-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGptVBrZt5D+78Vv6YfNEZsfyksFWlg4SONtBt2fm/yrXCplIcjWEbt9s7a2Uj21 hVRNVwQNAEu1OJDe/o9QyQ== 0000912057-96-018678.txt : 19960923 0000912057-96-018678.hdr.sgml : 19960923 ACCESSION NUMBER: 0000912057-96-018678 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960526 FILED AS OF DATE: 19960823 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MILLS INC CENTRAL INDEX KEY: 0000040704 STANDARD INDUSTRIAL CLASSIFICATION: 2040 IRS NUMBER: 410274440 STATE OF INCORPORATION: DE FISCAL YEAR END: 0525 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01185 FILM NUMBER: 96619673 BUSINESS ADDRESS: STREET 1: NUMBER ONE GENERAL MILLS BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55426 BUSINESS PHONE: 6125402311 MAIL ADDRESS: STREET 1: P O BOX 1113 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 10-K 1 FORM 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------- FORM 10-K ------- (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED MAY 26, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM .............. TO ............. COMMISSION FILE NUMBER 1-1185 ------- GENERAL MILLS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 41-0274440 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) NUMBER ONE GENERAL MILLS BOULEVARD MINNEAPOLIS, MN 55426 (MAIL: P.O. BOX 1113) (MAIL: 55440) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (612) 540-2311 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, $.10 par value New York Stock Exchange Chicago 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 ----- ----- 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 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. [ ] Aggregate market value of Common Stock held by non-affiliates of the Registrant, based on the closing price of $55.125 per share as reported on the New York Stock Exchange on August 1, 1996: $8,663.3 million. Number of shares of Common Stock outstanding as of August 1, 1996: 157,157,501 (excluding 46,995,831 shares held in the treasury). DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement dated August 22, 1996 are incorporated by reference into Part III, and portions of Registrant's 1996 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. General Mills, Inc. was incorporated in Delaware in 1928. The Company is engaged in the manufacture and marketing of consumer foods products. The terms "General Mills," "Company" and "Registrant" mean General Mills, Inc. and its subsidiaries unless the context indicates otherwise. RECENT DEVELOPMENTS. On August 13, 1996, the Company entered into an agreement to purchase the branded ready-to-eat cereal and snack mix businesses of Ralcorp Holdings, Inc., including its CHEX and COOKIE CRISP brands, for a total price of $570 million, payable in General Mills common stock and through the assumption of Ralcorp debt. The acquisition is expected to close following approval by Ralcorp shareholders and federal regulatory agencies. The transaction includes a Cincinnati, Ohio manufacturing facility that employs 240 people, and trademark and technology rights for the branded products in the Americas. GENERAL BUSINESS. The Company is a leading producer of packaged consumer foods and markets its products primarily through its own sales organizations, supported by advertising and other promotional activities. Such products are primarily distributed directly to retail food chains, co-operatives, membership stores and wholesalers. Certain food products, such as yogurt and some foodservice products, are sold through distributors and brokers. The packaged consumer foods market is highly competitive, with numerous competitors of varying sizes. The principal methods of competition include product quality, advertising, promotion and price. In most of its consumer foods lines, described below, General Mills competes not only with other widely advertised branded products, but also with generic products and private label products, which are generally distributed at lower prices. CEREALS. General Mills produces and sells a number of ready-to-eat cereals, including such brands as: CHEERIOS, HONEY NUT CHEERIOS, APPLE CINNAMON CHEERIOS, MULTI-GRAIN CHEERIOS, WHEATIES, LUCKY CHARMS, CORN TOTAL, WHEAT TOTAL, TRIX, GOLDEN GRAHAMS, KIX, BERRY BERRY KIX, FIBER ONE, REESE'S PEANUT BUTTER PUFFS, COCOA PUFFS, CRISPY WHEATIES 'N RAISINS, CINNAMON TOAST CRUNCH, CLUSTERS, RAISIN NUT BRAN, TOTAL RAISIN BRAN, OATMEAL CRISP, TRIPLES and BASIC 4. In fiscal 1996, the Company introduced FROSTED CHEERIOS, HONEY FROSTED WHEATIES and TEAM USA CHEERIOS. DESSERTS, FLOUR AND BAKING MIXES. General Mills makes and sells a line of dessert mixes under the BETTY CROCKER trademark, including SUPERMOIST layer cakes, CREAMY DELUXE and WHIPPED DELUXE ready-to-spread frostings, SUPREMe brownie mixes, SUPREME dessert bars, muffin mixes, and SWEET REWARDS fat-free and reduced-fat dessert mixes. The Company markets a variety of baking mixes under the BISQUICK trademark, sells pouch mixes under the BETTY CROCKER and GOLD MEDAL names, and produces family flour under the GOLD MEDAL brand, introduced in 1880, and regional brands such as LA PINA, ROBIN HOOD and RED BAND. The Company also engages in grain merchandising, produces ingredient flour for internal requirements and sells flour to bakery, foodservice and manufacturing markets. DINNER AND SIDE DISH PRODUCTS. General Mills manufactures a line of BETTY CROCKER dry packaged dinner mixes under the HAMBURGER HELPER, TUNA HELPER, and SKILLET CHICKEN HELPER trademarks. Also under the BETTY CROCKER trademark, the Company sells dry packaged specialty potatoes, POTATO BUDS instant mashed potatoes, POTATO SHAKERS seasoning mixes, SUDDENLY SALAD and BAC*O'S salad topping. SNACK PRODUCTS AND BEVERAGES. General Mills markets POP SECRET microwave popcorn; a line of grain snacks including new lowfat chewy and traditional crunchy NATURE VALLEY granola bars and DUNKAROOS; a line of fruit snacks including FRUIT ROLL-UPS, FRUIT BY THE FOOT, GUSHERS, FRUIT STRING THING, BUGS BUNNY and TASMANIAN DEVIL; a line of fat-free snack bars under the name SWEET REWARDS and a savory snack marketed under the name BUGLES. The Company also produces and sells a line of -1- single-serving fruit juice drinks marketed under the SQUEEZIT trademark and SQUEEZIT 100, a 100% juice beverage. YOGURT PRODUCTS. Yoplait USA manufactures and sells a line of yogurt, including YOPLAIT ORIGINAL, YOPLAIT LIGHT, CUSTARD STYLE, FAT FREE FRUIT ON THE BOTTOM, TRIX, a layered yogurt for children and YOPLAIT CRUNCHY LIGHT, a non-fat yogurt with an overcap of crunchy toppings. Yoplait USA also markets frozen yogurt and novelties under a licensing arrangement. The Colombo yogurt business manufactures and sells a variety of refrigerated cup yogurt products under the COLOMBO brand name. FOODSERVICE. The Foodservice division markets General Mills branded baking mixes, cereals, snacks, refrigerated and soft frozen yogurt and custom products to the commercial and non-commercial sectors, including airlines, schools, restaurants and food management companies. INTERNATIONAL FOOD OPERATIONS. General Mills Canada, Inc. manufactures and sells BIG G ready-to-eat cereals in Canada. It also markets BETTY CROCKER dessert, baking and packaged dinner mixes and snacks in Canada, licenses food products for manufacture in Europe and the Asia/Pacific region, and exports flour and packaged products throughout the world. Cereal Partners Worldwide (CPW), the Company's joint venture with Nestle, S.A. through various entities, competes in more than 60 countries and republics, including, its newest market, Argentina. The following products under the umbrella NESTLE trademark were marketed in fiscal 1996: TRIO, CLUSTERS, NESQUICK, MULTI-CHEERIOS, HONEY NUT CHEERIOS, GOLDEN GRAHAMS, CINI MINIS, CHOCAPIC, TRIX, ESTRELITAS, GOLD, KIX, MILO, FIBRE 1, KANGUS, SPORTIES, FITNESS, SHREDDED WHEAT, SHREDDIES, COUNTRY CORN FLAKES, APPLE PUFFS, HONEY STARS AND KOKO KRUNCH. CPW also manufactures private label cereals for customers in the United Kingdom. The Company has a 50% equity interest in CPW. See Note Four to Consolidated Financial Statements appearing on page 24 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. Snack Ventures Europe (SVE), the Company's joint venture with PepsiCo, Inc., manufactures and sells snack foods in Holland, France, Belgium, Spain, Portugal, Greece, Italy, Estonia, Hungary, Russia and Slovakia. The Company has a 40.5% equity interest in SVE. See Note Four to Consolidated Financial Statements appearing on page 24 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. International Dessert Partners L.L.C. (IDP), the Company's joint venture with CPC International Inc., began selling baking and dessert mixes in Latin America in fiscal 1996 under a joint venture agreement executed in December, 1994. The Company has a 50% equity interest in IDP. See Note Four to Consolidated Financial Statements appearing on page 24 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. GENERAL TRADEMARKS AND PATENTS. The Company's products are marketed and businesses operated under trademarks and service marks owned by or licensed to the Company. Trademarks and service marks are vital to the Company's business. The most significant trademarks and service marks of the Company are contained in the business segment discussions above. 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 upon any single patent or group of related patents. Outside its joint venture activities, the Company's activities under licenses or other franchises or concessions are not material. RAW MATERIALS AND SUPPLIES. The principal raw materials used by General Mills are cereal grains, sugar, fruits, other agricultural products, vegetable oils, and plastic and paper for packaging materials. -2- Although General Mills has some long-term contracts, the majority of such raw materials are purchased on the open market. Prices of most raw materials will probably increase over the long term. Nonetheless, General Mills believes that it will be able to obtain an adequate supply of needed ingredients and packaging materials. Occasionally and where possible, General Mills makes advance purchases of commodities significant to its business in order to ensure continuity of operations. The Company's objective is to procure ingredients meeting both the Company's quality standards and its production needs at the lowest total costs to the Company. The Company's strategy is to buy these ingredients at price levels that allow a targeted profit margin. Since ingredients generally represent the largest variable cost in manufacturing the Company's products, to the extent possible, the Company hedges the risk associated with adverse price movements of grains and vegetable oils using exchange-traded futures and options and forward cash contracts. These tools enable the Company to manage the related commodity price risk over periods of time that exceed the period of time in which the physical commodity is available. Sugar is not hedged since there is no viable derivative market that meets the Company's needs. Accordingly, the Company uses hedging to mitigate the risks associated with adverse price movements and not to speculate in the marketplace. See also Note Seven to Consolidated Financial Statements appearing on page 26 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. CAPITAL EXPENDITURES. During the three fiscal years ended May 26, 1996, General Mills expended $498 million for capital expenditures, not including the cost of acquired companies. The Company expects to spend approximately $170 million for such purposes in fiscal 1997. RESEARCH AND DEVELOPMENT. The main research and development facilities are located at the James Ford Bell Technical Center in Golden Valley (suburban Minneapolis), Minnesota. With a staff of approximately 760, the Center is responsible for most of the food research for the Company. Approximately one- half of the staff hold degrees in various chemical, biological and engineering sciences. Research and development expenditures (all Company-sponsored) amounted to $60.1 million in fiscal 1996, $59.8 million in fiscal 1995 and $59.1 million in fiscal 1994. General Mills' research and development resources are focused on new product development, product improvement, process design and improvement, packaging and exploratory research in new business areas. EMPLOYEES. At May 26, 1996, General Mills had approximately 9,800 employees. ENVIRONMENTAL MATTERS. As of June 30, 1996, the Company has received notices advising it that there have been releases or threatened releases of hazardous substances or wastes at 10 sites, and alleging that the Company is potentially responsible for cleaning up those sites and/or paying certain costs in connection with those sites. These matters involve several different procedural contexts, including litigation initiated by governmental authorities and/or private parties, administrative proceedings commenced by regulatory agencies, and demand letters issued by regulatory agencies and/or private parties. The Company recognizes that its potential exposure with respect to any of these sites may be joint and several, but has concluded that its probable aggregate exposure is not material. This conclusion is based upon, among other things, the Company's payments and/or accruals with respect to each site; the number, ranking, and financial strength of other potentially responsible parties identified at each of the sites; the status of the proceedings, including various settlement agreements, consent decrees or court orders; allocations of volumetric waste contributions and allocations of relative responsibility among potentially responsible parties developed by regulatory agencies and by private parties; remediation cost estimates prepared by governmental authorities or private technical consultants; and the Company's historical experience in negotiating and settling disputes with respect to similar sites. Based on current facts and circumstances, General Mills believes that neither the results of these proceedings nor its compliance in general with environmental laws or regulations will have a material adverse effect upon the capital expenditures, earnings or competitive position of the Company. SEGMENT INFORMATION. Reporting financial information relating to industry segments of General Mills was discontinued as of May 28, 1995 with the distribution of the restaurant business. For a -3- description of the distribution, see Note Two to Consolidated Financial Statements appearing on page 24 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. Geographic financial information is found in Note Eighteen to Consolidated Financial Statements appearing on page 33 of the Company's 1996 Annual Report to Stockholders, incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, together with their ages and business experience, are set forth below. Dean Belbas, age 64, is Senior Vice President, Investor Relations. Mr. Belbas joined General Mills in 1956, was elected Vice President in 1977 and was elected Senior Vice President in 1995. Y. Marc Belton, age 37, is Vice President; President, Snacks. Mr. Belton joined the Company in 1983 and served in various food marketing management positions. He was appointed a Vice President of the Company in 1991 and named to his present position in 1994. Edward K. Bixby, age 60, is Senior Vice President; President, Consumer Foods Sales and Distribution. Mr. Bixby joined the Company in 1958 and served as General Manager of several Consumer Foods divisions. Mr. Bixby was elected Senior Vice President, General Manager, Grocery Products Sales Division in 1987, named President, Consumer Foods Sales in 1989 and named to his present position in 1994. Randy G. Darcy, age 45, is Senior Vice President, Operations. Mr. Darcy joined the Company in 1987 and was named Vice President, Director of Manufacturing, Technology and Operations in 1989 and named to his present position in 1994. Stephen R. Demeritt, age 52, is Executive Vice President of General Mills and Chief Executive Officer of CPW, S.A., a joint venture of General Mills and Nestle, S.A. Mr. Demeritt joined the Company in 1969 and was named a Marketing Director in the Big G Division in 1976, appointed a Vice President of the Company in 1983, named President of General Mills Canada, Inc. in 1986, elected Senior Vice President of General Mills in 1992, and named Chief Executive Officer of CPW, S.A. in 1993. He was named to his present position in 1996. Jon L. Finley, age 42, is Senior Vice President; President, Gold Medal, a division that includes Gold Medal and other family flour, Bisquick baking mix and Betty Crocker desserts and baking mixes. Mr. Finley joined the Company in 1983 and was named President, Yoplait USA in 1991, appointed a Vice President of the Company in 1991, elected Senior Vice President in 1994, named Senior Vice President, New Business in 1995 and named to his present position in 1996. Leslie M. Frecon, age 43, is Senior Vice President, Corporate Finance. Ms. Frecon joined the Company in 1981 as Manager of Acquisitions and was named Director of Acquisitions in 1983, Controller of Foodservice in 1989 and Controller of Sperry in 1991. She was named a Vice President of the Company in 1991 and was elected to her present position in 1993. Charles W. Gaillard, age 55, was elected President of General Mills, effective May 28, 1995, with responsibility for all domestic marketing divisions. He was previously Vice Chairman of General Mills, Inc. with responsibility for Big G, Consumer Food Sales and Yoplait. He earlier served as Chief Executive Officer of Cereal Partners Worldwide, a joint venture of the Company and Nestle, S.A. and as President of Big G. Mr. Gaillard joined General Mills in 1966 and has served in various food marketing management positions. He was elected a Senior Vice President in 1985 and Executive Vice President in 1989. -4- Stephen J. Garthwaite, age 52, is Senior Vice President, Innovation and Technology. Mr. Garthwaite joined the Company in 1982 as Vice President, Director of Corporate Research and was named Vice President, Research and Development for the Betty Crocker Division in 1986. He assumed the position of Vice President, Research and Development for Consumer Foods in 1987, was elected Senior Vice President, Research and Development in 1989, was named Senior Vice President, Technology and Operations in 1990 and was named to his present position in 1994. Eric J. Larson, age 40, is Senior Vice President. Mr. Larson joined the Company in this position in June 1996 from Morgan Stanley & Co. where he had been a partner and senior analyst covering packaged food, agri-business, foodservice, tobacco and selected beverage companies since 1992. He previously worked as an analyst covering consumer products companies at First Boston Corporation and Paine Webber. In late 1996 Mr. Larson will assume responsibility for Investor Relations. Siri S. Marshall, age 48, is Senior Vice President, General Counsel and Secretary. Ms. Marshall joined the Company in this position in 1994 from Avon Products, Inc. where she held the positions of Senior Vice President, General Counsel and Secretary from 1992 to 1994 and Vice President-Legal and Government Affairs and Secretary from 1990 to 1992. David D. Murphy, age 44, is Senior Vice President; President, International Foods. Mr. Murphy joined the Company in 1976, and served as the head of several divisions including Minnetonka, Betty Crocker Products and Big G. He was elected a Senior Vice President in 1991, named President of General Mills Canada in 1993 and named to his present position in 1996. Michael A. Peel, age 46, is Senior Vice President, Personnel. Mr. Peel joined the Company in this position in 1991 from PepsiCo, Inc. where he was Senior Vice President, Personnel, responsible for PepsiCo Worldwide Foods. Kendall J. Powell, age 42, is Vice President; President, Yoplait USA. Mr. Powell joined the Company in 1979 and was appointed a Vice President of General Mills and named Marketing Director of Cereal Partners U.K. in 1990. He was named to his present position in 1995. Jeffrey J. Rotsch, age 46, is Senior Vice President; President, Big G. Mr. Rotsch joined the Company in 1974 and was named Vice President, Director of Marketing for the Betty Crocker Division in 1987, Vice President, General Manager for Betty Crocker main meals and side dishes in 1989, elected Senior Vice President in 1993 and named to his present position in 1994. Roger W. Rumble, age 59, is Vice President; President, Foodservice. Mr. Rumble joined the Company in 1959, and was named Vice President, Director of Marketing, Foodservice in 1987, Vice President, Assistant General Manager, Sperry Division in 1988, and named to his present position in 1989. Stephen W. Sanger, age 50, is Chairman and Chief Executive Officer of General Mills, Inc., a position to which he was elected May 28, 1995. Mr. Sanger joined the Company in 1974 and served as the head of several business units, including Yoplait USA and Big G. He was elected a Senior Vice President in 1989, Executive Vice President in 1991, Vice Chairman in 1992 and President in 1993. Christina L. Steiner, age 43, is Vice President; President, Betty Crocker. Ms. Steiner joined the Company in 1976 and was appointed a Vice President in 1987. She was appointed Vice President, New Business Development for Yoplait USA in 1991, Vice President, General Manager of Betty Crocker Products' Main Meals and Side Dishes in 1992, and named to her present position in 1994. Austin P. Sullivan, Jr., age 56, is Senior Vice President, Corporate Relations. Mr. Sullivan joined the Company in 1976, was named a Vice President in 1978, named Director of Public Affairs in 1979 and -5- assumed responsibility for Corporate Communications in 1993. He was named to his present position in 1994. Kenneth L. Thome, age 48, is Senior Vice President, Financial Operations. Mr. Thome joined the Company in 1969 and was named Vice President, Controller for Convenience and International Foods Group in 1985, Vice President, Controller for International Foods in 1989, Vice President, Director of Information Systems in 1991 and was elected to his present position in 1993. Raymond G. Viault, age 52, is Vice Chairman of the Company, with overall responsibility for all international operations and business development, as well as for all financial activities of the Company. Mr. Viault joined the Company in January 1996 from Philip Morris, where he had been based in Zurich, Switzerland, serving since 1990 as President of Kraft Jacobs Suchard. Mr. Viault had been with Kraft General Foods a total of 20 years, serving in a variety of major marketing and general management positions. CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company and its representatives may from time to time make written or oral forward-looking statements with respect to long-term goals of the Company, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Among the factors which have affected and may continue to affect operating results are the following: (i) significant price competition by the largest branded cereal manufacturers, including competitive promotional spending levels; and (ii) high ingredient prices compared to historical levels. The Company's operating results may also be affected by other external factors such as: the effect of economic conditions; the impact of competitive products and pricing; product development; actions of competitors; changes in laws and regulations, including changes in accounting standards; customer demand; effectiveness of advertising and marketing spending or programs; consumer perception of health- related issues; fluctuations in the cost and availability of supply-chain resources; and foreign economic conditions, including currency rate fluctuations. The Company specifically declines to undertake any obligation to publicly revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ITEM 2. PROPERTIES. The Company's principal executive offices and main research laboratory are Company-owned and located in the Minneapolis, Minnesota metropolitan area. General Mills operates numerous manufacturing facilities and maintains many sales and administrative offices and warehouses, mainly in the United States. Other facilities are also operated in Canada. -6- General Mills operates ten major consumer foods plants for the production of cereal products, prepared mixes, convenience foods and other food products. These facilities are located at Albuquerque, New Mexico; Buffalo, New York; Cedar Rapids, Iowa; Chicago, Illinois area (3); Covington, Georgia; Lodi, California; Toledo, Ohio; and Etobicoke, Canada. The Company owns seven flour mills located at Avon, Iowa; Buffalo, New York; Great Falls, Montana; Johnson City, Tennessee; Kansas City, Missouri; Vallejo, California; and Vernon, California. The Company operates seven terminal grain elevators and has country grain elevators in 28 locations, primarily in Idaho and Montana. General Mills also has eight other food and beverage production facilities with total floor space of approximately 555,000 square feet, including 231,000 square feet of leased space. General Mills also owns or leases warehouse space aggregating approximately 6,840,000 square feet, of which approximately 4,298,000 square feet are leased. A number of sales and administrative offices are maintained in the United States and Canada, totaling 1,761,000 square feet. ITEM 3. LEGAL PROCEEDINGS. In management's opinion, there were no claims or litigation pending at May 26, 1996, the outcome of which could have a material adverse effect on the consolidated financial position of General Mills, Inc. and its subsidiaries. See the information contained under the section entitled "Environmental Matters," supra, for a discussion of environmental matters in which the Company is involved. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. -- Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information relating to the market prices and dividends of the Company's common stock contained in Note Nineteen to Consolidated Financial Statements appearing on page 33 of Registrant's 1996 Annual Report to Stockholders is incorporated herein by reference. As of August 1, 1996, the number of record holders of common stock was 43,275. The Company's common stock ($.10 par value) is listed on the New York and Chicago Stock Exchanges. ITEM 6. SELECTED FINANCIAL DATA. The information for fiscal years 1992 through 1996 contained in the Eleven-Year Financial Summary on page 34 of Registrant's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The information set forth in the section entitled "Management's Discussion of Results of Operations and Financial Condition" on pages 16 through 18 of Registrant's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information on pages 19 through 33 of Registrant's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. --Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained in the sections entitled "Information Concerning Nominees" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in Registrant's definitive proxy materials dated August 22, 1996 is incorporated herein by reference. -7- ITEM 11. EXECUTIVE COMPENSATION. The information contained on pages 20 through 23 of Registrant's definitive proxy materials dated August 22, 1996 is incorporated herein by reference. The information appearing under the heading "Report of Compensation Committee on Executive Compensation" is not incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained in the section entitled "Share Ownership of Directors and Executive Officers" contained in Registrant's definitive proxy materials dated August 22, 1996 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. -- Not applicable. - - ---------------------- The Company's Annual Report on Form 10-K for the fiscal year ended May 26, 1996, at the time of its filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Sections 13, 14 and 15(d) of the 1934 Act for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by reference such Annual Report on Form 10-K. -8- AUDITORS' REPORT The Stockholders and the Board of Directors General Mills, Inc.: Under date of June 26, 1996, we reported on the consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 26, 1996 and May 28, 1995 and the related consolidated statements of earnings and cash flows for each of the fiscal years in the three-year period ended May 26, 1996, as contained in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year ended May 26, 1996. In connection with our audits of the aforementioned consolidated financial statements, we have also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Our report covering the basic consolidated financial statements refers to changes in the method of accounting for investments in debt and equity securities in fiscal 1995 and postemployment benefits and income taxes in fiscal 1994. KPMG Peat Marwick LLP Minneapolis, Minnesota June 26, 1996 AUDITORS' CONSENT The Board of Directors General Mills, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 2-49637, 33-56032 and 333-00745) on Form S-3 and Registration Statements (Nos. 2-13460, 2-53523, 2-66320, 2-91987, 2-95574, 33-24504, 33-27628, 33- 32059, 33-36892, 33-36893, 33-50337 and 33-62729) on Form S-8 of General Mills, Inc. of our reports dated June 26, 1996, relating to the consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 26, 1996 and May 28, 1995 and the related consolidated statements of earnings, cash flows and related financial statement schedule for each of the fiscal years in the three-year period ended May 26, 1996, which reports are included or incorporated by reference in the May 26, 1996 annual report on Form 10-K of General Mills, Inc. Our report covering the basic consolidated financial statements refers to changes in the method of accounting for investments in debt and equity securities in fiscal 1995 and postemployment benefits and income taxes in fiscal 1994. KPMG Peat Marwick LLP Minneapolis, Minnesota August 22, 1996 -9- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS: Consolidated Statements of Earnings for the Fiscal Years Ended May 26, 1996, May 28, 1995 and May 29, 1994 (incorporated herein by reference to page 20 of the Registrant's 1996 Annual Report to Stockholders). Consolidated Balance Sheets at May 26, 1996 and May 28, 1995 (incorporated herein by reference to page 21 of the Registrant's 1996 Annual Report to Stockholders). Consolidated Statements of Cash Flows for the Fiscal Years Ended May 26, 1996, May 28, 1995 and May 29, 1994 (incorporated herein by reference to page 22 of the Registrant's 1996 Annual Report to Stockholders). Notes to Consolidated Financial Statements (incorporated herein by reference to pages 23 through 33 of the Registrant's 1996 Annual Report to Stockholders). 2. FINANCIAL STATEMENT SCHEDULES: For the Fiscal Years Ended May 26, 1996, May 28, 1995 and May 29, 1994: II - Valuation and Qualifying Accounts 3. EXHIBITS: 3.1 - Copy of Registrant's Restated Certificate of Incorporation, as amended to date (incorporated herein by reference to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 28, 1995). 3.2 - Copy of Registrant's By-Laws, as amended to date (incorporated herein by reference to Exhibit 3 to Registrant's Report on Form 8-K dated December 11, 1995). 4.1 - Copy of Indenture between Registrant and Continental Illinois National Bank and Trust Company of Chicago, as amended to date by Supplemental Indentures Nos. 1 through 8 (incorporated herein by reference to Exhibit 4 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992 and to Exhibit 4(b) to Registrant's Current Report on Form 8-K filed January 8, 1993). 4.2 - Copy of Rights Agreement dated as of December 11, 1995 between Registrant and Norwest Bank Minnesota, N.A. (incorporated herein by reference to Exhibit 1 to Registrant's Report on Form 8-K dated December 11, 1995). 4.3 - Copy of Indenture between Registrant and First Trust of Illinois, National Association dated February 1, 1996 (incorporated herein by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-3 effective February 23, 1996). *10.1 - Copy of Stock Option and Long-Term Incentive Plan of 1988, as amended to date (incorporated herein by reference to Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). *10.2 - Copy of Stock Option and Long-Term Incentive Plan of 1984, as amended to date (incorporated herein by reference to Exhibit 10.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. -10- 10.3 - Distribution Agreement with Darden Restaurants, Inc. dated May 12, 1995 (incorporated herein by reference to Exhibit 2 to Registrant's Report on Form 8-K dated May 28, 1995). *10.4 - Copy of Executive Incentive Plan, as amended to date (incorporated herein by reference to Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 28, 1995). *10.5 - Copy of Management Continuity Agreement (incorporated herein by reference to Exhibit 4 to Registrant's Report on Form 8-K dated December 11, 1995). *10.6 - Copy of Supplemental Retirement Plan, as amended to date (incorporated herein by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). *10.7 - Copy of Executive Survivor Income Plan, as amended to date. *10.8 - Copy of Executive Health Plan, as amended to date. *10.9 - Copy of Supplemental Savings Plan, as amended to date (incorporated herein by reference to Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). *10.10 - Copy of Compensation Plan for Non-Employee Directors, as amended to date (incorporated herein by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992). *10.11 - Copy of General Mills, Inc. 1995 Salary Replacement Stock Option Plan. *10.12 - Copy of Deferred Compensation Plan, as amended to date (incorporated herein by reference to Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 28, 1995). *10.13 - Copy of Supplemental Benefits Trust Agreement dated February 9, 1987, as amended and restated as of September 26, 1988 (incorporated herein by reference to Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). *10.14 - Copy of Supplemental Benefits Trust Agreement dated September 26, 1988 (incorporated herein by reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). 