Mondelez International Annual Report 2003

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FY2003 Annual Report · Mondelez International

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Kraft Foods Inc. 2003 Annual Report

How we will grow

future..
grow ourour future

We can say it in six simple words. Value. Transform

We are committed to delivering sustainable growth – top

must delight the world with the right beneﬁts at the right

a step ahead of tomorrow. We must expand our global

We must be organized to leverage our strengths. And

That’s exactly what we intend to do.

ation. Scale. Cost. Organization. Responsibility.

line, bottom line and cash ﬂow. To do it, we know our brands

price. We must continuously transform our products

scale. We must capture cost savings to fuel our growth.

we must act responsibly throughout the world community.

2003 Financial Highlights. Consolidated Results

(in millions, except per share data)

Volume (in pounds)
Net revenues
Operating 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*

2003

2002

% Change

18,681
$ 31,010
6,011
3,476
2.01

18,549
$ 29,723
6,114
3,394
1.96

9,439
2,230

9,172**
2,210**

4,801
887

4,567
1,247

3,100
556

4,887**
1,051**

4,412
1,136

3,014
556

$ 21,907
4,920

$ 21,485
4,953

7,045
1,012

6,203
962

2,058
270

2,035
368

9,103
1,282

8,238
1,330

0.7%
4.3%
(1.7)%
2.4%
2.6%

2.9%
0.9%

(1.8)%
(15.6)%

3.5%
9.8%

2.9%
–

2.0%
(0.7)%

13.6%
5.2%

1.1%
(26.6)%

10.5%
(3.6)%

*Kraft’s management reviews operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles,
to evaluate segment performance and allocate resources. For a reconciliation of operating companies income to operating income, see Note 13. Segment Reporting.
**During 2003, management responsibility for the Canadian Biscuits and Pet Snacks operations was transferred from the Biscuits, Snacks and Confectionery segment
to the Cheese, Meals and Enhancers segment, which contains the other Canadian businesses. Accordingly, the 2002 amounts have been reclassified to reflect
the transfer.

Fellow Shareholders,

Our results in 2003 did not meet the growth targets we set at the start of the year.

While we are not satisﬁed with our performance, we have taken signiﬁcant steps

to correct our course and get back on track for sustainable growth.

Kraft remains a strong and proﬁtable food and beverage industry leader

with great global potential. In this report, we share our plan for growth – how

we intend to build brand value, transform our portfolio, expand our global scale,

reduce our costs and asset base, strengthen our organization, and do so in a

responsible way to deliver long-term sustainable growth.

For 2003, net revenues increased 4.3%. Volume was up 0.7%, or 1.6% excluding

divestitures. Operating income declined 1.7%, net earnings increased 2.4%

and diluted earnings per share were up 2.6% to $2.01. We generated more than

$3 billion in discretionary cash ﬂow – deﬁned as net cash provided from operating

activities less capital expenditures – an increase of 19.6% over 2002. And we

raised our quarterly dividend 20% to $0.18 per common share.

Across our businesses, volume, excluding divestitures, and revenues were up

in ﬁve of our six segments. However, operating companies income increased

in only three segments.

We entered 2003 with good momentum. But, as the year unfolded, we encountered

a number of signiﬁcant challenges, most notably the rising cost of commodities,

packaging and energy, and pensions and medical beneﬁts. We tried to recover

those costs through higher pricing in several categories. However, as a result of

these higher prices, along with several new-product disappointments and other

factors, our consumption and shares declined, particularly in cheese, cold cuts,

coffee, crackers and cookies in the U.S.

In September, we initiated a reinvestment program to restore our brand value

in those focus categories. We invested nearly $200 million in the last four months

of the year to increase marketing and manage prices, and by January of 2004,

we witnessed good progress. With the important exception of cookies, consumption

and share trends improved across the other focus categories of cheese, cold cuts,

coffee and crackers.

We were encouraged, but recognized we needed to do more than simply reverse

these declines. We had to address several critical realities in a changed operating

environment:

• Consumers and retailers are increasingly value-conscious.

• Powerful trends are reshaping the food business, including health and wellness,

convenience, shifts in retail channels and the growth of the multicultural

population in the United States.

• The competitive need for global scale has never been greater.

• Costs will continue to rise.

With these realities in mind, we decided to realign our organizational structure,

reenergize our performance with a Sustainable Growth Plan and set new

ﬁnancial targets.

Our new global structure links three organizational dimensions – a Global Marketing

& Category Development group to create global category strategies and new-

product growth platforms; North America Commercial and International Commercial

units to drive sales and marketing execution country by country; and global

functions to foster best practices around the world in a cost-effective manner.

With a “best of global, best of local” organization, we’re set up to deliver

our four-point Sustainable Growth Plan.

First, to build superior brand value, we must deliver more product beneﬁts for

the price paid than our competitors.

We have an exceptional portfolio of brands. To ensure we continue to grow our

leading brands, we are targeting an increase in our marketing spending in 2004

of $500 million to $600 million. This stepped-up rate of spending, based on a

category-by-category, country-by-country analysis, will give us the resources

we need to market and price our products competitively.

Second, to transform our portfolio, we are aligning our products with key

consumer and customer trends, retail channels and demographic groups.

As more consumers focus on health and wellness, we’re responding with products

like Triscuit crackers with zero grams trans fat; Kool-Aid Jammers 10 with only

10 calories per serving; and Tang Plus with fortiﬁcation and ﬂavors tailored to the

nutritional needs and taste preferences of different countries.

We’re meeting the growing need for convenience with products like single-serve

Philadelphia Minis in Europe, nutritionally balanced Lunchables Fun Fuel in the

U.S., and the launch in France later in 2004 of Tassimo, our innovative new,

on-demand, hot beverage system.

Third, to expand our global scale, particularly in fast-growing developing countries,

we are capturing the growth potential of our core categories in markets where we

already operate, and we are building our infrastructure in new high-potential markets.

And fourth, to reduce our costs and asset base, we announced in January 2004

a major cost restructuring program that goes beyond our ongoing productivity

efforts and that will help fund our growth initiatives. Over the next three years,

we anticipate exiting or closing up to 20 production facilities and reducing our

global work force by approximately 6%, or about 6,000 positions across all

levels of the organization.

The program is expected to result in pre-tax charges of about $1.2 billion, with

the majority occurring in 2004 and 2005. We expect to generate approximately

$400 million in annual pre-tax savings by 2006, which is more than 50% of the

cash outlays required to implement the program.

It’s never easy to close a plant or eliminate a job because of the impact it has

on the people who have worked hard to make this company successful. However

difﬁcult these steps may be, achieving sustainable growth is ultimately the best

way to build a stronger company and meet our responsibilities to the greatest

number of employees, investors and communities.

We believe our Sustainable Growth Plan will deliver consistent results over

the long term. In 2004, we expect constant currency revenue growth to be around

3%, including tack-on acquisitions and excluding divestitures, driven by volume

growth of 2%-3%. However, the step-up in marketing spending and an anticipated

$0.30 per share in restructuring charges will lower diluted earnings per share to

a projected range of $1.63-$1.70, versus $2.01 in 2003.

On a longer-term basis, we believe we can grow constant currency revenues,

including tack-on acquisitions and excluding divestitures, in the 3% range,

supported by volume growth of 2%-3%. And we expect to deliver long-term

annual earnings per share growth of 6%-9%.

We believe these results, combined with an attractive dividend, should

provide a satisfying return for investors over the long term. We are committed

to achieving these results, reliably and consistently, year after year. And that

commitment will be a deﬁning characteristic of this company and the thousands

of talented and dedicated people who are the source of our success.

As we look forward to the future, we’d like to thank our employees for their

unwavering efforts on behalf of our business, and our investors for their continued

conﬁdence in Kraft.

Louis C. Camilleri
Chairman

February 27, 2004

Roger K. Deromedi
Chief Executive Officer

Value. The ultimate measure of a brand.
Value.

Food may be a trillion-dollar business, but every dollar of sales is still

earned one purchase at a time. And nothing determines a buying decision

more than brand value – delivering the right beneﬁts at the right price.

It usually takes only an instant for consumers to weigh the beneﬁts each

brand offers, consider the price, then reach for what they want. At that

moment of choice, we want to be the choice they make.

That’s why our highest priority – the thing we must do ﬁrst, quickest and best

– is invest in brand value. We are ﬁxing the value equation wherever it’s out

of balance and continuing to build brand value across our entire portfolio.

The bundle of beneﬁts each brand offers may include superior taste, more

convenient packaging or simple availability wherever people expect to

ﬁnd a product. Or it may be nutrition or even the service a brand provides.

Supported by our world-class R&D capabilities, we must innovate constantly

and refresh the beneﬁts we offer.

Whatever those beneﬁts are, they must come at an attractive price.

We must anticipate market forces and manage our costs to ensure our

pricing is competitive. And we must support our brands with the optimal

level of marketing. The additional funds we reinvested in marketing and

price management in 2003 helped restore brand value in our focus

categories. The progress was encouraging, and we’re planning on an

increase in spending of $500 million to $600 million in 2004.

There’s no better long-term investment we can make than building

the value of our brands.

Transformation.. Growing the next generation of products.
Transformation

In a world of change, we have to run just to stand still. To achieve

sustainable growth, we must stay a step ahead of tomorrow.

We are accelerating a shift in our portfolio to satisfy the growing demand

for health and wellness, and convenience. We are developing additional

products and packages that ﬁt fast-growing distribution channels.

And we are deepening our connection to multicultural households

with more products and services tailored to their needs.

We are bringing to market a generation of new products to help consumers

meet a range of health and wellness needs – weight management, natural

and organic foods, performance nutrition, health management and general

nutrition. To answer the call for convenience, we’re introducing products

that are easier to prepare, more portable and pre-portioned.

As more volume shifts to newer and broader retail channels, we are

customizing our portfolio and programs to build our share. We’re placing

our brands in fast-growing food-away-from-home venues, not only to gain

volume but also to create billions of consumer brand impressions.

And in the U.S., where the Hispanic population continues to grow rapidly,

our on-the-ground dedicated marketing teams are introducing more

specialty products, bilingual packaging and outreach programs to suit

local preferences, local culture and local community needs.

Tomorrow, the world will want something different than it wants today.

We need to anticipate, identify, develop and market it faster and better

than ever before.

Scale.. Extending our global reach.
Scale

We must become a more global company. The greater our scale,

the more proﬁtable our growth. And nowhere is that more true than

in the developing world, where faster population and income growth

rates are driving increased demand for branded consumer goods.

Today, developing markets account for 84% of the world’s population,

30% of its packaged food consumption and 23% of its gross domestic

product. Yet, these markets account for only 11% of our revenues.

We’re focusing ﬁrst on countries like Russia, China, Brazil and Mexico,

where we have the scale and efﬁciency to grow most proﬁtably. We’re

growing by expanding our core categories where they already exist.

So, for example, in China we are building our biscuits business with new

introductions that leverage our global technologies but deliver a local taste.

We’re also expanding our core categories into current markets where

they don’t yet exist. For instance, we added Philadelphia cream cheese to

our established portfolio of products in Brazil last year, and after only six

months, we became the number one cream cheese in the country.

But we’re also targeting new markets where we can build scale and

ultimately accelerate growth. Our acquisition a couple of years ago in

Russia of the Stollwerck confectionery business is a good example. With

the scale we gained, not only did we grow the confectionery business we

acquired, we also were able to expand our coffee business as well and

drive more than 14% growth in overall volume in Russia in 2003.

We’re now at home in more than 150 countries around the world.

But we’ve only begun to reach our global growth potential.

CostCost.. How we fund our future.

Grow

Save

Invest

Save, invest, grow. It’s the continuous cycle that drives long-term,

sustainable results.

Productivity – and the steady ﬂow of savings it creates – will continue to be

a hallmark of Kraft. While it comes from many sources, we see two areas

that offer particular opportunity for ongoing cost savings.

The ﬁrst is supply chain initiatives, where we will further leverage

our procurement scale on a global basis and rationalize less proﬁtable

product variations to help us achieve greater production and

distribution efﬁciencies.

The second is through advances in technology. We will continue to automate

our plants and distribution centers, formulate our products in lower-cost

ways that improve or maintain our product quality, and seek out alternative,

lower-cost packaging materials.

Beginning in 2004, we’re taking additional steps that are right for the

future but difﬁcult in the present. To increase our investment in growth,

we must become an even more efﬁcient company. So we are beginning

an estimated $1.2 billion pre-tax, three-year cost restructuring program.

By leveraging our global scale, lowering our cost structure and optimizing

our capacity utilization, we expect this program to generate about

$400 million in annual pre-tax savings by 2006 to invest back in our

brands and accelerate top-line-driven earnings growth.

We know the actions we take to reduce our costs today will give us the

ﬁnancial ﬂexibility to fund our success tomorrow.

Organization.. The best of global, best of local.
Organization

world.
company.
team.

With one world to serve, we are now organized into a uniﬁed, global

team. But in going global, we’re still ready to meet the local needs of

consumers and customers around the world.

Our new structure brings together three organizational dimensions – a new

global marketing and category development group, our geographic-based

commercial units and our key global functions.

The power of this new organizational structure lies in its ability to accelerate

the ﬂow of innovation from market to market, create true worldwide

category and functional expertise, ensure superior local execution and

develop our management strength—all at a faster pace than ever before.

This new structure is also more efﬁcient. It eliminates duplication within

functions and provides the opportunity to further consolidate facilities.

Of course, an organizational structure is nothing more than lines and boxes

on a page without the people who bring it alive. We believe we have one of

the strongest and most experienced leadership teams in the food industry.

From the 12 senior leaders on the new Kraft Executive Team to the tens of

thousands of dedicated employees around the world who put quality into

every Kraft product, it’s their talent, insight, experience and passion that

make the difference.

No matter what else changes, one thing will remain the same. We can

create a new organizational structure, we can develop a new plan, we can

set any growth target we wish, but we can do nothing without our people.

Responsibility.. Helping people eat and live better.
Responsibility

Achieving sustainable growth is not enough. We must do it in a

responsible way. In fact, we think business success is not sustainable

if it ignores the economic, social and environmental consequences

on which it is built.

To ensure we meet our responsibilities as a public company and global

citizen, we have formed a Corporate Responsibility Council of senior

leaders from across the company. The council is focused on three primary

areas. First, we strengthened our already rigorous governance programs

by updating our corporate code of conduct and providing training for

employees around the world. Second, we provided more than $90 million

in food and ﬁnancial support to communities worldwide. And third, we took

important steps to address key societal issues relevant to our business.

Two initiatives were of particular note.

With the help of an advisory council of experts, we increased our

response to the rise in obesity by initiating an ongoing program to modify

the nutritional proﬁle of our products, revise our marketing policies and

practices, increase nutrition labeling and advocate for constructive

public policy changes.

Recognizing the importance of a viable supply chain, we joined with

the Rainforest Alliance to strengthen Kraft’s decade-long commitment to

promoting sustainable coffee production. The goals: to improve conditions

on coffee farms, provide a better economic return for coffee growers and

help move sustainable coffee from market niche to the mainstream.

Ultimately, the success of any business depends on the public’s trust.

We are committed to earning that trust every day.

Innovation. Creating what consumers want next.
Innovation.

Snacks
Snacks
Net Revenues $9.2 Billion

As the pace of life quickens, the snacking trend
continues to grow. People want snacks that taste
good, but they also want convenient, better-for-you
snacks that bridge the growing mealtime gap.

