEASES The Company's leases are generally for equipment and warehouse space. Rent expense on all operating leases was $100.0 million in 2001, $36.7 million in 2000, and $31.5 million in 1999. The increase in 2001 rent expense as compared to prior years relates primarily to operating leases held by Keebler Foods Company, acquired by the Company in March 2001 (refer to Note 2 for further information). At December 31, 2001, future minimum annual rental commitments under noncancelable operating leases totaled $268 million consisting of (in millions): 2002-$83; 2003-$53; 2004-$40; 2005-$31; 2006- $31; 2007 and beyond-$30. At December 31, 2001, future minimum annual payments under noncancelable capital leases totaled $14.6 million consisting of (in millions): 2002-$2.8; 2003-$1.9; 2004-$6.3; 2005-$1.7; 2006-$1.5; 2007 and beyond-$.4. NOTE 7 DEBT Notes payable at year-end consisted of commercial paper borrowings in the United States and Canada and, to a lesser extent, bank loans of foreign subsidiaries at competitive market rates, as follows:

(dollars in millions) 2001 2000 - ------------------------------------------------------------------------------------ EFFECTIVE EFFECTIVE PRINCIPAL INTEREST PRINCIPAL INTEREST AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------ U.S. commercial paper $ 320.8 3.0% $ 429.8 6.6% Canadian commercial paper 171.1 2.5% -- -- Other 21.4 55.4 - ------------------------------------------------------------------------------------ $ 513.3 $ 485.2 ====================================================================================

35 Additionally, during 2000, the Company entered into financing arrangements that provided for the sale of future foreign currency revenues. As of December 31, 2000, the Company had committed to borrowings during 2001 in the cumulative principal amount of approximately $160 million, which were converted to foreign currency forward contracts in January 2001. No borrowings were outstanding under these arrangements at December 31, 2000. Long-term debt at year-end consisted primarily of fixed rate issuances of U.S. and Euro Dollar Notes, as follows:

(millions) 2001 2000 - ---------------------------------------------------------------------- (a) 4.875% U.S. Dollar Notes due 2005 $ 200.0 $ 200.0 (b) 6.625% Euro Dollar Notes due 2004 500.0 500.0 (c) 6.125% Euro Dollar Notes due 2001 -- 500.0 (d) 5.75% U.S. Dollar Notes due 2001 -- 400.0 (e) 5.5% U.S. Dollar Notes due 2003 998.4 -- (e) 6.0% U.S. Dollar Notes due 2006 994.5 -- (e) 6.6% U.S. Dollar Notes due 2011 1,491.8 -- (e) 7.45% U.S. Dollar Debentures due 2031 1,085.3 -- (f) 4.49% U.S. Dollar Notes due 2006 375.0 -- Other 56.3 10.3 - ---------------------------------------------------------------------- 5,701.3 1,610.3 Less current maturities (82.3) (901.1) - ---------------------------------------------------------------------- Balance, December 31 $ 5,619.0 $ 709.2 ======================================================================

(a) In October 1998, the Company issued $200 of seven-year 4.875% fixed rate U.S. Dollar Notes to replace maturing long-term debt. In conjunction with this issuance, the Company settled $200 notional amount of interest rate forward swap agreements, which, when combined with original issue discount, effectively fixed the interest rate on the debt at 6.07%. (b) In January 1997, the Company issued $500 of seven-year 6.625% fixed rate Euro Dollar Notes. In conjunction with this issuance, the Company settled $500 notional amount of interest rate forward swap agreements, which effectively fixed the interest rate on the debt at 6.354%. (c) In August 1997, the Company issued $500 of four-year 6.125% Euro Dollar Notes which were repaid in August 2001. In conjunction with this issuance, the Company settled $400 notional amount of interest rate forward swap agreements which effectively fixed the interest rate on the debt at 6.4%. Associated with this debt, during September 1997, the Company entered into a $200 notional, four-year fixed-to-floating interest rate swap, indexed to three-month LIBOR. (d) In February 1998, the Company issued $400 of three-year 5.75% fixed rate U.S. Dollar Notes. These Notes were issued under an existing "shelf registration" with the Securities and Exchange Commission, and provided an option to holders to extend the obligation for an additional four years at a predetermined interest rate of 5.63% plus the Company's then-current credit spread. As a result of this option, the effective interest rate on the Notes was 5.23%. In conjunction with this issuance, the Company entered into a $400 notional, three-year fixed-to-floating interest rate swap, indexed to the Federal Reserve AA Composite Rate on 30-day commercial paper. During February 2001, the Company paid holders $11.6 to extinguish the Notes prior to the extension date. Thus, during the first quarter of 2001, the Company reported an extraordinary loss, net of tax, of $7.4 ($.02 per share). (e) In March 2001, the Company issued $4.6 billion of long-term debt instruments, further described in the table below, primarily to finance the acquisition of Keebler Foods Company (refer to Note 2). Initially, these instruments were privately placed, or sold outside the United States, in reliance on exemptions from registration under the Securities Act of 1933, as amended (the "1933 Act"). The Company then exchanged new debt securities for these initial debt instruments, with the new debt securities being substantially identical in all respects to the initial debt instruments, except for being registered under the 1933 Act. These debt securities contain standard events of default and covenants. The Notes due 2006 and 2011, and the Debentures due 2031 may be redeemed in whole or part by the Company at any time at prices determined under a formula (but not less than 100% of the principal amount plus unpaid interest to the redemption date). In conjunction with this issuance, the Company settled $1.9 billion notional amount of forward-starting interest rate swaps for approximately $88 in cash. The swaps effectively fixed a portion of the interest rate on an equivalent amount of debt prior to issuance. The swaps were designated as cash flow hedges pursuant to SFAS No. 133 (refer to Note 12). As a result, the loss on settlement (net of tax benefit) of $56 was recorded in other comprehensive income, and is being amortized to interest expense over periods of 5 to 30 years. The pretax loss of $88 is presented in the "Other" caption within the Consolidated Statement of Cash Flows. The effective interest rates presented in the following table reflect this amortization expense, as well as discount on the debt.

PRINCIPAL EFFECTIVE (dollars in millions) AMOUNT NET PROCEEDS INTEREST RATE - -------------------------------------------------------------------------------------------- 5.5% U.S. Dollar Notes due 2003 $ 1,000.0 $ 997.4 5.64% 6.0% U.S. Dollar Notes due 2006 1,000.0 993.5 6.39% 6.6% U.S. Dollar Notes due 2011 1,500.0 1,491.2 7.08% 7.45% U.S. Dollar Debentures due 2031 1,100.0 1,084.9 7.62% - ------------------------------------------------------------------------------------------ $ 4,600.0 $ 4,567.0 ==========================================================================================

(f) In November 2001, a subsidiary of the Company issued $375 of five-year 4.49% fixed rate U.S. Dollar Notes to replace other maturing debt. These Notes are guaranteed by the Company and mature $75 per year over the five-year term. These Notes, which were privately placed, contain standard warranties, events of default, and covenants. They also require the maintenance of a specified amount of consolidated net worth and a specified consolidated interest expense coverage ratio, and limit capital lease obligations and subsidiary debt. In conjunction with this issuance, the subsidiary of the Company entered into a $375 notional US$/ Pound Sterling currency swap, which effectively converted this debt into a 5.302% fixed rate Pound Sterling obligation for the duration of the five-year term. In order to provide additional short-term liquidity in connection with the Keebler Foods Company acquisition referenced above, the Company entered into a 364-Day Credit Agreement, which was renewed in January 2002, and a Five-Year Credit Agreement, expiring in January 2006. The 364-day agreement permits the Company or certain subsidiaries to borrow up to $950 million. The five-year agreement permits the Company or certain subsidiaries to borrow up to $1.15 billion (or certain amounts in foreign currencies). These two credit agreements contain standard warranties, events of default, and covenants. They also require the maintenance of a specified amount of consolidated net worth and a specified consolidated interest expense coverage ratio, and limit capital lease obligations and subsidiary debt. These credit facilities were unused at December 31, 2001. Including the aforementioned Credit Agreements, the Company had $2.50 billion of short-term lines of credit at December 31, 2001, virtually all of which were unused and available for borrowing on an unsecured basis. Scheduled principal repayments on long-term debt are (in millions): 2002-$82.3; 2003- $1,106.2; 2004-$582.3; 2005-$278.8; 2006-$1,077.4; 2007 and beyond-$2,604.4. Interest paid was (in millions): 2001-$303; 2000-$141; 1999-$124. Interest expense capitalized as part of the construction cost of fixed assets was (in millions): 2001-$2.9; 2000-$5.6; 1999-$8.4. At December 31, 2001, the Company's Keebler subsidiary was guarantor on approximately $13 million of loans for approximately 400 independent contractors for the purchase of DSD route franchises. NOTE 8 STOCK COMPENSATION The 2001 Long-Term Incentive Plan ("2001 Plan") provides for benefits to be awarded to key employees and officers in the form of incentive and nonqualified stock options, performance shares, performance units, restricted stock grants, and other stock-based awards. Options granted under this plan generally vest over two years, subject to earlier vesting if a change of control occurs. Restricted stock grants under this plan generally vest in three years. Under this plan, approximately 300,000 restricted shares of common stock were granted during 2001 to eligible employees. Also under this plan, performance units were awarded during 2001 to a limited number of senior executive-level employees for the achievement of cumulative cash flow targets for a three-year period ending on December 31, 2003. If the performance targets are met, the award of units represents the right to receive shares of common stock equal to the dollar award valued on the vesting date. The awards are earned and vest in February 2004. No awards are earned unless a minimum threshold is attained. The maximum dollar award that could be attained under this program is $18 million. During 2001, the Company recognized total compensation expense of $6 million related to restricted stock grants and performance unit awards. 36 The 2001 Plan and the Non-Employee Director Stock Plan described below contain an accelerated ownership feature ("AOF"). An AOF option is generally granted when Company stock is used to pay the exercise price of a stock option or any taxes owed. The holder of the option is generally granted an AOF option for the number of shares so used with the exercise price equal to the then fair market value of the Company's stock. For all AOF options, the original expiration date is not changed but the options vest immediately. Prior to approval by shareholders during 2000 of the 2001 Plan, the Key Employee Long-Term Incentive Plan provided substantially similar stock-based benefits to executive-level employees. Under this plan, approximately 100,000 restricted shares of common stock were granted during 2000 to eligible employees. The Kellogg Employee Stock Ownership Plan was designed to offer stock and other incentive awards based on Company performance to employees who were not eligible to participate in the Key Employee Long Term Incentive Plan. Options which have been awarded under this plan generally vest over five years. Options under all plans described above are granted with exercise prices equal to the fair market value of the Company's common stock at the time of the grant and have a term of no more than ten years, if they are incentive stock options, or no more than ten years and one day, if they are non-qualified stock options. The Non-Employee Director Stock Plan was approved by shareholders in 2000 and allows each eligible non-employee director to receive 1,700 shares of the Company's common stock and annual grants of options to purchase 5,000 shares of the Company's common stock. These shares are placed in the Kellogg Company Grantor Trust for Non-Employee Directors (the "Grantor Trust"). Under the terms of the Grantor Trust, shares are available to a director only upon termination of service on the Board. During 2001, 55,000 options and 17,000 shares of common stock were granted under this plan. As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the Company has elected to account for employee and director stock option grants under APB No. 25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for these grants. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for the stock option plans been determined based on the fair value at the grant date consistent with SFAS No. 123, the Company's net earnings and earnings per share are estimated as follows:

(millions, except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------------ Net earnings: As reported $ 473.6 $ 587.7 $ 338.3 Pro forma $ 449.9 $ 567.1 $ 311.4 Basic net earnings per share: As reported $ 1.17 $ 1.45 $ .83 Pro forma $ 1.11 $ 1.40 $ .77 Diluted net earnings per share: As reported $ 1.16 $ 1.45 $ .83 Pro forma $ 1.10 $ 1.40 $ .77 ====================================================================================

The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

2001 2000 1999 - ---------------------------------------------------------------------------------- Risk-free interest rate 4.57% 6.59% 4.83% Dividend yield 3.30% 3.90% 3.00% Volatility 28.21% 25.43% 23.16% Average expected term (years) 3.08 3.17 3.76 Fair value of options granted $ 7.50 $ 6.69 $ 6.38 ==================================================================================

Transactions under these plans were:

(millions, except per share data) 2001 2000 1999 - --------------------------------------------------------------------------------- Under option, January 1 23.4 19.9 16.4 Granted 17.1 6.4 6.6 Exercised (1.3) (.1) (1.1) Cancelled (2.2) (2.8) (2.0) - --------------------------------------------------------------------------------- Under option, December 31 37.0 23.4 19.9 - --------------------------------------------------------------------------------- Exercisable, December 31 16.9 13.7 10.1 ================================================================================= Shares available, December 31, for options that may be granted under the following plans: Key Employee Long-Term Incentive Plan -- 3.2 7.1 Kellogg Employee Stock Ownership Plan 2.8 4.8 4.6 2000 Non-employee Directors Stock Plan .9 .9 -- 2001 Long-Term Incentive Plan 16.1 26.0 -- - --------------------------------------------------------------------------------- Total shares available, December 31, for options that may be granted 19.8 34.9 11.7 ================================================================================= Average prices per share - --------------------------------------------------------------------------------- Under option, January 1 $ 34 $ 38 $ 38 Granted 27 24 36 Exercised 25 26 32 Cancelled 34 36 39 - --------------------------------------------------------------------------------- Under option, December 31 $ 31 $ 34 $ 38 - --------------------------------------------------------------------------------- Exercisable, December 31 $ 36 $ 38 $ 39 =================================================================================

Employee stock options outstanding and exercisable under these plans as of December 31, 2001, were: (millions, except per share data)

OUTSTANDING EXERCISABLE --------------------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE PRICES OF OPTIONS PRICE LIFE (YRS.) OF OPTIONS PRICE - ---------------------------------------------------------------------------- $19 - 26 11.8 $25 8.7 2.3 $24 27 - 28 10.1 28 9.0 .8 28 29 - 37 7.0 34 6.5 6.5 35 38 - 50 8.1 43 6.1 7.3 43 - -------------------------------------------------------------------------- 37.0 16.9 ==========================================================================

37 NOTE 9 PENSION BENEFITS The Company has a number of U.S. and foreign pension plans to provide retirement benefits for its employees. Benefits for salaried employees are generally based on salary and years of service, while union employee benefits are generally a negotiated amount for each year of service. Plan funding strategies are influenced by tax regulations. Plan assets consist primarily of equity securities with smaller holdings of bonds, real estate, and other investments. Investment in Company common stock represented 1.7% and 1.9% of consolidated plan assets at December 31, 2001 and 2000, respectively. The components of pension expense were:

(millions) 2001 2000 1999 - -------------------------------------------------------------------------------------- Service cost $ 47.4 $ 34.5 $ 42.6 Interest cost 124.5 91.1 83.7 Expected return on plan assets (192.4) (143.3) (125.1) Amortization of unrecognized transition obligation .3 .6 2.0 Amortization of unrecognized prior service cost 6.6 7.0 7.4 Recognized net (gain) loss 4.6 (4.2) 10.9 Curtailment and special termination benefits - net (gain) loss (1.5) 8.5 33.5 - -------------------------------------------------------------------------------------- Pension (income) expense - Company plans (10.5) (5.8) 55.0 Pension expense - multiemployer plans 3.0 2.2 1.4 - -------------------------------------------------------------------------------------- Total pension (income) expense ($ 7.5) ($ 3.6) $ 56.4 ======================================================================================

The worldwide weighted average actuarial assumptions were:

2001 2000 1999 - ------------------------------------------------------------------------------------- Discount rate 7.0% 7.0% 7.2% Long-term rate of compensation increase 4.7% 4.6% 4.2% Long-term rate of return on plan assets 10.5% 10.4% 10.4% =====================================================================================

The aggregate change in projected benefit obligation, change in plan assets, and funded status were:

(millions) 2001 2000 - --------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year $ 1,381.5 $ 1,350.4 Acquisition adjustment 613.4 -- Service cost 47.4 34.5 Interest cost 124.5 91.1 Plan participants' contributions 1.3 1.4 Amendments .7 5.3 Actuarial loss 9.7 32.1 Benefits paid (123.4) (91.8) Foreign currency adjustments (17.1) (42.4) Other .7 .9 - --------------------------------------------------------------------------- Projected benefit obligation at end of year $ 2,038.7 $ 1,381.5 ===========================================================================

(millions) 2001 2000 - --------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets of beginning of year $ 1,405.0 $ 1,578.0 Acquisition adjustment 568.6 -- Actual return on plan assets (13.8) (86.4) Employer contribution 23.8 41.7 Plan participants' contributions 1.3 1.4 Benefits paid (121.6) (91.8) Foreign currency adjustments (18.2) (38.1) Other .2 .2 - --------------------------------------------------------------------------- Fair value of plan assets at end of year $ 1,845.3 $ 1,405.0 =========================================================================== FUNDED STATUS ($ 193.4) $ 23.5 Unrecognized net loss 334.0 118.5 Unrecognized transition amount 2.4 2.7 Unrecognized prior service cost 29.5 34.8 - --------------------------------------------------------------------------- Prepaid pension $ 172.5 $ 179.5 =========================================================================== AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET Prepaid benefit cost $ 287.4 $ 252.0 Accrued benefit liability (140.3) (87.1) Intangible asset 5.6 4.6 Minimum pension liability 19.8 10.0 - --------------------------------------------------------------------------- Net amount recognized $ 172.5 $ 179.5 ===========================================================================

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were:

(millions) 2001 2000 - -------------------------------------------------------------- Projected benefit obligation $ 204.1 $ 104.6 Accumulated benefit obligation 178.9 86.1 Fair value of plan assets 68.9 7.1 ==============================================================

All gains and losses, other than those related to curtailment or special termination benefits, are recognized over the average remaining service period of active plan participants. Net gains or losses from curtailment and special termination benefits recognized in 1999-2001 were recorded as a component of restructuring charges. Refer to Note 3 for further information. At December 31, 2001, a cumulative after-tax charge of $13.3 million ($19.8 million pre-tax) has been recorded in other comprehensive income to recognize the additional minimum pension liability in excess of unrecognized prior service cost. Certain of the Company's subsidiaries sponsor 401(k) or similar savings plans for active employees. Expense related to these plans was (in millions): 2001- $18; 2000-$16; 1999-$17. NOTE 10 NONPENSION POSTRETIREMENT BENEFITS Certain of the Company's U.S. and Canadian subsidiaries provide health care and other benefits to substantially all retired employees, their covered dependents, and beneficiaries. Generally, employees are currently eligible for these benefits when one of the following service/age requirements is met: 30 years and any age; 20 years and age 55; 5 years and age 62. Plan assets consist primarily of equity securities with smaller holdings of bonds. 38 Components of postretirement benefit expense were:

(millions) 2001 2000 1999 - ------------------------------------------------------------------------------------ Service cost $ 10.7 $ 7.7 $ 9.3 Interest cost 49.7 44.4 37.4 Expected return on plan assets (24.5) (21.4) (17.8) Amortization of unrecognized prior service cost (1.1) (1.1) (.5) Recognized net gains (2.3) (3.2) (4.8) Curtailment and special termination benefits - net (gain) loss (.2) (.1) .5 - ------------------------------------------------------------------------------------ Postretirement benefit expense $ 32.3 $ 26.3 $ 24.1 ===================================================================================

The weighted average actuarial assumptions were:

2001 2000 1999 - -------------------------------------------------------------------------------------- Discount rate 7.25% 7.5% 8.0% Long-term rate of return on plan assets 10.2% 10.5% 10.5% ======================================================================================

The aggregate change in accumulated postretirement benefit obligation, change in plan assets, and funded status were:

(millions) 2001 2000 - ------------------------------------------------------------------------------------ CHANGE IN ACCUMULATED BENEFIT OBLIGATION Accumulated benefit obligation at beginning of year $ 618.6 $ 580.2 Acquisition adjustment 92.9 -- Service cost 10.7 7.7 Interest cost 49.7 44.4 Actuarial loss 171.8 28.9 Amendments .2 -- Benefits paid (48.3) (42.3) Other (.4) (.3) - ------------------------------------------------------------------------------------ Accumulated benefit obligation at end of year $ 895.2 $ 618.6 ==================================================================================== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 222.9 $ 230.0 Actual return on plan assets (16.4) (7.4) Employer contribution 52.5 42.6 Benefits paid (46.9) (42.3) Other .5 -- - ------------------------------------------------------------------------------------ Fair value of plan assets at end of year $ 212.6 $ 222.9 ==================================================================================== FUNDED STATUS ($ 682.6) ($ 395.7) Unrecognized net loss (gain) 188.4 (26.4) Unrecognized prior service cost (8.3) (9.4) - ------------------------------------------------------------------------------------ Accrued postretirement benefit cost ($ 502.5) ($ 431.5) - ------------------------------------------------------------------------------------ AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET Accrued benefit liability ($ 502.5) ($ 431.5) ====================================================================================

The assumed health care cost trend rate was 9% for 2002, decreasing gradually to 4.5% by the year 2007 and remaining at that level thereafter. These trend rates reflect the Company's prior experience and management's expectation that future rates will decline. A one percentage point change in assumed health care cost trend rates would have the following effects:

ONE PERCENTAGE ONE PERCENTAGE (millions) POINT INCREASE POINT DECREASE - ---------------------------------------------------------------------- Effect on total of service and interest cost components $ 10.3 ($ 8.4) Effect on postretirement benefit obligation $ 103.5 ($ 86.1) ======================================================================

All gains and losses, other than those related to curtailment or special termination benefits, are recognized over the average remaining service period of active plan participants. Net gains from curtailment and special termination benefits recognized in 2001 and 2000 were recorded as a component of restructuring charges. The net loss from curtailment and special termination benefits for 1999 includes a $2.2 million loss recorded as a component of restructuring charges and a $1.7 million gain recorded as a component of disposition-related charges. Refer to Notes 2 and 3 for further information. The Company contributes to a voluntary employee benefit association (VEBA) trust for funding of its nonpension postretirement benefit obligations. NOTE 11 INCOME TAXES Earnings before income taxes, extraordinary loss, and cumulative effect of accounting change, and the provision for U.S. federal, state, and foreign taxes on these earnings, were:

(millions) 2001 2000 1999 - ------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE United States $ 464.2 $ 561.9 $ 235.1 Foreign 339.9 305.8 301.6 - ------------------------------------------------------------------------------- $ 804.1 $ 867.7 $ 536.7 - ------------------------------------------------------------------------------- INCOME TAXES Currently payable Federal $ 120.9 $ 134.0 $ 135.9 State 30.1 20.3 20.6 Foreign 99.6 127.1 102.4 - ------------------------------------------------------------------------------- 250.6 281.4 258.9 - ------------------------------------------------------------------------------- Deferred Federal 53.1 (1.2) (60.7) State 1.2 4.1 (4.5) Foreign 17.2 (4.3) 4.7 - ------------------------------------------------------------------------------- 71.5 (1.4) (60.5) - ------------------------------------------------------------------------------- Total income taxes $ 322.1 $ 280.0 $ 198.4 ===============================================================================

The difference between the U.S. federal statutory tax rate and the Company's effective rate was:

2001 2000 1999 - ------------------------------------------------------------------------------------------- U.S. statutory rate 35.0% 35.0% 35.0% Foreign rates varying from 35% (1.1) (.6) (.5) State income taxes, net of federal benefit 2.5 1.8 2.0 Net change in valuation allowances .1 (3.0) (1.3) Non-deductible goodwill amortization 2.9 .6 -- Statutory rate changes, deferred tax impact (.1) (.3) (.6) Other .8 (1.2) 2.4 - ------------------------------------------------------------------------------------------- Effective income tax rate 40.1% 32.3% 37.0% ===========================================================================================

Generally, the changes in valuation allowances on deferred tax assets and corresponding impacts on the effective income tax rate, as presented above, result from management's assessment of the Company's ability to utilize certain operating loss and tax credit carryforwards. For 2000, the change in valuation allowance relates primarily to utilization of U.S. foreign tax credit carryforwards. As a result, the effective income tax rate was significantly lower in 2000 as compared to either 2001 or 1999. Reduced statutory rates in the United Kingdom, Australia, and Germany also contributed to the lower effective income tax rate in 2000 as compared to 1999. 39 For 2001, the significant increase in the income tax rate impact of nondeductible goodwill relates to the Company's acquisition of Keebler Foods Company (refer to Note 2). As a result of the Company's adoption of SFAS No. 142 on January 1, 2002 (refer to Note 1), goodwill amortization expense - and the resulting impact on the effective income tax rate - will be eliminated in post-2001 years. Total tax benefits of carryforwards at year-end 2001 and 2000 were $23.9 million and $20.3 million, respectively, which expire principally after five years. The deferred tax assets and liabilities included in the balance sheet at year- end were:

DEFERRED DEFERRED TAX ASSETS TAX LIABILITIES ------------------------- -------------------------- (millions) 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Current Promotion and advertising $ 16.3 $ 14.0 $ 7.2 $ 8.1 Wages and payroll taxes 29.0 17.0 -- .3 Inventory valuation 12.2 8.7 14.6 11.0 Health and postretirement benefits 28.9 19.9 2.7 .4 State taxes 11.7 6.9 -- -- Operating loss and credit carryforwards .2 .5 .2 -- Deferred intercompany revenue 10.3 53.3 7.8 7.0 Keebler exit liabilities 22.7 -- -- -- Unrealized hedging losses, net 29.7 -- .2 -- Other 28.9 32.6 3.0 6.7 - ---------------------------------------------------------------------------------------------------------------- 189.9 152.9 35.7 33.5 Less valuation allowance (1.6) (3.6) -- -- - ---------------------------------------------------------------------------------------------------------------- 188.3 149.3 35.7 33.5 ================================================================================================================ Noncurrent Depreciation and asset disposals 8.4 12.8 339.7 288.2 Health and postretirement benefits 179.4 151.0 71.1 73.0 Capitalized interest -- -- 21.2 23.3 State taxes -- -- 74.3 5.2 Operating loss and credit carryforwards 23.7 19.8 -- -- Trademarks and other intangibles -- -- 662.6 30.6 Deferred compensation 28.9 3.4 -- -- Other 35.4 25.4 9.0 8.9 - ---------------------------------------------------------------------------------------------------------------- 275.8 212.4 1,177.9 429.2 Less valuation allowance (35.1) (32.5) -- -- - ---------------------------------------------------------------------------------------------------------------- 240.7 179.9 1,177.9 429.2 - ---------------------------------------------------------------------------------------------------------------- Total deferred taxes $ 429.0 $ 329.2 $1,213.6 $ 462.7 ================================================================================================================

The amounts reported above for unrealized hedging losses, net, relate to the effect of cash flow hedges recorded in other comprehensive income pursuant to SFAS No. 133, which the Company adopted on January 1, 2001. Refer to Notes 5 and 12 for further information. For further information on the amount reported above for Keebler exit liabilities, refer to Note 2. At December 31, 2001, foreign subsidiary earnings of approximately $1.09 billion were considered permanently invested in those businesses. Accordingly, U.S. income taxes have not been provided on these earnings. Cash paid for income taxes was (in millions): 2001-$195.7; 2000-$246; 1999- $242. The 2001 amount is net of a tax refund of approximately $73 million related to the cash-out of Keebler employee and director stock options upon acquisition of Keebler Foods Company (refer to Note 2 for further information). NOTE 12 FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION The fair values of the Company's financial instruments are based on carrying value in the case of short-term items, quoted market prices for derivatives and investments, and, in the case of long-term debt, incremental borrowing rates currently available on loans with similar terms and maturities. The carrying amounts of the Company's cash, cash equivalents, receivables, and notes payable approximate fair value. The fair value of the Company's long-term debt at December 31, 2001, exceeded its carrying value by approximately $217 million. The Company is exposed to certain market risks which exist as a part of its ongoing business operations and uses derivative financial and commodity instruments, where appropriate, to manage these risks. In general, instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. In accordance with SFAS No. 133 (refer to Note 1), the Company designates derivatives as either cash flow hedges, fair value hedges, net investment hedges, or other contracts used to reduce volatility in the translation of foreign currency earnings to U.S. Dollars. The fair values of all hedges are recorded in accounts receivable or other current liabilities. Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recorded in other income (expense), net. These amounts were insignificant during 2001. CASH FLOW HEDGES Qualifying derivatives are accounted for as cash flow hedges when the hedged item is a forecasted transaction. Gains and losses on these instruments are recorded in other comprehensive income until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive income to the Statement of Earnings on the same line item as the underlying transaction. The total net loss attributable to cash flow hedges recorded in accumulated other comprehensive income at December 31, 2001, was $48.9 million related primarily to forward-starting interest rate swaps settled during 2001 (refer to Note 7). This loss is being reclassified into interest expense over periods of 5 to 30 years. Other insignificant amounts related to foreign currency and commodity price cash flow hedges will be reclassified into earnings during the next 12 months. FAIR VALUE HEDGES Qualifying derivatives are accounted for as fair value hedges when the hedged item is a recognized asset, liability, or firm commitment. Gains and losses on these instruments are recorded in earnings, offsetting gains and losses on the hedged item. NET INVESTMENT HEDGES Qualifying derivative and non-derivative financial instruments are accounted for as net investment hedges when the hedged item is a foreign currency investment in a subsidiary. Gains and losses on these instruments are recorded as a foreign currency translation adjustment in other comprehensive income. The net amount recorded in other comprehensive income during 2001 was insignificant. OTHER CONTRACTS The Company also enters into foreign currency forward contracts and options to reduce volatility in the translation of foreign currency earnings to U.S. 40 Dollars. Gains and losses on these instruments are recorded in other income (expense), net, generally reducing the exposure to translation volatility during a full-year period. FOREIGN EXCHANGE RISK The Company is exposed to fluctuations in foreign currency cash flows related primarily to third-party purchases, intercompany loans and product shipments, and non-functional currency denominated third-party debt. The Company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, the Company is exposed to volatility in the translation of foreign currency earnings to U.S. Dollars. The Company assesses foreign currency risk based on transactional cash flows and enters into forward contracts, options, and currency swaps to reduce fluctuations in net long or short currency positions. Forward contracts and options are generally less than 12 months duration. Currency swap agreements are established in conjunction with the term of underlying debt issues. For foreign currency cash flow and fair value hedges, the assessment of effectiveness is generally based on changes in spot rates. Changes in time value are reported in other income (expense), net. INTEREST RATE RISK The Company is exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing issuances of variable rate debt. The Company currently uses interest rate swaps, including forward-starting swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions. Variable-to-fixed interest rate swaps are accounted for as cash flow hedges and the assessment of effectiveness is based on changes in the present value of interest payments on the underlying debt. Fixed-to-variable interest rate swaps are accounted for as fair value hedges and the assessment of effectiveness is based on changes in the fair value of the underlying debt, using incremental borrowing rates currently available on loans with similar terms and maturities. PRICE RISK The Company is exposed to price fluctuations primarily as a result of antici- pated purchases of raw and packaging materials. The Company uses the combination of long cash positions with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted purchases over a duration of generally less than one year. Commodity contracts are accounted for as cash flow hedges. The assessment of effectiveness is based on changes in futures prices. CREDIT RISK CONCENTRATION The Company is exposed to credit loss in the event of nonperformance by counterparties on derivative financial and commodity contracts. This credit loss is limited to the cost of replacing these contracts at current market rates. Management believes the probability of such loss is remote. Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily cash, cash equivalents, and accounts receivable. The Company places its investments in highly rated financial institutions and investment-grade short-term debt instruments, and limits the amount of credit exposure to any one entity. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)

(millions, except per share data) NET SALES GROSS PROFIT - ----------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------- First $ 1,707.3 $ 1,751.9 $ 883.5 $ 915.0 Second 2,342.9 1,801.1 1,241.4 951.6 Third 2,590.1 1,845.7 1,409.4 970.0 Fourth 2,213.0 1,556.0 1,190.5 791.1 - ----------------------------------------------------------------------------- $ 8,853.3 $ 6,954.7 $ 4,724.8 $ 3,627.7 =============================================================================

EARNINGS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE NET EARNINGS PER SHARE EFFECT OF BEFORE EXTRAORDINARY LOSS ACCOUNTING AND CUMULATIVE EFFECT OF CHANGE (a) ACCOUNTING CHANGE (a) (b) - --------------------------------------------------------------------------- 2001 2000 2001 2000 - --------------------------------------------------------------------------- First $ 92.5 $ 161.7 $ .23 $ .40 Second 114.6 150.9 .28 .37 Third 150.3 181.9 .37 .45 Fourth 124.6 93.2 .31 .23 - --------------------------------------------------------------------------- $ 482.0 $ 587.7 ===========================================================================

NET EARNINGS NET EARNINGS (a) PER SHARE (a) (b) - ---------------------------------------------------------------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------- First $ 84.1 $ 161.7 $ .21 $ .40 Second 114.6 150.9 .28 .37 Third 150.3 181.9 .37 .45 Fourth 124.6 93.2 .31 .23 - ---------------------------------------------------------------------------- $ 473.6 $ 587.7 ============================================================================

(a) The quarterly results above include charges as follows (refer to Notes 1, 3, and 7 for further information).

NET EARNINGS NET EARNINGS PER SHARE (b) - ------------------------------------------------------------------------------------ 2001 2000 2001 2000 - ------------------------------------------------------------------------------------ Restructuring charges First ($ 30.3) $ -- ($ .07) $ -- Second -- (14.7) -- (.04) Third -- -- -- -- Fourth 9.8 (49.5) .02 (.12) - ------------------------------------------------------------------------------------ Earnings before extraordinary loss and cumulative effect of accounting change (20.5) (64.2) First: Extraordinary loss (7.4) -- (.02) -- Cumulative effect of accounting change (1.0) -- -- -- - ------------------------------------------------------------------------------------ Net earnings ($ 28.9) ($ 64.2) ====================================================================================

(b) Earnings per share represents both basic and diluted earnings per share. The principal market for trading Kellogg shares is the New York Stock Exchange (NYSE). The shares are also traded on the Boston, Chicago, Cincinnati, Pacific, and Philadelphia Stock Exchanges. At year-end 2001, the closing price (on the NYSE) was $30.10 and there were 46,126 shareholders of record. Dividends paid and the quarterly price ranges on the NYSE during the last two years were:

STOCK PRICE ----------------------- 2001 - QUARTER DIVIDEND HIGH LOW - ----------------------------------------------------------------- First $ .2525 $ 28.10 $ 25.00 Second .2525 29.00 25.18 Third .2525 33.56 28.61 Fourth .2525 31.70 28.90 - ----------------------------------------------------------------- $1.0100 ================================================================= 2000 - QUARTER - ----------------------------------------------------------------- First $ .2450 $ 30.50 $ 20.75 Second .2450 32.00 23.31 Third .2525 30.75 22.63 Fourth .2525 28.75 21.56 - ----------------------------------------------------------------- $ .9950 =================================================================

41 NOTE 14 OPERATING SEGMENTS Kellogg Company is the world's leading producer of ready-to-eat cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones. Principal markets for these products include the United States and United Kingdom. The Company is managed in two major divisions - the United States and International - with International further delineated into Europe, Latin America, Canada, Australia, and Asia. Thus, the Company's reportable operating segments under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" consist of the United States, Europe, and Latin America. All other geographic areas have been combined under the quantitative threshold guidelines of SFAS No. 131 for purposes of the information presented below. The measurement of operating segment results is generally consistent with the presentation of the Consolidated Statement of Earnings and Balance Sheet. Intercompany transactions between reportable operating segments were insignificant in all periods presented.

