EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
General Mills is a global consumer foods company. We compete in markets
around the world by developing differentiated food products that consumers
recognize as superior to alternative offerings. We market our value-added
products under unique brand names, and build the equity of those brands with
strong consumer-directed advertising and innovative merchandising. We believe
this brand-building strategy is the key to winning and sustaining market share
leadership. With the addition of the Pillsbury businesses, we have expanded our
portfolio of leading consumer brands. We believe that this portfolio will
generate superior financial returns for our shareholders over the long term.
Our financial performance is determined by how well we execute the key
elements of our business model. These business drivers are: unit volume growth,
which is the single most critical element; productivity initiatives, to mitigate
the effects of cost inflation; efficient utilization of capital; and prudent
management of risk. This section of the annual report discusses our critical
accounting policies, the results of our operations, our liquidity and financial
condition, and our risk management practices.
CRITICAL ACCOUNTING POLICIES
For a complete description of our significant accounting policies, please
see Note One to the consolidated financial statements. Our critical accounting
policies are those that have meaningful impact on the reporting of our financial
condition and results, and that require significant management judgment and
estimates. These policies include our accounting for (a) trade and consumer
promotion activities; (b) asset impairments; and (c) income taxes.
The amount and timing of expense recognition for trade and consumer
promotion activities involve management judgment related to estimated
participation and performance levels. The vast majority of year-end liabilities
associated with these activities are resolved within the following fiscal year
and therefore do not require highly uncertain long-term estimates.
Evaluating the impairment of long-lived assets, including goodwill,
involves management judgment in estimating the fair values and future cash flows
related to these assets. Although the predictability of long-term cash flows may
be somewhat uncertain, our evaluations indicate fair values of assets
significantly in excess of stated book values. Therefore, we believe the risk of
unrecognized impairment is low.
Income tax expense involves management judgment as to the ultimate
resolution of any tax issues. Historically, our assessments of the ultimate
resolution of tax issues have been reasonably accurate. The current open issues
are not dissimilar from historical items.
NEW ACCOUNTING RULES ADOPTED
In fiscal 2002, we adopted four new accounting policies, all required by
new accounting standards. Each of these new rules is discussed in more detail in
Note One (O) to the consolidated financial statements.
At the beginning of the year, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires all derivatives to be recorded at fair value on the
balance sheet and establishes new accounting rules for hedging. The cumulative
effect of adopting this accounting change was a $3 million after-tax charge to
earnings and a $158 million after-tax charge to Accumulated Other Comprehensive
Income, recorded in the first quarter of fiscal 2002.
SFAS No. 141, "Business Combinations," requires all business combinations
to be accounted for using the purchase method. The Pillsbury transaction was
accounted for as a purchase. Under SFAS No. 142, "Goodwill and Other Intangible
Assets," the amortization of goodwill is eliminated and goodwill
12
is tested for impairment. We completed our assessment of goodwill in the second
quarter of 2002 and found no impairment.
In the fourth quarter of 2002, we adopted Emerging Issues Task Force (EITF)
Issue 01-09, which resulted in the reclassification of certain coupon and trade
promotion expenses from selling, general and administrative expenses to a
reduction of net sales. All sales and selling, general and administrative
expenses throughout this report and our consolidated financial statements
reflect the adoption of Issue 01-09.
RESULTS OF OPERATIONS -- 2002 VS. 2001
The acquisition of The Pillsbury Company, on Oct. 31, 2001, significantly
affected fiscal 2002 comparisons for our results of operations. Annual net sales
rose 46 percent, to $7.95 billion, including seven months of Pillsbury results.
Worldwide unit volume for fiscal 2002 was 49 percent above last year's. However,
on a comparable basis, as if General Mills had owned Pillsbury for all of fiscal
2001 and 2002, worldwide unit volume grew only slightly. This performance,
caused by the initial disruption of combining General Mills' and Pillsbury's
organizations, was significantly below General Mills' historical trends and
reduced our earnings in fiscal 2002.
The Pillsbury acquisition also materially altered our business structure.
Our Bakeries and Foodservice and International business segments, which now
represent larger portions of our sales and earnings, have lower gross margins
than General Mills' historical margin. These businesses also are generally
supported with lower marketing spending as a percent of sales.
Cost of goods sold as a percent of sales rose from 52 percent in fiscal
2001 to 59 percent in fiscal 2002. About three-quarters of that increase was due
to our new business structure, as discussed in the preceding paragraph. The
remainder of the increase was largely due to reduced operating leverage. Reduced
operating leverage is defined as decreased absorption of fixed operating costs
as a result of lower volume levels.
Our selling, general and administrative expense includes items which are
associated with infrequently occurring events: (a) merger-related costs which
relate to the planning and execution of the integration of Pillsbury including
consulting, system conversions, relocation, training and communications
amounting to $52 million in 2002 and $8 million in 2001; (b) insurance
settlement income relating to a 1994 oats handling incident of $30 million in
2002 and $55 million in 2001; and (c) a special contribution of $30 million to
the General Mills Foundation in 2002 to increase its net assets to an
appropriate level following the acquisition of Pillsbury. Selling, general and
administrative costs as a percent of sales were 26 percent and 25 percent in
fiscal 2001 and 2002, respectively. The infrequently occurring items increased
selling, general and administrative costs as a percent of sales by .7 percent in
fiscal 2002, but had the effect of reducing selling, general and administrative
costs as a percent of sales by .8 percent in fiscal 2001. The resulting year
over year 1.5 percent increase in selling, general and administrative costs as a
percent of sales was offset by other factors, which caused a reduction in
selling, general and administrative costs as a percent of sales of 2.4 percent.