Beverages
Beverages
Net Revenues $6.1 Billion

Kraft offers more than just “something to drink.”
We have beverages that refresh, relax, energize
and help people meet their nutritional needs.
More and more, people are looking to Kraft to
quench their thirst.

Cheese & Dairy
Cheese & Dairy
Net Revenues $5.6 Billion

Carb-conscious consumers are choosing the
calcium-rich goodness of cheese. And Kraft is
there to offer it to them – their way. Around the
world, we meet local needs to satisfy the global
appetite for cheese.

Grocery
Grocery
Net Revenues $5.2 Billion

At Kraft, sometimes innovation means thinking
outside the box – and inside the cup, bottle,
packet or jar. No matter what form or flavor,
Kraft innovations in quality and taste are as
close as the nearest grocery aisle.

Convenient Meals
Convenient Meals
Net Revenues $4.9 Billion

To help take the stress out of mealtime, Kraft offers
a wide variety of easy meal options for the whole
family. With our broad menu of meals, we’ve got
the great tastes that make even the most finicky,
time-pressed eater run to the table.

• Ritz, America’s number-one-selling cracker has an oven-toasted chip with less fat than regular fried potato chips.
Since its introduction in August 2003, Ritz Chips has achieved a 2.8% share of the U.S. cracker category.

• New crispy, aromatic Pacific Soda Seaweed crackers helped grow total Pacific Soda share of the biscuits category in China.
The cracker is well aligned with the health and wellness trend.

• There’s good news in nuts. Not only did consumption of Planters nuts in the U.S. grow double digits in 2003, but a new
heart health claim and a good fit with carb-conscious diets pave the way for future growth.

• The U.K. launch of fun and convenient Terry’s Chocolate Orange Segsations twist-wrapped chocolates drove a 3% increase in
U.K. confectionery volume.

• With its launch in September 2003, In A Biskit crackers’ new Vegemite flavor built on the strong Vegemite franchise,
expanding it into the snacks category and capturing 7.2% of the Australian flavored snacks segment.

• Ready-to-drink beverages continued their rapid volume growth in the U.S. with strong performances from new products,

including Capri Sun Refreshers, packaged in an innovative bottle-can.

• We successfully launched Tang Plus fortified with vitamins and minerals in 10 developing markets in 2003.

• In Brazil, we introduced Maguary Vit, a combination of three fruits, which, when added to milk, becomes a tasty and
nutritious drink for the whole family.

• Our Maxwell House coffee easy-open Fresh Seal can in the U.S. eliminated an important “dissatisfier” in coffee – the need

for a can opener.

• Designed especially to quench the thirsty Hispanic market, Kool-Aid Aguas Frescas, a new line of Kool-Aid powdered soft drinks,
was launched in the U.S.

• In France, Carte Noire Voluptuoso soft pods offer the deep Carte Noire flavor topped with a smooth foam. It’s designed for

the coffee-machine owner looking for on-demand convenience.

• Kraft Singles with “Double the Calcium” taps into parents’ need to get more calcium in kids’ diets. Its debut in the U.S.
helped grow consumption by more than four points and share by nearly two points.

• Introduced in the second quarter of 2003 in the U.K., Ireland and Italy, Philadelphia Minis offer four individually sealed tubs of
cream cheese in one package – perfect for a fresh and portable snack. It helped increase U.K. Philadelphia share by 2.5 points

to more than 60% for the year.

• Designed for easy use, new Kraft Cracker Cuts feature 18 pre-cut, cracker-sized slices. This innovation has helped grow

the natural cheese business and maintain our number one branded share position in chunk cheese in the U.S.

• Launched in Australia in August, two new Kraft Individually Wrapped Singles flavors – Swiss Style and Tasty Style – have captured
5.6% of the singles segment.

• Introduced in the U.S., Jell-O Smoothies – a wholesome, 100-calorie treat – is the first fruit-based product from the Jell-O brand
and the first packaged smoothie you eat with a spoon.

• In 2003, Kraft Canada launched Miracle Whip, Miracle Whip Light and Miracle Whip Hot ‘n Spicy Dressing in an easy-to-use
upside-down squeeze bottle.

• In the fast-growing nutritional and energy bar category, we took our most popular Balance sub-line in the U.S. and extended it
with the launch of four great Balance Gold Crunch items.

• A.1. Chicago Steakhouse Marinade has become the number one item in the brand’s marinades line and one of the top selling in

the category. In the U.S., A.1. Marinades consumption is up nearly 35%, and share is up about two points.

• In Brazil, we recently introduced Fresh Gelatin, using a hybrid sweetener system that delivers more servings per easy-to-use pouch.
Fresh Gelatin is available in four flavors – strawberry, lemon, pineapple and grape.

• Since its U.S. national introduction in April, Oscar Mayer Deli Style Shaved Ham & Turkey has gained a dollar share point of

the large cold cuts category. The fast-selling Deli Style Shaved line will be expanded in 2004.

• Kraft acquired Back to Nature cereal and granola in the U.S. as a platform for expansion into a range of fast-growing, natural and
organic food categories.

• Lunchables Fun Fuel, a new nutritionally balanced meal combination, drove Lunchables U.S. pound share to more than 89%.

• Since its U.S. national launch in April, Boca Rising Crust Supreme Pizza has become the number one item in dollar share in the
meat alternatives pizza segment.

• Dairylea Lunchables Pitta Pouches launched in the U.K. and is available in regular and Funpack formats.

• Our Kraft Dinner Macaroni and Cheese continued its leading performance in Canada, with 2.4 points of pound share growth and
a 6.6% jump in consumption.

Kraft Foods Inc. Financial Review

Financial Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................... 23

Selected Financial Data – Five Year Review ................................................................................................. 39

Consolidated Balance Sheets ...................................................................................................................... 40

Consolidated Statements of Earnings .......................................................................................................... 41

Consolidated Statements of Cash Flows ..................................................................................................... 42

Consolidated Statements of Shareholders’ Equity ....................................................................................... 43

Notes to Consolidated Financial Statements ............................................................................................... 44

Report of Independent Auditors ................................................................................................................... 60

Company Report on Financial Statements ................................................................................................... 60

Kraft Foods Inc. Guide to Select Disclosures

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

Benefit Plans (See Note 14) ........................................................................................................................ 53

Related Party Transactions (See Note 3) .................................................................................................... 47

Segment Reporting (See Note 13) .............................................................................................................. 51

Stock Plans (See Note 10) .......................................................................................................................... 49

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, Kraft was a wholly-owned subsidiary of Altria Group,
Inc. On June 13, 2001, Kraft 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 Kraft’s capital
stock through its ownership of 49.5% of Kraft’s Class A common
stock and 100% of Kraft’s Class B common stock. Kraft’s Class A
common stock has one vote per share, while Kraft’s Class B
common stock has ten votes per share. At December 31, 2003,
Altria Group, Inc. held 97.9% of the combined voting power of Kraft’s
outstanding capital stock and owned approximately 84.6% of the
outstanding shares of Kraft’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
principally by product category, while KFI manages its operations by
geographic region. During 2003, 2002 and 2001, KFNA’s segments
were 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, Mexico and Puerto Rico were
reported through the Cheese, Meals and Enhancers segment. KFI’s
segments were Europe, Middle East and Africa; and Latin America
and Asia Paciﬁc.

During January 2004, the Company announced a new global
organizational structure, which will result in new segments for
ﬁnancial reporting purposes. Beginning in 2004, the Company’s
new segments will be U.S. Beverages & Grocery; U.S. Snacks; U.S.
Cheese, Canada & North America Foodservice; U.S. Convenient
Meals; Europe, Middle East & Africa; and Latin America & Asia
Paciﬁc. The new segment structure in North America reﬂects a
shift of certain divisions and brands between segments to align
businesses with consumer targets. Results for the Mexico and
Puerto Rico businesses will be reported in the Latin America and
Asia Paciﬁc segment.

The Company’s 2003, 2002 and 2001 results by segment are
discussed herein under the reporting structure in place during 2003.
The Company will report ﬁnancial results in the new segment
structure beginning with the results for the ﬁrst quarter of 2004, and
historical amounts will be restated.

Critical Accounting Policies

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 consolidated results of operations 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.

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The selection and disclosure of the Company’s critical accounting
policies and estimates have been discussed with the Company’s
Audit Committee. 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 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, 2003, 2002 and 2001, 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 for employee
beneﬁt plans

2003

$ (46)
74
229
6
84

2002

$ (33)
47
217
35
64

(in millions)
2001

$(227)
35
199
12
63

$347

$330

$ 82

The 2003 net expense for employee beneﬁt plans of $347 million
increased by $17 million over the 2002 amount. This cost increase
primarily relates to higher settlement losses in the U.S. pension
plan, a lowering of the Company’s discount rate assumption on its
pension and postretirement beneﬁt plans, increased amortization
of deferred losses, as well as higher matching of employee
contributions in the savings plan, partially offset by $148 million of

costs in 2002 associated with voluntary early retirement and
integration programs. 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 in 2002
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.

In December 2003, the United States enacted into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(the “Act”). The Act establishes a prescription drug beneﬁt under
Medicare, known as “Medicare Part D,” and a federal subsidy to
sponsors of retiree health care beneﬁt plans that provide a beneﬁt
that is at least actuarially equivalent to Medicare Part D.

In January 2004, the Financial Accounting Standards Board (“FASB”)
issued FASB Staff Position No. 106-1, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003” (“FSP 106-1”). The
Company has elected to defer accounting for the effects of the Act,
as permitted by FSP 106-1. Therefore, in accordance with FSP 106-1,
the Company’s accumulated postretirement beneﬁt obligation and
net postretirement health care costs included in the consolidated
ﬁnancial statements and accompanying notes do not reﬂect the
effects of the Act on the plans. Speciﬁc authoritative guidance on
the accounting for the federal subsidy is pending.

At December 31, 2003, for the U.S. pension and postretirement
plans, the Company reduced its discount rate assumption
from 6.5% to 6.25%, maintained its expected return on asset
assumption at 9.0%, and increased its health care cost trend
rate assumption. The Company presently anticipates that these
assumption changes, coupled with the amortization of lower returns
on pension fund assets in prior years, will result in an increase in
2004 pre-tax beneﬁt expense of approximately $130 million, or
approximately $0.05 per share. The expected increase in beneﬁt
expense is prior to the consideration of any cost reduction derived
from the implementation of the Act, discussed above, and any
impact of the three-year restructuring program announced in
January 2004. 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 2004 assumptions, a ﬁfty-basis-
point decline in the Company’s discount rate would increase the

Company’s pension and postretirement expense by approximately
$65 million, while a ﬁfty-basis-point increase in the discount rate
would decrease pension and postretirement expense by
approximately $55 million. Similarly, a ﬁfty-basis-point decrease
(increase) in the expected return on plan assets would increase
(decrease) the Company’s pension expense for the U.S. pension
plans by approximately $30 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 estimated 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.

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, on January 1, 2002, the Company adopted the
provisions of a new accounting standard and, as a result, stopped
recording the amortization of goodwill as a charge to earnings as
of January 1, 2002.

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 amounts on
its year-end consolidated balance sheet with respect to marketing
costs. The Company expenses advertising costs in the year
incurred. 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., 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 and a management fee,
were $318 million, $327 million and $339 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Although the

cost of these services cannot be quantiﬁed on a stand-alone basis,
management has assessed 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 consists solely of independent directors. The effects of these
transactions are included in operating cash ﬂows in the Company’s
consolidated statements of cash ﬂows.

The Company had 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

2003

(in millions)
2002

$ —

$1,150

1,410
$2,560

$ —

During 2003, the Company repaid Altria Group, Inc. the remaining
$1,150 million on the 7.0% note, as well as the $1,410 million of short-
term borrowings reclassiﬁed to long-term. In addition, at December
31, 2003 and 2002, the Company had short-term amounts payable
to Altria Group, Inc. of $543 million and $895 million, respectively.
Interest on these borrowings is based on the applicable London
Interbank Offered Rate.

Income Taxes: The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards
(“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 currently 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. Based on the Company’s current
estimate, this beneﬁt is calculated to be approximately $100 million,
$240 million and $220 million for the years ended December 31,
2003, 2002 and 2001, respectively. The beneﬁt is dependent on a
variety of tax attributes which have a tendency to vary year to year.
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. The provision for
income taxes is based on domestic and international statutory
income tax rates and tax planning opportunities available to the
Company in the jurisdictions in which it operates. Signiﬁcant
judgment is required in determining income tax provisions and in

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

evaluating tax positions. The Company establishes additional
provisions for income taxes when, despite the belief that existing tax
positions are fully supportable, there remain certain positions that
are likely to be challenged and that may not be sustained on review
by tax authorities. The Company adjusts these additional accruals
in light of changing facts and circumstances. The consolidated
tax provision includes the impact of changes to accruals that are
considered appropriate, as well as the related net interest. If the
Company’s ﬁling positions are ultimately upheld under audits by
respective taxing authorities, it is possible that the provision for
income taxes in future years may reﬂect favorable adjustments.

Business Environment

The Company is subject to a number of challenges that may
adversely affect its businesses. These challenges, which are
discussed below and under the “Forward-Looking and Cautionary
Statements” section include:

• ﬂuctuations in commodity prices;

• movements of foreign currencies against the U.S. dollar;

• competitive challenges in various products and markets, including

price gaps with competitor products and the increasing price-
consciousness of consumers;

• a rising cost environment;

• a trend toward increasing consolidation in the retail trade and

consequent inventory reductions;

• changing consumer preferences;

• competitors with different proﬁt objectives and less susceptibility to

currency exchange rates; and

• consumer concerns about food safety, quality and health, including
concerns about genetically modiﬁed organisms, trans-fatty acids
and obesity.

To confront these challenges, the Company continues to take steps
to build the value of its brands, to improve its food business portfolio
with new product and marketing initiatives, to reduce costs through
productivity and to address consumer concerns about food safety,
quality and health. In July 2003, the Company announced a range
of initiatives addressing product nutrition, marketing practices,
consumer information, and public advocacy and dialogue.

During 2003, several factors contributed to lower than anticipated
volume growth. These factors included higher price gaps in some
key categories and countries, trade inventory reductions resulting
from several customers experiencing ﬁnancial difﬁculty, warehouse
consolidations, store closings and retailers’ stated initiatives to
reduce working capital, as well as the combined adverse effect
of global economic weakness. To improve volume and share
trends, the Company increased spending behind certain businesses
during the second half of 2003 by approximately $200 million more
than had previously been planned. The Company also anticipates
$500 million to $600 million of increased spending in 2004 over
2003 across all its businesses.

In January 2004, the Company announced its adoption of a four-
point plan to achieve sustainable growth. The ﬁrst element of the
plan is to build brand value by continuing to improve its products,
to use more value-added packaging, to develop innovative new
products, to effectively manage price gaps and to build closer
relationships with consumers.

The second element of the plan is to accelerate the shift in the
Company’s brand portfolio to address growing consumer demand
for products meeting their health and wellness concerns and their
desire for convenience. The Company is reducing trans-fat in its
products, identifying its products that are low in carbohydrates,
introducing more sugar-free products, and emphasizing positive
nutrition products. The Company is addressing convenience needs
by offering more convenient packaging, such as single-serve and
resealable packaging, and products requiring reduced preparation.
The Company is also offering packaging that is customized to suit
the needs of growing alternate channels of distribution such as
supercenters, mass merchandisers, drugstores and club stores.
The Company also plans to shift its portfolio to reﬂect changing
demographics, for example, by expanding the availability of
Hispanic products and bilingual packaging.