10.15 - Copy of Agreements dated November 29, 1989 by and between General Mills, Inc. and Nestle, S.A. (incorporated herein by reference to Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 28, 1995). 10.16 - Copy of Protocol and Addendum No. 1 to Protocol of Cereal Partners Worldwide. *10.17 - Copy of Stock Plan for Non-Employee Directors, as amended to date (incorporated herein by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 28, 1995). *10.18 - Copy of 1990 Salary Replacement Stock Option Plan, as amended to date. (incorporated herein by reference to Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). 10.19 - Copy of Addendum No. 2 dated March 16, 1993 to Protocol of Cereal Partners Worldwide (incorporated herein by reference to Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 30, 1993). 10.20 - Copy of Agreement dated July 31, 1992 by and between General Mills, Inc. and PepsiCo, Inc. (incorporated herein by reference to Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 30, 1993). * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. -11- *10.21 - Copy of Stock Option and Long-Term Incentive Plan of 1993, as amended to date (incorporated herein by reference to Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended May 29, 1994). 10.22 - Copy of Standstill Agreement with CPC International, Inc. dated October 17, 1994 (incorporated herein by reference to Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the period ended February 26, 1995). 10.23 - Copy of Addendum No. 3 effective as of March 15, 1993 to Protocol of Cereal Partners Worldwide (incorporated herein by reference to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for the period ended February 26, 1995). 11 - Statement of Determination of Common Shares and Common Share Equivalents (contained on page 16 of this Report). 12 - Statement of Ratio of Earnings to Fixed Charges (contained on page 17 of this Report). 13 - 1996 Annual Report to Stockholders (only those portions expressly incorporated by reference herein shall be deemed filed with the Commission). 21 - List of Subsidiaries of General Mills, Inc. 23 - Consent of KPMG Peat Marwick LLP (contained on page 9 of this Report). * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K. -- Not applicable. -12- 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. GENERAL MILLS, INC. Dated: August 22, 1996 By: /s/ S. S. MARSHALL ----------------------------------------- S. S. Marshall SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY 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. SIGNATURE TITLE DATE --------- ----- ---- /s/ R.M. BRESSLER Director August 7, 1996 - - ----------------------- -------------------- (Richard M. Bressler) /s/ L. DE SIMONE Director August 8, 1996 - - ----------------------- -------------------- (Livio D. DeSimone) /s/ W.T. ESREY Director August 9, 1996 - - ----------------------- -------------------- (William T. Esrey) /s/ C. W. GAILLARD Director, August 8, 1996 - - ----------------------- President -------------------- (Charles W. Gaillard) /s/ JUDITH R. HOPE Director August 8, 1996 - - ----------------------- -------------------- (Judith R. Hope) /s/ KENNETH MACKE Director August 8, 1996 - - ----------------------- -------------------- (Kenneth A. Macke) /s/ GEORGE PUTNAM Director August 9, 1996 - - ----------------------- -------------------- (George Putnam) /s/ M.D. ROSE Director August 8, 1996 - - ----------------------- -------------------- (Michael D. Rose) -13- SIGNATURE TITLE DATE --------- ----- ---- /s/ S. W. SANGER Chairman of the Board and August 8, 1996 - - ----------------------- Chief Executive Officer -------------------- (Stephen W. Sanger) /s/ A. MICHAEL SPENCE Director August 8, 1996 - - ----------------------- -------------------- (A. Michael Spence) /s/ D. A. TERRELL Director August 8, 1996 - - ----------------------- -------------------- (Dorothy A. Terrell) /s/ RAYMOND G. VIAULT Director August 8, 1996 - - ----------------------- Vice Chairman -------------------- (Raymond G. Viault) /s/ C. ANGUS WURTELE Director August 8, 1996 - - ----------------------- -------------------- (C. Angus Wurtele) /s/ KENNETH L. THOME Senior Vice President, August 8, 1996 - - ----------------------- Financial Operations -------------------- (Kenneth L. Thome) (Principal Accounting Officer) -14- GENERAL MILLS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - - ------------------------ -------- -------- -------- -------- ADDITIONS BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND FROM AT END OF DESCRIPTION OF PERIOD EXPENSES RESERVES PERIOD - - ----------- ----------- ---------- ---------- -------- Allowance for possible losses on accounts receivable: Year ended May 26, 1996. . $4.1 $ .1 $ .4 (a) $4.1 (.3)(b) ---- ---- ---- ---- Total. . . . . . . . . $4.1 $ .1 $ .1 $4.1 ---- ---- ---- ---- ---- ---- ---- ---- Year ended May 28, 1995. . $3.6 $1.0 $ .8 (a) $4.1 (.3)(b) ---- ---- ---- ---- Total. . . . . . . . . $3.6 $1.0 $ .5 $4.1 ---- ---- ---- ---- ---- ---- ---- ---- Year ended May 29, 1994. . $3.5 $ .9 $1.0 (a) $3.6 (.2)(b) ---- ---- ---- ---- Total. . . . . . . . . . . $3.5 $ .9 $ .8 $3.6 ---- ---- ---- ---- ---- ---- ---- ---- - - --------------------------- Notes: (a) Bad debt write-offs. (b) Other adjustments and reclassifications. -15- EXHIBIT 11 GENERAL MILLS, INC. STATEMENT OF DETERMINATION OF COMMON SHARES AND COMMON SHARE EQUIVALENTS (IN MILLIONS) Weighted average number of common shares and common share equivalents assumed outstanding ------------------------------------ For the Fiscal Years Ended ------------------------------------ May 26, May 28, May 29, 1996 1995 1994 ------- ------- -------- Weighted average number of common shares outstanding, excluding common stock held in treasury (a) . . . . . . . . . 158.9 158.0 159.1 Common share equivalents resulting from the assumed exercise of certain stock options (b). . . . . . . . . . . . . . 3.1* 2.1* 2.4* ----- ----- ----- Total common shares and common share equivalents. . . . . . . . . . . . . . 162.0 160.1 161.5 ----- ----- ----- ----- ----- ----- - - --------------------------- Notes: (a) Computed as the weighted average net shares outstanding on stock-exchange trading days. (b) Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. - - --------------------------- * Common share equivalents are not material. As a result, earnings per share have been computed using the weighted average of common shares outstanding of 158.9 million, 158.0 million and 159.1 million for fiscal 1996, 1995 and 1994, respectively. -16- EXHIBIT 12 GENERAL MILLS, INC. RATIO OF EARNINGS TO FIXED CHARGES Fiscal Year Ended ----------------------------------------------- May 26, May 28, May 29, May 30, May 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges. . . . . . . . . . . 6.94 4.10 6.18 8.62 9.28 For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations, plus earnings or losses of joint ventures, plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the proportion deemed representative of the interest factor) of rents of continuing operations. -17- EXHIBIT INDEX 10.7 - Copy of Executive Survivor Income Plan, as amended to date. 10.8 - Copy of Executive Health Plan, as amended to date. 10.11 - Copy of General Mills, Inc. 1995 Salary Replacement Stock Option Plan. 10.16 - Copy of Protocol and Addendum No. 1 to Protocol of Cereal Partners Worldwide. 11 - Statement of Determination of Common Shares and Common Share Equivalents (contained on page 16 of this Report). 12 - Statement of Ratio of Earnings to Fixed Charges (contained on page 17 of this Report). 13 - 1996 Annual Report to Stockholders (only those portions expressly incorporated by reference herein shall be deemed filed with the Commission). 21 - List of Subsidiaries of General Mills, Inc. 23 - Consent of KPMG Peat Marwick (contained on page 9 of this Report). 27 - Financial Data Schedule. EX-10.7 2 EXEC SURVIVOR INCOME PLAN EXHIBIT 10.7 EXECUTIVE SURVIVOR INCOME PLAN OF GENERAL MILLS, INC. ARTICLE I - DEFINITIONS 1.01 "Administrator" shall mean the Vice President, Employee Relations of the Company, or like successor. 1.02 "Company" shall mean General Mills, Inc. and its subsidiaries. 1.03 "Dependent" shall mean surviving unmarried children of the Participant (including legally adopted and step-children) less than age twenty-two (22) provided they (i) attend school full-time or reside with Participant, and (ii) depended upon the Participant for support and maintenance; and surviving unmarried children of the Participant (including legally adopted and step-children) age twenty-two (22) or older provided they (i) are totally disabled or attending school full-time, and (ii) depended upon the Participant for support and maintenance. 1.04 "Earnable Compensation" shall mean all compensation for services paid to a Participant of the Plan including salary, bonuses, commissions, Deferred Cash Awards as accrued under the Executive Incentive and Estate Building Plan (excluding interest thereon) and all other special payments made as compensation for services as determined by the Administrator, excluding Stock Option and Long Term Incentive Plan of 1980. [1.04 Amended Effective 1/1/1982] 1.05 "Final Average Earnings" shall mean the average of Participant's Earnable Compensation which is the larger of the two formulas in (a) and (b) following: (a) Determine the average of the five highest calendar years of Earnable Compensation received by a Participant in the Participant's last ten consecutive calendar years of Company service immediately preceding death. (b) Select the five highest calendar years of Earnable Compensation (herein referred to as "selected years") received by a Participant in the Participant's last ten consecutive calendar years and (1) to the total of the compensation received in the selected years add the full months of Earnable Compensation which the Participant received for all full calendar months of Company service during the calendar year in which the Participant died, and (2) deduct the Earnable Compensation which the Participant received during the same month in the selected year in which the Participant's Earnable Compensation was the lowest. Divide the total compensation so determined by five. 1.06 "Participant" shall mean any employee of the Company who is a Participant of the Plan at the date of his or her death. 1.07 "Plan" shall mean the Executive Survivor Income Plan of General Mills, Inc. 1.08 "Surviving Spouse" shall mean the then living spouse (excluding a legally separated spouse) of the Participant, who at the time of the Participant's death had been married to the Participant for a minimum of one year. ARTICLE II - BENEFITS 2.01 SURVIVING SPOUSE'S BENEFIT Upon the death of a Participant of the Plan, the Surviving Spouse shall be entitled to receive a monthly benefit equal to one-twelfth (1/12) of twenty-five percent (25%) of the Participant's Final Average Earnings, provided that for Participants who were enrolled in the Company's insured Survivor Income Plan immediately prior to participation in this Plan, the Surviving Spouse's benefit shall not be less than the benefit payable to the Surviving Spouse under the Survivor Income Plan as of the last day the Participant was enrolled in the Survivor Income Plan. 2.02 SURVIVING SPOUSE'S BENEFIT PAYMENT Upon receipt of written proof of the death of the Participant satisfactory to the Plan Administrator, the Surviving Spouse's benefit shall become payable as of the first day of the calendar payment shall be made as of the first day of the calendar month in which the Surviving Spouse's death occurs. This benefit shall continue to be payable in the event the Surviving Spouse remarries. 2.03 DEPENDENT'S BENEFIT In the event there is no Surviving Spouse of the Participant or in the event the Surviving Spouse thereafter dies and there are one or more Dependents, a monthly benefit equal to one-twelfth (1/12) of twelve and one-half percent (12 1/2%) of the Participant's Final Average Earnings shall be paid to Participant's Dependents, apportioned equally among such Dependents, so long as they qualify as dependents as defined herein. For Participants who were enrolled in the Company's insured Survivor Income Plan immediately prior to participation in this Plan, the Dependent's benefit shall not be less than the benefit payable to Dependents under the Survivor Income Plan as of the last day the Participant was enrolled in the Survivor Income Plan. Any adjustment in the benefit caused by the change in the number of Dependents as determined by the Administrator shall take effect immediately. 2.04 DEPENDENT'S BENEFIT PAYMENT Upon receipt of written proof of the status of persons as Dependents satisfactory to the Plan Administrator, and where such has not previously been furnished written proof of the death of the Participant, the Dependent's benefits shall become payable as of thefirst day of the calendar month next following the death of the Participant if there is no Surviving Spouse or as of the first day of the calendar month next following the death of the Surviving Spouse. 2.05 BENEFIT REDUCTION Any benefit payable hereunder shall be reduced by amount payable under all other Company-paid survivor income benefit plans, including pension and profit-sharing retirement plans and Company-paid individual life insurance policies. Any amounts payable from Company-paid profit-sharing retirement plans shall be restated to a monthly benefit basis. Amounts payable under Company-paid group life insurance policies shall not reduce benefits payable hereunder. 2.06 PAYMENT TO TRUSTS A Participant may, upon written notice to the Administrator, direct that the benefits payable hereunder be paid to a trust, provided that at the time of such designation, the Administrator shall be furnished a copy of the trust instrument for review and approval. The trust instrument must provide that the benefits payable hereunder shall accrue to the Surviving Spouse or Dependents to the same extent and manner as if the said benefits were paid in accordance with this Plan. Payments of benefits to such trust shall discharge the Company from all liability or obligation to the extent of the amount so paid. 2.07 MINORITY OR INCOMPETENCY PAYMENT If any benefit is payable to a minor or to a person otherwise incapable of giving a valid release for any payment due, and until a claim is made by a duly appointed guardian or committee of such person, payment may be made to such person or to any person or institution appearing to the Administrator to have assumed the custody and principal support of such person, and the liability of the Company shall be discharged to the extent of the amount so paid. ARTICLE III - ADMINISTRATION OF THE PLAN 3.01 ADMINISTRATOR The Plan shall be supervised by the Administrator, who shall have the authority to construe and interpret the Plan. The Management Policy Committee of the Company shall have final authority in cases where the Administrator, in his or her sole discretion, determines that such Committee make a final decision. Interpretations and decisions of the Administrator and the Management Policy Committee shall be final and binding on all parties, including the Company and the Participants. 3.02 DELEGATED DUTIES The Administrator shall have authority to delegate to the Director of Employee Benefits, or others, the duties and responsibilities of maintaining records, issuing such rules and regulations as it deems appropriate, and directing and making the payment of benefits provided hereunder. 3.03 DESIGNATION AND TERMINATION OF PARTICIPANT STATUS The Director of Executive Development and Compensation of the Company shall designate by written instrument those employees chosen to be Participants in the Plan. Participants shall be chosen from a list of key employees recommended by management. Participants may be added or deleted (upon management recommendation) by the Director of Executive Development and Compensation of the Company at any time as needed. 3.04 AMENDMENT AND TERMINATION OF PLAN The Company may amend, modify or terminate the Plan and all benefits hereunder at any time. 3.05 PAYMENTS The Company shall pay all benefits arising under this Plan and all costs, charges and expenses relating thereto. 3.06 NON-ASSIGNABILITY OF BENEFITS Except to the extent required by law and other than as provided herein, the benefits payable hereunder or the right to receive future benefits under the Plan may not be anticipated, alienated, sold, transferred, assign, pledged, encumbered, or subjected to any charge or legal process, and if any attempt is made to do so, or a person eligible for any benefits becomes bankrupt, the interest under the Plan of the person affected may be terminated by the Administrator, who, in his or her sole discretion, may cause the same to be held or applied for the benefit of one or more of the Dependents of such person or make any other disposition of such benefits as he or she deems appropriate. 3.07 APPLICABLE LAW All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the United States and the laws of the State of Minnesota. 3.08 EFFECTIVE DATE This Plan shall become effective as of January 1, 1980. EX-10.8 3 EXHIBIT 10.8 EXECUTIVE HEALTH PLAN EXHIBIT 10.8 FOREWORD This handbook is intended to serve as a summary of the benefits and practices and is not a contract. If a discrepancy or conflict should arise between this handbook and the official plan document or policy, the terms of the plan document or policy will prevail. General Mills, Inc. expressly reserves the right to amend, terminate or replace the benefits, practices or policies at any time and at its sole discretion. This handbook supersedes all previous handbooks. IMPORTANT NOTICE: This Booklet is an important document and should be kept in a safe place. This Booklet and the Certificate of Coverage made a part of this Booklet forms your Group Insurance Certificate. TABLE OF CONTENTS FOREWORD 1 SCHEDULE OF BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Who is Covered? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Effective Date of These Benefts . . . . . . . . . . . . . . . . . . . . . .5 You Should Know. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Dental Expense Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . .5 Orthodontic Expense Coverage Supplement. . . . . . . . . . . . . . . . . . .6 Major Medical Expense Coverage . . . . . . . . . . . . . . . . . . . . . . .6 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Maximums; Cost of the Insurance; When You Have a Claim ELIGIBIUTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Who is Eligible? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Effective Date of Coverage . . . . . . . . . . . . . . . . . . . . . . . . .9 When Coverage Could Bo Delayed . . . . . . . . . . . . . . . . . . . . . . .11 DENTAL EXPENSE COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Benefits; What is Covered?; Charges Not Covered ORTHODONTIC EXPENSE COVERAGE SUPPLEMENT. . . . . . . . . . . . . . . . . . . .16 Benefits; What is Covered?; Charges Not Covered MAJOR MEDICAL EXPENSE COVERAGE . . . . . . . . . . . . . . . . . . . . . . . .19 Benefits; What is Covered?; Charges Not Covered; Maximum MODIFICATION - WHEN ANOTHER PERSON IS LIABLE FOR YOUR SICKNESS OR INJURY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 IF AN INDIVIDUAL IS COVERED BY MORE THAN ONE PLAN. . . . . . . . . . . . . . .27 HOW MEDICARE AFFECTS BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . .31 GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Assignment of Coverages to Others . . . . . . . . . . . . . . . . . . . . .33 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 If You Need to Make a Claim. . . . . . . . . . . . . . . . . . . . . . . . .36 TERMINATION OF COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Events That Can End Your Insurance; End of Employment Continuation of Coverage . . . . . . . . . . . . . . . . . . . . . . . . . .37 Continued Coverage for an Incapacitated Child; When Health Care Insurance May Be Continued (Including Rights Under COBRA) EXTENSION OF HEALTH CARE PROTECTION DURING TOTAL DISABILITY . . . . . . . . .43 CONVERSION PRIVILEGE FOR HEALTH CARE INSURANCE . . . . . . . . . . . . . . . .44 SCHEDULE OF BENEFITS Covered Classes: Employees of General Mills, Inc. (and its Affiliates) listed below are eligible for this Plan: (1) All Employees classified by General Mills, Inc. as Chairman of the Board, Vice Chairman of the Board, President. Elected Corporate Vice Presidents and Executive or Senior Vice Presidents who are Company Officers. (2) All former employees who: (1) are retired from the Company: and (2) were covered by this Plan on their last day of employment with the Company. Program Date: January 1, 1996. This Booklet describes the benefits under the Plan as of the Program Date. You should know... * The Coverages in this Booklet are available to you if you are included in the Covered Classes. Only those Coverages for which you become insured will apply to you. The rules for becoming insured are in the Effective Date of Coverage section of this Booklet. * There is a Delay of Effective Date section. The rules of that section may delay the start of your insurance. * The Delay of Effective Date section also applies to any change, unless otherwise stated. * The Coverages are described more fully on later pages of this Booklet. Be sure to read these pages carefully. They show when benefits are or are not payable under the Group Contract. They also outline when your insurance ends and the conditions, limitations and exclusions that apply to the Coverages. The benefits otherwise payable under the Group Contract for a person's health care expenses may be reduced because of benefits from other sources. See later pages for details. * A Definitions section is included in this Booklet. Many of the terms used in this Booklet, such as "Active Work Requirement", are defined in that section. * This Booklet and the Certificate of Coverage forms your Group Insurance Certificate. The Coverages in this Booklet are insured under a Group Contract issued by Prudential. All benefits are subject in every way to the entire Group Contract which includes the Group Insurance Certificate. It alone forms the agreement under which payment of insurance is made. * The Group Contract referred to in this Booklet, or a copy of it, may be reviewed by you during regular business hours either at General Mills, Inc. or at Prudential's Group Operations office in Horsham, Pennsylvania. * General Mills expects to continue the Group Program indefinitely. But General Mills reserves the right to amend, terminate or replace the benefits, practices or policies at anytime at its sole discretion. This would change or end the terms of the Group Program in effect at that time for active and retired Employees. DENTAL EXPENSE COVERAGE * This Coverage pays benefits for many of the charges incurred for the preventive and corrective dental care you and your Qualified Dependents receive. Not all charges are eligible, some are eligible only to a limited extent. Benefits are based on the Eligible Charges incurred in a Calendar Year. There are Benefit Maximums. There is also an extension that may apply after a person ceases to be covered. If a proposed course of treatment is expected to involve charges of $300.00 or more, Pre-determination of Benefits is recommended. Pre-determination of Benefits is explained in the Coverage pages. ORTHODONTIC EXPENSE COVERAGE SUPPLEMENT * This supplements your Dental Expense Coverage. It pays benefits for some of the charges incurred for Orthodontic Procedures performed on you and your Qualified Dependents. Benefits are based on the Eligible Charges incurred in a Calendar Year. There are Benefit Maximums. Protection is not extended after the date a person ceases to be a Covered Person for the benefits of this Coverage Supplement. MAJOR MEDICAL EXPENSE COVERAGE * This Coverage pays benefits for many of the charges incurred for care and treatment of you or your Qualified Dependent's Sicknesses and Injuries. Not all charges are eligible and some are eligible only to a limited extent. Benefits are based on the Eligible Charges incurred in a Calendar Year. There are benefit maximums. There is also an extension that may apply after a person ceases to be covered. Some eligible charges under this coverage are subject to certain limits. Benefit Maximums also apply. These limits and maximums may apply on a calendar year or lifetime basis. This coverage may be changed in the future. If it is, any used parts of this coverage's maximums and limits will reduce any similar maximums and limits that apply under the changed coverage. This coverage may be replacing another Prudential Major Medical Expense coverage previously issued to the Employer. If so, the maximums and limits of this coverage will be reduced by any used parts of similar benefit maximums and limits under the replaced coverage. Another way to state this is that any benefit maximums and limits reduced by benefits received are not restored for future charges by any changes - whether to the coverage itself, or from another Major Medical Expense coverage to this one, except as follows. Any automatic limited restoration or restoration with evidence of insurability provisions under the coverage will continue to apply. OTHER INFORMATION Contract Holder: GENERAL MILLS, INC. Group Contract No.: GE-40100 Affiliates: Affiliates are employers who are the Contract Holder's subsidiaries or affiliates and are reported to Prudential in writing by General Mills, Inc. for inclusion under the Group Contract, provided that Prudential has approved such request. BENEFITS All Eligible Charges are subject to the Benefit Maximum: The Amount Payable is 100% of the Eligible Charges. BENEFIT MAXIMUM: Lifetime Benefit Maximum for all Sicknesses and Injuries: $2,000,000 per each Covered Person. Cost of the Insurance: The insurance in this Booklet is Non-contributory Insurance. The entire cost of the insurance is being paid by General Mills. Prudential's Address: The Prudential Insurance Company of America Central Group Operations P.O. Box 950 Horsham, Pennsylvania 19044-0950 WHEN YOU HAVE A CLAIM No claim forms are required. Bills for medical and dental expenses can be sent directly to The Prudential by the provider, or submitted by the claimant. All bills or correspondence must be identified with "General Mills Executive Health Plan, Prudential Group Policy GE-40 100." Claim envelopes are available for your use by contacting the Employee Benefits Department at General Mills. ALTERNATE BENEFIT PAYMENT Whenever a law or court order requires payment of health care expense benefits under the Group Contract to be made to a person or facility other than you, the payment will be made to that person or facility. ELIGIBILITY FOR EMPLOYEE INSURANCE You are eligible for Employee Insurance while:* * You are an Employee of General Mills; and * You are in a Covered Class. *If you are retired from General Mills while covered by this Plan, you will continue to be eligible for Insurance as a retiree. Your class is determined by General Mills. This will be done under its rules, on dates it sets. General Mills must not discriminate among persons in like situations. You cannot belong to more than one class for insurance on each basis, Contributory or Non-contributory Insurance, under a Coverage. "Class" means Covered Class, Benefit Class or anything related to work, such as position or Earnings, which affects the insurance available. FOR DEPENDENTS INSURANCE Qualified Dependents: These are the persons for whom you may obtain Dependents Insurance: * Your spouse. * Your unmarried children less than 19 years old or age 25, if a full-time student. Your children include your legally adopted children and each of your stepchildren, foster children and children of your Qualified Dependent children who depend on you for support and maintenance. In the case of health care expense Coverages, your children also include children placed with you for adoption prior to legal adoption. A child placed with you for adoption prior to legal adoption is considered your Qualified Dependent from the date of placement for adoption, and is treated as though the child was a newborn child born to you. Exceptions: * The age 19 limit does not apply to a child who: (a) wholly depends on you for support and maintenance; (b) is enrolled as a full-time student in a school; and (c) is less than 25. * Your spouse or child is not your Qualified Dependent while: (a) on active duty in the armed forces of any country; or (b) separately insured for health care expenses under the Group Contract as an Employee. A child will not be considered the Qualified Dependent of more than one Employee. If this would otherwise be the case, the child will be considered the Qualified Dependent of the Employee named in a written agreement of all such Employees filed with General Mills. If there is no written agreement, the child will be considered the Qualified Dependent of: (a) the Employee who became insured under the Group Contract with respect to the child, while the child was a Qualified Dependent of only that Employee; and otherwise (b) the Employee who has the longest continuous service with the Employer, based on its records. EFFECTIVE DATE OF COVERAGE FOR EMPLOYEE INSURANCE Your Employee Insurance under a Coverage will begin the first day on which: * You are eligible for Employee Insurance; and * You are in a Covered Class for that insurance; and * Your insurance is not being delayed under the Delay of Effective Date section below; and * That Coverage is part of the Group Contract. At anytime, the benefits for which you are insured are those for your class, unless otherwise stated. FOR DEPENDENTS INSURANCE Your Dependents Insurance under a Coverage for a person will begin the first day on which: * The person is your Qualified Dependent; and * You are in a Covered Class for that insurance; and * You are insured for the Employee Insurance, if any, under that Coverage; and * Your insurance for that Qualified Dependent is not being delayed under the Delay of Effective Date section below; and * Dependents Insurance under that Coverage is part of the Group Contract. Special Dependents Insurance Rules for Newborn Children and Children Placed for Adoption Prior to Legal Adoption: These rules apply only to Dependents Insurance under a health care expense Coverage. They modify the above rules with respect to a child: (a) born to you; or (b) born to your Qualified Dependent child; or (c) placed with you for adoption prior to legal adoption. They modify the above rules with respect to such child when you: (1) are in a Covered Class for that insurance; and (2) are insured for Employee Insurance under that Coverage; and (3) are not insured for that child under the above rules. You will become insured for that child from the moment of the child's birth, or in the case of a child placed for adoption, from the date the child is placed with you for adoption prior to legal adoption. The insurance for the child will end as described in the Termination of Coverage section, except that: (1) It will not end, by reason of your failure to pay any required contribution for that insurance, during the 31 day period starting with: (a) the child's birth; or (b) in the case of a child placed for adoption, the date the child is placed with you for adoption prior to legal adoption. (2) Subject to (3) below: (a) That insurance will not continue beyond the end of that 31 day period. (b) No benefits will be paid for any service or supply furnished for the child's health care after that period. (3) Item (2) above will not apply if, at the end of that 31 day period, you are insured for the child by complying, as to that child, with the rules for becoming insured for Dependents Insurance. The Delay of Effective Date section will not preclude continuing the insurance for the child beyond that period. Any exclusion of charges for pre-existing Sickness or Injury will not exclude charges for services and supplies furnished to a child placed with you for adoption prior to legal adoption. Special Dependents Insurance Rules for Handicapped Dependents: These rules apply only to Dependents Insurance under a health care expense Coverage. They modify the requirements for becoming insured with respect to a Handicapped Dependent. A "Handicapped Dependent" is a Qualified Dependent who is unable to carry on the regular and customary activities of a person in good health and of the same age and sex due to a bodily or mental disorder. The same rules apply with respect to becoming insured for Dependents Insurance under a Coverage for a Handicapped Dependent as for any other Qualified Dependent, except as follows: * The Delay of Effective Date section below will not operate to delay the date your insurance with respect to your Handicapped Dependent takes effect. Any exclusion of charges for pre-existing Sickness or Injury will not exclude charges for services and supplies furnished to a Handicapped Dependent. You must submit proof, when and as required by General Mills, that the Qualified Dependent is a Handicapped Dependent. Change in Family Status: It is important that you inform General Mills promptly when you first acquire a Qualified Dependent. You should also inform General Mills if your Dependents Insurance status changes from one to another of these categories: * No Qualified Dependents. * Qualified Dependent spouse only. * Qualified Dependent spouse and children. * Qualified Dependent children