(millions) 2001 2000 1999 - -------------------------------------------------------------------------------------- NET SALES United States $ 6,129.0 $ 4,067.4 $ 4,014.1 Europe 1,363.1 1,463.4 1,614.4 Latin America 652.7 626.7 567.0 All other operating segments 708.5 776.7 788.8 Corporate -- 20.5 (.1) - -------------------------------------------------------------------------------------- Consolidated $ 8,853.3 $ 6,954.7 $ 6,984.2 ====================================================================================== OPERATING PROFIT EXCLUDING CHARGES AND KEEBLER AMORTIZATION EXPENSE (a) United States $ 945.0 $ 746.2 $ 803.0 Europe 245.6 235.2 224.1 Latin America 170.6 161.1 141.3 All other operating segments 103.0 89.2 93.7 Corporate (172.6) (155.4) (188.7) - -------------------------------------------------------------------------------------- Consolidated $ 1,291.6 $ 1,076.3 $ 1,073.4 Charges (a) (33.3) (86.5) (244.6) Keebler amortization expense (90.4) -- -- - -------------------------------------------------------------------------------------- Operating profit $ 1,167.9 $ 989.8 $ 828.8 ====================================================================================== CHARGES (a) United States $ 29.5 $ 2.0 $ 197.9 Europe (.2) 26.7 22.4 Latin America (.1) 14.6 1.7 All other operating segments 1.4 28.7 4.6 Corporate 2.7 14.5 18.0 - -------------------------------------------------------------------------------------- Consolidated $ 33.3 $ 86.5 $ 244.6 ====================================================================================== DEPRECIATION AND AMORTIZATION United States $ 275.9 $ 131.4 $ 138.1 Europe 59.5 57.1 57.8 Latin America 21.7 17.2 14.5 All other operating segments 31.4 40.8 35.7 Corporate 50.1 44.1 41.9 - -------------------------------------------------------------------------------------- Consolidated $ 438.6 $ 290.6 $ 288.0 ====================================================================================== INTEREST EXPENSE United States $ 5.7 $ -- $ .2 Europe 2.9 4.7 9.3 Latin America 2.8 .1 .6 All other operating segments 1.5 .4 (.1) Corporate 338.6 132.3 108.8 - -------------------------------------------------------------------------------------- Consolidated $ 351.5 $ 137.5 $ 118.8 ======================================================================================

(millions) 2001 2000 1999 - --------------------------------------------------------------------------------------- INCOME TAXES EXCLUDING CHARGES (b) United States $ 257.6 $ 197.1 $ 214.9 Europe 54.4 43.4 28.8 Latin America 40.3 40.0 34.4 All other operating segments 18.1 11.1 26.7 Corporate (35.5) 10.7 38.8 - --------------------------------------------------------------------------------------- Consolidated $ 334.9 $ 302.3 $ 343.6 Effect of charges (12.8) (22.3) (145.2) - --------------------------------------------------------------------------------------- Income taxes $ 322.1 $ 280.0 $ 198.4 ======================================================================================= TOTAL ASSETS United States $ 9,634.4 $ 2,178.6 $ 2,214.9 Europe 1,801.0 1,102.5 1,157.3 Latin America 415.5 444.6 414.3 All other operating segments 681.2 627.8 641.3 Corporate 5,697.6 2,061.2 1,755.9 Elimination entries (7,861.1) (1,528.7) (1,375.0) - --------------------------------------------------------------------------------------- Consolidated $ 10,368.6 $ 4,886.0 $ 4,808.7 ======================================================================================= ADDITIONS TO LONG-LIVED ASSETS United States $ 5,601.2 $ 135.4 $ 460.0 Europe 43.8 71.7 67.4 Latin America 11.7 39.7 47.4 All other operating segments 10.8 42.7 37.0 Corporate 29.5 138.1 41.7 - --------------------------------------------------------------------------------------- Consolidated $ 5,697.0 $ 427.6 $ 653.5 =======================================================================================

(a) Charges include restructuring charges in 2001, 2000, and 1999. Refer to Note 3 for further information. (b) Charges include those described in (a) plus extraordinary loss and cumulative effect of accounting change in 2001, reported net of tax. In addition, disposition-related charges in 1999 are reported in earnings before income taxes. Refer to Notes 1, 2, and 7 for further information. The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 11% of consolidated net sales during 2001, comprised principally of sales within the United States. Sales to any single customer during 2000 and 1999 were less than 10%. Supplemental geographic information is provided below for revenues from external customers and long-lived assets:

(millions) 2001 2000 1999 - --------------------------------------------------------------------------- NET SALES United States $ 6,129.0 $ 4,067.4 $ 4,014.1 United Kingdom 624.0 652.8 689.3 Other foreign countries 2,100.3 2,234.5 2,280.8 - --------------------------------------------------------------------------- Consolidated $ 8,853.3 $ 6,954.7 $ 6,984.2 =========================================================================== LONG-LIVED ASSETS United States $ 6,861.0 $ 1,553.5 $ 1,549.3 United Kingdom 526.6 535.4 552.3 Other foreign countries 1,040.8 1,154.0 1,110.3 - --------------------------------------------------------------------------- Consolidated $ 8,428.4 $ 3,242.9 $ 3,211.9 ===========================================================================

Supplemental product information is provided below for net sales from external customers:

(millions) 2001 2000 1999 - ------------------------------------------------------------------------- United States Retail channel cereal $ 2,481.9 $ 2,394.0 $ 2,412.5 Snacks 2,263.5 484.9 669.4 Other 1,383.6 1,188.5 932.2 International Cereal 2,432.2 2,579.7 2,708.4 Convenience foods 292.1 307.6 261.7 - ------------------------------------------------------------------------- Consolidated $ 8,853.3 $ 6,954.7 $ 6,984.2 =========================================================================

42 NOTE 15 SUPPLEMENTAL FINANCIAL STATEMENT DATA (millions)

- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF EARNINGS 2001 2000 1999 - -------------------------------------------------------------------------------- Research and development expense $ 110.2 $ 118.4 $ 104.1 Advertising expense $ 519.2 $ 604.2 $ 674.1

- -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS 2001 2000 1999 - -------------------------------------------------------------------------------- Accounts receivable $ 100.9 $ 1.1 $ 21.0 Inventories 15.8 54.5 (39.1) Other current assets (17.8) (20.2) 14.7 Accounts payable 47.6 75.1 (84.8) Other current liabilities 112.9 (83.5) (58.6) - -------------------------------------------------------------------------------- CHANGES IN OPERATING ASSETS AND LIABILITIES $ 259.4 $ 27.0 ($ 146.8)

- ------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET 2001 2000 - ------------------------------------------------------------------ Trade receivables $ 692.0 $ 607.2 Allowance for doubtful accounts (15.5) (8.6) Other receivables 85.8 86.7 - ------------------------------------------------------------------ ACCOUNTS RECEIVABLE, NET $ 762.3 $ 685.3 - ------------------------------------------------------------------ Raw materials and supplies $ 170.7 $ 138.2 Finished goods and materials in process 403.8 305.6 - ------------------------------------------------------------------ INVENTORIES $ 574.5 $ 443.8 - ------------------------------------------------------------------ Deferred income taxes $ 151.5 $ 136.5 Other prepaid assets 181.9 147.1 - ------------------------------------------------------------------ OTHER CURRENT ASSETS $ 333.4 $ 283.6 - ------------------------------------------------------------------ Land $ 65.7 $ 40.5 Buildings 1,279.1 1,197.1 Machinery and equipment 4,074.5 3,683.1 Construction in progress 192.7 114.5 Accumulated depreciation (2,659.2) (2,508.3) - ------------------------------------------------------------------ PROPERTY, NET $2,952.8 $2,526.9 - ------------------------------------------------------------------ Goodwill $3,138.5 $ 218.7 -- Accumulated amortization (69.0) (10.5) Other intangibles 2,118.8 217.8 -- Accumulated amortization (67.7) (18.6) Other 393.2 334.6 - ------------------------------------------------------------------ OTHER ASSETS $5,513.8 $ 742.0 - ------------------------------------------------------------------ Accrued income taxes $ 77.3 $ 130.8 Accrued salaries and wages 233.5 96.6 Accrued advertising and promotion 233.2 178.2 Accrued interest 112.4 61.8 Other 378.1 240.4 - ------------------------------------------------------------------ OTHER CURRENT LIABILITIES $1,034.5 $ 707.8 - ------------------------------------------------------------------ Nonpension postretirement benefits $ 475.1 $ 408.5 Deferred income taxes 949.8 266.7 Other 245.6 121.8 - ------------------------------------------------------------------ OTHER LIABILITIES $1,670.5 $ 797.0 - ------------------------------------------------------------------

REPORT OF INDEPENDENT ACCOUNTANTS PRICEWATERHOUSECOOPERS LLP To the Shareholders and Board of Directors of Kellogg Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of earnings, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Kellogg Company and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Battle Creek, Michigan January 25, 2002 43 SUPPLEMENTAL FINANCIAL INFORMATION QUANTITATIVE AND QUALITATIVE DISCLOSURES RELATED TO MARKET RISK SENSITIVE INSTRUMENTS The Company is exposed to certain market risks which exist as a part of its ongoing business operations and uses derivative financial and commodity instruments, where appropriate, to manage these risks. The Company, as a matter of policy, does not engage in trading or speculative transactions. Refer to Note 12 within Notes to Consolidated Financial Statements for further information on accounting policies related to derivative financial and commodity instruments. FOREIGN EXCHANGE RISK The Company is exposed to fluctuations in foreign currency cash flows related to third-party purchases, intercompany loans and product shipments, and non-functional currency denominated third-party debt. The Company is also exposed to fluctuations in the value of foreign currency investments in subsidiaries and cash flows related to repatriation of these investments. Additionally, the Company is exposed to volatility in the translation of foreign currency earnings to U.S. Dollars. Primary exposures include the U.S. Dollar versus the British Pound, Euro, Australian Dollar, Canadian Dollar, and Mexican Peso, and in the case of inter-subsidiary transactions, the British Pound versus the Euro. The Company assesses foreign currency risk based on transactional cash flows and enters into forward contracts, options, and currency swaps to reduce fluctuations in net long or short currency positions. Forward contracts and options are generally less than 12 months duration. Currency swap agreements are established in conjunction with the term of underlying debt issuances. Additionally, during 2000, the Company entered into financing arrangements that provided for the sale of foreign currency revenues. No borrowings were outstanding under commitments to sell foreign currency revenues at December 31, 2000. As of December 31, 2000, the Company had committed to borrowings during 2001 in the cumulative principal amount of approximately $160 million, which were converted to foreign currency forward contracts in January 2001. The tables below summarize forward contracts and currency swaps held at year-end 2001 and 2000. All of these derivatives are valued in U.S. Dollars using year-end exchange rates, are hedges of anticipated transactions, and mature within one year, except where indicated. CONTRACTS TO SELL FOREIGN CURRENCY

- ------------------------------------------------------------------------------------ Notional Exchange Fair Currency value rate value Currency sold received (millions) (fc/1US$) (millions) - ------------------------------------------------------------------------------------ 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------ Euro Pound Sterling $37.8 $ -- 1.10 -- ($.5) $ -- New Zealand Australian Dollar Dollar -- 4.0 -- 2.38 -- (.2) Pound Sterling (a) Danish Kroner 12.0 18.3 .66 .63 .6 1.0 Spanish Peseta Pound Sterling -- 21.4 -- 179.45 -- (.3) Euro U.S. Dollar -- 15.9 -- 1.12 -- (.7) Australian Dollar U.S. Dollar -- 27.4 -- 1.84 -- (.6) Mexican Peso U.S. Dollar -- 67.4 -- 9.51 -- 1.5 Canadian Dollar U.S. Dollar -- 33.0 -- 1.51 -- (.3) - ------------------------------------------------------------------------------------ TOTAL $49.8 $187.4 $.1 $ .4 - ------------------------------------------------------------------------------------

(a) Several contracts maturing 2002-2003. CONTRACTS TO PURCHASE FOREIGN CURRENCY

- ----------------------------------------------------------------------------------------- Notional Exchange Fair Currency value rate value Currency purchased exchanged (millions) (fc/1US$) (millions) - ----------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------- Euro South African Rand $ -- $ -- 1.53 -- $ -- $ -- Australian Dollar (a) U.S. Dollar 1.1 -- 1.96 -- -- -- Canadian Dollar (a) U.S. Dollar 1.0 -- 1.60 -- -- -- U.S. Dollar Japanese Yen 2.9 -- 131.58 -- .2 -- Pound Sterling Japanese Yen .5 -- .76 -- -- -- Australian Dollar Japanese Yen .9 -- 3.01 -- .1 -- Euro (a) U.S. Dollar 2.4 -- 1.12 -- .2 -- U.S. Dollar Canadian Dollar 35.4 -- 1.60 -- .5 -- U.S. Dollar Australian Dollar 2.1 3.5 2.04 1.86 -- (.1) Pound Sterling South African Rand 3.0 1.8 .98 .70 1.3 .1 U.S. Dollar South African Rand .4 .2 12.05 7.07 -- -- Swiss Franc Euro -- 5.2 -- 1.44 -- -- Pound Sterling (a) U.S. Dollar 1.8 40.5 .68 .68 -- .6 - ----------------------------------------------------------------------------------------- TOTAL $51.5 $51.2 $2.3 $ .6 - -----------------------------------------------------------------------------------------

(a) Hedge of existing assets or liabilities. CURRENCY SWAPS (dollars in millions)

Year of maturity Fair value Instrument ------------------------------------------ ------------ characteristics 2002 2003 2004 2005 2006 2001 2000 - -------------------------------------------------------------------------------------------------- Currency swap - Notional amt. $75.0 $75.0 $75.0 $75.0 $75.0 ($9.3) $ -- pay Pound Sterling/ receive US$ - Pay 5.302% 5.302% 5.302% 5.302% 5.302% hedge of existing debt issue Receive 4.490% 4.490% 4.490% 4.490% 4.490% - --------------------------------------------------------------------------------------------------

INTEREST RATE RISK The Company is exposed to interest rate volatility with regard to future issuances of fixed rate debt and existing issuances of variable rate debt. Primary exposures include movements in U.S. Treasury rates, London Interbank Offered Rates (LIBOR), and commercial paper rates. The Company currently uses interest rate swaps, including forward swaps, to reduce interest rate volatility and funding costs associated with certain debt issues, and to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions. The tables on page 45 provide information on the Company's significant debt issues and related hedging instruments at year-end 2001 and 2000 (refer to the table above for currency swaps related to debt issues). For foreign currency-denominated debt, the information is presented in U.S. Dollar equivalents. Variable interest rates are based on effective rates or implied forward rates as of year-end 2001. Refer to Note 7 within Notes to Consolidated Financial Statements for further information. 44 SIGNIFICANT DEBT ISSUES (dollars in millions) - --------------------------------------------------------------------------------

Principal by year of maturity Fair value Debt ----------------------------------------------------------------------------- ----------------- characteristics 2001 2002 2003 2004 2005 2006 2011 2031 2001 2000 ----------------------------------------------------------------------------- ----------------- Euro Dollar $500.0 $ -- $500.0 fixed rate 6.125% effective rate (a) 6.400% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $400.0 $ -- $409.0 fixed rate 5.75% effective rate (b) 5.23% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $1,000.0 $1,025.6 $ -- fixed rate 5.50% effective rate (a) 5.64% - ------------------------------------------------------------------------------------------------------------------------------ Euro Dollar $500.0 $ 518.3 $499.7 fixed rate 6.625% effective rate (a) 6.354% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $200.0 $ 197.1 $189.7 fixed rate 4.875% effective rate (a) 6.070% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $1,000.0 $1,024.3 $ -- fixed rate 6.000% effective rate (a) 6.390% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $1,500.0 $1,542.3 $ -- fixed rate 6.600% effective rate (a) 7.080% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $1,100.0 $1,186.7 $ -- fixed rate 7.450% effective rate (a) 7.620% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Dollar $ 75.0 $ 75.0 $ 75.0 $ 75.0 $ 75.0 $ 367.4 $ -- fixed rate 4.490% 4.490% 4.490% 4.490% 4.490% effective rate (c) 5.302% 5.302% 5.302% 5.302% 5.302% - ------------------------------------------------------------------------------------------------------------------------------ U.S. commercial paper $429.8 $320.8 $ 320.8 $429.8 weighted avg. variable 6.6% 3.0% - ------------------------------------------------------------------------------------------------------------------------------ Canadian commercial paper $ -- $171.1 $ 171.1 $ -- weighted avg. variable -- 2.5% - ------------------------------------------------------------------------------------------------------------------------------

(a) Effective fixed interest rate paid, as a result of debt discount and settlement of forward interest rate swap at date of debt issuance. (b) Effective fixed interest rate paid, as a result of extendable feature. Refer to Note 7 within Notes to Consolidated Financial Statements for further information. (c) Effective fixed interest rate paid, as a result of related US$/Pound Sterling currency swap. INTEREST RATE SWAPS (dollars in millions) - --------------------------------------------------------------------------------

Year of maturity Fair value Instrument ---------------- -------------- characteristics 2001 2001 2000 - ----------------------------------------------------------------------------------- Interest rate swap - Notional amt. $200.0 $ -- ($.4) pay variable/receive fixed - Pay 6.60% hedge of existing debt issue Receive 6.40% - ----------------------------------------------------------------------------------- Interest rate swap - Notional amt. $400.0 $ -- ($2.2) pay variable/receive fixed - Pay 5.99% hedge of existing debt issue Receive 5.23% - ----------------------------------------------------------------------------------- Interest rate swap - Notional amt. $100.0 $ -- $ -- pay fixed/receive variable - Pay 5.98% hedge of existing debt issue (a) Receive 6.36% - ----------------------------------------------------------------------------------- Interest rate swap - Notional amt. $975.0 $ -- ($26.9) pay fixed/receive variable - Pay 6.53% hedge of existing debt issue (a) Receive 6.36% - ----------------------------------------------------------------------------------- Interest rate swap - Notional amt. $425.0 $ -- $ .5 pay fixed/receive variable - Pay 6.13% hedge of existing debt issue (a) Receive 6.36% - -----------------------------------------------------------------------------------

(a) Forward-starting interest rate swaps which were settled in conjunction with a debt issuance in 2001. PRICE RISK The Company is exposed to price fluctuations primarily as a result of anticipated purchases of raw and packaging materials. Primary exposures include corn, wheat, soybeans, soybean oil, sugar, cocoa, and paperboard. The Company uses the combination of long cash positions with suppliers, and exchange-traded futures and option contracts to reduce price fluctuations in a desired percentage of forecasted purchases over a duration of generally less than one year. The fair values of commodity contracts held at year-end 2001 and 2000 were insignificant, and potential near-term changes in commodity prices were not expected to have a significant impact on the Company's future earnings or cash flows. For all derivative financial instruments presented in the tables above, changes in fair values of these instruments and the resulting impact on the Company's cash flows and/or earnings would generally be offset by changes in values of underlying transactions and positions. Therefore, it should be noted that the exclusion of certain of the underlying exposures from the tables above may be a limitation in assessing the net market risk of the Company. 46 EX-21.01 8 k67850ex21-01.txt DOMESTIC & FOREIGN SUBSIDIARIES OF THE COMPANY EXHIBIT 21.01 KELLOGG COMPANY SUBSIDIARIES NORTH AMERICA - ------------- Argkel, Inc. - Battle Creek, MI Ensemble Functional Food Company - Battle Creek, MI Liquidating Gollek Inc. - Battle Creek, MI K-One Inc. - Battle Creek, MI K-Two Inc. - Battle Creek, MI K (China) Limited - Battle Creek, MI K India Private Limited - Battle Creek, MI Kashi Company - LaJolla, California Keeb Canada Inc. - Rexdale, Ontario, Canada Keebler USA, Inc. - Battle Creek, MI Kelarg, Inc. - Battle Creek, MI Kellogg Asia Inc. - Battle Creek, MI Kellogg Asia Marketing Inc. - Battle Creek, MI Kellogg Brasil, Inc. - Battle Creek, MI Kellogg Caribbean Inc. - Battle Creek, MI Kellogg Caribbean Services Company, Inc. - Guayabo, Puerto Rico Kellogg Chile Inc. - Battle Creek, MI Kellogg Fearn, Inc. - Battle Creek, MI Kellogg Italia S.p.A. - Battle Creek, MI Kellogg Latvia, Inc. - Battle Creek, MI Kellogg Sales Company - Battle Creek, MI Liquidated as of 1/1/02 Kellogg Services Group, Inc. - Battle Creek, MI Liquidated as of 1/1/02 Kellogg (Thailand) Limited - Battle Creek, MI Kellogg USA Inc. - Battle Creek, MI KFSC, Inc. - Barbados McCamly Plaza Hotel Inc. - Battle Creek, MI Mountaintop Baking Company - Battle Creek, MI The Eggo Company - Battle Creek, MI Trafford Park Insurance Limited - Bermuda Kellogg Canada Inc. - Rexdale, Ontario, Canada Gollek Interamericas, S. de R. L. de C.V., Queretaro, Mexico (subsidiary of Kellogg Canada) Kellogg's Malaysia Manufacturing SDN. BHD, Kuala Lumpur, Malaysia (subsidiary of Kellogg Canada) Worthington Foods, Inc., Worthington, Ohio Specialty Foods Investment Company (subsidiary of Worthington Foods, Inc.) Kellogg A$, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Yen, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Bolivar, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg C$, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Euro, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Sterling, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Mpeso, Cayman Islands Liquidating in 1st quarter, 2002 Kellogg Talbot Limited - Battle Creek, MI ASIA-PACIFIC - ------------ Kellogg Asia Pacific Limited, Hong Kong Kellogg (Aust.) Pty. Ltd. - Sydney, Australia Day Dawn (Aust.) Pty. Ltd. - Pagewood, Australia (subsidiary of Kellogg Australia) Kellogg (N.Z.) Limited - Auckland, New Zealand (subsidiary of Kellogg Australia) Kellogg Superannuation Pty. Ltd. - Sydney, Australia (subsidiary of Kellogg Australia) Kellogg (China) Limited - Guangzhou, China 2 Kellogg Company of South Africa (Pty.) Ltd. - Springs, South Africa Kellogg Project 1995 (Pty.) Ltd. - Springs, South Africa (subsidiary of Kellogg South Africa) Kellogg India Private Limited - Mumbai, India Kellogg (Japan) K.K. - Tokyo, Japan Kellogg (Thailand) Limited - Bangkok,Thailand Nhong Shim Kellogg Co. Ltd. - Seoul, South Korea The Kellogg Healthy Snak People Pty Limited - Carmahaven, NSW, Australia Worthington Australia (subsidiary of Worthington Foods, Inc.) Liquidating Kellogg South East Asia Sdn. Bhd., Malaysia Liquidating Kellogg Asia Marketing (Shanghai) Trading Co. Ltd., Shanghai Liquidating EUROPE - ------ Gollek B.V. - Amsterdam, The Netherlands Kellogg Company of Great Britain Limited - Manchester, England Favorite Food Products Limited - Manchester, England (subsidiary of Kellogg Great Britain) Garden City Bakery Limited - Manchester, England (subsidiary of Lender's Bakery Limited) Liquidating Kelcone Limited - Aylesbury, England (subsidiary of Kellogg Great Britain) Kelcorn Limited - Manchester, England (subsidiary of Kellogg Great Britain) Kellogg Company of Ireland, Limited - Dublin, Ireland (subsidiary of Kellogg Great Britain) Kellogg Management Services (Europe) Limited - Manchester, England (subsidiary of Kellogg UK Holding) Kellogg Marketing and Sales Company (UK) Limited - Manchester, England (subsidiary of Kellogg UK Holding) Kellogg Supply Services (Europe) Limited - Manchester, England (subsidiary of Kellogg UK Holding Co) Kellogg Talbot Limited - Manchester, England Kellogg Manchester Limited - Manchester, England Kelf Limited - Manchester, England Kellogg U.K. Holding Company Limited - Manchester, England Kellogg Espana, S.A. - Valls, Spain (subsidiary of Kellogg Great Britain) Kelmill Limited - Liverpool, England (subsidiary of Kellogg Great Britain) Kelpac Limited - Manchester, England (subsidiary of Kellogg Great Britain) Lender's Bakery Limited - Manchester, England (subsidiary of Kellogg UK Holding) Liquidating Portable Foods Manufacturing Company Limited - Manchester, England Saragusa Frozen Foods Limited - Manchester, England (subsidiary of Kellogg Great Britain) Kellogg (Deutschland) GmbH - Bremen, Germany Gebrueder Nielsen Reismuehlen und Staerke-Fabrik mit Beschraenkter Haftung - Bremen, Germany (subsidiary of Kellogg Deutschland) Reis- und Handels AG Unterstuetzungskasse GmbH - Bremen, Germany (subsidiary of Kellogg Deutschland) Kellogg (Hungary) Trading Limited Liability Company, Budapest, Hungary Kellogg Italia S.p.A. - Milan, Italy Kellogg Latvia, Inc. - Riga, Latvia Liquidating Kellogg (Poland) Sp. zo.o., Warsaw, Poland Liquidating Kellogg's Produits Alimentaires, S.A. - Rosny, France Nordisk Kellogg's A/S - Svendborg, Denmark NK Leasing, Svendborg, Denmark (subsidiary of Nordisk Kellogg's A/S) Kellogg (Schweiz) AG, Kanton, Zug, Switzerland (subsidiary of Kellogg Deutschland) Kellogg (Osterreich) GmbH, Vienna, Austria (subsidiary of Kellogg Deutschland) LATIN AMERICA - ------------- Alimentos Kellogg, S.A. - Caracas, Venezuela Gollek, S.A. - Caracas, Venezuela (subsidiary of Alimentos Kellogg) Gollek Servicios, S.C., Queretaro, Mexico Gollek Argkel, Queretaro, Mexico Kellogg Argentina S.A. - Buenos Aires, Argentina Kellogg Brasil & Cia. - Sao Paulo, Brasil Kellogg Chile Limited - Santiago, Chile 3 Kellogg de Centro America, S.A. - Guatemala, Centro America Kellogg de Colombia, S.A. - Bogota, Colombia Kellogg de Mexico, S.A. de C.V. - Queretaro, Mexico Kellogg El Salvador Ltda. de D.V., El Salvador CELNASA (La Compania de Cereales Nacionales S.A.), Ecuador Kellogg de Peru, S.A.C., Lima, Peru 4 KEEBLER FOODS COMPANY A SUBSIDIARY OF KELLOGG COMPANY AS OF NOVEMBER 16, 2001 KEEBLER FOODS COMPANY SUBSIDIARIES: - ---------------------------------- KEEBLER LEASING CORP.- Elmhurst, IL KEEBLER FUNDING CORPORATION- Elmhurst, IL SHAFFER, CLARKE & CO., INC- Elmhurst, IL JOHNSTON'S READY CRUST COMPANY- Elmhurst, IL BAKE-LINE PRODUCTS, INC. - Des Plaines, IL BDH, INC.- Cary, NC AUSTIN QUALITY FOODS, INC. - Cary, NC AQFTM, INC. - Cary, NC CARY LAND CORPORATION- Cary, NC KEEBLER COMPANY- Elmhurst, IL KEEBLER COMPANY SUBSIDIARIES KEEBLER COMPANY/PUERTO RICO, INC.- Puerto Rico HOLLOW TREE COMPANY- Elmhurst, IL KEEBLER COOKIE AND CRACKER COMPANY- Elmhurst, IL ILLINOIS BAKING CORPORATION- Elmhurst, IL KEEBLER H.C., INC. - Elmhurst, IL STEAMBOAT CORPORATION- Elmhurst, IL KEEBLER FOREIGN SALES CORPORATION- Elmhurst, IL KEEBLER-GEORGIA, INC. - Elmhurst, IL KEEBLER INTERNATIONAL PREP TRACK &FIELD INVITATIONAL FOUNDATION- Elmhurst, IL KEEBLER COMPANY FOUNDATION HOLLOW TREE FINANCIAL COMPANY, L.L.C ELFIN EQUITY COMPANY, L.L.C- Elmhurst, IL KEEBLER ASSETS COMPANY, L.L.C.- Elmhurst, IL (is owned by Keebler Co. 34%, Keebler-Georgia 33%, Keebler Leasing Corp. 33%) GODFREY TRANSPORT, INC.- Indianpolis, Indiana PRESIDENT BAKING COMPANY, L.L.C.- Atlanta, GA MOTHER'S COOKIE COMPANY, L.L.C.- Louisville, KY FAMOUS AMOS CHOCOLATE CHIP COOKIE COMPANY, L.L.C. BARBARA DEE COOKIE COMPANY, L.L.C. - Louisville, KY BISHOP BAKING COMPANY, INC.- Cleveland, TN MURRAY BISCUIT COMPANY, L.L.C. - Atlanta, GA LITTLE BROWNIE BAKERS, L.L.C. - Louisville, KY SUNSHINE BISCUITS, L.L.C.- Elmhurst, IL EX-23.01 9 k67850ex23-01.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-72312) and the Registration Statements on Form S-8 (Nos. 2-77316, 33-27293, 33-27294, 33-40651,33-53403, 333-56536, 333-56542) of Kellogg Company of our report dated January 25, 2002 relating to the financial statements, which appears in the 2001 Annual Report to Shareholders of Kellogg Company, which is incorporated by reference in this Annual Report on Form 10-K for the year ended December 31 ,2001. We also consent to the incorporation by reference of our report dated January 25, 2002 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Battle Creek, Michigan March 22, 2002 EX-24.01 10 k67850ex24-01.txt POWERS OF ATTORNEY EXHIBIT 24.01 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ John T. Dillon ------------------------------ Director Dated: March 5, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Gordon Gund ------------------------------ Director Dated: February 26, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Ann McLaughlin Korologos ------------------------------ Director Dated: February 19, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related Thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ John L. Zabriskie ------------------------------ Director Dated: February 20, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Dorothy A. Johnson ------------------------------ Director Dated: February 20, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Sam K. Reed ------------------------------ Director Dated: February 21, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ James M. Jenness ------------------------------ Director Dated: February 27, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ William C. Richardson ------------------------------ Director Dated: February 19, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly till power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Claudio X. Gonzalez ------------------------------ Director Dated: February 20, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ Benjamin S. Carson Sr. ------------------------------ Director Dated: February 21, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President - Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ William D. Perez ------------------------------ Director Dated: February 22, 2002 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly, Executive Vice President -- Corporate Development and Administration, General Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and agent, to act on my behalf, with full power of substitution, in preparing, executing and filing the Company's Annual Report on Form 10-K for fiscal year ended December 31, 2001, and any exhibits, amendments and other documents related thereto, with the Securities and Exchange Commission. Said filing shall be for the purpose of fulfilling applicable legal requirements. Whereupon, I grant unto said Janet Langford Kelly full power and authority to perform all necessary and appropriate acts in connection therewith, and hereby ratify and confirm all that said attorney-in-fact and agent, or her substitute, may lawfully do, or cause to be done, by virtue hereof. /s/ L. Daniel Jorndt -------------------------------- Director Dated: March 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.23

                                                                   EXHIBIT 10.23

                               SEVERANCE AGREEMENT
                           (PRESENTED: MARCH 9, 2001)

This Severance Agreement hereafter, (the "Agreement") is made and entered into
as of March 31, 2001, by and between Kellogg Company, a Delaware corporation
("the Company") and Michael J. Teale, an individual ("Employee").

PURPOSE

The purpose of this 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 MARCH 16,
2001. 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.

         Employee shall receive a lump sum severance payment in the amount of
         $834,000 (eight hundred thirty four thousand dollars) payable within 60
         days of retirement. Commencing March 16, 2001 (or as soon as
         administratively possible), Employee shall begin receiving retirement
         benefits from the Kellogg Company tax qualified, Excess Benefit and
         Supplemental Retirement Plans, estimated today to be $373,000 (three
         hundred, seventy three thousand dollars) 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 has the right to request a lump sum payment option for any
         portion of his annual non-qualified pension benefits.

         Usual and customary withholding for tax purposes will be withheld from
         your lump sum severance 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 employer payroll
         taxes), will be Employee's responsibility.

         Employee agrees not to receive or make an election to receive any of
         the pension benefits he earned while working for the Company in the
         United Kingdom. The Employee also agrees to sign any documents
         presented by the U.K. pension plan trustees transferring benefits from
         the U.K. pension plan to the U.S. plan. Further, if the



                                  Page 1 of 7



         Employee does, at a future date, elect to receive pension benefits from
         the U.K. pension plan, the value of those benefits will be deducted
         from future pension payments to the extent permitted by law or from
         other payments from Company benefit plans, including the Executive
         Survivor Income Plan.

     B.  Employee shall also receive a prorated bonus in the amount of $67,800
         [sixty seven, thousand eight hundred dollars), payable within 60 days
         of his retirement date for performance year 2001,

     C.  Within sixty (60) days of the last day worked (i.e., March 16, 2001),
         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.

     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 and the 2001 Long-Term Incentive Plan and
         will be administered in accordance with and be subject to the
         respective provisions of those Plans and Option Agreements, and shall
         continue for such period of time as provided by such Plans and Option
         Agreements upon Employee's retirement. The ability to utilize the
         accelerated ownership feature of the Plans shall continue through March
         16, 2001.

     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 at $2,271,000 (two million, two hundred, seventy one thousand
         dollars).

     F.  Employee hereby irrevocably elects to retire March 16, 2001 and shall
         be eligible for pension benefits through Kellogg Company Salaried
         Pension Plan, the Kellogg Company Excess Benefit or Supplemental
         Retirement Plan [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. At the time Employee elects to begin receiving such
         benefits, he should contact the Employee Benefits Department of the
         Company.

     G.  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 to the
         extent provided in such plans, upon Employee's retirement.



                                  Page 2 of 7

     H.  Company will pay for financial planning and/or tax advice provided to
         Employee, up to $10,000 (ten thousand dollars) for the 2001 tax year.

     I.  In further consideration of the foregoing, Employee agrees that, for
         the respective Restricted Periods (as hereafter 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

     J.  As a result of the lump sum payments, 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.

     K.  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,



                                  Page 3 of 7


         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.

     L.  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.

     M.  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, attorney's fees incurred as a result of such
         cooperation. Nothing herein shall prevent Employee from communicating
         with or participating in any government investigation.

     N.  Employee has carefully read this Severance Agreement and understands
         its contents. Employee recognizes that he will have no further job
         responsibilities at Kellogg Company.

     O.  Employee has been advised to seek legal council to understand its full
         force and effect. Employee has been given the opportunity to consult
         with a lawyer.

     P.  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
         "Releases") 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-Larson 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



                                  Page 4 of 7


         Reemployment Rights Act of 1964, ERISA, Americans and 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 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 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.

     Q.  Employee accepts the terms and conditions of the Agreement knowingly
         and voluntarily.

     R.  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.

     S.  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


                                  Page 5 of 7


         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.

     T.  Employee understands and agrees that signing this 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.

     U.  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.

     V.  Employee signs this 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.

     W.  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.

     X.  Employee understands that this 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 adhered and/or modified by this
         Severance Agreement.

     Y.  Employee also understands that the Company is not obligated to offer
         employment to him now or in the future.

     Z.  Employee understands that the Nondisclosure Confidentiality Agreement
         that he signed shall remain in full force and effect indefinitely.

     AA. 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.

     BB. Employee agrees that if any provision of this Severance Agreement is
         invalid or unenforceable by a court of law, it will not effect the
         validity or enforceability of any other provision of this Agreement
         which shall remain in full force and effect.