The third component of the plan is to expand the Company’s
global scale through international growth, particularly in developing
markets. These markets account for 84% of the world’s population
and 30% of its packaged food consumption, but only 11% of the
Company’s net revenues. The plan calls for the Company to capture
the growth potential of its core categories in existing markets and
to expand its core categories into new markets.

As the ﬁnal component of its plan, the Company announced a three-
year restructuring program with the objectives of leveraging the
Company’s global scale, realigning and lowering the cost structure,
and optimizing capacity utilization. As part of this program, the
Company anticipates the exit or closing of up to twenty plants and
the elimination of approximately six thousand positions. Over the
next three years, the Company expects to incur up to $1.2 billion in
pre-tax charges, reﬂecting asset disposals, severance and other
implementation costs, including an estimated range of $750 million
to $800 million in 2004. Approximately one-half of the pre-tax

charges are expected to require cash payments. In addition, the
Company expects to spend approximately $140 million in capital
over the next three years to implement the program, including
approximately $50 million in 2004. Cost savings as a result of this
program in 2004 are expected to be approximately $120 million to
$140 million and are anticipated to reach annual cost savings of
approximately $400 million by 2006, all of which are expected to
be used in supporting brand-building initiatives.

Fluctuations in commodity prices can lead to retail price volatility
and intensive price competition, and can inﬂuence consumer and
trade buying patterns. KFNA’s and KFI’s businesses are subject
to ﬂuctuating commodity costs, including dairy, coffee and cocoa
costs. In 2003, the Company’s commodity costs on average were
higher than those incurred in 2002 and adversely affected earnings.

The Company’s performance in 2003 was also affected by a rising
cost environment, which is expected to continue. In particular,
the Company experienced increased pension, medical, packaging
and energy costs.

During 2003, the Company acquired a biscuits business in Egypt
and trademarks associated with a small U.S.-based natural foods
business. The total cost of these and other smaller acquisitions was
$98 million. 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, results of operations
or cash ﬂows in any of the periods presented.

During 2003, the Company sold a European rice business and a
branded fresh cheese business in Italy. The aggregate proceeds
received from sales of businesses were $96 million, on which the
Company recorded pre-tax gains of $31 million.

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.

The operating results of the businesses sold were not material to the
Company’s consolidated ﬁnancial position, results of operations or
cash ﬂows in any of the periods presented.

In November 2003, the Company was advised by the Fort Worth
District Ofﬁce of the Securities and Exchange Commission (“SEC”)
that the staff is considering recommending that the SEC bring a civil
injunctive action against the Company charging it with aiding and
abetting Fleming Companies (“Fleming”) in violations of the securities
laws. District staff alleges that a Company employee, who received a
similar “Wells” notice, signed documents requested by Fleming,
which Fleming used in order to accelerate its revenue recognition.
The notice does not contain any allegations or statements regarding
the Company’s accounting for transactions with Fleming. The
Company believes that it properly recorded the transactions in
accordance with U.S. GAAP. The Company has submitted a
response to the staff indicating why it believes that no enforcement
action should be brought against it. The Company has cooperated
fully with the SEC with respect to this matter and the SEC’s
investigation of Fleming.

Consolidated Operating Results

Year Ended December 31,

Volume (in pounds):

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

Volume (in pounds)

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 income:
Operating companies income:

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

Amortization of intangibles
General corporate expenses

Operating income

Net earnings

Weighted average shares for
diluted earnings per share

(in millions, except per share data)
2001

2002

2003

6,183
2,083
3,905
1,570
13,741
2,971
1,969
4,940
18,681

$ 9,439
4,801
4,567
3,100
21,907
7,045
2,058
9,103
$31,010

6,082
2,185
3,708
1,554
13,529
2,961
2,059
5,020
18,549

$ 9,172
4,887
4,412
3,014
21,485
6,203
2,035
8,238
$29,723

5,404
2,165
3,421
1,519
12,509
2,826
2,057
4,883
17,392

$ 9,014
4,789
4,237
2,930
20,970
5,936
2,328
8,264
$29,234

$ 2,230
887
1,247
556
1,012
270
(9)
(182)
$ 6,011

$ 2,210
1,051
1,136
556
962
368
(7)
(162)
$ 6,114

$ 2,132
933
1,192
539
861
378
(962)
(189)
$ 4,884

$ 3,476

$ 3,394

$ 1,882

1,728

1,736

1,610

Diluted earnings per share

$ 2.01

$ 1.96

$ 1.17

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating income was affected by the following items during 2003,
2002 and 2001:

businesses were included in the operating companies income of
the following segments:

Integration Costs and a Loss on Sale of a Food Factory: During
2003, the Company reversed $13 million related to previously
recorded integration charges. During 2002, the Company 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.
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
items were included in the operating companies income of the
following segments:

For the Years Ended December 31,

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Latin America and Asia Paciﬁc
Integration costs and a loss on

2003

$(10)

(3)

(in millions)
2001

$63
2
12
5

2002

$ 30
1
56
7
17

sale of a food factory

$(13)

$111

$82

Asset Impairment and Exit Costs: During 2003, the Company
recorded a pre-tax charge of $6 million for asset impairment and
exit costs related to the closure of a Nordic snacks plant. During
2002, the Company recorded a pre-tax charge of $142 million
related to employee acceptances under a voluntary retirement
program. Approximately 700 employees elected to retire or
terminate employment under the program. During 2001, there were
no asset impairment and exit costs. These charges were included
in the operating companies income of the following segments:

For the Years Ended December 31,

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
Asset impairment and exit costs

2003

(in millions)
2002

$ 60
3
47
25
5
2
$142

Gains on Sales of Businesses: During 2003, the Company sold
a European rice business and a branded fresh cheese business
in Italy for aggregate pre-tax gains of $31 million. During 2002,
the Company sold its Latin American yeast and industrial bakery
ingredients business, resulting in a pre-tax gain of $69 million,
and several small food businesses, resulting in pre-tax gains of
$11 million. During 2003, 2002 and 2001, total gains on sales of

For the Years Ended December 31,

2003

Biscuits, Snacks and Confectionery
Europe, Middle East and Africa
Latin America and Asia Paciﬁc
Gains on sales of businesses

$31

2002

$ 8

72
$80

(in millions)
2001

$8
$8

Amortization of Intangibles: As previously discussed, the
Company stopped recording the amortization of goodwill as
a charge to earnings as of January 1, 2002.

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 dates of
sales. 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 the 2003 and 2002 consolidated
operating results of KFNA.

As discussed in Note 13 to the consolidated ﬁnancial statements, the
Company’s management uses operating companies income, which
is deﬁned as operating income before general corporate expenses
and amortization of intangibles, to evaluate segment performance
and allocate resources. Management believes it is appropriate to
disclose this measure to help investors analyze the business
performance and trends of the various business segments.

2003 compared with 2002

The following discussion compares consolidated operating results
for 2003 with 2002.

Volume increased 132 million pounds (0.7%), due primarily to
increased shipments in the Beverages, Desserts and Cereals
segment and the Cheese, Meals and Enhancers segment, growth
in developing markets and the impact of acquisitions, partially offset
by the impact of divested businesses, lower consumption in certain
categories, particularly U.S. cookies, trade inventory reductions,
price competition and the impact of a weaker global economy.

Net revenues increased $1,287 million (4.3%), due to favorable
currency ($730 million), higher pricing ($471 million, reﬂecting
higher commodity and currency devaluation-driven cost increases,
partially offset by higher promotional spending), higher volume/mix
($114 million) and the impact of acquisitions ($59 million), partially
offset by the impact of divested businesses ($87 million).

Operating income decreased $103 million (1.7%), due primarily to
higher ﬁxed manufacturing costs ($110 million, including higher
beneﬁt costs), higher marketing, administration and research costs
($104 million), unfavorable costs, net of higher pricing ($94 million,
due primarily to higher commodity costs and increased promotional
spending), unfavorable volume/mix ($66 million), the impact of gains
on sales of businesses ($49 million) and the impact of divestitures
($18 million), partially offset by the impact of lower pre-tax charges
for asset impairment and exit costs ($136 million) and the impact

from integration costs and a loss on sale of a food factory ($124 mil-
lion) and favorable currency ($94 million). The higher beneﬁt costs
were primarily related to pension and stock compensation costs.

Currency movements increased net revenues by $730 million and
operating income by $94 million. These increases were due primarily
to the further weakening of the U.S. dollar against the euro, the
Canadian dollar and other currencies, partially offset by the strength
of the U.S. dollar against certain Latin American currencies.

Interest and other debt expense, net, decreased $182 million. This
decrease is due to the Company’s reﬁnancing of notes payable to
Altria Group, Inc. and the use of free cash ﬂow to pay down debt.

The Company’s reported effective tax rate decreased by 0.6
percentage points to 34.9%, due primarily to rate differences from
foreign operations.

Net earnings of $3,476 million increased $82 million (2.4%), due
primarily to lower interest expense and a lower effective tax rate,
partially offset by lower operating income. Diluted and basic earnings
per share (“EPS”), which were both $2.01, increased by 2.6%.

2002 compared with 2001

The following discussion compares consolidated operating results
for 2002 with 2001.

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

Net revenues increased $489 million (1.7%), due primarily to higher
volume/mix ($401 million), the inclusion in 2002 of a business
previously considered held for sale ($252 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).

Operating income increased $1,230 million (25.2%), due primarily
to the elimination of substantially all goodwill amortization, volume
growth and favorable margins.

Currency movements decreased net revenues by $291 million and
operating income by $4 million. These decreases in net revenues
and operating income were 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.

Interest and other debt expense, net, decreased $590 million. 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.

The Company’s effective tax rate decreased by 9.9 percentage
points to 35.5%, due primarily to the adoption of SFAS No. 141 and
SFAS No. 142, under which the Company is no longer required to
amortize goodwill as a charge to earnings.

Net earnings of $3,394 million increased $1,512 million (80.3%), due
primarily to growth in operating income and lower interest expense.
Diluted and basic EPS, which were both $1.96, increased by 67.5%.

Operating Results by Reportable Segment

Kraft Foods North America

For the Years Ended December 31,

2003

2002

Volume (in pounds):

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

Volume (in pounds)

Net revenues:

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

Net revenues

Operating companies income:
Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza

Operating companies income

2003 compared with 2002

(in millions)
2001

5,404
2,165
3,421
1,519
12,509

6,183
2,083
3,905
1,570
13,741

6,082
2,185
3,708
1,554
13,529

$ 9,439
4,801
4,567
3,100
$21,907

$ 9,172
4,887
4,412
3,014
$21,485

$ 9,014
4,789
4,237
2,930
$20,970

$ 2,230
887
1,247
556
$ 4,920

$ 2,210
1,051
1,136
556
$ 4,953

$ 2,132
933
1,192
539
$ 4,796

The following discussion compares KFNA’s operating results for
2003 with 2002.

Volume increased 1.6%, due primarily to contributions from new
products and increased shipments in the Beverages, Desserts and
Cereals segment and the Cheese, Meals and Enhancers segment,
partially offset by the divestiture of a small confectionery business in
2002, consumption weakness in certain categories, primarily
cookies, and trade inventory reductions.

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net revenues increased $422 million (2.0%), due primarily to higher
volume/mix ($170 million), higher pricing, net of increased promo-
tional spending ($151 million), and favorable currency ($120 million),
partially offset by the divestiture of a small confectionery business in
2002 ($21 million).

Operating companies income decreased $33 million (0.7%), due
primarily to unfavorable costs, net of higher pricing ($161 million,
including higher commodity costs and increased promotional
spending), higher ﬁxed manufacturing costs ($79 million, including
higher beneﬁt costs) and unfavorable volume/mix ($37 million),
partially offset by 2002 pre-tax charges for asset impairment and exit
costs ($135 million) and the impact of lower integration costs and a
loss on sale of a food factory ($107 million).

Operating companies income decreased $164 million (15.6%),
due primarily to lower volume/mix ($84 million), higher ﬁxed
manufacturing costs ($77 million) and unfavorable costs, net
of higher pricing ($71 million, including higher commodity costs
and increased promotional spending), partially offset by lower
marketing, administration and research costs ($77 million).

Beverages, Desserts and Cereals: Volume increased 5.3%, due
primarily to higher shipments of ready-to-drink beverages, which
were aided by new product introductions. Desserts volume also
increased, due primarily to higher shipments of sugar-free items
and increased merchandising programs. In coffee, volume declined,
impacted by competitive activity and a category decline due to
higher prices.

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

Net revenues increased $155 million (3.5%), due to higher
volume/mix ($100 million) and higher pricing ($55 million).

Cheese, Meals and Enhancers: Volume increased 1.7%, due
primarily to higher shipments in cheese, food service, Canada
and Mexico. Cheese volume increased due primarily to improved
consumption and share trends resulting from the investment
program that began in the third quarter of 2003. Volume for the
food service business in the United States also increased, due to
higher shipments to national accounts. Volume in Canada and
Mexico increased, driven by new beverage product introductions.

Net revenues increased $267 million (2.9%), due to favorable
currency ($120 million), higher volume/mix ($82 million) and
higher pricing ($65 million, including the impact of increased
promotional spending).

Operating companies income increased $20 million (0.9%), due
primarily to the 2002 pre-tax charges for asset impairment and
exit costs ($60 million), the impact of lower integration costs and
a loss on the sale of a food factory ($40 million) and favorable
currency ($22 million), partially offset by unfavorable costs, net
of higher pricing ($72 million, including higher commodity costs
and increased promotional spending), higher ﬁxed manufacturing
costs ($23 million, including higher beneﬁt costs) and unfavorable
volume/mix.

Biscuits, Snacks and Confectionery: Volume decreased 4.7%,
due primarily to lower shipments in biscuits and the divestiture of a
small confectionery business in 2002. In biscuits, volume declined,
due primarily to reduced consumption in cookies, reﬂecting higher
pricing, lower impact of new products, and consumer health and
wellness concerns. Snacks volume increased, beneﬁting from
category and consumption gains in snack nuts.

Net revenues decreased $86 million (1.8%), due to lower volume/mix
($56 million), the divestiture of a small confectionery business in
2002 ($21 million) and higher promotional spending, net of higher
pricing ($9 million).

Operating companies income increased $111 million (9.8%), due
primarily to the impact of lower integration costs ($59 million),
the 2002 asset impairment and exit costs ($47 million) and higher
volume/mix ($43 million), partially offset by higher marketing,
administration and research costs ($31 million), unfavorable
costs, net of higher pricing ($13 million, including higher commodity
costs) and higher beneﬁt costs.

Oscar Mayer and Pizza: Volume increased 1.0%, due primarily to
gains in cold cuts, hot dogs, bacon, soy-based meat alternatives
and frozen pizza.

Net revenues increased $86 million (2.9%), due primarily to higher
volume/mix ($44 million) and higher pricing ($40 million, including the
impact of increased promotional spending).

Operating companies income was equal to the prior year’s, as the
impact of 2002 pre-tax charges for asset impairment and exit
costs ($25 million) and integration costs ($7 million), lower ﬁxed
manufacturing costs ($14 million) and higher volume/mix ($10 million)
was offset by higher marketing, administration and research costs
($51 million), unfavorable costs, net of higher pricing ($5 million,
including higher commodity costs and increased promotional
spending) and higher beneﬁt costs.