only. DELAY OF EFFECTIVE DATE (This does not apply to Retired Employees who are in the Covered Classes.) FOR EMPLOYEE INSURANCE Your Employee Insurance under a Coverage will be delayed if you do not meet the Active Work Requirement on the day your insurance would otherwise begin. Instead, it will begin on the first day you meet the Active Work Requirement and the other requirements for the insurance. The same delay rule will apply to any change in your insurance that is subject to this section. If you do not meet the Active Work Requirement on the day that change would take effect, it will take effect on the first day you meet that requirement. FOR DEPENDENTS INSURANCE A Qualified Dependent may be confined for medical care or treatment, at home or elsewhere. If a Qualified Dependent is so confined on the day that your Dependents Insurance under a Coverage for that Qualified Dependent, or any change in that insurance that is subject to this section, would take effect, it will not then take effect. The insurance or change will take effect upon the Qualified Dependent's final medical release from all such confinement. The other requirements for the insurance or change must also be met. Exception for Newborn Child and Child Adopted or Placed for Adoption: Under a Coverage, this section does not apply to a child of yours at that child's birth if the child is born to you and either: (1) is your first Qualified Dependent; or (2) becomes a Qualified Dependent while you are insured for Dependents Insurance under that Coverage for any other Qualified Dependent. Also, if a child is adopted or placed with you for adoption, this section does not apply to such child on the date of such placement or adoption. DENTAL EXPENSE COVERAGE FOR YOU AND YOUR DEPENDENTS This Coverage pays benefits for many of the charges incurred for the preventive and corrective dental care you and your Qualified Dependents receive. Not all charges are eligible; some are eligible only to a limited extent. Section C has an extension that may apply under this Coverage after the date a person ceases to be a Covered Person. A person may have benefits under this Coverage pre-determined. "Pre-Determination of Benefits" is a system that allows a person and that person's Dentist to know, in advance, what estimated benefits would be payable under this Coverage for a proposed course of dental treatment. Under Pre-Determination of Benefits, the Dentist can send Prudential a treatment plan before any Dental Services are performed. That plan should: (a) list the recommended Dental Services; and (b) show the charge for each Dental Service. The plan will be reviewed by Prudential and returned to the Dentist showing estimated benefits. Prudential may request supporting pre-operative x-rays or other diagnostic records in connection with Pre-determination of Benefits. In computing the estimated benefits, Prudential may consider alternate Dental Services that are suitable for care of a specific condition. This will be done only if those alternate services would produce a professionally acceptable result, as determined by Prudential. Pre-Determination of Benefits is recommended if a proposed course of treatment is expected to involve charges of $300.00 or more. Some of the terms used in this Coverage: * Eligible Charges: These are the charges that may be used as the basis for a claim. They are the charges for certain services, to the extent the charges meet the terms of Section B. * Dental Services: A service in the List of Dental Services. * Dentist: A person who is either of these: (a) a licensed dentist acting within the scope of the dental profession. (b) any other Doctor furnishing dental services that the Doctor is licensed to perform. A. BENEFITS. The benefits are described below. Benefit Amount. Payable: The benefit amount payable is the applicable Covered Percent of Eligible Charges incurred for a person's dental care. The Benefit Maximum and the Covered Percents are shown in the Schedule of Benefits. B. ELIGIBLE CHARGES. A charge is an Eligible Charge if all of these conditions are met: (1) It is made for a Dental Service furnished to you or your Qualified Dependent. (2) The Dental Service applies, or is furnished for treatment of the following: (a) temporomandibular joint disorders; or (b) craniomandibular disorder; or (c) malocclusion involving joints or muscles; or (d) birth defects known as cleft lip and cleft palate, including orthodontic treatment and oral surgery involved in the management of these defects. Such treatment must be provided before the person attains age 19. (3) The person is a Covered Person when the charge is incurred. A charge is considered incurred on the date the service is furnished. (4) It is not described in Charges Not Covered below. With respect to item (3) above, a charge is considered incurred as follows: (1) For an appliance, or alteration of one: on the date the impression for it is taken. (2) For a crown, bridge or gold restoration: on the date the tooth is prepared for it. (3) For root canal therapy: on the date the pulp chamber is opened. (4) For all other Dental Services: on the date the service is provided. A charge, or part of a charge, for a Dental Service is not an Eligible Charge if excluded. It is excluded to the extent it: (1) falls outside the Charge Limit below for that service; or (2) is described in Charges Not Covered below. CHARGE LIMIT: This applies if a benefit for a charge for a Dental Service would be provided under both of the following: (1) this Coverage; and (2) any other program which is paid for in full or in part, directly or indirectly, by General Mills. This includes both insured and uninsured programs. When a program provides benefits in the form of services, the cash value of each service rendered is considered both a charge incurred and the benefit provided for that charge. In that case, the charge for the Dental Service will be eligible only to the extent needed to pay a benefit equal to the amount, if any, by which (a) exceeds (b): (a) The benefit that would be payable for that charge under this Coverage if this limit did not apply. (b) The total benefits for that charge under all other programs described above. CHARGES NOT COVERED: (1) A charge for a service not reasonably necessary, or not customarily performed, for the dental care of a specific condition of the Covered Person. (2) A charge for a service not furnished by a Dentist. This (2) does not apply if the service: (a) is performed by a licensed dental hygienist under the direction of a Dentist; or (b) is an x-ray ordered by a Dentist. (3) A charge for a service: (a) furnished by or for the federal or any state or local government, unless payment of the charge is required; or (b) to the extent that the service, or any benefit for the charge, is provided by any law or governmental plan under which the person is or could be covered. This (b) does not apply to a state plan under Medicaid or to any law or plan when, by law, its benefits are excess to those of any private insurance program or other non-governmental program. (4) A charge for a replacement or modification of a partial or full removable denture, a removable bridge or fixed bridgework, or for adding teeth to any of these, or for a replacement or modification of a crown or gold restoration, within 5 years after that denture, bridge, bridgework, crown or gold restoration was installed. (5) A charge for a partial or full removable denture, removable bridge, or fixed bridgework if it includes replacement of one or more natural teeth missing before the person became a Covered Person under this Coverage. This (5) does not apply if the denture, bridge or bridgework also includes replacement of a natural tooth that: (a) is removed while the person is a Covered Person; and (b) was not an abutment to a partial denture, removable bridge or fixed bridge installed during the prior 5 years. (6) A charge for any of the following services: (a) An appliance, or modification of one, if an impression for it was made before the person became a Covered Person. (b) A crown, bridge or gold restoration, if a tooth was prepared for it before the person became a Covered Person. (c) Root canal therapy, if the pulp chamber for it was opened before the person became a Covered Person. (7) A charge in connection with a service furnished for cosmetic purposes. Facings on crowns, or pontics, that are behind the second bicuspid will always be considered cosmetic. This (8) does not apply if the service is needed as a result of accidental injuries sustained while a person is a Covered Person. (8) A charge in connection with: (a) an orthodontic service or procedure, other than one involved in the management of cleft lip or cleft palate; or (b) replacement of lost or stolen appliances; or (c) appliances, restorations or procedures needed to alter vertical dimensions or restore occlusion, or for the purpose of splinting or correcting attrition or abrasion. (9) A charge in connection with Injury or disease arising out of, or in the course of, any work for wage or profit (whether or not with the Employer) if such Injury or disease is covered by any workers' compensation law, occupational disease law or similar law. (10) A charge for a service to the extent that it is more than the usual charge made by the provider for the service when there is no insurance. (11) A charge for a service to the extent that it is above the reasonable and customary charge in the area for dental care of a comparable nature. A charge is above the reasonable and customary charge to the extent that it is above the range of charges generally made in the area for dental care of a comparable nature. The area and that range are as determined by Prudential. The benefits of this Coverage are payable to you. The Claim Rules apply to the payment of the benefits. ORTHODONTIC EXPENSE COVERAGE SUPPLEMENT FOR YOU OR YOUR QUALIFIED DEPENDENTS This supplements your Dental Expense Coverage. It pays benefits for some of the charges incurred for Orthodontic Procedures performed on you or your Qualified Dependents. Not all charges are eligible. The Eligible Charges under this Coverage Supplement are those described below. Protection under this Coverage Supplement is not extended after the date a person ceases to be a Covered Person for the benefits of this Coverage Supplement. Some of the terms used in this Coverage Supplement: Orthodontic Procedure: Use of active appliances to move teeth, to correct: (1) faulty position of teeth (malposition); or (2) abnormal bite (malocclusion). Orthodontic Treatment Plan: A Dentist's report, on a form approved by Prudential, that: (1) states the class of malocclusion or malposition; and (2) recommends and describes needed treatment by Orthodontic Procedures; and (3) estimates the duration of the treatment; and (4) estimates the total charge for the treatment; and (5) includes cephalometric x-rays, study models and any other supporting evidence that Prudential may reasonably require. Eligible Charges: These are the charges that may be used as the basis for a claim. They are charges for certain services and supplies, to the extent the charges meet the terms of Section B. Covered Percent: A percentage of Eligible Charges used to determine the benefits payable for certain charges. The Covered Percent is shown in the Schedule of Benefits. A. BENEFITS. The benefits for the Eligible Charges incurred in connection with the Orthodontic Procedures performed on a person and described in an Orthodontic Treatment Plan are described below. Benefit Amount Payable: The benefit amount payable is the Covered Percent of those Eligible Charges. The Benefit Maximum and the Covered Percent are shown in the Schedule of Benefits. B. ELIGIBLE CHARGES. A charge is an Eligible Charge if all of these conditions are met: (1) It is made for a service or supply furnished a person in connection with an Orthodontic Procedure and before the end of the estimated duration shown in the Orthodontic Treatment Plan. (2) An active appliance for that Orthodontic Procedure is inserted while the person is a Covered Person for the benefits of this Coverage Supplement. (3) The charge is incurred during a 3-month period described below. That period must start while the person is a Covered Person for the benefits of this Coverage Supplement. (4) The Orthodontic Procedure is needed to correct one of these conditions: (a) Vertical or horizontal overlap of upper teeth over lower teeth (overbite or overjet). (b) Faulty alignment (either frontwards or backwards) of the upper and lower arches with each other. (c) Cross-bite. (5) The service or supply is made part of an Orthodontic Treatment Plan that, before the Orthodontic Procedure is performed, has been: (a) sent to Prudential for review; and (b) returned by Prudential to the Dentist showing estimated benefits. A charge, or part of a charge, is not eligible if it is excluded. It is excluded to the extent it is described in the Charges Not Covered below. The total estimated Eligible Charges for an Orthodontic Treatment Plan, as determined from that Plan, will be considered made and incurred in installments over the estimated duration of the Orthodontic Treatment Plan shown in that Plan, in these amounts and at these times: (1) Amounts: The installments, except the first, will be equal. The first will be twice each of the others. (2) Times: The date the appliances are first inserted, at the end of the 3-month period starting with that date, and at the end of each of the following 3-month periods. If the actual Eligible Charges for the Orthodontic Treatment Plan are less than or more than the estimated Eligible Charges, the last installment above will be: (a) reduced by any excess of estimated over actual; or (b) increased by any excess of actual over estimated. Charges Not Covered: (1) Any "Charges Not Covered" that are part of the Dental Expense Coverage. This does not apply to items (6), (7) and (8) of that part. (2) Any charges for an Orthodontic Procedure if an active appliance for that Orthodontic Procedure has been installed before the first day on which the person became a Covered Person for the benefits of this Coverage Supplement. (3) Any charges for an Orthodontic Procedure for which an active appliance has been installed within the two years starting with the date the person became a Covered Person for the benefits of this Coverage Supplement. This applies only to a person who does not become such a Covered Person by the 31st day after the first day the person is eligible to become such a Covered Person. The benefits of this Coverage Supplement are payable to you. The Claim Rules apply to the payment of the benefits. MAJOR MEDICAL EXPENSE COVERAGE FOR YOU AND YOUR DEPENDENTS This Coverage pays benefits for many of the charges incurred for care and treatment of you or your Qualified Dependent's Sicknesses and Injuries. Not all charges are eligible; some are eligible only to a limited extent. Benefits are based on the Eligible Charges incurred in a Calendar Year. A person's protection under this Coverage may be extended after the date that person ceases to be a Covered Person. See the Extension of Health Care Protection page. That page applies to this Coverage. Some of the terms used in this Coverage: * Eligible Charges: These are the charges that may be used as the basis for a claim. They are the charges for certain services and supplies, to the extent the charges meet the terms of Section B. * Covered Percent: A percentage of Eligible Charges used to determine the benefits payable for certain charges. The Covered Percent is shown in the Schedule of Benefits. A. BENEFITS. The benefits are described below. All benefits are subject to the lifetime benefit maximum of $2,000,000 per covered person for all sicknesses and injuries. B. ELIGIBLE CHARGES. A charge is an Eligible Charge if all of these conditions are met: (1) It is made for a service or supply furnished to you or your Qualified Dependent. (2) The service or supply is ordered by a Doctor. (3) The person is a Covered Person when the charge is incurred. (4) The service or supply is furnished: (a) in connection with the diagnosis, cure, mitigation, treatment or prevention of disease; or (b) for the purpose of affecting any structure or function of the body. A charge is considered incurred on the date of the service or purchase for which the charge is made. A charge, or part of a charge, is not an Eligible Charge if excluded. It is excluded if it is described in the Charges Not Covered below. Charges Not Covered (1) War: Charges for Sickness or Injury due to war or any act of war while the person is a Covered Person. "War" means declared or undeclared war and includes resistance to armed aggression. (2) Work-connected Injury or Disease Charge: A charge in connection with (a) or (b), to the extent covered by any other plan or program: (a) Injury arising out of, or in the course of, any work for wage or profit (whether or not with General Mills). (b) Disease covered, with respect to such work, by any workers' compensation law, occupational disease law or similar law. (3) Government Plan Charge: A charge for a service or supply: (a) furnished by or for the United States government or any other government, unless payment of the charge is required by law; or (b) to the extent that the service or supply, or any benefit for the charge, is provided by any law or governmental plan under which the patient is or could be covered. This (b) does not apply to a state plan under Medicaid or to any law or plan when, by law, its benefits are excess to those of any private insurance program or other non-governmental program. (4) Charges for Services or Supplies that are Not Needed or Not Appropriately Provided: A charge for a service or supply is not covered to the extent that it is not needed or not appropriately provided. Charges for services or supplies furnished in connection with a service or supply that is not needed or not appropriately provided are also not covered. For the purpose of this exclusion a service or supply will be considered both "needed and appropriately provided" if Prudential determines that it meets each of these requirements: (a) It is ordered by a Doctor for the diagnosis, cure, mitigation, treatment or prevention of a Sickness or Injury. (b) The prevailing opinion within the appropriate specialty of the United States medical profession is that it is safe and effective for its intended use, and that its omission would adversely affect the person's medical condition. (c) It is furnished by a provider with appropriate training, experience, staff and facilities to furnish that particular service or supply. Prudential will determine whether these requirements have been met based on: * Published reports in authoritative medical literature; * Regulations, reports, publications or evaluations issued by government agencies such as the Agency for Health Care Policy and Research, the National Institutes of Health, and the Food and Drug Administration (FDA); * Listings in the following drug compendia: The American Medical Association Drug Evaluations, The American Hospital Formulary Service Drug Information and The United States Pharmacopeia Dispensing Information; and * Other authoritative medical sources to the extent that Prudential determines them to be necessary. (5) Charge Above the Usual Charge: A charge for a service or supply to the extent that it is above the usual charge made by the provider for the service or supply when there is no insurance. (6) Charge Above the Prevailing Charge: A charge for a service or supply to the extent that it is above the prevailing charge in the area for a like service or supply. A charge is above the prevailing charge to the extent that it is above the usual charge of the provider to a person of socio-economic status. The prevailing charge will be determined by Prudential. (7) Charges for Experimental or Investigational Services or Supplies: A charge for a service or supply is not covered to the extent that it is experimental or investigational. Charges for services or supplies furnished in connection with a service or supply that is experimental or investigational are also not covered. For the purpose of this exclusion a service or supply will be considered "experimental or investigational" if Prudential determines that one or more of the following is true: (a) The service or supply is under study or in a clinical trial to evaluate its toxicity, safety or efficacy for a particular diagnosis or set of indications. Clinical trials include but are not limited to phase I, II and III clinical trials. (b) The prevailing opinion within the appropriate specialty of the United States medical profession is that the service or supply needs further evaluation for the particular diagnosis or set of indications before it is used outside clinical trials or other research settings. Prudential will determine if this item (b) is true based on: (i) Published reports in authoritative medical literature; and (ii) Regulations, reports, publications and evaluations issued by government agencies such as the Agency for Health Care Policy and Research, the National Institutes of Health, and the FDA. (c) In the case of a drug, device or other supply that is subject to FDA approval: (i) It does not have FDA approval; or (ii) It has FDA approval only under its Treatment Investigational New Drug regulation or a similar regulation; or (iii) It has FDA approval, but it is being used for an indication or at a dosage that is not an accepted off-label use. Prudential will determine if a use is an accepted off-label use based on published reports in authoritative medical literature and entries in the following drug compendia: The American Medical Association Drug Evaluations, The American Hospital Formulary Service Drug Information and The United States Pharmacopeia Dispensing Information. (d) The provider's institutional review board acknowledges that the use of the service or supply is experimental or investigational and subject to that board's approval. (e) The provider's institutional review board requires that the patient, parent or guardian give an informed consent stating that the service or supply is experimental or investigational or part of a research project or study; or federal law requires such a consent (f) Research protocols indicate that the service or supply is experimental or investigational. This item (f) applies for protocols used by the patient's provider as well as for protocols used by other providers studying substantially the same service or supply. (8) Charges for Educational Services or Supplies: A charge for a service or supply is not covered to the extent that it is determined by Prudential to be educational. Charges for services or supplies furnished in connection with a service or supply that is educational are also not covered. "Educational" means: (a) That the primary purpose of the service or supply is to provide the person with any of the following: training in the activities of daily living; instruction in scholastic skills such as reading and writing; preparation for an occupation; or treatment for learning disabilities; or (b) That the service or supply is being provided to promote development beyond any level of function previously demonstrated. "Training in the activities of daily living" does not include training directly related to treatment of a Sickness or Injury that resulted in a loss of a previously demonstrated ability to perform those activities. In the case of a Hospital stay, the length of the stay and Hospital services and supplies are not covered to the extent that they are determined to be allocable to the scholastic education or vocational training of the patient. (9) Blood Charge: A charge for blood or blood plasma which is replaced by or for the patient. (10) Cosmetic Surgery Charge: A charge in connection with Cosmetic Surgery. "Cosmetic Surgery" means surgery performed mainly to change a person's appearance. It includes surgery performed to treat a mental, psychoneurotic or personality disorder through change in appearance. But the following are not considered to be Cosmetic Surgery: (a) Surgery to correct the result of an accidental injury sustained while a person is a Covered Person. (b) Surgery to treat a condition, including a birth defect, which impairs the function of a body organ. (c) Surgery to reconstruct a breast after a mastectomy performed for the treatment of a disease. (11) Impregnation or Fertilization Charge: A charge for either of the following that involves either a Covered Person or a surrogate as a donor or recipient: (a) Actual or attempted impregnation. (b) Actual or attempted fertilization. (12) Custodial Care: Charges for services in connection with Custodial Care. (13) Payment Not Required: Charges which the Covered Person is not legally required to pay. (14) Charge made by the Employer or a Close Relative: A charge for a service or supply furnished by: (a) the Employer; (b) a Close Relative. "Close Relative" means you, your spouse, and a child, brother, sister or parent of you or your spouse. (15) Charge under Employer's Other Programs: A charge to the extent it would be covered under one of the following programs without regard to any rules of the program for coordination of benefits: (a) Any group insurance, other than this Major Medical Expense Coverage. (b) Any other program of coverage for individuals in a group. This includes insured and uninsured programs. These programs are included in this part (15) if they: (a) provide benefits for, or due to, medical or dental care or treatment; and (b) are paid for in full or in part, directly or indirectly, by the Employer. When a program provides benefits in the form of services, the cash value of each service rendered is considered both a charge incurred and the benefit provided for that charge. (16) Transportation Charge: A charge for transportation. This will not apply to local ambulance travel. (17) Motor Vehicle Charge: A charge for the purchase of, or alteration of, a motor vehicle. (18) Charge for Capital Improvement of Property: A charge for the purchase, installation, or construction of any: (a) device; or (b) equipment; or (c) facility; determined by Prudential to be a capital improvement of property. (19) Cost of Insurance Coverage: A charge for the cost of insurance coverage. "Insurance coverage" means any: (a) group insurance; or (b) individual insurance; or (c) other program of coverage that provides benefits for, or due to, medical or dental care or treatment. This includes: (i) insured and uninsured programs. (ii) pre-payment programs. C. MAXIMUM. The lifetime benefit for you and your covered dependents is $2,000,000 per covered person. The benefits of this Coverage are payable to you. The Claim Rules apply to the payment of the benefits. MODIFICATION OF PROVISIONS CONCERNING TO WHOM BENEFITS ARE PAYABLE This modification changes the parts of the Group Contract that state to whom benefits under the health care expense Coverages of the Group Contract are payable. It applies to benefits payable under those Coverages with respect to a Qualified Dependent child for whom you are insured for Dependents Insurance under those Coverages, but only when all the following conditions exist: (1) You are the parent of the Qualified Dependent child. (2) You and the other parent of such child are divorced or separated. (3) By court decree, you have legal responsibility for the health care expenses of such child, but you do not have custody of the child. (4) The other parent of such child has custody of the child (called Custodial Parent below). If all the above conditions are met, the following will apply: 1. Upon request by the Custodial Parent, Prudential will pay any benefits payable under a health care expense Coverage of the Group Contract for charges for a service or supply furnished to such Qualified Dependent child directly to the provider of such service or supply. But this is subject to the following conditions: (a) Any such request must be made in accordance with the Group Contract's Claim Rules. (b) No payment will be made to the provider of such service or supply if any benefits have been paid to you for such service or supply before Prudential receives the request from the Custodial Parent. (c) Any such payment of benefits by Prudential will be made whether or not you have made claim for such benefits. 2. When Prudential pays any benefits directly to the provider of a service or supply in accordance with 1. above: (a) Such benefits will be paid directly to the provider as if they had been assigned by you to such provider. (b) Solely with respect to payment of such benefits, this payment provision will supersede: (i) any assignment provisions of the Group Contract; and (ii) any provision of the Group Contract that states benefits are payable to you. If an amount is so paid directly to the provider of a service or supply, Prudential will not have to pay that part of the insurance again. BENEFIT MODIFICATION FOR THIRD PARTY LIABILITY This form modifies any Coverage of the Group Contract that: (1) is a health care expense Coverage; or (2) provides weekly or long term disability benefits. A. This Modification applies when: (1) a person, other than the person for whom a claim is made, is considered responsible for a Sickness or Injury; (2) payment for the Sickness or Injury has been made, or may be made in the future, by or for that responsible person (as a settlement, judgment or in any other way); and (3) the total amount of benefits paid under one or more coverages to which this Modification applies on account of that Sickness or Injury exceeds $5,000. B. Once this Modification applies, Prudential may require the Covered Person(s) involved (or, if incapable, that person's legal representative) to agree in writing that, upon receiving the full amount of any payments required from, and made by or for, the person responsible for the Sickness or Injury (as a result of a settlement, judgment, etc.), the Covered Person(s) or the legal representative will promptly pay back the benefits paid under this Group Contract due to that Sickness or Injury, to the extent of any such payments made by or for the responsible person. The agreement referred to above is to apply whether or not: (a) liability for the payments is admitted by the responsible person; and (b) such payments are itemized. A reasonable share of fees and costs incurred to obtain such payments may be deducted from amounts to be repaid to Prudential. C. Amounts due Prudential to repay benefits, agreed to as described above, may be deducted from other benefits payable by Prudential after the payments by or for the responsible person have been made. When benefits have been provided in the form of services, the reasonable cash value for each service rendered will be considered a benefit paid. RULES FOR COORDINATION OF BENEFITS OF THE GROUP CONTRACT WITH OTHER BENEFITS The purpose of a group health care program is to help you pay for covered expenses, but not to result in total benefits greater than the covered expenses incurred. Thus, the Group Contract's benefits that, without these rules, would be payable for you or your Qualified Dependent's health care expenses may be reduced so that the total benefits from this and all of the other Programs (defined below) will not be more than the total Allowable Expenses (defined below). That reduction will be made only if these rules so state. This coordination with other Programs helps to control the cost of benefits for everyone. These rules for coordination apply to This Program, but only with respect to expenses incurred on or after the date these rules take effect. "This Program" and other terms used in these rules are defined in Section A. Section B describes the effect of other health care benefits on those of the Group Contract, subject to Sections C, D and E. A. DEFINITIONS. (1) Program: Any of these which provide benefits or services for, or by reason of, dental, vision, or medical care or treatment: (a) Coverage under a governmental plan or required or provided by law. This does not include a state plan under Medicaid or any law or plan when, by law, its benefits are excess to those of any private insurance program or other non-governmental program. (b) Group insurance or other coverage for persons in a group, whether insured or uninsured. This includes prepayment, group practice or individual practice coverage. But this does not include school accident-type coverage for grammar school, high school, and college students. (c) Medical, dental or vision care coverage under the "no fault" or medical payments provisions of an automobile insurance contract. For the purposes of these rules, each Program will be treated as one of these three types of Program: A Dental Program is one that mainly provides benefits or services for, or because of, dental care or treatment. A Vision Care Program is one that mainly provides benefits or services for, or because of, vision care or treatment. A Medical Program is one that mainly provides benefits or services for, or because of, medical care or treatment, and is not a Dental Program or a Vision Care Program. Separate Programs: Each contract or other arrangement for coverage under (a), (b) or (c) is a separate Program. But each part of a contract or other arrangement for-coverage that is a Dental Program, a Vision Care Program, or a Medical Program is a separate Program. Also, rules for coordination of benefits may apply only to part of a Dental Program, Vision Care Program, or Medical Program. If so, the part to which the rules apply is a separate Program from the part to which the rules do not apply. (2) This Program: The part of the Group Contract that provides benefits for health care expenses. The term "This Program" applies separately to each part of the Group Contract that is a Dental Program, a Vision Care Program, or a Medical Program. (3) Allowable Expense: For any health care expense insurance Coverages described in the Booklet, the usual and prevailing charge for a needed service or supply, when the charge, service or supply is covered at least in part by one or more Medical Programs or Vision Care Programs covering the person for whom claim is made. "Usual charge", "prevailing charge" and "needed service or supply" have the same meanings as in the Major Medical Expense Coverage. For any dental expense insurance Coverage described in the Booklet, an Allowable Expense is the usual and prevailing charge for a reasonably necessary service or supply, when the charge, service or supply is covered at least in part by one or more Dental Programs covering the person for whom claim is made. "Usual charge" and "prevailing charge" have the same meanings as described in the dental expense insurance Coverage. When a Program provides benefits in the form of services, the reasonable cash value for each service rendered will be considered both an Allowable Expense and a benefit paid. If a person covered by This Program has expenses for a stay in a Hospital private room, the term Allowable Expense does not include the difference between the charge for the Hospital private room and the Eligible Charge for a Hospital room under This Program, unless: (a) the Hospital private room charges are a covered expense under one of the Programs; or (b) the person's stay in a Hospital private room is medically necessary in terms of generally accepted medical practice. (4) Claim Determination Period: A Calendar Year, but, for a person, this does not include any part while the person has no coverage under This Program or any part before the date these or similar rules take effect. B. EFFECT ON BENEFITS. (1) When this Section Applies: This Section B applies when the sum of the benefits in (a) and (b) below for a person's Allowable Expenses in a Claim Determination Period would be more than those Allowable Expenses. In that case, the benefits of This Program will be reduced so that they and the benefits in (b) do not total more than those Allowable Expenses. (a) The benefits that would be payable for the Allowable Expenses under This Program in the absence of this Section B. (b) The benefits that would be payable for the Allowable Expenses under all other Programs of the same type as This Program, in the absence of rules with a purpose like that of these rules, whether or not claim is made. But this (b) does not include the benefits of a Program if: (i) It has rules coordinating its benefits with those of This Program; and (ii) Those rules have Claim Determination Period and Facility of Payment items similar to those in these rules; and (iii) Its rules and This Program's rules both require This Program to determine benefits before it does. (2) This Program's Rules for the Order in which Benefits are Determined: When a person's health care is the basis for a claim: (a) Non-dependent/Dependent: The benefits of a Program that covers the person other than as a dependent are determined before those of a Program that covers the person as a dependent. (b) Dependent Child/Parents Not Separated or Divorced: Except as stated in subparagraph B.