                                  Page 6 of 7


     CC. 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.

     DD. For purposes of any construction or interpretation of this Severance
         Agreement, all terms and provisions thereof shall be deemed to have
         been mutually drafted by both of the parties.

     EE. Employee acknowledges and agrees that this is the entire 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.

By: /s/ Carlos M. Gutierrez                     /s/ Michael J. Teale
   ------------------------------               --------------------------------
Carlos M. Gutierrez                             Michael J. Teale
Chairman of the Board,
President and Chief Executive Officer

March 16, 2001                                  December 6th 2001
- ------------------                              --------------------
Date                                            Date







                                  Page 7 of 7

EX-10.24

                                                                   EXHIBIT 10.24

                KELLOGG COMPANY 2002 EMPLOYEE STOCK PURCHASE PLAN

         1. Purpose. Kellogg Company (the "Company") has established this
Kellogg Company 2002 Employee Stock Purchase Plan (the "Plan") to encourage and
enable its eligible employees and the eligible employees of its Subsidiaries to
acquire the Company's Common Stock, and to align more closely the interests of
those individuals and the Company's share owners. The Company intends that the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended.

         2. Definitions. Unless the context clearly indicates otherwise, for
purposes of the Plan, the following terms shall have the following meanings:

                  (a) "Board" means the Board of Directors of Kellogg Company,
         as constituted from time to time.

                  (b) "Beneficiary" means (i) the person designated by the
         Participant to receive benefits under a Company-sponsored and
         Company-paid life insurance program, if any, or (ii) the Participant's
         estate.

                  (c) "Code" means the Internal Revenue Code of 1986, as
         amended.

                  (d) "Committee" means the Compensation Committee of the Board.

                  (e) "Common Stock" means the Common Stock, par value $0.25 per
         share, of the Company or any security of the Company issued by the
         Company in substitution or exchange therefor.

                  (f) "Company" means Kellogg Company, a Delaware corporation,
         or any successor corporation to Kellogg Company.

                  (g) "Compensation" means with respect to a Participant, the
         portion of the Participant's base salary, commissions or wages paid to
         the Participant during the applicable payroll period.

                  (h) "Custodian" means the individual or organization appointed
         by the Plan Administrator to maintain custody of Participants' payroll
         deductions, purchase Common Stock under the Plan, and allocate Common
         Stock among Participants.

                  (i) "Designated Subsidiary" means any Subsidiary that the
         Board has designated from time to time, in its sole discretion, as
         eligible to participate in the Plan.




                  (j) "Disability" means disability as determined by the
         Committee in accordance with standards and procedures similar to those
         under the long-term disability plan of the Company or Designated
         Subsidiary, if any, or if the Participant is then a party to an
         effective employment agreement with the Company or Designated
         Subsidiary that defines disability, "Disability" means disability as
         defined in the Participant's then effective employment agreement.
         Subject to the first sentence of this paragraph, at any time that the
         Company or Designated Subsidiary does not maintain a long-term
         disability plan, "Disability" shall mean any physical or mental
         disability that is determined to be total and permanent by a physician
         selected in good faith by the Company or Designated Subsidiary.

                  (k) "Effective Date" means July 1, 2002.

                  (l) "Eligible Employee" means each Employee of the Company or
         a Designated Subsidiary. Notwithstanding the foregoing, any Employee
         who is covered by a collective bargaining agreement and whose decision
         not to participate in the Plan was the subject of good faith
         negotiations between the Company or a Designated Subsidiary and a labor
         organization will not be eligible to participate in the Plan, unless
         the decision not to participate in the Plan is revoked by the labor
         organization upon reasonable notice to the Company.

                  (m) "Employee" means each and every person employed by the
         Company or a Designated Subsidiary, and whom the Company or Designated
         Subsidiary classifies as a common law employee; provided that, only
         individuals who are paid as common law employees from the payroll of
         the Company or a Designated Subsidiary shall be deemed to be Employees
         for purposes of the Plan.

                  For purposes of this definition of Employee, and
         notwithstanding any other provisions of the Plan to the contrary,
         individuals who are not classified by the Company or by a Designated
         Subsidiary, in its discretion, as employees under Code Section 3121(d)
         (including, but not limited to, individuals classified by the Company
         or a Designated Subsidiary as independent contractors and non-employee
         consultants) and individuals who are classified by the Company or by a
         Designated Subsidiary, in its discretion, as employees of any entity
         other than the Company or a Designated Subsidiary, do not meet the
         definition of Employee and are ineligible for benefits under the Plan,
         even if the classification by the Company or Designated Subsidiary is
         later determined to be erroneous, or is retroactively revised. In the
         event the classification of an individual who is excluded from the
         definition of Employee under the preceding sentence is determined to be
         erroneous or is retroactively revised, the individual shall nonetheless
         continue to be excluded from the definition of Employee and shall be
         ineligible for benefits for all periods prior to the date the Company
         or Designated Subsidiary determines its classification of the
         individual is erroneous or should be revised.

                  (n) "Exchange Act" means the Securities Exchange Act of 1934,
         as in effect and as amended from time to time, or any successor statute
         thereto, together with any rules, regulations and interpretations
         promulgated thereunder or with respect thereto.


                                      -2-


                  (o) "Fair Market Value" means, with respect to any date, the
         closing price per share on the New York Stock Exchange Composite
         Transactions Tape on such date, provided that if there shall be no
         sales of shares reported on such date, the Fair Market Value of a share
         on such date shall be deemed to be equal to the closing price per share
         on such Composite Tape for the last preceding date on which sales of
         shares were reported.

                  (p) "Offering Date" means the first day of a Purchase Period,
         each January 1, April 1, July 1 and October 1.

                  (q) "Option" means an option to purchase shares of Common
         Stock under the Plan, pursuant to the terms and conditions thereof.

                  (r) "Participant" means an Eligible Employee who is
         participating in the Plan pursuant to Section 4.

                  (s) "Plan" means the Kellogg Company 2002 Employee Stock
         Purchase Plan, as set forth herein, as in effect, and as amended from
         time to time (together with any rules and regulations promulgated by
         the Committee with respect thereto).

                  (t) "Plan Account" means an account maintained by the Plan
         Administrator for each Participant to which the Participant's payroll
         deductions are credited, against which funds used to purchase shares of
         Common Stock are charged, and to which shares of Common Stock purchased
         are credited.

                  (u) "Plan Administrator" means such other person or persons,
         including a committee, as the Committee may appoint to administer the
         Plan.

                  (v) "Purchase Date" means, except as provided in Sections 13
         and 18, the last day of a Purchase Period, each March 31, June 30,
         September 30 and December 31.

                  (w) "Purchase Period" means each calendar quarter.

                  (x) "Purchase Price" means, with respect to each Purchase
         Period, the lesser of 85% of the Fair Market Value of Common Stock on
         the Offering Date, and 85% of the Fair Market Value of a share of
         Common Stock on the Purchase Date.

                  (y) "Retirement" means the voluntary retirement by the
         Participant from active employment with the Company and its Designated
         Subsidiaries on or after the attainment of early or normal retirement
         age under the pension or retirement plan sponsored by the Company or
         Designated Subsidiary in which he or she participates, or any other age
         with the consent of the Company or Designated Subsidiary.



                                      -3-


                  (z) "Subsidiary" means any corporation, domestic or foreign,
         other than the Company, in an unbroken chain of corporations beginning
         with the Company if, at the time of the granting of the Option, each of
         the corporations other than the last corporation in the unbroken chain
         owns stock possessing 50% or more of the total combined voting power of
         all classes of stock in one of the other corporations in such chain.
         Notwithstanding the foregoing, the term "Subsidiary" shall include a
         limited liability company that is disregarded as an entity separate
         from a Subsidiary.

         3. Stock Subject to the Plan. Subject to Section 14, the aggregate
number of shares of Common Stock that may be sold under the Plan is 2,500,000.
Shares of Common Stock to be issued under the Plan may be authorized and
unissued shares, issued shares that have been reacquired by the Company (in the
open-market or in private transactions) and that are being held as treasury
shares, or a combination thereof.

         4. Participation in the Plan. Each Eligible Employee may participate in
the Plan effective as of any Offering Date, by completing and delivering a
payroll deduction authorization to the Plan Administrator at least 20 days in
advance of the applicable Offering Date in the manner specified by the Plan
Administrator. The Offering Date as of which an Eligible Employee commences or
recommences participation in the Plan, and each Offering Date as of which an
Eligible Employee renews his or her authorization under paragraph (a), is an
Offering Date with respect to that Eligible Employee. A Participant's payroll
deductions under the Plan shall commence on his or her initial Offering Date,
and shall continue, subject to paragraph (a), until the Eligible Employee
terminates participation in the Plan, is no longer an Eligible Employee, or the
Plan is terminated.

                  (a) A Participant's payroll deduction authorization shall be
         automatically renewed effective on the Offering Date following the
         conclusion of his or her initial Purchase Period and each subsequent
         Purchase Period, unless the Participant otherwise notifies the Plan
         Administrator in the manner specified by the Plan Administrator at
         least 20 days in advance of such date.

                  (b) Notwithstanding the foregoing, an Eligible Employee shall
         not be granted an Option on any Offering Date if such Eligible
         Employee, immediately after the Option is granted, owns stock
         possessing 5% or more of the total combined voting power or value of
         all classes of stock of the Company or any Subsidiary. For purposes of
         this paragraph (b), the rules of Code Section 424(d) shall apply in
         determining the stock ownership of an individual, and stock that an
         Eligible Employee may purchase under outstanding options shall be
         treated as stock owned by the Eligible Employee.

                  (c) Notwithstanding the foregoing, an Eligible Employee shall
         not be permitted to elect participation in the Plan for the next two
         full Purchase Periods immediately following his or her sale, transfer
         (including transfer to a different brokerage account or withdrawal from
         the Participant's Plan Account), or other disposition of Common Stock
         that was acquired within one year of the Purchase Date applicable to
         that Common Stock.



                                      -4-


         5. Payroll Deductions. An Eligible Employee may participate in the Plan
only through payroll deductions. After-tax payroll deductions shall be made from
the Compensation paid to each Participant for each Purchase Period in such whole
percentage from 1% to 10% as the Participant shall authorize in his or her
election form. No Eligible Employee may be granted an Option that permits his or
her rights to purchase Common Stock under the Plan, and any other stock purchase
plan of the Company or any Subsidiary that is qualified under Code Section 423,
to accrue at a rate that exceeds $25,000 of Fair Market Value of such stock
(determined on the Offering Date of such Option) for each calendar year of the
Company in which the Option is outstanding at any time.

         6. Changes in Payroll Deductions. A Participant may not increase or
decrease the amount of his or her payroll deductions during a Purchase Period. A
Participant may change his or her payroll deductions effective as of a
subsequent Purchase Period by notifying the Plan Administrator in the manner
specified by the Plan Administrator at least 20 days in advance of the next
Offering Date.

         7. Termination of Participation in Plan.

                  (a) A Participant may, for any reason and at any time prior to
         each Purchase Date, voluntarily terminate participation in the Plan by
         notifying the appropriate payroll office in the time and manner
         specified by the Plan Administrator. Such Participant's payroll
         deductions under the Plan shall cease as soon as practicable following
         delivery of such notice. If the former Participant remains employed by
         the Company or any Designated Subsidiary after termination of his or
         her participation in the Plan, any payroll deductions credited to such
         Participant's Plan Account may be used to purchase shares of Common
         Stock on the next Purchase Date or refunded, without interest, to the
         Participant, at the election of the Participant. An Eligible Employee
         whose participation in the Plan is terminated may rejoin the Plan no
         earlier than the beginning of the Purchase Period next following his or
         her withdrawal, by delivering a new payroll deduction authorization in
         accordance with Section 4.

                  (b) A Participant's participation in the Plan shall terminate
         upon termination of his or her employment with the Company and its
         Designated Subsidiaries, or termination of status as an Eligible
         Employee, for any reason. If a former Participant is no longer employed
         by the Company or any Designated Subsidiary, any payroll deductions
         credited to his or her Plan Account shall be paid to the former
         Participant in cash, without interest, as soon as practicable following
         his or her termination of employment. If the Company or a Designated
         Subsidiary terminated the Participant's employment without cause (as
         determined in good faith by the Company or Designated Subsidiary), the
         Participant's termination was due to death, Disability or Retirement,
         or the former Participant remains employed by the Company or any
         Designated Subsidiary after termination of his or her participation in
         the Plan, any payroll deductions credited to such Participant's Plan
         Account may be used to purchase shares of Common Stock on the next
         Purchase Date or refunded, without interest, to the Participant, at the
         election of the Participant (or, in the event of the Participant's
         death or Disability, the Participant's Beneficiary).



                                      -5-


         8. Purchase of Shares.

                  (a) On each Offering Date, each Participant shall be deemed to
         have been granted an Option. In no event will a Participant be deemed
         to have been granted more than one Option during any Purchase Period.

                  (b) On the Purchase Date of a Purchase Period, each
         Participant shall be deemed, without any further action, to have
         purchased that number of whole and fractional shares of Common Stock
         determined by dividing the balance in the Participant's Plan Account on
         the Purchase Date by the Purchase Price. (Fractional shares will be
         calculated to the third decimal place.) Any amount remaining in the
         Participant's Plan Account shall be carried forward to the next
         Purchase Date unless the Plan Account is closed. Except as provided in
         Sections 13 and 18, in no event may a Participant purchase shares of
         Common Stock prior to the Purchase Date of a Purchase Period.

                  (c) As soon as practicable after each Purchase Date, a
         statement shall be delivered to each Participant that shall include the
         number of shares of Common Stock purchased on the Purchase Date on
         behalf of such Participant under the Plan.

                  (d) As of the Purchase Date of each Purchase Period, the
         Common Stock purchased by each Participant shall be considered to be
         issued and outstanding to his or her credit as a bookkeeping entry
         maintained by the Custodian in the Participant's Plan Account. Subject
         to the restrictions of Section 4(c) above, a stock certificate for
         shares of Common Stock credited to a Participant's Plan Account
         shall be issued upon request of the Participant at any time. Stock
         certificates under the Plan shall be issued, at the election of the
         Participant, in the Participant's name or in his or her name and the
         name of another person as joint tenants with right of survivorship or
         as tenants in common. A cash payment shall be made for any fraction of
         a share in such Plan Account, if necessary to close the Plan Account.

         9. Rights as a Share Owner. A Participant shall not be treated as the
owner of Common Stock until the Purchase Date of such stock under the Plan. As
of the Purchase Date a Participant shall be treated as the record owner of his
or her shares purchased on such date pursuant to the Plan. Unless the
Participant elects otherwise in the time and manner specified by the Plan
Administrator, any dividends paid in respect of Common Stock purchased by a
Participant under the Plan and credited to his or her Plan Account will be
reinvested in Common Stock in accordance with procedures established by the
Company.

         10. Rights Not Transferable. Rights under the Plan are not transferable
by a Participant other than by will or the laws of descent and distribution, and
are exercisable during the Participant's lifetime only by the Participant or by
the Participant's guardian or legal representative. No rights or payroll
deductions of a Participant shall be subject to execution, attachment, levy,
garnishment or similar process.

         11. Application of Funds. All funds of Participants received or held by
the Company under the Plan before purchase of the shares of Common Stock shall
be held by the Company without liability for interest or other increment.


                                      -6-


         12. Administration of the Plan. The Plan shall be administered by the
Plan Administrator. The Plan Administrator shall have authority to make rules
and regulations for the administration of the Plan, and its interpretations and
decisions with regard to the Plan and such rules and regulations shall be final
and conclusive. It is intended that the Plan shall at all times meet the
requirements of Code Section 423, if applicable, and the Plan Administrator
shall, to the extent possible, interpret the provision of the Plan so as to
carry out such intent.

         13. Change of Control Provisions.

                  (a) Notwithstanding any other provision of the Plan to the
         contrary, in the event of a Change in Control, each Option outstanding
         under the Plan shall be assumed or an equivalent option shall be
         substituted by the successor corporation or a parent or subsidiary of
         such successor corporation. If the successor corporation refuses or is
         unable to assume or substitute for outstanding Options, each Purchase
         Period then in progress shall be shortened and a new Purchase Date
         shall be set (the "New Purchase Date"), as of which date any Purchase
         Period then in progress will terminate. The New Purchase Date shall be
         on or immediately before the effective time of the Change in Control,
         and the Plan Administrator shall notify each Participant in writing, at
         least 10 days before the New Purchase Date, that the Purchase Date for
         his or her Option has been changed to the New Purchase Date, and that
         the Participant's Option will be exercised automatically on the New
         Purchase Date unless the Participant has withdrawn from the Purchase
         Period before the New Purchase Date, as provided in Section 7.

                  (b) For purposes of the Plan, a "Change in Control" shall mean
         the happening of any of the following events:

                           (i) An acquisition after the Effective Date by any
                  individual, entity or group (within the meaning of Section
                  13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
                  beneficial ownership (within the meaning of Rule 13d-3
                  promulgated under the Exchange Act) of 20% or more of either
                  (a) the then outstanding shares of common stock of the Company
                  (the "Outstanding Company Common Stock") or (b) the combined
                  voting power of the then outstanding voting securities of the
                  Company entitled to vote generally in the election of
                  directors (the "Outstanding Company Voting Securities");
                  excluding, however, the following: (1) any acquisition
                  directly from the Company, other than an acquisition by virtue
                  of the exercise of a conversion privilege unless the security
                  being so converted was itself acquired directly from the
                  Company or approved by the Incumbent Board (as defined below),
                  (2) any acquisition by the Company, (3) any acquisition by any
                  employee benefit plan (or related trust) sponsored or
                  maintained by the Company or any entity controlled by the
                  Company, (4) any acquisition by an underwriter temporarily
                  holding Company securities pursuant to an offering of such
                  securities, or (5) any acquisition pursuant to a transaction
                  that complies with clauses (1), (2) and (3) of subsection
                  (iii) of this Section 13; or



                                      -7-


                           (ii) A change in the composition of the Board such
                  that the individuals who, as of the Effective Date, constitute
                  the Board (such Board shall be hereinafter referred to as the
                  "Incumbent Board") cease for any reason to constitute at least
                  a majority of the Board; provided, however, for purposes of
                  this Section 13, that any individual who becomes a member of
                  the Board subsequent to the Effective Date, whose election, or
                  nomination for election by the Company's share owners, was
                  approved by a vote of at least a majority of those individuals
                  who are members of the Board and who were also members of the
                  Incumbent Board (or deemed to be such pursuant to this
                  proviso), either by a specific vote or by approval of the
                  proxy statement of the Company in which such person is named
                  as a nominee for director, without written objection to such
                  nomination shall be considered as though such individual were
                  a member of the Incumbent Board; but, provided further, that
                  any such individual whose initial assumption of office occurs
                  as a result of either an actual or threatened election contest
                  with respect to the election or removal of directors or other
                  actual or threatened solicitation of proxies or consents by or
                  on behalf of a Person other than the Board shall not be so
                  considered as a member of the Incumbent Board; or

                           (iii) Consummation of a reorganization, merger or
                  consolidation (or similar transaction), a sale or other
                  disposition of all or substantially all of the assets of the
                  Company, or the acquisition of assets or stock of another
                  entity ("Corporate Transaction"); in each case, unless
                  immediately following such Corporate Transaction (1) all or
                  substantially all of the individuals and entities who are the
                  beneficial owners, respectively, of the Outstanding Company
                  Common Stock and Outstanding Company Voting Securities
                  immediately prior to such Corporate Transaction will
                  beneficially own, directly or indirectly, more than 60% of,
                  respectively, the outstanding shares of common stock, and the
                  combined voting power of the then outstanding voting
                  securities entitled to vote generally in the election of
                  directors, as the case may be, of the corporation resulting
                  from such Corporate Transaction (including, without
                  limitation, a corporation which as a result of such
                  transaction owns the Company or all or substantially all of
                  the Company's assets either directly or through one or more
                  subsidiaries) in substantially the same proportions as their
                  ownership, immediately prior to such Corporate Transaction, of
                  the Outstanding Company Common Stock and Outstanding Company
                  Voting Securities, as the case may be, (2) no Person (other
                  than the Company, any employee benefit plan (or related trust)
                  of the Company or such corporation resulting from such
                  Corporate Transaction) will beneficially own, directly or
                  indirectly, 20% or more of, respectively, the outstanding
                  shares of common stock of the corporation resulting from such
                  Corporate Transaction or the combined voting power of the
                  outstanding voting securities of such corporation entitled to
                  vote generally in the election of directors, except to the
                  extent that such ownership existed prior to the Corporate
                  Transaction, and (3) individuals who were members of the
                  Incumbent Board at the time of the Board's approval of the
                  execution of the initial agreement providing for such
                  Corporate Transaction will constitute at least a majority of
                  the members of the board of directors of the corporation
                  resulting from such Corporate Transaction; or



                                      -8-


                           (iv) The approval by the share owners of the Company
                  of a complete liquidation or dissolution of the Company.

         14. Adjustments in Case of Changes Affecting Shares. In the event of
any dividend or other distribution (whether in the form of cash, Common Stock,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, Change in Control or exchange of Common Stock or other
securities of the Company, or other corporate transaction or event that affects
the Common Stock: (a) the number of shares of Common Stock approved for the Plan
shall be increased or decreased proportionately, and (b) the Board may
determine, in its sole discretion, that an adjustment is necessary or
appropriate in order to prevent dilution or enlargement of benefits or potential
benefits intended to be made available under the Plan.

         15. No Corporate Action Restriction. The existence of the Plan and/or
the Options granted hereunder shall not limit, affect or restrict in any way the
right or power of the Board or the Company's share owners to make or authorize
(a) any adjustment, recapitalization, reorganization or other change in the
Company's or any Subsidiary's capital structure or its business, (b) any merger,
consolidation or change in the ownership of the Company or any Subsidiary, (c)
any issue of bonds, debentures, capital, preferred or prior preference stocks
ahead of or affecting the Company's or any Subsidiary's capital stock or the
rights thereof, (d) any dissolution or liquidation of the Company or any
Subsidiary, (e) any sale or transfer of all or any part of the Company's or any
Subsidiary's assets or business, or (f) any other corporate act or proceeding by
the Company or any Subsidiary. No Participant, Employee, beneficiary or any
other person shall have any claim against any member of the Board or the
Committee, the Company or any Subsidiary, or any employees, officers, share
owners or agents of the Company or any Subsidiary, as a result of any such
action.

         16. Notices. All notices or other communications by an Employee or
Participant to the Company under or in connection with the Plan shall be deemed
to have been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the receipt
thereof.

         17. Amendments to the Plan. The Committee may, at any time, or from
time to time, amend or modify the Plan; provided, however, that no amendment
shall be made increasing or decreasing the number of shares authorized for the
Plan (other than as provided in Section 14), and that, except to conform the
Plan to the requirements of the Code, no amendment shall be made that would
cause the Plan to fail to meet the applicable requirements of Code Section 423.

         18. Termination of Plan. The Plan shall terminate upon the earlier of
(a) the fifth anniversary of the Effective Date, (b) the date no more shares of
Common Stock remain to be purchased under the Plan, or (c) the termination of
the Plan by the Board as specified below. The Board may terminate the Plan as of
any date. The date of termination of the Plan shall be deemed a Purchase Date.
If on such Purchase Date Participants in the aggregate have Options to purchase
more shares of Common Stock than are available for purchase under the Plan, each
Participant shall be eligible to purchase a reduced number of shares of Common
Stock on a pro rata basis, and any excess payroll deductions shall be returned
to Participants, without interest, all as provided by rules and regulations
adopted by the Plan Administrator.


                                      -9-


         19. Costs. All costs and expenses incurred in administering the Plan
shall be paid by the Company. Any costs or expenses of selling shares of Company
Stock acquired pursuant to the Plan shall be borne by the holder thereof.

         20. Governmental Regulations. The Company's obligation to sell and
deliver its Common Stock pursuant to the Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such stock. Shares shall not be issued with respect to an Option
unless the exercise of such Option and the issuance and delivery of such shares
pursuant thereto shall comply with all applicable provisions of law, domestic or
foreign, including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, state securities laws, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.

         As a condition to the exercise of an Option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares of Common Stock are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned applicable provisions of law.

         21. Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the United States of
America and, to the extent not inconsistent therewith, by the laws of the State
of Delaware, without reference to the principles of conflict of laws thereof.
This Plan is not to be subject to the Employee Retirement Income Security Act of
1974, as amended, but is intended to comply with Code Section 423. Accordingly,
the provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code. Any provisions required to be set forth in this Plan by such Code
section are hereby included as fully as if set forth in the Plan in full. Any
titles and headings herein are for reference purposes only, and shall in no way
limit, define or otherwise affect the meaning, construction or interpretation of
any provisions of the Plan.

         22. Effect on Employment. The provisions of this Plan shall not affect
the right of the Company or any Designated Subsidiary or any Participant to
terminate the Participant's employment with the Company or any Designated
Subsidiary.

         23. Withholding. The Company reserves the right to withhold from stock
or cash distributed to a Participant any amounts that it is required by law to
withhold.

         24. Other Company Benefit and Compensation Programs. For purposes of
the determination of benefits under any other employee welfare or benefit plans
or arrangements, if any, provided by the Company or any Designated Subsidiary
(a) any amounts deducted from a Participant's Compensation pursuant to the
Participant's payroll deduction election under Section 4 shall be deemed a part
of a Participant's compensation, and (b) payments and other benefits received by
a Participant under an Option shall not be deemed a part of a Participant's
compensation, unless expressly provided in such other plans or arrangements, or
except where the Board expressly determines in writing. The existence of the
Plan notwithstanding, the


                                      -10-


Company or any Designated Subsidiary may adopt such other compensation plans or
programs and additional compensation arrangements as it deems necessary to
attract, retain and motivate employees.

         25. Effective Date. The Plan shall become effective July 1, 2002,
provided that the Company's share owners approve it within 12 months after the
date the Plan was adopted by the Board.












                                      -11-

EX-10.25

                                                                   EXHIBIT 10.25

                  KELLOGG COMPANY EXECUTIVE STOCK PURCHASE PLAN

         1. Purpose. Kellogg Company (the "Company") has established this
Kellogg Company Executive Stock Purchase Plan (the "Plan") to encourage and
enable certain eligible employees of the Company and its Subsidiaries to acquire
the Company's Common Stock, and to align more closely the interests of those
individuals and the Company's share owners.

         2. Definitions. Unless the context clearly indicates otherwise, for
purposes of the Plan, the following terms shall have the following meanings:

                  (a) "Award Date" means the date on which a Participant would
         have first received payment of his or her Bonus but for his or her
         election to purchase shares of Common Stock in accordance with the
         provisions of Section 4.

                  (b) "Board" means the Board of Directors of Kellogg Company,
         as constituted from time to time.

                  (c) "Bonus" means with respect to a Participant, the after-tax
         portion of any incentive compensation payable to the Participant under
         the Company's annual bonus plan for the applicable Plan Year.

                  (d) "Code" means the Internal Revenue Code of 1986, as
         amended.

                  (e) "Committee" means the Compensation Committee of the Board.

                  (f) "Common Stock" means the Common Stock, par value $0.25 per
         share, of the Company or any security of the Company issued by the
         Company in substitution or exchange therefor.

                  (g) "Company" means Kellogg Company, a Delaware corporation,
         or any successor corporation to Kellogg Company.

                  (h) "Effective Date" means February 22, 2002.

                  (i) "Eligible Employee" means each employee of the Company or
         a Subsidiary designated from time to time by the Committee or the Chief
         Executive Officer as an Eligible Employee; provided, however, that the
         class of Eligible Employees shall be limited to individuals who are
         members of a select group of management or highly compensated
         employees.

                  (j) "Exchange Act" means the Securities Exchange Act of 1934,
         as in effect and as amended from time to time, or any successor statute
         thereto, together with any rules, regulations and interpretations
         promulgated thereunder or with respect thereto.




                  (k) "Fair Market Value" means, with respect to any date, the
         closing price per share on the New York Stock Exchange Composite
         Transactions Tape on such date, provided that if there shall be no
         sales of shares reported on such date, the Fair Market Value of a share
         on such date shall be deemed to be equal to the closing price per share
         on such Composite Tape for the last preceding date on which sales of
         shares were reported.

                  (l) "Participant" means an Eligible Employee who is
         participating in the Plan pursuant to Section 4.

                  (m) "Plan" means the Kellogg Company Executive Stock Purchase
         Plan, as set forth herein, as in effect, and as amended from time to
         time (together with any rules and regulations promulgated by the Plan
         Administrator with respect thereto).

                  (n) "Plan Administrator" means such other person or persons,
         including a committee, as the Committee may appoint to administer the
         Plan.

                  (o) "Plan Year" means the calendar year.

                  (p) "Purchase Date" means, except as provided in Section 17,
         the 31st trading day following the Award Date.

                  (q) "Purchase Price" means, with respect to each Purchase
         Period, the average Fair Market Value of a share of Common Stock
         measured over the 30-trading day period commencing on the Award Date.

                  (r) "Subsidiary" means any corporation, domestic or foreign,
         other than the Company, in an unbroken chain of corporations beginning
         with the Company if each of the corporations other than the last
         corporation in the unbroken chain owns stock possessing 50% or more of
         the total combined voting power of all classes of stock in one of the
         other corporations in such chain. Notwithstanding the foregoing, the
         term "Subsidiary" shall include a limited liability company that is
         disregarded as an entity separate from a Subsidiary.

         3. Stock Subject to the Plan. Subject to Section 13, the aggregate
number of shares of Common Stock that may be sold under the Plan is 500,000.
Shares of Common Stock to be issued under the Plan shall be issued shares that
have been reacquired by the Company (in the open-market or in private
transactions) and that are being held as treasury shares.

         4. Participation in the Plan. Each Eligible Employee may participate in
the Plan effective as of any Award Date, by completing and delivering a payroll
deduction authorization to the Plan Administrator at least 7 days in advance of
the applicable Award Date in the manner specified by the Plan Administrator. A
Participant's payroll deduction authorization shall only be effective for the
Bonus to be received for the applicable Plan Year.

         5. Payroll Deductions. An Eligible Employee may participate in the Plan
only through payroll deductions. After-tax payroll deductions shall be made from
the Bonus


                                      -2-


otherwise payable to each Participant for the Plan Year in such whole percentage
from 1% to 100% as the Participant shall authorize in his or her payroll
deduction authorization.

         6. Changes in Payroll Deductions. Once the payroll deduction
authorization has been received by the Plan Administrator, the Participant may
not increase or decrease the amount of his or her payroll deduction
authorization for the applicable Plan Year.

         7. Termination of Participation in Plan.

                  (a) Once the payroll deduction authorization has been received
         by the Plan Administrator, the Participant may not voluntarily
         terminate participation in the Plan with respect to the applicable Plan
         Year.

                  (b) A Participant's participation in the Plan shall terminate
         upon termination of his or her employment with the Company and its
         Subsidiaries, or termination of status as an Eligible Employee, for any
         reason. If a former Participant is no longer employed by the Company or
         any Subsidiary, the Participant's accrued but unpaid Bonus, if any,
         shall be paid to the former Participant in cash, without interest, as
         soon as practicable following his or her termination of employment.

         8. Purchase of Shares.

                  (a) On each Purchase Date, each Participant shall be deemed,
         without any further action, to have purchased that number of whole
         shares of Common Stock determined by dividing the dollar value of the
         Participant's Bonus subject to his or her payroll deduction
         authorization for the applicable Plan Year by the Purchase Price.
         Except as provided in Section 17, in no event may a Participant
         purchase shares of Common Stock prior to the Purchase Date in any Plan
         Year.

                  (b) A stock certificate for whole shares of Common Stock
         purchased by each Participant shall be issued as soon as practicable
         after each Purchase Date. Stock certificates under the Plan shall be
         issued, at the election of the Participant, in the Participant's name
         or in the Participant's name and the name of another person as joint
         tenants with right of survivorship or as tenants in common. A cash
         payment shall be made to a Participant, without interest, for any
         fraction of a share, if necessary.

                  (c) Each stock certificate evidencing whole shares of Common
         Stock purchased by a Participant will be stamped or otherwise imprinted
         with such legend as the Board requires.

                  (d) If on any Purchase Date Participants in the aggregate have
         elected to purchase more shares of Common Stock than are available for
         purchase under the Plan, each Participant shall be eligible to purchase
         a reduced number of shares of Common Stock on a pro rata basis, and any
         excess accrued but unpaid Bonus subject to his or her payroll deduction
         authorization shall be returned to the Participant, without interest,
         all as provided by rules and regulations adopted by the Plan
         Administrator.



                                      -3-


         9. Rights as a Share Owner. A Participant shall not be treated as the
owner of Common Stock until the Purchase Date of such Common Stock under the
Plan. As of the Purchase Date a Participant shall be treated as the record owner
of his or her shares purchased on such date pursuant to the Plan.

         10. Rights Not Transferable; Restrictions on Transfers of Shares.
Rights under the Plan are not transferable by a Participant other than by will
or the laws of descent and distribution, and are exercisable during the
Participant's lifetime only by the Participant or by the Participant's guardian
or legal representative. No rights or payroll deductions of a Participant shall
be subject to execution, attachment, levy, garnishment or similar process. The
shares of Common Stock received under this Plan must be held for at least six
months following the Purchase Date.

         11. Application of Funds. All funds of Participants received or held by
the Company under the Plan before purchase of the shares of Common Stock shall
be held by the Company without liability for interest or other increment.

         12. Administration of the Plan. The Plan shall be administered by the
Plan Administrator. The Plan Administrator shall have authority to make rules
and regulations for the administration of the Plan, and its interpretations and
decisions with regard to the Plan and such rules and regulations shall be final
and conclusive.

         13. Adjustments in Case of Changes Affecting Shares. In the event of
any dividend or other distribution (whether in the form of cash, Common Stock,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, exchange of Common Stock or other securities of the
Company, or other corporate transaction or event that affects the Common Stock:
(a) the number of shares of Common Stock approved for the Plan shall be
increased or decreased proportionately, and (b) the Board may determine, in its
sole discretion, that an adjustment is necessary or appropriate in order to
prevent dilution or enlargement of benefits or potential benefits intended to be
made available under the Plan.

         14. No Corporate Action Restriction. The existence of the Plan and/or
the rights granted hereunder shall not limit, affect or restrict in any way the
right or power of the Board or the Company's share owners to make or authorize
(a) any adjustment, recapitalization, reorganization or other change in the
Company's or any Subsidiary's capital structure or its business, (b) any merger,
consolidation or change in the ownership of the Company or any Subsidiary, (c)
any issue of bonds, debentures, capital, preferred or prior preference stocks
ahead of or affecting the Company's or any Subsidiary's capital stock or the
rights thereof, (d) any dissolution or liquidation of the Company or any
Subsidiary, (e) any sale or transfer of all or any part of the Company's or any
Subsidiary's assets or business, or (f) any other corporate act or proceeding by
the Company or any Subsidiary. No Participant, Eligible Employee, beneficiary or
any other person shall have any claim against any member of the Board or the
Committee, the Plan Administrator, the Company, any Subsidiary or any employees,
officers, share owners or agents of the Company or any Subsidiary, as a result
of any such action.



                                      -4-


         15. Notices. All notices or other communications by an Eligible
Employee or Participant to the Company under or in connection with the Plan
shall be deemed to have been duly given when received in the form specified by
the Company at the location, or by the person, designated by the Company for the
receipt thereof.

