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MERRILL CORPORATION MBLOUNT// 9-MAR-06 14:03 DISK126:[06CHI5.06CHI1135]DE1135A.;25
mrll.fmt Free: 3DM/0D Foot: 0D/ 0D VJ Seq: 1 Clr: 0
DISK024:[PAGER.PSTYLES]UNIVERSAL.BST;51
KRAFT FOODS-FSC CERTIFIED-10K/AR Proj: P1102CHI06 Job: 06CHI1135 File: DE1135A.;25
Merrill Corporation/Chicago (312) 786-6300 Page Dim: 8.250X 10.750Copy Dim: 38. X 54.3
PART I
Item 1. Business.
(a) General Development of Business
General
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 packaged foods and beverages in the United States, Canada, Europe, Latin
America, Asia Pacific, the Middle East and Africa.
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. At December 31, 2005, Altria Group, Inc. held 98.3% of the combined voting
power of Kraft’s outstanding capital stock and owned 87.2% of the outstanding shares of Kraft’s capital
stock.
In June 2005, the Company sold substantially all of its sugar confectionery business for pre-tax
proceeds of approximately $1.4 billion. The Company has reflected the results of its sugar confectionery
business prior to the closing date as discontinued operations on the consolidated statements of
earnings for all years presented. The assets related to the sugar confectionery business were reflected
as assets of discontinued operations held for sale on the consolidated balance sheet at December 31,
2004.
In October 2005, the Company announced that, effective January 1, 2006, its Canadian business
will be realigned to better integrate it into the Company’s North American business by product category.
Beginning in the first quarter of 2006, the operating results of the Canadian business will be reported
throughout the North American food segments. In addition, in the first quarter of 2006, the Company’s
international businesses will be realigned to reflect the reorganization announced within Europe in
November 2005. Beginning in the first quarter of 2006, the operating results of the Company’s
international businesses will be reported in two revised segments—European Union; and Developing
Markets, Oceania and North Asia, the latter to reflect the Company’s increased management focus on
developing markets. Accordingly, prior period segment results will be restated.
In January 2004, the Company announced a three-year restructuring program with the objectives of
leveraging the Company’s global scale, realigning and lowering its cost structure, and optimizing
capacity utilization. As part of this program, the Company anticipates the closure or sale of up to 20
plants and the elimination of approximately 6,000 positions. From 2004 through 2006, the Company
expects to incur approximately $1.2 billion in pre-tax charges, reflecting asset disposals, severance and
other implementation costs, including $297 million and $641 million incurred in 2005 and 2004,
respectively. Approximately 60% of the pre-tax charges are expected to require cash payments. In
addition, in January 2006, the Company announced plans to expand its restructuring efforts beyond
those originally contemplated. Additional pre-tax charges are anticipated to be $2.5 billion from 2006 to
2009, of which approximately $1.6 billion are expected to require cash payments. These charges will
result in the anticipated closure of up to 20 additional facilities and the elimination of approximately 8,000
additional positions. Initiatives under the expanded program include additional organizational
streamlining and facility closures. The entire restructuring program is expected to ultimately result in
$3.7 billion in pre-tax charges, the closure of up to 40 facilities and the elimination of approximately
14,000 positions. Approximately $2.3 billion of the $3.7 billion in pre-tax charges are expected to require
cash payments.
Source of Funds—Dividends
Because Kraft is a holding company, its principal source of funds is dividends from its subsidiaries.
Kraft’s principal wholly owned subsidiaries currently are not limited by long-term debt or other
agreements in their ability to pay cash dividends or make other distributions with respect to their
common stock.
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