(2)(c) below, when This Program and another Program cover the same child as a dependent of different persons, called "parents": (i) the benefits of the Program of the parent whose birthday falls earlier in a year are determined before those of the Program of the parent whose birthday falls later in that year; but (ii) if both parents have the same birthday, the benefits of the Program which covered the parent longer are determined before those of the Program which covered the other parent for a shorter period of time. However, if the other Program does not have this rule (b), and if, as a result, the Programs do not agree on the order of benefits, the rule in the other Program will determine the order of benefits. (c) Dependent Child/Separated or Divorced Parents: If two or more Programs cover a person who is a dependent child of divorced or separated parents, benefits for the child are determined in this order: (i) first, the Program of the parent with custody of the child; (ii) then, the Program of the spouse of the parent with custody of the child; and (iii) finally, the Program of the parent not having custody of the child. However, if the specific terms of a court decree state that one of the parents is responsible for the health care expenses of the child, and the entity obligated to pay or provide the benefits of the Program of that parent has actual knowledge of those terms, the benefits of that Program are determined first. This paragraph does not apply when any benefits are actually paid or provided before the entity has that actual knowledge. (d) Active/Inactive Employee: The benefits of a Program which covers a person as an employee who is neither laid off nor retired, or as that employee's dependent, are determined before those of a Program which covers that person as a laid off or retired employee or as that employee's dependent. If the other Program does not have this rule, and if, as a result, the Programs do not agree on the order of benefits, this rule (d) is ignored. (e) Longer/Shorter Length of Coverage: If none of the above rules determine the order of benefits, the benefits of the Program which covered a person longer are determined before those of the Program which covered that person for the shorter time. (3) Effect of Reduction in Benefits: When these rules reduce This Program's benefits, each benefit is reduced in proportion. It is then charged against any applicable benefit limit of This Program. C. RIGHT TO RECEIVE AND RELEASE NEEDED INFORMATION. Certain facts are needed to apply these coordination of benefits rules. Prudential has the right to decide which facts it needs. It may get needed facts from or give them to any other organization or person. Prudential need not tell, or get the consent of, any person to do this. Each person claiming benefits under This Program must give Prudential any facts it needs to pay the claim. D. FACILITY OF PAYMENT. A payment made under another Program may include an amount which should have been paid under This Program. If it does, Prudential may pay that amount to the organization which made that payment. That amount will then be treated as though it were a benefit paid under This Program. Prudential will not have to pay that amount again. The term "payment made" includes providing benefits in the form of services, in which case the payment made shall be deemed to be the reasonable cash value of any benefits provided in the form of services. E. RIGHT OF RECOVERY. If the amount of the payments made by Prudential is more than it should have paid under This Program, it may recover the excess. It may get such recovery or payment from one or more of: (A) the persons it has paid or for whom it has paid; (B) insurance companies; or (C) other organizations. The "amount of the payments made" includes the reasonable cash value of any benefits provided in the form of services. PROVISIONS FOR REDUCTION OF BENEFITS BECAUSE OF MEDICARE These Provisions apply to all health care expense Coverages under the Group Contract (called Affected Coverages below). They change the Affected Coverages to reduce their benefits because of those a person has or could have obtained under Medicare. The changes are described below. Some of the terms used in these Provisions: Medicare: Title XVIII (Health Insurance for the Aged and Disabled) of the United States Social Security Act, as amended from time to time. Part A of Medicare: The program of Hospital Insurance Benefits for the Aged and Disabled under Part A of Medicare. Part B of Medicare: The voluntary program of Supplementary Medical Insurance Benefits for the Aged and Disabled under Part B of Medicare. Subject Person: A person who is or could be covered under Medicare. Full Medicare Coverage: Coverage for all benefits provided under Part A and Part B of Medicare. This includes benefits that would be provided under Medicare in the absence of benefits payable under the group health plan of an employer other than General Mills. But it does not include benefits provided under Part A of Medicare in the case of a Subject Person who: (1) is not covered under that Part A; and (2) could become covered under that part only by enrolling and paying the required premium. Changes made in the Group Contract: (1) The following will apply when charges within the scope of the Affected Coverages are made for services and supplies furnished a Subject Person, in a Calendar Year and while the Subject Person has protection under those Coverages. The total benefits payable for those charges under those Coverages will be (a) minus (b): (a) The total amount that would be payable for those charges under the Affected Coverages in the absence of these Provisions. (b) The total amount that is considered to be paid for those charges under Medicare, as described in (2). The above will be determined before the rules of the Group Contract for coordination of benefits are applied. (2) In determining amounts under (1): (a) This applies when charges are not actually made because payment under Medicare is based on the "reasonable cost" of services and supplies rather than charges. Charges for those services and supplies will be considered to have been made in the amount of the usual and prevailing charges that would have been made for them in the absence of Medicare. (b) The amount considered to be paid under Medicare with respect to services and supplies is the amount of the charges made for those services and supplies, to the extent that: (i) those charges are usual and prevailing; and (ii) those services and supplies are within the scope of Full Medicare Coverage. But that amount will not include coinsurance and other amounts which are directly chargeable to the Subject Person under Medicare or would be so chargeable if the Subject Person had Full Medicare Coverage. (3) Any provision of the Group Contract that excludes a charge for a service or supply to the extent that the service or supply, or any benefit for the charge, is provided by any law or governmental plan, will not apply to Medicare. (4) The rules of the Group Contract for coordination of benefits are changed as follows: (a) The term Program in those rules will not include any coverage under Medicare. (b) If a Subject Person incurs an expense for a service or supply during a Claim Determination Period (defined in those rules), that both is an Allowable Expense (defined in those rules) and is within the scope of that person's Medicare coverage, the following will apply. The total Allowable Expenses will be reduced by the amount equal to the benefits that are considered to be paid under Medicare for that service or supply. (See (2)(b) above.) GENERAL INFORMATION LIMITS ON ASSIGNMENTS You may assign your insurance under a Coverage. Unless the Schedule of Benefits states otherwise, the following rules apply to assignments: (1) Insurance under any Coverage providing periodic benefits on account of disability may be assigned only as a gift assignment; (2) Insurance under any other Coverage may be assigned without restriction. Any rights, benefits or privileges that you have as an Employee may be assigned. Prudential will not decide if an assignment does what it is intended to do. Prudential will not be held to know that one has been made unless it or a copy is filed with Prudential through General Mills. DEFINITIONS Active Work Requirement: A requirement that you be actively at work at General Mills' place of business, or at any other place that General Mills' business requires you to go. Calendar Year: A year starting January 1. Contributory Insurance, Non-contributory Insurance: Contributory Insurance is insurance for which the Contract Holder has the right to require your contributions. Non-contributory Insurance is insurance for which the Contract Holder does not have the right to require your contributions. The Schedule of Benefits shows whether insurance under a Coverage is Contributory Insurance or Non-contributory Insurance. Coverage: A part of the Booklet consisting of: (1) A benefit page labeled as a Coverage in its title. (2) Any page or pages that continue the same kind of benefits. (3) A Schedule of Benefits entry and other benefit pages or forms that by their terms apply to that kind of benefits. Covered Person under a Coverage: An Employee or retired employee who is insured for Employee Insurance under that Coverage; a Qualified Dependent for whom an Employee is insured for Dependents Insurance, if any, under that Coverage. Custodial Care: This means that care that provides a level of routine maintenance for the purpose of meeting personal needs. This is care that can be provided by a lay person who does not have professional qualifications, skills or training. Custodial Care includes, but is not limited to: help in walking and getting into or out of bed; help in bathing, dressing, and eating; help in other functions of daily living of a similar nature; administration of or help in using or applying medications, creams and ointments; routine administration of medical gasses after a regimen of therapy has been set up; routine care of a patient, including functions such as changes of dressings, diapers and protective sheets and periodic turning and positioning in bed; routine care and maintenance in connection with casts, braces and other similar devices, or other equipment and supplies used in treatment of a patient, such as colostomy and ileostomy bags and indwelling catheters; routine tracheostomy care; general supervision of exercise programs including carrying out of maintenance programs of repetitive exercises that do not need the skills of a therapist and are not skilled rehabilitation services. Dependents Insurance: Insurance on the person of a dependent. Doctor: A licensed practitioner of the healing arts acting within the scope of the license. Employee: A person employed by General Mills. The term also applies to that person for any rights after insurance ends. Employee Insurance: Insurance on the person of an Employee. General Mills: Collectively, General Mills, Inc. and all of its Affiliates included under the Group Contract. Hospital: An institution that meets any of these five tests: * It is accredited as a hospital under the Hospital Accreditation Program of the Joint Commission on Accreditation of Healthcare Organizations. * It is legally operated, has 24 hour a day supervision by a staff of Doctors, has 24 hour a day nursing service by registered graduate nurses, and complies with (1) or (2): (1) It mainly provides general inpatient medical care and treatment of sick and injured persons by the use of medical, diagnostic and major surgical facilities. All such facilities are in it or under its control. (2) It mainly provides specialized inpatient medical care and treatment of sick or injured persons by the use of medical and diagnostic facilities (including X-ray and laboratory). All such facilities are in it, under its control, or available to it under a written agreement with a Hospital (as defined above) or with a specialized provider of those facilities. * It is an Intermediate Care Facility. * It is an alcoholism or drug abuse treatment center that complies with (a), (b), or (c): (a) It is licensed as a hospital. (b) It is a facility licensed, certified or approved to provide services for the care and treatment of alcoholism or chug abuse by the appropriate agency of the state in which it is located. (c) It is accredited as an alcoholism or drug abuse treatment center by the Joint Commission on Accreditation of Healthcare Organizations. * It is licensed, certified or approved as a free-standing surgical facility by the appropriate agency of the state in which it is located. But Hospital does not include a nursing home. Neither does it include an institution, or part of one, which: (a) is used mainly as a place for convalescence, rest, nursing care or for the aged; or (b) furnishes mainly homelike or Custodial Care, or training in the routines of daily living; or (c) is mainly a school. Injury: Injury to the body of a Covered Person. Intermediate Care Facility: An institution that provides care and treatment of mental, psychoneurotic and personality disorders; alcoholism; or drug abuse through one or more specialized programs and meets all of these three tests: * It is staffed by registered graduate nurses and other mental health professionals. * It provides for the clinical supervision of such specialized programs by Doctors who are licensed in the state in which it is located. * Each specialized program provided by it must (1) provide treatment for no less than three hours nor more than twelve hours per day; and (2) furnish a written, individual treatment plan which states specific goals and objectives; and (3) maintain, at a minimum, ongoing weekly progress notes which demonstrate periodic review and direct patient evaluation by the attending Doctor; and (4) meet either of these two tests: (a) It is accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) to provide the type of specialized program described above; or (b) It is licensed, accredited or approved by the appropriate agency in the state in which it is located to provide the type of specialized program described above. Medicaid: Title XIX (Grants to States for Medical Assistance Programs) of the United States Social Security Act, as amended from time to time. Medicare: Title XVIII (Health Insurance for the Aged and Disabled) of the United States Social Security Act, as amended from time to time. Prudential: The Prudential Insurance Company of America. Sickness: Any disorder of the body or mind of a Covered Person, but not an Injury; pregnancy of a Covered Person, including abortion, miscarriage or childbirth. You: An Employee. CLAIM RULES These rules apply to payment of benefits under a Coverage when the Coverage states that they do. Proof of Loss: Prudential must be given written proof of the loss for which claim is made under the Coverage. This proof must cover the occurrence, character and extent of that loss. It must be furnished within 90 days after the date of the loss, except that: (1) If any Coverage provides for periodic payment of benefits at monthly or shorter intervals, the proof of loss for each such period must be furnished within 90 days after its end. (2) If payment under a Coverage is to be made for charges incurred during a Calendar Year, the proof for that Calendar Year must be furnished within 90 days after its end. A claim will not be considered valid unless the proof is furnished within these time limits. However, it may not be reasonably possible to do so. In that case, the claim will still be considered valid if the proof is furnished as soon as reasonably possible. When Benefits are Paid: Benefits are paid when Prudential receives written proof of the loss. But, if a Coverage provides that benefits are payable at equal intervals of a month or less, Prudential will not have to pay those benefits more often. A benefit unpaid at your death will be paid to your estate. But this does not apply if the Coverage or the Limits on Assignments section on an earlier page states otherwise. Physical Exam: Prudential, at its own expense, has the right to examine the person whose loss is the basis of claim. Prudential may do this when and as often as is reasonable while the claim is pending. Legal Action: No action at law or in equity shall be brought to recover on the Group Contract until 60 days after the written proof described above is furnished. No such action shall be brought more than three years after the end of the time within which proof of loss is required. INCONTESTABILITY OF INSURANCE TO WHICH THE CLAIM RULES APPLY This limits Prudential's use of your statements in contesting an amount of that insurance for which you are insured. These are statements made to persuade Prudential to effect an amount of that insurance. They will be considered to be made to the best of your knowledge and belief. These rules apply to each statement: (1) It will not be used in a contest to avoid or reduce that amount of insurance unless: (a) It is in a written application signed by you; and (b) A copy of that application is or has been furnished to you. (2) It will not be used in the contest after that amount of insurance has been in force, before the contest, for at least two years during your lifetime. TERMINATION OF COVERAGE EMPLOYEE AND DEPENDENTS INSURANCE Coverage for you and your Dependents will terminate at the end of the month in which the first of these occurs: * Your membership in the Covered Classes for the insurance ends because your employment ends (see below) or for any other reason. * The part of the Group Contract providing the insurance ends. * The insurance is Dependents Insurance and your Employee Insurance under that Coverage ends. Your Dependents Insurance for a Qualified Dependent under a Coverage will end when that person ceases to be a Qualified Dependent for that Coverage. (See Continued Coverage for an Incapacitated Child below.) End of Employment: For insurance purposes, your employment will end when you are no longer an Employee actively at work for General Mills, unless the termination is due to your retirement from General Mills. But, under the terms of the Group Contract, the Contract Holder may consider you as still employed in the Covered Classes during certain types of absences from full-time work. This is subject to any time limits or other conditions stated in the Group Contract. With regard to your health care expense insurance under the Group Contract, your employment in the Covered Classes will not be considered to end while you are absent from work due to leave for which insurance is required to be continued under the Federal Family and Medical Leave Act of 1993 or a state law requiring similar continuation, as reported to Prudential by the Employer. If you stop active work for any reason, you should contact General Mills at once to determine what arrangements, if any, have been made to continue any of your insurance. CONTINUATION OF COVERAGE Continued Coverage for an Incapacitated Child: This applies only to the Dependents Insurance you have for a child under a health care expense Coverage. The insurance for the child will not end on the date the age limit in the definition of Qualified Dependent is reached, if both of these are true (1) The child is then mentally or physically incapable of earning a living. You must submit proof of such incapacity to General Mills within 31 days of the date your dependent would otherwise lose eligibility for coverage. (2) The child depends on you for support and maintenance. If these conditions are met, the age limit will not cause the child to stop being a Qualified Dependent under that Coverage. This will apply as long as the child remains so incapacitated and dependent on you for support and maintenance. Continued Health Care Expense Insurance at Your or Your Dependents' Option (including rights under COBRA): These provisions apply to the health care expense Coverages of the Group Contract. They describe who has the right to continue insurance under those Coverages and how it may be continued. The provisions are concerned with continuation of your insurance beyond the date it would otherwise have ended. Right to Continue Insurance: A right under this part is subject to the rest of these provisions: You have the right to continue your Employee or Employee and Dependents Insurance under the health care expense Coverages of the Group Contract if your insurance under those Coverages would have ended: (1) because your employment ended for a reason other than gross misconduct; or (2) because your work hours were reduced; or (3) because you are no longer actively at work for General Mills on account of your Total Disability. Solely for the purpose of these provisions, "Total Disability" exists when, due to Sickness or accidental Injury, both of these are true: (1) You are not able to perform, for wage or profit, the material and substantial duties of your occupation. (2) After the first two years of Total Disability, you are not able to perform, for wage or profit, the material and substantial duties of any job for which you are, or may become, reasonably fitted by your education, experience or training, including rehabilitative training. Each of your Qualified Dependents has the right to continue insurance under the health care expense Coverages of the Group Contract if your Dependents Insurance for the Qualified Dependent under those Coverages would have ended: (1) because your employment ended for a reason other than gross misconduct; or (2) because your work hours were reduced; or (3) because you are no longer actively at work for General Mills on account of your Total Disability; or (4) at your death; or (5) because you became entitled to Medicare benefits; or (6) in the case of your spouse, when your spouse ceased to be a Qualified Dependent as a result of divorce or legal separation; or (7) in the case of your Qualified Dependent child, when your child ceased to be a Qualified Dependent under the rules of the Group Contract. Notice: This applies if your Dependents Insurance for a Qualified Dependent would have ended due to an event shown in (6) or (7) above. If a person wants to continue the insurance, written notice of the event must be given to General Mills within 60 days after the event shown in (6) or (7) above. Continuation: General Mills will give a written election notice of the right to continue the insurance. Such notice will state the amount of the payments, if any, required for the continued insurance and the manner in which any payments must be made. If you are a surviving or former spouse whose insurance is continued solely because of the requirements of a Minnesota law, General Mills will, upon your request, provide written verification from The Prudential of the cost of continuation insurance for the spouse and any dependents of the spouse. If a person wants to continue the insurance, the election notice must be completed and returned to General Mills within 60 days (90 days if the insurance is being continued due to your death) of the later of: (1) the date the insurance would otherwise have ended; or (2) the date the person receives the notice informing him or her of the right to continue. But, in no event, may election be made more than 120 days (150 days if the insurance is being continued due to an event shown in (6) or (7) above) after the date the insurance would otherwise have ended. The first payment for the continued insurance must be made by the 45th day (9Oth day if the insurance is being continued due to your death) after the date the election notice is completed. If this is done, the insurance will be continued until the first of these occurs: (1) The day 18 months from the earlier of the date: (a) your employment ends for a reason other than (i) gross misconduct or (ii) your Total Disability as defined above, or (b) your work hours are reduced. But, insurance may continue for up to 11 additional months while a person is determined to be disabled under Title II or XVI of the United States Social Security Act if: (i) the disability was determined to exist on the date employment ended or work hours were reduced; and (ii) the person gives General Mills written notice of the disability within 60 days after the determination of disability is made and within the 18 months after the date employment ended or work hours were reduced. General Mills must be notified if there is a final determination under the United States Social Security Act that the person is no longer disabled. The notice must be provided within 30 days after the final determination. The insurance will end as of the first month that starts more than 30 days after the determination. (2) If the insurance is being continued due to your Total Disability, as defined above, the day your Total Disability ends. But, if this (2) would otherwise cause the insurance to end less than 18 months from the earlier of the date your employment ends or your work hours are reduced, then the insurance will not end due to this (2) until the end of that 18 month period. (3) If the insurance is being continued due to your entitlement to Medicare benefits, the later of (a) the day 36 months from the date the continued insurance was elected and (b) the day 36 months from the date of your entitlement to Medicare benefits. (4) If the insurance is being continued due to your Qualified Dependent child ceasing to be a Qualified Dependent under the rules of the Group Contract, the later of (a) the day 36 months from the date the continued insurance was elected and (b) the day 36 months from the date the child ceased to be a Qualified Dependent. (5) If the insurance is being continued due to your divorce or legal separation from your spouse, the date your insurance under the Coverages ends. But, if this (5) would otherwise cause the insurance to end before the day 36 months from the date of your divorce or legal separation, then the insurance will not end due to this (5) until the end of that 36 month period. (6) If the person fails to make any payment required by General Mills for the continued insurance, the end of the period for which the person has made required payments. (7) The day the person becomes covered (after the day the person made the election for continuation coverage) under any other health plan for persons in a group, on an insured or uninsured basis. This item (7) does not apply if the insurance is being continued due to your Total Disability, as defined above. Also, this item (7) by itself will not prevent coverage from being continued until the end of any period for which preexisting conditions are excluded or benefits for them are limited under the other health plan. (8) The part of the Group Contract providing the insurance ends. While Employee Insurance is continued under this part, all other terms of the Group Contract will apply, except that the For Employee Insurance part of the Delay of Effective Date section will not apply. While Dependents Insurance is continued under this part, all other terms of the Group Contract will apply, except that benefits under the health care expense Coverages will be paid to the person who elected the continuation right. If the person who elected the continuation right is not living, the following will apply: (1) If you elected the continuation right, benefits will be paid to: (a) your spouse, if living; or (b) your spouse's estate, if your spouse is not living but survived your Qualified Dependent children; or (c) the person or institution appearing to Prudential to have assumed the main support of your Qualified Dependent children, if neither (a) nor (b) applies. (2) If your spouse elected the continuation right, benefits will be paid to: (a) your spouse's estate, if your spouse survived your Qualified Dependent children; or (b) the person or institution appearing to Prudential to have assumed the main support of your Qualified Dependent children, if (a) does not apply. (3) If your Qualified Dependent child elected the continuation right, benefits will be paid to your Qualified Dependent child's estate. If an amount is so paid, Prudential will not have to pay that part of your insurance again. Continued Health Care Expense Insurance for Retirees in the Event of Bankruptcy: These provisions apply to the health care expense Coverages of the Group Contract. They apply only if coverage for retired Employees and their Dependents is provided under those Coverages. The provisions are concerned with continuation of your insurance beyond the date it would otherwise have ended because General Mills entered into a bankruptcy proceeding under Title Xl, United States Code. Right to Continue Insurance: A right under this part is subject to the rest of these provisions: For the purpose of these provisions, reference to your insurance ending includes a substantial elimination of your insurance, provided that it occurs within one year before or after the bankruptcy proceeding begins; and reference to a Qualified Dependent includes a Surviving Spouse if your death occurs: (a) after your retirement from employment with the Employer; and (b) before the date the insurance under the Coverage would have ended because the Employer entered into a Title Xl bankruptcy proceeding. You have the right to continue your Employee or Employee and Dependents Insurance under the health care expense Coverages of the Group Contract if these two conditions are met: (1) The insurance under the Coverage would have ended because the Employer entered into a Title Xl bankruptcy proceeding. (2) You retired from employment with the Employer on or before the date the insurance under the Coverage ended. Each of your Qualified Dependents (including a Surviving Spouse) has the right to continue insurance under the health care expense Coverages of the Group Contract if your Dependents Insurance for the Qualified Dependent under those Coverages would have ended, provided: (a) the above conditions (1) and (2) are met; and (b) such Qualified Dependent was covered for the insurance on the day prior to the date it would have ended. Continuation: General Mills will give a written election notice of the right to continue the insurance. Such notice will state the amount of the payments, if any, required for the continued insurance. If a person wants to continue the insurance, the election notice must be completed and returned to General Mills within 60 days of the later of: (1) the date the insurance would otherwise have ended; or (2) the date of the notice informing the person of the right to continue. But, in no event, may election be made more than 120 days after the date the insurance would otherwise have ended. The first payment for the