         16. Amendments to the Plan. The Committee may, at any time, or from
time to time, amend or modify the Plan.

         17. Termination of Plan. The Plan shall terminate upon the earliest of
(a) the fifth anniversary of the Effective Date, (b) the date no more shares of
Common Stock remain to be purchased under the Plan, and (c) the termination of
the Plan by the Board as specified below. The Board may terminate the Plan as of
any date. A Participant's accrued but unpaid Bonus, if any, shall be paid to the
Participant in cash, without interest, as soon as practicable following the
termination of the Plan.

         18. Costs. All costs and expenses incurred in administering the Plan
shall be paid by the Company. Any costs or expenses of selling shares of Company
Stock acquired pursuant to the Plan shall be borne by the holder thereof.

         19. Governmental Regulations. The Company's obligation to sell and
deliver its Common Stock pursuant to the Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such stock. Shares shall not be issued unless the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, state securities laws, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.

         As a condition to the purchase of Common Stock under the Plan, the
Company may require the person purchasing such Common Stock to represent and
warrant at the time of any such purchase that the shares of Common Stock are
being purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned applicable provisions of
law.

         20. Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the United States of
America and, to the extent not inconsistent therewith, by the laws of the State
of Delaware, without reference to the principles of conflict of laws thereof.
This Plan is not to be subject to the Employee Retirement Income Security Act of
1974, as amended. Any titles and headings herein are for reference purposes
only, and shall in no way limit, define or otherwise affect the meaning,
construction or interpretation of any provisions of the Plan.

         21. Effect on Employment. The provisions of this Plan shall not affect
the right of the Company, any Subsidiary or any Participant to terminate the
Participant's employment with the Company or any Subsidiary.



                                      -5-


         22. Withholding. The Company reserves the right to withhold from stock
or cash distributed to a Participant any amounts that it is required by law to
withhold.

         23. Other Company Benefit and Compensation Programs. For purposes of
the determination of benefits under any other employee welfare or benefit plans
or arrangements, if any, provided by the Company or any Subsidiary (a) any
amounts deducted from a Participant's Bonus pursuant to the Participant's
payroll deduction authorization under Section 4 shall be deemed a part of a
Participant's compensation, and (b) payments and other benefits received by a
Participant under the Plan shall not be deemed a part of a Participant's
compensation, unless expressly provided in such other plans or arrangements, or
except where the Board expressly determines in writing. The existence of the
Plan notwithstanding, the Company or any Subsidiary may adopt such other
compensation plans or programs and additional compensation arrangements as it
deems necessary to attract, retain and motivate employees.

         24. Effective Date. The Plan shall become effective on the Effective
Date.







                                      -6-

EX-10.26

                                                                   EXHIBIT 10.26


                                 KELLOGG COMPANY
                     SENIOR EXECUTIVE ANNUAL INCENTIVE PLAN


                                    SECTION 1
                            Establishment and Purpose

                  Kellogg Company (the "Company") hereby establishes the
"Kellogg Company Senior Executive Annual Incentive Plan" (the "Plan"). The Plan
will be submitted to the stockholders of the Company for approval at the 2002
Annual Meeting of Stockholders of the Company scheduled to be held on April 26,
2002, and will be effective retroactively to January 1, 2002 (the "Effective
Date"). The purposes of the Plan are to motivate selected senior executives
toward achievement of performance goals; encourage teamwork in various segments
of the Company; and reward performance with cash bonuses that vary in relation
to the achievement of the preestablished performance goals. The Plan replaces
the Kellogg Company Senior Executive Officer Performance Bonus Plan, which has
expired.

                                    SECTION 2
                                   Eligibility

                  The individuals who are assigned one or more of the following
titles by the Company are eligible to participate in the Plan, as determined and
selected by the Committee (as defined in Section 3 hereof): (i) Chairman, Vice
Chairman, Kellogg Company Chief Executive Officer, or Kellogg Company President;
(ii) Kellogg Company Executive Vice President; or (iii) Kellogg Company Senior
Vice President. Each individual selected for participation will be known as a
"Participant".

                                    SECTION 3
                                 Administration

                  The Plan will be administered by the Compensation Committee of
the Company's Board of Directors (the "Board"), or such other committee as the
Board may from time to time select (the "Committee"). The Committee will at all
times be composed of two or more members of the Board, each of whom qualifies as
an "outside director" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended ("Section 162(m)").

                  Except as limited by law or the Company's Amended and/or
Restated Certificate of Incorporation or Bylaws, and subject to the provisions
herein, the Committee will have full power and authority, to the fullest extent
required to comply with Section 162(m), to select Participants (as defined in
Section 2 hereof); determine the size of bonus awards; determine the terms,
conditions, restrictions and other provisions of bonus awards, including the
establishment of the Performance Goals (as defined in Section 4 hereof);
interpret the Plan; establish, amend or rescind guidelines, rules and
regulations for the Plan's administration; review and certify the achievement of
Performance Goals; and, subject to Section 9 hereof and the restrictions under
Section 162(m), amend the terms and conditions of the Plan, including
outstanding Award





Opportunities (as defined in Section 4 hereof). Further, the Committee will make
all other determinations which may be necessary or advisable for the
administration and operation of the Plan. Except as to the extent prohibited by
applicable law, the Committee may delegate all or any portion of its
responsibilities and powers granted under the Plan to such other person or
entity it deems appropriate, including, but not limited to, senior management of
the Company. Any such delegation may be revoked by the Committee at any time.
All determinations and decisions of the Committee arising under the Plan will be
final, binding and conclusive upon all parties. By accepting any benefits under
the Plan, each Participant, and each person claiming under or through such
Participant, will be conclusively deemed to have indicated acceptance and
ratification of, and consent to, all provisions of the Plan and any
determination or decision under the Plan by the Company, the Board or the
Committee.

                                    SECTION 4
                       Participation and Performance Goals

                  The Committee will have the authority to select Participants
(as defined in Section 2 hereof) for cash bonus awards under the Plan for each
Measurement Period and the financial and other performance criteria
("Performance Goals") upon which such awards will be based. For purposes of the
Plan, the term "Measurement Period" means the period of one fiscal year, unless
an alternate period (such as a portion of a fiscal year or multiple fiscal
years) is otherwise selected and established in writing by the Committee at the
time the Performance Goal is established. No later than the earlier of ninety
(90) days after the commencement of the applicable Measurement Period or the
completion of 25% of such Measurement Period, the Committee will, in its
discretion, determine the Participants for such Measurement Period and establish
the Performance Goals applicable to each Participant's award.

                  Performance Goals need not be the same for all Participants.
The Performance Goals may be based on any one or more of the following measures
(or the relative change for any such measure): the Company's earnings per share,
return on equity, return on assets, return on invested capital, growth in sales
and earnings, net sales, cash flow, discounted cash flow, cumulative cash flow,
operating profits, pre-tax profits, post-tax profits, consolidated net income,
unit sales volume, economic value added, costs, production, unit production
volume, improvements in financial ratings, regulatory compliance, achievement of
balance sheet or income statement objectives, market share and total return to
stockholders (including both the market value of the Company's stock and
dividends thereon) and the extent to which strategic and business plan goals are
met.

                  With respect to each Participant, the Committee will establish
ranges of Performance Goals which correspond to various levels of cash bonus
amounts ("Award Opportunities") for the Measurement Period. Each range of
Performance Goals will include a level of performance at which one hundred
percent (100%) of the targeted bonus award ("Target Bonus Award") may be earned.
In addition, each range of Performance Goals will include levels of performance
above and below the one hundred percent (100%) performance level. The Committee
may establish minimum levels of Performance Goal achievement, below which no
bonus payment will be made to the Participant. Once established, Performance
Goals and Award Opportunities may be adjusted during the Measurement Period only
to mitigate the unbudgeted


                                       2



impact of unusual or nonrecurring gains and losses, accounting changes or other
extraordinary events not foreseen at the time such Performance Goals and Award
Opportunities were established.

                                    SECTION 5
                         Final Bonus Award Determination

                    Awards are based on the achievement of the preestablished
Performance Goals. After the Performance Goals are established as described in
Section 4 hereof, the Committee will align the achievement of the Performance
Goals with Award Opportunities, such that the level of achievement of the
Performance Goals at the end of the Measurement Period will determine the
Participant's actual annual bonus award ("Final Bonus Award"). Final Bonus
Awards may vary above or below the Target Bonus Award, based on the level of
achievement of the preestablished Performance Goals.

                  Negative discretion may be used by the Committee to reduce the
Final Bonus Award. In no event, however, will an exercise of negative discretion
to reduce the Final Bonus Award of a Participant have the effect of increasing
the amount of a Final Bonus Award otherwise payable to any other Participant.

                                    SECTION 6
                             Final Bonus Award Limit

                  The total of all Final Bonus Awards payable to Participants
for performance in any Measurement Period will not under any circumstances
exceed one percent (1%) of the Net Income of the Company (the "Maximum Bonus
Awards Pool") for such period. For purposes of the Plan, the term "Net Income"
means the income from continuing operations of the Company and its subsidiaries,
as determined on a consolidated basis in accordance with generally accepted
accounting principles, adjusted to exclude the following: (i) all restructuring
and disposition-related charges or credits for the fiscal year, net of related
tax effect; and (ii) incremental and non-recurring integration costs and other
financial impacts, net of tax, related to the business operations of an entity
acquired by the Company.

                  The maximum Final Bonus Award any Participant can receive for
performance in any Measurement Period is three million dollars ($3,000,000). In
the event that the total of all Final Bonus Awards payable to Participants
should exceed the Maximum Bonus Awards Pool as specified above, the Final Bonus
Award of each Participant will be proportionately reduced such that the total of
all such Final Bonus Awards paid is equal to the Maximum Bonus Awards Pool.

                                    SECTION 7
                                Payment of Awards

                  If the Performance Goals established by the Committee are
satisfied and upon written certification by the Committee that the Performance
Goals have been satisfied, payment will be made in cash as soon as practicable
in accordance with the terms of the award, unless the Committee determines in
its sole discretion to reduce or eliminate Final Bonus Award



                                       3



determinations for any or all Participants, based upon any objective or
subjective criteria it deems appropriate. There is no obligation for uniformity
of treatment of Participants under the Plan.

                                    SECTION 8
                            Termination of Employment

                  Each Participant must remain employed with the Company or a
subsidiary through the last day of the Measurement Period to be considered for a
Final Bonus Award; provided, however, in the event of a Participant's death,
disability or retirement (as defined in the Kellogg Company Salaried Pension
Plan or any other retirement plan of the Company or a subsidiary in which the
individual participates) during the Measurement Period, the Participant's bonus
award will based on the portion of the Measurement Period in which the
Participant was employed, computed as determined by the Committee. In the event
that a Participant's employment is terminated for any reason other than death,
disability or retirement, the Participant's rights to a Final Bonus Award will
be forfeited; provided, however, the Committee may, in its sole discretion, pay
a prorated bonus award to the Participant for the portion of the Measurement
Period in which the Participant was employed, computed as determined by the
Committee. In the event that a Participant's employment with the Company or a
subsidiary terminates for any reason after the completion of the Measurement
Period but prior to the actual payment of the cash bonus, the balance of any
bonus which remains unpaid at the time of such termination will be payable to
the Participant, or forfeited by the Participant, in accordance with the terms
of the award granted by the Committee.

                                    SECTION 9
                            Amendment and Termination

                  The Board and the Committee each has the right to amend or
terminate the Plan at any time and in any respect, except that, unless otherwise
determined by the Board or the Committee, no amendment may be made without
stockholder approval if, and to the extent that, such approval would be required
to comply with any applicable provisions of Section 162(m). Similarly, no
amendment or termination of the Plan may alter or impair the rights of any
Participant pursuant to an outstanding award without the consent of the
Participant.

                  This Plan will expire on December 31, 2006, unless terminated
earlier by the Board or the Committee. No further awards will be made under the
Plan after termination, but termination will not affect the rights of any
Participant under any award made prior to termination.

                                   SECTION 10
                                  Miscellaneous

                  Bonus payments will be made from the general funds of the
Company and no special or separate fund will be established or other segregation
of assets made to assure payment. No Participant or other person will have under
any circumstances any interest in any particular property or assets of the
Company. The Plan will be governed by and construed in



                                       4




accordance with the laws of the State of Delaware, without regard to its
principles of conflict of laws.

                  Neither the establishment of this Plan nor the payment of any
award hereunder nor any action of the Company, the Board or the Committee with
respect to this Plan will be held or construed to confer upon any Participant
any legal right to be continued in the employ of the Company or to receive any
particular rate of cash compensation other than pursuant to the terms of this
Plan and the determination of the Committee, and the Company expressly reserves
the right to discharge any Participant whenever the interest of the Company may
so permit or require without liability to the Company, the Board or the
Committee, except as to any rights which may be expressly conferred upon a
Participant under this Plan.

                  The adoption of this Plan will not affect any other
compensation plans in effect for the Company or any subsidiary or affiliate of
the Company, nor will the Plan preclude the Company or any subsidiary or
affiliate thereof from establishing any other forms of incentive or other
compensation for the Participants.




                                       5

EX-13.01

                                                                   EXHIBIT 13.01

                               TABLE OF CONTENTS

Management's Discussion and Analysis................................... 17

Selected Financial Data................................................ 26

Consolidated Financial Statements...................................... 27

Notes to Consolidated Financial Statements............................. 30

Report of Independent Accountants...................................... 43

Supplemental Financial Information..................................... 44


MANAGEMENT'S DISCUSSION AND ANALYSIS

KELLOGG COMPANY AND SUBSIDIARIES


RESULTS OF OPERATIONS

OVERVIEW

Kellogg Company is the world's leading producer of cereal and a leading
producer of convenience foods, including cookies, crackers, toaster pastries,
cereal bars, frozen waffles, meat alternatives, pie crusts, and ice cream cones.
Kellogg products are manufactured in 19 countries and marketed in more than 160
countries around the world. The Company is managed in two major divisions - the
United States and International - with International further delineated into
Europe, Latin America, Canada, Australia, and Asia. This organizational
structure is the basis of the operating segment data presented in this report.

During the first quarter of 2001, we completed our acquisition of Keebler Foods
Company (the "Keebler acquisition"), making Kellogg Company a leader in the U.S.
cookie and cracker categories. Primarily as a result of the Keebler
contribution, 2001 net sales and operating profit increased significantly.
Despite these increases, net earnings and earnings per share were down versus
the prior year, due primarily to increased interest and tax expense related to
the Keebler acquisition. We believe that these results reflect, in part, the
significant amount of change which occurred at our company during 2001 and
somewhat mask the progress we made in positioning our business for sustainable
growth in 2002 and beyond. During 2001, we achieved three primary goals. First,
we restored our competitiveness in the U.S. cereal category, as evidenced by
our improved dollar share. Second, we increased our gross margin through pricing
and mix improvements, which will help fund further marketing investment.
Finally, our internal measure of "cash flow" (net cash provided from operating
activities less expenditures for property additions) was the highest in our
company's history.

In 2000, we achieved growth in net earnings and earnings per share, excluding
charges, despite softness in our U.S. convenience foods business, higher
energy prices and interest rates, weak foreign currencies, and inventory
write-offs in Southeast Asia. We were able to more than offset these factors
through manufacturing efficiencies, reduced advertising and overhead expenses,
and recognition of benefits related to U.S. tax credits.

During 1999, we increased sales and achieved double-digit growth in net earnings
and earnings per share, excluding charges. Volume gains in our Latin America,
Australia, and Asia cereal markets; continued expansion of our global
convenience foods business; and cost savings from ongoing streamlining and
efficiency initiatives contributed significantly to these results.

The following items have been excluded from all applicable amounts presented in
the "Results of operations" section for purposes of comparison among historical,
current, and future periods:

- -        Subsequent to the acquisition of Keebler, we have incurred costs and
         experienced other financial impacts related to integration of the
         Keebler business, which reduced sales and operating profit during 2001.

- -        During 1999, 2000, and 2001, we reported restructuring charges in
         operating profit related to our "focus and align" strategy and other
         streamlining initiatives around the world.

- -        During 1999, we reported net disposition-related charges in earnings
         before income taxes attributable primarily to our sale of the Lender's
         Bagels business.

- -        During 2001, net earnings included an extraordinary loss related to
         extinguishment of long-term debt and a charge for the cumulative effect
         of an accounting change.


Reported results are reconciled to comparable results, as follows:



======================================================================================================
Net earnings (millions)                                                          Change vs. prior year
- ------------------------------------------------------------------------------------------------------
                                             2001        2000           1999         2001        2000
- ------------------------------------------------------------------------------------------------------
                                                                                 
Reported consolidated results               $473.6      $587.7         $338.3       -19.4%      +73.7%
Integration impact                            46.2          --             --
Restructuring charges,
  net of credits                              20.5        64.2          156.4
Disposition-related charges                     --          --          111.5
Extraordinary loss                             7.4          --             --
Cumulative effect of
  accounting change                            1.0          --             --
- ------------------------------------------------------------------------------------------------------
Comparable consolidated results             $548.7      $651.9         $606.2       -15.8%      +7.5%
======================================================================================================




======================================================================================================
Net earnings per share                                                        Change vs. prior year
- ------------------------------------------------------------------------------------------------------
                                             2001        2000          1999         2001        2000
- ------------------------------------------------------------------------------------------------------
                                                                                
Reported diluted net earnings
  per share                                  $1.16       $1.45         $ .83        -20.0%     +74.7%
Dilution impact                                .01          --            --
- ------------------------------------------------------------------------------------------------------
Reported basic net earnings
  per share                                  $1.17       $1.45         $ .83
Integration impact                             .11          --            --
Restructuring charges,
  net of credits                               .05         .16           .40
Disposition-related charges                     --          --           .27
Extraordinary loss                             .02          --            --
Cumulative effect of
  accounting change                             --          --            --
- ------------------------------------------------------------------------------------------------------
Comparable consolidated results              $1.35       $1.61         $1.50        -16.1%      +7.3%
======================================================================================================


For 2001, the decrease in comparable earnings per share of $.26 was primarily
the result of $.34 from incremental interest expense, $.18 from incremental
amortization expense, $.17 from a higher effective tax rate, and $.07 from
unfavorable foreign currency movements. This was offset by $.50 from business
growth, which includes the results of the Keebler business.


                                                                              17

For 2000, the increase in comparable earnings per share of $.11 consisted of
$.02 from business growth and $.11 from favorable tax-rate movements, partially
offset by $.02 from unfavorable foreign currency movements.

NET SALES AND OPERATING PROFIT

2001 COMPARED TO 2000

The following tables provide an analysis of net sales and operating profit
performance for 2001 versus 2000:



========================================================================================================================
                                                                                 Other
                                   United                          Latin       operating                       Consoli-
(dollars in millions)              States           Europe        America        (d)           Corporate        dated
- ------------------------------------------------------------------------------------------------------------------------
                                                                                             
2001 NET SALES                    $6,129.0        $1,363.1        $652.7        $708.5             --          $8,853.3
2000 NET SALES                    $4,067.4        $1,463.4        $626.7        $776.7          $20.5          $6,954.7
- ------------------------------------------------------------------------------------------------------------------------
% change - 2001 vs. 2000:
  Volume                               +.9%           -6.8%         +1.8%         -1.7%            --              -1.3%
  Pricing/mix                          -.7%           +4.6%         +3.1%           --             --              +1.2%
  Integration impact (a)               -.4%             --            --            --             --               -.3%
  Acquisitions &
    dispositions (b)                 +50.9%             --            --           +.6%            --             +29.9%
Foreign currency impact                 --            -4.7%          -.7%         -7.7%            --              -2.2%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE                         +50.7%           -6.9%         +4.2%         -8.8%            --             +27.3%
========================================================================================================================




========================================================================================================================
                                                                                   Other
                                    United                         Latin        operating                      Consoli-
(dollars in millions)               States         Europe         America           (d)        Corporate         dated
- ------------------------------------------------------------------------------------------------------------------------
                                                                                             
2001 operating profit               $825.1         $245.8         $170.7          $101.6        ($175.3)       $1,167.9
2001 restructuring
  charges (c)                         29.5            (.2)           (.1)            1.4            2.7            33.3
Keebler amortization
  expense                             90.4             --             --              --             --            90.4
- ------------------------------------------------------------------------------------------------------------------------
2001 OPERATING PROFIT
  EXCLUDING RESTRUCTURING
  CHARGES AND KEEBLER
  AMORTIZATION
  EXPENSE                           $945.0         $245.6         $170.6          $103.0        ($172.6)       $1,291.6
- ------------------------------------------------------------------------------------------------------------------------
2000 operating profit               $744.2         $208.5         $146.5          $ 60.5        ($169.9)       $  989.8
2000 restructuring
  charges (c)                          2.0           26.7           14.6            28.7           14.5            86.5
- ------------------------------------------------------------------------------------------------------------------------
2000 OPERATING PROFIT
  EXCLUDING RESTRUCTURING
  CHARGES                           $746.2         $235.2         $161.1          $ 89.2        ($155.4)       $1,076.3
- ------------------------------------------------------------------------------------------------------------------------
% change - 2001 vs. 2000:
  Comparable business                 -5.1%          +9.9%          +5.3%          +24.6%          +7.1%           +2.5%
  Integration impact (a)              -9.0%            --             --              --           -5.0%           -6.9%
  Acquisitions &
    dispositions (b)                 +40.7%            --             --             +.5%            --           +28.2%
  Foreign currency impact               --           -5.5%          +.6%            -9.6%         -13.2%           -3.8%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE                        +26.6%           +4.4%          +5.9%          +15.5%         -11.1%          +20.0%
========================================================================================================================



(a)      Trade inventory reductions, asset write-offs, accelerated depreciation
         expense, and incremental costs related to integration of Keebler
         business. Refer to "Keebler acquisition" section, pages 20-21, for
         further information.

(b)      Includes results for applicable portion of the year from Keebler Foods
         Company, acquired in March 2001; Kashi Company, acquired in June 2000;
         and The Healthy Snack People business, an Australian convenience foods
         operation, acquired in July 2000.

(c)      Refer to "Restructuring charges" section, pages 20-21, for further
         information.

(d)      Includes Canada, Australia, and Asia.


On a comparable business basis, consolidated net sales for 2001 were essentially
flat (volume decline of 1.3% partially offset by pricing/mix improvement of
1.2%), as a 4% increase in U.S. cereal sales to the retail channel was offset by
declines in U.S. snack sales and in all international segments except Latin
America and Canada. The decline in U.S. snack sales was due primarily to our
product rationalization initiative and postponed innovation and marketing
support during the integration of this business into the Keebler direct store
door (DSD) delivery system. The decline in international sales was driven by the
discontinuation of our private-label program in Germany and continued cereal
category softness in the United Kingdom and Australia.

On a comparable business basis, consolidated operating profit for 2001 was up
2.5%. Increased profitability in international businesses offset the impact of
the comparable sales declines discussed above, as well as the impact of
increased marketing investment in the U.S. cereal business and additional sales
force hiring and training costs in the United States.

The impact of Keebler integration activities ("integration impact") reduced
growth in consolidated operating profit by approximately 7% during 2001. This
integration impact consisted primarily of 1) the sales and gross profit effect
of lowering trade inventories to transfer our snack foods to Keebler's DSD
system, 2) direct costs for employee incentive and retention programs, employee
separation and relocation benefits, and consulting contracts, and 3) impairment
and accelerated depreciation of software assets being abandoned due to the
conversion of our U.S. business to the SAP system. We estimate that these
activities reduced net sales by $17.8 million, increased cost of goods sold by
$5.6 million, and increased selling, general, and administrative expense by
$51.0 million, for a total 2001 operating profit reduction of $74.4 million.

The inclusion of the Keebler business in consolidated results increased our net
sales by approximately 29% and operating profit (excluding Keebler amortization
expense and restructuring charges) by approximately 28% versus the prior year.
Assuming we had owned Keebler during the comparable prior-year period, 2001
consolidated net sales (excluding foreign currency and integration impacts)
would have been approximately even with the prior year. Similarly, operating
profit (excluding Keebler amortization expense, restructuring charges, foreign
currency, and integration impacts) would have increased approximately 4%.
Keebler's net sales for full-year 2001 (excluding Kellogg snacks integrated into
the DSD system) decreased approximately 1% versus the prior year, primarily as a
result of our product rationalization initiative, exit of various non-strategic
custom manufacturing contracts, and postponement of new product introductions
during the integration process.



18

2000 COMPARED TO 1999

The following tables provide an analysis of net sales and operating profit
performance for 2000 versus 1999:



=====================================================================================================================
                                                                                 Other
                                      United                      Latin         operating                   Consoli-
(dollars in millions)                 States         Europe       America          (c)        Corporate       dated
- ---------------------------------------------------------------------------------------------------------------------
                                                                                         
2000 NET SALES                       $4,067.4       $1,463.4       $626.7        $776.7        $20.5       $6,954.7
1999 NET SALES                       $4,014.1       $1,614.4       $567.0        $788.8          (.1)      $6,984.2
- ---------------------------------------------------------------------------------------------------------------------
% change - 2000 vs. 1999:
  Volume                                  +.3%           -.8%        +7.7%         +1.4%          --            +.9%
  Pricing/mix                             -.6%          +1.4%        +4.7%          -.4%          --            +.2%
  Acquisitions &
    dispositions (a)                     +1.6%            --           --           +.5%          --           +1.0%
Foreign currency impact                    --          -10.0%        -1.9%         -3.0%          --           -2.5%
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE                             +1.3%          -9.4%       +10.5%         -1.5%          --            -.4%
=====================================================================================================================




=====================================================================================================================
                                                                                 Other
                                        United                    Latin         operating                   Consoli-
(dollars in millions)                   States       Europe       America          (c)        Corporate        dated
- ---------------------------------------------------------------------------------------------------------------------
                                                                                          
2000 operating profit                  $744.2         $208.5       $146.5         $60.5       ($169.9)      $  989.8
2000 restructuring
  charges (b)                             2.0           26.7         14.6          28.7          14.5           86.5
- ---------------------------------------------------------------------------------------------------------------------
2000 OPERATING PROFIT
  EXCLUDING RESTRUCTURING
  CHARGES                              $746.2         $235.2       $161.1         $89.2       ($155.4)      $1,076.3
- ---------------------------------------------------------------------------------------------------------------------
1999 operating profit                  $605.1         $201.7       $139.6         $89.1       ($206.7)      $  828.8
1999 restructuring
  charges (b)                           197.9           22.4          1.7           4.6          18.0          244.6
- ---------------------------------------------------------------------------------------------------------------------
1999 OPERATING PROFIT
  EXCLUDING RESTRUCTURING
  CHARGES                              $803.0         $224.1       $141.3         $93.7       ($188.7)      $1,073.4
- ---------------------------------------------------------------------------------------------------------------------
% change - 2000 vs. 1999:
  Comparable business                    -5.9%         +14.0%       +16.0%         -1.8%         +6.8%          +1.8%
  Acquisitions &
    dispositions (a)                     -1.2%            --           --          +1.1%           --            -.9%
  Foreign currency impact                  --           -9.1%        -2.0%         -4.1%        +10.9%           -.6%
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE                             -7.1%          +4.9%       +14.0%         -4.8%        +17.7%           +.3%
=====================================================================================================================



(a)      Includes results for applicable portion of the year from Kashi Company,
         acquired in June 2000, the Healthy Snack People business, an Australian
         convenience foods operation, acquired in July 2000; Worthington Foods,
         Inc., acquired in November 1999; and the Lenders Bagels business,
         divested in November 1999.

(b)      Refer to "Restructuring charges" section, pages 20-21, for further
         information.

(c)      Includes Canada, Australia, and Asia.

For 2000, the comparable business sales decline in the United States was .3%
(favorable volume of .3% less unfavorable pricing/mix impact of .6%) versus a
comparable business operating profit decline of 5.9%. The operating profit
decline was attributable primarily to increased production, distribution, and
promotional expenditures for convenience foods products, and higher energy
costs. In Europe, operating efficiencies and a decline in marketing expense
resulted in comparable business growth in operating profit of 14.0%, building on
a sales increase of .6% (unfavorable volume of .8% offset by favorable
pricing/mix of 1.4%). In Latin America, comparable business sales growth of
12.4% (favorable volume of 7.7% plus favorable pricing/mix of 4.7%) combined
with operating efficiencies resulted in comparable business operating profit
growth of 16.0%. In other operating segments, comparable business operating
profit declined 1.8%, despite a sales increase of 1.0% (favorable volume of 1.4%
less unfavorable pricing/mix impact of .4%).

Contributing significantly to this operating profit decline was approximately
$14 million in aged inventory write-offs and related expenses in Southeast Asia
as management initiated restructuring actions to refocus certain Asian markets
on sustainable growth.

MARGIN PERFORMANCE

Margin performance (excluding restructuring charges and 2001 integration
impact) was:



================================================================================
                                                    Change vs. prior year (pts)
- --------------------------------------------------------------------------------
                                   2001       2000      1999      2001     2000
- --------------------------------------------------------------------------------
                                                            
Gross margin                       53.5%      52.2%     52.4%     +1.3     -.2
- --------------------------------------------------------------------------------
SGA% as reported (a)               39.1%      36.7%     37.0%
Keebler amortization impact        -1.0%        --        --
- --------------------------------------------------------------------------------
SGA% excluding
  Keebler amortization             38.1%      36.7%     37.0%     -1.4     +.3
- --------------------------------------------------------------------------------
Operating margin excluding
  Keebler amortization             15.4%      15.5%     15.4%     -.1      +.1
================================================================================


(a) Selling, general, and administrative expense as a percentage of net sales.


For 2001, the gross margin improvement was attributable to sales of
higher-margin Keebler products, cereal price increases in the United States and
Europe, and efforts to improve our global sales mix. The gross margin
improvement was offset by an increase in SGA%, resulting in an operating margin
comparable to the prior year. The higher SGA% was attributable principally to
expenditures for marketing programs, U.S. sales force expansion, and improved
employee performance incentives.

For 2000, the gross margin was relatively flat versus the prior year, as higher
costs of production for Worthington and other new products, aged inventory
write-offs in Southeast Asia, and increased energy costs offset productivity
gains and lower employee benefit costs. The decrease in SGA% versus the prior
year was due primarily to reduced advertising and overhead expenses.

INTEREST EXPENSE

For 2001, gross interest expense, prior to amounts capitalized, increased
significantly versus the prior year, due primarily to interest expense on debt
issued late in the first quarter to finance the Keebler acquisition. (Refer to
the "Liquidity and capital resources" section beginning on page 23 for further
information.)

For 2000, gross interest expense was up versus the prior year, due primarily to
an increase in short-term interest rates.



================================================================================
(dollars in millions)                                     Change vs. prior year
- --------------------------------------------------------------------------------
                                 2001       2000       1999      2001      2000
- --------------------------------------------------------------------------------
                                                           
Reported interest expense       $351.5     $137.5     $118.8
  Amounts capitalized              2.9        5.6        8.4
- --------------------------------------------------------------------------------
Gross interest expense          $354.4     $143.1     $127.2    +147.7%   +12.5%
================================================================================



Primarily as a result of the full-year impact of Keebler acquisition related
debt, we expect reported 2002 interest expense to increase by approximately $60
million versus the 2001 level.


                                                                              19

INCOME TAXES

For 2001, the consolidated effective tax rate increased significantly over the
prior year, primarily as a result of the impact of the Keebler acquisition on
nondeductible goodwill and the level of U.S. tax on 2001 foreign subsidiary
earnings. Additionally, the 2000 effective tax rate was unusually low, due to
the recognition of $33 million in tax credits. Of these credits, $9 million was
recorded based on completing studies with respect to U.S. research and
experimentation credits for prior years. The remaining $24 million related
primarily to utilization of U.S. foreign tax credit carryforwards. Reduced
statutory rates in the United Kingdom, Australia, and Germany also contributed
to the lower effective income tax rate in 2000 as compared to 1999.

As a result of our adoption of Statement of Financial Accounting Standards
(SFAS) No. 142 on January 1, 2002 (refer to "Significant accounting policies"
section beginning on page 24), goodwill amortization expense - and the resulting
impact on the effective income tax rate - will be eliminated in post-2001 years.
Thus, we expect the 2002 effective income tax rate to return to historical
levels of approximately 37%.




================================================================================
Effective income tax rate                            Change vs. prior year (pts)
- --------------------------------------------------------------------------------
                                     2001     2000      1999      2001     2000
- --------------------------------------------------------------------------------
                                                            
Comparable (a)                       40.0%    31.7%     36.2%     +8.3     -4.5
- --------------------------------------------------------------------------------
As reported                          40.1%    32.3%     37.0%     +7.8     -4.7
================================================================================


(a) Excludes restructuring and disposition-related charges. Refer to sections
    beginning on pages 20 and 22.

The variance in the reported rates (as compared to the rates excluding the
impact of restructuring and disposition-related charges) relates primarily to
the disposition of nondeductible goodwill in 1999 and certain restructuring
charges in all years for which no tax benefit was provided, based on
management's assessment of the likelihood of recovering such benefit in future
years.

OTHER INCOME (EXPENSE), NET

Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales. Other income (expense), net for 2000 includes a credit of
approximately $12 million related to the 1999 sale of the Lender's Bagels
business. The total amount consists of approximately $9 million for disposal of
assets associated with the business which were not purchased by Aurora Foods
Inc. (refer to "Dispositions" section on page 22) and approximately $3 million
for final working capital settlement with Aurora.

RESTRUCTURING CHARGES

During the past several years, we have commenced major productivity and
operational streamlining initiatives in an effort to optimize the Company's cost
structure and align resources with our growth strategy. The incremental costs of
these programs have been reported during these years as restructuring charges.
Specifically, during 2000, we adopted a "focus and align" strategy that
emphasizes a stricter prioritization for resource allocation to the United
States and our other core markets. In conjunction with this strategy, the
Company was reorganized from four operating areas into two divisions - U.S. and
International. As a result, we initiated restructuring actions around the world
to support this strategy and organization, including staff reductions in our
global supply chain and innovation organization, rationalization of
international convenience foods capacity, and restructuring of various non-core
markets to improve return on investment. These initiatives resulted in
restructuring charges during both 2000 and 2001. For the periods presented,
operating profit includes restructuring charges for streamlining initiatives, as
follows:



================================================================================
(millions, except per share data)                2001        2000         1999
- --------------------------------------------------------------------------------
                                                                
Restructuring charges                            $48.3       $86.5       $244.6
Credits for reserve adjustments                  (15.0)         --           --
- --------------------------------------------------------------------------------
Net charges                                      $33.3       $86.5       $244.6
- --------------------------------------------------------------------------------
After-tax impact                                 $20.5       $64.2       $156.4
- --------------------------------------------------------------------------------
Net earnings per share impact                    $ .05       $ .16       $  .40
================================================================================


The 2001 charges of $48.3 million are related to preparing Kellogg for the
Keebler integration and continued actions supporting our focus and align
strategy. Specific initiatives included a headcount reduction of about 30 in our
U.S. and global management, rationalization of product offerings and other
actions to combine the Kellogg and Keebler logistics systems, and further
reductions in convenience foods capacity in Southeast Asia. Approximately
two-thirds of the charges were comprised of asset write-offs with the remainder
consisting of employee separation benefits and other cash costs. As a result of
actions during 2000 and 2001 related to our focus and align strategy, in 2001 we
realized approximately $45 million from cost reductions and elimination of
operating losses. Savings from Keebler integration-related initiatives have
contributed to the total estimate of acquisition-related synergies (refer to
"Keebler acquisition" section beginning on page 21).

