Mondelez International Annual Report 2002

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FY2002 Annual Report · Mondelez International

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kraft foods inc.

2002 annual report

WE’RE AT HOME...

...ALL AROUND

the world.

people

insight brands marketing customers efficiency integrity performance

L O C A Lknowledge

At Kraft, we believe we have the best people in the industry. They live

and work in countries around the world—seeing, hearing and tasting the

things that will help them drive growth. Through their insights, we see—

and meet—people’s needs for high-quality, convenient and nutritious

food. But we don’t let the best ideas just sit in one country. Through

global category and function councils, we share local knowledge and

build enterprise-wide understanding—so that the best people in the

business can grow the best business in the industry.

global understanding

people insight

brands marketing customers efficiency integrity performance

L O C A Ltaste

global appetite

We build global brands by catering to local tastes one
country at a time. Take cream cheese, for example.
In the Netherlands, it tops baked potatoes. In the U.K.,
people enjoy it with breadsticks. It might be salmon flavor
in Spain, tomato and basil in Germany or strawberry in
the U.S. It could be in a tub, a brick or the convenience
of a snack bar. But whatever the flavor or form, people
in 94 countries enjoy Philadelphia customized to their
tastes, making it the No. 1 cream cheese in the world.
And, just the same, you can find local flavors and forms
of Maxwell House in 78 countries, Ritz in 49 and Milka
in 91, proving that good taste is appreciated everywhere.

people insight brands

marketing customers efficiency integrity performance

L O C A Lfavorites

global

reach

Beyond its people, the most important assets a food company
has are its brands, and Kraft has the best in the food business.
In fact, we have dozens of the world’s most popular brands.
And whether it’s a local favorite or a global powerhouse,
each brand is built on a firm foundation of trust, quality and
convenience. It’s meeting those fundamental needs that drives
growth—and gives our broad portfolio of local favorites the

power to satisfy the world.

people insight brands marketing

customers efficiency integrity performance

L O C A Ltouch

global connection

Over our 100-year history, we’ve had our share of advertising’s

most memorable moments, but that’s not enough anymore. Today,

successful food marketing is more than just selling products—it’s

about connecting with people in a personal way. We work hard to

offer the services people need—whether it’s our toll-free numbers,

health & wellness information or on-line meal planners—when and

where they need them. The 20 million monthly visitors who make

our U.S. websites No. 1 among food company sites tell us we’re

on target as well as on-line.

people insight brands marketing customers

efficiency integrity performance

L O C A Lrelationships

global partnerships

Succeeding in business is all about building relationships.
But what elevates a relationship to a true partnership?
Is it trust? Dependability? Service? At Kraft, we’re proud
that our focus on “all of the above” has led U.S. retailers
to name us in an independent survey as their No. 1 partner
among all consumer products companies. We know that our
growth can’t happen if it’s not a winning opportunity for our

retail partners, too. So whether it’s a small shop in China,

a supermarket in Chicago or a global team aligned with

one of our global customers, we work with our partners

to make sure that success is what’s in store.

people insight brands marketing customers efficiency

integrity performance

L O C A Lingenuity

global

productivity

In thousands of different ways and thousands of different places,
our people create new ways to work a little faster, a little smarter,
a little better. We are constantly refining how we produce our products,
how we distribute them and how we sell them. And then we apply the
best of what we learn in one part of our business everywhere else we

can. That’s how we achieved productivity gains totaling more than 3.5%

of cost of goods sold again this year. And it’s with these savings that

we seed the next generation of growth.

people insight brands marketing customers efficiency integrity

performance

L O C A Lcommitment

global

trust

While, to some, the issue of

corporate integrity may seem

like a new concept, at Kraft,

it’s been part of our 100-year

history all along. From our

earliest beginnings, we have

focused on delivering on our

promises—to consumers,

retail partners, suppliers,

employees, communities and

investors. For us, corporate

integrity is yesterday’s

legacy, today’s commitment

and tomorrow’s assurance.

You can find the foundation

of our beliefs in a corporate

handbook from more than

50 years ago or you can just

walk the halls of any Kraft

facility today to see integrity

in action.

people insight brands marketing customers efficiency integrity performance

L O C A L

opportunity

+3.1%

worldwide volume*

operating companies income*

+5.5%
+

+15.4%

earnings per share*

global growth

Growth is built from the bottom up. By seeing the opportunities and understanding

local markets everywhere we operate, we make the day-to-day, place-to-place

successes add up to global growth. Here’s what capitalizing on opportunities added

up to for Kraft in 2002*: Compared with 2001, worldwide volume was up 3.1%;

operating companies income increased 5.5% to $6.4 billion; net earnings grew

15.2% to $3.5 billion; diluted earnings per share were up 15.4% to $2.02; and our

total return to shareholders was 16.1%. How do you spell growth? K-R-A-F-T.

net earnings*

+15.2%
16.1%

total return to shareholders

*Operating results are on a pro forma basis.
See 2002 Financial Highlights on page 20
for a more detailed explanation.

T H E W O R L D ’ S

favorite foods

for 10 0 years

As we celebrate our 100th anniversary, we’re

proud of how far we’ve come and even prouder

of where we’re going. With a commitment to

innovation, quality and growth at the heart of

everything we do, we’re looking forward to the

next 100 years.

®
®

Snacks
The world is moving fast and,

Beverages
From sun-up to sundown,

more than ever, reaching for a snack

from Tokyo to Topeka, Kraft has

along the way. Whether it’s Nabisco
cookies and crackers, Balance
energy bars, Planters nuts or Milka
chocolates, we have great-tasting

snacks in convenient, portable

packages to help people eat on

the run without losing a step.

beverages that refresh, soothe and

help people meet their nutritional
needs. It might be Tang fortified
with vitamins and minerals, Capri Sun
Big Pouch, or Maxwell House, Jacobs
or Carte Noire coffee. Whatever
people need, we have just the right

beverage for them.

Cheese
The world wants great taste and
the world needs more calcium. Kraft
cheese delivers both. Kraft is the

global leader in cheese because we

know how to customize it—in all its

flavors and forms—to meet local

preferences around the world. From
Kraft Singles and Shreds to Cracker
Barrel and El Caserío, Kraft makes
the cheese that people love to eat.

• New Double Delight Oreo helped drive Oreo,
the world’s best-selling cookie brand, to an
all-time U.S. category share of 14.4%.

• In September, we acquired Kar Gida, a leading
salted-snacks producer in the key developing
market of Turkey.

• With the introduction of Altoids Sours, we
extended the “sours” category to adults and
strengthened our “curiously strong” franchise.

• We made snacking more convenient with
Go Paks cups—innovative packaging for
Nabisco cookies and crackers that fits into
car cup holders.

• Our acquisition of Lanes Food Group gave
us control of key Nabisco biscuit brands
in Australia.

• We expanded Club Social throughout much
of Latin America—and in Brazil, where it’s
only in its third year, Club Social is already
the No. 1 cracker.

• Chips Ahoy! Cremewiches were the best-selling
new chocolate chip cookie introduced in the
U.S. in 2002.

• Our ready-to-drink beverages continued

their double-digit growth in the U.S. with
strong performances from Capri Sun and
Kool-Aid Jammers.

• Ice Presso ready-to-drink coffee, already popular
in Austria, made its debut in Germany, Greece
and Sweden under the Jacobs and Gevalia brands.

• Available in 38 flavors and formulated to meet
local nutritional needs, Tang is now sold in
more than 78 countries.

• In the U.S., we introduced our innovative Fresh
Seal technology and new packaging graphics
on Maxwell House and Yuban coffees.

• New Jacques Vabre Mastro Lorenzo premium
coffee pods made it easier for French coffee
drinkers to use their espresso machines.

• In Canada, Crystal Light expanded its portfolio
to include convenient single-serve pouches.

• In Mexico, we extended our popular Clight
brand with three new flavors in a convenient
ready-to-drink form.

• Kraft maintained its No.1 dollar-share position
in the U.S., where annual per capita cheese
consumption is more than 30 pounds.

• Continuing our efforts to meet nutritional
needs around the world, we expanded
calcium-fortified cheese products in Asia.

• Responding to local tastes and preferences,
we added new Philadelphia cream cheese
flavors in Europe, including light varieties.

• With the introduction of an apples-and-

cinnamon flavor of Knudsen and Breakstone’s
Cottage Doubles, we continued our
revitalization of the cottage cheese category
in the U.S.

• In the U.S., we launched innovative new

packaging for Kraft Natural Shredded Cheese.

• We launched Philadelphia Marble Brownie,

the newest flavor in our successful U.S. snack
bar line.

Revenues $9.1 Billion

Revenues $5.8 Billion

Revenues $5.3 Billion

Convenient Meals
Ready in minutes, not much clean-

Grocery
From breakfast to dessert and just

up, lots of variety and taste, all at

about everything in between, our

a great price—that’s what the world

wants for dinner. And that’s just what
we offer, including It’s Pasta Anytime
and Kraft Fresh Prep meal kits;
DiGiorno, Delissio and Tombstone
pizza; Kraft and Mirácoli dinners and
Boca meat alternatives. Oh, and for
lunch we’ve got Oscar Mayer meats
and Lunchables lunch combinations.

grocery sector has something for
everyone—from Post cereals to
Jell-O desserts, with A.1. steak
sauce, Grey Poupon mustard and
Kraft salad dressings, mayonnaise,
barbecue sauce and peanut butter

in between. Like we said, something

for everyone.

• Our pizza business delivered another banner

year, led by double-digit growth from DiGiorno,
including the continued expansion of DiGiorno
Stuffed Crust pizza.

• In ready-to-eat cereals, Post Honey Bunches
of Oats became the fifth-best-selling U.S.
trademark, with the successful launch of
Honey Bunches of Oats with Strawberries.

• We introduced Mirácoli O’Fino, a dry

packaged meal kit featuring both creamy
tomato and herb cheese flavors, in Germany.

• We made our first entry into the prepared-

potato category with Velveeta Cheesy Potatoes.

• Innovations in packaging technology helped us
increase volume, revenues and market share for
Oscar Mayer ready-to-serve bacon.

• It’s Pasta Anytime, our convenient meal solution
for smaller households, expanded with several
new sauce flavors.

• In 2002, Boca Original Burger became the
fastest-selling burger in the meat alternative
category.

• By launching a new pasta shape—SpongeBob

SquarePants—to a classic favorite, we
introduced a new generation of kids to
Kraft Macaroni & Cheese dinners.

• Clight gelatin made its debut in Brazil and

Colombia and is available in many of the same
flavors as our popular Clight beverage line.

• Continuing to leverage our Nabisco acquisition
with successful co-branded products, in the
U.S. we introduced Oreo and Chips Ahoy! Jell-O
No Bake pies.

• We introduced a new Mediterranean flavor of

Miracel Whip in Germany.

• New advertising for A.1. steak sauce helped
increase our U.S. category share to 50%.

• In the U.S., Cool Whip frozen whipped topping

posted strong volume growth, driven by
successful holiday programming.

Revenues $4.7 Billion

Note: All revenues stated are net revenues
on a pro forma basis.

kraft foods inc.

2002 ﬁnancial highlights

Consolidated Results

(in millions, except per share data)

2002

2001

% Change

2002

2001

% Change

Reported

Pro Forma

Volume (in pounds)

Net revenues*

Operating companies income

Net earnings

Diluted earnings per share

Results by Business Segment

North America

Cheese, Meals and Enhancers

Net revenues*

Operating companies income

Biscuits, Snacks and Confectionery

Net revenues*

Operating companies income

Beverages, Desserts and Cereals

Net revenues*

Operating companies income

Oscar Mayer and Pizza

Net revenues*

Operating companies income

Total North America

Net revenues*

Operating companies income

International

Europe, Middle East and Africa

Net revenues*

Operating companies income

Latin America and Asia Pacific

Net revenues*

Operating companies income

Total International

Net revenues*

Operating companies income

Total Kraft Foods

Net revenues*

Operating companies income

18,549

17,392

6.7%

18,399

17,852

3.1%

$29,723

$29,234

6,283

3,394

1.96

6,035

1,882

1.17

1.7

4.1

80.3

67.5

$29,634

$29,365

6,441

3,505

2.02

6,108

3,042

1.75

0.9

5.5

15.2

15.4

$ 8,877

$ 8,732

2,168

2,099

1.7%

3.3

$ 8,877

$ 8,984

2,258

2,185

(1.2)%

3.3

5,182

1,093

4,412

1,136

3,014

556

5,071

966

4,237

1,192

2,930

539

2.2

13.1

4.1

(4.7)

2.9

3.2

5,161

1,084

4,412

1,239

3,014

588

5,052

964

4,225

1,202

2,930

544

2.2

12.4

4.4

3.1

2.9

8.1

$21,485

$20,970

4,953

4,796

2.5%

3.3

$21,464

$21,191

5,169

4,895

1.3%

5.6

$ 6,203

$ 5,936

962

861

4.5%

11.7

$ 6,203

$ 5,936

967

861

2,035

368

2,328

378

(12.6)

(2.6)

1,967

305

2,238

352

$ 8,238

$ 8,264

1,330

1,239

$29,723

$29,234

6,283

6,035

(0.3%)

7.3

1.7%

4.1

$ 8,170

$ 8,174

1,272

1,213

$29,634

$29,365

6,441

6,108

4.5%

12.3

(12.1)

(13.4)

—%

4.9

0.9%

5.5

Pro forma results assume that shares issued following the Kraft IPO on June 13, 2001, were outstanding since January 1, 2001, and that the
net proceeds of the IPO were used to retire indebtedness incurred to finance the Nabisco acquisition. Results for 2001 have been adjusted to
exclude businesses that were reclassified as assets held for sale during 2001 and to include Nabisco’s Canadian grocery business. Results for
2001 have also been adjusted to assume that the Company’s adoption of SFAS No. 141 and No. 142, which eliminates substantially all goodwill
amortization, was effective January 1, 2001. In addition, these results adjust for certain items, including charges associated with reconfigurations
and consolidation as Kraft and Nabisco are integrated and, due to the recent gains on divestitures, all gains and losses on sales of businesses.
A reconciliation of reported results to pro forma results can be found within this annual report in the section entitled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”

* The Company has adopted Emerging Issues Task Force (“EITF”) statements relating to the classification of vendor consideration and certain sales
incentives. Prior period data has been restated. The adoption of the EITF statements has no impact on operating companies income, net earnings
or diluted earnings per share.

fellow shareholders:

In Kraft Foods’ 100th year, we once again delivered on our commitments, relying on
the same enduring values that have inspired a century of growth.

Despite the marketplace challenges of 2002, including a weak global economy,
volatile commodity prices and significant economic uncertainty in Latin America, we
achieved strong results. Volume grew 3.1%, operating companies income increased
5.5% to $6.4 billion, net earnings increased 15.2% to $3.5 billion and diluted earnings
per share grew 15.4% to $2.02.

Around the world, our success is built on two key strengths — the best brands
and the best people.

And in 2002, this powerful combination of innovation and talent produced another
year of accomplishment:

• New products generated $1.1 billion in net revenues.

• We acquired two new growth businesses in Australia and Turkey.

• Our volume grew 7.1% in developing markets.

• More than 20 million people around the world visited our websites each month for

food ideas and information.

• In an independent survey of leading U.S. retailers, our customers selected Kraft as

“Best of the Best” among all consumer products companies.

our mission

to be the undisputed global
food leader

consumers... ﬁrst choice

customers... indispensable partner

alliances... most desired partner

employees... employer of choice

communities... responsible citizen

investors... top-tier performer

• The integration of Nabisco created new growth opportunities and strong synergy

savings.

• We met our productivity target of at least 3.5% of cost of goods sold.

• We generated $2.5 billion in discretionary cash flow (operating cash flow minus

capital expenditures).

• We increased our dividend in the third quarter by 15% to 15 cents, bringing the annual

rate to 60 cents per share.

• And in a very challenging year for equities, we delivered to our investors a total return

of 16.1%.

Despite challenges in some key categories and geographies, our strong results
extended across the company.

All six of our business segments increased volume, and five of the six grew operating
companies income for the year. We saw a negative impact on income in our Latin
America and Asia Pacific segment due to the economic issues we faced in several
Latin American markets.

Kraft Foods North America
Beverages, Desserts and Cereals—Volume was up a strong 8.4%, once again led by
growth in ready-to-drink beverages, including Capri Sun and Kool-Aid Jammers.
Both Maxwell House coffee and Jell-O desserts gained volume as well. Operating
companies income for the segment increased 3.1%.

Biscuits, Snacks and Confectionery—Volume increased 0.7% on strong growth in
cookies and crackers from new products, including Double Delight Oreo, Chips Ahoy!
Cremewiches and Ritz Bits. Snacks volume also was up; however, confectionery
volume was off versus the prior year. Operating companies income was up 12.4%.

Cheese, Meals and Enhancers—Volume grew 0.5%, as gains in Kraft salad dressings,
barbecue sauce and macaroni & cheese dinners, and It’s Pasta Anytime more than
offset lower cheese volume. Operating companies income increased 3.3%.

Oscar Mayer and Pizza—Volume increased 2.3% on growth in Oscar Mayer hot dogs
and bacon, DiGiorno Stuffed Crust pizza and Boca meat alternatives. Operating
companies income was up 8.1%.

Note: All operating results discussed in this letter are on a pro forma basis.

Kraft Foods International
Europe, Middle East and Africa—Volume grew 4.8%, as gains from acquisitions along
with growth in many markets more than offset lower volume in Germany. Operating
companies income increased 12.3%.

Latin America and Asia Pacific—Volume was up 2.1%, led by gains in beverages,
snacks and convenient meals. However, operating companies income declined
13.4%, due primarily to currency devaluations and difficult economic conditions in
Brazil, Argentina and Venezuela.

Looking ahead to 2003, our business fundamentals are strong. However, two factors
will restrain the growth of our earnings.

First, higher benefit costs, primarily related to pension and post-retirement medical
expenses, are expected to reduce our earnings per share by 7 cents, or three
percentage points of growth. The higher pension costs are primarily the result of
lower returns on our U.S. pension-fund assets. Despite these lower returns, our U.S.
pension plan is well funded, and we will not need to make a cash contribution in the
near future.

Second, a new stock-based compensation plan using a three-year restricted stock
grant in place of stock options will reduce earnings per share by 2 cents, or more than
one percentage point of growth. The restricted stock will further align the long-term
interest of employees with those of Kraft’s shareholders, and it enables us to expense
stock-based compensation in a transparent manner.

Importantly, both the pension and stock-compensation expenses are primarily
non-cash charges. We look forward to continued strong cash generation, with an
expected increase in discretionary cash flow of more than 10% in 2003.

Diluted earnings per share for the year are targeted to increase 4%-6% to $2.10-
$2.15. Other challenges, some anticipated and some we cannot foresee, also remain
risks to these results.

If our focus were strictly short term, we might choose to roll back marketing support
or cut our investment in product development to offset the combined impact on
earnings of these issues. But in the long-term interests of our brands—and our
shareholders—we will increase our investment in future growth. The health of our
business is strong, and as we manage through these challenges, we are committed to
keeping it that way.

The five enduring strategies we’ve used to build our business will guide our
growth in the future.

Accelerate growth of core brands by:

• Focusing new-product innovation on four high-growth consumer needs—snacking,

beverages, convenient meals and health & wellness.

• Capturing a greater share of the fastest-growing distribution channels.

• Expanding our products and marketing programs to connect with the rapidly growing

U.S. Hispanic population.

• Supporting all our brands with world-class marketing.

Drive global category leadership by:

• Using worldwide category councils to share best practices, fast-adapt product ideas,

and optimize productivity and sourcing.

• Stepping up our expansion in developing markets.