continued insurance must be made by the 45th day after the date the election notice is completed. If this is done, the insurance will be continued until the first of these occurs: (1) Your death. However, the insurance for your spouse and Qualified Dependent children may be continued for up to 36 months from the date of your death if written notice is given to General Mills within 60 days after your death. See "Notice" (below) for details. (2) In the case of a person who is a Surviving Spouse of a deceased retired Employee when the coverage would have ended, the date the Surviving Spouse dies. (3) If the person fails to make any payment required by General Mills for the continued insurance, the end of the period for which the person has made required payments. (4) The day the person becomes covered (after the day the person made the election for continuation coverage) under any other health plan for persons in a group, on an insured or uninsured basis. This item (4) by itself will not prevent coverage from being continued until the end of any period for which preexisting conditions are excluded or benefits for them are limited under the other health plan. (5) The part of the Group Contract providing the insurance ends. Notice: This applies if you die while your Dependents Insurance for a Qualified Dependent is being continued by reason of these provisions. If your Qualified Dependents want to continue the insurance after your death, written notice of the death must be given to General Mills within 60 days after the death. While Employee Insurance is continued under this part, all other terms of the Group Contract will apply, except that the For Employee Insurance part of the Delay of Effective Date section will not apply. While Dependents Insurance is continued under this part, all other terms of the Group Contract will apply, except that benefits under the health care expense Coverages will be paid to the person who elected the continuation right. If the person who elected the continuation right is not living, the following will apply (1) If you elected the continuation right, benefits will be paid to: (a) your spouse, if living; or (b) your spouse's estate, if your spouse is not living but survived your Qualified Dependent children; or (c) the person or institution appearing to Prudential to have assumed the main support of your Qualified Dependent children, if neither (a) nor (b) applies. (2) If your spouse (including a Surviving Spouse) elected the continuation right, benefits will be paid to: (a) your spouse's estate, if your spouse survived your Qualified Dependent children; or (b) the person or institution appearing to Prudential to have assumed the main support of your Qualified Dependent children, if (a) does not apply. (3) If your Qualified Dependent child elected the continuation right, benefits will be paid to your Qualified Dependent child's estate. If an amount is so paid, Prudential will not have to pay that part of your insurance again. EXTENSION OF HEALTH CARE PROTECTION This page applies to a health care expense Coverage when that Coverage states that it does. A person's protection under the Coverage may be extended after the date that person ceases to be a Covered Person under that Coverage. It will be extended if, on that date, the person is totally disabled from a Sickness or Injury and is under a Doctor's care. The extension is only for that and any related Sickness or Injury. It will be for the time the person remains so disabled from any such Sickness or Injury and under such care, but not beyond one month. A Coverage will apply during an extension as if the person were still a Covered Person. There are two exceptions. Restorations will not be allowed under the Overall Maximum section of the Major Medical Expense Coverage. And a Coverage will apply only to the extent that other coverage for its Eligible Charges is not provided for the person through the Employer. CONVERSION PRIVILEGE UNDER HEALTH CARE EXPENSE INSURANCE This Conversion Privilege applies only to health care expense insurance under the Group Contract (called group health care insurance below). It describes when and how you, or your spouse or child, may get an individual health care expense insurance contract (called the Converted Contract below) when your group health care insurance, or that of your spouse or child, ends. Right to Convert A right under this section is subject to the rest of this Conversion Privilege. You have the right to get a Converted Contract if your group health care insurance ends for any reason other than: (a) your failure to pay, when due, any contribution required for an insurance of the Group Contract; or (b) the end of your employment if you then have the right to elect to continue your group health care insurance. Your spouse or each of your children has the right to get a Converted Contract if your Dependents Insurance for your spouse or child under the group health care insurance ends for one of these reasons: (a) Your death. (b) Your spouse ceases to be a Qualified Dependent, due to divorce or annulment of your marriage. (c) Your spouse or child ceases to be a Qualified Dependent for any other reason, and you do not have the right to get a Converted Contract at that time. A child does not have the right to get a Converted Contract while your spouse has that right. Application and First Premium Payment The person who has the right to get the Converted Contract must apply for it, and pay the first premium, to Prudential within 31 days after the group health care insurance for that person ends except as follows: (a) If insurance for your spouse ends because of divorce or annulment of your marriage, the spouse must apply for the Converted Contract and pay the first premium to Prudential within thirty days after the spouse receives notice that insurance is ending; or (b) If your insurance ends because the Group Contract ends, you must apply for the Converted Contract and pay the first premium to Prudential within thirty days after you receive notice that insurance is ending. Effective Date The Converted Contract will take effect on the day after the group health care insurance ends. Converted Contract The Converted Contract's form and premiums, and the persons covered by it, will be as stated below. Form: Any form of Converted Contract that Prudential then makes available. The benefits will comply with any state laws or regulations that may apply. Some of the group health care coverages may not be available under the Converted Contract. The levels of benefits under the Converted Contract may be lower than those of the group health care insurance. If the person who has the right to get the Converted Contract is a resident of Minnesota, the following will apply: (a) The person may select a Converted Contract that provides at least the minimum benefits of either a number three, a number two, or a number one qualified plan, as provided by Section 62E.06, subdivisions 1 to 3, of the Minnesota Insurance Laws. (b) Under any such selected Converted Contract, Pregnancy will be treated the same as any other Sickness. Premiums: For the Converted Contract, these will be based on Prudential's rates for: (1) the age and class of risk (but not health) of each person covered under it; and (2) the type and amount of insurance it provides; and (3) its premium period. This is the usual one for the Converted Contract. But premiums will not be due less often than quarterly unless the insured agrees. Persons Covered: Subject to the exceptions below, these are: (1) If the Converted Contract is issued to you, you and your Qualified Dependents whose group health care insurance ended when yours did. (2) If your spouse has the right to get a Converted Contract and it is issued to your spouse, your spouse and any of your Qualified Dependent children whose group health care insurance ended at the same time. (3) If your child has the right to get a Converted Contract and it is issued to your child, only that child. These are the exceptions to the above rules: (a) Prudential may issue a separate Converted Contract to any person. (b) Prudential does not have to issue a Converted Contract covering these persons: (i) A person to whom one or more of the items below applies, when the benefits of the Converted Contract, together with the similar benefits provided or available from the sources shown in those items, would result in overinsurance under Prudential's standards. (A) The person is a resident of Minnesota and is covered by another qualified plan as defined in Section 62E.02, subdivision 4 of the Minnesota Insurance Laws. (B) The person is not a resident of Minnesota and is eligible for coverage (whether or not covered) under any insured or uninsured arrangement for coverage for persons in a group. EX-10.11 4 EXHIBIT 10.11 1995 SALARY REPLCMNT STOCK OPT PLAN EXHIBIT 10.11 GENERAL MILLS, INC. 1995 SALARY REPLACEMENT STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purpose of the General Mills, Inc. 1995 Salary Replacement Stock Option Plan (the "Plan") is to give management employees of General Mills, Inc. (the "Company") and its subsidiaries the opportunity to receive stock option grants in lieu of salary increases and certain other compensation and benefits thereby encouraging focus on the growth and profitability of the Company and its Common Stock. Restricted stock is not permitted to be issued under the terms of this Plan. 2. EFFECTIVE DATE OF PLAN This Plan shall become effective as of September 18, 1995, subject to the approval of the stockholders of the Company at the Annual Meeting on September 18, 1995. 3. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Compensation Committee (the "Committee"). The Committee shall be made up of non-management members of the Board of Directors (the "Board") appointed in accordance with the Company's Certificate of Incorporation. The Committee shall have authority to adopt rules and regulations for carrying out the purpose of the Plan, select the employees to whom grants will be made ("Optionees"), the number of shares to be optioned and interpret, construe and implement the provisions of the Plan; provided that if at any time Rule 16b-3 or any successor rule ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "1934 Act"), so permits without adversely affecting the ability of the Plan to comply with the conditions for exemption from Section 16 of the 1934 Act (or any successor provisions) provided by Rule 16b-3, the Committee may delegate the administration of the Plan in whole or in part, on such terms and conditions, and to such person or persons as it may determine in its discretion. Decisions of the Committee (or its delegate as permitted herein) shall be final, conclusive and binding upon all parties, including the Company, stockholders and Optionees. 4. COMMON STOCK SUBJECT TO THE PLAN The shares of "Common Stock" of the Company ($.10 par value) to be issued upon the exercise of a non-qualified option to purchase Common Stock granted hereunder (an "Option") may be made available from the authorized but unissued Common Stock, shares of Common Stock held in the treasury, or Common Stock purchased on the open market or otherwise. Approval of the Plan by the stockholders of the Company shall constitute authorization to use such shares for the Plan, subject to the discretion of the Board or as such discretion may be delegated to the Committee. Subject to the provisions of the next succeeding paragraph, the maximum aggregate number of shares authorized under the Plan for which Options may be granted under the Plan shall be 7,000,000 shares. If an Option granted under the Plan is terminated without having been exercised in full, the unpurchased or forfeited shares or rights to receive shares shall become available for grant to other employees. The number of shares of Common Stock subject to Options granted under this Plan to any Optionee shall not exceed 5% of the total number of shares of Common Stock which may be issued under this Plan. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Common Stock, securities of a subsidiary of the Company, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event affects the Common Stock such that an adjustment is determined by the Committee to be appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in its sole discretion and in such manner as it may deem equitable, adjust any or all of (i) the number of shares of Common Stock subject to the Plan, subject to Section 15, (ii) the number of shares of Common Stock subject to outstanding Options, and (iii) the grant or exercise price with respect to any Option and, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Option; PROVIDED, that the number of shares of Common Stock subject to any Option denominated in Common Stock shall always be a whole number. 5. ELIGIBLE PERSONS Only persons who are officers or management employees of the Company or a subsidiary shall be eligible to receive grants under the Plan. No grant shall be made to any member of the Committee or any other non-employee director. 6. PURCHASE PRICE OF STOCK OPTIONS The purchase price for each share of Common Stock issuable under an Option shall not be less than 100 percent of the Fair Market Value of the Shares of Common Stock of the Company subject to such option on the date of grant. "Fair Market Value" as used in the Plan shall equal the mean of the high and low price of the Common Stock on the New York Stock Exchange on the applicable date. 7. OPTION TERM The term of each Option grant as determined by the Committee shall not exceed ten (10) years and one (1) month from the date of that grant and shall expire as of the last day of the designated term, unless terminated earlier under the provisions of the Plan. 8. OPTION TYPE Option grants will be non-qualified stock options governed by Section 83 of the Internal Revenue Code of 1986, as amended (the "Code") or any successor provision. 9. NON-TRANSFERABILITY OF OPTIONS No Option granted under this Plan shall be transferable by the Optionee otherwise than by the Optionee's last will and testament or by the applicable laws of descent and distribution and an Option may be exercised during the Optionee's lifetime only by the Optionee or his or her guardian or legal representative. An Optionee shall forfeit any Option assigned or transferred, voluntarily or involuntarily, other than as permitted under this Section. 10. EXERCISE OF OPTIONS Except as provided in Sections 12, 13 and 14, each Option shall be vested and may be exercised in accordance with such terms and conditions as may be determined by the Committee for grants to officers or executives and by the Chief Executive Officer of the Company for grants to other management participants. Subject to the provision of this Section 10, each Option may be exercised in whole or, from time to time, in part with respect to the number of then exercisable shares in any sequence desired by the Optionee without regard to the date of grant of stock options under other plans of the Company. An Optionee exercising an Option shall give notice to the Company of such exercise and of the number of shares elected to be purchased prior to 4:30 P.M. CST/CDT on the day of exercise, which must be a business day at the executive offices of the Company. At the time of purchase, the Optionee shall tender the full purchase price of the shares purchased. Until such payment has been made and either a certificate or certificates for the shares purchased has been issued in the Optionee's name or the ownership of such shares by the Optionee has been entered by the Company's transfer agent on the master stockholder records of the Company, the Optionee shall possess no stockholder rights with respect to any such shares. Payment of such purchase price shall be made to the Company, subject to any applicable rule or regulation adopted by the Committee: (i) in cash (including check, draft, money order or wire transfer made payable to the order of the Company); (ii) through the delivery of shares of Common Stock owned by the Optionee; or (iii) by a combination of (i) and (ii) above. For determining the payment, Common Stock delivered pursuant to (ii) or (iii) shall have a value equal to the Fair Market Value of the Common Stock on the date of exercise. 11. WITHHOLDING TAXES ON OPTION EXERCISE Each Optionee shall deliver to the Company cash in an amount equal to all federal, state and local withholding taxes required to be collected by the Company in respect of the exercise of an Option, and until such payment is made, the Company may, in its discretion, retain all or a portion of the shares to be issued. Notwithstanding the foregoing, to the extent permitted by law and pursuant to such rules as the Committee may adopt, an Optionee may authorize the Company to satisfy any such withholding requirement by directing the Company to withhold from any shares to be issued such number of shares as shall be sufficient to satisfy the withholding obligation. 12. EXERCISE OF OPTIONS IN EVENT OF CERTAIN CHANGES OF CONTROL Each outstanding Option shall become immediately and fully exercisable for a period of one (1) year following the date of the following occurrences, each constituting a "Change of Control": (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act), (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of voting securities of the Company where such acquisition causes such Person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Voting Securities; or (b) Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least of a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of 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; or (c) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by stockholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then 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 Business Combination (including, without limitation, a corporation that 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 Business Combination of the Outstanding Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. After such one (1) year period the normal option exercise provisions of the Plan shall govern. In the event an Optionee is terminated as an employee of the Company or a Subsidiary within two (2) years of any of the events specified in (a), (b), (c) or (d), all outstanding Options at that date of termination shall become immediately exercisable for a period of six (6) months, subject to the provisions of Section 7. 13. TERMINATION OF EMPLOYMENT OF AN OPTIONEE (a) NORMAL TERMINATION If the Optionee's employment by the Company or a subsidiary terminates for any reason other than as specified in subsections (b), (c) or (d) below, the Options shall terminate three (3) months after such termination. If the employment by the Company or a subsidiary of an Optionee is terminated for the convenience of the Company, as determined by the Committee, the Committee, in its sole discretion, may vest such Optionee in all or any portion of the outstanding Option (which shall become exercisable) effective as of the date of such termination and if, at the time of such termination, the sum of the Optionee's age and service with the Company equals or exceeds 70, the Committee, in its sole discretion, may permit such Option to remain exercisable until the expiration of the Option in accordance with its original term. (b) DEATH If the termination of employment is due to the Optionee's death, the Options may be exercised as provided in Section 14. (c) RETIREMENT If the termination of employment is due to the Optionee's retirement, the Optionee thereafter may exercise an Option within the period remaining under the original term of the Option. (d) DISCONTINUATION OF A COMPLETE LINE OF BUSINESS If the termination of employment is due to the cessation, transfer, or spin-off of a complete line of business of the Company, the Committee, in its sole discretion, may determine that all outstanding Options granted to the Optionee prior to such termination shall immediately become exercisable for a period of up to five (5) years after the date of such termination, subject to the provisions of Section 7. 14. DEATH OF OPTIONEE If an Optionee should die while employed by the Company or a subsidiary, any Option previously granted to the Optionee under this Plan may be exercised by the person designated in such Optionee's last will and testament or, in the absence of such designation, by the Optionee's estate, to the full extent that such Option could have been exercised by such Optionee immediately prior to the Optionee's death, subject to the original term of the Option. Further, with respect to outstanding Options which, as of the date of death, are not yet exercisable, any such Option shall vest and become exercisable in a pro rata amount, based on the number of full months of employment completed during the full vesting period of the Option from the date of grant to the date of death. 15. AMENDMENTS TO THE PLAN The Committee and the Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such stockholder approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement that is a prerequisite for exemptive relief from Section 16(b) of the 1934 Act. Notwithstanding anything to the contrary contained herein, any amendment, suspension or termination made in accordance with this Section 15 that would adversely affect an Optionee's rights under an Option granted under the Plan may not be made without such Optionee's consent. The Committee shall have authority to cause the Company to take any action related to the Plan which may be required to comply with the provisions of the Securities Act of 1933, as amended, the 1934 Act, and the rules and regulations prescribed by the Securities and Exchange Commission. Any such action shall be at the expense of the Company. 16. FOREIGN JURISDICTIONS The Committee may adopt, amend, and terminate such arrangements, not inconsistent with the intent of the Plan, as it may deem necessary or desirable to make available tax or other benefits of laws of any foreign jurisdiction, to key employees of the Company who are subject to such laws and who are eligible to receive Option grants under the Plan. 17. DURATION OF THE PLAN Grants may be made under the Plan until September 30, 2000. 18. NOTICE All notices and communications to the Company shall be in writing, effective as of actual receipt by the Company, and shall be sent to: General Mills, Inc. Number One General Mills Boulevard Minneapolis, Minnesota 55426 Attention: Corporate Compensation If by Telex: 170360 Gen Mills If by Facsimile: (612) 540-4925 19. SECTION 16 OFFICERS With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Effective as of September 18, 1995 EX-10.16 5 EXHIBIT 10.16 PROTO. & ADDENDM #1 TO PROTO. OF CPW EXHIBIT 10.16 PROTOCOL OF CEREAL PARTNERS WORLDWIDE FIRST. General Mills and Nestle have identified a common area of interest in developing together the business of breakfast cereals outside of North America and Japan, starting in Europe. SECOND. General Mills is a diversified consumer foods and restaurant business that has developed a strong, successful breakfast cereal business in North America. It recently captured the number one position with Cheerios brand. THIRD. Nestle, a diversified food business, has operations in over 60 countries, and amongst its portfolio of branded leading food products has been traditionally selling in most countries outside North America and the U.K., infant weaning cereals where it enjoys leadership. Nestle has recently entered the breakfast cereal market in Europe and some selected countries overseas. FOURTH. Both companies recognize the following: (a) Potential growth opportunities above average in many countries outside North America and particularly in Europe. (b) Both companies, apart from non-significant exceptions, do not compete directly in the food business on a geographical basis. (c) General Mills' long-standing successful breakfast cereal technological and marketing know-how with strong product brands in North America which can be globalised. (d) Nestle's long-standing and successful worldwide manufacturing and marketing organisation, selling top quality food products under the strong Nestle endorsement name; also its recent entry into breakfast cereals. (e) Strong and dedicated R&D activities of both companies in the areas of food and nutrition. FIFTH. General Mills has been offered the possibility on a strictly confidential basis by RHM to make a private bid for the cereals business, part of which was recently acquired in the U.K. from RJR Nabisco. General Mills will endeavor to obtain permission from RHM to share with Nestle available data and other information pertaining to the possible acquisition. Both companies will decide within an estimated 3 to 4 weeks period to make or not a bid if they agree on an acceptable price range, in which case the purchase will be done and the RHM cereal business would be integrated in the joint venture "Cereals Partners Europe." However, it is agreed that if the acquisition from RHM does not materialize, this should not in any circumstances impinge on the agreement concerning the contemplated joint venture. THEREFORE, in order to successfully exploit their complementary natures, the companies intend to enter into a general agreement covering the following: 1. Establishment of a worldwide cereal joint venture ("JV") covering all countries in the world with the exception of the USA, Puerto Rico, U.S. territories, Canada and Japan. (a) As a first step, the JV will enter Europe (EEC and EFTA countries including possible ventures in countries of Eastern Europe currently outside these territories). (b) As subsequent steps, the JV will enter other countries or territories sequentially as feasible. (c) The partners will discuss an approach for Japan. (d) The exact form of cooperation between General Mills and Nestle in the following countries where Nestle has already a breakfast cereals business commitment will be further agreed upon between the two parties: Malaysia, India, Chile, Zimbabwe and Tunisia. 2. Purposes of the joint venture: (a) To become a significant player in the fast growing worldwide breakfast cereal business, and (b) To exploit the strength and complementary nature of both partners to successfully build a viable, sizeable business against strong competitors. 3. Nature of agreement: (a) A 50/50 JV by combining the respective knowledge and know-how related to the business to facilitate the efficient manufacturing, marketing and selling of breakfast cereals. (b) The JV shall be organised as mutually agreed based upon business considerations and other matters including legal and tax. (c) The JV shall be physically separated from the main flow of both partners, with a management fully responsible and accountable for its operations and reporting to a board as defined below. (d) The defined field of the business is the following: Breakfast cereals, defined as all family, child and adult ready-to-eat and hot cereals excluding infant weaning cereals defined as dry or wet cereal-based products intended for infants and children not more than 3 years of age normally prepared as paps diluted in liquids. Excluded unless agreed upon at a later date are grain-based products presented in the form of snack bars and the like. (e) The parties shall share equally in the initial and on-going investment required by the JV. (f) All acquisitions in the defined product range and territory originating from one of the partners shall be offered to the other partner to be part of the JV or shared equally by both parties. If the partner being offered does not want or is unable to accept for reasons other than price, then that party will exclude itself from entering the breakfast cereal market in that country. 4. Nature of Board of Directors: General Mills and Nestle agree to establish a supervisory Board in order to coordinate business activities, set the policies and authorize strategies, plans and budgets proposed by the CEO and resolve possible conflicts. The Board shall consist of an even number of members not to exceed six. General Mills and Nestle shall each be entitled to elect one half of the members. In the event a member resigns or becomes unable to serve, the parties agree that before taking any further action, a new member will be elected within 90 days by the party whose member has resigned. Neither the CEO nor any JV employee shall be a Board member. Each party will appoint a Co-Chairman of the Board. The Co-Chairmen will alternate in chairing the Board meetings. Minutes shall be kept for all Board meetings and be approved by the Board. The meetings of the Board shall be held at such times and such places as may from time to time be decided by the Board; however, it should meet initially at least three times a year. Each member may be accompanied at Board meetings by any special advisor deemed necessary. All possible conflicts should be solved in earnest and good faith for the exclusive benefit of the JV. However, in case of a necessary arbitration, the Board will submit the matter to the CEO's of both companies. A detailed arbitration procedure will be established by both companies in common agreement. The Board will elect the Key Executives of the JV and determine their conditions of employment. The Board will also review and approve: (a) Establishment of overall strategic objectives. (b) Long-term plans of the JV. (c) Capital, finance and operating budgets. (d) Research and Development budget plans to be farmed out to the parties. (e) Acquisitions and divestments. (f) Application of trademarks - brands - their utilization by the JV. (g) Bonuses and long-term incentive programmes. (h) Yearly results and proposed use of cash and profits. 5. Nature of Management: It will be a responsibility of the JV management to define business objectives, strategies, long and short term plans and budgets to be approved by the Board. The execution of such plans within certain boundaries set by the Board will be the sole responsibility of the JV management. To initially form the JV, the Board will select a CEO with the proper qualifications to manage the European business and who may be proposed by either JV partner. The partner who did not propose the selected CEO candidate will propose the CFO candidate to be selected. General Mills will propose to the Board marketing and technical management candidates fully qualified in the cereal business. Nestle will propose to the Board sales, distribution and manufacturing candidates who are fully qualified. It is contemplated that the marketing staff will include people from each partner. EUROPEAN OPERATIONS In order to begin JV operations starting in Europe, General Mills will provide its long-standing breakfast cereal technological and marketing know-how and strong product brand names to the JV at no cost. Likewise Nestle will provide its strong Nestle endorsement name, its breakfast cereal brand names and its marketing and technological know-how to the JV at no cost. Initially, the European operations of the JV will comprise the present Nestle manufacturing operations for breakfast cereals as well as such facilities as may be acquired by the JV from RHM. In principle, initially the JV will preferably use Nestle's selling and physical distribution organization within Europe unless other alternatives are more suitable. For this purpose the JV will enter into an agreement with Nestle to purchase the physical distribution service at cost. The selling service will be purchased at cost plus an appropriate sales incentive. Existing Nestle breakfast cereals' European fixed assets shall be transferred to the JV at true asset value. If agreement on true asset value cannot be reached by the parties, Peat Marwick Main & Co. will evaluate the assets independently and both parties will accept their valuation. If other related Nestle fixed assets needed for the JV cannot be physically separated for JV ownership, the JV will enter into an arm's length agreement with Nestle on a fiscally acceptable cost basis. Products supplied by either party to the JV will be invoiced at a fiscally acceptable cost plus basis. BRANDS It is the intention to use Nestle as the endorsement for all products. General Mills' and Nestle's strong product brand names will be used and agreed upon according to what is in the best interest of the JV. Visual properties of both company brands would be harmonised while respecting individual logos, etc. In view of the exclusive arrangement of Nestle with EuroDisney, the JV would use such licensed characters as appropriate within the agreement signed by Nestle and Disney. EXPORTS Exports made to other than European countries will be the subject of future agreements between the parties. ACCOUNTING MATTERS The JV will establish accounting systems and procedures to meet its and the partners' needs. The JV will reimburse the partners for services other than those mentioned in the second paragraph of the European Operations section on page 4 hereof, provided to the JV on a fiscally acceptable cost basis; e.g., legal, accounting, product development, technical resources, market research, etc. The partners recognize the need for flexibility to minimize taxes and fiscally required payments of each party shall be balanced. PRESS RELEASE Both parties will conform to the wording and schedule of agreed-to press releases. DURATION 1. This agreement is intended to be perpetual. 2. Neither partner may sell or assign its interest to a third party. FURTHER AGREEMENTS - To be executed with this Protocol 1. The Confidentiality Agreement covering exchange of technical information between General Mills and Nestle necessary to agree upon and form the JV (Annex "A"). 2. Agreement by Nestle covering non-disclosure of RHM information ("Annex B"). 