2002 compared with 2001

The following discussion compares KFNA’s operating results for
2002 with 2001.

KFNA’s volume increased 8.2%, due primarily to the inclusion
in 2002 of a business that was previously held for sale and
contributions from new products.

Net revenues increased $515 million (2.5%), due primarily to
higher volume/mix ($437 million) and the inclusion in 2002 of a
business that was previously held for sale ($252 million), partially
offset by lower selling prices in response to lower commodity
costs ($154 million).

Operating companies income increased $157 million (3.3%), 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 asset
impairment and exit costs ($135 million).

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

Cheese, Meals and Enhancers: Volume increased 12.5%, due
primarily to the inclusion in 2002 of a business that was previously
held for sale and 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.

Net revenues increased $158 million (1.8%), due primarily to the
inclusion in 2002 of a business that was previously held for sale
($252 million) and higher volume/mix ($34 million), partially offset
by lower net pricing ($118 million, primarily related to lower dairy
commodity costs).

Operating companies income increased $78 million (3.7%), due
primarily to favorable margins ($63 million, due primarily to lower
cheese commodity costs and productivity savings), lower integration
related costs in 2002 ($33 million), higher volume/mix ($31 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 asset impairment and exit costs
($60 million).

Biscuits, Snacks and Confectionery: Volume increased 0.9%,
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.

Net revenues increased $98 million (2.0%), due primarily to higher
volume/mix ($61 million) and higher net pricing ($35 million).

Operating companies income increased $118 million (12.6%), due
primarily to favorable margins ($81 million, due primarily to higher
net pricing and lower commodity costs for nuts), Nabisco synergy
savings and higher volume/mix.

Beverages, Desserts and Cereals: Volume increased 8.4%, 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.

Net revenues increased $175 million (4.1%), due primarily to higher
volume/mix ($245 million), partially offset by lower net pricing
($58 million).

Operating companies income decreased $56 million (4.7%),
primarily reﬂecting the 2002 charge for asset impairment and exit
costs ($47 million), higher integration-related costs ($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.

Oscar Mayer and Pizza: Volume increased 2.3%, 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.

Net revenues increased $84 million (2.9%), due to higher volume/mix
($97 million), partially offset by lower net pricing ($13 million).

Operating companies income increased $17 million (3.2%), 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 asset
impairment and exit costs ($25 million), higher marketing,
administration and research costs ($24 million, including higher
beneﬁt costs) and higher manufacturing costs.

Kraft Foods International

For the Years Ended December 31,

2003

2002

(in millions)
2001

Volume (in pounds):

Europe, Middle East and Africa
Latin America and Asia Paciﬁc

Volume (in pounds)

Net revenues:

Europe, Middle East and Africa
Latin America and Asia Paciﬁc

Net revenues

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

2,971
1,969
4,940

2,961
2,059
5,020

2,826
2,057
4,883

$7,045
2,058
$9,103

$6,203
2,035
$8,238

$5,936
2,328
$8,264

$1,012
270
$1,282

$ 962
368
$1,330

$ 861
378
$1,239

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

2003 compared with 2002
The following discussion compares KFI’s operating results for 2003
with 2002.

Volume decreased 1.6%, due to the divestiture of a Latin American
bakery ingredients business in 2002 and a rice business and a
branded fresh cheese business in Europe in 2003, the impact
of price competition, particularly in Germany and France, and the
adverse impact of a summer heat wave across Europe on the
chocolate and coffee businesses. These declines were partially
offset by growth in developing markets, including Russia, Brazil
and China, and the acquisitions of a snacks business in Turkey
and a biscuits business in Egypt.

Net revenues increased $865 million (10.5%), due to favorable
currency ($610 million), higher pricing ($320 million, reﬂecting higher
commodity and currency devaluation-driven cost increases in Latin
America) and the impact of acquisitions ($57 million), partially offset
by the impact of divestitures ($66 million) and lower volume/mix
($56 million).

Operating companies income decreased $48 million (3.6%), due
primarily to higher marketing, administration and research costs ($98
million, including higher beneﬁt costs and infrastructure investment
in developing markets), the net impact of lower gains on sales of
businesses ($41 million), lower volume/mix ($29 million) and the
impact of divestitures ($13 million), partially offset by favorable
currency ($72 million), higher pricing, net of cost increases ($36
million, including ﬁxed manufacturing costs), the 2002 pre-tax
charges for integration costs ($17 million) and the impact of
acquisitions ($7 million).

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

Europe, Middle East and Africa: Volume increased 0.3%, due
to volume growth in the Central and Eastern Europe, Middle East
and Africa region, which beneﬁted from the acquisition of a biscuits
business in Egypt in 2003 as well as a snacks business acquisition in
Turkey during the third quarter of 2002, and new product
introductions. These gains were partially offset by the impact of
the summer heat wave across Europe on the chocolate and coffee
businesses, price competition in Germany and France, and the
divestiture of a rice business and a branded fresh cheese business
in Europe in 2003. In snacks, volume increased in biscuits and
salted snacks, beneﬁting from acquisitions, partially offset by lower
confectionery volume due to the summer heat wave across Europe
and price competition. In beverages, volume declined, due primarily
to the summer heat wave across Europe (which had an adverse
impact on coffee shipments) and price competition. These declines
were partially offset by increased coffee shipments in Russia,
beneﬁting from expanded distribution, and Poland, aided by new
product introductions. Convenient meals volume also declined, due

to the divestiture of a rice business in Europe, partially offset by
higher shipments of canned meats in Italy. Cheese volume declined,
due primarily to the impact of price competition in Germany and
Spain, partially offset by gains in cream cheese in Italy.

Net revenues increased $842 million (13.6%), due primarily to
favorable currency ($808 million), the impact of acquisitions
($57 million) and higher pricing ($18 million), partially offset by
unfavorable volume/mix ($43 million).

Operating companies income increased $50 million (5.2%), due
primarily to favorable currency ($100 million) and the gain on the sale
of a rice business and a branded fresh cheese business in Europe
($31 million), partially offset by unfavorable costs, net of higher
pricing ($39 million, including higher commodity costs and increased
promotional spending), unfavorable volume/mix ($28 million) and
higher marketing, administration and research costs ($17 million,
including higher beneﬁt costs and infrastructure investment in
eastern Europe).

Latin America and Asia Paciﬁc: Volume decreased 4.4%, due to
the divestiture of a Latin American bakery ingredients business in
2002, partially offset by growth in Argentina, Brazil, China and
Australia. In grocery, volume declined in Latin America, due primarily
to the sale of a bakery ingredients business in the fourth quarter of
2002. In beverages, volume increased, due primarily to growth in
Brazil, Venezuela and China, aided by new product introductions.
Snacks volume also increased, as biscuits volume growth in Brazil,
Argentina, China and Australia, aided by new product introductions,
was partially offset by a decline in confectionery, which was
impacted by economic weakness, trade inventory reductions and
price competition in Brazil. In cheese, volume increased, due to
higher shipments in Asia Paciﬁc, beneﬁting from new products in
Australia and promotional programs in the Philippines, partially offset
by declines in Latin America. In convenient meals, volume grew,
beneﬁting from gains in Argentina.

Net revenues increased $23 million (1.1%), due to higher pricing
($302 million, reﬂecting higher commodity and currency
devaluation-driven costs), partially offset by unfavorable currency
($198 million), the divestiture of a Latin American bakery ingredients
business in 2002 ($68 million) and lower volume/mix ($13 million).

Operating companies income decreased $98 million (26.6%), due
primarily to higher marketing, administration and research costs
($81 million), gains on sales of businesses in 2002 ($72 million),
unfavorable currency ($28 million) and the divestiture of a Latin
American bakery ingredients business in 2002 ($10 million), partially
offset by higher pricing, net of cost increases ($75 million) and the
2002 pre-tax charges for integration costs ($17 million).

2002 compared with 2001

The following discussion compares KFI’s operating results for 2002
with 2001.

KFI’s volume increased 2.8% 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 and the
impact of businesses sold.

Net revenues decreased $26 million (0.3%), 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).

Operating companies income increased $91 million (7.3%), 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).

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

Europe, Middle East and Africa: Volume increased 4.8%, 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.

Net revenues increased $267 million (4.5%), 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).

Operating companies income increased $101 million (11.7%), 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.

Latin America and Asia Paciﬁc: Volume increased slightly, as
the acquisition of a biscuits business in Australia and gains across
numerous markets were partially offset by a volume decline in
Argentina due to economic weakness, lower results in China and
the impact of businesses sold. 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.

Net revenues decreased $293 million (12.6%), 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).

Operating companies income decreased $10 million (2.6%), 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).

Financial Review

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $4.1 billion in 2003,
$3.7 billion in 2002 and $3.3 billion in 2001. The increase in 2003
operating cash ﬂows over 2002 was due primarily to a lower use of
cash to fund working capital, partially offset by increased pension
contributions. 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.

Kraft Foods Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations

During 2003, 2002 and 2001, net cash used in investing activities
was $1.0 billion, $1.1 billion and $1.2 billion, respectively. The
decrease in 2003 primarily reﬂected lower capital expenditures
and lower purchases of businesses, partially offset by the reduction
in the cash received from the sales of businesses. The decrease
in 2002 primarily reﬂected lower purchases of businesses and
an increase in the cash received from the sales of businesses,
partially offset by higher capital expenditures related to the
integration of Nabisco.

Capital expenditures, which were funded by operating activities,
were $1.1 billion, $1.2 billion and $1.1 billion in 2003, 2002 and 2001,
respectively. The capital expenditures were primarily to modernize
manufacturing facilities, lower cost of production and expand
production capacity for growing product lines. In 2004, capital
expenditures are currently expected to be at or slightly above
2003 expenditures, including capital expenditures required for
the restructuring program announced in January 2004. These
expenditures are expected to be funded from operations.

Net Cash Used in Financing Activities

During 2003, net cash of $2.8 billion was used in ﬁnancing activities,
compared with $2.6 billion during 2002. The increase in cash used in
2003 was due primarily to an increase in the Company’s Class A
share repurchases and an increase in dividend payments, partially
offset by a decrease in net debt repayments in 2003 (including
amounts due to Altria Group, Inc. and afﬁliates). During 2003, the
Company issued $1.5 billion of third-party long-term debt, the net
proceeds of which were used to repay outstanding related party
indebtedness. Financing activities included net debt repayments
of approximately $1.4 billion in 2003.

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, Kraft issued
$2.5 billion of global bonds and $750 million of ﬂoating rate notes,
the net proceeds of which were used to repay outstanding related
party indebtedness. Financing activities included net debt
repayments of approximately $1.5 billion in 2002.

Debt and Liquidity

Debt: The Company’s total debt, including amounts due to Altria
Group, Inc. and afﬁliates, was $13.5 billion at December 31, 2003
and $14.4 billion at December 31, 2002. The decrease in total debt is
due primarily to the repayment of amounts due to Altria Group, Inc.
and afﬁliates, partially offset by an increase in third-party borrowings.
The Company’s debt-to-equity ratio was 0.47 at December 31, 2003
and 0.56 at December 31, 2002.

During 2003, the Company repaid the remaining $1,150 million of the
7.0% long-term notes payable to Altria Group, Inc. and afﬁliates, as
well as the $1,410 million of short-term borrowings reclassiﬁed to
long-term. In September 2003, Kraft issued $1.5 billion of third-party
long-term debt, including $700 million of 5-year notes bearing
interest at a rate of 4.0% and $800 million of 10-year notes bearing
interest at 5.25%. The net proceeds from the offering were used
to repay outstanding related party indebtedness. At December 31,
2003 and 2002, the Company had short-term amounts payable
to Altria Group, Inc. of $543 million and $895 million, respectively.
Interest on these borrowings is based on the applicable London
Interbank Offered Rate.

Credit Ratings: Following a $10.1 billion judgment on March 21,
2003 against Altria Group, Inc.’s domestic tobacco subsidiary,
Philip Morris USA Inc., the three major credit rating agencies took a
series of ratings actions resulting in the lowering of the Company’s
short-term and long-term debt ratings, despite the fact the
Company is neither a party to, nor has exposure to, this litigation.
Moody’s lowered the Company’s short-term debt rating from “P-1”
to “P-2” and its long-term debt rating from “A2” to “A3,” with stable
outlook. Standard & Poor’s lowered the Company’s short-term debt
rating from “A-1” to “A-2” and its long-term debt rating from “A-” to
“BBB+,” with stable outlook. Fitch Rating Services lowered the
Company’s short-term debt rating from “F-1” to “F-2” and its long-
term debt rating from “A” to “BBB+,” with stable outlook. As a result
of the credit rating agencies’ actions, the Company temporarily
lost access to the commercial paper market, and borrowing costs
increased. None of the Company’s debt agreements requires
accelerated repayment in the event of a decrease in credit ratings.

Credit Lines: The Company maintains revolving credit facilities that
have historically been used to support the issuance of commercial
paper. At December 31, 2003, credit lines for the Company and the
related activity were as follows:

Financial Reporting Release No. 61 sets forth the views of the
Securities and Exchange Commission (“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.

Type

364-day (expires July 2004)
Multi-year (expires July 2006)

Credit
Lines

$2.5
2.0
$4.5

Amount
Drawn

$ —

(in billions of dollars)

Commercial
Paper
Outstanding

$0.3
1.9
$2.2

The Company’s revolving credit facilities, which are for its sole use,
require the maintenance of a minimum net worth of $18.2 billion.
The Company met this covenant at December 31, 2003 and expects
to continue to meet this covenant. 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 multi-year revolving credit facility enables the Company to
reclassify short-term debt on a long-term basis. At December 31,
2003, $1.9 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.

In addition to the above, certain international subsidiaries of
Kraft maintain uncommitted credit lines to meet the short-term
working capital needs of the international businesses. These
credit lines, which amounted to approximately $658 million as
of December 31, 2003, are for the sole use of the Company’s
international businesses. Borrowings on these lines were
approximately $220 million at December 31, 2003 and 2002.

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

The Company has no off-balance sheet arrangements other than the
guarantees and contractual obligations that are discussed below.

Guarantees: 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
approximately $38 million at December 31, 2003. Substantially all
of these guarantees expire through 2014, with $13 million expiring
during 2004. 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
a liability of $26 million on its consolidated balance sheet at
December 31, 2003, relating to these guarantees.

In addition, at December 31, 2003, the Company was contingently
liable for $123 million of guarantees related to its own performance.
These include surety bonds related to dairy commodity purchases
and guarantees related to the payment of customs duties and taxes,
and letters of credit.

Guarantees do not have, and are not expected to have, a signiﬁcant
impact on the Company’s liquidity.

Aggregate Contractual Obligations: The following table
summarizes the Company’s contractual obligations at
December 31, 2003:

(in millions)

Long-term debt(1)
Operating leases(2)
Purchase obligations(3):

Inventory and

production costs

Other

Other long-term
liabilities(4)

Payments Due

Total

2009 and
2004 2005–06 2007–08 Thereafter

$10,510
1,187

$ 775
307

$1,994
397

$2,100
247

$5,641
236

5,611
781
6,392

2,643
617
3,260

1,162
111
1,273

578
46
624

1,228
7
1,235

41
$18,130

$4,342

20
$3,684

11
$2,982

10
$7,122

(1) Amounts represent the expected cash payments of the Company’s long-term debt and do not
include short-term borrowings reclassiﬁed as long-term debt, bond premiums or discounts.