The 2001 credits of $15.0 million result from adjustments to various
restructuring and asset disposal reserves. With numerous multi-year streamlining
initiatives nearing completion in late 2001, we conducted an assessment of
post-2001 reserve needs, resulting in net reductions of $8.8 million for cash
outlays and $6.2 million for asset disposals. (Asset disposal reserves are
reported within Property, net, on the Consolidated Balance Sheet.) The reduction
in cash outlays relates primarily to lower-than-anticipated employee severance
and asset removal expenditures, and higher-than-anticipated asset sale proceeds.


20

The 2000 charges of $86.5 million consist of $65.2 million for actions
supporting our focus and align strategy and $21.3 million for a supply chain
efficiency initiative in Europe. Approximately one-half of the charges for the
focus and align program were comprised of asset write-offs with the remainder
consisting primarily of cash costs associated with involuntary employee
separation programs. Approximately 500 salaried and hourly positions were
eliminated, primarily during the fourth quarter of 2000. The charges for the
European supply chain program were comprised principally of voluntary employee
retirement and separation benefits. This program resulted in hourly and salaried
headcount reductions totaling 190 during 2000 and generated approximately $13
million in annual pretax savings in 2001.

The 1999 charges consist of $193.2 million for closing the South Operations
portion of the Company's Battle Creek, Michigan, cereal plant; $32.7 million for
workforce reduction initiatives around the world; and $18.7 million, primarily
for manufacturing equipment write-offs related to previously closed or impaired
facilities in various locations. Approximately one-half of the charges for the
South Operations closing were comprised of asset write-offs, with the remainder
consisting primarily of cash costs for employee retirement and separation
benefits, equipment removal, and building demolition. Approximately 525 hourly
and salaried positions at the Battle Creek plant were eliminated by the end of
the first quarter of 2000 through a combination of voluntary and involuntary
separation programs. These actions resulted in annual pretax savings of
approximately $30 million in 2000 and a further $10 million in 2001, for a total
2001 benefit of $40 million. The charges for workforce reduction initiatives
were comprised principally of employee retirement and separation benefit costs
for elimination of approximately 325 employee positions in Europe, Latin
America, Australia, and Asia during 1999. These initiatives generated
approximately $15 million of pretax savings during 1999, and a further $10
million in pretax savings in 2000, for a total 2000 benefit of $25 million.

Incremental pretax savings achieved from all streamlining initiatives (except
those associated with the Keebler integration) by year, and the relative impact
on captions within the Consolidated Statement of Earnings, are:



================================================================================
                                                       Relative impact on
                                               ---------------------------------
                            Incremental         Cost of
(dollars in millions)      pretax savings      goods sold         SGA(a)
- --------------------------------------------------------------------------------
                                                         
1999                           $125                10%              90%
2000                             50                80%              20%
2001                             75                50%              50%
================================================================================


(a) Selling, general, and administrative expense.


Total cash outlays incurred or expected for streamlining initiatives by year
are:



================================================================================
(millions)
- --------------------------------------------------------------------------------
                                     
1999                                    $69
2000                                     68
2001                                     35
2002 expected                            10
================================================================================


As a result of the Keebler acquisition, we assumed $14.9 million of reserves for
severance and facility closures related to Keebler's ongoing restructuring and
acquisition-related synergy initiatives. Approximately $5 million of those
reserves were utilized in 2001, with the remainder being attributable primarily
to noncancelable lease obligations extending through 2006.

Refer to Note 3 within Notes to Consolidated Financial Statements for
information on the components of the restructuring charges by initiative, as
well as reserve balances remaining at December 31, 2001, 2000, and 1999.

KEEBLER ACQUISITION

On March 26, 2001, we completed our acquisition of Keebler Foods Company
("Keebler") in a transaction entered into with Keebler and with Flowers
Industries, Inc., the majority shareholder of Keebler. Keebler, headquartered in
Elmhurst, Illinois, ranks second in the United States in the cookie and cracker
categories and has the third largest food direct store door (DSD) delivery
system in the United States.

Under the purchase agreement, we paid $42 in cash for each common share of
Keebler or approximately $3.65 billion, including $66 million of related
acquisition costs. We also assumed $208 million in obligations to cash out
employee and director stock options, resulting in a total cash outlay for
Keebler stock of approximately $3.86 billion. Additionally, we assumed $696
million of Keebler debt, bringing the total value of the transaction to $4.56
billion. Of the debt assumed, $560 million was refinanced on the acquisition
date.

The acquisition was accounted for under the purchase method and was financed
through a combination of short-term and long-term debt. The assets and
liabilities of the acquired business were included in the consolidated balance
sheet as of March 31, 2001. For purposes of consolidated reporting during 2001,
Keebler's interim results of operations were reported for the periods ended
March 24, 2001, June 16, 2001, October 6, 2001, and December 29, 2001.
Therefore, Keebler results from the date of acquisition to June 16, 2001, were
included in the Company's second quarter 2001 results.

Related to this acquisition, we recorded $90.4 million of intangible
amortization expense during 2001 ($76.5 million after tax) and would have
recorded approximately $121 million ($102 million after tax) in 2002. As a
result of our adoption of SFAS No. 142 on January 1, 2002 (refer to "Significant
accounting policies" section beginning on page 24), this amortization expense
will be eliminated in post-2001 years.


                                                                              21

As of December 31, 2001, the purchase price allocation included $92.9 million of
liabilities related to our plans to exit certain activities and operations of
the acquired company ("exit liabilities"), comprised of Keebler employee
severance and relocation, contract cancellation, and facility closure costs
(refer to Note 2 within Notes to Consolidated Financial Statements for further
information). Cash outlays related to these exit plans were $28 million in 2001
and are projected to be approximately $54 million in 2002, with the remaining
amounts spent principally during 2003.

Exit plans implemented thus far include separation of approximately 90 Keebler
administrative employees and the closing of a bakery in Denver, Colorado,
eliminating approximately 440 employee positions. During June 2001, the Company
communicated plans to transfer portions of Keebler's Grand Rapids, Michigan,
bakery production to other plants in the United States during the next 12
months. As a result, approximately 140 employee positions have been eliminated,
primarily through a voluntary retirement program. During October 2001, the
Company communicated plans to consolidate and expand Keebler's ice cream cone
production operation in Chicago, Illinois, which will result in the closure of
one facility at this location during 2002.

As discussed in the "Results of operations" section on page 18, during 2001 we
incurred integration-related costs for consolidation of Kellogg and Keebler
employee organizations, computer systems, manufacturing capacity, and
distribution systems. We also recognized impairment losses and accelerated
depreciation on software assets being abandoned due to the conversion of our
U.S. business to the SAP system. Additionally, during the second quarter of
2001, sales and operating profit were impacted negatively by a reduction in
trade inventories preceding the transfer of our snack foods to Keebler's DSD
system. These financial impacts reduced 2001 operating profit by $74.4 million.
While the 2002 operating profit impact of continuing integration activity is
currently expected to be insignificant, actual results will depend on various
factors, primarily the timing of completion of planned supply chain and
information technology initiatives. These activities and other actions are
expected to result in Keebler-related pretax annual cost savings of
approximately $170 million by 2003, with supply chain initiatives expected to
generate the bulk of these savings.

OTHER ACQUISITIONS

During 2000, we paid cash for several business acquisitions. In January, we
purchased certain assets and liabilities of the Mondo Baking Company Division of
Southeastern Mills, Inc., a convenience foods manufacturing operation, for
approximately $93 million, including related acquisition costs. In June, we
acquired the outstanding stock of Kashi Company, a U.S. natural foods company,
for approximately $33 million, including related acquisition costs. In July, we
purchased certain assets and liabilities of The Healthy Snack People business,
an Australian convenience foods operation, for approximately $12 million,
including related acquisition costs.

In November 1999, we purchased the outstanding common stock of Worthington
Foods, Inc. for approximately $300 million in cash, including related
acquisition costs. Additionally, we assumed approximately $50 million of
Worthington debt, bringing the total value of the acquisition to $350 million.
Worthington Foods, Inc. is a leader in the manufacturing and marketing of soy
protein-based meat alternatives and other healthful foods.

DISPOSITIONS

During November 1999, we sold certain assets and liabilities of the Lender's
Bagels business to Aurora Foods Inc. for $275 million in cash. As a result of
this transaction, we recorded a pretax charge of $178.9 million ($119.3 million
after tax or $.29 per share). This charge included approximately $57 million for
disposal of other assets associated with the Lender's business, which were not
purchased by Aurora. Disposal of these other assets was completed during 2000.
The original reserve of $57 million exceeded actual losses from asset sales and
related disposal costs by approximated $9 million. This amount was recorded as a
credit to other income (expense), net during 2000.

During July 1999, we sold our 51% interest in a United Kingdom corn milling
operation to Cargill Inc., which owned the remaining 49%. As a result of this
sale, we recorded a pretax gain of $10.4 million ($7.8 million after tax or
$.02 per share).

In total, we recorded net disposition-related charges of $168.5 million ($111.5
million after tax or $.27 per share) during 1999.

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. The Euro existed alongside the old national currencies during a
transition period from January 1, 1999, to January 1, 2002. During this period,
entities within participating countries were required to complete changes that
enable them to transact in the Euro.

In early 1998, we formed a task force to monitor EMU developments, evaluate the
impact of the Euro conversion on our operations, and develop and execute action
plans, as necessary. Required business strategy, system, and process changes
within our European region have been successfully completed, and business is
being transacted in Euros with all relevant suppliers and customers.

As a result of our successful implementation of Euro-based processes, internal
business risks previously faced by our company have been substantially
eliminated. However, we will continue to face external


22

marketplace risk throughout 2002 related to potential competitor and supplier
pricing actions, and possible changes in customer and consumer purchasing
behavior. Additionally, the Euro has weakened against the U.S. Dollar and
British Pound since introduction and needs to be observed over a longer time
period before conclusions can be drawn on the currency's long-term strength.

LIQUIDITY AND CAPITAL RESOURCES

For 2001, net cash provided by operating activities was $1.13 billion, up $251.1
million from the prior-year amount of $880.9 million. The increase was due
primarily to favorable core working capital (trade receivables, inventory, and
trade payables) trends, with average core working capital representing 8.3% of
net sales, versus the year-ago level of 10.3%.

Due to the factors discussed above, our measure of 2001 full-year "cash flow"
(net cash provided from operating activities less expenditures for property
additions) of $855.5 million increased significantly from the 2000 level of
$650.0 million. We expect 2002 "cash flow" to be less than the 2001 level,
reduced in part, by cash outlays related to Keebler exit plans (refer to
"Keebler acquisition" section beginning on page 21), increased employee
performance incentive payments, increased interest payments, and a slowing in
the pace of further core working capital improvements.

Net cash used in investing activities was $4.14 billion, up from $379.3 million
in 2000, as a result of the Keebler acquisition. Expenditures for property
additions were $276.5 million, which represented 3.1% of net sales compared with
3.3% in 2000. We believe full-year 2002 expenditures will be slightly less than
the 2001 level.

Net cash provided by financing activities was $3.04 billion, related primarily
to issuance of $4.6 billion of long-term debt instruments to finance the Keebler
acquisition, net of $1.6 billion of long-term debt retirements. The debt
retirements consisted primarily of $400 million of Extendable Notes due February
2001, $500 million of Euro Dollar Notes due August 2001, and $676.2 million of
Notes previously held by Keebler Foods Company.

In February 2001, we paid holders $11.6 million (in addition to the principal
amount and accrued interest) to extinguish $400 million of Extendable Notes
prior to the extension date. Thus, during the first quarter of 2001, we reported
an extraordinary loss, net of tax, of $7.4 million.

On March 29, 2001, we issued $4.6 billion of long-term debt instruments
primarily to finance the Keebler acquisition. Initially, these instruments were
privately placed, or sold outside the United States, in reliance on exemptions
from registration under the Securities Act of 1933, as amended (the "1933 Act").
We then exchanged new debt securities for these initial debt instruments, with
the new debt securities being substantially identical in all respects to the
initial debt instruments, except for being registered under the 1933 Act.

In conjunction with this issuance, we settled $1.9 billion notional amount of
forward-starting interest rate swaps for approximately $88 million in cash. The
swaps effectively fixed a portion of the interest rate on an equivalent amount
of debt prior to issuance. The swaps were designated as cash flow hedges
pursuant to SFAS No. 133 (refer to Note 12 within Notes to Consolidated
Financial Statements for further information). As a result, the loss on
settlement (net of tax benefit) of $56 million was recorded in other
comprehensive income, and is being amortized to interest expense over periods of
5 to 30 years. As a result of this amortization expense, as well as discount on
the debt, the overall effective interest rate on the total $4.6 billion
long-term debt issuance was approximately 6.75% during 2001.

In November 2001, a subsidiary of the Company issued $375 million of five-year
4.49% fixed rate U.S. Dollar Notes to replace other maturing debt. These Notes
are guaranteed by the Company and mature $75 million per year over the five-year
term. These Notes, which were privately placed, contain standard warranties,
events of default, and covenants. They also require the maintenance of a
specified amount of consolidated net worth and a specified consolidated interest
expense coverage ratio, and limit capital lease obligations and subsidiary debt.
In conjunction with this issuance, the subsidiary of the Company entered into a
$375 million notional US$ / Pound Sterling currency swap, which effectively
converted this debt into a 5.302% fixed rate Pound Sterling obligation for the
duration of the five-year term.

In order to provide additional short-term liquidity in connection with the
Keebler acquisition, we entered into a 364-Day Credit Agreement, which was
renewed in January 2002, and a Five-Year Credit Agreement, which expires in
January 2006. The 364-day agreement permits the Company or certain subsidiaries
to borrow up to $950 million. The five-year agreement permits the Company or
certain subsidiaries to borrow up to $1.15 billion (or certain amounts in
foreign currencies). These agreements require the maintenance of a specified
amount of consolidated net worth and a specified consolidated interest expense
coverage ratio, and limit capital lease obligations and subsidiary debt. These
credit facilities were unused at December 31, 2001.

Our company has no material off-balance sheet financing arrangements or
transactions with structured finance or special purpose entities. Our
off-balance sheet commitments are generally limited to future payments under
noncancelable operating leases totaling $268 million at December 31, 2001 (refer
to Note 6 within Notes to Consolidated Financal Statements for further
information). In addition, our Keebler subsidiary is guarantor on approximately
$13 million of loans for approximately 400 independent contractors for the
purchase of DSD route franchises.

Despite the substantial amount of debt incurred to finance the Keebler
acquisition, we believe that we will be able to meet our interest and principal
repayment obligations and maintain our debt covenants for the foreseeable
future, while still meeting our operational needs through our strong cash flow,
our program of issuing commercial paper, and maintaining credit facilities on a
global basis.


                                                                              23

The Company's significant long-term debt issues do not contain acceleration of
maturity clauses that are dependent on credit ratings. A change in the Company's
credit ratings could limit its access to the U.S. commercial paper market and/or
increase the cost of refinancing long-term debt in the future. However, even
under these circumstances, the Company would continue to have access to its
aforementioned credit facilities which are in amounts sufficient to cover the
outstanding commercial paper balance and debt principal repayments through 2003.

In October 2001, we filed a registration statement with the SEC, which
subsequently became effective and allows Kellogg Company and certain business
trusts to issue $2.0 billion of debt or equity securities from time to time.

SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are discussed in Note 1 of Notes to
Consolidated Financial Statements. Our critical accounting policies, which
require significant judgments and estimates, are generally limited to those
governing the amount and timing of recognition of consumer promotional
expenditures and the assessment of the carrying value of intangible assets
including goodwill under SFAS No. 121 for the periods presented. Our promotional
activities are conducted either through the retail trade or directly with
consumers and involve in-store displays; feature price discounts on our
products; consumer coupons, contests, and loyalty programs; and similar
activities. The costs of these activities are generally recognized at the time
the related revenue is recorded, which normally precedes the actual cash
expenditure. The recognition of these costs therefore requires management
judgment regarding the volume of promotional offers that will be redeemed by
either the retail trade or consumer. These estimates are made using various
techniques including historical data on performance of similar promotional
programs. Differences between estimated expense and actual redemptions are
normally insignificant and recognized as a change in management estimate in a
subsequent period. However, as the Company's total promotional expenditures
represented nearly 25% of 2001 net sales, the likelihood exists of materially
different reported results if different assumptions or conditions were to
prevail. Our assessment of the carrying value of intangible assets including
goodwill is based upon our projection of future cash flows associated with these
assets. Projections of future cash flows are dependent upon management estimates
of future results. These estimates are made using various techniques including
historical data, current and anticipated market conditions, management plans,
and values realized by other consumer product companies in merger or sale
transactions. At December 31, 2001, intangible assets, net, were $5.1 billion.

Following is a discussion of recently issued pronouncements that will affect our
Company beginning in 2002.

REVENUE MEASUREMENT

Beginning January 1, 2002, we have applied the consensus reached by the Emerging
Issues Task Force of the FASB in Issue No. 01-09 "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products." Under
this consensus, generally, cash consideration is to be classified as a reduction
of revenue, unless specific criteria are met regarding goods or services that
the vendor may receive in return for this consideration. Non-cash consideration
is to be classified as a cost of sales. Upon application of this consensus,
prior-period financial statements should be reclassified to comply with this
guidance.

This guidance is applicable to Kellogg Company in several ways. First, it
applies to payments we make to our customers (the retail trade) primarily for
conducting consumer promotional activities, such as in-store display and feature
price discounts on our products. Second, it applies to discount coupons and
other cash redemption offers that we provide directly to consumers at the point
of sale. Third, it applies to promotional items such as toys that are inserted
in or attached to our product packages ("package inserts"). Consistent with
industry practice, we had historically classified these items as promotional
expenditures within selling, general, and administrative expense (SGA), and had
generally recognized the cost as the related revenue was earned.

As a result of applying this consensus, we will reclassify promotional payments
to our customers and the cost of consumer coupons and other cash redemption
offers from SGA to net sales. We will reclassify the cost of package inserts
from SGA to cost of goods sold. We believe that consolidated net sales could be
reduced up to 15% in 2002, with approximately 95% of this impact reflected in
the U.S. operating segment. Consolidated cost of goods sold could be increased
by approximately 1.5%. SGA will be reduced correspondingly such that net
earnings will not be affected.

Restated consolidated and total U.S. net sales for 1997-2001 are as follows:



================================================================================
                              Consolidated               U.S. operating segment
                         -----------------------      --------------------------
(millions)               Original      Restated        Original        Restated
- --------------------------------------------------------------------------------
                                                           
2001                     $8,853.3      $7,548.4        $6,129.0        $4,889.4
2000                      6,954.7       6,086.7         4,067.4         3,263.6
1999                      6,984.2       6,156.5         4,014.1         3,247.5
1998                      6,762.1       6,110.5         3,858.0         3,256.6
1997                      6,830.1       6,282.9         3,922.2         3,427.1
================================================================================



BUSINESS COMBINATIONS

We adopted SFAS No. 141 "Business Combinations" on July 1, 2001, and SFAS No.
142 "Goodwill and Other Intangible Assets" on January 1, 2002. Both of these
standards provide guidance on how companies account for acquired businesses and
related disclosure issues.

Chief among the provisions of these standards are 1) elimination of the "pooling
of interest" method for transactions initiated after June 30, 2001, 2)
elimination of amortization of goodwill and "indefinite-lived" intangible assets
effective for Kellogg Company on January 1, 2002,



24

and 3) annual impairment testing and potential loss recognition for goodwill and
non-amortized intangible assets, also effective for the Company on January 1,
2002. Goodwill impairment testing first requires a comparison between the
carrying value and fair value of a reporting unit, including goodwill allocated
to it. If carrying value exceeds fair value, goodwill is considered impaired.
The amount of impairment loss is measured as the difference between carrying
value and implied fair value of goodwill, which is determined in the same manner
as the amount of goodwill recognized in a business combination. Impairment
testing for non-amortized intangibles requires a comparison between the fair
value and carrying value of the intangible asset. If carrying value exceeds fair
value, the intangible is considered impaired and is reduced to fair value.

Transitional impairment tests of goodwill and non-amortized intangibles are also
performed upon adoption of SFAS No. 142, with any recognized impairment loss
reported as the cumulative effect of an accounting change in the first period of
adoption. We have completed these transitional tests and will not be recognizing
any impairment losses upon adoption of SFAS No. 142.

Regarding the elimination of goodwill and indefinite-lived intangible
amortization, this change will be made prospectively upon adoption of SFAS No.
142 on January 1, 2002. Prior-period financial results will not be restated.
However, comparative earnings information for prior periods will be disclosed.
Substantially all of our total after-tax amortization expense will be eliminated
under these new guidelines. Before impact of these new standards, total
after-tax amortization expense in 2002 would have been approximately $110-$115
million.

ACCOUNTING FOR LONG-LIVED ASSETS

We adopted SFAS No. 144 "Accounting for Impairment or Disposal of Long-lived
Assets" on January 1, 2002. This Standard will generally be effective for the
Company on a prospective basis.

SFAS No. 144 clarifies and revises existing guidance on accounting for
impairment of plant, property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting literature.
Significant changes include 1) establishing criteria beyond those previously
specified in existing literature for determining when a long-lived asset is held
for sale, and 2) requiring that the depreciable life of a long-lived asset to be
abandoned is revised. These provisions could be expected to have the general
effect of reducing or delaying recognition of future impairment losses on assets
to be disposed, offset by higher depreciation expense during the remaining
holding period. However, we do not expect the adoption of this standard to have
a significant impact on our 2002 financial results. SFAS No. 144 also broadens
the presentation of discontinued operations to include a component of an entity
(rather than only a segment of a business).

FORWARD-LOOKING STATEMENTS

Our Management's Discussion and Analysis contains "forward-looking statements"
with projections concerning, among other things, our strategy and plans;
integration activities, costs, and savings related to the Keebler acquisition;
cash outlays and savings related to restructuring actions; the impact of
accounting changes; our ability to meet interest and debt principal repayment
obligations; effective income tax rate; amortization expense; cash flow;
property addition expenditures; and interest expense. Forward-looking statements
include predictions of future results or activities and may contain the words
"expect," "believe," "will," "will deliver," "anticipate," "project," "should,"
or words or phrases of similar meaning. Our actual results or activities may
differ materially from these predictions. In particular, future results or
activities could be affected by factors related to the Keebler acquisition,
including integration problems, failures to achieve savings, unanticipated
liabilities, and the substantial amount of debt incurred to finance the
acquisition, which could, among other things, hinder our ability to adjust
rapidly to changing market conditions, make us more vulnerable in the event of a
downturn, and place us at a competitive disadvantage relative to less-leveraged
competitors. In addition, our future results could be affected by a variety of
other factors, including:

- -        competitive conditions in our markets;

- -        marketing spending levels and pricing actions of competitors;

- -        the impact of competitive conditions, marketing spending, and/or
         incremental pricing actions on actual volumes and product mix;

- -        effectiveness of advertising and marketing spending or programs;

- -        the success of new product introductions;

- -        the availability of and interest rates on short-term financing;

- -        the levels of spending on systems initiatives, properties, business
         opportunities, integration of acquired businesses, and other general
         and administrative costs;

- -        commodity price and labor cost fluctuations;

- -        changes in consumer preferences;

- -        changes in U.S. or foreign regulations affecting the food industry;

- -        expenditures necessary to carry out restructuring initiatives and
         savings derived from these initiatives;

- -        U.S. and foreign economic conditions, including currency rate
         fluctuations; and,

- -        business disruption from terrorist acts or our nation's response to
         them.

Forward-looking statements speak only as of the date they were made, and we
undertake no obligation to publicly update them.


                                                                              25

KELLOGG COMPANY AND SUBSIDIARIES

SELECTED FINANCIAL DATA

(millions, except per share data and number of employees)




=================================================================================================================================
                                                                  2001          2000         1999          1998           1997
- ---------------------------------------------------------------------------------------------------------------------------------
                                                                                                        
OPERATING TRENDS
Net sales                                                     $ 8,853.3      $6,954.7      $6,984.2      $6,762.1      $6,830.1
Gross profit as a % of net sales                                   53.4%         52.2%         52.4%         51.5%         52.1%
Depreciation                                                      331.0         275.6         273.6         261.8         272.0
Amortization                                                      107.6          15.0          14.4          16.3          15.3
Advertising expense                                               519.2         604.2         674.1         695.3         780.4
R&D expense                                                       110.2         118.4         104.1         121.9         106.1
Operating profit (a)                                            1,167.9         989.8         828.8         895.1       1,009.1
Operating profit, excluding charges                             1,201.2       1,076.3       1,073.4         965.6       1,193.2
Operating profit, excluding charges, as a % of net sales           13.6%         15.5%         15.4%         14.3%         17.5%
Interest expense                                                  351.5         137.5         118.8         119.5         108.3
Earnings before extraordinary loss and
cumulative effect of accounting change (a) (b):                   482.0         587.7         338.3         502.6         564.0
Average shares outstanding (basic)                                406.1         405.6         405.2         407.8         414.1
Earnings per share before extraordinary loss and
  cumulative effect of accounting change (a) (b):
  Basic                                                            1.19          1.45           .83          1.23          1.36
  Diluted                                                          1.18          1.45           .83          1.23          1.36
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW TRENDS
Net cash provided from operating activities                   $ 1,132.0      $  880.9      $  795.2      $  719.7      $  879.8
Capital expenditures                                              276.5         230.9         266.2         373.9         312.4
Net cash provided from operating activities
  reduced by capital expenditures                                 855.5         650.0         529.0         345.8         567.4
Net cash used in investing activities                          (4,143.8)       (379.3)       (244.2)       (398.0)       (329.3)
Net cash provided from (used in) financing activities           3,040.2        (441.8)       (527.6)       (358.3)       (607.3)
Interest coverage ratio (c)                                         4.7           9.9          11.5          10.4          13.7
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL STRUCTURE TRENDS
Total assets                                                  $10,368.6      $4,886.0      $4,808.7      $5,051.5      $4,877.6
Property, net                                                   2,952.8       2,526.9       2,640.9       2,888.8       2,773.3
Short-term debt                                                   595.6       1,386.3         521.5         621.5         579.8
Long-term debt                                                  5,619.0         709.2       1,612.8       1,614.5       1,415.4
Shareholders' equity                                              871.5         897.5         813.2         889.8         997.5
- ---------------------------------------------------------------------------------------------------------------------------------
SHARE PRICE TRENDS
Stock price range                                             $   25-34      $  21-32      $  30-42      $  30-50      $  32-50
Cash dividends per common share                                   1.010          .995           .96           .92           .87
- ---------------------------------------------------------------------------------------------------------------------------------
Number of employees                                              26,424        15,196        15,051        14,498        14,339
=================================================================================================================================



(a)      Operating profit for 2001 includes restructuring charges, net of
         credits, of $33.3 ($20.5 after tax or $.05 per share). Operating profit
         for 2000 includes restructuring charges of $86.5 ($64.2 after tax or
         $.16 per share). Operating profit for 1999 includes restructuring
         charges of $244.6 ($156.4 after tax or $.40 per share). Earnings before
         extraordinary loss and cumulative effect of accounting change for 1999
         include disposition- related charges of $168.5 ($111.5 after tax or
         $.27 per share). Operating profit for 1998 includes restructuring
         charges of $70.5 ($46.3 after tax or $.12 per share). Operating profit
         for 1997 includes restructuring charges of $161.1 and asset impairment
         losses of $23.0 ($140.5 after tax or $.34 per share). Refer to
         Management's Discussion and Analysis on pages 17-25 and Notes 2 and 3
         within Notes to Consolidated Financial Statements for further
         explanation of charges for years 1999-2001.

(b)      Earnings before extraordinary loss and cumulative effect of accounting
         change for 2001 exclude the effect of a charge of $7.4 after tax ($.02
         per share) for extinguishment of debt and a charge of $1.0 after tax to
         adopt SFAS No. 133 "Accounting for Derivative Instruments and Hedging
         Activities". Earnings before extraordinary loss and cumulative effect
         of accounting change for 1997 exclude the effect of a charge of $18.0
         after tax ($.04 per share) to write off business process reengineering
         costs in accordance with guidance issued by the Emerging Issues Task
         Force of the FASB.

(c)      Interest coverage ratio is calculated based on operating profit
         excluding charges [refer to note (a)], depreciation, and amortization
         divided by interest expense.



26

KELLOGG COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS



Year ended December 31,
================================================================================================================
(millions, except per share data)                                   2001                2000             1999
- ----------------------------------------------------------------------------------------------------------------
                                                                                              
NET SALES                                                         $8,853.3            $6,954.7         $6,984.2
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold                                                 4,128.5             3,327.0          3,325.1
Selling, general, and administrative expense                       3,523.6             2,551.4          2,585.7
Restructuring charges                                                 33.3                86.5            244.6
- ----------------------------------------------------------------------------------------------------------------
OPERATING PROFIT                                                  $1,167.9            $  989.8         $  828.8
- ----------------------------------------------------------------------------------------------------------------
Interest expense                                                     351.5               137.5            118.8
Disposition-related charges                                             --                  --            168.5
Other income (expense), net                                          (12.3)               15.4             (4.8)
- ----------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES, EXTRAORDINARY LOSS, AND
  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                          $  804.1            $  867.7         $  536.7
Income taxes                                                         322.1               280.0            198.4
- ----------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY LOSS AND
  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                          $  482.0            $  587.7         $  338.3
- ----------------------------------------------------------------------------------------------------------------
Extraordinary loss (net of tax)                                       (7.4)                 --               --
Cumulative effect of accounting change (net of tax)                   (1.0)                 --               --
- ----------------------------------------------------------------------------------------------------------------
NET EARNINGS                                                      $  473.6            $  587.7         $  338.3
- ----------------------------------------------------------------------------------------------------------------
PER SHARE AMOUNTS:
  Earnings before extraordinary loss and cumulative
  effect of accounting change           Basic                     $   1.19            $   1.45         $    .83
                                        Diluted                       1.18                1.45              .83
  Net earnings                          Basic                         1.17                1.45              .83
                                        Diluted                       1.16                1.45              .83
================================================================================================================



CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY



====================================================================================================================================
                                                                                        Accumulated
                        Common stock      Capital in                Treasury stock        other           Total           Total
                      ----------------    excess of    Retained    ----------------    comprehensive   shareholders'   comprehensive
(millions)            shares    amount    par value    earnings    shares    amount       income          equity          income
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                            
Balance, January
 1, 1999              415.3     $103.8     $105.0      $1,367.7     10.3    ($394.3)     ($292.4)       $ 889.8
Net earnings                                              338.3                                           338.3          $ 338.3
Dividends                                                (388.7)                                         (388.7)
Other
 comprehensive
  income                                                                                   (39.0)         (39.0)           (39.0)
Stock options
 exercised
  and other              .2                   (.5)          (.1)     (.3)      13.4                        12.8
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
 31, 1999             415.5     $103.8     $104.5      $1,317.2     10.0    ($380.9)     ($331.4)       $ 813.2          $ 299.3
                                                                                                                         -----------
Net earnings                                              587.7                                           587.7            587.7
Dividends                                                (403.9)                                         (403.9)
Other
 comprehensive
  income                                                                                  (103.9)        (103.9)          (103.9)
Stock options
 exercised
  and other                                  (2.5)                   (.2)       6.9                         4.4
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
 31, 2000             415.5     $103.8     $102.0      $1,501.0      9.8    ($374.0)     ($435.3)       $ 897.5          $ 483.8
                                                                                                                         -----------
Net earnings                                              473.6                                           473.6            473.6
Dividends                                                (409.8)                                         (409.9)
Other
 comprehensive
  income                                                                                  (116.1)        (116.1)          (116.1)
Stock options
 exercised
  and other                                 (10.5)          (.1)    (1.0)      36.9                        26.4
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
 31, 2001             415.5     $103.8     $ 91.5      $1,564.7      8.8    ($337.1)     ($551.4)       $ 871.5          $ 357.5
====================================================================================================================================



Refer to Notes to Consolidated Financial Statements.


                                                                              27

KELLOGG COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE  SHEET



At December 31,
==============================================================================================
(millions, except share data)                                           2001            2000
- ----------------------------------------------------------------------------------------------
                                                                               
CURRENT ASSETS
Cash and cash equivalents                                           $   231.8        $  204.4
Accounts receivable, net                                                762.3           685.3
Inventories                                                             574.5           443.8
Other current assets                                                    333.4           283.6
- ----------------------------------------------------------------------------------------------
  TOTAL CURRENT ASSETS                                              $ 1,902.0        $1,617.1
- ----------------------------------------------------------------------------------------------
PROPERTY, NET                                                         2,952.8         2,526.9

OTHER ASSETS                                                          5,513.8           742.0
- ----------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                      $10,368.6        $4,886.0
==============================================================================================
CURRENT LIABILITIES
Current maturities of long-term debt                                $    82.3        $  901.1
Notes payable                                                           513.3           485.2
Accounts payable                                                        577.5           388.2
Other current liabilities                                             1,034.5           707.8
- ----------------------------------------------------------------------------------------------
  TOTAL CURRENT LIABILITIES                                         $ 2,207.6        $2,482.3
- ----------------------------------------------------------------------------------------------
LONG-TERM DEBT                                                        5,619.0           709.2
OTHER LIABILITIES                                                     1,670.5           797.0
SHAREHOLDERS' EQUITY
Common stock, $.25 par value, 1,000,000,000 shares authorized
  Issued: 415,451,198 shares in 2001 and 415,451,198 in 2000            103.8           103.8
Capital in excess of par value                                           91.5           102.0
Retained earnings                                                     1,564.7         1,501.0
Treasury stock at cost:
  8,840,028 shares in 2001 and 9,812,543 shares in 2000                (337.1)         (374.0)
Accumulated other comprehensive income                                 (551.4)         (435.3)
- ----------------------------------------------------------------------------------------------
  TOTAL SHAREHOLDERS' EQUITY                                        $   871.5        $  897.5
- ----------------------------------------------------------------------------------------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $10,368.6        $4,886.0
==============================================================================================



Refer to Notes to Consolidated Financial Statements.



28

KELLOGG COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS




Year ended December 31,
================================================================================================================
(millions)                                                                  2001           2000          1999
- ----------------------------------------------------------------------------------------------------------------
                                                                                             
OPERATING ACTIVITIES
Net earnings                                                            $    473.6      $  587.7      $  338.3
Items in net earnings not requiring (providing) cash:
  Depreciation and amortization                                              438.6         290.6         288.0
  Deferred income taxes                                                       71.5          (1.4)        (60.5)
  Restructuring charges, net of cash paid                                     31.2          62.5         220.1
  Disposition-related charges                                                   --            --         168.5
  Other                                                                      (66.0)         (1.2)         65.7
Pension and other postretirement benefit contributions                       (76.3)        (84.3)        (78.1)
Changes in operating assets and liabilities                                  259.4          27.0        (146.8)
- ----------------------------------------------------------------------------------------------------------------
  NET CASH PROVIDED FROM OPERATING ACTIVITIES                           $  1,132.0      $  880.9      $  795.2
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to properties                                                    ($276.5)      ($230.9)      ($266.2)
Acquisitions of businesses                                                (3,858.0)       (137.2)       (298.2)
Dispositions of businesses                                                      --            --         291.2
Property disposals                                                            10.1           4.8          36.6
Other                                                                        (19.4)        (16.0)         (7.6)
- ----------------------------------------------------------------------------------------------------------------
  NET CASH USED IN INVESTING ACTIVITIES                                  ($4,143.8)      ($379.3)      ($244.2)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (reduction) of notes payable, with maturities
  less than or equal to 90 days                                            ($154.0)     $  290.5       ($410.8)
Issuances of notes payable, with maturities greater than 90 days             549.6           3.5         292.1
Reductions of notes payable, with maturities greater than 90 days           (365.6)       (331.6)        (19.0)
Issuances of long-term debt                                                5,001.4            --            --
Reductions of long-term debt                                              (1,608.4)         (4.8)        (14.1)
Net issuances of common stock                                                 26.4           4.5          12.9
Cash dividends                                                              (409.8)       (403.9)       (388.7)
Other                                                                           .6            --            --
- ----------------------------------------------------------------------------------------------------------------
  NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES                 $  3,040.2       ($441.8)      ($527.6)
- ----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                                       (1.0)         (6.0)         (9.2)
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents                                   $     27.4      $   53.8      $   14.2
Cash and cash equivalents at beginning of year                               204.4         150.6         136.4
- ----------------------------------------------------------------------------------------------------------------
  CASH AND CASH EQUIVALENTS AT END OF YEAR                              $    231.8      $  204.4      $  150.6
================================================================================================================


Refer to Notes to Consolidated Financial Statements.