• Building distribution in all markets.

our strategies

accelerate growth of core brands

drive global category leadership

optimize our portfolio

drive world-class productivity,
quality and service

build employee and organizational
excellence

Optimize our portfolio by:

• Acquiring high-potential businesses to jump-start us in fast-growing categories

or countries and give us greater scale in existing ones.

• Divesting businesses that do not meet our growth or financial expectations.

Drive world-class productivity, quality and service by:

• Delivering annual productivity of 3.5% of cost of goods sold.

• Achieving ongoing annual synergy savings from the integration of Nabisco.

• Ensuring product quality and customer-service levels in all categories in all markets.

Build employee and organizational excellence by:

• Creating a winning work environment that values leadership development, diversity

and work/life balance.

• Meeting our responsibilities to the societies in which we live, work and market

our products.

As a result of these efforts, we expect that our volume growth will again
be around 3% in 2003.

from left to right:

Louis C. Camilleri

Betsy D. Holden

Roger K. Deromedi

As we close the books on 2002, we want to pay special recognition to Geoffrey C.
Bible, former Chairman of Kraft Foods, and William C. Webb, a former director of Kraft
Foods, both of whom retired in August. On behalf of the 109,000 Kraft employees
around the world, we thank Geoff and Bill for their inspiration and leadership. Their
guidance and expertise were a major force in the global success we enjoy today.

From all the people of Kraft over the last 100 years, we have inherited a company built
on trust—trust in our brands, our beliefs and the commitments we make. As we look
forward to 2003 and the next 100 years, our highest priority is to sustain that trust.

Louis C. Camilleri
Chairman of the Board
Kraft Foods Inc.

February 28, 2003

Betsy D. Holden
Co-CEO, Kraft Foods Inc.
President & CEO
Kraft Foods North America

Roger K. Deromedi
Co-CEO, Kraft Foods Inc.
President & CEO
Kraft Foods International

kraft foods inc.

kraft and the community

Staying Connected with Public Expectations

Addressing key issues

Global corporations have risen to be among the most visible and
influential institutions of our day. Along with their influence have
come expectations, and a greater level of scrutiny than perhaps
at any time in the past. Quite rightly, the public wants assurance
that companies are operating lawfully and ethically, are providing
appropriate support to the community and are addressing
important social issues related to their business.

The manufacture and marketing of food products inevitably
involves companies like Kraft in a variety of complex social issues
of importance to the public. We have the responsibility and the
desire to address these issues constructively. We are committed
to doing our part to help forge lasting solutions where we have a
meaningful role to play. Among the issues we are addressing are:

For our part, Kraft Foods is committed to meeting these
expectations.

Managing with integrity

Kraft has a long heritage of strong corporate governance.
We want to do the right thing, and we have the policies and
programs in place to help ensure that we do. And while we can
look back over a history of ethical conduct, our focus is on the
steps we are taking now to further strengthen the public’s trust.
Among these are:
• An expanded Compliance & Integrity program that provides

comprehensive standards for business conduct and is managed
by formal Compliance Councils, with oversight by the Audit
Committee of the Board of Directors.

• A new Disclosure Committee to ensure that the company is
meeting all disclosure requirements in its financial reporting.

• Independent Audit and Compensation & Governance

Committees of the Board of Directors, both composed
entirely of outside Directors.

Supporting the community

Under the Kraft Cares umbrella, we provided more than
$35 million in food and financial support in 2002 to communities
around the world, along with countless hours of personal
involvement by employee volunteers. Wherever possible, we
focus our resources on sustainable solutions that will increase
the long-term capabilities of individuals and organizations. A few
highlights of our efforts in the last year include:
• The Kraft Community Nutrition Program, which helps food
banks and other feeding programs in the U.S. increase the
quantity and nutritional quality of the food they provide.

• A regional cooperation agreement with the European Federation

of Food Banks to provide assistance in six countries.

• Green Roof for Europe, a program developed with Alp Action
to protect Europe’s alpine environment by planting more than
500,000 trees since 1991.

• More than $4 million of annual employee giving to the Kraft
Employee Fund and United Way in support of community
nonprofit organizations.

• A wide range of employee volunteer activities, including
Kraft Cares Day in the U.S., Brazil, Australia and the U.K.

• Emergency food for victims of natural disasters on

five continents.

Nutrition, activity and health—The growing prevalence of
obesity is a major public health challenge. We are focusing
our efforts in three areas:
• Increasing our long-standing support for innovative public
education programs that help families improve their eating
and activity behaviors.

• Strengthening our marketing policies and practices to ensure
they are consistent with our commitment to helping people
make healthy lifestyle choices.

• Enhancing our range of product choices to make it easier to

eat and live better.

Food biotechnology—While we have no direct economic
investment in biotechnology, we believe it holds promise for
significant nutritional and environmental benefits. We also
believe that strong science-based regulatory systems must
be in place to ensure those benefits are attained safely. We
comply fully with applicable laws in each country in which
we sell our products, and make decisions regarding the use
of ingredients based on regulatory requirements and public
acceptance in individual markets.

Agricultural supply chain—Some of our products, such as
coffee and chocolate, are dependent on agricultural commodities
grown in developing countries. While we do not own or control
farms in these countries, we have made a range of commitments
in a number of locations to work with farmers, international
development organizations and others to improve farming
practices, support economic development and encourage
appropriate labor policies. These include:
• Programs to improve coffee quality and the value of crops in

Peru and Vietnam.

• Assistance for food and education programs in Nicaragua,
Panama and other countries affected by the current decline
in coffee prices.

• Joint efforts with industry and government groups to promote
labor practices on cocoa farms in West Africa in keeping with
International Labor Organization standards and Kraft’s own
labor policies.

Environment—In conducting our business, we are always
mindful of the environmental impacts our activities may have.
We have put programs in place to reduce these impacts wherever
practicable, and we strive to conduct our operations as a good
neighbor and a responsible corporate citizen.

We know that to sustain the public’s trust we must meet the
public’s expectations. Whether it’s support for the community
or our role in important social issues, Kraft is committed to
sustaining that trust.

kraft foods inc.

financial review

Financial Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................................................. 26

Selected Financial Data—Five-Year Review ........................................................................................................................................... 43

Consolidated Balance Sheets ................................................................................................................................................................ 44

Consolidated Statements of Earnings .................................................................................................................................................... 45

Consolidated Statements of Cash Flows ............................................................................................................................................... 46

Consolidated Statements of Shareholders’ Equity ................................................................................................................................. 47

Notes to Consolidated Financial Statements ......................................................................................................................................... 48

Report of Independent Accountants ...................................................................................................................................................... 63

Company Report on Financial Statements ............................................................................................................................................ 63

kraft foods inc.

guide to select disclosures

For easy reference, areas that may be of interest to investors are highlighted in the index below.

Acquisitions (See Note 5) ...................................................................................................................................................................... 52

Benefit Plans (See Note 14) ................................................................................................................................................................... 58

Related Party Transactions (See Note 3) ............................................................................................................................................... 51

Segment Reporting (See Note 13) ........................................................................................................................................................ 56

Stock Plans (See Note 10) ..................................................................................................................................................................... 54

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

Overview

Kraft Foods Inc. (“Kraft”), together with its subsidiaries
(collectively referred to as the “Company”) is the largest branded
food and beverage company headquartered in the United States.
Prior to June 13, 2001, the Company was a wholly-owned
subsidiary of Altria Group, Inc. (formerly Philip Morris Companies
Inc.). On June 13, 2001, the Company completed an initial public
offering (“IPO”) of 280,000,000 shares of its Class A common
stock at a price of $31.00 per share. The IPO proceeds, net of the
underwriting discount and expenses, of $8.4 billion were used to
retire a portion of an $11.0 billion long-term note payable to Altria
Group, Inc., incurred in connection with the acquisition of
Nabisco Holdings Corp. (“Nabisco”). After the IPO, Altria Group,
Inc. owned approximately 83.9% of the outstanding shares of the
Company’s capital stock through its ownership of 49.5% of the
Company’s Class A common stock and 100% of the Company’s
Class B common stock. The Company’s Class A common stock
has one vote per share, while the Company’s Class B common
stock has ten votes per share. At December 31, 2002, Altria
Group, Inc. held 97.8% of the combined voting power of the
Company’s outstanding capital stock and owned approximately
84.2% of the outstanding shares of the Company’s capital stock.

The Company conducts its global business through two
subsidiaries: Kraft Foods North America, Inc. (“KFNA”) and Kraft
Foods International, Inc. (“KFI”). KFNA manages its operations
by product category, while KFI manages its operations by
geographic region. KFNA’s segments are Cheese, Meals and
Enhancers; Biscuits, Snacks and Confectionery; Beverages,
Desserts and Cereals; and Oscar Mayer and Pizza. KFNA’s food
service business within the United States and its businesses in
Canada and Mexico are reported through the Cheese, Meals and
Enhancers segment. KFI’s segments are Europe, Middle East and
Africa; and Latin America and Asia Pacific.

Critical Accounting Policies

Financial Reporting Release No. 60, which was issued by the
Securities and Exchange Commission (“SEC”), requires all
registrants to discuss critical accounting policies or methods
used in the preparation of financial statements. Note 2 to the
consolidated financial statements includes a summary of the
significant accounting policies and methods used in the
preparation of the Company’s consolidated financial statements.
In most instances, the Company must use an accounting policy
or method because it is the only policy or method permitted
under accounting principles generally accepted in the United
States of America (“U.S. GAAP”).

The preparation of all financial statements includes the use of
estimates and assumptions that affect a number of amounts
included in the Company’s financial statements, including, among
other things, employee benefit costs and income taxes. The
Company bases its estimates on historical experience and other
assumptions that it believes are reasonable. If actual amounts are
ultimately different from previous estimates, the revisions are
included in the Company’s results for the period in which the
actual amounts become known. Historically, the aggregate
differences, if any, between the Company’s estimates and actual

amounts in any year have not had a significant impact on the
Company’s consolidated financial statements.

The Company’s Audit Committee has reviewed the development,
selection and disclosure of the critical accounting policies
and estimates.

The following is a review of the more significant assumptions and
estimates, as well as the accounting policies and methods used
in the preparation of the Company’s consolidated financial
statements:

Employee Benefit Plans: As discussed in Note 14 to the
consolidated financial statements, the Company provides a
range of benefits to its employees and retired employees,
including pensions, postretirement health care benefits and
postemployment benefits (primarily severance). The Company
records amounts relating to these plans based on calculations
specified by U.S. GAAP, which include various actuarial
assumptions, such as discount rates, assumed rates of return on
plan assets, compensation increases, turnover rates and health
care cost trend rates. The Company reviews its actuarial
assumptions on an annual basis and makes modifications to the
assumptions based on current rates and trends when it is
deemed appropriate to do so. As required by U.S. GAAP, the
effect of the modifications is generally recorded or amortized over
future periods. The Company believes that the assumptions
utilized in recording its obligations under its plans, which are
presented in Note 14 to the consolidated financial statements, are
reasonable based on its experience and advice from its actuaries.

During the years ended December 31, 2002, 2001 and 2000, the
Company recorded the following amounts in the consolidated
statement of earnings for employee benefit plans:

U.S. pension plan income
Non-U.S. pension plan cost
Postretirement healthcare cost
Postemployment benefit plan cost
Employee savings plan cost

Net expense (income) for employee
benefit plans

2002

$ (33)
47
217
35
64

2001

$(227)
35
199
12
63

(in millions)
2000

$(315)
34
126
9
43

$330

$ 82

$(103)

The 2002 net expense for employee benefit plans of $330 million
increased by $248 million over the 2001 amount. This increase
includes the costs associated with voluntary early retirement and
integration programs ($148 million), which were recorded during
2002. The remainder of the cost increase primarily relates to a
lowering of the Company’s discount rate assumption on its
pension and postretirement benefit plans, and lower than
expected returns on invested pension assets. The 2001 net
expense for employee benefit plans of $82 million increased by
$185 million over the 2000 amount. This increase was due
primarily to the Company’s acquisition of Nabisco, lower pension
asset returns and higher retiree medical costs.

At December 31, 2002, for the U.S. pension and postretirement
plans, the Company reduced its discount rate assumption
from 7.0% to 6.5%, maintained its expected return on asset
assumption at 9.0%, and increased its medical trend rate
assumption. The Company presently anticipates that these
assumption changes, coupled with lower returns on pension fund
assets in prior years, will result in an increase in 2003 pre-tax
benefit expense of approximately $180 million, or approximately
$0.07 per share, exclusive of the impact of the voluntary early
retirement and integration programs in 2002. The Company’s
long-term rate of return assumption remains at 9.0% based on
the investment of its pension assets primarily in U.S. equity
securities. While the Company does not presently anticipate a
change in its 2003 assumptions, a fifty basis point decline in
the Company’s discount rate would increase the Company’s
pension and postretirement expense by approximately
$50 million, while a fifty basis point increase in the discount
rate would decrease pension and postretirement expense by
approximately $35 million. Similarly, a fifty basis point decline
(increase) in the expected return on plan assets would increase
(decrease) the Company’s pension expense for the U.S. pension
plans by approximately $35 million. See Note 14 to the
consolidated financial statements, for a sensitivity discussion of
the assumed health care cost trend rates.

Revenue Recognition: As required by U.S. GAAP, the Company
recognizes revenues, net of sales incentives, and including
shipping and handling charges billed to customers, upon
shipment of goods when title and risk of loss pass to customers.
Shipping and handling costs are classified as part of cost of
sales. Provisions and allowances for sales returns and bad debts
are also recorded in the Company’s consolidated financial
statements. The amounts recorded for these provisions and
related allowances are not significant to the Company’s
consolidated financial position or results of operations. As
discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company adopted newly required
accounting standards mandating that certain costs reported as
marketing, administration and research costs be shown as a
reduction of operating revenues or an increase in cost of sales.
As a result, previously reported revenues were reduced by
approximately $4.6 billion and $3.6 billion for 2001 and 2000,
respectively. The adoption of the new accounting standards had
no impact on operating income, net earnings or basic or diluted
earnings per share (“EPS”).

Depreciation and Amortization: The Company depreciates
property, plant and equipment and amortizes definite life
intangibles using straight-line methods over the estimated useful
lives of the assets. As discussed in Note 2 to the consolidated
financial statements, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other Intangible
Assets,” on January 1, 2002. The Company has determined that
substantially all of its goodwill and other intangible assets have
indefinite lives due to the long history of its brands. As a result,
the Company stopped recording the amortization of goodwill
and substantially all of its intangible assets as a charge to

earnings. Net earnings and diluted EPS would have been as
follows had the provisions of the new standards been applied
as of January 1, 2000:

Year Ended December 31,

Net earnings, as previously reported
Adjustment for amortization
of goodwill and indefinite
life intangibles

Net earnings, as adjusted

Diluted EPS, as previously reported
Adjustment for amortization
of goodwill and indefinite
life intangibles

Diluted EPS, as adjusted

Average diluted shares outstanding

(in millions, except per share amounts)
2000
2001

$1,882

$2,001

955
$2,837

$ 1.17

530
$2,531

$ 1.38

0.59
$ 1.76

1,610

0.36
$ 1.74

1,455

Marketing and Advertising Costs: As required by U.S. GAAP,
the Company records marketing costs as an expense in the year
to which such costs relate. The Company does not defer any
amounts on its consolidated balance sheet with respect to
marketing costs. The Company expenses advertising costs in the
year in which the related advertisement initially appears. The
Company records consumer incentive and trade promotion costs
as a reduction of revenues in the year in which these programs
are offered, based on estimates of utilization and redemption
rates that are developed from historical information.

Related Party Transactions: As discussed in Note 3 to
the consolidated financial statements, Altria Group, Inc.’s
subsidiary, Altria Corporate Services, Inc. (formerly Philip Morris
Management Corp.), provides the Company with various
services, including planning, legal, treasury, accounting, auditing,
insurance, human resources, office of the secretary, corporate
affairs, information technology and tax services. Billings for these
services, which were based on the cost to Altria Corporate
Services, Inc. to provide such services plus a management fee,
were $327 million, $339 million and $248 million for the years
ended December 31, 2002, 2001 and 2000, respectively. Although
the value of services provided by Altria Corporate Services, Inc.
cannot be quantified on a stand-alone basis, management
believes that the billings are reasonable based on the level of
support provided by Altria Corporate Services, Inc., and that the
charges reflect all services provided. The cost and nature of the
services are reviewed annually by the Company’s Audit
Committee, which is comprised of independent directors.

The Company also has long-term notes payable to Altria Group,
Inc. and its affiliates of $2.6 billion at December 31, 2002 and
$5.0 billion at December 31, 2001. The decrease from 2001 to
2002 reflects the repayment of borrowings with proceeds from
public global bond offerings, floating rate notes and short-term
borrowings. The interest rates on the debt with Altria Group, Inc.
were established at market rates available to Altria Group, Inc. at
the time of issuance for similar debt with matching maturities. The
remaining amount due under the 7.0% long-term note payable to
Altria Group, Inc. and affiliates has no prepayment penalty, and

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

the Company may repay some or all of the note with the proceeds
from external debt offerings.

The Company accounts for income taxes in accordance with
SFAS No. 109, “Accounting for Income Taxes.” The accounts
of the Company are included in the consolidated federal income
tax return of Altria Group, Inc. Income taxes are generally
computed on a separate company basis. To the extent that
foreign tax credits, capital losses and other credits generated by
the Company, which cannot be utilized on a separate company
basis, are utilized in Altria Group, Inc.’s consolidated federal
income tax return, the benefit is recognized in the calculation of
the Company’s provision for income taxes. The Company utilized
tax benefits that it would otherwise not have been able to use of
$193 million, $185 million and $139 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

Business Environment

The Company faces a number of challenges in 2003, including
among other things, higher benefit costs, increased stock
compensation costs and weak economies in certain parts of
Latin America. As previously discussed, higher benefit costs are
expected to impact 2003 EPS by approximately $0.07 per share.
The higher benefit costs are primarily the result of lower returns
on pension fund assets, a lower discount rate and higher retiree
medical costs. The additional stock compensation costs, which
are expected to impact 2003 earnings per share by approximately
$0.02 per share, relate to restricted stock awards to employees.
These awards have a three-year vesting period and will further
align the long-term interests of employees with those of the
Company’s shareholders. The award of restricted stock to
employees (rather than stock options) is more transparent to
shareholders as the cost of the program is based upon the
average market price of the stock on the date of grant, rather
than a fair value generated by an option-pricing model. In Latin
America, political unrest in Venezuela, as well as the devaluation
of certain currencies, are also expected to negatively impact
2003 EPS.

The Company is subject to fluctuating commodity costs, currency
movements and competitive challenges in various product
categories and markets, including a trend toward increasing
consolidation in the retail trade and consequent inventory
reductions and changing consumer preferences. In addition,
certain competitors may have different profit objectives, and
some competitors may be more or less susceptible to currency
exchange rates. To confront these challenges, the Company
continues to take steps to build the value of its brands and
improve its food business portfolio with new products and
marketing initiatives.

On December 11, 2000, the Company acquired all of the
outstanding shares of Nabisco for $55 per share in cash. The
purchase of the outstanding shares, retirement of employee stock
options and other payments totaled approximately $15.2 billion.
In addition, the acquisition included the assumption of
approximately $4.0 billion of existing Nabisco debt. The Company
financed the acquisition through the issuance of two long-term
notes payable to Altria Group, Inc., totaling $15.0 billion, and
short-term intercompany borrowings of $255 million. The
acquisition has been accounted for as a purchase. Beginning
January 1, 2001, Nabisco’s earnings have been included in the
consolidated operating results of the Company.