(2) Operating leases represent the minimum rental commitments under non-cancelable operating

leases. The Company has no signiﬁcant capital lease obligations.

(3) Purchase obligations for inventory and production costs (such as raw materials, indirect materials

and supplies, packaging, co-manufacturing arrangements, storage and distribution) are
commitments for projected needs to be utilized in the normal course of business. Other purchase
obligations include commitments for marketing, advertising, capital expenditures, information
technology and professional services. Arrangements are considered purchase obligations if a
contract speciﬁed all signiﬁcant terms, including ﬁxed or minimum quantities to be purchased, a
pricing structure and approximate timing of the transaction. Most arrangements are cancelable
without a signiﬁcant penalty, and with short notice (usually 30 days). Any amounts reﬂected on
the consolidated balance sheet as accounts payable and accrued liabilities are excluded from
the table above.

(4) Other long-term liabilities primarily consist of certain speciﬁc severance and incentive compensation
arrangements. The following long-term liabilities included on the consolidated balance sheet are
excluded from the table above: accrued pension, postretirement health care and postemployment
costs, income taxes, minority interest, insurance accruals and other accruals. The Company is
unable to estimate the timing of the payments for these items. Currently, the Company anticipates
making U.S. pension contributions of approximately $70 million in 2004, based on current tax law
(as discussed in Note 14 to the consolidated ﬁnancial statements).

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

Equity and Dividends

In 2002, Kraft’s Board of Directors approved the repurchase from
time to time of up to $500 million of Kraft’s Class A common stock
solely to satisfy the obligations of Kraft to provide shares under its
2001 Performance Incentive Plan, 2001 Director Plan for non-
employee directors, and other plans where options to purchase
Kraft’s Class A common stock are granted to employees of the
Company. On December 3, 2003, Kraft completed the $500 million
Class A common stock repurchase program, acquiring 15,308,458
Class A shares at an average price of $32.66 per share. On
December 8, 2003, Kraft commenced repurchasing shares under a

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. During the year ended December 31, 2003,
ineffectiveness related to cash ﬂow hedges resulted in a gain of
$13 million, which was recorded in cost of sales on the consolidated
statement of earnings. Ineffectiveness related to cash ﬂow hedges
during the year ended December 31, 2002 was not material.
At December 31, 2003, the Company was hedging forecasted
transactions for periods not exceeding twelve 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 businesses, include the euro, Swiss franc, British
pound and Canadian dollar. At December 31, 2003 and 2002, the
Company had option and forward foreign exchange contracts with
aggregate notional amounts of $2,486 million and $575 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.

new $700 million Class A common stock repurchase authority
approved by its Board of Directors in 2003. Through December 31,
2003, repurchases under the $700 million program were 1,583,600
shares at a cost of $50 million, or $31.57 per share. During 2003,
Kraft repurchased 12.5 million shares at a cost of $380 million, and in
2002 Kraft repurchased 4.4 million shares at a cost of $170 million.

Concurrently with the IPO, certain employees of Altria Group, Inc.
and its subsidiaries received a one-time grant of options to purchase
shares of Kraft’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, Altria Group, Inc. purchased 1.6 million shares of Kraft’s
Class A common stock in open market transactions during 2002.

During the ﬁrst quarter of 2003, the Company granted shares of
restricted stock and rights to receive shares of stock to eligible
employees, giving them in most instances all of the rights of
stockholders, except that they may not sell, assign, pledge or
otherwise encumber such shares and rights. Such shares and
rights are subject to forfeiture if certain employment conditions are
not met. During the ﬁrst quarter of 2003, the Company granted
approximately 3.7 million restricted Class A shares to eligible U.S.-
based employees and also issued to eligible non-U.S. employees
rights to receive approximately 1.6 million Class A equivalent shares.
Restrictions on the stock and rights lapse in the ﬁrst quarter of 2006.
The market value per restricted share or right was $36.56 on the
date of grant.

The fair value of the shares of restricted stock and rights to receive
shares of stock at the date of grant is amortized to expense ratably
over the restriction period. The Company recorded compensation
expense related to the restricted stock and rights of $57 million
for the year ended December 31, 2003. The unamortized portion,
which is reported on the consolidated balance sheet as a reduction
of earnings reinvested in the business, was $129 million at December
31, 2003.

Dividends paid in 2003 and 2002 were $1,089 million and $936 mil-
lion, respectively, reﬂecting a higher dividend rate in 2003, partially
offset by lower shares outstanding as a result of Class A share
repurchases. During the third quarter of 2003, Kraft’s Board of
Directors approved a 20% increase in the quarterly dividend rate
to $0.18 per share on its Class A and Class B common stock. As a
result, the present annualized dividend rate is $0.72 per common
share. The declaration of dividends is subject to the discretion of
Kraft’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 Kraft’s Board of Directors.

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, 2003 and 2002,
the Company had net long commodity positions of $255 million
and $544 million, respectively. Unrealized gains or losses on net
commodity positions were immaterial at December 31, 2003
and 2002. 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, 2003 and 2002, 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 12/31/03

Average

High

Low

Pre-Tax Earnings Impact

Instruments sensitive to:
Foreign currency rates
Commodity prices

$21
5

$ 8
5

$ 21
7

$ 3
3

(in millions)

At 12/31/03

Average

High

Low

Instruments sensitive to:

Interest rates

$77

$97

$114

$77

Fair Value Impact

(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

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

See Note 2 to the consolidated ﬁnancial statements for a discussion
of recently adopted accounting standards.

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 Securities and Exchange
Commission (“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 and demand for its products, the
effects of changing prices for its raw materials and local economic
and market 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, 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 and to realize the cost
savings and improved asset utilization contemplated by its
restructuring program. In addition, the Company is subject to the
effects of foreign economies, currency movements, ﬂuctuations in
levels of customer inventories and credit and other business risks
related to its customers operating in a challenging economic and
competitive environment. The Company’s results are affected by its
access to credit markets, borrowing costs and credit ratings, which
may in turn be inﬂuenced by the credit ratings of Altria Group, Inc.
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. The food industry is also
subject to consumer concerns regarding genetically modiﬁed
organisms and the health implications of obesity and trans-fatty
acids. 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.

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

Total deferred income taxes
Shareholders’ equity
Common dividends declared as a % of Basic EPS
Common dividends declared as a % of Diluted EPS
Book value per common share outstanding
Market price per Class A common share—high/low

Closing price of Class A common share at year end
Price/earnings ratio at year end—Basic
Price/earnings ratio at year end—Diluted
Number of common shares outstanding at

year end (millions)
Number of employees

2003

2002

2001

2000

1999

$31,010
18,828
6,011
665
5,346
17.2%
1,866

3,476
2.01
2.01
0.66
1,727
1,728

1,085
804
10,155
3,343
59,285
11,591
—
13,462

$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

5,175
28,530
32.8%
32.8%
16.57
39.40-26.35

32.22
16
16

4,917
25,832
28.6%
28.6%
14.92
43.95-32.50

38.93
20
20

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
—

—
—
—

1,722
106,000

1,731
109,000

1,735
114,000

1,455
117,000

$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

Kraft Foods Inc. Consolidated Balance Sheets

(in millions of dollars)

At December 31,

Assets

Cash and cash equivalents
Receivables (less allowances of $114 and $119)
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
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 2003 and 2002)
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 (13,062,876 and 4,381,150 Class A shares)

Total shareholders’ equity

Total Liabilities and Shareholders’ Equity

See notes to consolidated ﬁnancial statements.

2003

2002

514
3,369

215
3,116

1,375
1,968

3,343
681
217

8,124

407
3,422
11,293
683

15,805
5,650

10,155
25,402
11,477
3,243
884

1,372
2,010

3,382
511
232

7,456

387
3,153
10,108
802

14,450
4,891

9,559
24,911
11,509
2,814
851

$59,285

$57,100

553
775
543
2,005

1,500
699
1,335
451

7,861

11,591
5,856
1,894

3,553

30,755

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

23,704
7,020
(1,792)

28,932
(402)

28,530

23,655
4,814
(2,467)

26,002
(170)

25,832

$59,285

$57,100

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
Asset impairment and exit costs
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.

2003

$31,010
18,828

12,182
6,200
(13)
6
(31)
9

6,011
665

5,346
1,866

3,480
4

2002

2001

$29,723
17,720

$29,234
17,566

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

$ 3,476

$ 3,394

$ 1,882

$ 2.01

$ 1.96

$ 1.17

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, net of cash paid
Asset impairment and exit costs, net of cash paid
Cash effects of changes, net of the effects from acquired and

divested companies:
Receivables, net
Inventories
Accounts payable
Income taxes
Amounts due to Altria Group, Inc. and afﬁliates
Other working capital items

Change in pension assets and postretirement liabilities, net
Other

Net cash provided by operating activities

Cash Provided By (Used In) Investing Activities

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

Net cash used in 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.

2003

2002

2001

$ 3,476

$ 3,394

$ 1,882

813
244
(31)
(26)
6

(45)
197
(116)
(125)
169
(167)
(419)
143

716
278
(80)
91
128

116
(220)
(116)
277
(244)
(330)
(217)
(73)

1,642
414
(8)
79

23
(107)
(73)
74
138
(290)
(305)
(141)

4,119

3,720

3,328

(1,085)
(98)
96
38

(1,049)

819
1,577
(491)
(2,757)
(525)
(372)
(1,089)

(2,786)

299
215

514

642

(1,184)
(122)
219
35

(1,052)

(1,036)
3,325
(609)
(3,850)
660
(170)
(936)

(2,616)

53
162

215

825

$ 1,726

$ 1,368

(1,101)
(194)
21
52

(1,222)

2,505
4,077
(705)
(16,350)
142

(225)
8,425

(2,131)

(4)

(29)
191

162

$ 1,433

$ 1,058

Kraft Foods Inc. Consolidated Statements of Shareholders’ Equity

(in millions of dollars, except per share data)

Balances, January 1, 2001

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

Cash 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
Cash dividends declared

($0.56 per share)
Class A common stock

repurchased
Balances, December 31, 2002

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
Exercise of stock options and

issuance of other stock awards

Cash dividends declared

($0.66 per share)
Class A common stock

repurchased
Balances, December 31, 2003

See notes to consolidated ﬁnancial statements.

Class A
and B
Common
Stock
$ —

Additional
Paid-in
Capital
$15,230

Earnings
Reinvested
in the
Business
$ 992

1,882

Accumulated Other
Comprehensive Earnings (Losses)

Currency
Translation
Adjustments
$(2,138)

Other
$ (36)

Total
$(2,174)

Cost of
Repurchased
Stock
$ —

Total
Shareholders’
Equity
$14,048

8,425

—

23,655

(298)

(78)

(18)

(78)

(18)

(2,436)

(132)

(2,568)

—

187

(117)

(483)
2,391

3,394

(971)

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

3,476

(129)

(1,141)

755

(68)

(12)

$ —

$23,704

$ 7,020

$(1,494)

$(298)

$(1,792)

43
43

3,476

755

(68)

(12)
675
4,151

148

(1,141)

(380)
$(402)

(380)
$28,530

Kraft Foods Inc. 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. 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.

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
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, 2003, Altria Group, Inc. held 97.9% of
the combined voting power of the Company’s outstanding capital
stock and owned approximately 84.6% of the outstanding shares of
the Company’s capital stock.

Basis of presentation: The consolidated ﬁnancial statements
include Kraft, as well as its wholly-owned and majority-owned
subsidiaries. Investments in which the Company exercises signiﬁcant
inﬂuence (20%–50% ownership interest) are accounted for under the
equity method of accounting. Investments in which the Company
has an ownership interest of less than 20%, or does not exercise
signiﬁcant inﬂuence, are accounted for with the cost method of
accounting. All intercompany transactions and balances between
and among Kraft’s subsidiaries have been eliminated. Transactions
between any of the Company’s businesses and Altria Group, Inc.
and its afﬁliates are included in these ﬁnancial statements.

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 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.

Certain prior years’ amounts have been reclassiﬁed to conform with
the current year’s presentation, due primarily to the disclosure of
more detailed information on the consolidated balance sheets and
the consolidated statements of cash ﬂows, as well as the transfer
of Canadian Biscuits and Pet Snacks from the Biscuits, Snacks
and Confectionery segment to the Cheese, Meals and Enhancers
segment, which contains the Company’s other Canadian businesses.

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
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, 2001:

(in millions, except per share amounts)

For the year ended December 31,

Net earnings, as previously reported

Adjustment for amortization of goodwill
Net earnings, as adjusted

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

$1,882

955
2,837

$ 1.17
0.59
$ 1.76

In addition, the Company is required to conduct an annual review
of goodwill and intangible assets for potential impairment. Goodwill
impairment testing requires a comparison between the carrying
value and fair value of a reportable goodwill asset. If the carrying
value exceeds the fair value, goodwill is considered impaired. The
amount of impairment loss is measured as the difference between
the carrying value and implied fair value of goodwill, which is
determined using discounted cash ﬂows. Impairment testing for
non-amortizable intangible assets requires a comparison between
fair value and carrying value of the intangible asset. If the carrying
value exceeds fair value, the intangible asset is considered impaired
and is reduced to fair value. In 2003, the Company did not have to
record a charge to earnings for an impairment of goodwill or other
intangible assets as a result of its annual review.

At December 31, 2003 and 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

2003

$ 8,834
8,963
2,143
613
20,553
4,562
287
4,849
$25,402

(in millions)
2002

$ 8,803
9,015
2,143
616
20,577
4,082
252
4,334
$24,911

Intangible assets at December 31, 2003 and 2002, were as follows:

2003

Gross

Carrying Accumulated
Amount Amortization

Non-amortizable

intangible assets

$11,432

Amortizable

intangible assets

Total intangible assets

$11,516

$39

(in millions)

2002

Gross
Carrying
Amount

Accumulated
Amortization

$11,485

$11,539

$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 $9 million and $7 million for the
years ended December 31, 2003 and 2002, respectively.
Amortization expense for each of the next ﬁve years is currently
estimated to be $10 million or less.

The movement in goodwill and intangible assets from December 31,
2002, is as follows:

(in millions)

Intangible
Assets

Goodwill

Balance at December 31, 2002

$24,911

$11,539

Changes due to:
Acquisitions
Currency
Other

Balance at December 31, 2003

49
520
(78)
$25,402

30
(40)
(13)
$11,516

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
marketing, administration and research costs on the consolidated
statements of earnings and were not signiﬁcant for any of the
periods presented.

Guarantees: Effective January 1, 2003, the Company adopted
Financial Accounting Standards Board (“FASB”) Interpretation
No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness
of Others.” Interpretation No. 45 required the disclosure of certain
guarantees existing at December 31, 2002. In addition, Interpretation
No. 45 required 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 has
applied the recognition provisions of Interpretation No. 45 to
guarantees initiated after December 31, 2002. Adoption of
Interpretation No. 45 as of January 1, 2003 did not have a material
impact on the Company’s consolidated ﬁnancial statements. 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.” These standards require that all derivative ﬁnancial
instruments be recorded at fair value on the consolidated balance
sheets as either assets or liabilities. Changes in the fair value of
derivatives are recorded each period either in accumulated other
comprehensive earnings (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

Kraft Foods Inc. Notes to Consolidated Financial Statements

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 compre-
hensive losses (less than $1 million).