3. Agreements by Nestle and General Mills not to engage in any activity which is directly or indirectly an attempt to take-over the other party (Annex "C"). FORMAL JOINT VENTURE AGREEMENT This Agreement is to be executed on or before January 15, 1990. AGREEMENTS SUBSIDIARY TO THE JOINT VENTURE AGREEMENT 1. Agreements providing for the transfer of technology (patents and know-how) relating to breakfast cereals from the partners to the JV. Such agreements will provide that neither the JV nor Nestle may use breakfast cereal technology in the USA, its territories, Canada or Japan. 2. Agreements by both partners on the use of trademarks covering "Nestle" as an endorsement and the use of product brands presently used by Nestle on breakfast cereals and reciprocally General Mills' trademarks defined as product brands used by the latter in North America and elsewhere. 3. R&D general agreements between both partners whereby future know how of the partners relating to breakfast cereals will be shared in common for all subsequent R&D projects. Executed this 21 day of November, 1989. NESTLE S.A. GENERAL MILLS, INC. By /s/ Camillo Pagano By /s/ H. B. Atwater, Jr. -------------------------- ----------------------------- Chairman and Chief Executive Officer ANNEX C OUTLINE OF MUTUAL "STANDSTILL" AGREEMENTS Each party will agree not to acquire or offer to acquire the stock or assets of the other party, nor engage in a proxy contest to gain control of the other party, whether alone or in concert with others. These agreements will extend for the longer of: ten years from the date of the agreements; or ten years from the date the JV is dissolved or the structure of the JV is materially changed. ADDENDUM NO. 1 TO THE PROTOCOL OF CEREAL PARTNERS WORLDWIDE THIS ADDENDUM NO. 1 is to the Protocol of Cereal Partners Worldwide between General Mills, Inc. and Nestle S.A. (the "Partners"), executed on the 21st day of November, 1989. Upon execution hereof this Addendum shall become an integral part of the Protocol, and the parties hereto agree that the Protocol, this Addendum, and any subsequent addendums hereto shall constitute the Formal Joint Venture Agreement contemplated to be executed by the parties on or before January 15, 1990. FORMATION OF MANAGEMENT COMPANY The Partners agree that a management company shall be legally formed under the laws of Switzerland with a physical location in the Canton of Vaud. The name of this Swiss company may possibly be "CEREAL PARTNERS WORLDWIDE" or "CPW" or the translation in French of "CEREAL PARTNERS WORLDWIDE" ("CPW"). CPW is to be incorporated on or before June 1, 1990. CEREAL BUSINESSES IN GERMANY, FRANCE, SPAIN AND PORTUGAL It is agreed that the present Nestle cereal businesses in Germany, France, Spain and Portugal are to be transferred to the responsibility of the JV on June 1, 1990 under the various "Subsidiary Agreements" referred to hereafter in this Addendum. Notwithstanding that the legal structure of the JV in France, Spain and Portugal is being studied at this time, CPW will have full operational authority and responsibility for the above cereal businesses beginning June 1, 1990. SUBSIDIARY AGREEMENTS FOR GERMANY, FRANCE, SPAIN AND PORTUGAL To most efficiently begin the JV operations in Germany, France, Spain and Portugal on June 1, 1990, it is anticipated that some or all of the following agreements in some form will be necessary: 1. Co-pack Agreements 2. Distribution Agreements 3. Technology and Trademark License Agreements 4. Management Agreements The preceding agreements, all to be effective June 1, 1990, shall be between Nestle S.A. or General Mills, Inc. and the affiliated companies or entities of the JV, e.g., CPW and whatever legal entities are formed for the cereal businesses of Germany, France, Spain and Portugal, and subsidiary companies of Nestle S.A. or General Mills, Inc. located in these countries. Notwithstanding that the JV will become operational on June 1, 1990 under the preceding agreements, General Mills, Inc. also agrees that upon written notice from Nestle S.A., the existing Nestle S.A. breakfast cereals' European fixed assets shall be transferred to the JV in accordance with the provisions of the third paragraph of EUROPEAN OPERATIONS of the Protocol. ARBITRATION Any "material dispute" which may arise between Nestle S.A. and General Mills, Inc. concerning any aspect of the JV, the Protocol, or any matter related thereto, including, but not limited to the interpretation, the implementation, or the termination of the JV, shall be submitted for mediation and resolution to the respective chief executive officer of General Mills, Inc. and Nestle S.A. A "material dispute" shall mean any disagreement or impasse or failure to take any action by Nestle S.A. or General Mills, Inc., or any of the companies or entities associated with the JV, which will have a substantial negative consequence in the operation of the JV. If such a "material dispute" is not resolved within 60 days after submission to the chief executive officers of General Mills, Inc. and Nestle S.A., the dispute, including a decision as to whether or not the dispute is material, shall be resolved by arbitration pursuant to the Rules of Conciliation and Arbitration of the International Chamber of Commerce, which arbitration shall take place in the City of London. Notwithstanding such rules, it is agreed that the arbitrators shall be three in number, one of whom shall be chosen by Nestle S.A., the second by General Mills, Inc., and the third shall be chosen by the two arbitrators designated by Nestle S.A. and General Mills, Inc. The arbitration proceedings shall be conducted in the English language, but documents shall be submitted in the language of the original with translations thereof being provided to the arbitrators. Judgment by the International Chamber of Commerce shall be final and not subject to any appeal, and the award thereof, if necessary, may be entered into any court of competent jurisdiction of any country. TERMINATION The JV envisioned and delineated by the Protocol shall continue until December 31, 2040, unless terminated by the mutual written consent of General Mills, Inc. and Nestle S.A. prior thereto, or by the provisions under LIQUIDATION. Notwithstanding the date of December 31, 2040, the JV shall be automatically extended for additional consecutive 10-year periods, subject that either Nestle S.A. or General Mills, Inc., by written notice to the other at least three years prior to December 31, 2040, or any renewal date, gives notice that the JV shall not be continued or renewed. MATERIAL BREACH In addition to the JV terminating pursuant to the provisions of TERMINATION, the JV may also terminate upon a "material breach" by Nestle S.A. or General Mills, Inc., or any affiliated company or entity carrying out any aspect of the JV which is not cured. A "material breach" shall be defined in the same manner as a "material dispute," and if there is disagreement as to whether or not a "material breach" has occurred, this matter shall be resolved or arbitrated in accordance with the provisions of ARBITRATION. In the event that any entity or party to the JV wishes to assert that a material breach has occurred, written notice thereof shall be given to the chief executive officer of either Nestle S.A. or General Mills, Inc., and the notified party shall be given a period of 60 days in which to cure or rectify such material breach. If it is impossible to rectify or cure such material breach within the said 60 day period, it shall nevertheless be deemed to have been rectified or cured if the notified party provides a financial bond or other financial guaranty which will assure that the costs of curing or rectifying the "material breach" will be met. MATERIAL CHANGE OF CIRCUMSTANCES A "material change of circumstances" shall be deemed to be an event or events which, absent termination of the JV, will cause a material inequity to occur to Nestle S.A. or General Mills, Inc., or any affiliated entity or company thereof, not including a JV entity (the "affected party"). A material change of circumstances would be one which was not contemplated by the parties hereto to occur as of the date hereof and which will have the consequence of materially changing the manner in which the JV is to be conducted or in the characteristics, including the corporate structure, of either Nestle S.A. or General Mills, Inc. If a material change of circumstances has occurred, Nestle S.A. or General Mills, Inc. as the "affected party," that is the party not incurring the material change of circumstances, shall have the right to purchase the other party's interest in the JV at an equitable price subject that all other relationships between the parties (e.g., licenses) also are resolved on an equitable basis. In the event that Nestle S.A. and General Mills, Inc. are not in agreement that an event has occurred which constitutes a "material change of circumstances," or there is not agreement as to the price at which one party may purchase the other party's interest in the JV or the settlement of other rights, such disagreement shall be subject to ARBITRATION as herein provided. LIQUIDATION In the event that the JV is to be terminated under any of the provisions of the Protocol, Nestle S.A. and General Mills, Inc. will negotiate in the utmost good faith a termination of the companies and entities comprising the JV under the following principles: 1. If the businesses of the JV, or any part thereof, are to be discontinued, the assets thereof shall be applied first to the payment of the associated liabilities, then to the expenses of such liquidation, and any net remainder shall be distributed equally to Nestle S.A. or General Mills, Inc., or the assigns thereof. 2. Intellectual property transferred or licensed to the company or entity which is to be liquidated shall be reassigned or transferred to the entity which was the transferor of the intellectual property. 3. Intellectual property that has been developed solely by any company or entity of the JV, or is the sole and exclusive property of such entity or company under contract, shall be distributed to Nestle S.A. and General Mills, Inc. (or the assigns thereof) in shares that are as equal as practical under the circumstances, taking into account the fair value of such intellectual property. It is agreed that if either Nestle S.A. or General Mills, Inc. pursuant to this provision receives the exclusive title or right to such intellectual property, such party will grant to the other party of the JV an irrevocable, royalty-free license without limitation as to term, with full rights to sublicense to any company or entity which is directly or indirectly owned or controlled by Nestle S.A. or General Mills, Inc. 4. In the event that the parties are unable to agree upon the manner in which any of the preceding principles of termination are to be effected or resolved, the matter shall be submitted for resolution pursuant to ARBITRATION as herein provided. EXECUTED THIS 9th day of February, 1990. NESTLE S.A. By /s/ Ramon Masip --------------------------------- Its Executive Vice President -------------------------------- GENERAL MILLS, INC. By /s/ Mark H. Willes -------------------------------- Its President -------------------------------- EX-11 6 EXHIBIT 11 STMT OF DETERMINATION OF COMMON SHARES EXHIBIT 11 GENERAL MILLS, INC. STATEMENT OF DETERMINATION OF COMMON SHARES AND COMMON SHARE EQUIVALENTS (IN MILLIONS)
Weighted average number of common shares and common share equivalents assumed outstanding -------------------------------------------- For the Fiscal Years Ended -------------------------------------------- May 26, 1996 May 28, 1995 May 29, 1994 ------------ ------------ ------------ Weighted average number of common shares outstanding, excluding common stock held in treasury (a). . . . 158.9 158.0 159.1 Common share equivalents resulting from the assumed exercise of certain stock options (b). . . . . . . 3.1* 2.1* 2.4* ----- ----- ----- Total common shares and common share equivalents. . . 162.0 160.1 161.5 ----- ----- ----- ----- ----- -----
- - ---------------------------------- Notes: (a) Computed as the weighted average net shares outstanding on stock-exchange trading days. (b) Common share equivalents are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that had an option price below the average market price for the period, and then deducts the number of shares that could have been repurchased with the proceeds of options exercised. - - ---------------------------------- * Common share equivalents are not material. As a result, earnings per share have been computed using the weighted average of common shares outstanding of 158.9 million, 158.0 million and 159.1 million for fiscal 1996, 1995 and 1994, respectively. EX-12 7 EXHIBIT 12 STMT OF RATIO OF EARN. TO FIXED CHARGES EXHIBIT 12 GENERAL MILLS, INC. RATIO OF EARNINGS TO FIXED CHARGES
Fiscal Year Ended ------------------------------------------------------- May 26, May 28, May 29, May 30, May 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges. .. . . . . 6.94 4.10 6.18 8.62 9.28
For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations, plus earnings or losses of joint ventures, plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the proportion deemed representative of the interest factor) of rents of continuing operations. EX-13 8 EXHIBIT 13 PORTIONS OF 1996 AR INCORP'D BY REF. EXHIBIT 13 MANAGEMENT'S DISCUSSION OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION General Mills' overriding financial objective is to deliver performance that ranks us within the top decile of American public companies measured by the combination of earnings per share growth and return on capital. Key strategic and operating actions taken in 1995 sharpened the company's focus on its best growth and return opportunities in consumer foods. Performance in 1996 reflected this strengthened focus, as General Mills achieved broad-based growth and record financial results. The company expects to record continued earnings growth in 1997, driven by the good momentum visible in our domestic non-cereal businesses and international operations. However, the rate of growth will be moderated by recent pricing actions in the U.S. ready-to-eat cereal market. During the spring and summer of 1996, the industry's major participants announced various actions to reduce prices and promotional spending. Actions taken by Big G will reduce its fiscal 1997 sales by about 4 percent, or $100 million. We expect planned reductions in marketing spending and continued productivity increases to offset about one-half of this 1997 impact. We further expect continued cereal unit-volume growth to offset a portion of the remainder. Nonetheless, this short-term impact will likely cause Big G's earnings in 1997 to be relatively unchanged from the prior year, and cause General Mills' overall earnings per share growth to fall below our long-term goal of 12 percent. The company believes prospects for meeting its long-term goals of superior growth and returns beyond 1997 remain excellent. RESULTS OF OPERATIONS IN 1996 VS. 1995 For the year ended May 26, 1996, earnings totaled $476.4 million, or $3.00 per share. This represented a 28 percent increase from the $371.3 million, or $2.35 per share, earned by continuing operations before restructuring charges in the preceding year. Consumer Foods restructuring charges in 1995 totaled $111.6 million, or 71 cents per share, and related primarily to elimination of the company's least-efficient manufacturing capacity and realignment of the sales organization. Including these charges, 1995 earnings for continuing operations totaled $259.7 million, or $1.64 per share. Reported sales for fiscal 1996 increased 8 percent to $5.42 billion. General Mills' strong performance in 1996 reflected unit volume increases across the company's domestic food businesses, continued productivity gains and accelerating international performance. In the United States, unit volume grew 7 percent to an all-time high, more than recovering volume lost in 1995 during the oats-related business disruption in cereals and the company's transition to new, efficient promotion strategies. Big G cereals led the company's performance. Unit volume rose nearly 10 percent, exceeding results of two years ago to set an all-time record. Volume for established cereals rose nearly 6 percent, driven by focused product improvement efforts on brands including Lucky Charms and Cocoa Puffs. Big G also recorded strong new product volume with Frosted Cheerios, extensions of the Wheaties brand franchise, and the limited-edition Team USA Cheerios offered as part of the company's sponsorship of the 1996 U.S. Olympic Team. Betty Crocker desserts posted 5 percent volume growth driven by innovative new products such as Whipped Deluxe ready-to-spread frostings and a broad line of Sweet Rewards reduced fat and fat-free dessert mixes. Volume for Helper dinner mixes grew 16 percent on the success of new varieties, innovative advertising and effective merchandising. The company's snack business renewed its earnings momentum in 1996 and recorded a 2 percent unit volume gain, with volume up 11 percent for the final six months of the year. This performance reflected strong product innovation efforts, including Sweet Rewards fat-free snack bars, Pop Secret Jumbo Pop microwave popcorn and new fruit snacks. Gold Medal flour, Yoplait and Colombo yogurts and Foodservice operations also achieved good volume gains. International operations generated 13 percent unit volume growth in 1996 and earnings grew more than 50 percent to account for 10 cents, or 3 percent, of total earnings per share. In Canada, food operations posted a 10 percent unit volume gain and good market share progress. Cereal Partners Worldwide, the company's joint venture with Nestle, achieved 21 percent volume growth with share gains in nearly every major market. Snack Ventures Europe, our joint venture with PepsiCo, also posted good volume growth driven by product line additions in established markets and expansion to initial markets in eastern Europe. Our International Dessert Partners joint venture with CPC International launched its first products in four Latin American markets late in fiscal 1996. Net interest expense was $101.4 million and $101.2 million in fiscal 1996 and 1995, respectively. The 1995 amount was $22.4 million higher than 1994 net interest expense of $78.8 million, primarily due to increased working capital, higher interest rates and previous borrowings associated with the company's share repurchase program. The effective income tax rate in 1996, 1995 and 1994 was 36.8%, 36.5% and 38.5%, respectively. The rate was lower in 1996 and 1995 due to a number of factors, including a lower impact from state income taxes. It is management's view that changes in the rate of inflation have not had a significant effect on profitability from continuing operations over the three most recent years. Management attempts to minimize the effects of inflation through appropriate planning and operating practices. Adoption of SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of" is required in fiscal 1997. We will calculate its impact at that time. Adoption of the disclosure requirements of SFAS No. 123, "Accounting for Stock-based Compensation," is also required in fiscal 1997. This will have no impact on our financial condition or results of operations. 1995 COMPARED WITH 1994 1995 earnings for continuing operations of $371.3 million before restructuring charges, or $2.35 per share, were down 13 percent from $427.1 million, or $2.69 per share earned before unusual items in 1994. The profit decline in 1995 reflected the oats-related disruption experienced by Big G cereals during the first quarter, as well as lower shipments of domestic snack products and the one-time impact of strategic trade-promotion changes. Sales of $5.03 billion in fiscal 1995 were 6 percent lower than 1994. Foodservice, yogurt, family and bakery flour operations, and dinner mixes each recorded volume gains, but total domestic unit volume was down 4 percent in 1995. International results included volume gains of 12 percent in Canada, 21 percent by CPW, and 15 percent for SVE. Fiscal 1994 results included an unusual after-tax charge of $87.1 million, or 55 cents per share, to cover estimated costs associated with the improper use of a pesticide by an independent contractor in treating some of the company's oat supplies. Including restructuring and unusual charges in both years, earnings for continuing operations were $259.7 million, or $1.64 per share, in 1995, and $340.0 million, or $2.14 per share, in 1994. FINANCIAL CONDITION It is management's view that the most important measures of financial strength are the ratios of cash flow to debt and fixed charge coverage. The cash flow to debt ratio measures the amount of cash that the company generates each year as a percentage of its total debt. The fixed charge coverage ratio measures the number of times each year that the company earns enough to cover its fixed charges. Our targets are 40 to 45 percent cash flow to debt, and fixed charge coverage of at least 6 times. Fiscal 1996 performance, with 49 percent cash flow to debt and 6.9 times fixed charge coverage, exceeded those targets and represented a strengthening of the company's financial position from the point when restaurant operations were spun off at the end of fiscal 1995. General Mills' balance sheet reflects the impact of that spin-off, which reduced stockholders' equity in 1995 by approximately $1.2 billion. Strong cash flow from operations enabled the company to increase shareholders' equity by $167 million and reduce total long-term debt by nearly $200 million during 1996. The composition of the company's capital structure is shown in the accompanying table: CAPITAL STRUCTURE In Millions MAY 26, 1996 May 28, 1995 - - -------------------------------------------------------------------------------- Notes payable $ 141.6 $ 112.9 Current portion of long-term debt 75.4 93.7 Long-term debt 1,220.9 1,400.9 Deferred income taxes - tax leases 157.5 169.1 - - -------------------------------------------------------------------------------- Total debt 1,595.4 1,776.6 Debt adjustments: Leases - debt equivalent 159.4 165.0 Marketable investments, at cost (171.8) (169.2) - - -------------------------------------------------------------------------------- Adjusted debt 1,583.0 1,772.4 Stockholders' equity 307.7 141.0 - - -------------------------------------------------------------------------------- Total capital $1,890.7 $1,913.4 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- The company intends to manage its businesses and financial ratios so as to maintain a strong "A" bond rating, which allows access to financing at reasonable costs. Currently, General Mills' publicly issued long-term debt carries "A2" (Moody's Investors Services, Inc.) and "A+" (Standard & Poor's Corporation) ratings. Our commercial paper has ratings of "P-1" (Moody's) and "A-1" (Standard & Poor's) in the United States and "R-1 (middle)" in Canada from Dominion Bond Rating Service. We selectively use derivatives to hedge financial risks, primarily interest rate volatility and foreign currency fluctuations. The derivatives are generally treated as hedges for accounting purposes. We manage our debt structure through both issuance of fixed and floating-rate debt, and the use of derivatives. The debt equivalent of our leases and deferred income taxes related to tax leases are both fixed-rate obligations. The accompanying table, when reviewed in conjunction with the capital structure table, shows the composition of our debt structure including the impact of derivatives. DEBT STRUCTURE Dollars in Millions MAY 26, 1996 May 28, 1995 - - ------------------------------------------------------------------------- Floating-rate debt $ 280.3 18% $ 347.9 20% Fixed-rate debt 985.8 62 1,090.4 61 Leases - debt equivalent 159.4 10 165.0 9 Deferred income taxes - tax leases 157.5 10 169.1 10 - - ------------------------------------------------------------------------ Total debt $1,583.0 100% $1,772.4 100% - - ------------------------------------------------------------------------- Commercial paper is a continuing source of short-term financing. Bank credit lines are maintained to ensure availability of short-term funds on an as-needed basis. As of May 26, 1996, we had fee-paid credit lines of $350 million. Our shelf registration statements permit issuance of up to $562.1 million net proceeds in unsecured debt securities. The shelf registration authorizes a medium-term note program that provides additional flexibility in accessing the debt markets. Sources and uses of cash in the past three fiscal years are shown in the accompanying table: CASH SOURCES (USES) IN MILLIONS 1996 1995 1994 - - ------------------------------------------------------------------------ From continuing operations $ 676.4 $ 457.4 $ 561.3 From discontinued operations (16.6) 210.1 259.3 Fixed assets and other investments, net-continuing (173.9) (231.6) (395.8) Change in marketable securities .9 27.4 (50.1) Proceeds from disposition of businesses -- 188.3 -- Investment activities, net-discontinued operations -- (357.5) (336.3) Increase (decrease) in outstanding debt-net (164.8) (312.6) 287.7 Financing activities-discontinued operations -- 347.9 -- Common stock issued 38.0 24.3 13.3 Treasury stock purchases (35.6) (57.7) (145.7) Dividends paid (303.6) (297.2) (299.4) Other (13.2) (13.6) (4.2) - - ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents $ 7.6 $ (14.8) $(109.9) - - ------------------------------------------------------------------------- Continuing operations generated $219.0 million more cash in 1996 than in 1995 primarily due to higher earnings and a decreased impact from the change in working capital. Capital investment for fixed assets and joint venture development totaled $174 million in 1996, compared to $208 million in 1995. For fiscal 1997 through 1999, we expect our capital investment needs (including development spending for our international joint ventures) to average about $225 million annually. If we meet our earnings growth expectations, cash flow from operations after capital investments should increase and would be available to support growth initiatives including new business development, dividend increases and stock repurchases. During the first two months of 1997, we repurchased 1.9 million shares for $103.4 million. Proceeds from disposition of businesses of $188.3 million in 1995 include the sale of Gorton's and certain Latin American operations. Prior to the spin-off at the end of fiscal 1995, the restaurant operations initiated their own borrowings and the funds were used to reduce General Mills' notes payable. INDEPENDENT AUDITORS' REPORT The Stockholders and the Board of Directors of General Mills, Inc.: We have audited the accompanying consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 26, 1996 and May 28, 1995, and the related consolidated statements of earnings and cash flows for each of the fiscal years in the three-year period ended May 26, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Mills, Inc. and subsidiaries as of May 26, 1996 and May 28, 1995, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended May 26, 1996 in conformity with generally accepted accounting principles. As discussed in notes five, fourteen and sixteen, respectively, to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, in fiscal 1995, and Statements No. 112, Employers' Accounting for Postemployment Benefits, and No. 109, Accounting for Income Taxes, in fiscal 1994. Minneapolis, Minnesota June 26, 1996 CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended ------------------------------- MAY 26, May 28, May 29, In Millions, Except per Share Data 1996 1995 1994 - - -------------------------------------------------------------------------------- Continuing Operations: Sales $5,416.0 $5,026.7 $5,327.2 Costs and Expenses: Cost of sales 2,241.0 2,123.0 2,012.5 Selling, general and administrative 2,128.3 2,008.3 2,350.5 Depreciation and amortization 186.7 191.4 173.8 Interest, net 101.4 101.2 78.8 Unusual items - 183.2 146.9 - - -------------------------------------------------------------------------------- Total Costs and Expenses 4,657.4 4,607.1 4,762.5 - - -------------------------------------------------------------------------------- Earnings from Continuing Operations before Taxes and Earnings (Losses) of Joint Ventures 758.6 419.6 564.7 Income Taxes 279.4 153.3 217.4 Earnings (Losses) from Joint Ventures (2.8) (6.6) (7.3) - - -------------------------------------------------------------------------------- Earnings from Continuing Operations 476.4 259.7 340.0 Discontinued Operations after Taxes - 107.7 133.4 Cumulative Effect to May 31, 1993 of Continuing Operations Accounting Changes - - (3.5) - - -------------------------------------------------------------------------------- Net Earnings $476.4 $367.4 $469.9 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Earnings per Share: Continuing operations $3.00 $1.64 $2.14 Discontinued operations - .69 .83 Cumulative effect of accounting changes - - (.02) - - -------------------------------------------------------------------------------- Net Earnings per Share $3.00 $2.33 $2.95 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Average Number of Common Shares 158.9 158.0 159.1 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEETS MAY 26, May 28, In Millions 1996 1995 - - -------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $20.6 $13.0 Receivables, less allowance for doubtful accounts of $4.1 in both 1996 and 1995 337.8 277.3 Inventories 395.5 372.0 Prepaid expenses and other current assets 132.6 80.8 Deferred income taxes 108.6 153.8 - - -------------------------------------------------------------------------------- Total Current Assets 995.1 896.9 Land, Buildings and Equipment, at cost 1,312.4 1,456.6 Other Assets 987.2 1,004.7 - - -------------------------------------------------------------------------------- Total Assets $3,294.7 $3,358.2 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- LIABILITIES AND EQUITY Current Liabilities: Accounts payable $590.7 $494.0 Current portion of long-term debt 75.4 93.7 Notes payable 141.6 112.9 Accrued taxes 124.3 108.8 Accrued payroll 124.7 118.2 Other current liabilities 135.2 293.3 - - -------------------------------------------------------------------------------- Total Current Liabilities 1,191.9 1,220.9 Long-term Debt 1,220.9 1,400.9 Deferred Income Taxes 250.0 248.6 Deferred Income Taxes -- Tax Leases 157.5 169.1 Other Liabilities 166.7 177.7 - - -------------------------------------------------------------------------------- Total Liabilities 2,987.0 3,217.2 - - -------------------------------------------------------------------------------- Stockholders' Equity: Cumulative preference stock, none issued - - Common stock, 204.2 shares issued 384.3 379.5 Retained earnings 1,408.6 1,233.3 Less common stock in treasury, at cost, shares of 45.2 in 1996 and 46.3 in 1995 (1,367.4) (1,372.1) Unearned compensation and other (61.2) (57.9) Cumulative foreign currency adjustment (56.6) (41.8) - - -------------------------------------------------------------------------------- Total Stockholders' Equity 307.7 141.0 - - -------------------------------------------------------------------------------- Total Liabilities and Equity $3,294.7 $3,358.2 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------- MAY 26, May 28, May 29, In Millions 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------- Cash Flows - Operating Activities: Earnings from continuing operations $476.4 $259.7 $336.5 Adjustments to reconcile earnings to cash flow: Depreciation and amortization 186.7 191.4 173.8 Deferred income taxes 42.4 59.0 (34.0) Change in current assets and liabilities, net of effects from business acquired (25.9) (227.8) (79.1) Unusual expenses - 183.2 146.9 Other, net (3.2) (8.1) 17.2 - - --------------------------------------------------------------------------------------------------------- Cash provided by continuing operations 676.4 457.4 561.3 Cash provided (used) by discontinued operations (16.6) 210.1 259.3 - - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 659.8 667.5 820.6 - - --------------------------------------------------------------------------------------------------------- Cash Flows - Investment Activities: Purchases of land, buildings and equipment (128.8) (156.5) (212.5) Investments in businesses, intangibles and affiliates, net of dividends (40.0) (48.8) (140.7) Purchases of marketable securities (21.6) (21.7) (83.8) Proceeds from sale of marketable securities 22.5 49.1 33.7 Proceeds from disposal of land, buildings and equipment 6.2 1.2 3.3 Proceeds from disposition of businesses - 188.3 - Other, net (11.3) (27.5) (45.9) Discontinued operations investment activities, net - (357.5) (336.3) - - --------------------------------------------------------------------------------------------------------- Net Cash Used by Investment Activities (173.0) (373.4) (782.2) - - --------------------------------------------------------------------------------------------------------- Cash Flows - Financing Activities: Increase (decrease) in notes payable (42.4) (330.4) 93.2 Issuance of long-term debt 42.3 135.0 273.6 Payment of long-term debt (164.7) (117.2) (79.1) Common stock issued 38.0 24.3 13.3 Purchases of common stock for treasury (35.6) (57.7) (145.7) Dividends paid (303.6) (297.2) (299.4) Other, net (13.2) (13.6) (4.2) Discontinued operations financing activities - 347.9 - - - --------------------------------------------------------------------------------------------------------- Net Cash Used by Financing Activities (479.2) (308.9) (148.3) - - --------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 7.6 (14.8) (109.9) Cash and Cash Equivalents - Beginning of Year 13.0 27.8 137.7 - - --------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents - End of Year $20.6 $13.0 $27.8 - - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- Cash Flow from Changes in Current Assets and Liabilities: Receivables $(59.5) $(11.9) $(11.5) Inventories (23.7) (52.7) (76.1) Prepaid expenses and other current assets (6.3) (11.9) (22.2) Accounts payable 93.2 (18.1) (5.7) Other current liabilities (29.6) (133.2) 36.4 - - --------------------------------------------------------------------------------------------------------- Change in Current Assets and Liabilities $(25.9) $(227.8) $(79.1) - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE ONE: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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. Certain prior-year amounts have been reclassified to conform to the 1996 presentation. A. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the following domestic and foreign operations: parent company and 100% owned subsidiaries, and General Mills' investment in and share of net earnings or losses of 20-50% owned companies. Our fiscal year ends on the last Sunday in May. Years 1996, 1995 and 1994 each consisted of 52 weeks. B. LAND, BUILDINGS, EQUIPMENT AND DEPRECIATION Buildings and equipment are depreciated over estimated useful lives ranging from three to 50 years, primarily using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. When an item is sold or retired, the accounts are relieved of its cost and related accumulated depreciation; the resulting gains and losses, if any, are recognized. C. INVENTORIES Inventories are valued at the lower of cost or market. Certain domestic inventories are valued using the LIFO method, while other inventories are generally valued using the FIFO method. D. INTANGIBLE ASSETS Goodwill represents the difference between purchase prices of acquired companies and the related fair values of net assets acquired and accounted for by the purchase method of accounting. Goodwill is amortized on a straight-line basis over 40 years or less. Intangible assets include an amount that offsets a minimum liability recorded for a pension plan with assets less than accumulated benefits as required by Financial Accounting Standard No. 87. The costs of patents, copyrights and other intangible assets are amortized evenly over their estimated useful lives. The Audit Committee of the Board of Directors annually reviews goodwill and other intangibles. At its meeting on April 22, 1996, the Board of Directors affirmed that the remaining amounts of these assets have continuing value. E. RESEARCH AND DEVELOPMENT All expenditures for research and development are charged against earnings in the year incurred. The charges for 1996, 1995 and 1994 were $60.1 million, $59.8 million and $59.1 million, respectively. F. EARNINGS PER SHARE Earnings per share has been determined by dividing the appropriate earnings by the weighted average number of common shares outstanding during the year. Common share equivalents were not material. G. FOREIGN CURRENCY TRANSLATION For most foreign operations, local currencies are considered the functional currency. Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation effects are accumulated in the foreign currency adjustment in stockholders' equity. H. STATEMENTS OF CASH FLOWS For purposes of the statement of cash flows, we consider all investments purchased with a maturity of three months or less to be cash equivalents. I. SEGMENT INFORMATION We operate exclusively in the consumer foods industry. On May 28, 1995 we spun off our restaurants segment. See note two. J. ADVERTISING COSTS Advertising expense (including production and communication costs) for fiscal 1996, 1995 and 1994 was $319.7, $323.7 and $292.1 million, respectively. Prepaid advertising costs (including syndication properties) of $24.2 and $33.1 million were reported as assets at May 26, 1996 and May 28, 1995, respectively. We expense the production costs of advertising the first time the advertising takes place. K. STOCK-BASED COMPENSATION We use the "intrinsic value-based method" for measuring the cost of compensation paid in company stock. This method defines our cost as the excess of the stock's market value at the time of the grant over the amount that the employee is required to pay. Our policy for stock options is to set the employee's payment at market value, as of the date of the grant. L. NEW ACCOUNTING RULES In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This new standard requires that long-lived assets be reviewed for impairment whenever the carrying amount of those assets may not be recoverable. The recoverability is based on the estimated future cash flows resulting from the use of the asset. Adoption of SFAS No. 121 is required in our fiscal 1997. We will calculate its impact at that time. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based Compensation." This new standard allows either a fair-value based method or an intrinsic value-based method of accounting for stock-based compensation plans. Adoption of the disclosure requirements of SFAS No. 123 is required in our fiscal 1997. We will adopt the disclosure provisions of SFAS No. 123 and retain the intrinsic value-based method described above. Therefore, there will be no impact on our financial condition or results of operations from the adoption of SFAS No. 123. NOTE TWO: DISCONTINUED OPERATIONS As of May 28, 1995, General Mills distributed to shareholders the common stock of Darden Restaurants, Inc. (Darden). General Mills' shareholders received one share of Darden for each share of General Mills common stock owned as of the close of business on May 15, 1995. This distribution reduced Stockholders' Equity by $1,218.7 million. Our former restaurant operations included in Darden are presented as a part of Discontinued Operations for all periods presented. On May 18, 1995, we sold our Gorton's frozen and canned seafood business to Unilever United States, Inc. Gorton's is also included in Discontinued Operations for all periods presented. The results of the discontinued operations in fiscal 1995 and 1994 are summarized as follows: Fiscal Year ------------------------- In Millions 1995 1994 - - ------------------------------------------------------------------------------- Total net sales $3,366.9 $3,189.7 - - -------------------------------------------------------------------------------- Pretax earnings $80.0 $205.2 Income taxes 17.9 75.5 - - -------------------------------------------------------------------------------- Net earnings - operations 62.1 129.7 Accounting changes - 3.7 Spin-off costs and other (7.7) - Gorton's sale and Red Lobster Japan joint venture termination 53.3 - - - -------------------------------------------------------------------------------- Discontinued operations, net $107.7 $133.4 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE THREE: UNUSUAL ITEMS In 1995, we recorded restructuring charges of $183.2 million pretax, $111.6 million after tax ($.71 per share) primarily related to shutting down and scaling back production systems at four food manufacturing locations and realignment of the sales organization. The charges included approximately $139 million in non-cash charges primarily related to asset write-offs and approximately $44 million of cash charges, primarily related to disposal of assets and severance costs. These restructuring activities were substantially completed in fiscal 1996 and there has been no adjustment to the original reserve. There is a remaining reserve of $27.3 million. In 1994, we recorded a charge of $146.9 million pretax, $87.1 million after tax ($.55 per share) to cover estimated costs associated with the actions of an independent licensed contractor who used an unapproved pesticide in treating some of our oat supplies, a portion of which was used in production. While the substitution presented no consumer health or safety issues, the pesticide had not been registered for use on oats and thus its application represented an FDA regulatory violation. The charge included estimated costs associated with the disposition of finished oat products and oats inventory and other related expenses, as well as the settlement costs of several consumer class action lawsuits. Most of these costs were incurred in fiscal 1995 and 1996 and the original reserve has not required adjustment. We are in litigation against our insurers to recover costs associated with this matter. NOTE FOUR: INVESTMENTS IN JOINT VENTURES We are involved in three joint ventures. We have a 50% equity interest in Cereal Partners Worldwide (CPW), our joint venture with Nestle, S.A., which manufactures and markets breakfast cereals outside North America. We have a 40.5% equity interest in Snack Ventures Europe (SVE), our joint venture with PepsiCo, Inc., which manufactures and markets snack foods in continental Europe. We have a 50% equity interest in International Dessert Partners (IDP), our joint venture with CPC International Inc., which manufactures and markets baking mixes and desserts in Latin America. The joint ventures are reflected in the financial statements on an equity accounting basis. We record our share of the earnings or (losses) of these joint ventures. (The table that follows in this footnote reflects the joint ventures on a 100% basis.) We also receive royalty income from these joint ventures, incur various expenses (primarily research and development), and record the tax impact of certain of the joint venture operations that are structured as partnerships. Including all these factors, the effect on our net income related to the joint ventures was a charge of $2.8 million, $6.6 million and $7.3 million in fiscal 1996, 1995 and 1994, respectively. Our cumulative investment in these joint ventures (including our share of earnings and losses) was $229.8 million, $228.8 million and $180.1 million at the end of fiscal years 1996, 1995 and 1994, respectively. We made aggregate investments in the joint ventures of $45.3 million, $51.6 million and $53.0 million in fiscal years 1996, 1995 and 1994, respectively. We received aggregate dividends from the joint ventures of $8.2 million and $7.3 million in fiscal years 1996 and 1995, respectively. No dividends were received in fiscal year 1994. Summary combined financial information for the joint ventures on a 100% basis follows. Since we record our share of CPW and IDP results on a two-month lag, their information is included in the combined information as of and for the twelve months ended March 31, whereas the SVE information included in the combined information is consistent with our May year end. COMBINED FINANCIAL INFORMATION - JOINT VENTURES - 100% BASIS Fiscal Year Ended ------------------------------------- MAY 26, May 28, May 29, In Millions 1996 1995 1994 - - --------------------------------------------------------------------------- Sales $1,599.5 $1,326.3 $1,085.8 Gross Profit 838.1 686.2 578.0 Earnings (losses) before Taxes 12.1 .6 (12.1) Earnings (losses) after Taxes (13.1) (18.9) (28.4) MAY 26, May 28, In Millions 1996 1995 - - ------------------------------------------------------------ Current Assets $379.4 $352.4 Non-current Assets 648.1 608.8 Current Liabilities 469.8 437.5 Non-current Liabilities 87.2 103.5 Our proportionate share of the sales of the joint ventures was $705.7 million, $584.0 million and $476.4 million for fiscal years 1996, 1995 and 1994, respectively. NOTE FIVE: BALANCE SHEET INFORMATION The components of certain balance sheet accounts are as follows: MAY 26, May 28, In Millions 1996 1995 - - -------------------------------------------------------------------------------- Land, Buildings and Equipment: Land $17.8 $18.5 Buildings 516.2 524.9 Equipment 1,865.4 1,877.5 Construction in progress 108.6 191.0 - - -------------------------------------------------------------------------------- Total land, buildings and equipment 2,508.0 2,611.9 Less accumulated depreciation (1,195.6) (1,155.3) - - -------------------------------------------------------------------------------- Net land, buildings and equipment $1,312.4 $1,456.6 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Other Assets: Prepaid pension $362.3 $320.7 Marketable securities, at market 167.9 214.7 Investments in and advances to affiliates 217.4 214.7 Intangible assets 110.3 119.9 Miscellaneous 129.3 134.7 - - -------------------------------------------------------------------------------- Total other assets $987.2 $1,004.7 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- We adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of May 30, 1994. Adoption of this standard had no impact on our Consolidated Statement of Earnings, and the Consolidated Balance Sheet was not materially affected. Beginning in fiscal 1995, available-for-sale securities, including their associated derivatives, are reflected at fair market value in the Consolidated Balance Sheet. The aggregate unrealized gains and losses on available-for-sale securities, net of tax effects, are accumulated in the "Unearned compensation and other" account within Stockholders' Equity. As of May 26, 1996, a comparison of cost and market values of our marketable securities (all of which are debt securities) was as follows: MARKET GROSS GROSS IN MILLIONS COST VALUE GAIN LOSS - - ------------------------------------------------------------------------------- In "Other Current Assets" $44.2 $44.4 $.2 $- In "Other Assets" 127.6 167.9 40.3 - - - ------------------------------------------------------------------------------- Total marketable securities $171.8 $212.3 $40.5 $- - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Realized gains from sales of marketable securities were $3.8 million and $.7 million in fiscal 1996 and 1995, respectively. In addition, realized losses from purchases of our related debt (see note nine) were $2.3 million and $1.6 million in fiscal 1996 and 1995, respectively. NOTE FIVE: BALANCE SHEET INFORMATION (continued) Scheduled maturities of our marketable securities are as follows: In Millions Cost Market Value - - -------------------------------------------------------------------------------- Under one year (current) $44.2 $44.4 From 1 to 3 years 37.3 37.3 From 4 to 7 years 23.6 23.9 Over 7 years 66.7 106.7 - - -------------------------------------------------------------------------------- Totals $171.8 $212.3 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- NOTE SIX: INVENTORIES The components of inventories are as follows: MAY 26, May 28, In Millions 1996 1995 - - -------------------------------------------------------------------------------- Raw materials, work in process and supplies $ 77.6 $ 77.1 Finished goods 255.1 282.2 Grain 118.5 65.7 Reserve for LIFO valuation method (55.7) (53.0) - - -------------------------------------------------------------------------------- Total inventories $395.5 $372.0 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- At May 26, 1996 and May 28, 1995, respectively, inventories of $209.2 million and $237.3 million were valued at LIFO. NOTE SEVEN: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Most of our financial instruments are recorded on the balance sheet. A few (known as "derivatives") are off-balance-sheet items. Derivatives are financial instruments whose value is derived from one or more underlying financial instruments. Examples of such underlying instruments are currencies, equities, commodities and interest rates. The carrying amount and fair value of our financial instruments at the balance-sheet dates are as follows: MAY 26, 1996 May 28, 1995 -------------------------------------------- CARRYING FAIR Carrying Fair In Millions AMOUNT VALUE Amount Value - - ---------------------------------------------------------------------------- ASSETS AND LIABILITIES - - ---------------------- Assets: Cash and cash equivalents $ 20.6 $ 20.6 $ 13.0 $ 13.0 Receivables 337.8 337.8 277.3 277.3 Marketable securities 215.1 215.1 216.3 216.3 Liabilities: Accounts payable 590.7 590.7 494.0 494.0 Debt 1,437.9 1,515.7 1,607.5 1,689.6 DERIVATIVES RELATING TO: - - ------------------------ Marketable securities (2.8) (2.8) (1.6) (1.6) Debt - 3.1 - 1.3 The fair values were estimated using current market quotes and interest rates. Gains or losses from derivatives offset and neutralize the corresponding losses or gains from the asset or liability being hedged. We ensure that these derivative instruments correlate with the asset or liability being hedged, and we do not issue or hold derivatives for trading or speculative purposes. We use derivative instruments to reduce financial risk in three areas: interest rates, foreign currency and commodities. The notional amounts of derivatives do not represent actual amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. Interest rate swap and foreign exchange agreements are made with a diversified group of highly rated financial institutions, whereas commodities agreements are entered into through various regulated exchanges. We have credit exposure associated with these agreements to the extent that the instruments have a positive fair value, but we do not anticipate any losses. The Company does not have a significant concentration of risk with any single party or group of parties in any of its financial instruments. (1) INTEREST RATE RISK MANAGEMENT - We use interest rate swaps to hedge and/or lower financing costs, to adjust our floating- and fixed-rate debt positions, and to lock in a positive interest rate spread between certain assets and liabilities. An interest rate swap used in conjunction with a debt financing may allow the Company to create fixed or floating-rate financing at a lower cost than with a stand-alone financing. Generally, under interest rate swaps, the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. The following table indicates the types of swaps used to hedge various assets and liabilities and their weighted average interest rates. Average variable rates are based on rates as of the end of the reporting period. The swap contracts mature from fiscal 1997 to fiscal 2008. MAY 26, 1996 May 28, 1995 ------------------------------------- $ in Millions ASSET LIABILITY Asset Liability - - ------------------------------------------------------------------------------ Receive fixed swaps - notional amount $ - $90.0 $ - $90.0 Average receive rate - 7.1% - 6.8% Average pay rate - 5.1% - 5.8% Pay fixed swaps - notional amount $63.0 $21.3 $74.8 $21.3 Average receive rate 5.7% 5.4% 6.4% 6.1% Average pay rate 8.9% 6.2% 8.3% 6.2% The interest rate differential on interest rate swaps used to hedge existing assets and liabilities is recognized as an adjustment of interest expense or income over the term of the agreement. The Company uses interest rate options and cap agreements primarily to reduce the impact of interest rate changes on its floating-rate debt, as well as to hedge the value of call options contained in long-term debt issued by the Company in earlier periods. In return for an upfront payment, an interest rate swap option grants the purchaser the right to receive (pay) the fixed rate interest amount in an interest rate swap. In return for an upfront payment, a cap agreement entitles the purchaser to receive the amount, if any, by which an agreed upon floating rate index exceeds the cap interest rate. The following table summarizes our option and cap agreements, which mature in fiscal 1997. MAY 26, 1996 May 28, 1995 ------------------------------------------ NOTIONAL AVERAGE Notional Average $ in Millions AMOUNT RATE Amount Rate - - -------------------------------------------------------------------------------- Caps purchased - receive floating $ 200.0 7.0% $200.0 7.0% The premiums paid/received for interest rate options and cap agreements are included in other assets/liabilities and are amortized to interest expense over the terms of the agreements. Amounts receivable or payable under the cap agreements are recognized as yield adjustments over the life of the related debt. (2) FOREIGN-CURRENCY EXPOSURE - We selectively hedge the potential effect of foreign currency fluctuations related to operating activities and net investments in foreign operations by entering into foreign exchange contracts with highly rated financial institutions. Realized and unrealized gains and losses on hedges of firm commitments are included in the cost basis of the asset being hedged and are recognized as the asset is expensed through cost of goods sold or depreciation. Realized and unrealized gains and losses on contracts that hedge other operating activities are recognized currently in net earnings. Realized and unrealized gains and losses on contracts that hedge net investments are recognized in the foreign currency adjustment in Stockholders' Equity. The components of our net foreign investment exposure by geographic region are as follows: MAY 26, May 28, In Millions 1996 1995 - - --------------------------------------------------------------------------- Europe $156.7 $165.3 North/South America 35.3 32.3 Asia 1.9 1.9 - - --------------------------------------------------------------------------- Total exposure 193.9 199.5 After-tax hedges - (7.0) - - --------------------------------------------------------------------------- Net exposure $193.9 $192.5 - - --------------------------------------------------------------------------- - - --------------------------------------------------------------------------- At May 26, 1996, we had forward contracts maturing in fiscal 1997 to sell $57.3 million of foreign currencies. The fair value of these contracts is based on third-party quotes and was immaterial at May 26, 1996. (3) COMMODITIES - The Company uses an integrated set of financial instruments in its purchasing cycle, including purchase orders, noncancelable contracts, futures contracts, and futures options. Except as described below, these instruments are all used to purchase ingredients for the Company's internal needs, and to manage purchase prices and inventory values as practical. All futures contracts and futures options are exchange-based instruments with ready liquidity and determinable market values. Unrealized gains and losses are recorded monthly and deferred until the physical ingredients flow through cost of goods sold. The net gain and losses deferred and expensed are immaterial. At May 26, 1996 and May 28, 1995, the aggregate fair value of our ingredient derivatives position was $66.9 million and $53.8 million, respectively. The Company also has a grain-merchandising operation, which uses cash contracts, futures contracts, and futures options. All futures contracts and futures options are exchange-based instruments with ready liquidity and market values. Neither results of operations nor the year-end positions from grain-merchandising operations was material to the Company's overall results. NOTE EIGHT: NOTES PAYABLE The components of notes payable and their respective weighted average interest rates at the end of the period are as follows:
MAY 26, 1996 May 28, 1995 ---------------------------------------------------- Weighted Weighted Average Average Notes Interest Notes Interest $ in Millions Payable Rate Payable Rate - - -------------------------------------------------------------------------------------------------------------- U.S. commercial paper $ 15.0 5.2% $ 78.3 6.1% Canadian commercial paper 19.9 4.8 22.8 7.7 Financial institutions 281.7 5.4 261.8 6.4 Amounts reclassified to long-term debt (175.0) - (250.0) - - - -------------------------------------------------------------------------------------------------------------- Total notes payable $141.6 $112.9 - - -------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------
To ensure availability of funds, we maintain bank credit lines sufficient to cover our outstanding short-term borrowings. As of May 26, 1996, we had $350.0 million fee-paid lines and $64.6 million uncommitted, no-fee lines available in the U.S. and Canada. In addition, other foreign subsidiaries had no-fee lines of $122.7 million of which $55.3 million are unused. We have a revolving credit agreement expiring in December 2000 that provides for the fee-paid credit lines. This agreement provides us with the ability to refinance short-term borrowings on a long-term basis, and therefore we have reclassified a portion of our notes payable to long-term debt. NOTE NINE: LONG-TERM DEBT MAY 26, May 28, In Millions 1996 1995 - - ------------------------------------------------------------------------------- Medium-term notes, 5.2% to 9.1%, due 1996 to 2033 $978.1 $1,094.4 Zero coupon notes, yield 11.1%, $284.0 due August 15, 2013 44.5 43.1 8.2% ESOP loan guaranty, due through June 30, 2007 70.4 74.5 Zero coupon notes, yield 11.7%, $64.4 due August 15, 2004 25.3 22.6 Notes payable, reclassified 175.0 250.0 Other 3.0 10.0 - - -------------------------------------------------------------------------------- 1,296.3 1,494.6 Less amounts due within one year (75.4) (93.7) - - -------------------------------------------------------------------------------- Total long-term debt $1,220.9 $1,400.9 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- At May 26, 1996 our debt shelf registrations permit the issuance of up to $562.1 million net proceeds in unsecured debt securities to reduce short-term debt and for other general corporate purposes, and include a medium-term note program that allows us to issue debt quickly for various amounts and at various rates and maturities. In 1996, we issued $35.0 million of debt under our medium-term note program with maturities from five to 12 years and interest rates from 5.2% to 7.2%. In 1995, $125.0 million of debt was issued under this program with maturities from two to 12 years and interest rates from 6.4% to 8.0%. The Company has guaranteed the debt of the Employee Stock Ownership Plan; therefore, the loan is reflected on our consolidated balance sheets as long-term debt with a related offset in stockholders' equity, "Unearned compensation and other." The sinking fund and principal payments due on long-term debt are (in millions) $75.4, $150.6, $84.7, $90.0 and $62.3 in fiscal years ending 1997, 1998, 1999, 2000 and 2001, respectively. The notes payable that are reclassified under our revolving credit agreement are not included in these principal payments. Our marketable securities (see note five) include zero coupon U.S. Treasury securities. These investments are intended to provide the funds for the payment of principal and interest for the zero coupon notes due August 15, 2004 and 2013. NOTE TEN: STOCK OPTIONS The following table contains information on stock options: Average Option Shares Price per Share - - -------------------------------------------------------------------------------- Granted 1996 4,127,602 $52.55 1995 4,063,100 55.11 1994 4,868,098 63.22 - - -------------------------------------------------------------------------------- Exercised 1996 1,778,823 $25.87 1995 725,437 32.31 1994 562,714 31.08 - - -------------------------------------------------------------------------------- Expired 1996 730,343 $49.40 1995 574,714 59.33 1994 459,800 62.56 - - -------------------------------------------------------------------------------- Outstanding at year end 1996 23,593,232 $44.46 1995 21,974,796 41.60 1994 18,009,478 49.52 - - -------------------------------------------------------------------------------- Exercisable at year end 1996 11,315,131$ 7.70 1995 12,576,580 33.37 1994 10,278,466 38.73 - - -------------------------------------------------------------------------------- A total of 13,693,716 shares (including 7,000,000 shares for salary replacement options and 219,817 shares for restricted stock) are available for grants of options or restricted stock to employees under our 1993 and 1995 stock plans through October 1, 1998 and September 30, 2000, respectively. An additional 1,430,400 shares are available for grants under the plans on a one-for-one basis as common stock is repurchased by the Company. Options may be granted at a price not less than 100 percent of fair market value on the date the option is granted. Options now outstanding include some granted under the 1984, 1988, and 1990 option plans, under which no further rights may be granted. All options expire within 10 years plus one month after the date of grant. The plans provide for full vesting of options in the event there is a change of control. The 1993 plan permits awards of restricted stock to key employees subject to a restricted period and a purchase price, if any, to be paid by the employee as determined by the Compensation Committee of the Board of Directors. The 1988 plan also permitted such awards. Most of the restricted stock awards require the employee to deposit personally owned shares (on a one-for-one basis) with the Company during the restricted period. In 1996, grants from the 1993 plan of 101,907 shares of restricted stock were made, and on May 26, 1996, there were 224,100 of such shares outstanding. The 1988 plan permitted the granting of performance units corresponding to stock options granted. The value of performance units was determined by return on equity and growth in earnings per share measured against preset goals over three-year performance periods. For seven years after a performance period, holders may elect to receive the value of performance units (with interest) as an alternative to exercising corresponding stock options. On May 26, 1996, there were 2,345,156 outstanding options with corresponding performance unit accounts. As of May 26, 1996, there were 25,758 shares of restricted stock outstanding under a separate 1990 stock plan for non-employee directors. A new plan to be presented to stockholders for approval at the 1996 annual meeting will annually grant each non-employee director an option to purchase 2,500 shares at fair market value on the date of grant. Options expire 10 years after the date of grant. The plan also includes an annual restricted stock grant to non-employee directors, who each may choose to receive either 500 shares of stock restricted for one year, or 500 restricted stock units convertible to common stock after his or her term of service on the board is completed. There will be 250,000 shares available for grants of options and restricted stock to non-employee directors until September 30, 2001 under this new plan. The number and exercise price of options outstanding when the Restaurant operations were spun off were adjusted to compensate for the market value of the Darden shares distributed to our stockholders. This adjustment increased the number of General Mills options outstanding at May 28, 1995 by 1,202,369 shares and decreased the exercise price of the option shares outstanding by approximately 17.7 percent. Other than these adjustments to the 1995 outstanding and exercisable options, no other data in the table above has been restated. NOTE ELEVEN: STOCKHOLDERS' EQUITY
$.10 Par Value Common Stock (One Billion Shares Authorized) ---------------------------------- Cumulative In Millions, Except Issued Treasury Unearned Foreign -------------- ----------------- Retained Compensation Currency per Share Data Shares Amount Shares Amount Earnings and Other Adjustment Total - - --------------------------------------------------------------------------------------------------------------------------------- Balance at May 30, 1993 204.2 $358.7 (43.7) $(1,196.4) $2,284.5 $(167.5) $(60.8) $1,218.5 Net earnings 469.9 469.9 Cash dividends declared ($1.88 per share), net of income taxes of $2.9 (296.5) (296.5) Stock option, profit sharing and ESOP plans - 8.0 .4 7.5 15.5 Shares purchased on open market (2.4) (145.7) (145.7) Put option premium - 6.3 - .2 6.5 Transfer of put options - (122.0) (122.0) Unearned compensation related to restricted stock awards (3.9) (3.9) Earned compensation 9.6 9.6 Minimum pension liability adjustment 1.6 1.6 Translation adjustments, net of income taxes of $4.2 (2.3) (2.3) - - --------------------------------------------------------------------------------------------------------------------------------- Balance at May 29, 1994 204.2 251.0 (45.7) (1,334.4) 2,457.9 (160.2) (63.1) 1,151.2 Unrealized gain, net of income taxes of $14.0, on available-for-sale securities at May 30, 1994 22.0 22.0 Net earnings 367.4 367.4 Cash dividends declared ($1.88 per share), net of income taxes of $3.1 (294.1) (294.1) Stock option, profit sharing and ESOP plans - 10.0 .4 17.2 27.2 Shares purchased via puts, or on open market (1.0) (57.7) (57.7) Put option premium/settlements, net - (3.5) - 2.8 (.7) Transfer of put options - 122.0 122.0 Unearned compensation related to restricted stock awards (5.6) (5.6)
$.10 Par Value Common Stock (One Billion Shares Authorized) ---------------------------------- Cumulative In Millions, Except Issued Treasury Unearned Foreign -------------- ----------------- Retained Compensation Currency per Share Data Shares Amount Shares Amount Earnings and Other Adjustment Total - - --------------------------------------------------------------------------------------------------------------------------------- Earned compensation 11.0 11.0 Change in unrealized gain, net of income taxes of $3.7, on available-for-sale securities 5.8 5.8 Amount charged to gain on sale of foreign operations 3.6 3.6 Translation adjustments, net of income tax benefit of $.2 7.6 7.6 Transfer of equity components to Darden prior to spin-off 69.1 10.1 79.2 Distribution of equity to stockholders from spin-off of Restaurant operations (1,297.9) (1,297.9) - - --------------------------------------------------------------------------------------------------------------------------------- Balance at May 28, 1995 204.2 379.5 (46.3) (1,372.1) 1,233.3 (57.9) (41.8) 141.0 Net earnings 476.4 476.4 Cash dividends declared ($1.91 per share), net of income taxes of $2.5 (301.1) (301.1) Stock option, profit sharing and ESOP plans - 4.6 1.7 40.3 44.9 Shares purchased on open market (.6) (35.6) (35.6) Put option premium - .2 .2 Unearned compensation related to restricted stock awards (6.5) (6.5) Earned compensation 7.1 7.1 Change in unrealized gain, net of income taxes of $2.0, on available-for-sale securities (3.1) (3.1) Minimum pension liability adjustment (.8) (.8) Translation adjustments, net of income tax benefit of $.2 (14.8) (14.8) - - --------------------------------------------------------------------------------------------------------------------------------- Balance at May 26, 1996 204.2 $384.3 (45.2) $(1,367.4) $ 1,408.6 $(61.2) $(56.6) $307.7 - - --------------------------------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------------------------------