The closure of a number of Nabisco domestic and international
facilities resulted in severance and other exit costs of
$379 million, which are included in the adjustments for the
allocation of the Nabisco purchase price. The closures will
result in the termination of approximately 7,500 employees
and will require total cash payments of $373 million, of which
approximately $190 million has been spent through December 31,
2002. Substantially all of the closures were completed as of
December 31, 2002, and the remaining payments relate to
salary continuation payments for severed employees and
lease payments.

The integration of Nabisco into the operations of the Company
has also resulted in the closure or reconfiguration of several of
the Company’s existing facilities. The aggregate charges to the
Company’s consolidated statement of earnings to close or
reconfigure its facilities and integrate Nabisco were originally
estimated to be in the range of $200 million to $300 million.
During 2002, the Company recorded pre-tax integration related
charges of $115 million to consolidate production lines, close
facilities and for other consolidation programs. In addition,
during 2001, the Company incurred pre-tax integration costs of
$53 million for site reconfigurations and other consolidation
programs in the United States. The integration related charges
of $168 million included $27 million relating to severance,
$117 million relating to asset write-offs and $24 million relating
to other cash exit costs. Cash payments relating to these
charges will approximate $51 million, of which $21 million has
been paid through December 31, 2002. In addition, during 2002,
approximately 700 salaried employees elected to retire or
terminate employment under voluntary retirement programs. As
a result, the Company recorded a pre-tax charge of $142 million
related to these programs. As of December 31, 2002, the
aggregate pre-tax charges to close or reconfigure the Company’s
facilities and integrate Nabisco, including charges for early
retirement programs, were $310 million, slightly above the original
estimate. No additional pre-tax charges are expected to be
recorded for these programs.

Fluctuations in commodity costs can lead to retail price volatility,
intensify price competition and influence consumer and trade
buying patterns. KFNA’s and KFI’s businesses are subject to
fluctuating commodity costs, including dairy, coffee bean and
cocoa costs. Dairy commodity costs on average were lower in
2002 than those seen in 2001. Coffee bean prices were also lower,
while cocoa bean prices were higher than in 2001.

During 2001, certain small Nabisco businesses were reclassified
to businesses held for sale, including their estimated results of
operations through anticipated sale dates. These businesses
have subsequently been sold, with the exception of one business
that had been held for sale since the acquisition of Nabisco. This
business, which is no longer held for sale, has been included in
2002 consolidated operating results.

53rd Week: The Company’s subsidiaries end their fiscal years
as of the Saturday closest to the end of each year. Accordingly,
most years contain 52 weeks of operating results while every fifth
or sixth year includes 53 weeks. The Company’s consolidated
statement of earnings for the year ended December 31, 2000
included a 53rd week. Volume comparisons contained in this
Management’s Discussion and Analysis for 2001 versus 2000
have been provided on a comparable 52-week basis to provide
a more meaningful comparison of operating results.

Consolidated Operating Results

The acquisition of Nabisco and subsequent IPO were significant
events that affect the comparability of earnings. In order to isolate
the financial effects of these events, and to provide a more
meaningful comparison of the Company’s results of operations,
the following tables and the subsequent discussion of the
Company’s consolidated operating results refer to results on a
reported and pro forma basis. Reported results include the
operating results of Nabisco in 2002 and 2001, but not in 2000.
Reported results also reflect average shares of common stock
outstanding during 2002 and 2001, and reflect an average of
1.455 billion shares outstanding during 2000. Pro forma results
assume the Company owned Nabisco for all of 2000. In addition,
pro forma results reflect common shares outstanding based on
the assumption that shares issued immediately following the IPO
were outstanding during 2001 and 2000, and that, effective
January 1, 2000, the net proceeds of the IPO were used to retire a
portion of a long-term note payable used to finance the Nabisco
acquisition. Pro forma results also adjust for other items, all of
which are detailed in reconciliations of reported to pro forma
results throughout this discussion. Management uses pro forma
results to manage and to evaluate the performance of the
Company. Management believes it is appropriate to disclose
pro forma results to assist investors with analyzing business
performance and trends. Pro forma measures should not be
considered in isolation or as a substitute for reported results,
which are prepared in accordance with accounting principles
generally accepted in the United States.

During 2002, the Company acquired a snacks business in Turkey
and a biscuits business in Australia. The total cost of these and
other smaller acquisitions was $122 million. During 2001, the
Company purchased coffee businesses in Romania, Morocco
and Bulgaria and also acquired confectionery businesses in
Russia and Poland. The total cost of these and other smaller
acquisitions was $194 million. During 2000, the Company
purchased Balance Bar Co. and Boca Burger, Inc. The total cost
of these and other smaller acquisitions was $365 million. The
operating results of these businesses were not material to the
Company’s consolidated financial position or results of
operations in any of the periods presented.

During 2002, the Company sold several small North American
food businesses, some of which were previously classified as
businesses held for sale. The net revenues and operating results
of the businesses held for sale, which were not significant, were
excluded from the Company’s consolidated statements of
earnings, and no gain or loss was recognized on these sales.
In addition, the Company sold its Latin American yeast and
industrial bakery ingredients business for $110 million and
recorded a pre-tax gain of $69 million. The aggregate proceeds
received from sales of businesses during 2002 were $219 million,
on which the Company recorded pre-tax gains of $80 million.

During 2001, the Company sold several small food businesses.
The aggregate proceeds received in these transactions were
$21 million, on which the Company recorded pre-tax gains of
$8 million.

During 2000, the Company sold a French confectionery
business for proceeds of $251 million, on which a pre-tax gain of
$139 million was recorded. Several small international and North
American food businesses were also sold in 2000. The aggregate
proceeds received from sales of businesses during 2000 were
$300 million, on which the Company recorded pre-tax gains of
$172 million.

The operating results of the businesses sold were not material
to the Company’s consolidated operating results in any of the
periods presented.

Century Date Change: The Company did not experience any
material disruptions to its business as a result of the Century
Date Change (“CDC”). The Company’s increases in 1999 year-end
inventories and trade receivables caused by preemptive CDC
contingency plans resulted in incremental cash outflows during
1999 of approximately $155 million. The cash outflows reversed in
the first quarter of 2000. In addition, the Company had increased
shipments in the fourth quarter of 1999 because customers
purchased additional product in anticipation of potential CDC-
related disruptions. The increased shipments in 1999 resulted in
estimated incremental net revenues and operating companies
income in 1999 of approximately $85 million and $40 million,
respectively, and corresponding decreases in net revenues and
operating companies income in 2000.

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

Consolidated Operating Results

Year Ended December 31,

2002

2001

Reported volume (in pounds):
Kraft Foods North America

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Kraft Foods International

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International

Total reported volume

Reported net revenues:
Kraft Foods North America

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Kraft Foods International

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Total reported net revenues

Reported operating

companies income:
Kraft Foods North America

5,898
2,369
3,708
1,554
13,529

2,961
2,059
5,020
18,549

5,219
2,350
3,421
1,519
12,509

2,826
2,057
4,883
17,392

$ 8,877
5,182
4,412
3,014
21,485

6,203
2,035
8,238
$29,723

$ 8,732
5,071
4,237
2,930
20,970

5,936
2,328
8,264
$29,234

(in millions)
2000

4,820
54
3,117
1,507
9,498

2,829
803
3,632
13,130

$ 7,923
293
4,267
2,829
15,312

6,398
1,212
7,610
$22,922

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

$ 2,168
1,093
1,136
556
4,953

$ 2,099
966
1,192
539
4,796

$ 1,845
100
1,090
512
3,547

Kraft Foods International

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Total reported operating
companies income

962
368
1,330

861
378
1,239

1,019
189
1,208

$ 6,283

$ 6,035

$ 4,755

The following is a reconciliation of reported operating results to
pro forma operating results:

Year Ended December 31,

2002

2001

(in millions)
2000

Reported volume (in pounds)
Volume of businesses sold
Changes due to businesses

held for sale

Estimated impact of century

date change
Nabisco volume

18,549
(150)

17,392
(187)

13,130
(82)

647

55
4,367
17,470

Pro forma volume (in pounds)

18,399

17,852

Reported net revenues

Net revenues of businesses sold
Changes due to businesses

held for sale

Estimated impact of century

date change

Nabisco net revenues
Pro forma net revenues

Reported operating
companies income
Gains on sales of businesses
Operating companies income of

businesses sold

Integration costs and a loss on

sale of a food factory

Separation programs
Changes due to businesses

held for sale

Estimated impact of century

date change
Nabisco operating

companies income

Pro forma operating
companies income

Reported net earnings
After-tax effect of:

Integration costs and a loss
on sale of a food factory

Separation programs
Gains on sales of businesses
Cessation of goodwill and
indefinite life intangible
asset amortization

Nabisco results
Interest reduction assuming

full-year IPO

Estimated impact of century

$29,723
(89)

$29,234
(121)

$22,922
(162)

252

$29,634

$29,365

85
6,822
$29,667

$ 6,283
(80)

$ 6,035
(8)

$ 4,755
(172)

(15)

111
142

(24)

(39)

1,000

$ 6,441

$ 6,108

$ 5,584

$ 3,394

$ 1,882

$ 2,001

72
91
(52)

(5)

955

(101)

530
(135)

165

363

date change
Pro forma net earnings

$ 3,505

$ 3,042

23
$ 2,681

Average diluted shares outstanding

1,736

1,610

1,455

Adjustment to reflect shares

outstanding after IPO

Pro forma diluted shares outstanding

1,736

125
1,735

280
1,735

2002 compared with 2001

Reported volume for 2002 increased 1,157 million pounds (6.7%)
over 2001, due primarily to the inclusion in 2002 of a business
previously considered held for sale, new product introductions,
geographic expansion and acquisitions. Pro forma volume
increased 3.1% over 2001, due primarily to new product
introductions, geographic expansion and acquisitions.

Reported net revenues for 2002 increased $489 million (1.7%)
over 2001, due primarily to the inclusion in 2002 of a business
previously considered held for sale, higher volume/mix and the
impact of acquisitions, partially offset by the adverse effect of
currency exchange rates and lower sales prices on cheese and
coffee products (driven by commodity-related declines). Pro
forma net revenues increased $269 million (0.9%) over 2001,
due primarily to higher volume/mix ($401 million) and the impact
of acquisitions ($191 million), partially offset by the adverse
effect of currency exchange rates ($291 million) and lower sales
prices on cheese and coffee products (driven by commodity-
related declines).

The Company’s management reviews operating companies
income to evaluate segment performance and allocate resources.
Operating companies income excludes general corporate
expenses and amortization of intangibles. Reported operating
companies income was affected by the following unusual items
during 2002 and 2001:

• Integration Costs and a Loss on Sale of a Food Factory: During
2002, the Company recorded pre-tax integration related charges
of $115 million to consolidate production lines, close facilities
and for other consolidation programs. In addition, during 2002,
the Company reversed $4 million related to the loss on sale of a
North American food factory. During 2001, the Company incurred
pre-tax integration costs of $53 million for site reconfigurations
and other consolidation programs in the United States. In
addition, the Company recorded a pre-tax charge of $29 million
to close a North American food factory. These items were
included in the operating companies income of the following
segments:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Latin America and Asia Pacific

2002

$ 30
1
56
7
17
$111

(in millions)
2001

$63
2
12
5

$82

• Separation Programs: During 2002, approximately 700 salaried
employees elected to retire or terminate employment under
voluntary retirement programs. As a result, the Company
recorded a pre-tax charge in 2002 of $142 million related to these
programs. This charge was included in the operating companies
income of the following segments: Cheese, Meals and Enhancers,
$60 million; Biscuits, Snacks and Confectionery, $3 million;
Beverages, Desserts and Cereals, $47 million; Oscar Mayer and

Pizza, $25 million; Europe, Middle East and Africa, $5 million; and
Latin America and Asia Pacific, $2 million.

• Businesses Held for Sale: During 2001, certain small Nabisco
businesses were reclassified to businesses held for sale,
including their estimated results of operations through anticipated
sale dates. These businesses have subsequently been sold with
the exception of one business that had been held for sale since
the acquisition of Nabisco. This business, which is no longer held
for sale, has been included in 2002 reported operating results and
has been included as an adjustment to arrive at pro forma results
for 2001.

Reported operating companies income increased $248 million
(4.1%) over 2001. On a pro forma basis, operating companies
income increased $333 million (5.5%), driven primarily by volume
growth and favorable margins.

In addition, reported net earnings were also affected by the
following during 2002:

• Amortization of Intangibles: On January 1, 2002, the Company
adopted SFAS No. 141 and SFAS No. 142. As a result, the
Company stopped recording the amortization of goodwill and
indefinite life intangible assets as a charge to earnings. Reported
net earnings and diluted EPS would have been approximately
$2.8 billion and $1.76, respectively, for the year ended December
31, 2001, and $2.5 billion and $1.74, respectively, for the year
ended December 31, 2000, had the provisions of the new
standards been applied in those periods.

Currency movements have decreased net revenues by
$291 million and operating companies income by $4 million
from 2001. Decreases in net revenues and operating companies
income are due primarily to the strength of the U.S. dollar
against certain Latin American currencies, partially offset by the
weakness of the U.S. dollar against the euro and other currencies.

Reported interest and other debt expense, net, decreased
$590 million in 2002. This decrease was due primarily to lower
debt levels after the repayment of Nabisco acquisition borrowings
with the proceeds from the Company’s IPO, as well as the
Company’s refinancing of notes payable to Altria Group, Inc. and
lower short-term interest rates. On a pro forma basis, interest and
other debt expense, net, decreased $288 million in 2002 from
$1,135 million in 2001. This decrease in pro forma interest expense
is due to the use of free cash flow to repay debt, the refinancing
of notes payable to Altria Group, Inc. and lower short-term
interest rates.

During 2002, the Company’s reported effective tax rate
decreased by 9.9 percentage points to 35.5% as compared
with 2001, due primarily to the adoption of SFAS No. 141 and
SFAS No. 142, under which the Company is no longer required
to amortize goodwill and indefinite life intangible assets as a
charge to earnings.

Reported diluted and basic EPS, which were both $1.96 for
2002, increased by 67.5% over 2001, due primarily to growth in
operating companies income, lower interest expense and the

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

elimination of substantially all goodwill amortization. Reported
net earnings of $3,394 million for 2002 increased $1,512 million
(80.3%) over 2001. On a pro forma basis, diluted and basic EPS,
which were both $2.02 for 2002, increased by 15.4% over 2001,
due primarily to growth in operating companies income and
lower interest expense. On a pro forma basis, net earnings of
$3,505 million for 2002 increased $463 million (15.2%) over 2001.

2001 compared with 2000

Reported volume for 2001 increased 4,262 million pounds
(32.5%) over 2000, due primarily to the acquisition of Nabisco.
Pro forma volume increased 2.2% over 2000. Excluding the
53rd week of shipments in 2000, volume increased 3.4%,
reflecting new product introductions and volume gains in
developing markets.

Reported net revenues for 2001 increased $6,312 million (27.5%)
over 2000, due primarily to the acquisition of Nabisco. Pro forma
net revenues decreased slightly from 2000, due primarily to the
53rd week of sales in 2000, the adverse effect of currency
exchange rates and lower sales prices on coffee products (driven
by commodity-related price declines), partially offset by the
favorable impact of volume growth.

Reported operating companies income increased $1,280 million
(26.9%) over 2000, due primarily to the acquisition of Nabisco.
On a pro forma basis, operating companies income increased
$524 million (9.4%), driven by volume growth, productivity
savings and Nabisco synergies, partially offset by unfavorable
currency movements.

Currency movements decreased net revenues by $493 million
and operating companies income by $60 million from 2000.
Decreases in net revenues and operating companies income were
due to the strength of the U.S. dollar against the euro, Canadian
dollar and certain Asian and Latin American currencies.

Reported interest and other debt expense, net, increased
$840 million in 2001. This increase was due primarily to notes
issued to Altria Group, Inc. in the fourth quarter of 2000 to finance
the acquisition of Nabisco. On a pro forma basis, interest and
other debt expense, net, decreased $213 million in 2001 from
$1,348 million in 2000. This decrease in pro forma interest
expense is due to the use of free cash flow to repay debt and
the refinancing of debt payable to Altria Group, Inc.

During 2001, the Company’s reported effective tax rate increased
by 4.0 percentage points to 45.4% as compared with 2000, due
primarily to higher Nabisco-related goodwill amortization, which
was not tax deductible.

Reported diluted and basic EPS, which were both $1.17 for 2001,
decreased by 15.2% from 2000, due primarily to higher levels of
goodwill amortization and interest expense associated with the
acquisition of Nabisco. Reported net earnings of $1,882 million
for 2001 decreased $119 million (5.9%) from 2000. On a pro forma
basis, diluted and basic EPS, which were both $1.75 for 2001,
increased by 12.9% over 2000, due primarily to higher operating

results in all segments. On a pro forma basis, net earnings of
$3,042 million for 2001 increased $361 million (13.5%) from 2000.

Operating Results by Reportable Segment

Kraft Foods North America

Year Ended December 31,

2002

2001

5,898
2,369
3,708
1,554
13,529

(15)

5,219
2,350
3,421
1,519
12,509

(13)
(1)

647

Reported volume (in pounds):

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total reported volume (in pounds)

Volume of businesses sold:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Changes due to businesses

held for sale:
Cheese, Meals and Enhancers

Estimated impact of century

date change:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Nabisco volume:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Pro forma volume (in pounds)

13,514

13,142

Reported net revenues:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Total reported net revenues

$ 8,877
5,182
4,412
3,014
21,485

$ 8,732
5,071
4,237
2,930
20,970

(21)

(19)
(12)

252

Net revenues of businesses sold:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Changes due to businesses

held for sale:
Cheese, Meals and Enhancers

Estimated impact of century

date change:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Nabisco net revenues:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Pro forma net revenues

$21,464

$21,191

(in millions)
2000

4,820
54
3,117
1,507
9,498

(5)

16
1
19
5

1,101
2,246
40
12,921

$ 7,923
293
4,267
2,829
15,312

(10)

29
3
16
11

1,016
4,653
79
$21,109

Kraft Foods North America (continued)

Year Ended December 31,

2002

2001

($252 million), partially offset by lower selling prices in response
to lower commodity costs ($154 million). On a pro forma basis,
net revenues increased 1.3%.

(in millions)
2000

Reported operating

companies income:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Total reported operating
companies income
Gains on sales of businesses:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery

Operating companies income of

businesses sold:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Integration costs and a loss on

sale of a food factory:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Separation programs:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Changes due to businesses

held for sale:
Cheese, Meals and Enhancers

Estimated impact of century

date change:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Nabisco operating

companies income:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals

Pro forma operating
companies income

2002 compared with 2001

$2,168
1,093
1,136
556

$2,099
966
1,192
539

$1,845
100
1,090
512

4,953

4,796

3,547

Reported operating companies income for 2002 increased
$157 million (3.3%) over 2001, due primarily to higher volume/mix
($174 million), favorable margins ($176 million, driven by lower
commodity-related costs and productivity) and Nabisco synergy
savings, partially offset by higher benefit expense, including the
2002 charge for voluntary retirement programs ($135 million). On
a pro forma basis, operating companies income increased 5.6%.

(8)

(5)

30
1
56
7

60
3
47
25

(4)
(2)

63
2
12
5

15
1
7
4

230
671
28

$5,169

$4,895

$4,466

(33)

The following discusses operating results within each of KFNA’s
reportable segments.

(4)

Cheese, Meals and Enhancers: Reported volume in 2002
increased 13.0% over 2001, due primarily to the inclusion in 2002
of a business that was previously held for sale. On a pro forma
basis, volume in 2002 increased 0.5%, driven by volume gains in
enhancers, meals and food service, partially offset by a decline in
cheese. Volume gains in enhancers and meals were led by Kraft
pourable dressings, barbecue sauce, macaroni & cheese dinners
and the 2001 acquisition of It’s Pasta Anytime. In cheese, volume
declined as lower dairy costs resulted in aggressive competitive
activity by private label manufacturers as they reduced prices and
increased merchandising levels.