Effective July 1, 2003, the Company adopted SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” SFAS No. 149 amends and clariﬁes ﬁnancial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. The adoption of SFAS No.
149 did not have a material impact on the Company’s consolidated
ﬁnancial position, results of operations or cash ﬂows. Collectively,
SFAS No. 133, SFAS No. 138 and SFAS No. 149 are referred to as
“SFAS No. 133.”

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.

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 currently 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. Based on the
Company’s current estimate, this beneﬁt is calculated to be
approximately $100 million, $240 million and $220 million for the
years ended December 31, 2003, 2002 and 2001, 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. Signiﬁcant judgment
is required in determining income tax provisions and in evaluating
tax positions. The Company and its subsidiaries establish additional
provisions for income taxes when, despite the belief that their tax
positions are fully supportable, there remain certain positions that
are likely to be challenged and that may not be sustained on review
by tax authorities. The Company and its subsidiaries adjust these
additional accruals in light of changing facts and circumstances.
The consolidated tax provision includes the impact of changes
to accruals that are considered appropriate, as well as the related
net interest.

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

Marketing costs: The Company promotes its products with
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 July 1, 2003, the Company adopted Emerging Issues
Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables,” which addresses certain aspects of a vendor’s
accounting 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.
The adoption of EITF Issue No. 00-21 did not have a material impact
on the Company’s consolidated ﬁnancial position, results of
operations or cash ﬂows.

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 included in property, plant and
equipment on the consolidated balance sheets and 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. The market value of restricted stock at
date of grant is recorded as compensation expense over the period
of restriction.

At December 31, 2003, 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 stock options. 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 pre-tax compensation expense
related to restricted stock and rights to receive shares of stock of
$57 million, $4 million and $39 million for the years ended December
31, 2003, 2002 and 2001, respectively. 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, 2003,
2002, and 2001:

(in millions, except per share data)
2001

2002

2003

the years ended December 31, 2003, 2002 and 2001, 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 has assessed 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.

$3,476

$3,394

$1,882

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

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

12
$3,464

78
$3,316

97
$1,785

$ 2.01

$ 2.00

$ 1.96

$ 1.91

$ 1.96

$ 1.91

$ 1.17

$ 1.11

$ 1.17

$ 1.11

New accounting pronouncements: Several recent accounting
pronouncements not previously discussed became effective during
2003. The adoption of these pronouncements did not have a
material impact on the Company’s consolidated ﬁnancial position,
results of operations or cash ﬂows. The pronouncements were
as follows:

• SFAS No. 150, “Accounting for Certain Financial Instruments with

Characteristics of both Liabilities and Equity”;

• EITF Issue No. 03-3, “Applicability of EITF Abstracts, Topic No.

D-79, ‘Accounting for Retroactive Insurance Contracts Purchased
by Entities Other Than Insurance Enterprises,’ to Claims-Made
Insurance Policies”;

• EITF Issue No. 01-8, “Determining Whether an Arrangement

Contains a Lease”;

• SFAS No. 146, “Accounting for Costs Associated with Exit or

Disposal Activities”; and

• FASB Interpretation No. 46, “Consolidation of Variable

Interest Entities.”

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. Billings for these services, which were based on the
cost to Altria Corporate Services, Inc. to provide such services and a
management fee, were $318 million, $327 million and $339 million for

At December 31,

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

afﬁliates reclassiﬁed as long-term

2003

$ —

(in millions)
2002

$1,150

1,410
$2,560

During 2003, the Company repaid Altria Group, Inc. the remaining
$1,150 million on the 7.0% note as well as the $1,410 million of short-
term reclassiﬁed to long-term. In addition, at December 31, 2003
and 2002, the Company had short-term amounts payable to Altria
Group, Inc. of $543 million and $895 million, respectively. Interest on
these borrowings is based on the applicable London Interbank
Offered Rate.

The fair values of the Company’s short-term 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.

The operating results of the businesses sold were not material to the
Company’s consolidated ﬁnancial position, results of operations or
cash ﬂows in any of the periods presented.

Kraft Foods Inc. Notes to Consolidated Financial Statements

Note 5. 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, results of operations or cash ﬂows in
any of the periods presented.

Note 6. Inventories:

The cost of approximately 39% and 43% of inventories in 2003 and
2002, respectively, was determined using the LIFO method. The
stated LIFO amounts of inventories were approximately $155 million
and $215 million higher than the current cost of inventories at
December 31, 2003 and 2002, respectively.

Note 7. Short-Term Borrowings and
Borrowing Arrangements:

At December 31, 2003 and 2002, the Company had short-term
borrowings of $2,453 million and $1,621 million, respectively,
consisting principally of commercial paper borrowings with an
average year-end interest rate of 1.4% and 1.3%, respectively. Of
these amounts, the Company reclassiﬁed $1,900 million and
$1,401 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, 2003 and 2002, based upon current market interest
rates, approximate the amounts disclosed above.

Following a $10.1 billion judgment on March 21, 2003 against Altria
Group, Inc.’s domestic tobacco subsidiary, Philip Morris USA Inc.,
the three major credit rating agencies took a series of ratings actions
resulting in the lowering of the Company’s short-term and long-term
debt ratings, despite the fact the Company is neither a party to, nor
has exposure to, this litigation. Moody’s lowered the Company’s
short-term debt rating from “P-1” to “P-2” and its long-term debt
rating from “A2” to “A3,” with stable outlook. Standard & Poor’s
lowered the Company’s short-term debt rating from “A-1” to “A-2”
and its long-term debt rating from “A–” to “BBB+,” with stable
outlook. Fitch Rating Services lowered the Company’s short-term

debt rating from “F-1” to “F-2” and its long-term debt rating from “A”
to “BBB+,” with stable outlook. As a result of the credit rating
agencies’ actions, the Company temporarily lost access to the
commercial paper market, and borrowing costs increased. None of
the Company’s debt agreements requires accelerated repayment in
the event of a decrease in credit ratings.

The Company maintains revolving credit facilities that have
historically been used to support the issuance of commercial paper.
At December 31, 2003, credit lines for the Company and the related
activity were as follows:

Type

364-day (expires July 2004)
Multi-year (expires July 2006)

(in billions of dollars)

Amount
Drawn

$ —

Commercial
Paper
Outstanding

$0.3
1.9
$2.2

Credit
Lines

$2.5
2.0
$4.5

In addition to the above, certain international subsidiaries of the
Company maintain uncommitted credit lines to meet the short-term
working capital needs of the international businesses. These credit
lines, which amounted to approximately $658 million as of
December 31, 2003, are for the sole use of the Company’s
international businesses. Borrowings on these lines amounted to
approximately $220 million at December 31, 2003 and 2002.

Note 8. Long-Term Debt:

At December 31, 2003 and 2002, the Company’s long-term debt
consisted of the following:

Short-term borrowings, reclassiﬁed as

long-term debt

Notes, 4.00% to 7.55% (average effective

rate 5.37%), due through 2035

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

Foreign currency obligations
Other

Less current portion of long-term debt

2003

(in millions)
2002

$1,900

$ 1,401

10,256

9,053

157
16
37
12,366
(775)
$11,591

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

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

2004
2005
2006
2007
2008
2009–2013
Thereafter

In addition, 1.18 billion Class B common shares were issued and
outstanding at December 31, 2003 and 2002. Altria Group, Inc.
holds 276.6 million Class A common shares and all of the Class B
common shares at December 31, 2003. 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 97.9% of the
combined voting power of the Company’s outstanding capital
stock at December 31, 2003. At December 31, 2003, 71,662,879
shares of common stock were reserved for stock options and other
stock awards.

(in millions)

$ 775
737
1,257
1,398
702
4,502
1,139

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
$12,873 million and $11,544 million at December 31, 2003 and
2002, respectively.

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, Altria Group, Inc. purchased
1.6 million shares of the Company’s Class A common stock in
open market transactions during 2002.

Note 9. Capital Stock:

Note 10. Stock Plans:

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 December 3,
2003, the Company completed a $500 million Class A common
stock repurchase program, acquiring 15,308,458 Class A shares
at an average price of $32.66 per share. On December 8, 2003,
the Company commenced repurchasing shares under a new
$700 million Class A common stock repurchase program. Through
December 31, 2003, repurchases under the $700 million program
were 1,583,600 shares at a cost of $50 million, or $31.57 per share.

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

Shares Issued

Shares
Repurchased

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

Repurchase of

Exercise of stock
options and
issuance of other
stock awards

Balance at

(12,508,908)

3,827,182

December 31, 2003

555,000,000

(13,062,876)

541,937,124

The Company’s Board of Directors and shareholders approved
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)
became 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) were scheduled to become exercisable based on total
shareholder return for the Company’s Class A common stock during
the three years following the date of the grant, or were to become
exercisable ﬁve years from the date of the grant. Based on total
shareholder return, one-third of these shares became exercisable
in June 2002 and one-third will become exercisable in June 2006.
The remaining one-third could become exercisable in June 2004 or
in June 2006, depending on shareholder return. These options will
also expire ten years from the date of the grant. Shares available to
be granted under the Plan at December 31, 2003, were 51,317,940.

The Company’s Board of Directors and shareholders also approved
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. Shares available to be
granted under the Kraft Director Plan at December 31, 2003,
were 470,705.

Kraft Foods Inc. Notes to Consolidated Financial Statements

The Company applies the intrinsic value-based methodology
in accounting for the various stock plans. Accordingly, no
compensation expense has been recognized other than for
restricted stock awards.

Stock option activity was as follows for the years ended
December 31, 2001, 2002 and 2003:

Shares Subject
to Option

Weighted Average
Exercise Price

Options
Exercisable

Balance at

January 1, 2001

—

Options granted
Options canceled

21,038,722
(268,420)

Balance at

December 31, 2001
Options granted
Options exercised
Options canceled

Balance at

December 31, 2002
Options exercised
Options canceled

Balance at

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

19,291,672
(346,868)
(663,027)

31.00
31.00

31.00
37.10
31.00
31.00

31.00
31.00
31.00

696,615

December 31, 2003

18,281,777

31.00

17,032,740

The following table summarizes the status of the Company’s stock
options outstanding and exercisable as of December 31, 2003:

Range of
Exercise
Prices

Options Outstanding

Options Exercisable

Average
Remaining
Number Contractual
Life

Outstanding

Weighted
Average
Exercise
Price

Number
Exercisable

$30.54 – $39.51 18,281,777
$31.00

7 years

$31.00 17,032,740

Prior to the IPO, certain employees of the Company participated in
Altria Group, Inc.’s stock compensation plans. Altria Group, Inc.
does not 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: 39,241,651 shares at
an average exercise price of $37.25 per share at December 31, 2003;
46,615,162 shares at an average exercise price of $35.78 per share at
December 31, 2002; and 57,349,595 shares at an average exercise
price of $34.66 per share at December 31, 2001. Of these amounts,
the following were exercisable at each date: 39,025,325 at an
average exercise price of $37.19 per share at December 31, 2003;
46,231,629 at an average exercise price of $35.69 per share at
December 31, 2002; and 44,930,609 at an average exercise price of
$31.95 per share at December 31, 2001.

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 basic and
diluted EPS would have been $3,464 million, $2.01 and $2.00,
respectively, for the year ended December 31, 2003; $3,316 million,
$1.91 and $1.91, respectively, for the year ended December 31, 2002;
and $1,785 million, $1.11 and $1.11, respectively, for the year ended
December 31, 2001. The foregoing impact of compensation cost was
determined using a modiﬁed Black-Scholes methodology and the
following assumptions:

Risk-Free
Interest
Rate

Weighted
Average
Expected
Life

Expected
Volatility

Expected
Dividend
Yield

Fair Value
at Grant
Date

—

2003 Altria Group, Inc.
2002 Kraft
2002 Altria Group, Inc.
2001 Kraft
2001 Altria Group, Inc.

2.68% 4 years
4.27
3.44
4.81
4.86

5
5
5
5

37.61% 6.04% $ 8.76
10.65
1.41
28.72
10.02
4.96
33.57
9.13
1.68
29.70
10.36
4.78
33.88

During the ﬁrst quarter of 2003, the Company granted shares of
restricted stock and rights to receive shares of stock to eligible
employees, giving them in most instances all of the rights of
stockholders, except that they may not sell, assign, pledge or
otherwise encumber such shares and rights. Such shares and
rights are subject to forfeiture if certain employment conditions are
not met. During the ﬁrst quarter of 2003, the Company granted
approximately 3.7 million restricted Class A shares to eligible
U.S.-based employees and also issued to eligible non-U.S.
employees rights to receive approximately 1.6 million Class A
equivalent shares. Restrictions on the stock and rights lapse in the
ﬁrst quarter of 2006. The market value per restricted share or right
was $36.56 on the date of grant.

The fair value of the shares of restricted stock and rights to receive
shares of stock at the date of grant is amortized to expense ratably
over the restriction period. The Company recorded compensation
expense related to the restricted stock and rights of $57 million for
the year ended December 31, 2003. The unamortized portion, which
is reported on the consolidated balance sheets as a reduction of
earnings reinvested in the business, was $129 million at
December 31, 2003.

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, Altria Group, Inc. granted to certain of the
Company’s U.S. employees restricted stock of 279,120 shares and to
certain of the Company’s non-U.S. employees rights to receive
31,310 equivalent shares. At December 31, 2003, there were no
restrictions on the stock. The fair value of the restricted shares and
rights at the date of grant was amortized to expense ratably over the
restriction period through a charge from Altria Group, Inc. In 2002
and 2001, the Company recorded compensation expense related to
these stock awards of $4 million and $39 million, respectively.

Note 11. Earnings Per Share:

Basic and diluted EPS were calculated using the following for the
years ended December 31, 2003, 2002 and 2001:

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, 2003, 2002 and 2001:

Net earnings

Weighted average shares for

basic EPS

Plus incremental shares from
assumed conversions:

2003

2002

(in millions)
2001

$3,476

$3,394

$1,882

1,727

1,734

1,610

Restricted stock and stock rights
Stock options

Weighted average shares for

diluted EPS

1,728

1,736

1,610

For the 2003 computation, 18 million Class A common stock options
were excluded from the calculation of weighted average shares for
diluted EPS because their effects were antidilutive.

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

Pre-tax earnings and provision for income taxes consisted of the
following for the years ended December 31, 2003, 2002 and 2001:

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

2003

2002

(in millions)
2001

$3,713
1,633
$5,346

$3,692
1,575
$5,267

$2,282
1,165
$3,447

$1,011
153
1,164
151
1,315

460
91
551
$1,866

$ 825
265
1,090
138
1,228

628
13
641
$1,869

$ 594
299
893
112
1,005

445
115
560
$1,565

At December 31, 2003, applicable United States federal income
taxes and foreign withholding taxes have not been provided on
approximately $3.3 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.

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

Goodwill amortization
Other (including reversal of taxes

no longer required)

Effective tax rate

2003

2002

2001

35.0%

1.8

1.7

2.0
9.4

(1.9)
34.9%

(1.2)
35.5%

(1.0)
45.4%

Rate differences from foreign operations, which are included in other,
above, reduced the Company’s effective tax rate by 0.8% in 2003
and 0.4% in 2001. Rate differences from foreign operations had no
impact in 2002.

The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities consisted of the following at
December 31, 2003 and 2002:

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:

2003

(in millions)
2002

809
392
1,201

(3,839)
(1,636)
(901)
(6,376)
$(5,175)

$ 759
519
1,278

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

The Company manufactures and markets packaged retail food
products, consisting principally of beverages, cheese, snacks,
convenient meals and various packaged grocery products through
Kraft Foods North America, Inc. (“KFNA”) and Kraft Foods
International, Inc. (“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.