                                                                              29

KELLOGG COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of Kellogg Company
and its majority-owned subsidiaries. Intercompany balances and transactions are
eliminated.

Certain amounts in the prior-year financial statements have been reclassified to
conform to the current-year presentation.

CASH AND CASH EQUIVALENTS

Highly liquid temporary investments with original maturities of less than three
months are considered to be cash equivalents. The carrying amount approximates
fair value.

INVENTORIES

Inventories are valued at the lower of cost (principally average) or market.

PROPERTY

Fixed assets are recorded at cost and depreciated over estimated useful lives
using straight-line methods for financial reporting and accelerated methods for
tax reporting. Cost includes an amount of interest associated with significant
capital projects.

GOODWILL AND OTHER INTANGIBLE ASSETS

For the periods presented, intangible assets are amortized on a straight-line
basis over the estimated periods benefited, generally 40 years for goodwill and
periods ranging from 5 to 40 years for other intangible assets. The
realizability of goodwill and other intangibles is evaluated periodically when
events or circumstances indicate a possible inability to recover the carrying
amount. Evaluation is based on undiscounted cash flow projections over the
remaining life of the asset. An excess of carrying value over cash flows would
result in recognition of an impairment loss. The amount of the loss would be
based on the difference between carrying value and fair value of the asset, as
measured by market comparables or discounted cash flows in the absence of market
data. The Company will be adopting new accounting policies in this area,
effective January 1, 2002, as discussed under the "Recently issued
pronouncements" caption that follows.

REVENUE RECOGNITION

The Company recognizes sales upon delivery of its products to customers net of
applicable provisions for discounts, returns, and allowances.

ADVERTISING

The costs of advertising are generally expensed as incurred.

STOCK COMPENSATION

The Company follows Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options and other stock-based compensation. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized. As permitted, the Company has elected to adopt the disclosure
provisions only of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Refer to Note 8 for further
information.

DERIVATIVES AND HEDGING TRANSACTIONS

The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" on January 1, 2001. This statement requires that all
derivative instruments be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
Upon adoption, the Company reported a charge to earnings of $1.0 million (net of
tax benefit of $.6 million) and a charge to other comprehensive income of $14.9
million (net of tax benefit of $8.6 million) in order to recognize the fair
value of derivative instruments as either assets or liabilities on the balance
sheet. The charge to earnings relates to the component of the derivative
instruments' net loss that has been excluded from the assessment of hedge
effectiveness. Refer to Note 12 for further information.

For periods prior to 2001, the Company accounted for derivatives and hedging
transactions in a manner similar to the provisions of SFAS No. 133, except that
1) unrealized gains and losses related to hedges of forecasted transactions were
deferred as assets or liabilities rather than in other comprehensive income,
and 2) the fair values of certain financial derivatives such as interest rate
swaps were carried off-balance sheet.

RECENTLY ISSUED PRONOUNCEMENTS

REVENUE MEASUREMENT

Beginning January 1, 2002, the Company has applied the consensus reached by the
Emerging Issues Task Force of the FASB in Issue No. 01-09 "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products." Under this consensus, generally, cash consideration is to be
classified as a reduction of revenue, unless specific criteria are met regarding
goods or services that the vendor may receive in return for this consideration.
Non-cash consideration is to be classified as a cost of sales. Upon application
of this consensus, prior-period financial statements should be reclassified to
comply with this guidance.

This guidance is applicable to Kellogg Company in several ways. First, it
applies to payments made by the Company to its customers (the retail trade)
primarily for conducting consumer promotional activities, such as in-store
display and feature price discounts on the Company's products. Second, it
applies to discount coupons and other cash redemption offers that the Company
provides directly to consumers at the point of sale. Third, it applies to
promotional items such as toys that the Company inserts in or attaches to its
product packages ("package inserts"). Consistent with industry practice, the
Company has historically classified these items as promotional expenditures
within selling, general, and administrative expense (SGA), and has generally
recognized the cost as the related revenue was earned.

As a result of applying this consensus, the Company will reclassify promotional
payments to its customers and the cost of consumer coupons and other cash
redemption offers from SGA to net sales. The Company will reclassify the cost of
package inserts from SGA to cost of goods sold. Management believes that
consolidated net sales could be reduced up to 15% in 2002, with approximately
95% of this impact reflected in the U.S. operating segment. Consolidated cost of
goods sold could be increased by approximately 1.5%. SGA will be reduced
correspondingly such that net earnings will not be affected.

30

Restated consolidated and total U.S. net sales for 1997-2001 are as follows:



                    Consolidated           U.S. operating segment
- -----------------------------------------------------------------
(millions)     Original     Restated     Original      Restated
- -----------------------------------------------------------------
                                           
      2001    $8,853.3      $7,548.4     $6,129.0      $4,889.4
      2000     6,954.7       6,086.7      4,067.4       3,263.6
      1999     6,984.2       6,156.5      4,014.1       3,247.5
      1998     6,762.1       6,110.5      3,858.0       3,256.6
      1997     6,830.1       6,282.9      3,922.2       3,427.1


BUSINESS COMBINATIONS

The Company adopted SFAS No. 141 "Business Combinations" on July 1, 2001, and
SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. Both of
these standards provide guidance on how companies account for acquired
businesses and related disclosure issues.

Chief among the provisions of these standards are 1) elimination of the "pooling
of interest" method for transactions initiated after June 30, 2001, 2)
elimination of amortization of goodwill and "indefinite-lived" intangible assets
effective for Kellogg Company on January 1, 2002, and 3) annual impairment
testing and potential loss recognition for goodwill and non-amortized
intangible assets, also effective for the Company on January 1, 2002. Goodwill
impairment testing first requires a comparison between the carrying value and
fair value of a reporting unit, including goodwill allocated to it. If carrying
value exceeds fair value, goodwill is considered impaired. The amount of
impairment loss is measured as the difference between carrying value and
implied fair value of goodwill, which is determined in the same manner as the
amount of goodwill recognized in a business combination. Impairment testing for
non-amortized intangibles requires a comparison between the fair value and
carrying value of the intangible asset. If carrying value exceeds fair value,
the intangible is considered impaired and is reduced to fair value.

Transitional impairment tests of goodwill and non-amortized intangibles are also
performed upon adoption of SFAS No. 142, with any recognized impairment loss
reported as the cumulative effect of an accounting change in the first period of
adoption. The Company has completed these transitional tests and will not be
recognizing any impairment losses upon adoption of SFAS No. 142.

Regarding the elimination of goodwill and indefinite-lived intangible
amortization, this change will be made prospectively upon adoption of SFAS No.
142 on January 1, 2002. Prior-period financial results will not be restated.
However, comparative earnings information for prior periods will be disclosed.
Substantially all of the Company's total after-tax amortization expense will be
eliminated under these new guidelines. Before impact of these new standards,
total after-tax amortization expense in 2002 would have been approximately
$110-$115 million.

ACCOUNTING FOR LONG-LIVED ASSETS

The Company adopted SFAS No. 144 "Accounting for Impairment or Disposal of
Long-lived Assets" on January 1, 2002. This standard will generally be effective
for the Company on a prospective basis.

SFAS No. 144 clarifies and revises existing guidance on accounting for
impairment of plant, property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting literature.
Significant changes include 1) establishing criteria beyond those previously
specified in existing literature for determining when a long-lived asset is held
for sale, and 2) requiring that the depreciable life of a long-lived asset to be
abandoned is revised. These provisions could be expected to have the general
effect of reducing or delaying recognition of future impairment losses on assets
to be disposed, offset by higher depreciation expense during the remaining
holding period. However, management does not expect the adoption of this
standard to have a significant impact on the Company's 2002 financial results.
SFAS No. 144 also broadens the presentation of discontinued operations to
include a component of an entity (rather than only a segment of a business).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

NOTE 2  ACQUISITIONS AND DISPOSITIONS

KEEBLER ACQUISITION

On March 26, 2001, the Company completed its acquisition of Keebler Foods
Company ("Keebler") in a transaction entered into with Keebler and with Flowers
Industries, Inc., the majority shareholder of Keebler. Keebler, headquartered in
Elmhurst, Illinois, ranks second in the United States in the cookie and cracker
categories and has the third largest food direct store door (DSD) delivery
system in the United States.

Under the purchase agreement, the Company paid $42 in cash for each common share
of Keebler or approximately $3.65 billion, including $66 million of related
acquisition costs. The Company also assumed $208 million in obligations to
cash out employee and director stock options, resulting in a total cash outlay
for Keebler stock of approximately $3.86 billion. Additionally, the Company
assumed $696 million of Keebler debt, bringing the total value of the
transaction to $4.56 billion. Of the debt assumed, $560 million was refinanced
on the acquisition date.

The acquisition was accounted for under the purchase method and was financed
through a combination of short-term and long-term debt. The assets and
liabilities of the acquired business were included in the consolidated balance
sheet as of March 31, 2001. For purposes of consolidated reporting during 2001,
Keebler's interim results of operations were reported for the periods ended
March 24, 2001, June 16, 2001, October 6, 2001, and December 29, 2001.
Therefore, Keebler results from the date of acquisition to June 16, 2001, were
included in the Company's second quarter 2001 results.

                                                                              31



As of December 31, 2001, the components of intangible assets included in the
allocation of purchase price are presented in the following table. During 2001,
these intangibles were amortized based on an estimated useful life of 40 years.
As a result of the Company's adoption of SFAS No. 142 on January 1, 2002 (refer
to Note 1), these intangibles will no longer be amortized after 2001, but will
be subject to annual impairment reviews. The process of finalizing valuations
of assets and obligations that existed as of the acquisition date is virtually
complete. However, management's estimate of "exit liabilities" (discussed
below) could change as plans for exit of certain activities and functions of
Keebler are refined during the first quarter of 2002, thus impacting the amount
of residual goodwill attributable to this acquisition.



(millions)
- ---------------------------------------------------------------
                                                    
Trademarks and tradenames                              $1,310.0
Direct store door (DSD) delivery system                   590.0
Goodwill                                                2,918.3
- ---------------------------------------------------------------
                                                       $4,818.3


As of December 31, 2001, the purchase price allocation included $92.9 million of
liabilities related to management's plans to exit certain activities and
operations of the acquired company ("exit liabilities"), as presented in the
table below. Cash outlays related to these exit plans are projected to be
approximately $54 million in 2002, with the remaining amounts spent principally
during 2003.



                                         EMPLOYEE                  LEASE & OTHER    FACILITY
                                         SEVERANCE    EMPLOYEE       CONTRACT       CLOSURE
(MILLIONS)                               BENEFITS    RELOCATION   TERMINATION       COSTS     TOTAL
- -----------------------------------------------------------------------------------------------------
                                                                              
Total reserve at March 26, 2001:
        Original estimate                  $59.3       $ 8.6           $12.3         $10.4      $90.6
        Purchase accounting
        adjustments                          4.4          .5            (2.0)          (.6)       2.3
- -----------------------------------------------------------------------------------------------------
        Adjusted                           $63.7       $ 9.1           $10.3         $ 9.8      $92.9
Amounts utilized during 2001               (22.8)       (1.8)           (1.0)         (2.4)     (28.0)
- -----------------------------------------------------------------------------------------------------
Remaining reserve at December 31, 2001     $40.9       $ 7.3           $ 9.3         $ 7.4      $64.9



Exit plans implemented thus far include separation of approximately 90 Keebler
administrative employees and the closing of a bakery in Denver, Colorado,
eliminating approximately 440 employee positions. During June 2001, the Company
communicated plans to transfer portions of Keebler's Grand Rapids, Michigan,
bakery production to other plants in the United States during the next 12
months. As a result, approximately 140 employee positions have been eliminated,
primarily through a voluntary retirement program. During October 2001, the
Company communicated plans to consolidate and expand Keebler's ice cream cone
production operation in Chicago, Illinois, which will result in the closure of
one facility at this location during 2002.

The following table includes the unaudited pro forma combined results as if
Kellogg Company had acquired Keebler Foods Company as of the beginning of either
2001 or 2000, instead of March 26, 2001.




(millions, except per share data)                        2001           2000
- ----------------------------------------------------------------------------
                                                             
Net sales                                           $ 9,500.1      $ 9,650.0
Earnings before extraordinary loss
    and cumulative effect of accounting change      $   438.1      $   518.3
Net earnings                                        $   429.7      $   518.3
Net earnings per share (basic and diluted)          $    1.06      $    1.28


The pro forma results include amortization of the intangibles presented above
and interest expense on debt assumed issued to finance the purchase. The pro
forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been completed as of the beginning of each of
the fiscal periods presented, nor are they necessarily indicative of future
consolidated results.

OTHER ACQUISITIONS

During 2000, the Company paid cash for several business acquisitions. In
January, the Company purchased certain assets and liabilities of the Mondo
Baking Company Division of Southeastern Mills, Inc., a convenience foods
manufacturing operation, for approximately $93 million, including related
acquisition costs. In June, the Company acquired the outstanding stock of Kashi
Company, a U.S. natural foods company, for approximately $33 million, including
related acquisition costs. In July, the Company purchased certain assets and
liabilities of The Healthy Snack People business, an Australian convenience
foods operation, for approximately $12 million, including related acquisition
costs.

In November 1999, the Company purchased the outstanding common stock of
Worthington Foods, Inc. for approximately $300 million in cash, including
related acquisition costs. Additionally, the Company assumed approximately $50
million of Worthington debt, bringing the total value of the acquisition to $350
million. Worthington Foods, Inc. is a leader in the manufacturing and marketing
of soy protein-based meat alternatives and other healthful foods. The
acquisition was accounted for as a purchase and was financed through short-term
borrowings. The purchase price allocation included trademarks and tradenames of
$100 million and residual goodwill of $190 million. Through December 31, 2001,
these intangibles were amortized based on an estimated useful life of 40 years.
As of result of the Company's adoption of SFAS No. 142 on January 1, 2002,
(refer to Note 1), these intangibles will no longer be amortized after 2001, but
will be subject to annual impairment reviews. The unaudited pro forma combined
historical results, as if Worthington Foods, Inc. had been acquired at the
beginning of 1999, are estimated to be: net sales-$7,130.1 million; net
earnings-$323.6 million; net earnings per share- $.80. The pro forma results
include amortization of the intangibles presented above and interest expense on
debt assumed issued to finance the purchase. The pro forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been completed as of the beginning of 1999, nor are they necessarily
indicative of future consolidated results.

DISPOSITIONS

During November 1999, the Company sold certain assets and liabilities of the
Lender's Bagels business to Aurora Foods Inc. for $275 million in cash. As a
result of this transaction, the Company recorded a pretax charge of $178.9
million ($119.3 million after tax or $.29 per share). This charge included
approximately $57 million for disposal of other assets associated with the
Lender's business, which were not purchased by Aurora. Disposal of these other
assets was completed during 2000. The original reserve of $57 million exceeded
actual losses from asset sales and related disposal costs by approximated $9
million. This amount was recorded as a credit to other income (expense), net
during 2000.

32



During July 1999, the Company sold its 51% interest in a United Kingdom corn
milling operation to Cargill Inc., which owned the remaining 49%. As a result of
this sale, the Company recorded a pretax gain of $10.4 million ($7.8 million
after tax or $.02 per share).

In total, the Company recorded net disposition-related charges of $168.5 million
($111.5 million after tax or $.27 per share) during 1999.

NOTE 3 RESTRUCTURING CHARGES

During the past several years, management has commenced major productivity and
operational streamlining initiatives in an effort to optimize the Company's cost
structure and align resources with the Company's growth strategy. The
incremental costs of these programs have been reported during these years as
restructuring charges. Specifically, during 2000, management adopted a "focus
and align" strategy that emphasizes a stricter prioritization for resource
allocation to the United States and the Company's other core markets. In
conjunction with this strategy, the Company was reorganized from four operating
areas into two divisions - U.S. and International. As a result, management
initiated restructuring actions around the world to support this strategy and
organization, including staff reductions in its global supply chain and
innovation organization, rationalization of international convenience foods
capacity, and restructuring of various non-core markets to improve return on
investment. These initiatives resulted in restructuring charges during both 2000
and 2001. For the periods presented, operating profit includes restructuring
charges for streamlining initiatives, as follows:




(millions, except per share data)          2001           2000          1999
- ----------------------------------------------------------------------------
                                                           
Restructuring charges                  $   48.3       $   86.5      $  244.6
Credits for reserve adjustments           (15.0)            --            --
- ----------------------------------------------------------------------------
Net charges                            $   33.3       $   86.5      $  244.6
- ----------------------------------------------------------------------------
After-tax impact                       $   20.5       $   64.2      $  156.4
- ----------------------------------------------------------------------------
Net earnings per share impact          $    .05       $    .16      $    .40


The 2001 charges of $48.3 million are related to preparing Kellogg for the
Keebler integration and continued actions supporting the Company's focus and
align strategy. Specific initiatives included a headcount reduction of about 30
in U.S. and global Company management, rationalization of product offerings and
other actions to combine the Kellogg and Keebler logistics systems, and
further reductions in convenience foods capacity in Southeast Asia.
Approximately two-thirds of the charges were comprised of asset write-offs with
the remainder consisting of employee separation benefits and other cash costs.

The 2001 credits of $15.0 million result from adjustments to various
restructuring and asset disposal reserves. With numerous multi-year streamlining
initiatives nearing completion in late 2001, management conducted an assessment
of post-2001 reserve needs, which resulted in net reductions of $8.8 million for
cash outlays and $6.2 million for asset disposals. (Asset disposal reserves are
reported within Property, net, on the Consolidated Balance Sheet.) The reduction
in cash outlays relates primarily to lower-than-anticipated employee severance
and asset removal expenditures, and higher-than-anticipated asset sale
proceeds.

The 2000 charges of $86.5 million consist of $65.2 million for actions
supporting the Company's focus and align strategy and $21.3 million for a supply
chain efficiency initiative in Europe. Approximately one-half of the charges for
the focus and align program were comprised of asset write-offs with the
remainder consisting primarily of cash costs associated with involuntary em-
ployee separation programs. Approximately 500 salaried and hourly positions were
eliminated, primarily during the fourth quarter of 2000. The charges for the
European supply chain program were comprised principally of voluntary employee
retirement and separation benefits. This program resulted in hourly and salaried
headcount reductions totaling 190 during 2000.

The 1999 charges consist of $193.2 million for closing the South Operations
portion of the Company's Battle Creek, Michigan, cereal plant; $32.7 million for
workforce reduction initiatives around the world; and $18.7 million, primarily
for manufacturing equipment write-offs related to previously closed or impaired
facilities in various locations. Approximately one-half of the charges for the
South Operations closing were comprised of asset write-offs, with the remainder
consisting primarily of cash costs for employee retirement and separation
benefits, equipment removal, and building demolition. Approximately 525 hourly
and salaried positions at the Battle Creek plant were eliminated by the end of
the first quarter of 2000 through a combination of voluntary and involuntary
separation programs. The charges for workforce reduction initiatives were
comprised principally of employee retirement and separation benefit costs for
elimination of approximately 325 employee positions in Europe, Latin America,
Australia, and Asia during 1999.

Total cash outlays incurred or expected for streamlining initiatives by year
are:



(millions)
- --------------------------------
                          
1999                         $69
2000                         68
2001                         35
2002 expected                10


As a result of the Keebler acquisition, we assumed $14.9 million of reserves for
severance and facility closures related to Keebler's ongoing restructuring and
acquisition-related synergy initiatives. Approximately $5 million of those
reserves were utilized in 2001, with the remainder being attributable primarily
to noncancelable lease obligations extending through 2006.

The components of the restructuring charges by initiative, as well as reserve
balances remaining at December 31, 2001, 2000, and 1999, were:



                                    EMPLOYEE
U.S. OPERATIONAL                   RETIREMENT
STREAMLINING                       AND SEVERANCE     ASSET           ASSET          OTHER
(millions)                          BENEFITS (a)   WRITE-OFFS       REMOVAL         COSTS (c)     TOTAL
- ----------------------------------------------------------------------------------------------------------
                                                                                
Remaining reserve at
     December 31, 1998              $    --        $     --         $   8.5          $ --        $     8.5
1999 restructuring charges             55.5           108.4            28.2           1.1            193.2
Amounts utilized during 1999          (34.1)         (108.4)           (8.6)         (1.1)          (152.2)
- ----------------------------------------------------------------------------------------------------------
Remaining reserve at
     December 31, 1999              $  21.4        $     --         $  28.1          $ --        $    49.5
Amounts utilized during 2000          (20.0)             --           (17.4)           --            (37.4)
- ----------------------------------------------------------------------------------------------------------
Remaining reserve at
     December 31, 2000              $   1.4        $     --         $  10.7          $ --        $    12.1
2001 restructuring credits             (1.1)           (1.1)            (.8)           --             (3.0)
Amounts utilized during 2001            (.3)            1.1            (8.2)           --             (7.4)
- ----------------------------------------------------------------------------------------------------------
Remaining reserve at
     December 31, 2001              $    --        $     --         $   1.7          $ --        $     1.7


                                                                              33



                                    EMPLOYEE
                                   RETIREMENT
PAN-EUROPEAN                          AND
REORGANIZATION                      SEVERANCE      ASSET        ASSET        OTHER
(millions)                         BENEFITS (a)  WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- ------------------------------------------------------------------------------------------------
                                                                          
Remaining reserve at
  December 31, 1998 (b)             $ 1.8         $  --         ($1.4)       $  --         $  .4
1999 restructuring charges           10.9          10.9            .6           --          22.4
Amounts utilized during 1999        (10.0)        (10.9)          (.4)          --         (21.3)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 1999 (b)             $ 2.7         $  --         ($1.2)       $  --         $ 1.5
2000 restructuring charges           19.6            --            --          1.7          21.3
Amounts utilized during 2000        (21.3)           --           1.2         (1.7)        (21.8)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2000                 $ 1.0         $  --         $  --        $  --         $ 1.0
Amounts utilized during 2001         (1.0)           --            --           --          (1.0)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2001                 $  --         $  --         $  --        $  --         $  --




                                    EMPLOYEE
                                   RETIREMENT
AUSTRALIAN PLANT                      AND
PRODUCTIVITY PROGRAM                SEVERANCE      ASSET        ASSET        OTHER
(millions)                           BENEFITS    WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- ------------------------------------------------------------------------------------------------
                                                                           
Remaining reserve at
  December 31, 1998                 $2.6           $ --          $1.6         $ --          $4.2
1999 restructuring charges           1.5             .2           (.4)          .1           1.4
Amounts utilized during 1999        (1.0)           (.2)          (.6)         (.1)         (1.9)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 1999                 $3.1           $ --          $ .6         $ --          $3.7
Amounts utilized during 2000        (3.1)            --           (.6)          --          (3.7)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2000                 $ --           $ --          $ --         $ --          $ --







                                    EMPLOYEE
NORTH AMERICAN                     RETIREMENT
OVERHEAD ACTIVITY                    AND
ANALYSIS                           SEVERANCE      ASSET        ASSET        OTHER
(millions)                          BENEFITS (a)  WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- -------------------------------------------------------------------------------------------------
                                                                           
Remaining reserve at
  December 31, 1998                 $34.4         $  --        $ 2.9        $  --          $37.3
1999 restructuring charges            5.5            --          1.1          4.5           11.1
Amounts utilized during 1999        (35.7)           --         (3.0)        (4.5)         (43.2)
- -------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 1999                 $ 4.2         $  --        $ 1.0        $  --          $ 5.2
Amounts utilized during 2000         (3.1)           --          (.5)          --           (3.6)
- -------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2000                 $ 1.1         $  --        $  .5        $  --          $ 1.6
Amounts utilized during 2001          (.8)           --          (.3)          --           (1.1)
- -------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2001                 $  .3         $  --        $  .2        $  --          $  .5




                                    EMPLOYEE
                                   RETIREMENT
GLOBAL STRATEGY                      AND
REALIGNMENT (d)                    SEVERANCE      ASSET        ASSET        OTHER
(millions)                         BENEFITS (a)  WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- ------------------------------------------------------------------------------------------------
                                                                           
2000 restructuring charges          $25.7         $29.9        $ 7.3        $ 2.3          $65.2
Amounts utilized during 2000         (5.9)        (29.9)        (1.6)        (2.3)         (39.7)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2000                 $19.8         $  --        $ 5.7        $  --          $25.5
2001 restructuring charges,
  net of credits                      6.9          28.6          1.0          (.2)          36.3
Amounts utilized during 2001        (20.6)        (28.6)        (5.1)          .2          (54.1)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2001                 $ 6.1         $  --        $ 1.6        $  --          $ 7.7





                                    EMPLOYEE
                                   RETIREMENT
                                     AND
ALL OTHER                          SEVERANCE      ASSET        ASSET        OTHER
(millions)                         BENEFITS    WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- ------------------------------------------------------------------------------------------------
                                                                           
Remaining reserve at
  December 31, 1998                 $  .8         $  --        $  .3        $  --          $ 1.1
1999 restructuring charges            4.8          11.7           --           --           16.5
Amounts utilized during 1999         (5.6)        (11.7)         (.3)          --          (17.6)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 1999                 $  --         $  --        $  --        $  --          $  --




                                     EMPLOYEE
                                    RETIREMENT
                                       AND
CONSOLIDATED                        SEVERANCE      ASSET        ASSET        OTHER
(millions)                          BENEFITS (a)  WRITE-OFFS    REMOVAL       COSTS (c)     TOTAL
- ------------------------------------------------------------------------------------------------
                                                                           
Remaining reserve at
  December 31, 1998                 $39.6         $  --        $11.9        $  --          $51.5
1999 restructuring charges           78.2         131.2         29.5          5.7          244.6
Amounts utilized during 1999        (86.4)        (131.2)      (12.9)        (5.7)         (236.2)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 1999                 $31.4         $  --        $28.5        $  --          $59.9
2000 restructuring charges           45.3          29.9          7.3          4.0           86.5
Amounts utilized during 2000        (53.4)        (29.9)       (18.9)        (4.0)         (106.2)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2000                 $23.3         $  --        $16.9        $  --          $40.2
2001 restructuring charges,
  net of credits                      5.8          27.5           .2          (.2)          33.3
Amounts utilized during 2001        (22.7)        (27.5)       (13.6)          .2          (63.6)
- ------------------------------------------------------------------------------------------------
Remaining reserve at
  December 31, 2001                 $ 6.4         $  --        $ 3.5        $  --          $ 9.9


- -----------

(a) Includes net (gains) or losses from pension and postretirement health care
    curtailment and special termination benefits as follows (Refer to Notes 9
    and 10):



                                    2001       2000       1999
- --------------------------------------------------------------
                                                
U.S. operational streamlining        $--         $ --     $ 32
Pan-European reorganization           --            5       --
North American overhead
activity analysis                     --           --        4
Global strategy realignment           (2)           3       --
- --------------------------------------------------------------
Consolidated                         ($2)        $  8     $ 36


- ------------

(b)  Negative removal reserves in Europe result from netting of anticipated
     proceeds from asset sales with removal costs.

(c)  Consist primarily of program-related non-exit costs incurred during the
     period of the reported charge.

(d)  Includes initiatives related to preparing Kellogg for the Keebler
     integration.

NOTE 4 OTHER INCOME (EXPENSE), NET

Other income (expense), net includes non-operating items such as interest
income, foreign exchange gains and losses, charitable donations, and gains on
asset sales.

Other income (expense), net for 2000 includes a credit of approximately $12
million related to the 1999 sale of the Lender's Bagels business. The total
amount consists of approximately $9 million for disposal of assets associated
with the business which were not purchased by Aurora Foods Inc. (refer to Note
2) and approximately $3 million for final working capital settlement with
Aurora.

34

NOTE 5 EQUITY

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 comprised principally of employee stock options
issued by the Company. Basic net earnings per share is reconciled to diluted net
earnings per share as follows:




                                          EARNINGS BEFORE
                                         EXTRAORDINARY LOSS
                                           AND CUMULATIVE       AVERAGE         NET
                                              EFFECT OF         SHARES        EARNINGS
(millions, except per share data)         ACCOUNTING CHANGE   OUTSTANDING     PER SHARE
- ---------------------------------------------------------------------------------------
                                                                    
2001
       Basic                                 $   482.0         406.1         $   1.19
       Dilutive employee stock options            --             1.1             (.01)
- -------------------------------------------------------------------------------------
       Diluted                               $   482.0         407.2         $   1.18
=====================================================================================
2000
       Basic                                 $   587.7         405.6         $   1.45
       Dilutive employee stock options            --              .2               --
- -------------------------------------------------------------------------------------
       Diluted                               $   587.7         405.8         $   1.45
=====================================================================================
1999
       Basic                                 $   338.3         405.2         $    .83
       Dilutive employee stock options            --              .5               --
- -------------------------------------------------------------------------------------
       Diluted                               $   338.3         405.7         $    .83
=====================================================================================



COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except those
resulting from investments by or distributions to shareholders. Comprehensive
income for the periods presented consists of net earnings, minimum pension
liability adjustments (refer to Note 9), unrealized gains and losses on cash
flow hedges pursuant to SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", and foreign currency translation adjustments pursuant to
SFAS No. 52 "Foreign Currency Translation" as follows:




                                                                     TAX
                                                    PRETAX         (EXPENSE)      AFTER-TAX
(millions)                                          AMOUNT          BENEFIT        AMOUNT
- -------------------------------------------------------------------------------------------
                                                                          
2001
Net earnings                                                                      $  473.6
Other comprehensive income:
  Foreign currency
     translation adjustments                        ($  60.4)      $   --           (60.4)
 Cash flow hedges:
     Unrealized gain (loss)
       on cash flow hedges                             (86.3)          31.9         (54.4)
     Reclassification to net earnings                    8.8           (3.3)          5.5
 Minimum pension liability adjustments                  (9.8)           3.0          (6.8)
- -----------------------------------------------------------------------------------------
                                                    ($ 147.7)      $   31.6        (116.1)
- -----------------------------------------------------------------------------------------
Total comprehensive income                                                       $  357.5
=========================================================================================




                                                                     TAX
                                                    PRETAX         (EXPENSE)      AFTER-TAX
(millions)                                          AMOUNT          BENEFIT        AMOUNT
- ------------------------------------------------------------------------------------------
                                                                          
2000
Net earnings                                                                   $   587.7
Other comprehensive income:
 Foreign currency
     translation adjustments                        ($   97.4)      $    --        (97.4)
 Minimum pension liability
     adjustments                                        (10.0)            3.5       (6.5)
- ----------------------------------------------------------------------------------------
                                                    ($  107.4)      $     3.5     (103.9)
- ----------------------------------------------------------------------------------------
Total comprehensive income                                                     $   483.8
========================================================================================
1999
Net earnings                                                                   $   338.3
Other comprehensive income:
 Foreign currency
     translation adjustments                        ($   39.0)      $    --        (39.0)
- ----------------------------------------------------------------------------------------
Total comprehensive income                                                     $   299.3
========================================================================================


Accumulated other comprehensive income (loss) at year-end consisted of the
following:



(millions)                                              2001            2000
- ------------------------------------------------------------------------------
                                                               
Foreign currency translation adjustments             ($  489.2)      ($  428.8)
Cash flow hedges-- unrealized net loss                   (48.9)             --
Minimum pension liability adjustments                    (13.3)           (6.5)
- ------------------------------------------------------------------------------
Total accumulated other
       comprehensive income (loss)                   ($  551.4)      ($  435.3)
==============================================================================


NOTE 6 LEASES

The Company's leases are generally for equipment and warehouse space. Rent
expense on all operating leases was $100.0 million in 2001, $36.7 million in
2000, and $31.5 million in 1999. The increase in 2001 rent expense as compared
to prior years relates primarily to operating leases held by Keebler Foods
Company, acquired by the Company in March 2001 (refer to Note 2 for further
information). At December 31, 2001, future minimum annual rental commitments
under noncancelable operating leases totaled $268 million consisting of (in
millions): 2002-$83; 2003-$53; 2004-$40; 2005-$31; 2006- $31; 2007 and
beyond-$30. At December 31, 2001, future minimum annual payments under
noncancelable capital leases totaled $14.6 million consisting of (in millions):
2002-$2.8; 2003-$1.9; 2004-$6.3; 2005-$1.7; 2006-$1.5; 2007 and beyond-$.4.

NOTE 7 DEBT

Notes payable at year-end consisted of commercial paper borrowings in the United
States and Canada and, to a lesser extent, bank loans of foreign subsidiaries
at competitive market rates, as follows:




(dollars in millions)                         2001                  2000
- ------------------------------------------------------------------------------------
                                                  EFFECTIVE                 EFFECTIVE
                                  PRINCIPAL       INTEREST      PRINCIPAL   INTEREST
                                   AMOUNT          RATE          AMOUNT      RATE
- ------------------------------------------------------------------------------------
                                                                     
U.S. commercial paper            $  320.8           3.0%      $  429.8           6.6%
Canadian commercial paper           171.1           2.5%          --            --
Other                                21.4                         55.4
- ------------------------------------------------------------------------------------
                                 $  513.3                     $  485.2
====================================================================================


                                                                              35

Additionally, during 2000, the Company entered into financing arrangements that
provided for the sale of future foreign currency revenues. As of December 31,
2000, the Company had committed to borrowings during 2001 in the cumulative
principal amount of approximately $160 million, which were converted to foreign
currency forward contracts in January 2001. No borrowings were outstanding under
these arrangements at December 31, 2000.

Long-term debt at year-end consisted primarily of fixed rate issuances of U.S.
and Euro Dollar Notes, as follows:



(millions)                                        2001           2000
- ----------------------------------------------------------------------
                                                         
(a) 4.875% U.S. Dollar Notes due 2005          $   200.0      $  200.0
(b) 6.625% Euro Dollar Notes due 2004              500.0         500.0
(c) 6.125% Euro Dollar Notes due 2001                --          500.0
(d) 5.75% U.S. Dollar Notes due 2001                 --          400.0
(e) 5.5% U.S. Dollar Notes due 2003                998.4           --
(e) 6.0% U.S. Dollar Notes due 2006                994.5           --
(e) 6.6% U.S. Dollar Notes due 2011              1,491.8           --
(e) 7.45% U.S. Dollar Debentures due 2031        1,085.3           --
(f) 4.49% U.S. Dollar Notes due 2006               375.0           --
  Other                                             56.3          10.3
- ----------------------------------------------------------------------
                                                 5,701.3       1,610.3
  Less current maturities                          (82.3)       (901.1)
- ----------------------------------------------------------------------
  Balance, December 31                         $ 5,619.0      $  709.2
======================================================================


(a)  In October 1998, the Company issued $200 of seven-year 4.875% fixed rate
     U.S. Dollar Notes to replace maturing long-term debt. In conjunction with
     this issuance, the Company settled $200 notional amount of interest rate
     forward swap agreements, which, when combined with original issue
     discount, effectively fixed the interest rate on the debt at 6.07%.