During 2002, reported net revenues increased $145 million (1.7%)
over 2001, due primarily to the inclusion in 2002 of a business that
was previously held for sale ($252 million) and higher volume/mix
($36 million), partially offset by lower net pricing ($135 million,
primarily related to lower dairy commodity costs). On a pro forma
basis, net revenues decreased 1.2% from the comparable period
of 2001, as lower net pricing was partially offset by higher
volume/mix.

Reported operating companies income for 2002 increased
$69 million (3.3%) over 2001, due primarily to favorable margins
($48 million, due primarily to lower cheese commodity costs and
productivity savings), higher volume/mix ($30 million), lower
integration related costs in 2002 ($33 million) and the inclusion in
2002 of a business that was previously held for sale ($23 million),
partially offset by higher benefit expenses, including the 2002
charge for voluntary retirement programs ($60 million). On a pro
forma basis, operating companies income also increased 3.3%,
driven by favorable margins and higher volume/mix, partially
offset by higher benefit expenses.

Biscuits, Snacks and Confectionery: Reported volume in 2002
increased 0.8% over 2001. On a pro forma basis, volume in 2002
increased 0.7% over 2001, as volume gains in biscuits and snacks
were partially offset by a decline in confectionery shipments. In
biscuits, volume increased, driven by new product initiatives in
both cookies and crackers. In snacks, volume also increased,
due primarily to promotional initiatives. Confectionery volume
declined, resulting primarily from competitive activity in the breath
freshening category, partially offset by new product introductions
in the non-chocolate confectionery business.

KFNA’s reported volume for 2002 increased 8.2% over 2001, due
primarily to the inclusion in 2002 of a business that was previously
held for sale and contributions from new products. On a pro
forma basis, volume for 2002 increased 2.8%, due primarily to
higher shipments across all segments, which benefited from
contributions by new products.

Reported net revenues increased $515 million (2.5%) over 2001,
due primarily to higher volume/mix ($437 million) and the
inclusion in 2002 of a business that was previously held for sale

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

During 2002, reported net revenues increased $111 million (2.2%)
over 2001, due to higher volume/mix ($59 million) and higher net
pricing ($52 million). On a pro forma basis, net revenues also
increased 2.2%.

Reported operating companies income for 2002 increased
$127 million (13.1%) over 2001, due primarily to favorable margins
($96 million, due primarily to higher net pricing and lower
commodity costs for nuts), Nabisco synergy savings and higher
volume/mix. On a pro forma basis, operating companies income
increased 12.4%.

Beverages, Desserts and Cereals: Reported and pro forma
volume in 2002 increased 8.4% over 2001, due primarily to growth
in ready-to-drink beverages. In coffee, volume increased, driven
by merchandising programs and packaging innovation. In the
desserts business, volume increases were led by dry packaged
desserts and frozen toppings, which benefited from holiday
programs, and in ready-to-eat desserts, aided by new products.

During 2002, reported net revenues increased $175 million (4.1%)
over 2001, due primarily to higher volume/mix ($245 million),
partially offset by lower net pricing ($58 million). On a pro forma
basis, net revenues increased 4.4%.

Reported operating companies income for 2002 decreased
$56 million (4.7%) from 2001, primarily reflecting the 2002
charge for voluntary retirement programs ($47 million), higher
integration related costs in 2002 ($44 million), higher marketing,
administration and research costs ($36 million, including higher
benefit costs) and lower margins ($18 million), partially offset by
higher volume/mix ($98 million) and productivity savings. On a
pro forma basis, operating companies income increased 3.1%,
resulting from volume growth and productivity savings, partially
offset by higher marketing, administration and research costs.

Oscar Mayer and Pizza: Reported and pro forma volume in 2002
increased 2.3% over 2001, due to volume gains in processed
meats and pizza. The increase in processed meats was driven by
gains in hot dogs, bacon and soy-based meat alternatives, aided
by new product introductions. The pizza business also benefited
from new products.

During 2002, reported and pro forma net revenues increased
$84 million (2.9%) over 2001, due to higher volume/mix
($97 million), partially offset by lower net pricing ($13 million).

Reported operating companies income for 2002 increased
$17 million (3.2%) over 2001, primarily reflecting favorable
costs ($50 million, due primarily to lower meat and cheese
commodity costs and productivity savings) and higher
volume/mix ($30 million), partially offset by the 2002 charge for
voluntary retirement programs ($25 million), higher marketing,
administration and research costs ($24 million, including higher
benefit costs) and higher manufacturing costs. On a pro forma
basis, operating companies income increased 8.1%.

2001 compared with 2000

KFNA’s reported volume for 2001 increased 31.7% over 2000,
due primarily to the acquisition of Nabisco. On a pro forma basis,
volume for 2001 increased 1.7%, or 2.9% excluding the 53rd week
of shipments in 2000. The 2.9% increase was due primarily to
higher shipments across all segments and reflects contributions
from new products.

Reported net revenues increased $5.7 billion (37.0%) over 2000,
due primarily to the acquisition of Nabisco ($5.7 billion) and the
shift in CDC revenues ($59 million), partially offset by unfavorable
currency movements ($62 million). On a pro forma basis, net
revenues increased 0.4%, due primarily to higher net revenues
from the Biscuits, Snacks and Confectionery segment and the
Oscar Mayer and Pizza segment, partially offset by the impact of
the 53rd week in 2000.

Reported operating companies income for 2001 increased
$1,249 million (35.2%) over 2000, due primarily to the acquisition
of Nabisco ($1.2 billion), lower marketing, administration and
research costs ($274 million) and the shift in CDC income
($27 million), partially offset by lower margins ($136 million, driven
primarily by higher dairy commodity-related costs) and the loss
on the sale of a North American food factory and integration
costs ($82 million). On a pro forma basis, operating companies
income increased 9.6%.

The following discusses operating results within each of KFNA’s
reportable segments.

Cheese, Meals and Enhancers: Reported volume in 2001
increased 8.3% over 2000, due primarily to the acquisition of
Nabisco. On a pro forma basis, volume in 2001 decreased 1.1%,
due primarily to the 53rd week of shipments in 2000. Excluding
the 53rd week of shipments in 2000, volume increased 0.2%, as
volume gains in meals, enhancers and Canada were partially
offset by declines in cheese and food service. Meals recorded
volume gains, reflecting higher shipments of macaroni & cheese
dinners. Enhancers also recorded volume gains, reflecting higher
shipments of spoonable and pourable dressings. In Canada,
volume grew on higher shipments of branded products. In
cheese, shipments decreased, due primarily to the Company’s
decision to exit the lower-margin, non-branded cheese business.
Volume also declined in process cheese loaves and cream
cheese, as retailers continued to reduce trade inventory levels,
partially offset by higher volume in grated and natural cheese. In
U.S. food service, shipments declined due to weakness in the
economy and the Company’s exit from lower-margin businesses.

During 2001, reported net revenues increased $809 million
(10.2%) over 2000, due primarily to the acquisition of Nabisco
($791 million), higher net pricing ($122 million, primarily related
to higher dairy commodity costs) and the shift in CDC revenues
($29 million), partially offset by lower volume/mix ($65 million) and
unfavorable currency movements ($62 million). On a pro forma
basis, net revenues increased slightly from the comparable period
of 2000, as higher pricing in cheese and food service were
partially offset by unfavorable currency and lower volume/mix.

Reported operating companies income for 2001 increased
$254 million (13.8%) over 2000, due primarily to the acquisition
of Nabisco ($234 million), lower marketing, administration and
research costs ($140 million, primarily lower marketing expense)
and the shift in CDC income ($15 million), partially offset by
unfavorable margins ($48 million, due primarily to higher dairy
commodity costs) and the loss on the sale of a North American
food factory and integration costs ($63 million). On a pro forma
basis, operating companies income increased 6.4%.

Biscuits, Snacks and Confectionery: Reported volume in 2001
increased more than 100% over 2000, due primarily to the
acquisition of Nabisco. On a pro forma basis, volume in 2001
increased 1.6% over 2000. Excluding the 53rd week of shipments
in 2000, volume also increased 1.6%, due primarily to new
product introductions in biscuits, partially offset by lower
shipments of snack nuts.

During 2001, reported net revenues increased $4.8 billion, or more
than 100% over 2000, due primarily to the acquisition of Nabisco.
On a pro forma basis, net revenues increased 2.1%, due primarily
to higher volume driven by new biscuit products and higher
pricing of biscuit and confectionery products.

Reported operating companies income for 2001 increased
$866 million, or more than 100% over 2000, due primarily to the
acquisition of Nabisco ($925 million), partially offset by higher
marketing, administration and research costs ($27 million). On a
pro forma basis, operating companies income increased 24.9%,
due primarily to higher volume from new biscuit products, lower
commodity costs for snack nuts, and productivity and Nabisco
synergy savings.

Beverages, Desserts and Cereals: Reported volume in 2001
increased 9.8% over 2000, due primarily to growth in beverages.
On a pro forma basis, volume in 2001 increased 7.7% over 2000.
Excluding the 53rd week of shipments in 2000, volume increased
9.3%, due primarily to increased shipments of ready-to-drink
beverages, benefiting from the introduction of new products.
Desserts volume was below the prior year, due to lower shipments
of dry packaged desserts and frozen toppings. Cereal volume
declined, due primarily to weak category performance and
increased competition in the ready-to-eat cereal category.

During 2001, reported net revenues decreased $30 million (0.7%)
from 2000, due primarily to lower net pricing ($167 million, due
primarily to coffee commodity-related price reductions), partially
offset by the acquisition of Nabisco ($83 million), the acquisition
of Balance Bar Co. ($20 million), the shift in CDC revenues ($16
million) and higher volume/mix ($17 million). On a pro forma basis,
net revenues decreased 3.1%, reflecting commodity-related price
reductions on coffee products and lower shipments in desserts
and cereals.

Reported operating companies income for 2001 increased
$102 million (9.4%) over 2000, primarily reflecting lower marketing,
administration and research costs ($139 million), the acquisition
of Nabisco ($32 million), and the shift in CDC income ($7 million),
partially offset by unfavorable margins ($31 million) and

integration costs ($12 million). On a pro forma basis, operating
companies income increased 6.8%.

Oscar Mayer and Pizza: Reported volume in 2001 increased
0.8% over 2000. Excluding the 53rd week of shipments in 2000,
volume increased 2.3%, due to volume gains in processed meats
and pizza. The processed meats business recorded volume gains
in luncheon meats, hot dogs, bacon and soy-based meat
alternatives. Volume in the pizza business increased, driven by
new products.

During 2001, reported net revenues increased $101 million (3.6%)
over 2000, due primarily to higher volume/mix ($75 million), the
shift in CDC revenues ($11 million) and the acquisition of Boca
Burger, Inc.

Reported operating companies income for 2001 increased
$27 million (5.3%) over 2000, primarily reflecting higher
volume/mix ($45 million), lower marketing, administration and
research costs ($22 million) and the shift in CDC income, partially
offset by unfavorable margins ($36 million, due primarily to higher
meat and cheese commodity costs).

Kraft Foods International

Year Ended December 31,

2002

2001

2,961
2,059
5,020

(135)

2,826
2,057
4,883

(1)
(172)

Reported volume (in pounds):

Europe, Middle East and Africa
Latin America and Asia Pacific
Total reported volume (in pounds)

Volume of businesses sold:

Europe, Middle East and Africa
Latin America and Asia Pacific

Estimated impact of century

date change:
Europe, Middle East and Africa
Latin America and Asia Pacific

Nabisco volume:

Europe, Middle East and Africa
Latin America and Asia Pacific

Pro forma volume (in pounds)

4,885

4,710

(in millions)
2000

2,829
803
3,632

(40)
(37)

7
7

44
936
4,549

Reported net revenues:

Europe, Middle East and Africa
Latin America and Asia Pacific

Total reported net revenues

Net revenues of businesses sold:
Europe, Middle East and Africa
Latin America and Asia Pacific

Estimated impact of century

date change:
Europe, Middle East and Africa
Latin America and Asia Pacific

Nabisco net revenues:

Europe, Middle East and Africa
Latin America and Asia Pacific

Pro forma net revenues

$8,170

$8,174

$6,203
2,035
8,238

$5,936
2,328
8,264

$6,398
1,212
7,610

(68)

(90)

(131)
(21)

14
12

46
1,028
$8,558

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

Kraft Foods International (continued)

Year Ended December 31,

2002

2001

(in millions)
2000

Reported operating

companies income:
Europe, Middle East and Africa
Latin America and Asia Pacific

Total reported operating
companies income
Gains on sales of businesses:

Europe, Middle East and Africa
Latin America and Asia Pacific
Operating companies income of

businesses sold:
Europe, Middle East and Africa
Latin America and Asia Pacific

Integration costs:

Latin America and Asia Pacific

Separation programs:

Europe, Middle East and Africa
Latin America and Asia Pacific

Estimated impact of century

date change:
Europe, Middle East and Africa
Latin America and Asia Pacific

Nabisco operating

companies income:
Europe, Middle East and Africa
Latin America and Asia Pacific

Pro forma operating
companies income

2002 compared with 2001

$ 962
368

$ 861
378

$1,019
189

1,330

1,239

1,208

(72)

(8)

(10)

(18)

5
2

(139)

(32)
(3)

8
5

1
70

$1,272

$1,213

$1,118

KFI’s reported volume for 2002 increased 2.8% over 2001. On a
pro forma basis, volume for 2002 increased 3.7% over 2001, due
primarily to acquisitions, new product introductions, geographic
expansion and marketing programs. This increase in volume was
partially offset by the impact of economic weakness in several
Latin American countries.

During 2002, reported net revenues decreased $26 million
(0.3%) from 2001, due primarily to unfavorable currency
movements ($271 million), lower volume/mix ($36 million) and
revenues of divested businesses ($22 million), partially offset
by the impact of acquisitions ($181 million) and higher net
pricing ($122 million). On a pro forma basis, net revenues
decreased slightly.

Reported operating companies income for 2002 increased
$91 million (7.3%) over 2001, due primarily to gains on sales of
businesses ($64 million), favorable margins ($37 million, including
productivity savings), lower marketing, administration and
research costs ($23 million, including synergy savings) and the
impact of acquisitions ($18 million), partially offset by lower
volume/mix ($19 million), 2002 integration costs ($17 million) and
income of divested businesses ($8 million). On a pro forma
basis, operating companies income increased 4.9%, driven

by productivity and synergy savings, partially offset by lower
volume/mix.

The following discusses operating results within each of KFI’s
reportable segments.

Europe, Middle East and Africa: Reported and pro forma
volume for 2002 increased 4.8% over 2001, driven by acquisitions
and volume growth across most markets including Italy, the
United Kingdom, Sweden, the Ukraine, the Middle East and
Poland, partially offset by declines in Germany and Romania.
Snacks volume increased, benefiting from confectionery
acquisitions in Russia and Poland, a snacks acquisition in Turkey
and new product introductions across the segment. Snacks
volume growth was moderated by a decline in Germany,
reflecting aggressive competitive activity, and in Romania, due
to lower consumer purchasing power. In beverages, volume
increased in both coffee and refreshment beverages. Coffee
volume grew in most markets, driven by new product
introductions, and acquisitions in Romania, Morocco and
Bulgaria. In Germany, coffee volume decreased, reflecting
market softness and increased price competition. Refreshment
beverages volume also increased, driven by the geographic
expansion of powdered beverages and new product
introductions. Cheese volume increased with gains in
Philadelphia cream cheese, benefiting from advertising and new
product introductions. In convenient meals, volume increased,
due primarily to higher canned meats volume in Italy against a
weak comparison in 2001, and new product introductions of lunch
combinations in the United Kingdom.

Reported and pro forma net revenues for 2002 increased
$267 million (4.5%) over 2001, due primarily to favorable
currency movements ($197 million), the acquisitions of coffee,
confectionery and snacks businesses ($147 million) and higher
volume/mix ($22 million), partially offset by lower net pricing
($99 million, due primarily to commodity-driven coffee
price declines).

Reported operating companies income for 2002 increased
$101 million (11.7%) over 2001, due primarily to favorable margins
($42 million), favorable currency movements ($37 million), higher
volume/mix ($19 million) and acquisitions ($16 million), partially
offset by higher marketing, administration and research costs. On
a pro forma basis, operating companies income increased 12.3%.

Latin America and Asia Pacific: Reported volume for 2002
increased slightly over 2001. On a pro forma basis, volume for
2002 increased 2.1% over 2001, driven by the acquisition of a
biscuits business in Australia and gains across numerous
markets, partially offset by a volume decline in Argentina due
to economic weakness, and lower results in China. In snacks,
volume growth was driven by gains in biscuits, benefiting from
geographic expansion of cookies and crackers in Latin America,
new product introductions and the acquisition of a biscuits
business in Australia. Snacks volume growth was partially offset
by the negative impact of the continued economic weakness
in Argentina and distributor inventory reductions in China.
Beverages volume also increased, due primarily to growth in
powdered beverages in numerous markets across Latin America

and Asia Pacific, which benefited from new product introductions.
In grocery, volume declined in both Latin America and Asia
Pacific. Continued instability of the economic climate in
Argentina, Brazil and Venezuela is expected to negatively impact
volume and income in the Latin America and Asia Pacific segment
during 2003.

During 2002, reported net revenues decreased $293 million
(12.6%) from 2001, due primarily to unfavorable currency
movements ($468 million), lower volume/mix ($58 million) and
revenues from divested businesses ($22 million), partially offset
by higher net pricing ($221 million) and the 2002 acquisition of a
biscuits business in Australia ($34 million). On a pro forma basis,
net revenues decreased 12.1%.

Reported operating companies income for 2002 decreased
$10 million (2.6%) from 2001, due primarily to lower volume/mix
($38 million), unfavorable currency movements ($37 million), 2002
integration costs ($17 million) and the operating companies
income of disposed businesses, partially offset by gains on sales
of businesses ($64 million) and lower marketing, administration
and research costs ($31 million, including synergy savings). On
a pro forma basis, operating companies income decreased
13.4%, due primarily to the devaluation driven cost increase
in Latin America and lower volume/mix, partially offset by
synergy savings.

2001 compared with 2000

KFI’s reported volume for 2001 increased 34.4% over 2000, due
primarily to the acquisition of Nabisco. On a pro forma basis,
volume for 2001 increased 3.5% over 2000. Excluding the 53rd
week of shipments in 2000, volume increased 4.8%, benefiting
from gains across most consumer sectors and driven by growth
in the developing markets of Central and Eastern Europe, Latin
America and Asia Pacific.

During 2001, reported net revenues increased $654 million
(8.6%) over 2000, due primarily to the acquisition of Nabisco
($1.2 billion) and the shift in CDC revenues ($26 million), partially
offset by unfavorable currency movements ($431 million) and
the revenues of divested businesses. On a pro forma basis, net
revenues decreased 4.5%, primarily reflecting unfavorable
currency movements.

Reported operating companies income for 2001 increased
$31 million (2.6%) over 2000, due primarily to the acquisition
of Nabisco ($128 million), lower marketing, administration and
research costs ($131 million) and the shift in CDC income
($13 million), partially offset by the gain on the sale of a French
confectionery business in 2000 ($139 million), unfavorable
currency movements ($51 million), unfavorable margins
($14 million) and income of divested businesses. On a pro
forma basis, operating companies income increased 8.5%.

The following discusses operating results within each of KFI’s
reportable segments.

