Kraft 2003 Annual Report Download - page 52

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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 Weighted Average Options
to Option Exercise Price Exercisable
Balance at
January 1, 2001 — $ ——
Options granted 21,038,722 31.00
Options canceled (268,420) 31.00
Balance at
December 31, 2001 20,770,302 31.00 —
Options granted 14,030 37.10
Options exercised (2,000) 31.00
Options canceled (1,490,660) 31.00
Balance at
December 31, 2002 19,291,672 31.00 696,615
Options exercised (346,868) 31.00
Options canceled (663,027) 31.00
Balance at
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:
Options Outstanding Options Exercisable
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$30.54 – $39.51 18,281,777 7 years $31.00 17,032,740
$31.00
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:
Weighted
Risk-Free Average Expected Fair Value
Interest Expected Expected Dividend at Grant
Rate Life Volatility Yield Date
2003 Altria Group, Inc. 2.68% 4 years 37.61% 6.04% $ 8.76
2002 Kraft 4.27 5 28.72 1.41 10.65
2002 Altria Group, Inc. 3.44 5 33.57 4.96 10.02
2001 Kraft 4.81 5 29.70 1.68 9.13
2001 Altria Group, Inc. 4.86 5 33.88 4.78 10.36
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.