(b)  In January 1997, the Company issued $500 of seven-year 6.625% fixed rate
     Euro Dollar Notes. In conjunction with this issuance, the Company settled
     $500 notional amount of interest rate forward swap agreements, which
     effectively fixed the interest rate on the debt at 6.354%.

(c)  In August 1997, the Company issued $500 of four-year 6.125% Euro Dollar
     Notes which were repaid in August 2001. In conjunction with this issuance,
     the Company settled $400 notional amount of interest rate forward swap
     agreements which effectively fixed the interest rate on the debt at 6.4%.
     Associated with this debt, during September 1997, the Company entered into
     a $200 notional, four-year fixed-to-floating interest rate swap, indexed to
     three-month LIBOR.

(d)  In February 1998, the Company issued $400 of three-year 5.75% fixed rate
     U.S. Dollar Notes. These Notes were issued under an existing "shelf
     registration" with the Securities and Exchange Commission, and provided an
     option to holders to extend the obligation for an additional four years
     at a predetermined interest rate of 5.63% plus the Company's then-current
     credit spread. As a result of this option, the effective interest rate on
     the Notes was 5.23%. In conjunction with this issuance, the Company entered
     into a $400 notional, three-year fixed-to-floating interest rate swap,
     indexed to the Federal Reserve AA Composite Rate on 30-day commercial
     paper. During February 2001, the Company paid holders $11.6 to extinguish
     the Notes prior to the extension date. Thus, during the first quarter of
     2001, the Company reported an extraordinary loss, net of tax, of $7.4
     ($.02 per share).

(e)   In March 2001, the Company issued $4.6 billion of long-term debt
      instruments, further described in the table below, primarily to finance
      the acquisition of Keebler Foods Company (refer to Note 2). Initially,
      these instruments were privately placed, or sold outside the United
      States, in reliance on exemptions from registration under the Securities
      Act of 1933, as amended (the "1933 Act"). The Company then exchanged new
      debt securities for these initial debt instruments, with the new debt
      securities being substantially identical in all respects to the initial
      debt instruments, except for being registered under the 1933 Act. These
      debt securities contain standard events of default and covenants. The
      Notes due 2006 and 2011, and the Debentures due 2031 may be redeemed in
      whole or part by the Company at any time at prices determined under a
      formula (but not less than 100% of the principal amount plus unpaid
      interest to the redemption date).

      In conjunction with this issuance, the Company settled $1.9 billion
      notional amount of forward-starting interest rate swaps for approximately
      $88 in cash. The swaps effectively fixed a portion of the interest rate on
      an equivalent amount of debt prior to issuance. The swaps were designated
      as cash flow hedges pursuant to SFAS No. 133 (refer to Note 12). As a
      result, the loss on settlement (net of tax benefit) of $56 was recorded in
      other comprehensive income, and is being amortized to interest expense
      over periods of 5 to 30 years. The pretax loss of $88 is presented in the
      "Other" caption within the Consolidated Statement of Cash Flows. The
      effective interest rates presented in the following table reflect this
      amortization expense, as well as discount on the debt.




                                               PRINCIPAL                         EFFECTIVE
(dollars in millions)                           AMOUNT       NET PROCEEDS      INTEREST RATE
- --------------------------------------------------------------------------------------------
                                                                      
5.5% U.S. Dollar Notes due 2003              $   1,000.0     $     997.4              5.64%
6.0% U.S. Dollar Notes due 2006                  1,000.0           993.5              6.39%
6.6% U.S. Dollar Notes due 2011                  1,500.0         1,491.2              7.08%
7.45% U.S. Dollar Debentures due 2031            1,100.0         1,084.9              7.62%
- ------------------------------------------------------------------------------------------
                                             $   4,600.0     $   4,567.0
==========================================================================================


(f)  In November 2001, a subsidiary of the Company issued $375 of five-year
     4.49% fixed rate U.S. Dollar Notes to replace other maturing debt. These
     Notes are guaranteed by the Company and mature $75 per year over the
     five-year term. These Notes, which were privately placed, contain standard
     warranties, events of default, and covenants. They also require the
     maintenance of a specified amount of consolidated net worth and a specified
     consolidated interest expense coverage ratio, and limit capital lease
     obligations and subsidiary debt. In conjunction with this issuance, the
     subsidiary of the Company entered into a $375 notional US$/ Pound Sterling
     currency swap, which effectively converted this debt into a 5.302% fixed
     rate Pound Sterling obligation for the duration of the five-year term.

In order to provide additional short-term liquidity in connection with the
Keebler Foods Company acquisition referenced above, the Company entered into a
364-Day Credit Agreement, which was renewed in January 2002, and a Five-Year
Credit Agreement, expiring in January 2006. The 364-day agreement permits the
Company or certain subsidiaries to borrow up to $950 million. The five-year
agreement permits the Company or certain subsidiaries to borrow up to $1.15
billion (or certain amounts in foreign currencies). These two credit agreements
contain standard warranties, events of default, and covenants. They also require
the maintenance of a specified amount of consolidated net worth and a specified
consolidated interest expense coverage ratio, and limit capital lease
obligations and subsidiary debt. These credit facilities were unused at December
31, 2001.

Including the aforementioned Credit Agreements, the Company had $2.50 billion of
short-term lines of credit at December 31, 2001, virtually all of which were
unused and available for borrowing on an unsecured basis.

Scheduled principal repayments on long-term debt are (in millions): 2002-$82.3;
2003- $1,106.2; 2004-$582.3; 2005-$278.8; 2006-$1,077.4; 2007 and
beyond-$2,604.4.

Interest paid was (in millions): 2001-$303; 2000-$141; 1999-$124. Interest
expense capitalized as part of the construction cost of fixed assets was (in
millions): 2001-$2.9; 2000-$5.6; 1999-$8.4.

At December 31, 2001, the Company's Keebler subsidiary was guarantor on
approximately $13 million of loans for approximately 400 independent contractors
for the purchase of DSD route franchises.

NOTE 8 STOCK COMPENSATION

The 2001 Long-Term Incentive Plan ("2001 Plan") provides for benefits to be
awarded to key employees and officers in the form of incentive and nonqualified
stock options, performance shares, performance units, restricted stock grants,
and other stock-based awards. Options granted under this plan generally vest
over two years, subject to earlier vesting if a change of control occurs.
Restricted stock grants under this plan generally vest in three years. Under
this plan, approximately 300,000 restricted shares of common stock were granted
during 2001 to eligible employees. Also under this plan, performance units were
awarded during 2001 to a limited number of senior executive-level employees for
the achievement of cumulative cash flow targets for a three-year period ending
on December 31, 2003. If the performance targets are met, the award of units
represents the right to receive shares of common stock equal to the dollar award
valued on the vesting date. The awards are earned and vest in February 2004. No
awards are earned unless a minimum threshold is attained. The maximum dollar
award that could be attained under this program is $18 million. During 2001, the
Company recognized total compensation expense of $6 million related to
restricted stock grants and performance unit awards.

36

The 2001 Plan and the Non-Employee Director Stock Plan described below contain
an accelerated ownership feature ("AOF"). An AOF option is generally granted
when Company stock is used to pay the exercise price of a stock option or any
taxes owed. The holder of the option is generally granted an AOF option for the
number of shares so used with the exercise price equal to the then fair market
value of the Company's stock. For all AOF options, the original expiration date
is not changed but the options vest immediately.

Prior to approval by shareholders during 2000 of the 2001 Plan, the Key Employee
Long-Term Incentive Plan provided substantially similar stock-based benefits to
executive-level employees. Under this plan, approximately 100,000 restricted
shares of common stock were granted during 2000 to eligible employees.

The Kellogg Employee Stock Ownership Plan was designed to offer stock and other
incentive awards based on Company performance to employees who were not eligible
to participate in the Key Employee Long Term Incentive Plan. Options which have
been awarded under this plan generally vest over five years.

Options under all plans described above are granted with exercise prices equal
to the fair market value of the Company's common stock at the time of the grant
and have a term of no more than ten years, if they are incentive stock options,
or no more than ten years and one day, if they are non-qualified stock
options.

The Non-Employee Director Stock Plan was approved by shareholders in 2000 and
allows each eligible non-employee director to receive 1,700 shares of the
Company's common stock and annual grants of options to purchase 5,000 shares of
the Company's common stock. These shares are placed in the Kellogg Company
Grantor Trust for Non-Employee Directors (the "Grantor Trust"). Under the terms
of the Grantor Trust, shares are available to a director only upon termination
of service on the Board. During 2001, 55,000 options and 17,000 shares of common
stock were granted under this plan.

As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation,"
the Company has elected to account for employee and director stock option
grants under APB No. 25 "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for these grants.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had compensation cost
for the stock option plans been determined based on the fair value at the grant
date consistent with SFAS No. 123, the Company's net earnings and earnings per
share are estimated as follows:




(millions, except per share data)            2001            2000            1999
- ------------------------------------------------------------------------------------
                                                                
Net earnings:
  As reported                            $     473.6      $    587.7      $    338.3
  Pro forma                              $     449.9      $    567.1      $    311.4
Basic net earnings per share:
  As reported                            $      1.17      $     1.45      $      .83
  Pro forma                              $      1.11      $     1.40      $      .77
Diluted net earnings per share:
  As reported                            $      1.16      $     1.45      $      .83
  Pro forma                              $      1.10      $     1.40      $      .77
====================================================================================


The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:




                                          2001             2000             1999
- ----------------------------------------------------------------------------------
                                                              
Risk-free interest rate                     4.57%            6.59%            4.83%
Dividend yield                              3.30%            3.90%            3.00%
Volatility                                 28.21%           25.43%           23.16%
Average expected term (years)               3.08             3.17             3.76
Fair value of options granted        $      7.50      $      6.69      $      6.38
==================================================================================


Transactions under these plans were:



(millions, except per share data)            2001           2000           1999
- ---------------------------------------------------------------------------------
                                                                 
Under option, January 1                          23.4          19.9          16.4
  Granted                                        17.1           6.4           6.6
  Exercised                                      (1.3)          (.1)         (1.1)
  Cancelled                                      (2.2)         (2.8)         (2.0)
- ---------------------------------------------------------------------------------
Under option, December 31                        37.0          23.4          19.9
- ---------------------------------------------------------------------------------
Exercisable, December 31                         16.9          13.7          10.1
=================================================================================
Shares available, December 31, for
  options that may be granted
  under the following plans:

Key Employee Long-Term Incentive Plan            --             3.2           7.1
Kellogg Employee Stock Ownership Plan             2.8           4.8           4.6
2000 Non-employee Directors Stock Plan             .9            .9          --
2001 Long-Term Incentive Plan                    16.1          26.0          --
- ---------------------------------------------------------------------------------
Total shares available, December 31,
  for options that may be granted                19.8          34.9          11.7

=================================================================================
Average prices per share
- ---------------------------------------------------------------------------------
Under option, January 1                       $  34         $  38         $  38
  Granted                                        27            24            36
  Exercised                                      25            26            32
  Cancelled                                      34            36            39
- ---------------------------------------------------------------------------------
Under option, December 31                     $  31         $  34         $  38
- ---------------------------------------------------------------------------------
Exercisable, December 31                      $  36         $  38         $  39
=================================================================================



Employee stock options outstanding and exercisable under these plans as of
December 31, 2001, were:


(millions, except per share data)


                         OUTSTANDING                        EXERCISABLE
                ---------------------------------    -----------------------
                                       WEIGHTED
                            WEIGHTED   AVERAGE                      WEIGHTED
RANGE OF                     AVERAGE   REMAINING                    AVERAGE
EXERCISE         NUMBER     EXERCISE   CONTRACTUAL      NUMBER      EXERCISE
PRICES         OF OPTIONS    PRICE     LIFE (YRS.)    OF OPTIONS     PRICE
- ----------------------------------------------------------------------------
                                                     
$19 - 26          11.8      $25           8.7           2.3            $24
27 - 28           10.1       28           9.0            .8             28
29 - 37            7.0       34           6.5           6.5             35
38 - 50            8.1       43           6.1           7.3             43
- --------------------------------------------------------------------------
                  37.0                                 16.9
==========================================================================


                                                                              37

NOTE 9 PENSION BENEFITS

The Company has a number of U.S. and foreign pension plans to provide retirement
benefits for its employees. Benefits for salaried employees are generally based
on salary and years of service, while union employee benefits are generally a
negotiated amount for each year of service. Plan funding strategies are
influenced by tax regulations. Plan assets consist primarily of equity
securities with smaller holdings of bonds, real estate, and other investments.
Investment in Company common stock represented 1.7% and 1.9% of consolidated
plan assets at December 31, 2001 and 2000, respectively.

The components of pension expense were:


(millions)                                       2001            2000            1999
- --------------------------------------------------------------------------------------
                                                                    
Service cost                                 $    47.4       $    34.5       $    42.6
Interest cost                                    124.5            91.1            83.7
Expected return on plan assets                  (192.4)         (143.3)         (125.1)
Amortization of unrecognized
  transition obligation                             .3              .6             2.0
Amortization of unrecognized
  prior service cost                               6.6             7.0             7.4
Recognized net (gain) loss                         4.6            (4.2)           10.9
Curtailment and special termination
  benefits - net (gain) loss                      (1.5)            8.5            33.5
- --------------------------------------------------------------------------------------
Pension (income) expense -
  Company plans                                  (10.5)           (5.8)           55.0
Pension expense - multiemployer plans              3.0             2.2             1.4
- --------------------------------------------------------------------------------------
Total pension (income) expense               ($    7.5)      ($    3.6)      $    56.4
======================================================================================



The worldwide weighted average actuarial assumptions were:



                                                    2001           2000          1999
- -------------------------------------------------------------------------------------
                                                                       
Discount rate                                       7.0%           7.0%           7.2%
Long-term rate of compensation increase             4.7%           4.6%           4.2%
Long-term rate of return on plan assets            10.5%          10.4%          10.4%
=====================================================================================


The aggregate change in projected benefit obligation, change in plan assets, and
funded status were:



(millions)                                          2001             2000
- ---------------------------------------------------------------------------
                                                           
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at
  beginning of year                             $  1,381.5       $  1,350.4
Acquisition adjustment                               613.4             --
Service cost                                          47.4             34.5
Interest cost                                        124.5             91.1
Plan participants' contributions                       1.3              1.4
Amendments                                              .7              5.3
Actuarial loss                                         9.7             32.1
Benefits paid                                       (123.4)           (91.8)
Foreign currency adjustments                         (17.1)           (42.4)
Other                                                   .7               .9
- ---------------------------------------------------------------------------
Projected benefit obligation at end
  of year                                       $  2,038.7       $  1,381.5
===========================================================================




(millions)                                          2001             2000
- ---------------------------------------------------------------------------
                                                           
CHANGE IN PLAN ASSETS
Fair value of plan assets of beginning of year  $  1,405.0       $  1,578.0
Acquisition adjustment                               568.6             --
Actual return on plan assets                         (13.8)           (86.4)
Employer contribution                                 23.8             41.7
Plan participants' contributions                       1.3              1.4
Benefits paid                                       (121.6)           (91.8)
Foreign currency adjustments                         (18.2)           (38.1)
Other                                                   .2               .2
- ---------------------------------------------------------------------------
Fair value of plan assets at end of year        $  1,845.3       $  1,405.0
===========================================================================
FUNDED STATUS                                   ($   193.4)      $     23.5
Unrecognized net loss                                334.0            118.5
Unrecognized transition amount                         2.4              2.7
Unrecognized prior service cost                       29.5             34.8
- ---------------------------------------------------------------------------
Prepaid pension                                 $    172.5       $    179.5
===========================================================================
AMOUNTS RECOGNIZED IN CONSOLIDATED
BALANCE SHEET
Prepaid benefit cost                            $    287.4       $    252.0
Accrued benefit liability                           (140.3)           (87.1)
Intangible asset                                       5.6              4.6
Minimum pension liability                             19.8             10.0
- ---------------------------------------------------------------------------
Net amount recognized                           $    172.5       $    179.5
===========================================================================


The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were:



(millions)                                 2001         2000
- --------------------------------------------------------------
                                               
Projected benefit obligation          $   204.1      $   104.6
Accumulated benefit obligation            178.9           86.1
Fair value of plan assets                  68.9            7.1
==============================================================


All gains and losses, other than those related to curtailment or special
termination benefits, are recognized over the average remaining service period
of active plan participants. Net gains or losses from curtailment and special
termination benefits recognized in 1999-2001 were recorded as a component of
restructuring charges. Refer to Note 3 for further information. At December 31,
2001, a cumulative after-tax charge of $13.3 million ($19.8 million pre-tax) has
been recorded in other comprehensive income to recognize the additional minimum
pension liability in excess of unrecognized prior service cost.

Certain of the Company's subsidiaries sponsor 401(k) or similar savings plans
for active employees. Expense related to these plans was (in millions): 2001-
$18; 2000-$16; 1999-$17.


NOTE 10 NONPENSION POSTRETIREMENT BENEFITS

Certain of the Company's U.S. and Canadian subsidiaries provide health care and
other benefits to substantially all retired employees, their covered dependents,
and beneficiaries. Generally, employees are currently eligible for these
benefits when one of the following service/age requirements is met: 30 years and
any age; 20 years and age 55; 5 years and age 62. Plan assets consist primarily
of equity securities with smaller holdings of bonds.

38

Components of postretirement benefit expense were:



(millions)                                    2001            2000            1999
- ------------------------------------------------------------------------------------
                                                                  
Service cost                               $    10.7       $     7.7       $     9.3
Interest cost                                   49.7            44.4            37.4
Expected return on plan assets                 (24.5)          (21.4)          (17.8)
Amortization of unrecognized
      prior service cost                        (1.1)           (1.1)            (.5)
Recognized net gains                            (2.3)           (3.2)           (4.8)
Curtailment and special termination
      benefits - net (gain) loss                 (.2)            (.1)             .5
- ------------------------------------------------------------------------------------
Postretirement benefit expense             $    32.3       $    26.3       $    24.1
===================================================================================


The weighted average actuarial assumptions were:



                                                     2001           2000         1999
- --------------------------------------------------------------------------------------
                                                                        
Discount rate                                        7.25%          7.5%           8.0%
Long-term rate of return on plan assets             10.2%          10.5%          10.5%
======================================================================================


The aggregate change in accumulated postretirement benefit obligation, change in
plan assets, and funded status were:



(millions)                                                    2001            2000
- ------------------------------------------------------------------------------------
                                                                     
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated benefit obligation at beginning of year        $   618.6       $   580.2
Acquisition adjustment                                          92.9            --
Service cost                                                    10.7             7.7
Interest cost                                                   49.7            44.4
Actuarial loss                                                 171.8            28.9
Amendments                                                        .2            --
Benefits paid                                                  (48.3)          (42.3)
Other                                                            (.4)            (.3)
- ------------------------------------------------------------------------------------
Accumulated benefit obligation at end of year              $   895.2       $   618.6
====================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year             $   222.9       $   230.0
Actual return on plan assets                                   (16.4)           (7.4)
Employer contribution                                           52.5            42.6
Benefits paid                                                  (46.9)          (42.3)
Other                                                             .5            --
- ------------------------------------------------------------------------------------
Fair value of plan assets at end of year                   $   212.6       $   222.9
====================================================================================
FUNDED STATUS                                              ($  682.6)      ($  395.7)
Unrecognized net loss (gain)                                   188.4           (26.4)
Unrecognized prior service cost                                 (8.3)           (9.4)
- ------------------------------------------------------------------------------------
Accrued postretirement benefit cost                        ($  502.5)      ($  431.5)
- ------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN CONSOLIDATED
BALANCE SHEET
Accrued benefit liability                                  ($  502.5)      ($  431.5)
====================================================================================



The assumed health care cost trend rate was 9% for 2002, decreasing gradually
to 4.5% by the year 2007 and remaining at that level thereafter. These trend
rates reflect the Company's prior experience and management's expectation that
future rates will decline. A one percentage point change in assumed health care
cost trend rates would have the following effects:



                                      ONE PERCENTAGE    ONE PERCENTAGE
(millions)                             POINT INCREASE   POINT DECREASE
- ----------------------------------------------------------------------
                                                     
Effect on total of service and
   interest cost components             $   10.3           ($  8.4)
Effect on postretirement benefit
   obligation                           $  103.5           ($ 86.1)
======================================================================


All gains and losses, other than those related to curtailment or special
termination benefits, are recognized over the average remaining service period
of active plan participants. Net gains from curtailment and special termination
benefits recognized in 2001 and 2000 were recorded as a component of
restructuring charges. The net loss from curtailment and special termination
benefits for 1999 includes a $2.2 million loss recorded as a component of
restructuring charges and a $1.7 million gain recorded as a component of
disposition-related charges. Refer to Notes 2 and 3 for further information. The
Company contributes to a voluntary employee benefit association (VEBA) trust for
funding of its nonpension postretirement benefit obligations.

NOTE 11 INCOME TAXES

Earnings before income taxes, extraordinary loss, and cumulative effect of
accounting change, and the provision for U.S. federal, state, and foreign taxes
on these earnings, were:



(millions)                                   2001         2000            1999
- -------------------------------------------------------------------------------
                                                              
EARNINGS BEFORE INCOME TAXES,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE
  United States                          $  464.2       $  561.9       $  235.1
  Foreign                                   339.9          305.8          301.6
- -------------------------------------------------------------------------------
                                         $  804.1       $  867.7       $  536.7
- -------------------------------------------------------------------------------
INCOME TAXES
  Currently payable
     Federal                             $  120.9       $  134.0       $  135.9
     State                                   30.1           20.3           20.6
     Foreign                                 99.6          127.1          102.4
- -------------------------------------------------------------------------------
                                            250.6          281.4          258.9
- -------------------------------------------------------------------------------
  Deferred
     Federal                                 53.1           (1.2)         (60.7)
     State                                    1.2            4.1           (4.5)
     Foreign                                 17.2           (4.3)           4.7
- -------------------------------------------------------------------------------
                                             71.5           (1.4)         (60.5)
- -------------------------------------------------------------------------------
Total income taxes                       $  322.1       $  280.0       $  198.4
===============================================================================


The difference between the U.S. federal statutory tax rate and the Company's
effective rate was:



                                                        2001           2000           1999
- -------------------------------------------------------------------------------------------
                                                                            
U.S. statutory rate                                    35.0%           35.0%           35.0%
Foreign rates varying from 35%                         (1.1)            (.6)            (.5)
State income taxes, net of federal benefit              2.5             1.8             2.0
Net change in valuation allowances                       .1            (3.0)           (1.3)
Non-deductible goodwill amortization                    2.9              .6            --
Statutory rate changes, deferred tax impact             (.1)            (.3)            (.6)
Other                                                    .8            (1.2)            2.4
- -------------------------------------------------------------------------------------------
Effective income tax rate                              40.1%           32.3%           37.0%
===========================================================================================


Generally, the changes in valuation allowances on deferred tax assets and
corresponding impacts on the effective income tax rate, as presented above,
result from management's assessment of the Company's ability to utilize certain
operating loss and tax credit carryforwards. For 2000, the change in valuation
allowance relates primarily to utilization of U.S. foreign tax credit
carryforwards. As a result, the effective income tax rate was significantly
lower in 2000 as compared to either 2001 or 1999. Reduced statutory rates in the
United Kingdom, Australia, and Germany also contributed to the lower effective
income tax rate in 2000 as compared to 1999.

                                                                              39

For 2001, the significant increase in the income tax rate impact of
nondeductible goodwill relates to the Company's acquisition of Keebler Foods
Company (refer to Note 2). As a result of the Company's adoption of SFAS No. 142
on January 1, 2002 (refer to Note 1), goodwill amortization expense - and the
resulting impact on the effective income tax rate - will be eliminated in
post-2001 years.

Total tax benefits of carryforwards at year-end 2001 and 2000 were $23.9 million
and $20.3 million, respectively, which expire principally after five years.

The deferred tax assets and liabilities included in the balance sheet at year-
end were:



                                                            DEFERRED                            DEFERRED
                                                          TAX ASSETS                        TAX LIABILITIES
                                                  -------------------------           --------------------------
(millions)                                            2001           2000                 2001              2000
- ----------------------------------------------------------------------------------------------------------------
                                                                                            
Current
   Promotion and advertising                      $   16.3       $    14.0            $    7.2          $    8.1
   Wages and payroll taxes                            29.0            17.0                --                  .3
   Inventory valuation                                12.2             8.7                14.6              11.0
   Health and postretirement benefits                 28.9            19.9                 2.7                .4
   State taxes                                        11.7             6.9                --                --
   Operating loss and credit carryforwards              .2              .5                  .2              --
   Deferred intercompany revenue                      10.3            53.3                 7.8               7.0
   Keebler exit liabilities                           22.7            --                  --                --
   Unrealized hedging losses, net                     29.7            --                    .2              --
   Other                                              28.9            32.6                 3.0               6.7
- ----------------------------------------------------------------------------------------------------------------
                                                     189.9           152.9                35.7              33.5
      Less valuation allowance                        (1.6)           (3.6)               --                --
- ----------------------------------------------------------------------------------------------------------------
                                                     188.3           149.3                35.7              33.5
================================================================================================================

Noncurrent
   Depreciation and asset disposals                    8.4            12.8               339.7             288.2
   Health and postretirement benefits                179.4           151.0                71.1              73.0
   Capitalized interest                               --              --                  21.2              23.3
   State taxes                                        --              --                  74.3               5.2
   Operating loss and credit carryforwards            23.7            19.8                --                --
   Trademarks and other intangibles                   --              --                 662.6              30.6
   Deferred compensation                              28.9             3.4                --                --
   Other                                              35.4            25.4                 9.0               8.9
- ----------------------------------------------------------------------------------------------------------------
                                                     275.8           212.4             1,177.9             429.2
      Less valuation allowance                       (35.1)          (32.5)                 --                --
- ----------------------------------------------------------------------------------------------------------------
                                                     240.7           179.9             1,177.9             429.2
- ----------------------------------------------------------------------------------------------------------------
Total deferred taxes                              $  429.0       $   329.2            $1,213.6          $  462.7
================================================================================================================



The amounts reported above for unrealized hedging losses, net, relate to the
effect of cash flow hedges recorded in other comprehensive income pursuant to
SFAS No. 133, which the Company adopted on January 1, 2001. Refer to Notes 5 and
12 for further information. For further information on the amount reported above
for Keebler exit liabilities, refer to Note 2.

At December 31, 2001, foreign subsidiary earnings of approximately $1.09 billion
were considered permanently invested in those businesses. Accordingly, U.S.
income taxes have not been provided on these earnings.

Cash paid for income taxes was (in millions): 2001-$195.7; 2000-$246; 1999-
$242. The 2001 amount is net of a tax refund of approximately $73 million
related to the cash-out of Keebler employee and director stock options upon
acquisition of Keebler Foods Company (refer to Note 2 for further information).

NOTE 12 FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION

The fair values of the Company's financial instruments are based on carrying
value in the case of short-term items, quoted market prices for derivatives and
investments, and, in the case of long-term debt, incremental borrowing rates
currently available on loans with similar terms and maturities. The carrying
amounts of the Company's cash, cash equivalents, receivables, and notes payable
approximate fair value. The fair value of the Company's long-term debt at
December 31, 2001, exceeded its carrying value by approximately $217 million.

The Company is exposed to certain market risks which exist as a part of its
ongoing business operations and uses derivative financial and commodity
instruments, where appropriate, to manage these risks. In general, instruments
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of
the contract. In accordance with SFAS No. 133 (refer to Note 1), the Company
designates derivatives as either cash flow hedges, fair value hedges, net
investment hedges, or other contracts used to reduce volatility in the
translation of foreign currency earnings to U.S. Dollars. The fair values of all
hedges are recorded in accounts receivable or other current liabilities. Gains
and losses representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recorded in other income
(expense), net. These amounts were insignificant during 2001.

CASH FLOW HEDGES

Qualifying derivatives are accounted for as cash flow hedges when the hedged
item is a forecasted transaction. Gains and losses on these instruments are
recorded in other comprehensive income until the underlying transaction is
recorded in earnings. When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive income to the Statement of
Earnings on the same line item as the underlying transaction.

The total net loss attributable to cash flow hedges recorded in accumulated
other comprehensive income at December 31, 2001, was $48.9 million related
primarily to forward-starting interest rate swaps settled during 2001 (refer
to Note 7). This loss is being reclassified into interest expense over periods
of 5 to 30 years. Other insignificant amounts related to foreign currency and
commodity price cash flow hedges will be reclassified into earnings during the
next 12 months.

FAIR VALUE HEDGES

Qualifying derivatives are accounted for as fair value hedges when the hedged
item is a recognized asset, liability, or firm commitment. Gains and losses on
these instruments are recorded in earnings, offsetting gains and losses on the
hedged item.

NET INVESTMENT HEDGES

Qualifying derivative and non-derivative financial instruments are accounted for
as net investment hedges when the hedged item is a foreign currency investment
in a subsidiary. Gains and losses on these instruments are recorded as a foreign
currency translation adjustment in other comprehensive income. The net amount
recorded in other comprehensive income during 2001 was insignificant.

OTHER CONTRACTS

The Company also enters into foreign currency forward contracts and options to
reduce volatility in the translation of foreign currency earnings to U.S.

40

Dollars. Gains and losses on these instruments are recorded in other income
(expense), net, generally reducing the exposure to translation volatility during
a full-year period.

FOREIGN EXCHANGE RISK

The Company is exposed to fluctuations in foreign currency cash flows related
primarily to third-party purchases, intercompany loans and product shipments,
and non-functional currency denominated third-party debt. The Company is also
exposed to fluctuations in the value of foreign currency investments in
subsidiaries and cash flows related to repatriation of these investments.
Additionally, the Company is exposed to volatility in the translation of foreign
currency earnings to U.S. Dollars. The Company assesses foreign currency risk
based on transactional cash flows and enters into forward contracts, options,
and currency swaps to reduce fluctuations in net long or short currency
positions. Forward contracts and options are generally less than 12 months
duration. Currency swap agreements are established in conjunction with the term
of underlying debt issues.

For foreign currency cash flow and fair value hedges, the assessment of
effectiveness is generally based on changes in spot rates. Changes in time value
are reported in other income (expense), net.

INTEREST RATE RISK

The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt. The
Company currently uses interest rate swaps, including forward-starting swaps, to
reduce interest rate volatility and funding costs associated with certain debt
issues, and to achieve a desired proportion of variable versus fixed rate debt,
based on current and projected market conditions.

Variable-to-fixed interest rate swaps are accounted for as cash flow hedges and
the assessment of effectiveness is based on changes in the present value of
interest payments on the underlying debt. Fixed-to-variable interest rate
swaps are accounted for as fair value hedges and the assessment of effectiveness
is based on changes in the fair value of the underlying debt, using incremental
borrowing rates currently available on loans with similar terms and maturities.

PRICE RISK

The Company is exposed to price fluctuations primarily as a result of antici-
pated purchases of raw and packaging materials. The Company uses the combination
of long cash positions with suppliers, and exchange-traded futures and option
contracts to reduce price fluctuations in a desired percentage of forecasted
purchases over a duration of generally less than one year.

Commodity contracts are accounted for as cash flow hedges. The assessment of
effectiveness is based on changes in futures prices.

CREDIT RISK CONCENTRATION

The Company is exposed to credit loss in the event of nonperformance by
counterparties on derivative financial and commodity contracts. This credit loss
is limited to the cost of replacing these contracts at current market rates.
Management believes the probability of such loss is remote.

Financial instruments, which potentially subject the Company to concentrations
of credit risk, are primarily cash, cash equivalents, and accounts receivable.
The Company places its investments in highly rated financial institutions and
investment-grade short-term debt instruments, and limits the amount of credit
exposure to any one entity. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers, generally
short payment terms, and their dispersion across geographic areas.

NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)



(millions, except
per share data)               NET SALES                     GROSS PROFIT
- -----------------------------------------------------------------------------
                        2001            2000          2001             2000
- -----------------------------------------------------------------------------
                                                       
First             $   1,707.3      $  1,751.9      $    883.5      $    915.0
Second                2,342.9         1,801.1         1,241.4           951.6
Third                 2,590.1         1,845.7         1,409.4           970.0
Fourth                2,213.0         1,556.0         1,190.5           791.1
- -----------------------------------------------------------------------------
                  $   8,853.3      $  6,954.7      $  4,724.8      $  3,627.7
=============================================================================




                        EARNINGS BEFORE
                         EXTRAORDINARY
                         LOSS AND
                         CUMULATIVE                NET EARNINGS PER SHARE
                         EFFECT OF                BEFORE EXTRAORDINARY LOSS
                         ACCOUNTING                AND CUMULATIVE EFFECT OF
                         CHANGE (a)               ACCOUNTING CHANGE (a) (b)
- ---------------------------------------------------------------------------
                   2001            2000              2001            2000
- ---------------------------------------------------------------------------
                                                     
First           $   92.5        $  161.7        $      .23       $      .40
Second             114.6           150.9               .28              .37
Third              150.3           181.9               .37              .45
Fourth             124.6            93.2               .31              .23
- ---------------------------------------------------------------------------
                $  482.0        $  587.7
===========================================================================




                                                         NET EARNINGS
                       NET EARNINGS (a)                 PER SHARE (a) (b)
- ----------------------------------------------------------------------------
                   2001             2000            2001              2000
- ----------------------------------------------------------------------------
                                                     
First           $   84.1        $  161.7        $      .21       $      .40
Second             114.6           150.9               .28              .37
Third              150.3           181.9               .37              .45
Fourth             124.6            93.2               .31              .23
- ----------------------------------------------------------------------------
                $  473.6        $  587.7
============================================================================


(a)  The quarterly results above include charges as follows (refer to Notes 1,
     3, and 7 for further information).




                                                                     NET EARNINGS
                                           NET EARNINGS              PER SHARE (b)
- ------------------------------------------------------------------------------------
                                        2001        2000          2001         2000
- ------------------------------------------------------------------------------------
                                                                  
Restructuring charges
  First                              ($ 30.3)      $  --         ($  .07)     $  --
  Second                                --           (14.7)          --         (.04)
  Third                                 --            --             --          --
  Fourth                                 9.8         (49.5)          .02        (.12)
- ------------------------------------------------------------------------------------
Earnings before extraordinary
  loss and cumulative effect of
  accounting change                    (20.5)        (64.2)
First:
  Extraordinary loss                    (7.4)         --            (.02)        --
  Cumulative effect of
    accounting change                   (1.0)         --             --          --
- ------------------------------------------------------------------------------------
Net earnings                         ($ 28.9)      ($ 64.2)
====================================================================================


(b)  Earnings per share represents both basic and diluted earnings per share.

The principal market for trading Kellogg shares is the New York Stock Exchange
(NYSE). The shares are also traded on the Boston, Chicago, Cincinnati, Pacific,
and Philadelphia Stock Exchanges. At year-end 2001, the closing price (on the
NYSE) was $30.10 and there were 46,126 shareholders of record.

