Kraft 2002 Annual Report Download - page 52

Note 1. Background and Basis of Presentation:
Background: Kraft Foods Inc. (“Kraft”) was incorporated in 2000
in the Commonwealth of Virginia. Following Kraft’s formation,
Altria Group, Inc. (formerly Philip Morris Companies Inc.),
transferred to Kraft its ownership interest in Kraft Foods North
America, Inc. (“KFNA”), a Delaware corporation, through a capital
contribution. In addition, during 2000, a subsidiary of Altria
Group, Inc. transferred management responsibility for its food
businesses in Latin America to KFNA and its wholly-owned
subsidiary, Kraft Foods International, Inc. (“KFI”). Kraft, through
its subsidiaries (Kraft and its subsidiaries are hereinafter referred
to as the “Company”), is engaged in the manufacture and sale of
branded foods and beverages in the United States, Canada,
Europe, Latin America, Asia Pacific and Middle East and Africa.
On December 11, 2000, the Company acquired all of the
outstanding shares of Nabisco Holdings Corp. (“Nabisco”) for
$55 per share in cash. See Note 5. Acquisitions for a complete
discussion of this transaction.
Prior to June 13, 2001, the Company was a wholly-owned
subsidiary of Altria Group, Inc. On June 13, 2001, the Company
completed an initial public offering (“IPO”) of 280,000,000 shares
of its Class A common stock at a price of $31.00 per share.
The IPO proceeds, net of the underwriting discount and expenses,
of $8.4 billion were used to retire a portion of an $11.0 billion long-
term note payable to Altria Group, Inc., incurred in connection
with the acquisition of Nabisco. After the IPO, Altria Group, Inc.
owned approximately 83.9% of the outstanding shares of the
Company’s capital stock through its ownership of 49.5% of the
Company’s Class A common stock and 100% of the Company’s
Class B common stock. The Company’s Class A common stock
has one vote per share, while the Company’s Class B common
stock has ten votes per share. At December 31, 2002, Altria
Group, Inc. held 97.8% of the combined voting power of the
Company’s outstanding capital stock and owned approximately
84.2% of the outstanding shares of the Company’s capital stock.
Basis of presentation: The consolidated financial statements
include Kraft and its subsidiaries. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the dates of the financial statements and
the reported amounts of net revenues and expenses during the
reporting periods. Significant estimates and assumptions include,
among other things, pension and benefit plan assumptions and
income taxes. Actual results could differ from those estimates.
The Company’s operating subsidiaries report year-end results
as of the Saturday closest to the end of each year. This resulted
in fifty-three weeks of operating results in the Company’s
consolidated statement of earnings for the year ended
December 31, 2000.
Certain prior years’ amounts have been reclassified to conform
with the current year’s presentation, due primarily to the adoption of
new accounting rules regarding revenues, as well as the disclosure
of more detailed information on the consolidated statements of
earnings and the consolidated statements of cash flows.
Note 2. Summary of Significant Accounting Policies:
Cash and cash equivalents: Cash equivalents include demand
deposits with banks and all highly liquid investments with original
maturities of three months or less.
Depreciation, amortization and goodwill valuation: Property,
plant and equipment are stated at historical cost and depreciated
by the straight-line method over the estimated useful lives of
the assets. Machinery and equipment are depreciated over
periods ranging from 3 to 20 years and buildings and building
improvements over periods up to 40 years.
On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business
Combinations” and SFAS No. 142, “Goodwill and Other Intangible
Assets.” As a result, the Company stopped recording the
amortization of goodwill and indefinite life intangible assets as
a charge to earnings as of January 1, 2002. Net earnings and
diluted earnings per share (“EPS”) would have been as follows
had the provisions of the new standards been applied as of
January 1, 2000:
(in millions, except per share amounts)
For the years ended December 31, 2001 2000
Net earnings, as previously reported $1,882 $2,001
Adjustment for amortization of goodwill and
indefinite life intangibles 955 530
Net earnings, as adjusted $2,837 $2,531
Diluted EPS, as previously reported $ 1.17 $ 1.38
Adjustment for amortization of goodwill and
indefinite life intangibles 0.59 0.36
Diluted EPS, as adjusted $ 1.76 $ 1.74
In addition, the Company is required to conduct an annual review
of goodwill and intangible assets for potential impairment.
In 2002, the Company completed its review and did not have to
record a charge to earnings for an impairment of goodwill or other
intangible assets.
At December 31, 2002, goodwill by reportable segment was
as follows:
(in millions)
Cheese, Meals and Enhancers $ 8,556
Biscuits, Snacks and Confectionery 9,262
Beverages, Desserts and Cereals 2,143
Oscar Mayer and Pizza 616
Total Kraft Foods North America 20,577
Europe, Middle East and Africa 4,082
Latin America and Asia Pacific 252
Total Kraft Foods International 4,334
Total goodwill $24,911
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kraft foods inc. notes to consolidated financial statementskraft foods inc. notes to consolidated financial statements