Kraft Foods Inc. Notes to Consolidated Financial Statements

The Company’s management uses operating companies income,
which is deﬁned as operating income before general corporate
expenses and amortization of intangibles, to evaluate segment
performance and allocate resources. 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 not included in 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 Note 2. Summary of Signiﬁcant
Accounting Policies.

During the ﬁrst quarter of 2003, the Company transferred
management responsibility of its Canadian Biscuits and Pet Snacks
operations from the Biscuits, Snacks and Confectionery segment to
the Cheese, Meals and Enhancers segment, which contains the
Company’s other Canadian businesses. Accordingly, all prior period
amounts have been reclassiﬁed to reﬂect the transfer. During
January 2004, the Company announced a new global organizational
structure, which will result in new segments for ﬁnancial reporting
purposes. Beginning in 2004, the Company’s new segments will be
U.S. Beverages & Grocery; U.S. Snacks; U.S. Cheese, Canada &
North America Foodservice; U.S. Convenient Meals; Europe, Middle
East and Africa; and Latin America and Asia Paciﬁc.

Segment data were as follows:

For the Years Ended December 31,

2003

2002

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

Earnings before income taxes and

minority interest:

Operating companies income:
Kraft Foods North America:

Cheese, Meals and Enhancers
Biscuits, Snacks and Confectionery
Beverages, Desserts and Cereals
Oscar Mayer and Pizza
Kraft Foods International:

Europe, Middle East and Africa
Latin America and Asia Paciﬁc

Amortization of intangibles
General corporate expenses

Operating income

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

(in millions)
2001

$ 9,014
4,789
4,237
2,930
20,970
5,936
2,328
8,264
$29,234

$ 9,439
4,801
4,567
3,100
21,907
7,045
2,058
9,103
$31,010

$ 9,172
4,887
4,412
3,014
21,485
6,203
2,035
8,238
$29,723

$2,230
887
1,247
556

$2,210
1,051
1,136
556

1,012
270
(9)
(182)
6,011
(665)

962
368
(7)
(162)
6,114
(847)

$2,132
933
1,192
539

861
378
(962)
(189)
4,884
(1,437)

minority interest

$ 5,346

$ 5,267

$ 3,447

The Company’s largest customer, Wal-Mart Stores, Inc. and its
afﬁliates, accounted for approximately 12%, 12% and 11% of
consolidated net revenues for 2003, 2002 and 2001, respectively.
These net revenues occurred primarily in the United States and were
across all segments.

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:

Consumer Sector

For the Years Ended December 31,

Snacks
Beverages
Cheese
Grocery
Convenient Meals

Total

2003

$3,622
3,124
1,302
741
314
$9,103

2002

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

(in millions)
2001

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

Items affecting the comparability of the Company’s results were
as follows:

• Integration Costs and a Loss on Sale of a Food Factory—During
2003, the Company reversed $13 million related to the previously
recorded integration charges. During 2002, the Company 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.
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 items
were included in the operating companies income of the
following segments:

For the Years Ended December 31,

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

Integration costs and a loss
on sale of a food factory

2003

$(10)

(3)

(in millions)
2001

$63
2
12
5

2002

$ 30
1
56
7
17

$(13)

$111

$82

• Asset Impairment and Exit Costs—During 2003, the Company
recorded a pre-tax charge of $6 million for asset impairment and exit
costs related to the closure of a Nordic snacks plant. During 2002,
the Company recorded a pre-tax charge of $142 million related to
employee acceptances under a voluntary retirement program.
Approximately 700 employees elected to retire or terminate
employment under the program. These charges were included in the

operating companies income of the following segments for the years
ended December 31, 2003 and 2002:

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

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

Asset impairment and exit costs

2003

(in millions)
2002

$ 60
3
47
25
5
2
$142

• Gains on Sales of Businesses—During 2003, the Company sold a
European rice business and a branded fresh cheese business in Italy
for aggregate pre-tax gains of $31 million. These pre-tax gains were
included in the operating companies income of the Europe, Middle
East and Africa segment. During 2002, the Company sold its Latin
American yeast and industrial bakery ingredients business, resulting
in a pre-tax gain of $69 million, and several small food businesses,
resulting in pre-tax gains of $11 million. These pre-tax gains were
included in the operating companies income of the following
segments: Biscuits, Snacks and Confectionery, $8 million; and Latin
America and Asia Paciﬁc, $72 million.

See Notes 4 and 5, respectively, regarding divestitures
and acquisitions.

For the Years Ended December 31,

2003

2002

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

$ 206
150
124
62
542
223
39
262
$ 804

$ 226
193
184
110
713
276
96
372
$1,085

$ 193
140
115
58
506
167
36
203
$ 709

$ 268
213
194
133
808
265
111
376
$1,184

(in millions)
2001

$ 180
135
113
55
483
158
39
197
$ 680

$ 266
162
202
131
761
231
109
340
$1,101

For the Years Ended December 31,

2003

2002

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

Note 14. Beneﬁt Plans:

$19,545
6,752
4,713
$31,010

$44,674
10,114
4,497
$59,285

$ 6,451
2,757
1,831
$11,039

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

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

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

(in millions)
2001

$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 December 2003, the FASB issued a revised SFAS No. 132,
“Employers’ Disclosures about Pensions and Other Postretirement
Beneﬁts.” In 2003, the Company adopted the revised disclosure
requirements of this pronouncement, except for certain disclosures
about non-U.S. plans and estimated future beneﬁt payments which
are not required until 2004.

The Company sponsors noncontributory deﬁned beneﬁt pension
plans covering substantially all U.S. employees. Pension coverage
for employees of the Company’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, the
Company’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.

The plan assets and beneﬁt obligations of the Company’s U.S.
pension plans are measured at December 31 of each year.

Kraft Foods Inc. Notes to Consolidated Financial Statements

Pension Plans

Obligations and Funded Status

The beneﬁt obligations, plan assets and funded status of the
Company’s pension plans at December 31, 2003 and 2002, were
as follows:

(in millions)

Beneﬁt obligation at

January 1
Service cost
Interest cost
Beneﬁts paid
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
Currency
Actuarial (losses) gains
Fair value of plan assets at

U.S. Plans

Non-U.S. Plans

2003

2002

2003

2002

$5,245
135
338
(398)
29
199

$4,964
120
339
(624)
127
367

(2)

(48)

$2,317
58
136
(132)

$2,021
49
120
(115)

124
392
15

85
144
13

5,546

5,245

2,910

2,317

4,965
1,038
219
(414)

6,359
(803)
26
(636)

(6)

1,337
204
209
(100)
216

1,329
(56)
81
(87)
70

December 31

5,802

4,965

1,866

1,337

Funded status (plan assets
in excess of (less than)
beneﬁt obligations)
at December 31
Unrecognized actuarial

losses

Unrecognized prior

service cost

Additional minimum

liability

Unrecognized net transition

obligation
Net prepaid pension

256

(280)

(1,044)

(980)

2,292

2,558

848

682

(85)

(71)

(367)

(288)

asset (liability) recognized

$2,486

$2,220

$ (501)

$ (529)

The combined U.S. and non-U.S. pension plans resulted in a net
prepaid pension asset of $1,985 million and $1,691 million at
December 31, 2003 and 2002, respectively. These amounts were
recognized in the Company’s consolidated balance sheets at
December 31, 2003 and 2002, as prepaid pension assets of
$3,243 million and $2,814 million, respectively, for those plans in
which plan assets exceeded their accumulated beneﬁt obligations,
and as other liabilities of $1,258 million and $1,123 million, respectively,
for plans in which the accumulated beneﬁt obligations exceeded
their plan assets.

For U.S. and non-U.S. pension plans, the change in the additional
minimum liability in 2003 and 2002 was as follows:

U.S. Plans

Non-U.S. Plans

2003

2002

2003

2002

(in millions)

Increase in minimum liability

included in other
comprehensive earnings
(losses), net of tax

$(9)

$(22)

$(59)

$(95)

The combined accumulated beneﬁt obligation for the U.S. pension
plans was $4,898 million and $4,562 million at December 31, 2003
and 2002, respectively.

At December 31, 2003 and 2002, certain of the Company’s U.S.
pension plans were underfunded, with projected beneﬁt obligations,
accumulated beneﬁt obligations and the fair value of plan assets of
$261 million, $208 million and $14 million, respectively, in 2003, and
$269 million, $217 million and $45 million, respectively, in 2002.
The majority of these relate to plans for salaried employees that
cannot be funded under IRS regulations. 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 $1,648 million,
$1,532 million and $588 million, respectively, as of December 31,
2003, and $1,375 million, $1,250 million and $424 million, respectively,
as of December 31, 2002.

The following weighted-average assumptions were used to
determine the Company’s beneﬁt obligations under the plans at
December 31:

U.S. Plans

Non-U.S. Plans

2003

2002

2003

2002

Discount rate
Rate of compensation increase

6.25%
4.00

6.50%
4.00

5.41%
3.11

5.56%
3.12

Components of Net Periodic Beneﬁt Cost

Plan Assets

Net periodic pension (income) cost consisted of the following for the
years ended December 31, 2003, 2002 and 2001:

The Company’s U.S. pension plan asset allocation at December 31,
2003 and 2002, was as follows:

2003

$ 135
338

U.S. Plans
2002

2001

2003

Non-U.S. Plans
2002

2001

$ 120
339

$ 107
339

$ 58
136

$ 49
120

$ 45
112

(587)

(631)

(648)

(146)

(134)

(126)

U.S. Plans Asset Category

Equity securities
Debt securities
Real estate
Other
Total

Percentage of Fair Value of
Plan Assets at December 31

2003

2002

70%
26
1
3
100%

63%
32
1
4
100%

(in millions)

Service cost
Interest cost
Expected return
on plan assets

Amortization:

Unrecognized net
loss (gain)
from experience
differences
Prior service cost
Other expense (income)
Net pension

15
2
51

8
1
130

(21)
8
(12)

18
8

5
7

(1)
5

(income) cost

$ (46) $ (33) $(227) $ 74

$ 47

$ 35

Retiring employees elected lump-sum payments, resulting in
settlement losses of $51 million and $21 million in 2003 and 2002,
respectively, and settlement gains of $12 million in 2001. In addition,
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.

The following weighted-average assumptions were used to
determine the Company’s net pension cost for the year ended
December 31:

increase

4.00

4.50

3.12

3.36

3.55

The Company’s expected rate of return on plan assets is determined
by the plan assets’ historical long-term investment performance,
current asset allocation and estimates of future long-term returns
by asset class.

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 $84 million,
$64 million and $63 million in 2003, 2002 and 2001, respectively.

2003

U.S. Plans
2002

2001

2003

Non-U.S. Plans
2002

2001

6.50% 7.00% 7.75% 5.56% 5.80% 5.88%

9.00

8.41

8.49

8.51

Postretirement Beneﬁt Plans

Discount rate
Expected rate of

return on plan assets
Rate of compensation

The Company’s investment strategy is based on an expectation that
equity securities will outperform debt securities over the long term.
Accordingly, the composition of the Company’s plan assets is
broadly characterized as a 70%/30% allocation between equity and
debt securities. The strategy utilizes indexed U.S. equity securities
and actively managed investment grade debt securities (which
constitute 80% or more of debt securities) with lesser allocations
to high yield and international debt securities.

The Company attempts to mitigate investment risk by rebalancing
between equity and debt asset classes as the Company’s
contributions and monthly beneﬁt payments are made.

The Company presently plans to make contributions, to the extent
that they are tax deductible, in order to maintain plan assets in
excess of the accumulated beneﬁt obligation of its funded U.S.
plans. Currently, the Company anticipates making contributions of
approximately $70 million in 2004, based on current tax law.
However, this estimate is subject to change as a result of current
tax proposals before Congress, as well as asset performance
signiﬁcantly above or below the assumed long-term rate of return
on pension assets.

Net postretirement health care costs consisted of the following for
the years ended December 31, 2003, 2002 and 2001:

Service cost
Interest cost
Amortization:

Unrecognized net loss from
experience differences

Unrecognized prior service cost

Other expense
Net postretirement health care costs

2003

$ 41
173

40
(25)

$229

2002

$ 32
168

21
(20)
16
$217

(in millions)
2001

$ 34
168

5
(8)

$199

Kraft Foods Inc. Notes to Consolidated Financial Statements

During 2002, certain salaried employees in the United States left the
Company under a voluntary early retirement program instituted in
2001. This resulted in curtailment losses of $16 million in 2002, which
are included in other expense, above.

The current portion of the Company’s accrued postretirement health
care costs of $199 million and $172 million at December 31, 2003 and
2002, respectively, are included in other accrued liabilities on the
consolidated balance sheets.

The following weighted-average assumptions were used to
determine the Company’s postretirement beneﬁt obligations at
December 31:

Discount rate
Health care cost trend rate
assumed for next year
Ultimate trend rate
Year that the rate reaches
the ultimate trend rate

U.S. Plans

Canadian Plans

2003

2002

2003

2002

6.25%

6.50%

6.75%

10.00
5.00

8.00
5.00

7.00
4.00

2006

2010

2006

Assumed health care cost trend rates have a signiﬁcant effect on the
amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the
following effects as of December 31, 2003:

Effect on total of service and

interest cost

Effect on postretirement

beneﬁt obligation

Postemployment Beneﬁt Plans

One-Percentage-
Point Increase

One-Percentage-
Point Decrease

14.0%

(11.2)%

10.2

(8.5)

Kraft and certain of its afﬁliates sponsor postemployment beneﬁt
plans covering substantially all salaried and certain hourly
employees. The cost of these plans is charged to expense over the
working lives of the covered employees. Net postemployment costs
consisted of the following for the years ended December 31, 2003,
2002 and 2001:

Service cost
Amortization of unrecognized net gains
Other expense
Net postemployment costs

2003

2002

(in millions)
2001

$10
(5)
1
$ 6

$19
(7)
23
$35

$20
(8)

$12

During 2002, certain salaried employees in the United States left the
Company under voluntary early retirement and integration programs.
These programs resulted in incremental postemployment costs of
$23 million, which are included in other expense, above.

In January 2004, the FASB issued FASB Staff Position No. 106-1,
“Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003”
(“FSP 106-1”). The Company has elected to defer accounting for
the effects of the Act, as permitted by FSP 106-1. Therefore, in
accordance with FSP 106-1, the Company’s accumulated
postretirement beneﬁt obligation and net postretirement health
care costs included in the consolidated ﬁnancial statements and
accompanying notes do not reﬂect the effects of the Act on the
plans. Speciﬁc authoritative guidance on the accounting for the
federal subsidy is pending, and that guidance, when issued, could
require the Company to change previously reported information.