Dividends paid and the quarterly price ranges on the NYSE during the last two
years were:



                                               STOCK PRICE
                                          -----------------------
2001 - QUARTER               DIVIDEND        HIGH           LOW
- -----------------------------------------------------------------
                                                 
First                      $ .2525        $ 28.10         $ 25.00
Second                       .2525          29.00           25.18
Third                        .2525          33.56           28.61
Fourth                       .2525          31.70           28.90
- -----------------------------------------------------------------
                           $1.0100
=================================================================
2000 - QUARTER
- -----------------------------------------------------------------
First                      $ .2450        $ 30.50         $ 20.75
Second                       .2450          32.00           23.31
Third                        .2525          30.75           22.63
Fourth                       .2525          28.75           21.56
- -----------------------------------------------------------------
                           $ .9950
=================================================================


                                                                              41

NOTE 14 OPERATING SEGMENTS

Kellogg Company is the world's leading producer of ready-to-eat cereal and a
leading producer of convenience foods, including cookies, crackers, toaster
pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and ice
cream cones. Principal markets for these products include the United States and
United Kingdom.

The Company is managed in two major divisions - the United States and
International - with International further delineated into Europe, Latin
America, Canada, Australia, and Asia. Thus, the Company's reportable operating
segments under SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" consist of the United States, Europe, and Latin America.
All other geographic areas have been combined under the quantitative threshold
guidelines of SFAS No. 131 for purposes of the information presented below.

The measurement of operating segment results is generally consistent with the
presentation of the Consolidated Statement of Earnings and Balance Sheet.
Intercompany transactions between reportable operating segments were
insignificant in all periods presented.



(millions)                                   2001             2000              1999
- --------------------------------------------------------------------------------------
                                                                   
NET SALES
  United States                           $  6,129.0       $  4,067.4       $  4,014.1
  Europe                                     1,363.1          1,463.4          1,614.4
  Latin America                                652.7            626.7            567.0
  All other operating segments                 708.5            776.7            788.8
  Corporate                                     --               20.5             (.1)
- --------------------------------------------------------------------------------------
  Consolidated                            $  8,853.3       $  6,954.7       $  6,984.2
======================================================================================
OPERATING PROFIT EXCLUDING CHARGES
AND KEEBLER AMORTIZATION EXPENSE (a)

  United States                           $    945.0       $    746.2       $    803.0
  Europe                                       245.6            235.2            224.1
  Latin America                                170.6            161.1            141.3
  All other operating segments                 103.0             89.2             93.7
  Corporate                                   (172.6)          (155.4)          (188.7)
- --------------------------------------------------------------------------------------
  Consolidated                            $  1,291.6       $  1,076.3       $  1,073.4
  Charges (a)                                  (33.3)           (86.5)          (244.6)
  Keebler amortization expense                 (90.4)            --                --
- --------------------------------------------------------------------------------------
  Operating profit                        $  1,167.9       $    989.8       $    828.8
======================================================================================
CHARGES (a)
  United States                           $     29.5       $      2.0       $    197.9
  Europe                                         (.2)            26.7             22.4
  Latin America                                  (.1)            14.6              1.7
  All other operating segments                   1.4             28.7              4.6
  Corporate                                      2.7             14.5             18.0
- --------------------------------------------------------------------------------------
  Consolidated                            $     33.3       $     86.5       $    244.6
======================================================================================
DEPRECIATION AND AMORTIZATION
  United States                           $    275.9       $    131.4       $    138.1
  Europe                                        59.5             57.1             57.8
  Latin America                                 21.7             17.2             14.5
  All other operating segments                  31.4             40.8             35.7
  Corporate                                     50.1             44.1             41.9
- --------------------------------------------------------------------------------------
  Consolidated                            $    438.6       $    290.6       $    288.0
======================================================================================
INTEREST EXPENSE
  United States                           $      5.7       $     --         $       .2
  Europe                                         2.9              4.7              9.3
  Latin America                                  2.8               .1               .6
  All other operating segments                   1.5               .4              (.1)
  Corporate                                    338.6            132.3            108.8
- --------------------------------------------------------------------------------------
  Consolidated                            $    351.5       $    137.5       $    118.8
======================================================================================




(millions)                                     2001             2000             1999
- ---------------------------------------------------------------------------------------
                                                                    
INCOME TAXES EXCLUDING CHARGES (b)
  United States                           $     257.6       $    197.1       $    214.9
  Europe                                         54.4             43.4             28.8
  Latin America                                  40.3             40.0             34.4
  All other operating segments                   18.1             11.1             26.7
  Corporate                                     (35.5)            10.7             38.8
- ---------------------------------------------------------------------------------------
  Consolidated                            $     334.9       $    302.3       $    343.6
  Effect of charges                             (12.8)           (22.3)          (145.2)
- ---------------------------------------------------------------------------------------
  Income taxes                            $     322.1       $    280.0       $    198.4
=======================================================================================
TOTAL ASSETS
  United States                           $   9,634.4       $  2,178.6       $  2,214.9
  Europe                                      1,801.0          1,102.5          1,157.3
  Latin America                                 415.5            444.6            414.3
  All other operating segments                  681.2            627.8            641.3
  Corporate                                   5,697.6          2,061.2          1,755.9
  Elimination entries                        (7,861.1)        (1,528.7)        (1,375.0)
- ---------------------------------------------------------------------------------------
  Consolidated                            $  10,368.6       $  4,886.0       $  4,808.7
=======================================================================================
ADDITIONS TO LONG-LIVED ASSETS
  United States                           $   5,601.2       $    135.4       $    460.0
  Europe                                         43.8             71.7             67.4
  Latin America                                  11.7             39.7             47.4
  All other operating segments                   10.8             42.7             37.0
  Corporate                                      29.5            138.1             41.7
- ---------------------------------------------------------------------------------------
  Consolidated                            $   5,697.0       $    427.6       $    653.5
=======================================================================================


(a)  Charges include restructuring charges in 2001, 2000, and 1999. Refer to
     Note 3 for further information.

(b)  Charges include those described in (a) plus extraordinary loss and
     cumulative effect of accounting change in 2001, reported net of tax. In
     addition, disposition-related charges in 1999 are reported in earnings
     before income taxes. Refer to Notes 1, 2, and 7 for further information.

The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for approximately 11% of consolidated net sales during 2001, comprised
principally of sales within the United States. Sales to any single customer
during 2000 and 1999 were less than 10%.

Supplemental geographic information is provided below for revenues from external
customers and long-lived assets:



(millions)                           2001            2000            1999
- ---------------------------------------------------------------------------
                                                        
NET SALES
  United States                  $  6,129.0      $  4,067.4      $  4,014.1
  United Kingdom                      624.0           652.8           689.3
  Other foreign countries           2,100.3         2,234.5         2,280.8
- ---------------------------------------------------------------------------
  Consolidated                   $  8,853.3      $  6,954.7      $  6,984.2
===========================================================================
LONG-LIVED ASSETS
  United States                  $  6,861.0      $  1,553.5      $  1,549.3
  United Kingdom                      526.6           535.4           552.3
  Other foreign countries           1,040.8         1,154.0         1,110.3
- ---------------------------------------------------------------------------
  Consolidated                   $  8,428.4      $  3,242.9      $  3,211.9
===========================================================================


Supplemental product information is provided below for net sales from external
customers:



(millions)                         2001            2000            1999
- -------------------------------------------------------------------------
                                                      
United States
  Retail channel cereal        $  2,481.9      $  2,394.0      $  2,412.5
  Snacks                          2,263.5           484.9           669.4
  Other                           1,383.6         1,188.5           932.2
International
  Cereal                          2,432.2         2,579.7         2,708.4
  Convenience foods                 292.1           307.6           261.7
- -------------------------------------------------------------------------
Consolidated                   $  8,853.3      $  6,954.7      $  6,984.2
=========================================================================


42

NOTE 15 SUPPLEMENTAL FINANCIAL STATEMENT DATA

(millions)



- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS             2001         2000          1999
- --------------------------------------------------------------------------------
                                                               
Research and development expense            $  110.2      $  118.4      $  104.1
Advertising expense                         $  519.2      $  604.2      $  674.1




- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS           2001          2000         1999
- --------------------------------------------------------------------------------
                                                               
Accounts receivable                         $  100.9      $    1.1      $   21.0
Inventories                                     15.8          54.5         (39.1)
Other current assets                           (17.8)        (20.2)         14.7
Accounts payable                                47.6          75.1         (84.8)
Other current liabilities                      112.9         (83.5)        (58.6)
- --------------------------------------------------------------------------------
CHANGES IN OPERATING ASSETS
  AND LIABILITIES                           $  259.4      $   27.0      ($ 146.8)




- ------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET                     2001          2000
- ------------------------------------------------------------------
                                                    
Trade receivables                           $  692.0      $  607.2
Allowance for doubtful accounts                (15.5)         (8.6)
Other receivables                               85.8          86.7
- ------------------------------------------------------------------
  ACCOUNTS RECEIVABLE, NET                  $  762.3      $  685.3
- ------------------------------------------------------------------
Raw materials and supplies                  $  170.7      $  138.2
Finished goods and materials in process        403.8         305.6
- ------------------------------------------------------------------
  INVENTORIES                               $  574.5      $  443.8
- ------------------------------------------------------------------
Deferred income taxes                       $  151.5      $  136.5
Other prepaid assets                           181.9         147.1
- ------------------------------------------------------------------
  OTHER CURRENT ASSETS                      $  333.4      $  283.6
- ------------------------------------------------------------------
Land                                        $   65.7      $   40.5
Buildings                                    1,279.1       1,197.1
Machinery and equipment                      4,074.5       3,683.1
Construction in progress                       192.7         114.5
Accumulated depreciation                    (2,659.2)     (2,508.3)
- ------------------------------------------------------------------
  PROPERTY, NET                             $2,952.8      $2,526.9
- ------------------------------------------------------------------
Goodwill                                    $3,138.5      $  218.7
   -- Accumulated amortization                 (69.0)        (10.5)
Other intangibles                            2,118.8         217.8
   -- Accumulated amortization                 (67.7)        (18.6)
Other                                          393.2         334.6
- ------------------------------------------------------------------
  OTHER ASSETS                              $5,513.8      $  742.0
- ------------------------------------------------------------------
Accrued income taxes                        $   77.3      $  130.8
Accrued salaries and wages                     233.5          96.6
Accrued advertising and promotion              233.2         178.2
Accrued interest                               112.4          61.8
Other                                          378.1         240.4
- ------------------------------------------------------------------
  OTHER CURRENT LIABILITIES                 $1,034.5      $  707.8
- ------------------------------------------------------------------
Nonpension postretirement benefits          $  475.1      $  408.5
Deferred income taxes                          949.8         266.7
Other                                          245.6         121.8
- ------------------------------------------------------------------
  OTHER LIABILITIES                         $1,670.5      $  797.0
- ------------------------------------------------------------------



REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP

To the Shareholders and Board of Directors of Kellogg Company

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Kellogg
Company and its subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Battle Creek, Michigan

January 25, 2002



43

SUPPLEMENTAL FINANCIAL INFORMATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES RELATED TO MARKET RISK SENSITIVE
INSTRUMENTS

The Company is exposed to certain market risks which exist as a part of its
ongoing business operations and uses derivative financial and commodity
instruments, where appropriate, to manage these risks. The Company, as a matter
of policy, does not engage in trading or speculative transactions. Refer to Note
12 within Notes to Consolidated Financial Statements for further information on
accounting policies related to derivative financial and commodity instruments.

FOREIGN EXCHANGE RISK

The Company is exposed to fluctuations in foreign currency cash flows related to
third-party purchases, intercompany loans and product shipments, and
non-functional currency denominated third-party debt. The Company is also
exposed to fluctuations in the value of foreign currency investments in
subsidiaries and cash flows related to repatriation of these investments.
Additionally, the Company is exposed to volatility in the translation of foreign
currency earnings to U.S. Dollars. Primary exposures include the U.S. Dollar
versus the British Pound, Euro, Australian Dollar, Canadian Dollar, and Mexican
Peso, and in the case of inter-subsidiary transactions, the British Pound versus
the Euro. The Company assesses foreign currency risk based on transactional cash
flows and enters into forward contracts, options, and currency swaps to reduce
fluctuations in net long or short currency positions. Forward contracts and
options are generally less than 12 months duration. Currency swap agreements are
established in conjunction with the term of underlying debt issuances.
Additionally, during 2000, the Company entered into financing arrangements that
provided for the sale of foreign currency revenues. No borrowings were
outstanding under commitments to sell foreign currency revenues at December 31,
2000. As of December 31, 2000, the Company had committed to borrowings during
2001 in the cumulative principal amount of approximately $160 million, which
were converted to foreign currency forward contracts in January 2001.

The tables below summarize forward contracts and currency swaps held at year-end
2001 and 2000. All of these derivatives are valued in U.S. Dollars using
year-end exchange rates, are hedges of anticipated transactions, and mature
within one year, except where indicated.

CONTRACTS TO SELL FOREIGN CURRENCY



- ------------------------------------------------------------------------------------
                                          Notional          Exchange        Fair
                    Currency                value             rate          value
Currency sold       received             (millions)         (fc/1US$)     (millions)
- ------------------------------------------------------------------------------------
                                       2001       2000    2001    2000   2001   2000
- ------------------------------------------------------------------------------------
                                                           
Euro                Pound Sterling    $37.8     $   --    1.10      --   ($.5)  $ --
New Zealand         Australian
  Dollar             Dollar              --        4.0      --    2.38     --    (.2)
Pound Sterling (a)  Danish Kroner      12.0       18.3     .66     .63     .6    1.0
Spanish Peseta      Pound Sterling       --       21.4      --  179.45     --    (.3)
Euro                U.S. Dollar          --       15.9      --    1.12     --    (.7)
Australian Dollar   U.S. Dollar          --       27.4      --    1.84     --    (.6)
Mexican Peso        U.S. Dollar          --       67.4      --    9.51     --    1.5
Canadian Dollar     U.S. Dollar          --       33.0      --    1.51     --    (.3)
- ------------------------------------------------------------------------------------
                    TOTAL             $49.8     $187.4                    $.1   $ .4
- ------------------------------------------------------------------------------------


(a) Several contracts maturing 2002-2003.

CONTRACTS TO PURCHASE FOREIGN CURRENCY



- -----------------------------------------------------------------------------------------
                                                Notional          Exchange       Fair
                       Currency                   value             rate         value
Currency purchased     exchanged                (millions)         (fc/1US$)    (millions)
- -----------------------------------------------------------------------------------------
                                             2001     2000     2001    2000   2001   2000
- -----------------------------------------------------------------------------------------
                                                                
Euro                   South African Rand   $  --     $  --     1.53     --   $ --   $ --
Australian Dollar (a)  U.S. Dollar            1.1        --     1.96     --     --     --
Canadian Dollar (a)    U.S. Dollar            1.0        --     1.60     --     --     --
U.S. Dollar            Japanese Yen           2.9        --   131.58     --     .2     --
Pound Sterling         Japanese Yen            .5        --      .76     --     --     --
Australian Dollar      Japanese Yen            .9        --     3.01     --     .1     --
Euro (a)               U.S. Dollar            2.4        --     1.12     --     .2     --
U.S. Dollar            Canadian Dollar       35.4        --     1.60     --     .5     --
U.S. Dollar            Australian Dollar      2.1       3.5     2.04   1.86     --    (.1)
Pound Sterling         South African Rand     3.0       1.8      .98    .70    1.3     .1
U.S. Dollar            South African Rand      .4        .2    12.05   7.07     --     --
Swiss Franc            Euro                    --       5.2       --   1.44     --     --
Pound Sterling (a)     U.S. Dollar            1.8      40.5      .68    .68     --     .6
- -----------------------------------------------------------------------------------------
                       TOTAL                $51.5     $51.2                   $2.3   $ .6
- -----------------------------------------------------------------------------------------


(a) Hedge of existing assets or liabilities.


CURRENCY SWAPS (dollars in millions)



                                                      Year of maturity                 Fair value
Instrument                               ------------------------------------------   ------------
characteristics                           2002     2003     2004     2005     2006     2001   2000
- --------------------------------------------------------------------------------------------------
                                                                      
Currency swap  -         Notional amt.    $75.0    $75.0    $75.0    $75.0    $75.0   ($9.3)  $ --
pay Pound Sterling/
receive US$  -           Pay             5.302%   5.302%   5.302%   5.302%   5.302%
hedge of existing
debt issue               Receive         4.490%   4.490%   4.490%   4.490%   4.490%
- --------------------------------------------------------------------------------------------------


INTEREST RATE RISK

The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt.
Primary exposures include movements in U.S. Treasury rates, London Interbank
Offered Rates (LIBOR), and commercial paper rates. The Company currently uses
interest rate swaps, including forward swaps, to reduce interest rate volatility
and funding costs associated with certain debt issues, and to achieve a desired
proportion of variable versus fixed rate debt, based on current and projected
market conditions.

The tables on page 45 provide information on the Company's significant debt
issues and related hedging instruments at year-end 2001 and 2000 (refer to the
table above for currency swaps related to debt issues). For foreign
currency-denominated debt, the information is presented in U.S. Dollar
equivalents. Variable interest rates are based on effective rates or implied
forward rates as of year-end 2001. Refer to Note 7 within Notes to Consolidated
Financial Statements for further information.


                                                                              44

SIGNIFICANT DEBT ISSUES (dollars in millions)
- --------------------------------------------------------------------------------



                                  Principal by year of maturity                                                  Fair value
Debt                         -----------------------------------------------------------------------------   -----------------
characteristics               2001     2002      2003      2004     2005      2006       2011       2031       2001      2000
                             -----------------------------------------------------------------------------   -----------------
                                                                                          
Euro Dollar                  $500.0                                                                          $     --   $500.0
fixed rate                   6.125%
effective rate (a)           6.400%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                  $400.0                                                                          $     --   $409.0
fixed rate                    5.75%
effective rate (b)            5.23%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                                    $1,000.0                                                      $1,025.6   $   --
fixed rate                                        5.50%
effective rate (a)                                5.64%
- ------------------------------------------------------------------------------------------------------------------------------
Euro Dollar                                               $500.0                                             $  518.3   $499.7
fixed rate                                                6.625%
effective rate (a)                                        6.354%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                                                        $200.0                                    $  197.1   $189.7
fixed rate                                                         4.875%
effective rate (a)                                                 6.070%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                                                                 $1,000.0                         $1,024.3   $   --
fixed rate                                                                    6.000%
effective rate (a)                                                            6.390%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                                                                            $1,500.0              $1,542.3   $   --
fixed rate                                                                               6.600%
effective rate (a)                                                                       7.080%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                                                                                       $1,100.0   $1,186.7   $   --
fixed rate                                                                                          7.450%
effective rate (a)                                                                                  7.620%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Dollar                           $ 75.0   $   75.0   $ 75.0   $ 75.0   $   75.0                         $  367.4   $   --
fixed rate                            4.490%     4.490%   4.490%   4.490%     4.490%
effective rate (c)                    5.302%     5.302%   5.302%   5.302%     5.302%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. commercial paper        $429.8   $320.8                                                                 $  320.8   $429.8
weighted avg.
variable                       6.6%     3.0%
- ------------------------------------------------------------------------------------------------------------------------------
Canadian commercial paper    $   --   $171.1                                                                 $  171.1   $   --
weighted avg.
variable                         --     2.5%
- ------------------------------------------------------------------------------------------------------------------------------


(a) Effective fixed interest rate paid, as a result of debt discount and
    settlement of forward interest rate swap at date of debt issuance.
(b) Effective fixed interest rate paid, as a result of extendable feature.
    Refer to Note 7 within Notes to Consolidated Financial Statements for
    further information.
(c) Effective fixed interest rate paid, as a result of related US$/Pound
    Sterling currency swap.


INTEREST RATE SWAPS (dollars in millions)
- --------------------------------------------------------------------------------



                                                  Year of maturity     Fair value
Instrument                                        ----------------   --------------
characteristics                                         2001         2001     2000
- -----------------------------------------------------------------------------------
                                                                 
Interest rate swap -              Notional amt.        $200.0        $ --      ($.4)
pay variable/receive fixed -      Pay                   6.60%
hedge of existing debt issue      Receive               6.40%
- -----------------------------------------------------------------------------------
Interest rate swap -              Notional amt.        $400.0        $ --     ($2.2)
pay variable/receive fixed -      Pay                   5.99%
hedge of existing debt issue      Receive               5.23%
- -----------------------------------------------------------------------------------
Interest rate swap -              Notional amt.        $100.0        $ --     $  --
pay fixed/receive variable -      Pay                   5.98%
hedge of existing debt issue (a)  Receive               6.36%
- -----------------------------------------------------------------------------------
Interest rate swap -              Notional amt.        $975.0        $ --    ($26.9)
pay fixed/receive variable -      Pay                   6.53%
hedge of existing debt issue (a)  Receive               6.36%
- -----------------------------------------------------------------------------------
Interest rate swap -              Notional amt.        $425.0        $ --     $  .5
pay fixed/receive variable -      Pay                   6.13%
hedge of existing debt issue (a)  Receive               6.36%
- -----------------------------------------------------------------------------------


(a) Forward-starting interest rate swaps which were settled in conjunction with
    a debt issuance in 2001.


PRICE RISK

The Company is exposed to price fluctuations primarily as a result of
anticipated purchases of raw and packaging materials. Primary exposures include
corn, wheat, soybeans, soybean oil, sugar, cocoa, and paperboard. The Company
uses the combination of long cash positions with suppliers, and exchange-traded
futures and option contracts to reduce price fluctuations in a desired
percentage of forecasted purchases over a duration of generally less than one
year. The fair values of commodity contracts held at year-end 2001 and 2000 were
insignificant, and potential near-term changes in commodity prices were not
expected to have a significant impact on the Company's future earnings or cash
flows.

For all derivative financial instruments presented in the tables above, changes
in fair values of these instruments and the resulting impact on the Company's
cash flows and/or earnings would generally be offset by changes in values of
underlying transactions and positions. Therefore, it should be noted that the
exclusion of certain of the underlying exposures from the tables above may be a
limitation in assessing the net market risk of the Company.


46

EX-21.01

                                                                   EXHIBIT 21.01

                                 KELLOGG COMPANY

                                  SUBSIDIARIES

NORTH AMERICA
- -------------
Argkel, Inc. - Battle Creek, MI
Ensemble Functional Food Company - Battle Creek, MI  Liquidating
Gollek Inc. - Battle Creek, MI
K-One Inc. - Battle Creek, MI
K-Two Inc. - Battle Creek, MI
K (China) Limited - Battle Creek, MI
K India Private Limited - Battle Creek, MI
Kashi Company - LaJolla, California
Keeb Canada Inc. - Rexdale, Ontario, Canada
Keebler USA, Inc. - Battle Creek, MI
Kelarg, Inc. - Battle Creek, MI
Kellogg Asia Inc. - Battle Creek, MI
Kellogg Asia Marketing Inc. - Battle Creek, MI
Kellogg Brasil, Inc. - Battle Creek, MI
Kellogg Caribbean Inc. - Battle Creek, MI
Kellogg Caribbean Services Company, Inc. - Guayabo, Puerto Rico
Kellogg Chile Inc. - Battle Creek, MI
Kellogg Fearn, Inc. - Battle Creek, MI
Kellogg Italia S.p.A. - Battle Creek, MI
Kellogg Latvia, Inc. - Battle Creek, MI
Kellogg Sales Company - Battle Creek, MI                        Liquidated as of 1/1/02
Kellogg Services Group, Inc. - Battle Creek, MI                 Liquidated as of 1/1/02
Kellogg (Thailand) Limited - Battle Creek, MI
Kellogg USA Inc. - Battle Creek, MI
KFSC, Inc. - Barbados
McCamly Plaza Hotel Inc. - Battle Creek, MI
Mountaintop Baking Company - Battle Creek, MI
The Eggo Company - Battle Creek, MI
Trafford Park Insurance Limited - Bermuda
Kellogg Canada Inc. - Rexdale, Ontario, Canada
Gollek Interamericas, S. de R. L. de C.V., Queretaro, Mexico (subsidiary of Kellogg Canada)
Kellogg's Malaysia Manufacturing SDN. BHD, Kuala Lumpur, Malaysia (subsidiary of Kellogg Canada)
Worthington Foods, Inc., Worthington, Ohio
Specialty Foods Investment Company (subsidiary of Worthington Foods, Inc.)
Kellogg A$, Cayman Islands                                      Liquidating in 1st quarter, 2002
Kellogg Yen, Cayman Islands                                     Liquidating in 1st quarter, 2002
Kellogg Bolivar, Cayman Islands                                 Liquidating in 1st quarter, 2002
Kellogg C$, Cayman Islands                                      Liquidating in 1st quarter, 2002
Kellogg Euro, Cayman Islands                                    Liquidating in 1st quarter, 2002
Kellogg Sterling, Cayman Islands                                Liquidating in 1st quarter, 2002
Kellogg Mpeso, Cayman Islands                                   Liquidating in 1st quarter, 2002
Kellogg Talbot Limited - Battle Creek, MI

ASIA-PACIFIC
- ------------
Kellogg Asia Pacific Limited, Hong Kong
Kellogg (Aust.) Pty. Ltd. - Sydney, Australia
Day Dawn (Aust.) Pty. Ltd. - Pagewood, Australia (subsidiary of Kellogg Australia)
Kellogg (N.Z.) Limited - Auckland, New Zealand (subsidiary of Kellogg Australia)
Kellogg Superannuation Pty. Ltd. - Sydney, Australia (subsidiary of Kellogg Australia)
Kellogg (China) Limited - Guangzhou, China





                                       2


Kellogg Company of South Africa (Pty.) Ltd. - Springs, South Africa
Kellogg Project 1995 (Pty.) Ltd. - Springs, South Africa (subsidiary of Kellogg South Africa)
Kellogg India Private Limited - Mumbai, India
Kellogg (Japan) K.K. - Tokyo, Japan
Kellogg (Thailand) Limited - Bangkok,Thailand
Nhong Shim Kellogg Co. Ltd. - Seoul, South Korea
The Kellogg Healthy Snak People Pty Limited - Carmahaven, NSW, Australia
Worthington Australia (subsidiary of Worthington Foods, Inc.)                   Liquidating
Kellogg South East Asia Sdn. Bhd., Malaysia                                     Liquidating
Kellogg Asia Marketing (Shanghai) Trading Co. Ltd., Shanghai                    Liquidating

EUROPE
- ------
Gollek B.V. - Amsterdam, The Netherlands
Kellogg Company of Great Britain Limited - Manchester, England
Favorite Food Products Limited - Manchester, England (subsidiary of Kellogg Great Britain)
Garden City Bakery Limited - Manchester, England (subsidiary of Lender's Bakery Limited)       Liquidating
Kelcone Limited - Aylesbury, England (subsidiary of Kellogg Great Britain)
Kelcorn Limited - Manchester, England (subsidiary of Kellogg Great Britain)
Kellogg Company of Ireland, Limited - Dublin, Ireland (subsidiary of Kellogg Great Britain)
Kellogg Management Services (Europe) Limited - Manchester, England
         (subsidiary of Kellogg UK Holding)
Kellogg Marketing and Sales Company (UK) Limited - Manchester, England
         (subsidiary of Kellogg UK Holding)
Kellogg Supply Services (Europe) Limited - Manchester, England
         (subsidiary of Kellogg UK Holding Co)
Kellogg Talbot Limited - Manchester, England
Kellogg Manchester Limited - Manchester, England Kelf Limited - Manchester, England
Kellogg U.K. Holding Company Limited - Manchester, England
Kellogg Espana, S.A. - Valls, Spain (subsidiary of Kellogg Great Britain)
Kelmill Limited - Liverpool, England (subsidiary of Kellogg Great Britain)
Kelpac Limited - Manchester, England (subsidiary of Kellogg Great Britain)
Lender's Bakery Limited - Manchester, England (subsidiary of Kellogg UK Holding)           Liquidating
Portable Foods Manufacturing Company Limited - Manchester, England
Saragusa Frozen Foods Limited - Manchester, England (subsidiary of Kellogg Great Britain)
Kellogg (Deutschland) GmbH - Bremen, Germany
Gebrueder Nielsen Reismuehlen und Staerke-Fabrik mit Beschraenkter Haftung - Bremen,
         Germany (subsidiary of Kellogg Deutschland)
Reis- und Handels AG Unterstuetzungskasse GmbH - Bremen, Germany (subsidiary of Kellogg
         Deutschland)
Kellogg (Hungary) Trading Limited Liability Company, Budapest, Hungary
Kellogg Italia S.p.A. - Milan, Italy
Kellogg Latvia, Inc. - Riga, Latvia             Liquidating
Kellogg (Poland) Sp. zo.o., Warsaw, Poland      Liquidating
Kellogg's Produits Alimentaires, S.A. - Rosny, France
Nordisk Kellogg's A/S - Svendborg, Denmark
NK Leasing, Svendborg, Denmark (subsidiary of Nordisk Kellogg's A/S)
Kellogg (Schweiz) AG, Kanton, Zug, Switzerland (subsidiary of Kellogg Deutschland)
Kellogg (Osterreich) GmbH, Vienna, Austria (subsidiary of Kellogg Deutschland)

LATIN AMERICA
- -------------
Alimentos Kellogg, S.A. - Caracas, Venezuela
Gollek, S.A. - Caracas, Venezuela (subsidiary of Alimentos Kellogg)
Gollek Servicios, S.C., Queretaro, Mexico
Gollek Argkel, Queretaro, Mexico
Kellogg Argentina S.A. - Buenos Aires, Argentina
Kellogg Brasil & Cia. - Sao Paulo, Brasil
Kellogg Chile Limited - Santiago, Chile




                                       3


Kellogg de Centro America, S.A. - Guatemala, Centro America
Kellogg de Colombia, S.A. - Bogota, Colombia
Kellogg de Mexico, S.A. de C.V. - Queretaro, Mexico
Kellogg El Salvador Ltda. de D.V., El Salvador
CELNASA (La Compania de Cereales Nacionales S.A.), Ecuador
Kellogg de Peru, S.A.C., Lima, Peru





                                       4


                              KEEBLER FOODS COMPANY
                         A SUBSIDIARY OF KELLOGG COMPANY
                             AS OF NOVEMBER 16, 2001

KEEBLER FOODS COMPANY SUBSIDIARIES:
- ----------------------------------

KEEBLER LEASING CORP.- Elmhurst, IL
KEEBLER FUNDING CORPORATION- Elmhurst, IL
SHAFFER, CLARKE & CO., INC- Elmhurst, IL
JOHNSTON'S READY CRUST COMPANY- Elmhurst, IL
BAKE-LINE PRODUCTS, INC. - Des Plaines, IL
BDH, INC.- Cary, NC
AUSTIN QUALITY FOODS, INC. - Cary, NC
AQFTM, INC. - Cary, NC
CARY LAND CORPORATION- Cary, NC
KEEBLER COMPANY- Elmhurst, IL

KEEBLER COMPANY SUBSIDIARIES

KEEBLER COMPANY/PUERTO RICO, INC.- Puerto Rico
HOLLOW TREE COMPANY- Elmhurst, IL
KEEBLER COOKIE AND CRACKER COMPANY- Elmhurst, IL
ILLINOIS BAKING CORPORATION- Elmhurst, IL
KEEBLER H.C., INC. - Elmhurst, IL
STEAMBOAT CORPORATION- Elmhurst, IL
KEEBLER FOREIGN SALES CORPORATION- Elmhurst, IL
KEEBLER-GEORGIA, INC. - Elmhurst, IL
KEEBLER INTERNATIONAL PREP TRACK &FIELD INVITATIONAL FOUNDATION- Elmhurst, IL
KEEBLER COMPANY FOUNDATION HOLLOW TREE FINANCIAL COMPANY, L.L.C
ELFIN EQUITY COMPANY, L.L.C- Elmhurst, IL
KEEBLER ASSETS COMPANY, L.L.C.- Elmhurst, IL (is owned by Keebler Co. 34%, Keebler-Georgia 33%,
                                     Keebler Leasing Corp. 33%)
GODFREY TRANSPORT, INC.- Indianpolis, Indiana
PRESIDENT BAKING COMPANY, L.L.C.- Atlanta, GA
MOTHER'S COOKIE COMPANY, L.L.C.- Louisville, KY
FAMOUS AMOS CHOCOLATE CHIP COOKIE COMPANY, L.L.C.
BARBARA DEE COOKIE COMPANY, L.L.C. - Louisville, KY
BISHOP BAKING COMPANY, INC.-  Cleveland, TN
MURRAY BISCUIT COMPANY, L.L.C. - Atlanta, GA
LITTLE BROWNIE BAKERS, L.L.C. - Louisville, KY
SUNSHINE BISCUITS, L.L.C.- Elmhurst, IL

EX-23.01

                                                                   EXHIBIT 23.01


                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-72312) and the Registration Statements on Form
S-8 (Nos. 2-77316, 33-27293, 33-27294, 33-40651,33-53403, 333-56536, 333-56542)
of Kellogg Company of our report dated January 25, 2002 relating to the
financial statements, which appears in the 2001 Annual Report to Shareholders of
Kellogg Company, which is incorporated by reference in this Annual Report on
Form 10-K for the year ended December 31 ,2001. We also consent to the
incorporation by reference of our report dated January 25, 2002 relating to the
financial statement schedule, which appears in this Form 10-K.


/s/ PRICEWATERHOUSECOOPERS LLP
Battle Creek, Michigan
March 22, 2002

EX-24.01

                                                                   EXHIBIT 24.01

                            POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.

                                                  /s/ John T. Dillon
                                                  ------------------------------
                                                            Director



Dated: March 5, 2002



                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Gordon Gund
                                                  ------------------------------
                                                            Director


Dated: February 26, 2002






                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Ann McLaughlin Korologos
                                                  ------------------------------
                                                            Director


Dated: February 19, 2002



                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related Thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ John L. Zabriskie
                                                  ------------------------------
                                                            Director


Dated: February 20, 2002



                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Dorothy A. Johnson
                                                  ------------------------------
                                                            Director


Dated: February 20, 2002



                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Sam K. Reed
                                                  ------------------------------
                                                            Director


Dated: February 21, 2002


                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ James M. Jenness
                                                  ------------------------------
                                                            Director


Dated: February 27, 2002


                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ William C. Richardson
                                                  ------------------------------
                                                            Director


Dated: February 19, 2002



                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly till power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Claudio X. Gonzalez
                                                  ------------------------------
                                                            Director


Dated: February 20, 2002


                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ Benjamin S. Carson Sr.
                                                  ------------------------------
                                                            Director


Dated: February 21, 2002


                             POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President - Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                                  /s/ William D. Perez
                                                  ------------------------------
                                                            Director


Dated: February 22, 2002


                               POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned Director of
Kellogg Company, a Delaware corporation, hereby appoint Janet Langford Kelly,
Executive Vice President -- Corporate Development and Administration, General
Counsel and Secretary of Kellogg Company, as my lawful attorney-in-fact and
agent, to act on my behalf, with full power of substitution, in preparing,
executing and filing the Company's Annual Report on Form 10-K for fiscal year
ended December 31, 2001, and any exhibits, amendments and other documents
related thereto, with the Securities and Exchange Commission. Said filing shall
be for the purpose of fulfilling applicable legal requirements.

         Whereupon, I grant unto said Janet Langford Kelly full power and
authority to perform all necessary and appropriate acts in connection therewith,
and hereby ratify and confirm all that said attorney-in-fact and agent, or her
substitute, may lawfully do, or cause to be done, by virtue hereof.



                                             /s/ L. Daniel Jorndt
                                             --------------------------------
                                                         Director




Dated: March 18, 2002