UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

(Mark One)
		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended JuneSeptember 30, 2001

OR

________________to _____________________

OR
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _______ to _______

Commission file number 1-4171

KELLOGG COMPANY

One Kellogg Square, P.O. Box 3599, Battle Creek, MI 49016-3599

Registrant’s telephone number: 616-961-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No

Common Stock outstanding JulyOctober 31, 2001 — 406,166,805– 406,476,332 shares

KELLOGG COMPANY

INDEX

Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
(millions, except per share data)

^* Condensed from audited financial statements

Refer to Notes to Consolidated Financial Statements

2

Kellogg Company and Subsidiaries
CONSOLIDATED EARNINGS
(millions, except per share data)

Refer to Notes to Consolidated Financial Statements

3

Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)

Refer to Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements
for the three and sixnine months ended JuneSeptember 30, 2001 (unaudited)

1. Accounting policies

The unaudited interim financial information included in this report reflects normal recurring adjustments that management believes are necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. This interim information should be read in conjunction with the financial statements and accompanying notes contained on pages 24 to 39 of the Company’s 2000 Annual Report. The accounting policies used in preparing these financial statements are the same as those summarized in the Company’s 2000 Annual Report, except as discussed in Note 6 below. Certain amounts for 2000 have been reclassified to conform to current-period classifications.

The results of operations for the three and sixnine months ended JuneSeptember 30, 2001, are not necessarily indicative of the results to be expected for other interim periods or the full year.

2. Acquisitions

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 approximately $700$696 million of Keebler debt, bringing the total value of the transaction to $4.56 billion. Approximately 80% ofOf 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 are being 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, have beenwere included in the Company’s second quarter 2001 results.

As of JuneSeptember 30, 2001, the components of intangible assets included in the allocation of purchase price, along with the related straight-line amortization periods, are presented in the following table. The Company is in the process of finalizing valuations of several assets and obligations that existed as of the acquisition date. As a result, the amountdate is virtually complete. However, management’s estimate of  goodwill“exit liabilities” (discussed below) could change upon completionas plans for exit of this work.certain activities and

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functions of Keebler are refined over the next six months, thus impacting the amount of residual goodwill attributable to this acquisition.

As of JuneSeptember 30, 2001, the purchase price allocation included $88.9 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 $50$30 million in 2001, with substantially allthe remaining amounts spent in 2002.during 2002 and 2003.

Exit plans implemented thus far include separation of approximately 7075 Keebler administrative employees and closing of a bakery in Denver, Colorado, eliminating approximately 470 employee positions. Additionally, duringDuring 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. The impact of this initiative onAs a result, the currentprevious workforce of approximately 675 employees is being reduced by an as-yet-undetermined amount during a one-year transition period. During October 2001, the Company communicated plans to consolidate and expand Keebler’s ice cream cone production operation in part, dependent on discussions under way with union and local government officials.Chicago, Illinois, which will result in the closure of one facility at this location during 2002.

The following tables include 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. The first table also includes consolidated results for the secondthird quarter of 2001 for comparison purposes only (Keebler was part of Kellogg Company for this entire period.)

Each pro forma period presented below includes separate company results of Keebler Foods Company as follows:

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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.

Prior-year 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. In June, the Company acquired the outstanding stock of Kashi Company, a U.S. natural foods company, for approximately $33 million. In July, the Company purchased certain assets and liabilities of The Healthy Snack People business, an Australian convenience foods operation, for approximately $12 million.

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. The incremental costs of these programs have been reported during these years as restructuring charges. Refer to pages 30-31 of the Company’s 2000 Annual Report for more information on these initiatives.

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Operating profit for the sixnine months ended JuneSeptember 30, 2001, includes restructuring charges of $48.3 million ($30.3 million after tax or $.07 per share), 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 3530 in the U.S. business and global layer of Company management, rationalization of product offerings and other actions to combine the Kellogg and Keebler logistics systems, and further reductions in convenience

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foods capacity in South East Asia. Approximately 70% of the charges were comprised of asset write-offs, with the remainder consisting of employee severance and other cash costs.

Operating profit for the three and sixnine months ended JuneSeptember 30, 2000, includes restructuring charges of $21.3 million ($14.7 million after tax or $.04 per share) for a supply chain efficiency initiative in Europe. The charges were comprised principally of voluntary employee retirement and separation benefits related to an hourly and salaried headcount reduction of approximately 190 during 2000.

Total cash outlays during the JuneSeptember 2001 year-to-date period for ongoing streamlining initiatives were approximately $23$30 million, compared to $34$42 million in 2000. Expected cash outlays are approximately $19$7 million for the remainder of 2001, with the balance of the reserves spent after 2001. With numerous multi-year streamlining programs nearing completion, management is currently assessing reserve needs for post-2001 periods.

The components of restructuring charges, as well as reserve balance changes, during the sixnine months ended JuneSeptember 30, 2001, were:

As a result of the Keebler acquisition, the Company assumed $14.9 million of reserves for severance and facility closures, related to Keebler’s ongoing restructuring and acquisition-related synergy initiatives.

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The restructuring-related reserves are attributable to the closing of Keebler’s manufacturing facility in Sayreville, New Jersey, in 1999, and are expected to be utilized during the remainder of 2001. The acquisition-related reserves are attributable primarily to the closing of various distribution and manufacturing facilities. Of the acquisition-related reserves, approximately $6 million is expected to be utilized in 2001. The remaining balance of approximately $8 million is attributable primarily to non-cancelable lease obligations extending through 2006.

4. 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 and had an insignificant impact on earnings per share during the periods presented. Basic net earnings per share is reconciled to diluted net earnings per share as follows:

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Comprehensive Income

Comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to shareholders. For the Company, comprehensiveComprehensive income for the periods presented consists of net earnings, 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:

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