The following weighted-average assumptions were used to
determine the Company’s net postretirement cost for the years
ended December 31:

Discount rate
Health care cost

trend rate

2003

U.S. Plans
2002

2001

2003

Canadian Plans
2002

2001

6.50% 7.00% 7.75% 6.75% 6.75% 7.00%

8.00

6.20

6.80

7.00

8.00

9.00

The Company’s postretirement health care plans are not funded.
The changes in the accumulated beneﬁt obligation and net amount
accrued at December 31, 2003 and 2002, were as follows:

Accumulated postretirement beneﬁt obligation

at January 1
Service cost
Interest cost
Beneﬁts paid
Curtailments
Plan amendments
Currency
Assumption changes
Actuarial losses

Accumulated postretirement beneﬁt obligation

at December 31
Unrecognized actuarial losses
Unrecognized prior service cost

Accrued postretirement health care costs

2003

(in millions)
2002

$ 2,712
41
173
(189)

(28)
18
174
54

2,955
(1,064)
202
$ 2,093

$2,436
32
168
(199)
21
(164)

193
225

2,712
(848)
197
$2,061

Note 16. Financial Instruments:

Derivative ﬁnancial instruments: 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. Financial instruments qualifying for hedge accounting
must maintain a speciﬁed level of effectiveness between the hedging
instrument and the item being hedged, both at inception and
throughout the hedged period. The Company formally documents
the nature of and relationships between the hedging instruments
and hedged items, as well as its risk-management objectives,
strategies for undertaking the various hedge transactions and
method of assessing hedge effectiveness. Additionally, for hedges of
forecasted transactions, the signiﬁcant characteristics and expected
terms of the forecasted transaction must be speciﬁcally identiﬁed,
and it must be probable that each forecasted transaction will occur.
If it was deemed probable that the forecasted transaction will not
occur, the gain or loss would be recognized in earnings currently.

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. Substantially all of the Company’s derivative
ﬁnancial instruments are effective as hedges. The fair value of all
derivative ﬁnancial instruments has been calculated based on
market quotes. The primary currencies to which the Company is
exposed, based on the size and location of its businesses, include
the euro, Swiss franc, British pound and Canadian dollar. At
December 31, 2003 and 2002, the Company had option and
forward foreign exchange contracts with aggregate notional
amounts of $2,486 million and $575 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.

The Company’s postemployment plans are not funded. The
changes in the beneﬁt obligations of the plans at December 31, 2003
and 2002, were as follows:

Accumulated beneﬁt obligation at January 1

Service cost
Beneﬁts paid
Actuarial (gains) losses

Accumulated beneﬁt obligation at December 31

Unrecognized experience gains

Accrued postemployment costs

2003

$ 295
10
(106)
42
241
56
$ 297

(in millions)
2002

$ 520
19
(141)
(103)
295
112
$ 407

The accumulated beneﬁt obligation was determined using an
assumed ultimate annual turnover rate of 0.3% in 2003 and 2002,
assumed compensation cost increases of 4.0% in 2003 and 2002,
and assumed beneﬁts as deﬁned in the respective plans.
Postemployment costs arising from actions that offer employees
beneﬁts in excess of those speciﬁed in the respective plans are
charged to expense when incurred.

Note 15. Additional Information:

For the Years Ended December 31,

2003

2002

(in millions)
2001

Research and development

expense

Advertising expense

Interest and other debt

expense, net:
Interest expense, Altria Group, Inc.

and afﬁliates

Interest expense, external debt
Interest income

Rent expense

$ 380

$1,176

$ 360

$1,145

$ 358

$1,190

31
647
(13)
$ 665

$ 243
611
(7)
$ 847

$1,103
349
(15)
$1,437

$ 452

$ 437

$ 372

Minimum rental commitments under non-cancelable operating
leases in effect at December 31, 2003, were as follows:

2004
2005
2006
2007
2008
Thereafter

(in millions)

$ 307
227
170
134
113
236
$1,187

Kraft Foods Inc. Notes to Consolidated Financial Statements

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, 2003 and 2002, the Company
had net long commodity positions of $255 million and $544 million,
respectively. Unrealized gains or losses on net commodity positions
were immaterial at December 31, 2003 and 2002. 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.

Derivative gains or losses reported in accumulated other
comprehensive earnings (losses) are a result of qualifying hedging
activity. Transfers of these gains or losses from accumulated other
comprehensive earnings (losses) to earnings are offset by
corresponding gains or losses on the underlying hedged items.
During the year ended December 31, 2003, ineffectiveness related to
cash ﬂow hedges was a gain of $13 million, which was recorded in
cost of sales on the consolidated statement of earnings.
Ineffectiveness related to cash ﬂow hedges during the year ended
December 31, 2002 was not material. At December 31, 2003,
the Company was hedging forecasted transactions for periods not
exceeding twelve 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.

Hedging activity affected accumulated other comprehensive
earnings (losses), net of income taxes, during the years ended
December 31, 2003, 2002 and 2001, as follows:

Gain (loss) as of January 1

Derivative (gains) losses transferred

to earnings

Change in fair value
Gain (loss) at December 31

2003

$ 13

2002

$(18)

(in millions)
2001

$ —

(17)
5
$ 1

21
10
$ 13

15
(33)
$(18)

Credit exposure and credit risk: The Company is exposed
to credit loss in the event of nonperformance by counterparties.
However, the Company does not anticipate nonperformance,
and such exposure was not material at December 31, 2003.

Fair value: The aggregate fair value, based on market quotes, of
the Company’s third-party debt at December 31, 2003, was $13,426
million as compared with its carrying value of $12,919 million. The
aggregate fair value of the Company’s third-party debt at December
31, 2002, was $11,764 million as compared with its carrying value of
$10,988 million. Based on interest rates available to the Company for
issuances of debt with similar terms and remaining maturities, the
aggregate fair value and carrying value of the Company’s long-term
notes payable to Altria Group, Inc. and its afﬁliates were $2,764
million and $2,560 million, respectively, at December 31, 2002.

See Notes 3, 7 and 8 for additional disclosures of fair value for short-
term borrowings and long-term debt.

Note 17. Contingencies:

The Company and its subsidiaries are parties to a variety of legal
proceedings arising out of the normal course of business, including
a few cases in which substantial amounts of damages are sought.
While the results of litigation cannot be predicted with certainty,
management believes that the ﬁnal outcome of these proceedings
will not have a material adverse effect on the Company’s
consolidated ﬁnancial position or results of operations.

Guarantees: At December 31, 2003, the Company’s third-party
guarantees, which are primarily derived from acquisition and
divestiture activities, approximated $38 million. Substantially all of
these guarantees expire through 2014, with $13 million expiring
during 2004. 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 a
liability of $26 million on its consolidated balance sheet at December
31, 2003, relating to these guarantees.

During 2003 and 2002, the Company recorded the following pre-tax
charges or (gains):

(in millions)

2003 Quarters

First

Second

Third

Fourth

Asset impairment and

exit costs
Integration costs
Gains on sales

of businesses

$ 6

$(13)

(23)

(8)

$ —

$(17)$(21

(in millions)

2002 Quarters

First

Second

Third

Fourth

Asset impairment and

exit costs

Integration costs and a
loss on sale of a
food factory
Gains on sales

of businesses

$142

$169

$92

(3)
$89

$ (8)

(77)
$(85)

$ —

Note 18. Subsequent Event:

In January 2004, the Company announced a three-year restructuring
program with the objective to leverage the Company’s global scale,
realign and lower the cost structure and optimize capacity utilization.
As part of this program, the Company anticipates the exit or closing
of up to 20 plants and the elimination of approximately six thousand
positions. Over the next three years, the Company expects to incur
up to $1.2 billion in pre-tax charges, reﬂecting asset disposals,
severance and other implementation costs, including an estimated
range of $750 million to $800 million
in 2004. Approximately one-half of the pre-tax charges are
expected to require cash payments.

Note 19. Quarterly Financial Data (Unaudited):

(in millions, except per share data)

2003 Quarters

Net revenues

Gross proﬁt

Net earnings

Weighted average
shares for
diluted EPS

Per share data:
Basic EPS

Diluted EPS

Dividends declared

Market price—high
—low

Net revenues

Gross proﬁt

Net earnings

Weighted average
shares for
diluted EPS

Per share data:
Basic EPS

Diluted EPS

Dividends declared

Market price—high
—low

First

Second

Third

Fourth

$7,359

$3,010

$ 848

$7,841

$3,146

$ 949

$7,480

$2,921

$ 810

$8,330

$3,105

$ 869

1,730

1,728

1,723

$ 0.49

$ 0.15

$39.40
$26.35

$ 0.55

$ 0.15

$33.96
$27.76

$ 0.47

$ 0.18

$32.79
$27.60

First

Second

$7,147

$2,864

$ 693

$7,513

$3,127

$ 901

Third

$7,216

$2,971

$ 869

$ 0.50

$ 0.18

$32.50
$28.50

Fourth

$7,847

$3,041

$ 931

1,737

1,738

1,737

1,734

$ 0.40

$ 0.13

$39.70
$32.50

$ 0.52

$ 0.13

$43.95
$38.32

$ 0.50

$ 0.15

$41.70
$33.87

$ 0.54

$ 0.15

$41.30
$36.12

(in millions, except per share data)

2002 Quarters

Basic and diluted EPS are computed independently for each of the periods presented.
Accordingly, the sum of the quarterly EPS amounts may not agree to the total year.

The principal stock exchange, on which the Company’s Class A common stock is listed, is the New York Stock Exchange. At January 30,
2004, there were approximately 2,400 holders of record of the Company’s Class A common stock.

Kraft Foods Inc. Report of Independent Auditors

Company Report on Financial Statements

To the Board of Directors and Shareholders of Kraft Foods Inc.:

In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of earnings, shareholders’
equity and cash ﬂows present fairly, in all material respects, the
consolidated ﬁnancial position of Kraft Foods Inc. and its
subsidiaries (the “Company”) at December 31, 2003 and 2002,
and the consolidated results of their operations and their cash ﬂows
for each of the three years in the period ended December 31, 2003,
in conformity with accounting principles generally accepted in the
United States of America. These ﬁnancial statements are the
responsibility of the Company’s management; our responsibility is
to express an opinion on these ﬁnancial statements based on our
audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the ﬁnancial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
ﬁnancial statements, assessing the accounting principles used and
signiﬁcant estimates made by management, and evaluating the
overall ﬁnancial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated ﬁnancial statements,
on January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets.”

PricewaterhouseCoopers LLP

Chicago, Illinois
January 23, 2004

The consolidated ﬁnancial statements and all related ﬁnancial
information herein are the responsibility of the Company.
The ﬁnancial statements, which include amounts based on
judgments, have been prepared in accordance with generally
accepted accounting principles. Other ﬁnancial information in the
annual report is consistent with that in the ﬁnancial statements.

The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in
accordance with management’s authorization and properly
recorded, that assets are safeguarded, and that accountability for
assets is maintained. The system of internal controls is characterized
by a control-oriented environment within the Company, which
includes written policies and procedures, careful selection and
training of personnel, and audits by a professional staff of internal
auditors.

PricewaterhouseCoopers LLP, independent auditors, have audited
and reported on the Company’s consolidated ﬁnancial statements.
Their audits were performed in accordance with generally accepted
auditing standards.

The Audit Committee of the Board of Directors, composed
of four non-employee directors, meets periodically with
PricewaterhouseCoopers LLP, the Company’s internal auditors
and management representatives to review internal accounting
control, auditing and ﬁnancial reporting matters. Both
PricewaterhouseCoopers LLP and the internal auditors have
unrestricted access to the Audit Committee and may meet
with it without management representatives being present.

Kraft Foods Inc. Board of Directors and Ofﬁcers

Board of Directors

Kraft Foods Executive Team

Michael Mudd
Executive Vice President,
Global Corporate Affairs

David G. Owens
Executive Vice President, Global Strategy &
Business Development

Jean E. Spence
Executive Vice President,
Global Technology & Quality

Franz-Josef Vogelsang
Executive Vice President,
Global Supply Chain

Roger K. Deromedi
Chief Executive Ofﬁcer

Betsy D. Holden
President, Global Marketing &
Category Development

David S. Johnson
President, North America Commercial

Hugh H. Roberts
President, International Commercial

James P. Dollive
Executive Vice President &
Chief Financial Ofﬁcer

Terry M. Faulk
Executive Vice President,
Global Human Resources

Marc S. Firestone
Executive Vice President, General Counsel &
Corporate Secretary

Alene M. Korby
Executive Vice President &
Chief Information Ofﬁcer

Louis C. Camilleri
Chairman of the Board, Kraft Foods Inc.,
and Chairman and Chief Executive Ofﬁcer,
Altria Group, Inc.

Roger K. Deromedi
Chief Executive Ofﬁcer,
Kraft Foods Inc.

Dinyar S. Devitre
Senior Vice President and
Chief Financial Ofﬁcer,
Altria Group, Inc.

W. James Farrell 1,2

Chairman and Chief Executive Ofﬁcer,
Illinois Tool Works Inc.
Glenview, IL

Betsy D. Holden
President, Global Marketing &
Category Development
Kraft Foods Inc.

John C. Pope 1,2
Chairman,
PFI Group, LLC
Chicago, IL

Mary L. Schapiro 1,2
Vice Chairman, NASD, Inc.
President, Regulatory Policy and Oversight
Washington, D.C.

Charles R. Wall
Senior Vice President and General Counsel
Altria Group, Inc.

Deborah C. Wright 1,2
President and Chief Executive Ofﬁcer,
Carver Bancorp, Inc.
New York, NY

Committees

1 Member of Compensation and

Governance Committee

W. James Farrell, Chair

2 Member of Audit Committee

John C. Pope, Chair

Kraft Foods Inc. Corporate and Shareholder Information

Kraft Foods Inc.
Three Lakes Drive
Northﬁeld, IL 60093-2753
www.kraft.com

Shareholder Services

2004 Annual Meeting
The Annual Meeting of Shareholders will be held at
9:00 a.m. EDT on Tuesday, April 27, 2004, at Kraft Foods Inc.,
Robert M. Schaeberle Technology Center, 188 River Road,
East Hanover, NJ 07936.
For further information, call toll-free: 1-800-295-1255.

Transfer Agent and Registrar
EquiServe Trust Company, N.A., our shareholder services and
transfer agent, will be happy to answer questions about your
accounts, certiﬁcates or dividends.

Independent Auditors
PricewaterhouseCoopers LLP
One North Wacker Drive
Chicago, IL 60606-2807

U.S. and Canadian shareholders may call: 1-866-655-7238

From outside the U.S. or Canada, shareholders may call:
1-781-575-3500

Trademarks
Trademarks and service marks in this report are the registered
property of or licensed by the subsidiaries of Kraft Foods Inc.
and are italicized or shown in their logo form.

Internet Access Helps Reduce Costs
As a convenience to shareholders and an important
cost-reduction measure, you can register to receive future
shareholder materials (i.e., Annual Report and proxy statement)
via the Internet. Shareholders also can vote their proxy via the
Internet. For complete instructions, visit www.kraft.com.

Postal address:
EquiServe Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3069

E-mail address:
kraft@equiserve.com

To eliminate duplicate mailings, please contact EquiServe
(if you are a registered shareholder) or your broker
(if you hold your stock through a brokerage ﬁrm).

Shareholder Publications
Kraft Foods Inc. makes a variety of publications and reports
available to its shareholders. These include the Annual Report,
proxy statement, news releases and other publications.
For copies, please visit our website at: www.kraft.com.

Legal Filings
Kraft Foods Inc. also makes a variety of legal ﬁlings (10-K, 10-Q)
available to its shareholders free of charge and as soon
as practicable. For copies, please visit our website at
www.kraft.com and click on SEC ﬁlings in the Investors section.

If you do not have Internet access, you can call
our Shareholder Publications Center toll-free:
1-800-295-1255.

Stock Exchange Listing
Kraft Foods Inc. is listed on the New York Stock Exchange
(ticker symbol KFT).

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