Europe, Middle East and Africa: Reported and pro forma
volume for 2001 decreased slightly from 2000, due primarily to

the 53rd week of shipments in 2000. Excluding the 53rd week
of shipments in 2000, volume increased 1.3%, due primarily to
volume gains in the developing markets of Central and Eastern
Europe and growth in many Western European markets, partially
offset by lower volume in Germany, reflecting increased price
competition and trade inventory reductions, and lower canned
meats volume in Italy. In beverages, volume increased in both
coffee and refreshment beverages. Coffee volume grew in many
markets, driven by new product introductions and recent
acquisitions in Romania, Morocco and Bulgaria. In Germany,
coffee volume increased despite trade inventory reductions.
Refreshment beverages volume increased, driven by higher
sales to the Middle East. Snacks volume increased, driven by
confectionery and salted snacks, particularly in Central and
Eastern Europe. Snacks volume in Germany was lower due to
increased price competition and trade inventory reductions.
Cheese volume increased, due primarily to Philadelphia cream
cheese growth across the region, partially offset by lower
volume in Germany. In convenient meals and grocery, volume
declined as lower canned meats volume in Italy and a decline
in grocery volume in Germany were partially offset by higher
shipments of lunch combinations and pourable dressings in
the United Kingdom.

Reported net revenues for 2001 decreased $462 million (7.2%)
from 2000, due primarily to unfavorable currency movements
($231 million), revenues from divested businesses, lower net
pricing ($122 million, primarily commodity-driven coffee price
decreases) and lower volume/mix ($69 million), partially offset by
the acquisition of Nabisco ($46 million), the 2001 acquisitions of
coffee businesses in Romania, Morocco and Bulgaria ($28 million)
and the shift in CDC revenues ($14 million). On a pro forma basis,
net revenues decreased 6.2%, reflecting unfavorable currency
movements and commodity-related coffee price decreases.

Reported operating companies income for 2001 decreased
$158 million (15.5%) from 2000, due primarily to the gain on the
sale of a French confectionery business in 2000 ($139 million),
unfavorable currency movements ($19 million), income from
divested businesses, lower volume/mix ($12 million) and
unfavorable margins ($7 million), partially offset by lower
marketing, administration and research costs ($42 million)
and the shift in CDC income. On a pro forma basis, operating
companies income increased 0.5%.

Latin America and Asia Pacific: Reported volume for 2001
increased more than 100% from 2000, due primarily to the
acquisition of Nabisco. On a pro forma basis, volume for 2001
increased 10.3% over 2000. Excluding the 53rd week of
shipments in 2000, volume increased 10.6%, due to gains across
most consumer sectors. Beverages volume increased, due
primarily to growth in refreshment beverages in Latin America and
Asia Pacific, and coffee in Asia Pacific. Cheese volume increased,
due primarily to cream cheese and process cheese. Grocery
volume was higher, due primarily to new product introductions.
Snacks volume increased, driven primarily by new biscuit product
introductions and geographic expansion, partially offset by lower
volume in Argentina, due to economic weakness.

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

During 2001, reported net revenues increased $1,116 million
(92.1%) over 2000, due primarily to the acquisition of Nabisco,
partially offset by unfavorable currency movements. On a pro
forma basis, net revenues increased 0.3%.

Reported operating companies income for 2001 increased
$189 million (100.0%) over 2000, due primarily to the acquisition
of Nabisco ($128 million), lower marketing, administration and
research costs ($89 million) and the shift in CDC income, partially
offset by unfavorable currency movements ($32 million). On a pro
forma basis, operating companies income increased 34.9%, due
primarily to productivity savings and Nabisco synergies.

During 2001, net cash of $2.1 billion was used in financing
activities, compared with $13.0 billion provided by financing
activities during 2000. During 2001, financing activities included
net debt repayments of $2.0 billion, excluding debt repayments
made with IPO proceeds. The net proceeds from the IPO were
used to repay debt to Altria Group, Inc. and affiliates, and, as
a result, had no impact on financing cash flows. In 2000, the
Company’s financing activities provided cash, as additional
borrowings to finance the acquisition of Nabisco exceeded the
cash used to pay dividends.

Debt and Liquidity

Financial Review

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $3.7 billion in 2002
and $3.3 billion in 2001 and 2000. The increase in 2002 operating
cash flows over 2001 primarily reflected cash flow from increased
net earnings.

Net Cash Used in Investing Activities

One element of the growth strategy of the Company is to
strengthen its brand portfolios through disciplined programs
of selective acquisitions and divestitures. The Company is
constantly investigating potential acquisition candidates and from
time to time sells businesses that are outside its core categories
or that do not meet its growth or profitability targets.

During 2002, 2001 and 2000, net cash used in investing
activities was $1.1 billion, $1.2 billion and $16.1 billion,
respectively. The decrease in 2002 primarily reflected lower
purchases of businesses and higher cash received from the
sales of businesses, partially offset by higher capital expenditures
related to the integration of Nabisco. The cash used in 2000
primarily reflected cash used for the acquisition of Nabisco.

Capital expenditures, which were funded by operating activities,
were $1.2 billion, $1.1 billion and $906 million in 2002, 2001 and
2000, respectively. The capital expenditures were primarily to
modernize the manufacturing facilities, lower cost of production
and expand production capacity for growing product lines. In
2003, capital expenditures are expected to be at or slightly
below 2002 expenditures and are expected to be funded
from operations.

Net Cash Used in Financing Activities

During 2002, net cash of $2.6 billion was used in financing
activities, compared with $2.1 billion during 2001. The increase
in cash used was due primarily to dividends paid during 2002
and repurchases of the Company’s Class A common stock.
During 2002, the Company issued $2.5 billion of global bonds
and $750 million of floating rate notes, the proceeds of which
were used to repay outstanding indebtedness. Financing
activities included net debt repayments of approximately
$1.5 billion in 2002.

The SEC issued Financial Reporting Release No. 61, which
sets forth the views of the SEC regarding enhanced disclosures
relating to liquidity and capital resources. The information
provided below about the Company’s debt, credit facilities,
guarantees and future commitments is included here to facilitate
a review of the Company’s liquidity.

Debt: The Company’s total debt, including amounts due to Altria
Group, Inc. and affiliates, was $14.4 billion at December 31, 2002
and $16.0 billion at December 31, 2001. Aggregate prepayments
of $3.9 billion on the 7.0% note payable to Altria Group, Inc. and
affiliates and repayments of short-term borrowings were partially
offset by an increase in long-term debt.

In April 2002, the Company filed a Form S-3 shelf registration
statement with the Securities and Exchange Commission, under
which the Company may sell debt securities and/or warrants to
purchase debt securities in one or more offerings up to a total
amount of $5.0 billion. In May 2002, the Company issued
$2.5 billion of global bonds under the shelf registration. The bond
offering included $1.0 billion of five-year notes bearing interest at
a rate of 5.25% and $1.5 billion of ten-year notes bearing interest
at a rate of 6.25%. The net proceeds from the offering were used
to retire maturing long-term debt in the amount of $400 million
and to prepay a portion (approximately $2.1 billion) of the
Company’s 7.0% long-term note payable to Altria Group, Inc. and
affiliates. In November 2002, the Company issued $750 million of
floating rate notes due in 2004 under the shelf registration. The
interest rate on the notes is based on the three-month London
Interbank Offered Rate plus 0.20% and will be reset quarterly. The
net proceeds from the offering were used to prepay a portion of
the Company’s 7.0% long-term note payable to Altria Group, Inc.
and affiliates. At December 31, 2002, the Company had $1,750
million of capacity remaining under its existing $5.0 billion shelf
registration statement.

During 2002, the Company prepaid $3,850 million of the 7.0%
long-term notes payable to Altria Group, Inc. and affiliates. In
addition, at December 31, 2002, the Company had short-term
debt totaling $2,305 million to Altria Group, Inc. and affiliates.
Interest on these borrowings is based on the average one-month
London Interbank Offered Rate. A portion of the short-term debt,
totaling $1,410 million, was reclassified on the consolidated
balance sheet as long-term notes due to Altria Group, Inc. and
affiliates based upon the Company’s ability and intention to
refinance such amounts on a long-term basis.

As discussed in Notes 3, 7 and 8 to the consolidated financial
statements, the Company’s total debt of $14.4 billion at December
31, 2002, which includes borrowings from Altria Group, Inc. and
affiliates, is due to be repaid as follows: in 2003, $4.3 billion; in
2004-2005, $1.6 billion; in 2006-2007, $2.6 billion; and thereafter,
$5.9 billion. Debt obligations due to be repaid in 2003 will be
satisfied with a combination of short-term borrowings, long-term
borrowings and operating cash flows. The Company’s debt-to-
equity ratio was 0.56 at December 31, 2002 and 0.68 at
December 31, 2001.

$12 million expiring in 2003. The Company is required to perform
under these guarantees in the event that a third-party fails to
make contractual payments or achieve performance measures.
The Company has recorded a liability of $21 million at December
31, 2002 relating to these guarantees. In addition, at December 31,
2002, the Company was contingently liable for $58 million of
guarantees related to its own performance. These include surety
bonds related to dairy commodity purchases and guarantees
related to letters of credit. Guarantees do not have, and are not
expected to have, a significant impact on the Company’s liquidity.

Credit Ratings: The Company’s credit ratings by Moody’s at
December 31, 2002 were “P-1” in the commercial paper market
and “A2” for long-term debt obligations. The Company’s credit
ratings by Standard & Poor’s at December 31, 2002 were “A-1”
in the commercial paper market and “A-” for long-term debt
obligations. The Company’s credit ratings by Fitch Rating
Services at December 31, 2002 were “F-1” in the commercial
paper market and “A” for long-term debt obligations. Changes
in the Company’s credit ratings, although none are currently
anticipated, could result in corresponding changes in the
Company’s borrowing costs. However, none of the Company’s
debt agreements require accelerated repayment in the event of
a decrease in credit ratings.

Credit Lines: The Company and its subsidiaries maintain
credit lines with a number of lending institutions, amounting to
$5.6 billion at December 31, 2002. Approximately $5.4 billion of
these lines were undrawn at December 31, 2002. Certain of these
credit lines were used to support commercial paper borrowings
of $1.4 billion at December 31, 2002, the proceeds of which were
used for general corporate purposes. Approximately $600 million
of these credit lines are available to meet the short-term working
capital needs of the Company’s international businesses. At
December 31, 2002, the Company’s credit lines also include a
$2.0 billion, five-year revolving credit facility expiring in July 2006
and a $3.0 billion 364-day revolving credit facility expiring in
July 2003. These credit facilities require the maintenance of a
minimum net worth, as defined in the credit facility, of $18.2
billion, which the Company met at December 31, 2002. The
Company does not currently anticipate any difficulty in continuing
to meet this covenant requirement. The foregoing revolving
credit facilities do not include any other financial tests, any
credit rating triggers or any provisions that could require the
posting of collateral. The five-year revolving credit facility
enables the Company to reclassify short-term debt on a long-
term basis. At December 31, 2002, $1.4 billion of commercial
paper borrowings that the Company intends to refinance were
reclassified as long-term debt. The Company expects to continue
to refinance long-term and short-term debt from time to time.
The nature and amount of the Company’s long-term and short-
term debt and the proportionate amount of each can be
expected to vary as a result of future business requirements,
market conditions and other factors.

Guarantees and Commitments: As discussed in Note 17 to the
consolidated financial statements, the Company had third-party
guarantees, which are primarily derived from acquisition and
divestiture activities, of $36 million at December 31, 2002.
Substantially all of these guarantees expire through 2012, with

The Company’s consolidated rent expense for 2002 was
$437 million. Accordingly, the Company does not consider its
lease commitments to be a significant determinant of the
Company’s liquidity.

The Company believes that its cash from operations, existing
credit facilities and access to global capital markets will provide
sufficient liquidity to meet its working capital needs, planned
capital expenditures and payment of its anticipated quarterly
dividends.

Equity and Dividends

Dividends paid in 2002 and 2001 were $936 million and
$225 million, respectively, reflecting the payment of four quarterly
dividends during 2002, compared with one during 2001, as well
as a higher dividend rate in 2002. During the third quarter of 2002,
the Company’s Board of Directors approved a 15.4% increase in
the quarterly dividend rate to $0.15 per share on its Class A and
Class B common stock. As a result, the present annualized
dividend rate is $0.60 per common share. The declaration of
dividends is subject to the discretion of the Company’s Board
of Directors and will depend on various factors, including the
Company’s net earnings, financial condition, cash requirements,
future prospects and other factors deemed relevant by the
Company’s Board of Directors.

On June 21, 2002, the Company’s Board of Directors approved
the repurchase from time to time of up to $500 million of the
Company’s Class A common stock solely to satisfy the
obligations of the Company to provide shares under its 2001
Performance Incentive Plan, 2001 Director Plan for non-employee
directors, and other plans where options to purchase the
Company’s Class A common stock are granted to employees
of the Company. During 2002, the Company repurchased
approximately 4.4 million shares of its Class A common stock at
a cost of $170 million.

Concurrently with the IPO, certain employees of Altria Group, Inc.
and its subsidiaries (other than the Company) received a one-time
grant of options to purchase shares of the Company’s Class A
common stock held by Altria Group, Inc. at the IPO price of
$31.00 per share. In order to completely satisfy this obligation and
maintain its current percentage ownership of the Company, Altria
Group, Inc. purchased 1.6 million shares of the Company’s Class
A common stock in open market transactions during 2002.

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

Market Risk

The Company operates globally, with manufacturing and sales
facilities in various locations around the world, and utilizes
certain financial instruments to manage its foreign currency and
commodity exposures, which primarily relate to forecasted
transactions. Derivative financial instruments are used by the
Company, principally to reduce exposures to market risks
resulting from fluctuations in foreign exchange rates and
commodity prices by creating offsetting exposures. The
Company is not a party to leveraged derivatives and, by policy,
does not use financial instruments for speculative purposes.

Substantially all of the Company’s derivative financial instruments
are effective as hedges under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” During the years
ended December 31, 2002 and 2001, ineffectiveness related to
cash flow hedges was not material. At December 31, 2002, the
Company is hedging forecasted transactions for periods not
exceeding fifteen months and expects substantially all amounts
reported in accumulated other comprehensive earnings (losses)
to be reclassified to the consolidated statement of earnings within
the next twelve months.

Foreign Exchange Rates: The Company uses forward foreign
exchange contracts and foreign currency options to mitigate its
exposure to changes in foreign currency exchange rates from
third-party and intercompany forecasted transactions. The
primary currencies to which the Company is exposed, based on
the size and location of its operations, include the euro, British
pound and Canadian dollar. At December 31, 2002 and 2001, the
Company had option and forward foreign exchange contracts
with aggregate notional amounts of $575 million and $431 million,
respectively, which are comprised of contracts for the purchase
and sale of foreign currencies. The effective portion of unrealized
gains and losses associated with forward contracts is deferred as
a component of accumulated other comprehensive earnings
(losses) until the underlying hedged transactions are reported on
the Company’s consolidated statement of earnings.

Commodities: The Company is exposed to price risk related to
forecasted purchases of certain commodities used as raw
materials by the Company’s businesses. Accordingly, the
Company uses commodity forward contracts, as cash flow
hedges, primarily for coffee, cocoa, milk and cheese. Commodity
futures and options are also used to hedge the price of certain
commodities, including milk, coffee, cocoa, wheat, corn, sugar
and soybean oil. In general, commodity forward contracts
qualify for the normal purchase exception under SFAS No. 133
and are, therefore, not subject to the provisions of SFAS
No. 133. At December 31, 2002 and 2001, the Company had net
long commodity positions of $544 million and $589 million,
respectively. Unrealized gains or losses on net commodity
positions were immaterial at December 31, 2002 and 2001. The
effective portion of unrealized gains and losses on commodity
futures and option contracts is deferred as a component of
accumulated other comprehensive earnings (losses) and is
recognized as a component of cost of sales in the Company’s
consolidated statement of earnings when the related inventory
is sold.

Value at Risk: The Company uses a value at risk (“VAR”)
computation to estimate the potential one-day loss in the fair
value of its interest rate-sensitive financial instruments and to
estimate the potential one-day loss in pre-tax earnings of its
foreign currency and commodity price-sensitive derivative
financial instruments. The VAR computation includes the
Company’s debt; short-term investments; foreign currency
forwards, swaps and options; and commodity futures, forwards
and options. Anticipated transactions, foreign currency trade
payables and receivables, and net investments in foreign
subsidiaries, which the foregoing instruments are intended to
hedge, were excluded from the computation.

The VAR estimates were made assuming normal market
conditions, using a 95% confidence interval. The Company used
a “variance/co-variance” model to determine the observed
interrelationships between movements in interest rates and
various currencies. These interrelationships were determined by
observing interest rate and forward currency rate movements
over the preceding quarter for the calculation of VAR amounts at
December 31, 2002 and 2001, and over each of the four preceding
quarters for the calculation of average VAR amounts during each
year. The values of foreign currency and commodity options do
not change on a one-to-one basis with the underlying currency or
commodity, and were valued accordingly in the VAR computation.

The estimated potential one-day loss in fair value of the
Company’s interest rate-sensitive instruments, primarily debt,
under normal market conditions and the estimated potential one-
day loss in pre-tax earnings from foreign currency and commodity
instruments under normal market conditions, as calculated in the
VAR model, were as follows:

(in millions)

At 12/31/02 Average

High

Low

Pre-Tax Earnings Impact

Instruments sensitive to:
Foreign currency rates
Commodity prices

$ 5
4

$ 2
6

$ 5
9

$ 1
4

(in millions)

At 12/31/02 Average

High

Low

Instruments sensitive to:

Interest rates

$ 76

$74

$ 76

$70

Fair Value Impact

(in millions)

At 12/31/01 Average

High

Low

Pre-Tax Earnings Impact

Instruments sensitive to:
Foreign currency rates
Commodity prices

$ 2
5

$ 6
7

$ 13
11

$ 2
5

(in millions)

At 12/31/01 Average

High

Low

Instruments sensitive to:

Interest rates

$122

$79

$122

$56

Fair Value Impact

This VAR computation is a risk analysis tool designed to
statistically estimate the maximum probable daily loss from
adverse movements in interest rates, foreign currency rates
and commodity prices under normal market conditions. The
computation does not purport to represent actual losses in fair
value or earnings to be incurred by the Company, nor does it
consider the effect of favorable changes in market rates. The
Company cannot predict actual future movements in such market
rates and does not present these VAR results to be indicative of
future movements in such market rates or to be representative of
any actual impact that future changes in market rates may have
on its future results of operations or financial position.

New Accounting Standards

As previously discussed, on January 1, 2002, the Company
adopted SFAS No. 141, “Business Combinations,” SFAS No. 142,
“Goodwill and Other Intangible Assets,” Emerging Issues Task
Force (“EITF”) Issue No. 00-14, “Accounting for Certain Sales
Incentives” and EITF Issue No. 00-25, “Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the
Vendor’s Products.”

Effective January 1, 2002, the Company adopted SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” which replaces SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of.” SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, expands the scope
of a discontinued operation to include a component of an
entity and eliminates the exemption to consolidation when
control over a subsidiary is likely to be temporary. The adoption
of this new standard did not have a material impact on the
Company’s consolidated financial position, results of
operations or cash flows.

In July 2002, the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities.” SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by SFAS No. 146 include
lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation,
plant closing or other exit or disposal activity. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002. Accordingly, the Company will apply the
provisions of SFAS No. 146 prospectively to exit or disposal
activities initiated after December 31, 2002.

In November 2002, the FASB issued Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” Interpretation No. 45 requires the disclosure of
certain guarantees existing at December 31, 2002. In addition,
Interpretation No. 45 requires the recognition of a liability for the
fair value of the obligation of qualifying guarantee activities that
are initiated or modified after December 31, 2002. Accordingly, the
Company will apply the recognition provisions of Interpretation
No. 45 prospectively to guarantee activities initiated after
December 31, 2002.