Cumulative preference stock of 5.0 million shares, without par value, is authorized but unissued. We have a shareholder rights plan that entitles each outstanding share of common stock to one right. Each right entitles the holder to purchase one one-hundredth of a share of cumulative preference stock (or, in certain circumstances, common stock or other securities), exercisable upon the occurrence of certain events. The rights are not transferable apart from the common stock until a person or group has acquired 20 percent or more, or makes a tender offer for 20 percent or more, of the common stock. If the Company is then acquired in a merger or other business combination transaction, each right will entitle the holder (other than the acquiror) to receive, upon exercise, common stock of either the Company or the acquiring company having a market value equal to two times the exercise price of the right. The initial exercise price is $240 per right. The rights are redeemable by the Board at anytime prior to the acquisition of 20 percent or more of the outstanding common stock. The rights expire on February 1, 2006. At May 26, 1996, there were 159.0 million rights issued and outstanding. The Board of Directors has authorized the repurchase, from time to time, of common stock for our treasury, provided that the number of shares held in treasury shall not exceed 60.0 million. Through private transactions in fiscal 1996 and 1994, we issued put options that entitled the holder to sell shares of our common stock to us, at a specified price, if the holder exercised the option. In 1996, we issued put options for .2 million shares for $.2 million in premiums. There were no put options outstanding at May 26, 1996. NOTE TWELVE: INTEREST EXPENSE The components of net interest expense are as follows: Fiscal Year -------------------------- In Millions 1996 1995 1994 - - -------------------------------------------------------------------------------- Interest expense $117.2 $150.0 $121.7 Capitalized interest (.6) (5.2) (6.1) Interest income (15.2) (19.4) (16.4) - - -------------------------------------------------------------------------------- Total interest expense, net 101.4 125.4 99.2 Net interest allocated to discontinued operations - (24.2) (20.4) - - -------------------------------------------------------------------------------- Interest expense, net $101.4 $101.2 $ 78.8 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- During 1996, 1995 and 1994, we paid interest (net of amount capitalized) of $103.8 million, $135.2 million and $99.0 million, respectively. The interest allocated to discontinued operations is net of capitalized interest credits of $4.3 million and $4.1 million in 1995 and 1994, respectively. NOTE THIRTEEN: RETIREMENT PLANS We have defined-benefit plans covering most employees. Benefits for salaried employees are based on length of service and final average compensation. The hourly plans include various monthly amounts for each year of credited service. Our funding policy is consistent with the funding requirements of federal law and regulations. Our principal plan covering salaried employees has a provision that any excess pension assets would be vested in plan participants if the plan is terminated within five years of a change in control. Plan assets consist principally of listed equity securities, corporate obligations and U.S. government securities. Components of net pension income are as follows: Fiscal Year ------------------------ Expense (Income) in Millions 1996 1995 1994 - - -------------------------------------------------------------------------------- Service cost--benefits earned $14.1 $ 13.5 $ 14.6 Interest cost on projected benefit obligation 56.7 55.1 52.9 Actual return on plan assets (162.3) (106.9) (47.8) Net amortization and deferral 61.4 8.3 (43.9) - - -------------------------------------------------------------------------------- Net pension income $(30.1) $(30.0) $(24.2) - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligations were 8.1% and 4.5% in 1996, and 8.0% and 4.5% in 1995, respectively. The expected long-term rate of return on assets was 10.4%. The funded status of the plans and the amount recognized on the consolidated balance sheets (as determined as of May 31, 1996 and 1995) are as follows:
MAY 26, 1996 May 28, 1995 ------------------------------------------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed In Millions Benefits Assets Benefits Assets - - ------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefits $649.5 $17.7 $623.7 $ 16.5 Nonvested benefits 41.3 .8 41.4 1.3 - - ------------------------------------------------------------------------------------------------ Accumulated benefit obligations 690.8 18.5 665.1 17.8 - - ------------------------------------------------------------------------------------------------ Projected benefit obligation 730.3 19.5 709.2 19.0 Plan assets at fair value 1,067.7 - 942.8 1.1 - - ------------------------------------------------------------------------------------------------ Plan assets in excess of (less than) the projected benefit obligation 337.4 (19.5) 233.6 (17.9) Unrecognized prior service cost 31.9 2.3 30.0 2.9
MAY 26, 1996 May 28, 1995 ------------------------------------------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed In Millions Benefits Assets Benefits Assets - - ------------------------------------------------------------------------------------------------ Unrecognized net loss (gain) 88.8 2.3 166.2 (13.3) Recognition of minimum liability - (7.9) - 7.1 Unrecognized transition (asset) liability (95.8) 4.3 (109.4) 5.3 - - ------------------------------------------------------------------------------------------------ Prepaid (accrued) pension cost $362.3 $(18.5) $320.4 $(15.9) - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------
We have defined-contribution plans covering salaried and non-union employees with net assets of $689.0 million at May 26, 1996 and $614.6 million at May 28, 1995. Our main defined contribution plan is a 401(k) savings plan which is open to substantially all employees. The plan includes investment funds and an Employee Stock Ownership Plan (ESOP). The ESOP's only assets are Company common stock and temporary cash balances. Expense recognized for all defined-contribution plans in fiscal 1996, 1995 and 1994 was $6.9 million, $5.4 million and $4.7 million, respectively. The ESOP's share of this expense was $6.6 million, $5.0 million and $4.3 million, respectively. The ESOP's expense is calculated by the "shares allocated" method. The ESOP uses Company common stock to convey benefits to employees and, through increased stock ownership, to align employee interests with those of shareholders. The Company matches a percentage of employee contributions with a base match plus a variable year-end match that depends on annual results. Employees receive the Company match in the form of common stock. The ESOP originally purchased Company common stock with funds borrowed from third parties (and guaranteed by the Company), plus $10.0 million borrowed from the Company at a variable interest rate. The ESOP shares are included in net shares outstanding for the purposes of calculating earnings per share. The ESOP's third-party debt is described in the long-term debt footnote. At May 26, 1996, the ESOP's debt to the Company had a balance of $6.8 million with an interest rate of 5.6% and sinking fund payments due to June 2015. The Company treats dividends paid to the ESOP the same as other dividends. Dividends received on leveraged shares (i.e., all shares originally purchased with the debt proceeds) are used for debt service, while dividends received on unleveraged shares are passed through to participants. The Company's cash contribution to the ESOP is calculated so as to pay off enough debt to release sufficient shares to make the Company match. The ESOP uses the Company's cash contributions to the plan, plus the dividends received on the ESOP's leveraged shares, to make principal and interest payments on the ESOP's debt. As loan payments are made, shares become unencumbered by debt and become committed to be allocated. The ESOP allocates shares to individual employee accounts on the basis of the match of employee payroll savings (contributions), plus reinvested dividends received on previously allocated shares. In 1996, 1995 and 1994, the ESOP incurred interest expense of $6.3 million, $6.6 million and $6.8 million, respectively. The ESOP used dividends of $9.1 million, $6.2 million and $6.0 million, along with Company contributions of $6.7 million, $4.8 million and $4.7 million to make interest and principal payments in the respective years. The number of shares of Company common stock within the ESOP are summarized as follows: MAY 26, May 28, Number of shares 1996 1995 - - ---------------------------------------------------------------------- Unreleased shares 2,415,000 2,690,000 Committed to be allocated 10,000 66,000 Allocated to participants 2,129,000 1,966,000 - - ---------------------------------------------------------------------- Total shares 4,554,000 4,722,000 - - ----------------------------------------------------------------------- - - ----------------------------------------------------------------------- As of May 28, 1995, the ESOP received Darden shares from the spin-off distribution described in note two. The Darden shares were immediately exchanged for Company shares, based on their relative market values immediately preceding the distribution date. NOTE FOURTEEN: OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS We sponsor several plans that provide health care benefits to the majority of our retirees. The salaried plan is contributory with retiree contributions based on years of service. We fund plans for certain employees and retirees on an annual basis. In 1996, 1995 and 1994 we contributed $14.0 million, $13.7 million and $38.3 million, respectively. Plan assets consist principally of listed equity securities and U.S. government securities. Components of the postretirement health care expense are as follows: Fiscal Year ------------------------- Expense (Income) in Millions 1996 1995 1994 - - -------------------------------------------------------------------------------- Service cost--benefits earned $4.9 $ 4.5 $ 5.0 Interest cost on accumulated benefit obligation 14.2 14.3 13.4 Actual return on plan assets (18.7) (15.1) (1.5) Net amortization and deferral 6.9 5.0 (4.6) - - -------------------------------------------------------------------------------- Net postretirement expense $7.3 $ 8.7 $ 12.3 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- The funded status of the plans and the amount recognized on our consolidated balance sheets are as follows:
MAY 26, 1996 May 28, 1995 ------------------------------------------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed In Millions Benefits Assets Benefits Assets - - ------------------------------------------------------------------------------------------------ Accumulated benefit obligations: Retirees $38.5 $55.7 $ 36.2 $ 47.2 Fully eligible active employees 13.1 5.1 14.6 8.5 Other active employees 38.3 38.5 35.8 50.6 - - ------------------------------------------------------------------------------------------------ Accumulated benefit obligations 89.9 99.3 86.6 106.3 Plan assets at fair value 121.9 13.2 104.6 7.5 - - ------------------------------------------------------------------------------------------------ Plan assets in excess of (less than) accumulated benefit obligations 32.0 (86.1) 18.0 (98.8) Unrecognized prior service credits (.1) (13.7) (.1) (17.3) Unrecognized net loss 14.3 23.8 27.1 33.8 - - ------------------------------------------------------------------------------------------------ Prepaid (accrued) postretirement benefits $46.2 $(76.0) $45.0 $(82.3) - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------
The discount rates used in determining the actuarial present value of the benefit obligations were 8.1% and 8.0% in 1996 and 1995, respectively. The expected long-term rate of return on assets was 10%. The assumed health care cost trend-rate increase in the per capita charges for benefits ranged from 5.9% to 9.2% for 1997 depending on the medical service category. The rates gradually decrease to 4.4% to 5.7% for 2007 and remain at that level thereafter. If the health care cost trend rate increased by one percentage point in each future year, the aggregate of the service and interest cost components of postretirement expense would increase for 1996 by $3.2 million and the accumulated benefit obligation as of May 26, 1996 would increase by $28.6 million. In 1994, we adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect as of May 31, 1993 of changing to the accrual basis for severance and disability costs was a decrease in net earnings of $14.7 million ($.09 per share). NOTE FIFTEEN: PROFIT-SHARING PLANS The Executive Incentive Plan provides incentives to key individuals who have the greatest potential to contribute to current earnings and successful future operations. These awards are approved by the Board of Directors upon recommendation of the Compensation Committee and depend on profit performance in relation to pre-established goals. The Plan is administered by the Compensation Committee, which consists solely of outside directors. Profit-sharing expense was $7.0 million, $.9 million and $1.5 million in 1996, 1995 and 1994, respectively. NOTE SIXTEEN: INCOME TAXES We adopted SFAS No. 109, "Accounting for Income Taxes" as of May 31, 1993. The adoption of SFAS No. 109 changed our method of accounting for income taxes from the deferred method to the asset and liability method. Deferred income taxes reflect the differences between assets and liabilities recognized for financial reporting purposes and amounts recognized for tax purposes measured using the current enacted tax rates. The cumulative effect of adoption was an increase in net earnings of $11.2 million ($.07 per share). The components of earnings from continuing operations before income taxes and the income taxes thereon are as follows: Fiscal Year ------------------------------- In Millions 1996 1995 1994 - - -------------------------------------------------------------------------------- Earnings (loss) before income taxes: U.S. $744.0 $412.1 $549.0 Foreign 14.6 7.5 15.7 - - -------------------------------------------------------------------------------- Total earnings before income taxes $758.6 $419.6 $564.7 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Income taxes: Current: Federal $206.5 $ 91.6 $192.0 State and local 28.5 1.3 46.8 Foreign 2.0 1.4 12.6 - - -------------------------------------------------------------------------------- Total current 237.0 94.3 251.4 - - -------------------------------------------------------------------------------- Deferred: Federal 33.7 50.6 (17.5) State and local 7.1 11.1 (4.3) Foreign 1.6 (2.7) (12.2) - - -------------------------------------------------------------------------------- Total deferred 42.4 59.0 (34.0) - - -------------------------------------------------------------------------------- Total income taxes $279.4 $153.3 $217.4 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- During 1996 and 1995, net income tax benefits/(expense) of $25.0 million and $(8.0) million, respectively, were allocated to stockholders' equity. These benefits/expenses were attributable to the exercise of employee stock options, dividends paid on unallocated ESOP shares, translation adjustments and unrealized gain on marketable securities. During 1996, 1995 and 1994, we paid income taxes of $194.0 million, $104.1 million and $202.2 million, respectively. In prior years we purchased certain income-tax items from other companies through tax lease transactions. Total current income taxes charged to earnings reflect the amounts attributable to operations and have not been materially affected by these tax leases. Actual current taxes payable relating to 1996, 1995 and 1994 operations were increased by approximately $15 million, $12 million and $10 million, respectively, due to the current effect of tax leases. These tax payments do not affect taxes for statement of earnings purposes since they repay tax benefits realized in prior years. The repayment liability is classified as "Deferred Income Taxes - Tax Leases." The following table reconciles the U.S. statutory income tax rate with the effective income tax rate: Fiscal Year ------------------------ 1996 1995 1994 - - ------------------------------------------------------------------------ U.S. statutory rate 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefits 3.0 3.6 5.0 Other, net (1.2) (2.1) (1.5) - - ------------------------------------------------------------------------ Effective income tax rate 36.8% 36.5% 38.5% - - ------------------------------------------------------------------------ - - ------------------------------------------------------------------------ The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows: MAY 26, May 28, In Millions 1996 1995 - - ------------------------------------------------------------------------ Accrued liabilities $ 84.6 $ 80.6 Unusual charge for oats matter 3.1 9.5 Unusual charge for restructuring 9.4 42.5 Compensation and employee benefits 53.3 55.2 Disposition liabilities 15.4 29.1 Foreign tax loss carryforward 12.4 19.4 Other 9.0 11.2 - - ------------------------------------------------------------------------ Gross deferred tax assets 187.2 247.5 - - ------------------------------------------------------------------------ Depreciation 130.5 139.4 Prepaid pension asset 138.1 125.1 Intangible assets 11.3 12.8 Other 37.5 53.8 - - ------------------------------------------------------------------------ Gross deferred tax liabilities 317.4 331.1 - - ------------------------------------------------------------------------ Valuation allowance 11.2 11.2 - - ------------------------------------------------------------------------ Net deferred tax liability $141.4 $94.8 - - ------------------------------------------------------------------------ - - ------------------------------------------------------------------------ As of May 26, 1996, we have foreign operating loss carryovers for tax purposes of $34.6 million, which will expire as follows if not offset against future taxable income: $11.0 million in 1998, $.1 million in 1999, $8.0 million in 2000, $15.2 million in 2001 and $.3 million in 2002. We have not recognized a deferred tax liability for unremitted earnings of $91.1 million for our foreign operations because we do not expect those earnings to become taxable to us in the foreseeable future. A determination of the potential liability is not practicable. If a portion were to be remitted, we believe income tax credits would substantially offset any resulting tax liability. NOTE SEVENTEEN: LEASES AND OTHER COMMITMENTS An analysis of rent expense by property leased follows: Fiscal Year ------------------------ In Millions 1996 1995 1994 - - ------------------------------------------------------------------------ Warehouse space $14.9 $14.0 $13.3 Equipment 7.3 8.7 8.1 Other 3.3 3.7 3.6 - - ------------------------------------------------------------------------ Total rent expense $25.5 $26.4 $25.0 - - ------------------------------------------------------------------------ - - ------------------------------------------------------------------------ Some leases require payment of property taxes, insurance and maintenance costs in addition to the rent payments. Contingent and escalation rent in excess of minimum rent payments and sublease income netted in rent expense were insignificant. Noncancelable future lease commitments are (in millions) $15.7 in 1997, $8.4 in 1998, $6.2 in 1999, $4.2 in 2000, $2.2 in 2001 and $2.0 after 2001, with a cumulative total of $38.7. We are contingently liable under guaranties and comfort letters for $94.7 million. The guaranties and comfort letters are principally issued to support borrowing arrangements, primarily for our joint ventures. General Mills remains the primary guarantor on a number of Darden leases and certain other obligations; however Darden has indemnified General Mills against any loss. NOTE EIGHTEEN: GEOGRAPHIC INFORMATION Unallocated Corporate Consolidated In Millions U.S.A. Foreign Items (a) Total - - ----------------------------------------------------------------------------- Sales 1996 $ 5,204.5 $211.5 $ - $5,416.0 1995 4,840.7 186.0 - 5,026.7 1994 5,156.8 170.4 - 5,327.2 - - ----------------------------------------------------------------------------- Operating Profits 1996 862.7 24.0 (128.1) 758.6 1995 504.0(b) 14.9(b) (99.3) 419.6 1994 642.7(c) 19.4 (97.4) 564.7 - - ----------------------------------------------------------------------------- Identifiable Assets 1996 2,509.1 293.2 492.4 3,294.7 1995 2,531.9 300.6 525.7 3,358.2 1994 2,502.3 245.7 2,056.0(d) 4,804.0 - - ----------------------------------------------------------------------------- (a) Corporate expenses reported here include net interest expense and general corporate expenses. (b) U.S.A. and Foreign operating profits are net of charges of $179.1 million and $4.1 million, respectively, for the unusual items described in note three. (c) U.S.A. operating profits include a charge of $146.9 million for the unusual item described in note three. (d) For 1994, Unallocated Corporate Items include the net assets of discontinued operations. See note two. The foreign sales above were made primarily by our Canadian subsidiary. Our proportionate share of our joint ventures' sales (not shown above) was $705.7 million, $584.0 million and $476.4 million for fiscal years 1996, 1995, and 1994, respectively. The foreign operating profits above exclude our share of the results from our joint ventures. NOTE NINETEEN: QUARTERLY DATA (UNAUDITED) Summarized quarterly data for 1996 and 1995 follows:
First Second Third Quarter Quarter Quarter In Millions, Except per Share ------------------------------------------------------------------------- and Market Price Amounts 1996 1995 1996 1995 1996 1995 - - --------------------------------------------------------------------------------------------------------------------------- Sales $1,276.3 $1,156.7 $1,448.4 $1,417.3 $1,309.2 $1,224.2 Gross profit (a) 750.7 696.5 852.3 822.2 776.1 703.3 Earnings (loss) from continuing operations 136.9 118.0 145.7 134.8 116.3 20.2(b) Earnings (loss) per share from continuing operations .86 .75 .92 .85 .73 .13 Discontinued operations - 32.8 - 14.4 - (14.8) Net earnings 136.9 150.8 145.7 149.2 116.3 5.4 Net earnings per share .86 .95 .92 .95 .73 .03 Dividends per share .47 .47 .47 .47 .47 .47 Market price of common stock: (c) High 54 3/8 56 1/4 58 1/8 58 3/8 60 1/2 61 5/8 Low 50 49 3/8 50 7/8 52 7/8 52 5/8 53 1/4 - - --------------------------------------------------------------------------------------------------------------------------- Fourth Total Quarter Year In Millions, Except per Share ----------------------------------------------- and Market Price Amounts 1996 1995 1996 1995 - - ------------------------------------------------------------------------------------------------- Sales $1,382.1 $1,228.5 $5,416.0 $5,026.7 Gross profit (a) 795.9 681.7 3,175.0 2,903.7 Earnings (loss) from continuing operations 77.5 (13.3)(b) 476.4 259.7 Earnings (loss) per share from continuing operations .49 (.09) 3.00 1.64 Discontinued operations - 75.3 - 107.7 Net earnings 77.5 62.0 476.4 367.4 Net earnings per share .49 .40 3.00 2.33 Dividends per share .50 .47 1.91 1.88 Market price of common stock: (c) High 60 63 3/4 60 1/2 63 3/4 Low 53 1/2 58 50 49 3/8 - - -------------------------------------------------------------------------------------------------
(a) Before charges for depreciation. (b) Includes after-tax losses of $82.8 million ($.52 per share) in the third quarter and $28.8 million ($.19 per share) in the fourth quarter related to restructuring. (c) Prices shown for 1995 are before the spin-off described in note two. The closing prices on May 26, 1995 of the two common stocks on a when-issued basis were $49 7/8 for General Mills and $10 7/8 for Darden Restaurants. ELEVEN YEAR FINANCIAL SUMMARY
May 26, May 28, May 29, May 30, May 31, In Millions, Except per Share Data 1996 1995 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------------ Financial Results Net earnings per share $ 3.00 $ 2.33 $ 2.95 $ 3.10 $ 2.99 Continuing operations earnings per share 3.00 1.64 2.14 2.52 2.39 Return on average equity 212.3% 52.0% 37.7% 39.1% 39.9% Dividends per share 1.91 1.88 1.88 1.68 1.48 Sales 5,416 5,027 5,327 5,138 4,964 Costs and expenses: Cost of sales 2,241 2,123 2,012 2,003 1,967 Selling, general and administrative 2,128 2,008 2,351 2,191 2,126 Depreciation and amortization 187 192 174 153 143 Interest, net 101 101 79 56 45 Unusual expenses (income) - 183 147 36 (12) Total costs and expenses 4,657 4,607 4,763 4,439 4,269 Earnings from continuing operations before taxes and earnings (losses) of joint ventures 759 420 564 699 695 Income taxes 280 153 217 276 283 Earnings (losses) of joint ventures (3) (7) (7) (12) (16) Earnings from continuing operations 476 260 340 411 396 Discontinued operations after taxes - 107 134 95 100 Accounting changes - - (4) - - Net earnings 476 367 470 506 496 Earnings from continuing operations as a percent of sales 8.8% 5.2% 6.4% 8.0% 8.0% Weighted average number of common shares 159 158 159 163 166 Taxes (income, payroll, property, etc.) per share 2.11 1.30 1.68 1.98 2.08 - - ------------------------------------------------------------------------------------------------------------------------ Financial Position Total assets 3,295 3,358 4,804 4,310 3,997 Land, buildings and equipment, net 1,312 1,457 1,503 1,463 1,398 Working capital at year end (197) (324) (630) (386) (238) Long-term debt, excluding current portion 1,221 1,401 1,413 1,264 916 Stockholders' equity 308 141 1,151 1,219 1,371 Stockholders' equity per share 1.94 .89 7.26 7.59 8.28 - - ------------------------------------------------------------------------------------------------------------------------ Other Statistics Total dividends 304 297 299 275 245 Gross capital expenditures 129 157 213 317 396 Research and development 60 60 59 56 55 Advertising media expenditures 320 324 292 283 309 Wages, salaries and employee benefits 541 538 558 556 598 Number of employees (actual) 9,790 9,882 10,616 10,577 12,195 Accumulated LIFO reserve 56 53 43 47 50 Common stock price range (a): High 60 1/2 63 3/4 68 3/4 74 1/8 75 7/8 Low 50 49 3/8 49 7/8 62 54 1/4 Close 58 1/4 60 5/8 54 1/2 65 1/4 63 1/2 - - ------------------------------------------------------------------------------------------------------------------------
(a) Prices shown prior to 1996 are before the spin-off of the Company's restaurant business on May 26, 1995. The closing prices on May 26, 1995 of the two common stocks on a when-issued basis were $49 7/8 for General Mills and $10 7/8 for Darden Restaurants. Note: All amounts presented in this summary have been restated to a continuing operations basis only. EX-21 9 EXHIBIT 21 LIST OF SUBSIDIARIES EXHIBIT 21 GENERAL MILLS, INC. SUBSIDIARIES Percentage Country or of Voting State in Which Securities Each Subsidiary Owned Was Organized (Note 1) ------------- ----------- COLOMBO DAIRY FOODS LTD. Ontario 100 COLOMBO, INC. Delaware 100 COLOMBO YOGURT SHOP, QUINCY MARKET, INC. Delaware 100 C.P.A. CEREAL PARTNERS HANDELSGESELLSCHAFT m.b.H. (Note 10) Austria 50 C.P.D. CEREAL PARTNERS DEUTSCHLAND VERWALTUNGSGESSELSCHAFT m.b.H (Note 2) Germany 50 CPW MEXICO S.A. de C.V. Mexico 50 CPW S.A. (Note 13) Switzerland 50 CPW-CI LIMITED Cayman Islands 50 FYL CORP. California 100 GENERAL MILLS CONTINENTAL, INC. (Note 11) Delaware 100 CEREAL PARTNERS L.L.C. Delaware 50 GENERAL MILLS DIRECT MARKETING, INC. Delaware 100 GENERAL MILLS EUROPE LIMITED England 100 C.P. HELLAS EEIG Greece 50 GENERAL MILLS FINANCE, INC. Delaware 100 GENERAL MILLS FRANCE S.A. France 100 GMSNACKS, SCA (Note 3) France 43.29 Snack Ventures Europe, SCA (Note 4) Belgium 40.49 Biscuiterie Nantaise-BN, S.A. France 100 S.A. de Bebidas Carbonicas (SABECA) Spain 100 Matutano, S.A. Portugal 100 Smiths Food Group B.V. The Netherlands 100 SVE Italia S.r.L. Italy 100 Tasty Foods S.A. Greece 100 GENERAL MILLS HOLDING B.V. (Note 5) The Netherlands 100 CEREAL PARTNERS FRANCE B.V. (Note 6) The Netherlands 100 GENERAL MILLS ESPANA B.V. (Note 7) The Netherlands 100 GENERAL MILLS HOLLAND B.V. The Netherlands 100 GENERAL MILLS MAARSSEN B.V. The Netherlands 100 GENERAL MILLS OPERATIONS, INC. (Note 14) Delaware 100 GENERAL MILLS PRODUCTS CORP. Delaware 100 GENERAL MILLS INTERNATIONAL LIMITED (Note 11) Delaware 100 Bimaler S.A. Uruguay 100 Cereal Partners L.L.C. Delaware 50 SVE (Hungary) Trading and Manufacturing Limited Hungary 100 INMOBILIARIA SELENE, S.A. DE C.V. Mexico 100 TORONTO MACARONI & IMPORTED FOODS LIMITED Ontario 100 General Mills Canada, Inc. (Note 8) Canada 100 GENERAL MILLS SALES, INC. Delaware 100 INTERNATIONAL DESSERT PARTNERS L.L.C. Delaware 50 GOLD MEDAL INSURANCE CO. (Note 9) Minnesota 100 GRANDES MOLINOS DE VENEZUELA, S.A Venezuela 12.61 MILLS MEDIA, INC. Minnesota 100 NESTLE ASEAN PHILIPPINES, INC. (Note 12) The Philippines 30 POPCORN DISTRIBUTORS, INC. Delaware 100 TORUN-PACIFIC SP. Z O.O. Poland 50 YOPLAIT USA, INC. Delaware 100 NOTES TO LIST OF SUBSIDIARIES: 1. Except where noted, the percentage of ownership refers to the total ownership by the indicated parent corporation. 2. General Mills, Inc. also owns a 50% ownership interest in a partnership organized under the laws of Germany. 3. General Mills Holland B.V. owns a 29.34% interest in GMSNACKS, SCA, General Mills Holding B.V. owns a 26.25% interest in GMSNACKS, SCA, and General Mills Products Corp. owns a 1.12% interest in GMSNACKS, SCA. 4. General Mills Holding B.V. owns a .01% interest in Snack Ventures Europe, SCA. 5. General Mills Holding B.V. and General Mills, Inc. together own a 100% interest in a Belgian partnership, General Mills Belgium, SNC, which also has a 50% interest in a partnership organized under the laws of Portugal. 6. Cereal Partners France B.V., General Mills, Inc. and General Mills France S.A. own a 100% interest in a French partnership, GMEAF SNC, which owns a 50% interest in a partnership organized under the laws of France. 7. General Mills Espana B.V. owns a 50% interest in a partnership organized under the laws of Spain. 8. General Mills Canada, Inc. and General Mills Products Corp. together own a 100% interest in a Canadian partnership, General Mills North America Affiliates, which owns a 50% interest in a partnership organized under the laws of the United Kingdom. 9. Eighty-one percent of the voting securities are owned by General Mills, Inc. and 19% of the voting securities are owned by General Mills Canada, Inc. 10. General Mills, Inc. also owns a 50% ownership interest in a partnership organized under the laws of Austria. 11. General Mills Continental, Inc. and General Mills International Limited together own a 100% interest in a Chilean partnership, General Mills Continental, Inc. y Compania, which owns a 50% interest in Cereales C.P.W. Chile Limitada, a corporation organized under the laws of Chile; as well as a 100% interest in a Mexican variable capital general partnership known as General Mills International y Compania S. en N.C. de C.V. 12. The 30% ownership interest of General Mills, inc. is held in trust by Nestle, S.A. 13. General Mills, Inc. also owns a 50% ownership interest in a partnership organized under the laws of Switzerland. 14. General Mills Operations, Inc. also owns a 50% ownership interest in a partnership organized under the laws of the state of Montana. EX-23 10 EXHIBIT 23 AUDITORS CONSENT EXHIBIT 23 AUDITORS' CONSENT The Board of Directors General Mills, Inc.: We consent to incorporation by reference in the Registration Statements (Nos. 2-49637, 33-56032 and 333-00745) on Form S-3 and Registration Statements (Nos. 2-13460, 2-53523, 2-66320, 2-91987, 2-95574, 33-24504, 33-27628, 33- 32059, 33-36892, 33-36893, 33-50337 and 33-62729) on Form S-8 of General Mills, Inc. of our reports dated June 26, 1996, relating to the consolidated balance sheets of General Mills, Inc. and subsidiaries as of May 26, 1996 and May 28, 1995 and the related consolidated statements of earnings, cash flows and related financial statement schedule for each of the fiscal years in the three-year period ended May 26, 1996, which reports are included or incorporated by reference in the May 26, 1996 annual report on Form 10-K of General Mills, Inc. Our report covering the basic consolidated financial statements refers to changes in the method of accounting for investments in debt and equity securities in fiscal 1995 and postemployment benefits and income taxes in fiscal 1994. KPMG Peat Marwick LLP Minneapolis, Minnesota August 22, 1996 EX-27 11 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR FORM 10-K FOR THE FISCAL YEAR ENDED MAY 26, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR MAY-26-1996 MAY-29-1995 MAY-26-1996 21 0 342 (4) 396 995 2,508 (1,196) 3,295 1,192 1,221 0 0 384 (77) 3,295 5,416 5,416 2,241 2,241 187 0 101 759 279 476 0 0 0 476 3.00 3.00
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