In November 2002, the EITF issued EITF Issue No. 00-21,
“Revenue Arrangements with Multiple Deliverables,” which
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-
generating activities. Specifically, EITF Issue No. 00-21 addresses
how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF
Issue No. 00-21 is effective for the Company for revenue
arrangements entered into beginning July 1, 2003. The Company
does not expect the adoption of EITF Issue No. 00-21 to have a
material impact on its 2003 consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46,
“Consolidation of Variable Interest Entities.” Interpretation No. 46
requires that the assets, liabilities and results of the activity of
variable interest entities be consolidated into the financial
statements of the company that has the controlling financial
interest. Interpretation No. 46 also provides the framework for
determining whether a variable interest entity should be
consolidated based on voting interests or significant financial
support provided to it. Interpretation No. 46 will be effective for
the Company on February 1, 2003 for variable interest entities
created after January 31, 2003, and on July 1, 2003 for variable
interest entities created prior to February 1, 2003. The Company
does not expect the adoption of Interpretation No. 46 to have a
material impact on its 2003 consolidated financial statements.

Contingencies

See Note 17 to the consolidated financial statements for a
discussion of contingencies.

kraft foods inc.

management’s discussion and analysis of financial condition and results of operations

Forward-Looking and Cautionary Statements

The Company and its representatives may from time to time
make written or oral forward-looking statements, including
statements contained in the Company’s filings with the SEC and
in its reports to shareholders. One can identify these forward-
looking statements by use of words such as “strategy,”
“expects,” “plans,” “anticipates,” “believes,” “will,” “continues,”
“estimates,” “intends,” “projects,” “goals,” “targets” and other
words of similar meaning. One can also identify them by the fact
that they do not relate strictly to historical or current facts. These
statements are based on our assumptions and estimates and are
subject to risks and uncertainties. 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 cause actual results and outcomes to differ materially from
those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by
reference to the following cautionary statements.

Each of the Company’s segments is subject to intense
competition, changes in consumer preferences, the effects of
changing prices for its raw materials and local economic
conditions. Their results are dependent upon their continued
ability to promote brand equity successfully, to anticipate and
respond to new consumer trends, to develop new products
and markets, to broaden brand portfolios in order to compete

effectively with lower priced products in a consolidating
environment at the retail and manufacturing levels, and to
improve productivity. The Company’s results are also dependent
on its ability to consummate and successfully integrate
acquisitions, including its ability to derive cost savings from
the integration of Nabisco’s operations with the Company.
In addition, the Company is subject to the effects of foreign
economies, currency movements and fluctuations in levels
of customer inventories. The Company’s benefit expense is
subject to the investment performance of pension plan assets,
interest rates and cost increases for medical benefits offered
to employees and retirees. The food industry continues to be
subject to recalls if products become adulterated or misbranded,
liability if product consumption causes injury, ingredient
disclosure and labeling laws and regulations and the possibility
that consumers could lose confidence in the safety and quality
of certain food products. Developments in any of these areas,
which are more fully described elsewhere in this document
and which descriptions are incorporated into this section by
reference, could cause the Company’s results to differ materially
from results that have been or may be projected by or on behalf
of the Company. The Company cautions that the foregoing list
of important factors is not exclusive. Any forward-looking
statements are made as of the date of the document in which
they appear. The Company does not undertake to update any
forward-looking statement that may be made from time to time
by or on behalf of the Company.

2002

2001

2000

1999

1998

kraft foods inc.

selected financial data — five-year review

(in millions of dollars, except per share data)

Summary of Operations:

Net revenues*
Cost of sales*
Operating income
Interest and other debt expense, net
Earnings before income taxes and minority interest
Pre-tax profit margin
Provision for income taxes

Net earnings
Basic EPS
Diluted EPS
Dividends declared per share
Weighted average shares (millions)—Basic
Weighted average shares (millions)—Diluted

Capital expenditures
Depreciation
Property, plant and equipment, net
Inventories
Total assets
Long-term debt
Notes payable to Altria Group, Inc. and affiliates
Total debt

$29,723
17,720
6,114
847
5,267
17.7%
1,869

3,394
1.96
1.96
0.56
1,734
1,736

1,184
709
9,559
3,382
57,100
10,416
2,560
14,443

$29,234
17,566
4,884
1,437
3,447
11.8%
1,565

1,882
1.17
1.17
0.26
1,610
1,610

1,101
680
9,109
3,026
55,798
8,134
5,000
16,007

4,917
Total deferred income taxes
25,832
Shareholders’ equity
28.6%
Common dividends declared as a % of Basic EPS
28.6%
Common dividends declared as a % of Diluted EPS
14.92
Book value per common share outstanding
Market price per Class A common share—high/low 43.95-32.50
38.93
Closing price of Class A common share at year end
20
Price/earnings ratio at year end—Basic
20
Price/earnings ratio at year end—Diluted
Number of common shares outstanding at

4,565
23,478
22.2%
22.2%
13.53
35.57-29.50

34.03
29
29

$22,922
13,959
4,012
597
3,415
14.9%
1,414

2,001
1.38
1.38
—
1,455
1,455

906
499
9,405
3,041
52,071
2,695
21,407
25,826

942
14,048
—
—
9.65
—

—
—
—

$23,430
14,615
3,579
539
3,040
13.0%
1,287

1,753
1.20
1.20
—
1,455
1,455

860
491
6,526
2,563
30,336
433
6,602
7,828

789
13,461
—
—
9.25
—

—
—
—

1,455
71,000

$24,140
15,586
3,535
536
2,999
12.4%
1,367

1,632
1.12
1.12
—
1,455
1,455

841
494
6,494
2,570
31,391
483
6,234
7,168

707
15,134
—
—
10.40
—

—
—
—

1,455
78,000

year end (millions)
Number of employees

1,731
109,000

1,735
114,000

1,455
117,000

* Kraft Foods Inc. adopted Emerging Issues Task Force (“EITF”) statements relating to the classification of vendor consideration and certain sales incentives resulting in a reclassification of prior period data.

The adoption of the EITF statements had no impact on operating income, net earnings, or basic and diluted EPS.

kraft foods inc.

consolidated balance sheets

(in millions of dollars)

At December 31,

Assets

Cash and cash equivalents
Receivables (less allowances of $119 and $151)
Inventories:

Raw materials
Finished product

Deferred income taxes
Other current assets

Total current assets

Property, plant and equipment, at cost:

Land and land improvements
Buildings and building equipment
Machinery and equipment
Construction in progress

Less accumulated depreciation

Goodwill and other intangible assets, net
Prepaid pension assets
Other assets
Total Assets

Liabilities

Short-term borrowings
Current portion of long-term debt
Due to Altria Group, Inc. and affiliates
Accounts payable
Accrued liabilities:
Marketing
Employment costs
Other
Income taxes

Total current liabilities

Long-term debt
Deferred income taxes
Accrued postretirement health care costs
Notes payable to Altria Group, Inc. and affiliates
Other liabilities

Total liabilities

Contingencies (Note 17)

Shareholders’ Equity

Class A common stock, no par value (555,000,000 shares issued in 2002 and 2001)
Class B common stock, no par value (1,180,000,000 shares issued and outstanding)
Additional paid-in capital
Earnings reinvested in the business
Accumulated other comprehensive losses (primarily currency translation adjustments)

Less cost of repurchased stock (4,381,150 Class A shares)

Total shareholders’ equity

Total Liabilities and Shareholders’ Equity

See notes to consolidated financial statements.

2002

2001

215
3,116

162
3,131

1,372
2,010

3,382
511
232

7,456

387
3,153
10,108
802

14,450
4,891

9,559
36,420
2,814
851

1,281
1,745

3,026
466
221

7,006

387
2,915
9,264
706

13,272
4,163

9,109
35,957
2,675
1,051

$57,100

$55,798

220
352
895
1,939

1,474
610
1,316
363

7,169

10,416
5,428
1,889
2,560
3,806

31,268

23,655
4,814
(2,467)

26,002
(170)

25,832

$57,100

681
540
1,652
1,897

1,398
658
1,821
228

8,875

8,134
5,031
1,850
5,000
3,430

32,320

23,655
2,391
(2,568)

23,478

$55,798

kraft foods inc.

consolidated statements of earnings

(in millions of dollars, except per share data)

For the years ended December 31,

Net revenues
Cost of sales

Gross profit

Marketing, administration and research costs
Integration costs and a loss on sale of a food factory
Separation programs
Gains on sales of businesses
Amortization of intangibles

Operating income

Interest and other debt expense, net

Earnings before income taxes and minority interest

Provision for income taxes

Earnings before minority interest

Minority interest in earnings, net

Net earnings

Per share data:

Basic earnings per share

Diluted earnings per share

See notes to consolidated financial statements.

2002

2001

2000

$29,723
17,720

$29,234
17,566

$22,922
13,959

12,003
5,709
111
142
(80)
7

6,114
847

5,267
1,869

3,398
4

11,668
5,748
82

(8)
962

4,884
1,437

3,447
1,565

1,882

8,963
4,588

(172)
535

4,012
597

3,415
1,414

2,001

$ 3,394

$ 1,882

$ 2,001

$ 1.96

$ 1.17

$ 1.38

kraft foods inc.

consolidated statements of cash flows

(in millions of dollars)

For the years ended December 31,

Cash Provided By (Used In) Operating Activities

Net earnings
Adjustments to reconcile net earnings to operating cash flows:

Depreciation and amortization
Deferred income tax provision
Gains on sales of businesses
Integration costs and a loss on sale of a food factory
Separation programs
Cash effects of changes, net of the effects from acquired and

divested companies:
Receivables, net
Inventories
Accounts payable
Income taxes
Other working capital items

Increase in pension assets and postretirement liabilities, net
(Decrease) increase in amount due to Altria Group, Inc. and affiliates
Other

2002

2001

2000

$ 3,394

$ 1,882

$ 2,001

716
278
(80)
111
142

116
(220)
(116)
277
(552)
(34)
(244)
(68)

1,642
414
(8)
82

23
(107)
(73)
74
(407)
(245)
138
(87)

1,034
245
(172)

204
175
13
35
(195)
(215)
104
25

Net cash provided by operating activities

3,720

3,328

3,254

Cash Provided By (Used In) Investing Activities

Capital expenditures
Purchase of Nabisco, net of acquired cash
Purchases of other businesses, net of acquired cash
Proceeds from sales of businesses
Other

Net cash used in investing activities

Cash Provided By (Used In) Financing Activities

Net (repayment) issuance of short-term borrowings
Long-term debt proceeds
Long-term debt repaid
Net proceeds from sale of Class A common stock
Proceeds from issuance of notes payable to Altria Group, Inc. and affiliates
Repayment of notes payable to Altria Group, Inc. and affiliates
Increase in amounts due to Altria Group, Inc. and affiliates
Repurchase of Class A common stock
Dividends paid
Other

Net cash (used in) provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Cash and cash equivalents:

Increase (decrease)
Balance at beginning of year

Balance at end of year

Cash paid:

Interest

Income taxes

See notes to consolidated financial statements.

(1,184)

(122)
219
35

(1,052)

(1,036)
3,325
(609)

(3,850)
660
(170)
(936)

(2,616)

53
162

215

825

$ 1,368

(1,101)

(194)
21
52

(1,222)

2,505
4,077
(705)
8,425

(16,350)
142

(225)

(2,131)

(4)

(29)
191

162

$ 1,433

$ 1,058

(906)
(15,159)
(365)
300
(8)

(16,138)

(816)
87
(112)

15,000
(124)
143

(1,009)
(187)

12,982

(2)

96
95

191

605

$ 1,051

kraft foods inc.

consolidated statements of shareholders’ equity

(in millions of dollars, except per share data)

Accumulated Other
Comprehensive Earnings (Losses)

Class A
and B
Common
Stock

Additional
Paid-in
Capital

Earnings
Reinvested
in the
Business

Currency
Translation
Adjustments

Other

Total

Cost of

Total
Repurchased Shareholders’
Equity

Stock

Balances, January 1, 2000

$ —

$15,230

—

$(1,741)

$ (28)

$(1,769)

$ —

$13,461

Comprehensive earnings:

Net earnings
Other comprehensive losses,

net of income taxes:
Currency translation

adjustments
Additional minimum
pension liability

Total other comprehensive losses

Total comprehensive earnings
Dividends declared

Balances, December 31, 2000

—

15,230

Comprehensive earnings:

Net earnings
Other comprehensive losses,

net of income taxes:
Currency translation

adjustments
Additional minimum
pension liability
Change in fair value of

derivatives accounted
for as hedges

Total other comprehensive losses

Total comprehensive earnings
Sale of Class A common stock

to public

Dividends declared
($0.26 per share)
Balances, December 31, 2001

Comprehensive earnings:

Net earnings
Other comprehensive earnings
(losses), net of income taxes:
Currency translation

adjustments
Additional minimum
pension liability
Change in fair value of

derivatives accounted
for as hedges

Total other comprehensive earnings

Total comprehensive earnings
Dividends declared
($0.56 per share)
Class A common stock

repurchased
Balances, December 31, 2002

See notes to consolidated financial statements.

8,425

—

23,655

2,001

(1,009)
992

1,882

(483)
2,391

3,394

(971)

(397)

(8)

(2,138)

(36)

(2,174)

—

(298)

(78)

(18)

(2,436)

(132)

(2,568)

—

187

(117)

2,001

(397)

(8)
(405)
1,596
(1,009)
14,048

1,882

(298)

(78)

(18)
(394)
1,488

8,425

(483)
23,478

3,394

187

(117)

31
101
3,495

(971)

$ —

$23,655

$ 4,814

$(2,249)

$(218)

$(2,467)

(170)
$(170)

(170)
$25,832

kraft foods inc.
kraft foods inc.

notes to consolidated financial statements
notes to consolidated financial statements

Note 1. Background and Basis of Presentation:

Background: Kraft Foods Inc. (“Kraft”) was incorporated in 2000
in the Commonwealth of Virginia. Following Kraft’s formation,
Altria Group, Inc. (formerly Philip Morris Companies Inc.),
transferred to Kraft its ownership interest in Kraft Foods North
America, Inc. (“KFNA”), a Delaware corporation, through a capital
contribution. In addition, during 2000, a subsidiary of Altria
Group, Inc. transferred management responsibility for its food
businesses in Latin America to KFNA and its wholly-owned
subsidiary, Kraft Foods International, Inc. (“KFI”). Kraft, through
its subsidiaries (Kraft and its subsidiaries are hereinafter referred
to as the “Company”), is engaged in the manufacture and sale of
branded foods and beverages in the United States, Canada,
Europe, Latin America, Asia Pacific and Middle East and Africa.

On December 11, 2000, the Company acquired all of the
outstanding shares of Nabisco Holdings Corp. (“Nabisco”) for
$55 per share in cash. See Note 5. Acquisitions for a complete
discussion of this transaction.

Prior to June 13, 2001, the Company was a wholly-owned
subsidiary of Altria Group, Inc. On June 13, 2001, the Company
completed an initial public offering (“IPO”) of 280,000,000 shares
of its Class A common stock at a price of $31.00 per share.
The IPO proceeds, net of the underwriting discount and expenses,
of $8.4 billion were used to retire a portion of an $11.0 billion long-
term note payable to Altria Group, Inc., incurred in connection
with the acquisition of Nabisco. After the IPO, Altria Group, Inc.
owned approximately 83.9% of the outstanding shares of the
Company’s capital stock through its ownership of 49.5% of the
Company’s Class A common stock and 100% of the Company’s
Class B common stock. The Company’s Class A common stock
has one vote per share, while the Company’s Class B common
stock has ten votes per share. At December 31, 2002, Altria
Group, Inc. held 97.8% of the combined voting power of the
Company’s outstanding capital stock and owned approximately
84.2% of the outstanding shares of the Company’s capital stock.

Basis of presentation: The consolidated financial statements
include Kraft and its subsidiaries. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the dates of the financial statements and
the reported amounts of net revenues and expenses during the
reporting periods. Significant estimates and assumptions include,
among other things, pension and benefit plan assumptions and
income taxes. Actual results could differ from those estimates.
The Company’s operating subsidiaries report year-end results
as of the Saturday closest to the end of each year. This resulted
in fifty-three weeks of operating results in the Company’s
consolidated statement of earnings for the year ended
December 31, 2000.

Certain prior years’ amounts have been reclassified to conform
with the current year’s presentation, due primarily to the adoption of
new accounting rules regarding revenues, as well as the disclosure

of more detailed information on the consolidated statements of
earnings and the consolidated statements of cash flows.

Note 2. Summary of Significant Accounting Policies:

Cash and cash equivalents: Cash equivalents include demand
deposits with banks and all highly liquid investments with original
maturities of three months or less.

Depreciation, amortization and goodwill valuation: Property,
plant and equipment are stated at historical cost and depreciated
by the straight-line method over the estimated useful lives of
the assets. Machinery and equipment are depreciated over
periods ranging from 3 to 20 years and buildings and building
improvements over periods up to 40 years.

On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other Intangible
Assets.” As a result, the Company stopped recording the
amortization of goodwill and indefinite life intangible assets as
a charge to earnings as of January 1, 2002. Net earnings and
diluted earnings per share (“EPS”) would have been as follows
had the provisions of the new standards been applied as of
January 1, 2000:

For the years ended December 31,

Net earnings, as previously reported
Adjustment for amortization of goodwill and

indefinite life intangibles
Net earnings, as adjusted

Diluted EPS, as previously reported
Adjustment for amortization of goodwill and

indefinite life intangibles

Diluted EPS, as adjusted

(in millions, except per share amounts)
2000
2001

$1,882

$2,001

955
$2,837

$ 1.17

530
$2,531

$ 1.38

0.59
$ 1.76

0.36
$ 1.74

In addition, the Company is required to conduct an annual review
of goodwill and intangible assets for potential impairment.
In 2002, the Company completed its review and did not have to
record a charge to earnings for an impairment of goodwill or other
intangible assets.

At December 31, 2002, goodwill by reportable segment was
as follows:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International

Total goodwill

(in millions)

$ 8,556
9,262
2,143
616
20,577
4,082
252
4,334
$24,911

Intangible assets as of December 31, 2002 were as follows:

Non-amortizable intangible assets

Amortizable intangible assets

Total intangible assets

Gross
Carrying
Amount

$11,485

$11,539

(in millions)

Accumulated
Amortization

$30

Non-amortizable intangible assets are substantially comprised
of brand names purchased through the Nabisco acquisition.
Amortizable intangible assets consist primarily of certain
trademark licenses and non-compete agreements. Pre-tax
amortization expense for intangible assets was $7 million for
the year ended December 31, 2002. Based upon the amortizable
intangible assets recorded on the consolidated balance sheet at
December 31, 2002, amortization expense for each of the next
five years is estimated to be $8 million or less.

The increase in goodwill and other intangible assets, net,
during the year ended December 31, 2002, of $463 million is
primarily related to currency translation, partially offset by a
$76 million decrease in goodwill relating to the favorable
completion of severance and exit programs associated
with the Nabisco acquisition.

Environmental costs: The Company is subject to laws and
regulations relating to the protection of the environment. The
Company provides for expenses associated with environmental
remediation obligations on an undiscounted basis when such
amounts are probable and can be reasonably estimated.
Such accruals are adjusted as new information develops or
circumstances change.

While it is not possible to quantify with certainty the potential
impact of actions regarding environmental remediation and
compliance efforts that the Company may undertake in the
future, in the opinion of management, environmental remediation
and compliance costs, before taking into account any recoveries
from third parties, will not have a material adverse effect on the
Company’s consolidated financial position, results of operations
or cash flows.

Foreign currency translation: The Company translates the
results of operations of its foreign subsidiaries using average
exchange rates during each period, whereas balance sheet
accounts are translated using exchange rates at the end of each
period. Currency translation adjustments are recorded as a
component of shareholders’ equity. Transaction gains and losses
are recorded in the consolidated statements of earnings and were
not significant for any of the periods presented.

Guarantees: In November 2002, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” Interpretation No. 45 requires the disclosure of

certain guarantees existing at December 31, 2002. In addition,
Interpretation No. 45 requires the recognition of a liability for the
fair value of the obligation of qualifying guarantee activities that
are initiated or modified after December 31, 2002. Accordingly,
the Company will apply the recognition provisions of Interpretation
No. 45 prospectively to guarantee activities initiated after
December 31, 2002. See Note 17. Contingencies for a further
discussion of guarantees.

Hedging instruments: Effective January 1, 2001, the Company
adopted SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” and its related amendment, SFAS No.
138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities” (collectively referred to as “SFAS No. 133”).
These standards require that all derivative financial instruments
be recorded on the consolidated balance sheets at their fair
value as either assets or liabilities. Changes in the fair value
of derivatives are recorded each period either in accumulated
other comprehensive losses or in earnings, depending on
whether a derivative is designated and effective as part of a
hedge transaction and, if it is, the type of hedge transaction.
Gains and losses on derivative instruments reported in
accumulated other comprehensive earnings (losses) are
reclassified to the consolidated statement of earnings in the
periods in which operating results are affected by the hedged
item. Cash flow hedging instruments are classified in the same
manner as the affected hedged item in the consolidated
statements of cash flows. As of January 1, 2001, the adoption
of these new standards did not have a material effect on net
earnings (less than $1 million) or accumulated other
comprehensive losses (less than $1 million).

Impairment of long-lived assets: The Company reviews
long-lived assets, including amortizable intangible assets,
for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company performs
undiscounted operating cash flow analyses to determine if an
impairment exists. If an impairment is determined to exist,
any related impairment loss is calculated based on fair value.
Impairment losses on assets to be disposed of, if any, are based
on the estimated proceeds to be received, less costs of disposal.

Effective January 1, 2002, the Company adopted SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” which replaces SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed Of.” SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment
loss for certain types of long-lived assets, expands the scope
of a discontinued operation to include a component of an entity
and eliminates the exemption to consolidation when control
over a subsidiary is likely to be temporary. The adoption of
this new standard did not have a material impact on the
Company’s consolidated financial position, results of operations
or cash flows.

kraft foods inc.

notes to consolidated financial statements

Income taxes: The Company accounts for income taxes in
accordance with SFAS No. 109, “Accounting for Income Taxes.”
The accounts of the Company are included in the consolidated
federal income tax return of Altria Group, Inc. Income taxes are
generally computed on a separate company basis. To the extent
that foreign tax credits, capital losses and other credits generated
by the Company, which cannot be utilized on a separate company
basis, are utilized in Altria Group, Inc.’s consolidated federal
income tax return, the benefit is recognized in the calculation of
the Company’s provision for income taxes. The Company utilized
tax benefits that it would otherwise not have been able to use of
$193 million, $185 million and $139 million for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company
makes payments to, or is reimbursed by, Altria Group, Inc., for the
tax effects resulting from its inclusion in Altria Group, Inc.’s
consolidated federal income tax return.

Inventories: Inventories are stated at the lower of cost or market.
The last-in, first-out (“LIFO”) method is used to cost substantially
all domestic inventories. The cost of other inventories is
principally determined by the average cost method.

Marketing costs: The Company promotes its products with
significant marketing activities, including advertising, consumer
incentives and trade promotions. Advertising costs are expensed
as incurred. Consumer incentive and trade promotion activities
are recorded as a reduction of revenues based on amounts
estimated as being due to customers and consumers at the
end of a period, based principally on historical utilization and
redemption rates.

Revenue recognition: The Company recognizes revenues,
net of sales incentives and including shipping and handling
charges billed to customers, upon shipment of goods when title
and risk of loss pass to customers. Shipping and handling costs
are classified as part of cost of sales.

Effective January 1, 2002, the Company adopted the Emerging
Issues Task Force (“EITF”) Issue No. 00-14, “Accounting for
Certain Sales Incentives” and EITF Issue No. 00-25, “Vendor
Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor’s Products.” Prior period consolidated
statements of earnings have been reclassified to reflect the
adoption. The adoption of these EITF Issues resulted in a
reduction of revenues of approximately $4.6 billion and
$3.6 billion in 2001 and 2000, respectively. In addition, the
adoption reduced marketing, administration and research costs
by $4.7 billion and $3.7 billion in 2001 and 2000, respectively,
while cost of sales increased by an insignificant amount. The
adoption of these EITF Issues had no impact on operating
income, net earnings or basic and diluted EPS.

Software costs: The Company capitalizes certain computer
software and software development costs incurred in connection
with developing or obtaining computer software for internal use.
Capitalized software costs are amortized on a straight-line basis
over the estimated useful lives of the software, which do not
exceed five years.

Stock-based compensation: The Company accounts for
employee stock compensation plans in accordance with the
intrinsic value-based method permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation,” which did not
result in compensation cost for stock options.

At December 31, 2002, the Company had stock-based employee
compensation plans, which are described more fully in
Note 10. Stock Plans. The Company applies the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related
Interpretations in accounting for those plans. No compensation
expense for employee stock options is reflected in net earnings
as all options granted under those plans had an exercise price
equal to the market value of the common stock on the date of the
grant. Net earnings, as reported, includes compensation expense
related to restricted stock. The following table illustrates the effect
on net earnings and EPS if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based
employee compensation for the years ended December 31, 2002,
2001 and 2000:

(in millions, except per share data)
2000

2001

2002

Net earnings, as reported
Deduct:
Total stock-based employee

compensation expense determined
under fair value method for all
stock option awards, net of related
tax effects

Pro forma net earnings

Earnings per share:

Basic—as reported

Basic—pro forma

Diluted—as reported

Diluted—pro forma

$3,394

$1,882

$2,001

78
$3,316

97
$1,785

54
$1,947

$ 1.96

$ 1.91

$ 1.96

$ 1.91

$ 1.17

$ 1.11

$ 1.17

$ 1.11

$ 1.38

$ 1.34

$ 1.38

$ 1.34

New accounting pronouncements: In July 2002, the FASB
issued SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities.” SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by SFAS No. 146 include
lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation,
plant closing or other exit or disposal activity. This statement is
effective for exit or disposal activities that are initiated after
December 31, 2002. Accordingly, the Company will apply the
provisions of SFAS No. 146 prospectively to exit or disposal
activities initiated after December 31, 2002.

deliverables contains more than one unit of accounting.
EITF Issue No. 00-21 is effective for the Company for revenue
arrangements entered into beginning July 1, 2003. The Company
does not expect the adoption of EITF Issue No. 00-21 to have a
material impact on its 2003 consolidated financial statements.

Note 3. Related Party Transactions:

Altria Group, Inc.’s subsidiary, Altria Corporate Services, Inc.,
provides the Company with various services, including planning,
legal, treasury, accounting, auditing, insurance, human resources,
office of the secretary, corporate affairs, information technology
and tax services. In 2001, the Company entered into a formal
agreement with Altria Corporate Services, Inc., providing for a
continuation of these services, the cost of which increased
$91 million during 2001 as Altria Corporate Services, Inc., provided
information technology and financial services, all of which were
previously performed by the Company at approximately the same
cost. Billings for these services, which were based on the cost to
Altria Corporate Services, Inc. to provide such services and a
management fee, were $327 million, $339 million and $248 million
for the years ended December 31, 2002, 2001 and 2000,
respectively. These costs were paid to Altria Corporate Services,
Inc. monthly. Although the cost of these services cannot be
quantified on a stand-alone basis, management believes that the
billings are reasonable based on the level of support provided by
Altria Corporate Services, Inc., and that they reflect all services
provided. The cost and nature of the services are reviewed
annually by the Company’s audit committee, which is comprised
of independent directors. The effects of these transactions are
included in operating cash flows in the Company’s consolidated
statements of cash flows.

In addition, the Company’s daily net cash or overdraft position
is transferred to Altria Group, Inc., or its European subsidiary.
The Company pays or receives interest based upon the applicable
London Interbank Offered Rate, on the amounts payable to, or
receivable from, Altria Group, Inc., or its European subsidiary.

The Company also has long-term notes payable to Altria Group,
Inc. and its affiliates as follows:

At December 31,

Notes payable in 2009, interest at 7.0%
Short-term due to Altria Group, Inc. and

affiliates reclassified as long-term

2002

(in millions)
2001

$1,150

$5,000

1,410
$2,560

$5,000

The 7.0% notes have no prepayment penalty. During 2002, the
Company prepaid $3,850 million of the 7.0% long-term notes
payable. In addition, at December 31, 2002, the Company has
short-term debt totaling $2,305 million to Altria Group, Inc.
Interest on these borrowings is based on the average one-month
London Interbank Offered Rate. A portion of the debt, totaling
$1,410 million, was reclassified on the consolidated balance sheet
as long-term notes due to Altria Group, Inc. and affiliates based
upon the Company’s ability and intention to refinance on a long-
term basis.

Based on interest rates available to the Company for issuances of
debt with similar terms and remaining maturities, the aggregate
fair value of the Company’s long-term notes payable to Altria
Group, Inc. and affiliates, at December 31, 2002 and 2001, were
$2,764 million and $5,325 million, respectively. The fair values of
the Company’s current amounts due to Altria Group, Inc. and
affiliates approximate carrying amounts.

Note 4. Divestitures:

During 2002, the Company sold several small North American
food businesses, some of which were previously classified as
businesses held for sale. The net revenues and operating
results of the businesses held for sale, which were not significant,
were excluded from the Company’s consolidated statements
of earnings, and no gain or loss was recognized on these sales.
In addition, the Company sold its Latin American yeast and
industrial bakery ingredients business for approximately
$110 million and recorded a pre-tax gain of $69 million. The
aggregate proceeds received from sales of businesses were
$219 million, on which the Company recorded pre-tax gains of
$80 million.

During 2001, the Company sold several small food businesses.
The aggregate proceeds received in these transactions were
$21 million, on which the Company recorded pre-tax gains of
$8 million.

During 2000, the Company sold a French confectionery business
for proceeds of $251 million, on which a pre-tax gain of
$139 million was recorded. Several small international and North
American food businesses were also sold in 2000. The aggregate
proceeds received from sales of businesses were $300 million,
on which the Company recorded pre-tax gains of $172 million.

The operating results of the businesses sold were not material to
the Company’s consolidated operating results in any of the
periods presented.

kraft foods inc.

notes to consolidated financial statements

Note 5. Acquisitions:

Nabisco: On December 11, 2000, the Company acquired all of
the outstanding shares of Nabisco for $55 per share in cash.
The purchase of the outstanding shares, retirement of employee
stock options and other payments totaled approximately
$15.2 billion. In addition, the acquisition included the assumption
of approximately $4.0 billion of existing Nabisco debt. The
Company financed the acquisition through the issuance
of two long-term notes payable to Altria Group, Inc., totaling
$15.0 billion, and short-term intercompany borrowings of
$255 million. The acquisition has been accounted for as a
purchase. Beginning January 1, 2001, Nabisco’s earnings have
been included in the consolidated operating results of the
Company. The Company’s interest cost associated with acquiring
Nabisco has been included in interest and other debt expense,
net, on the Company’s consolidated statements of earnings for
the years ended December 31, 2002, 2001 and 2000.

During 2001, the Company completed the allocation of excess
purchase price relating to Nabisco. As a result, the Company
recorded, among other things, the final valuations of property,
plant and equipment and intangible assets, primarily trade
names, amounts relating to the closure of Nabisco facilities and
related deferred income taxes. The final allocation of excess
purchase price at December 31, 2001 was as follows:

Purchase price
Historical value of tangible assets acquired and

liabilities assumed

Excess of purchase price over assets acquired and

liabilities assumed at the date of acquisition

Increases for allocation of purchase price:

Property, plant and equipment
Other assets
Accrued postretirement health care costs
Pension liabilities
Debt
Legal, professional, lease and contract termination costs
Other liabilities, principally severance
Deferred income taxes

Goodwill and other intangible assets at December 31, 2001

(in millions)
$15,254

(1,271)

16,525

367
347
230
190
50
129
602
3,583
$22,023

Goodwill and other intangible assets at December 31, 2001
included approximately $11.7 billion related to trade names.
The Company also recorded deferred federal income taxes of
$3.9 billion related to trade names. During 2002, the Company
decreased goodwill by $76 million due primarily to the favorable
completion of the severance and exit programs.

The closure of a number of Nabisco domestic and international
facilities resulted in severance and other exit costs of
$379 million, which are included in the above adjustments for
the allocation of the Nabisco purchase price. The closures
will result in the termination of approximately 7,500 employees
and will require total cash payments of $373 million, of
which approximately $190 million has been spent through
December 31, 2002. Substantially all of the closures were

completed as of December 31, 2002, and the remaining payments
relate to salary continuation payments for severed employees and
lease payments.

The integration of Nabisco into the operations of the Company
has also resulted in the closure or reconfiguration of several of
the Company’s existing facilities. The aggregate charges to the
Company’s consolidated statement of earnings to close or
reconfigure its facilities and integrate Nabisco were originally
estimated to be in the range of $200 million to $300 million.
During 2002, the Company recorded pre-tax integration related
charges of $115 million to consolidate production lines, close
facilities and for other consolidation programs. In addition, during
2001, the Company incurred pre-tax integration costs of
$53 million for site reconfigurations and other consolidation
programs in the United States. The integration related charges
of $168 million included $27 million relating to severance,
$117 million relating to asset write-offs and $24 million relating to
other cash exit costs. Cash payments relating to these charges
will approximate $51 million, of which $21 million has been
paid through December 31, 2002. In addition, during 2002,
approximately 700 salaried employees elected to retire or
terminate employment under voluntary retirement programs.
As a result, the Company recorded a pre-tax charge of
$142 million related to these programs. As of December 31, 2002,
the aggregate pre-tax charges to close or reconfigure the
Company’s facilities, including charges for early retirement
programs, were $310 million, slightly above the original estimate.
No additional pre-tax charges are expected to be recorded for
these programs.

Assuming the acquisition of Nabisco occurred at the beginning
of 2000, pro forma net revenues would have been approximately
$30 billion and pro forma net earnings would have been
$1.4 billion in 2000; while 2000 basic and diluted EPS would have
been $0.96. These pro forma results, which are unaudited, do not
give effect to any synergies expected to result from the merger of
Nabisco’s operations with those of the Company, nor do they give
effect to the reduction of interest expense from the repayment of
borrowings with the proceeds from the IPO. The pro forma results
also do not reflect the effects of SFAS No. 141 and 142 on the
amortization of goodwill or other intangible assets. The pro forma
results are not necessarily indicative of what actually would have
occurred if the acquisition had been consummated and the IPO
completed at the beginning of 2000, nor are they necessarily
indicative of future consolidated operating results.

During 2000, the Company purchased Balance Bar Co. and Boca
Burger, Inc. The total cost of these and other smaller acquisitions
was $365 million.

rate 5.53%), due through 2035

7% Debenture (effective rate 11.32%),
$200 million face amount, due 2011

Other Acquisitions: During 2002, the Company acquired a
snacks business in Turkey and a biscuits business in Australia.
The total cost of these and other smaller acquisitions was
$122 million.

During 2001, the Company purchased coffee businesses in
Romania, Morocco and Bulgaria and also acquired confectionery
businesses in Russia and Poland. The total cost of these and
other smaller acquisitions was $194 million.

The effects of these acquisitions were not material to the
Company’s consolidated financial position or results of
operations in any of the periods presented.

Note 6. Inventories:

The cost of approximately 49% and 54% of inventories in 2002
and 2001, respectively, was determined using the LIFO method.
The stated LIFO amounts of inventories were approximately
$215 million and $150 million higher than the current cost of
inventories at December 31, 2002 and 2001, respectively.

Note 7. Short-Term Borrowings and
Borrowing Arrangements:

At December 31, 2002 and 2001, the Company had short-term
borrowings of $1,621 million and $2,681 million, respectively,
consisting principally of commercial paper borrowings with an
average year-end interest rate of 1.3% and 1.9%, respectively.
Of these amounts, the Company reclassified $1,401 million and
$2,000 million, respectively, of the commercial paper borrowings
to long-term debt based upon its intent and ability to refinance
these borrowings on a long-term basis.

The fair values of the Company’s short-term borrowings at
December 31, 2002 and 2001, based upon current market interest
rates, approximate the amounts disclosed above.

The Company has a $2.0 billion 5-year revolving credit facility
maturing in July 2006 and a $3.0 billion 364-day revolving credit
facility maturing in July 2003. The Company intends to use these
credit facilities to support commercial paper borrowings, the
proceeds of which will be used for general corporate purposes.
None of these facilities were drawn at December 31, 2002. These
facilities require the maintenance of a minimum net worth. The
Company met this covenant at December 31, 2002. In addition,
the Company maintains credit lines with a number of lending
institutions amounting to approximately $577 million. The
Company maintains these credit lines primarily to meet the short-
term working capital needs of its international businesses.
The foregoing revolving credit facilities do not include any other
financial tests, any credit rating triggers or any provisions that
could require the posting of collateral.

Note 8. Long-Term Debt:

At December 31, 2002 and 2001, the Company’s long-term debt
consisted of the following:

Short-term borrowings, reclassified as

long-term debt

Notes, 4.63% to 7.55% (average effective

Foreign currency obligations
Other

Less current portion of long-term debt

2002

(in millions)
2001

$ 1,401

$2,000

9,053

6,229

153
117
44
10,768
(352)
$10,416

258
136
51
8,674
(540)
$8,134

Aggregate maturities of long-term debt, excluding short-term
borrowings reclassified as long-term debt, are as follows:

2003
2004
2005
2006
2007
2008-2012
Thereafter

(in millions)

$ 352
838
732
1,255
1,395
3,701
1,141

Based on market quotes, where available, or interest rates
currently available to the Company for issuance of debt with
similar terms and remaining maturities, the aggregate fair value
of the Company’s long-term debt, including the current portion
of long-term debt, was $11,544 million and $8,679 million at
December 31, 2002 and 2001, respectively.

Note 9. Capital Stock:

The Company’s articles of incorporation authorize 3.0 billion
shares of Class A common stock, 2.0 billion shares of Class B
common stock and 500 million shares of preferred stock.
On June 21, 2002, the Company’s Board of Directors approved
the repurchase from time to time of up to $500 million of the
Company’s Class A common stock solely to satisfy the
obligations of the Company under the 2001 Kraft Performance
Incentive Plan, the Kraft Director Plan for non-employee directors,
and other plans where options to purchase the Company’s
Class A common stock are granted. During 2002, the Company
repurchased approximately 4.4 million shares of its Class A
common stock at a cost of $170 million.

kraft foods inc.

notes to consolidated financial statements

Shares of Class A common stock issued, repurchased and
outstanding were as follows:

Shares Issued

Shares
Repurchased

Net Shares
Outstanding

Balance at

January 1, 2002

555,000,000

— 555,000,000

Repurchase of

Exercise of stock

options
Balance at

(4,383,150)

2,000

December 31, 2002

555,000,000

(4,381,150)

550,618,850

In addition, 1.18 billion Class B common shares were issued and
outstanding at December 31, 2002 and 2001. Altria Group, Inc.
holds 276.6 million Class A common shares and all of the Class B
common shares at December 31, 2002. There are no preferred
shares issued and outstanding. Class A common shares are
entitled to one vote each, while Class B common shares are
entitled to ten votes each. Therefore, Altria Group, Inc. holds
97.8% of the combined voting power of the Company’s
outstanding capital stock at December 31, 2002.
At December 31, 2002, 75,911,430 shares of common stock
were reserved for stock options and other stock awards.

Concurrent with the IPO, certain employees of Altria Group, Inc.
and its subsidiaries received a one-time grant of options to
purchase shares of the Company’s Class A common stock held
by Altria Group, Inc. at the IPO price of $31.00 per share. In order
to completely satisfy this obligation and maintain its current
percentage ownership of the Company, Altria Group, Inc.
purchased 1.6 million shares of the Company’s Class A common
stock in open market transactions during 2002.

Note 10. Stock Plans:

The Company’s Board of Directors adopted the 2001 Kraft
Performance Incentive Plan (the “Plan”), which was established
concurrently with the IPO. Under the Plan, the Company may
grant stock options, stock appreciation rights, restricted stock,
reload options and other awards based on the Company’s Class
A common stock, as well as performance-based annual and long-
term incentive awards. A maximum of 75 million shares of the
Company’s Class A common stock may be issued under the Plan.
The Company’s Board of Directors granted options for 21,029,777
shares of Class A common stock concurrent with the closing date
of the IPO (June 13, 2001) at an exercise price equal to the IPO
price of $31.00 per share. A portion of the shares granted
(18,904,637) becomes exercisable on January 31, 2003, and will
expire ten years from the date of the grant. The remainder of the
shares granted (2,125,140) may become exercisable on a schedule
based on total shareholder return for the Company’s Class A
common stock during the three years following the date of the
grant, or will become exercisable five years from the date of the
grant. These options will also expire ten years from the date of the
grant. Shares available to be granted under the Plan at December
31, 2002 were 56,135,543.

The Company’s Board of Directors has also adopted the Kraft
Director Plan. Under the Kraft Director Plan, awards are granted
only to members of the Board of Directors who are not full-time
employees of the Company or Altria Group, Inc., or their
subsidiaries. Up to 500,000 shares of Class A common stock may
be awarded under the Kraft Director Plan. During 2002 and 2001,
6,840 and 8,945 stock options were granted under the Kraft
Director Plan, respectively. Shares available to be granted under
the Kraft Director Plan at December 31, 2002 were 484,215.

The Company accounts for the plans in accordance with the
intrinsic value-based method permitted by SFAS No. 123,
“Accounting for Stock-Based Compensation,” which did not
result in compensation cost for stock options.

Option activity was as follows for the years ended December 31,
2001 and 2002:

Shares Subject Weighted Average
Exercise Price

to Option

Options
Exercisable

Balance at

January 1, 2001
Options granted
Options canceled

Balance at

December 31, 2001
Options granted
Options exercised
Options canceled

Balance at

—
21,038,722
(268,420)

20,770,302
14,030
(2,000)
(1,490,660)

—
31.00
31.00

31.00
37.10
31.00
31.00

—

December 31, 2002

19,291,672

31.00

696,615

The following table summarizes the status of the Company’s stock
options outstanding and exercisable as of December 31, 2002:

Range of
Exercise
Prices

Options Outstanding

Options Exercisable

Average
Remaining
Number Contractual
Life

Outstanding

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price

$30.54 – $39.51 19,291,672

8 years

$31.00

696,615

$31.08

Prior to the IPO, certain employees of the Company participated
in Altria Group, Inc.’s stock compensation plans. Altria Group, Inc.
does not currently intend to issue additional Altria Group, Inc.
stock compensation to the Company’s employees, except for
reloads of previously issued options. Altria Group, Inc. accounts
for its plans in accordance with the intrinsic value-based method
permitted by SFAS No. 123, “Accounting for Stock-Based
Compensation,” which did not result in compensation cost for
stock options.

The Company’s employees held options to purchase the
following number of shares of Altria Group, Inc. stock: 46,615,162
shares at an average exercise price of $35.78 per share at
December 31, 2002; 57,349,595 shares at an average exercise price
of $34.66 per share at December 31, 2001; and 56,977,329 shares
at an average exercise price of $30.46 per share at December 31,
2000. Of these amounts, the following were exercisable at each
date: 46,231,629 at an average exercise price of $35.69 per share
at December 31, 2002; 44,930,609 at an average exercise price of
$31.95 per share at December 31, 2001; and 38,444,963 at an
average exercise price of $34.82 per share at December 31, 2000.

Had compensation cost for stock option awards under the Kraft
plans and Altria Group, Inc. plans been determined by using the
fair value at the grant date, the Company’s net earnings and EPS
(basic and diluted) would have been $3,316 million and $1.91 for
the year ended December 31, 2002, respectively; $1,785 million
and $1.11 for the year ended December 31, 2001, respectively; and
$1,947 million and $1.34 for the year ended December 31, 2000,
respectively. The foregoing impact of compensation cost was
determined using a modified Black-Scholes methodology and the
following assumptions:

Note 11. Earnings Per Share:

Basic and diluted EPS were calculated using the following for the
years ended December 31, 2002, 2001 and 2000:

Net earnings

Weighted average shares for

basic EPS

Plus: Incremental shares from
assumed conversions of
stock options

Weighted average shares for

diluted EPS

2002

2001

(in millions)
2000

$3,394

$1,882

$2,001

1,734

1,610

1,455

1,736

1,610

1,455

During June 2001, the Company completed an IPO of
280,000,000 shares of its Class A common stock. Immediately
following the IPO, the Company had 1,735,000,000 Class A and B
common shares outstanding.

Note 12. Pre-tax Earnings and Provision for Income Taxes:

Risk-Free
Interest
Rate

Weighted
Average
Expected
Life

Expected
Volatility

Expected
Dividend
Yield

Fair Value
at Grant
Date

Pre-tax earnings and provision for income taxes consisted of the
following for the years ended December 31, 2002, 2001 and 2000:

2002 Kraft
2002 Altria Group, Inc.
2001 Kraft
2001 Altria Group, Inc.
2000 Altria Group, Inc.

4.27% 5 years
3.44
4.81
4.86
6.58

5
5
5
5

28.72% 1.41% $10.65
10.02
4.96
33.57
9.13
1.68
29.70
10.36
4.78
33.88
3.19
9.00
31.71

In addition, certain of the Company’s employees held shares of
Altria Group, Inc. restricted stock and rights to receive shares of
stock, giving these employees in most instances all of the rights
of shareholders, except that they may not sell, assign, pledge or
otherwise encumber such shares and rights. These shares and
rights are subject to forfeiture if certain employment conditions
are not met. During 2001 and 2000, Altria Group, Inc. granted to
certain of the Company’s U.S. employees restricted stock of
279,120 shares and 2,113,570 shares, respectively. Altria Group,
Inc. also issued to certain of the Company’s non-U.S. employees
rights to receive 31,310 and 683,790 equivalent shares during
2001 and 2000, respectively. At December 31, 2002, restrictions
on the stock, net of forfeitures, lapse as follows: 2003—84,000
shares. The fair value of the restricted shares and rights at the
date of grant is amortized to expense ratably over the restriction
period through a charge from Altria Group, Inc. In 2002, 2001 and
2000, the Company recorded compensation expense related to
restricted stock awards of $4 million, $39 million and $23 million,
respectively.

Pre-tax earnings:
United States
Outside United States

Total pre-tax earnings

Provision for income taxes:
United States federal:

Current
Deferred

State and local
Total United States
Outside United States:

Current
Deferred

Total outside United States
Total provision for income taxes

2002

2001

(in millions)
2000

$3,692
1,575
$5,267

$2,282
1,165
$3,447

$2,188
1,227
$3,415

$ 825
265
1,090
138
1,228

628
13
641
$1,869

$ 594
299
893
112
1,005

445
115
560
$1,565

$ 572
218
790
120
910

477
27
504
$1,414

The Company’s management reviews operating companies
income to evaluate segment performance and allocate resources.
Operating companies income excludes general corporate
expenses and amortization of intangibles. Interest and other
debt expense, net, and provision for income taxes are centrally
managed and, accordingly, such items are not presented by
segment since they are excluded from the measure of segment
profitability reviewed by management. The Company’s assets,
which are principally in the United States and Europe, are
managed geographically. The accounting policies of the
segments are the same as those described in the Summary
of Significant Accounting Policies.

Reportable segment data were as follows:

For the Years Ended December 31,

2002

2001

Net revenues:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Net revenues

Operating companies income:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Total operating companies income

Amortization of intangibles
General corporate expenses

Operating income

Interest and other debt expense, net
Earnings before income taxes and

$ 8,877
5,182
4,412
3,014
21,485
6,203
2,035
8,238
$29,723

$ 2,168
1,093
1,136
556
4,953
962
368
1,330
6,283
(7)
(162)
6,114
(847)

$ 8,732
5,071
4,237
2,930
20,970
5,936
2,328
8,264
$29,234

$ 2,099
966
1,192
539
4,796
861
378
1,239
6,035
(962)
(189)
4,884
(1,437)

(in millions)
2000

$ 7,923
293
4,267
2,829
15,312
6,398
1,212
7,610
$22,922

$ 1,845
100
1,090
512
3,547
1,019
189
1,208
4,755
(535)
(208)
4,012
(597)

minority interest

$ 5,267

$ 3,447

$ 3,415

kraft foods inc.

notes to consolidated financial statements

At December 31, 2002, applicable United States federal income
taxes and foreign withholding taxes have not been provided on
approximately $2.4 billion of accumulated earnings of foreign
subsidiaries that are expected to be permanently reinvested. It is
not practical to estimate the amount of additional taxes that might
be payable on such undistributed earnings.

The effective income tax rate on pre-tax earnings differed from the
U.S. federal statutory rate for the following reasons for the years
ended December 31, 2002, 2001 and 2000:

U.S. federal statutory rate
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit

Goodwill amortization
Other

Effective tax rate

2002

2001

2000

35.0%

1.7

(1.2)
35.5%

2.0
9.4
(1.0)
45.4%

2.2
5.2
(1.0)
41.4%

The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities consisted of the following at
December 31, 2002 and 2001:

Deferred income tax assets:

Accrued postretirement and
postemployment benefits

Other
Total deferred income tax assets

Deferred income tax liabilities:

Trade names
Property, plant and equipment
Prepaid pension costs
Total deferred income tax liabilities

Net deferred income tax liabilities

Note 13. Segment Reporting:

2002

(in millions)
2001

759
519
1,278

(3,839)
(1,515)
(841)
(6,195)
$(4,917)

$ 774
737
1,511

(3,847)
(1,379)
(850)
(6,076)
$(4,565)

The Company manufactures and markets packaged retail food
products, consisting principally of beverages, cheese, snacks,
convenient meals and various packaged grocery products
through KFNA and KFI. Reportable segments for KFNA are
organized and managed principally by product category. KFNA’s
segments are Cheese, Meals and Enhancers; Biscuits, Snacks
and Confectionery; Beverages, Desserts and Cereals; and Oscar
Mayer and Pizza. KFNA’s food service business within the United
States and its businesses in Canada and Mexico are reported
through the Cheese, Meals and Enhancers segment. KFI’s
operations are organized and managed by geographic location.
KFI’s segments are Europe, Middle East and Africa; and Latin
America and Asia Pacific.

As previously noted, the Company’s international operations are
managed by geographic location. Within its two geographic
regions, KFI’s brand portfolio spans five core consumer sectors.
Net revenues by consumer sector for KFI were as follows:

See Notes 4 and 5 regarding divestitures and acquisitions. The
acquisition of Nabisco primarily affected the reported results of
the Biscuits, Snacks and Confectionery and the Latin America
and Asia Pacific segments.

Consumer Sector

For the Years Ended December 31,

2002

2001

Snacks
Beverages
Cheese
Grocery
Convenient Meals

Total

$3,179
2,832
1,202
752
273
$8,238

$3,077
2,900
1,208
826
253
$8,264

(in millions)
2000

$2,565
3,034
1,193
544
274
$7,610

During 2002, the Company sold its Latin American yeast and
industrial bakery ingredients business at a pre-tax gain of
$69 million. This pre-tax gain was included in the operating
companies income of the Latin America and Asia Pacific segment.

In addition, during 2002, the Company recorded a pre-tax
charge of $142 million related to employee acceptances under
a voluntary retirement program. During 2002, the Company also
recorded pre-tax integration related charges of $115 million to
consolidate production lines in North America, close a Kraft
facility and for other consolidation programs. In addition, during
2002, the Company reversed $4 million related to the loss on sale
of a food factory. These items were included in the operating
companies income of the following segments:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Europe, Middle East and Africa
Latin America and Asia Pacific

(in millions)

Integration costs
and a loss on sale
of a food factory

$ 30
1
56
7

17
$111

Separation
Programs

$ 60
3
47
25
5
2
$142

During 2001, the Company recorded pre-tax charges of
$53 million for site reconfigurations and other consolidation
programs in the United States. In addition, the Company recorded
a pre-tax charge of $29 million to close a North American food
factory. These pre-tax charges, which aggregate $82 million, were
included in the operating companies income of the following
segments: Cheese, Meals and Enhancers, $63 million; Biscuits,
Snacks and Confectionery, $2 million; Beverages, Desserts and
Cereals, $12 million; and Oscar Mayer and Pizza, $5 million.

For the Years Ended December 31,

2002

2001

(in millions)
2000

Depreciation expense:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Total depreciation expense

Capital expenditures:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Total Kraft Foods North America

Europe, Middle East and Africa
Latin America and Asia Pacific

Total Kraft Foods International
Total capital expenditures

$ 177
156
115
58
506
167
36
203
$ 709

$ 249
232
194
133
808
265
111
376
$1,184

$ 163
152
113
55
483
158
39
197
$ 680

$ 257
171
202
131
761
231
109
340
$1,101

$150

109
51
310
163
26
189
$499

$247

193
148
588
239
79
318
$906

Geographic data for net revenues, total assets and long-lived
assets (which consist of all non-current assets, other than
goodwill and other intangible assets and prepaid pension assets)
were as follows:

For the Years Ended December 31,

2002

2001

Net revenues:

United States
Europe
Other

Total net revenues

Total assets:

United States
Europe
Other

Total assets

Long-lived assets:
United States
Europe
Other

Total long-lived assets

$19,395
5,908
4,420
$29,723

$44,406
8,738
3,956
$57,100

$ 6,382
2,432
1,596
$10,410

$19,193
5,667
4,374
$29,234

$44,420
7,362
4,016
$55,798

$ 6,360
2,132
1,668
$10,160

(in millions)
2000

$13,947
6,222
2,753
$22,922

$40,454
7,630
3,987
$52,071

$ 6,684
2,116
1,912
$10,712

kraft foods inc.

notes to consolidated financial statements

Note 14. Benefit Plans:

The Company sponsors noncontributory defined benefit pension
plans covering substantially all U.S. employees. Pension
coverage for employees of Kraft’s non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate
plans, many of which are governed by local statutory
requirements. In addition, Kraft’s U.S. and Canadian subsidiaries
provide health care and other benefits to substantially all retired
employees. Health care benefits for retirees outside the United
States and Canada are generally covered through local
government plans.

Pension Plans: Net pension (income) cost consisted of the
following for the years ended December 31, 2002, 2001 and 2000:

(in millions)

Service cost
Interest cost
Expected return on

plan assets
Amortization:

Net gain on adoption
of SFAS No. 87
Unrecognized net

loss (gain)
from experience
differences
Prior service cost
Other expense (income)

Net pension

U.S. Plans
2001

2000

2002

Non-U.S. Plans
2001

2000

$ 107
339

$ 69
213

$ 49
120

$ 45
112

$ 37
98

2002

$ 120
339

(631)

(648)

(523)

(134)

(126)

(103)

(11)

(36)
7
(34)

(1)

(1)
4

5
7

(1)
5

8
1
130

(21)
8
(12)

(income) cost

$ (33) $(227) $(315) $ 47

$ 35

$ 34

During 2002, certain salaried employees in the United States
left the Company under a voluntary early retirement program
instituted in 2001. This resulted in special termination benefits
and curtailment and settlement losses of $109 million in 2002.
In addition, retiring employees elected lump-sum payments,
resulting in settlement losses of $21 million in 2002 and
settlement gains of $12 million and $34 million in 2001
and 2000, respectively.

The changes in benefit obligations and plan assets, as well
as the funded status of the Company’s pension plans at
December 31, 2002 and 2001, were as follows:

(in millions)

Benefit obligation at

January 1
Service cost
Interest cost
Benefits paid
Acquisitions
Settlements
Actuarial losses
Currency
Other

Benefit obligation at

December 31

Fair value of plan assets at

January 1
Actual return on plan assets
Contributions
Benefits paid
Acquisitions
Currency
Actuarial gains

Fair value of plan assets at

U.S. Plans

Non-U.S. Plans

2002

2001

2002

2001

$4,964
120
339
(624)

127
367

$4,327
107
339
(403)
71
14
500

(48)

$2,021
49
120
(115)

85
144
13

$1,915
45
112
(108)
(22)

22
18
39

5,245

4,964

2,317

2,021

6,359
(914)
26
(636)

7,039
(386)
37
(394)
(45)

130

108

1,329
(56)
81
(87)

1,589
(227)
63
(76)
(41)
18
3

December 31

4,965

6,359

1,337

1,329

(Deficit) excess of plan assets
versus benefit obligations at

December 31

Unrecognized actuarial

losses

Unrecognized prior

service cost

Unrecognized net transition

obligation
Net prepaid pension

asset (liability)

(280)

1,395

(980)

(692)

2,487

756

394

226

(1)

$2,220

$2,206

$ (529)

$ (410)

The combined U.S. and non-U.S. pension plans resulted in
a net prepaid asset of $1,691 million and $1,796 million at
December 31, 2002 and 2001, respectively. These amounts
were recognized in the Company’s consolidated balance sheets
at December 31, 2002 and 2001, as prepaid pension assets
of $2,814 million and $2,675 million, respectively, for those
plans in which plan assets exceeded their accumulated benefit
obligations and as other liabilities of $1,123 million and
$879 million at December 31, 2002 and 2001, respectively, for
plans in which the accumulated benefit obligations exceeded
their plan assets.

At December 31, 2002 and 2001, certain of the Company’s U.S.
plans were underfunded, with projected benefit obligations,
accumulated benefit obligations and the fair value of plan assets
of $269 million, $217 million and $45 million, respectively, in 2002
and $213 million, $164 million and $15 million, respectively, in
2001. For certain non-U.S. plans, which have accumulated benefit
obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of plan
assets were $1,375 million, $1,250 million and $424 million,
respectively, as of December 31, 2002 and $1,165 million,
$1,073 million and $416 million, respectively, as of
December 31, 2001.

The following weighted-average assumptions were used to
determine the Company’s obligations under the plans:

Discount rate
Expected rate of return on

plan assets

Rate of compensation increase

U.S. Plans

Non-U.S. Plans

2002

2001

2002

2001

6.50%

7.00% 5.56%

5.80%

9.00
4.00

9.00
4.50

8.41
3.12

8.49
3.36

SFAS No. 87, “Employers’ Accounting for Pensions,” permits the
delayed recognition of pension fund gains and losses in ratable
periods of up to five years. The Company uses a four-year period
wherein pension fund gains and losses are reflected in the
pension calculation at 25% per year, beginning the year after the
gains or losses occur. Recent stock market declines have resulted
in deferred losses. The amortization of these deferred losses will
result in higher pension cost in future periods.

Kraft and certain of its subsidiaries sponsor employee savings
plans, to which the Company contributes. These plans cover
certain salaried, non-union and union employees. The Company’s
contributions and costs are determined by the matching of
employee contributions, as defined by the plans. Amounts charged
to expense for defined contribution plans totaled $64 million,
$63 million and $43 million in 2002, 2001 and 2000, respectively.

Postretirement Benefit Plans: Net postretirement health
care costs consisted of the following for the years ended
December 31, 2002, 2001 and 2000:

Service cost
Interest cost
Amortization:

Unrecognized net loss from
experience differences

Unrecognized prior service cost