Over half of that reduction was due to our new business structure, as discussed
above. The remainder of that reduction was primarily due to the benefit of
administrative cost synergies achieved in the second half of the year.
Our fiscal 2002 results included restructuring and other exit costs of $134
million pretax, $84 million after tax, as discussed in more detail in Note Three
to the consolidated financial statements. These costs were related to approved
plans established to accomplish the integration of Pillsbury, and for severance
costs and asset write-offs necessitated by the sale of our Toledo, Ohio, plant
as required to obtain regulatory clearance for the acquisition of Pillsbury. We
anticipate incurring additional costs under plans currently approved or expected
to be approved within one year of the date of the acquisition. Our current
estimate of this expense is approximately $50 million pretax.
Our fiscal 2001 results included restructuring and other exit costs of $12
million pretax, $7 million after tax, associated with the decision to exit the
Squeezit beverage business.
13
Interest expense doubled due to the additional debt associated with the
Pillsbury acquisition. Average diluted shares outstanding were 342 million in
2002, up 17 percent from 292 million in fiscal 2001 due to the additional shares
issued to Diageo. Net earnings (including cumulative effect of change in
accounting principle, as described in more detail in Note One (O) to the
consolidated financial statements) were $458 million, down 31% from fiscal 2001.
Diluted earnings per share were $1.34 compared to $2.28 in fiscal 2001.
U.S. RETAIL SEGMENT
Our U.S. Retail segment includes Big G cereals, Meals, Pillsbury USA,
Baking Products, Snacks, Yoplait-Colombo and Small Planet Foods. Net sales for
these operations totaled $6.14 billion in fiscal 2002, compared to $4.79 billion
in fiscal 2001. Operating profits totaled $1.07 billion, up 1 percent from the
prior year. Comparable unit volume was 1 percent below the prior year, primarily
due to the disruption caused by our sales force integration, as well as a
reduced level of new products and promotional activity during the integration
period. Volume gains in Yoplait-Colombo, Snacks and Pillsbury USA were more than
offset by declines in Big G cereals, Meals and Baking Products.
BAKERIES AND FOODSERVICE SEGMENT
Our Bakeries and Foodservice business includes sales to wholesale and
retail bakeries, foodservice distributors, convenience stores, vending and
foodservice operators. Net sales for our Bakeries and Foodservice operations
reached $1.03 billion in fiscal 2002 compared to $397 million in fiscal 2001,
and operating profits rose 60 percent to $146 million, reflecting the
incremental contribution from Pillsbury's operations and good growth in General
Mills' foodservice business. Comparable unit volume was essentially unchanged,
reflecting overall weak foodservice industry trends and lower results for our
in-store retail bakery segment.
INTERNATIONAL SEGMENT
Our International operations include our business in Canada, as well as our
consolidated operations in Europe, Asia and Latin America. With the addition of
Pillsbury's international businesses, net sales for our International operations
totaled $778 million in fiscal 2002 compared to $263 million in 2001. Operating
profits grew to $45 million, more than double last year's $17 million total.
Comparable unit volume rose 4 percent for the year, driven by good growth in
Canada, Europe and Asia.
PENSION ACCOUNTING
In fiscal 2002, we recorded net pension and postretirement income of $60
million compared to $66 million in 2001. As noted in Note Fourteen to the
consolidated financial statements, key assumptions which determine this income
include the discount rate and expected rate of return on plan assets.
Our discount rate assumption is determined annually based on the interest
rate for long-term high-quality corporate bonds. The discount rate used to
determine the pension and other postretirement obligations as of the balance
sheet date is the rate in effect as of that measurement date. That same discount
rate is also used to determine pension and other postretirement income or
expense for the following fiscal year. The discount rates used in our pension
and other postretirement assumptions were 8.25% for the obligation as of May 28,
2000 and for our fiscal 2001 income and expense estimate, 7.75% for the
obligation as of May 27, 2001 and for our fiscal 2002 income and expense
estimate, and 7.50% for the obligation as of May 26, 2002 and for our fiscal
2003 income and expense estimate.
Our expected rate of return on plan assets is determined by our asset
allocation, our historical long-term investment performance, and our estimate of
long-term return expectations by asset class using input from our actuaries,
several consultants and economists as well as long-term inflation assumptions.
For fiscal 2001 and 2002, we assumed a rate of return of 10.4% on our pension
plan assets and 10.0% on our other postretirement plan assets.
14
In addition to our assumptions about the discount rate and the expected
rate of return on plan assets, we base our determination of pension expense or
income on a market-related valuation of assets which reduces year-to-year
volatility in accordance with SFAS No. 87, "Employers' Accounting for Pensions".
This market-related valuation recognizes investment gains or losses over a
five-year period from the year in which they occur. Investment gains or losses
for this purpose are the difference between the expected return calculated using
the market-related value of assets and the actual return based on the market-
related value of assets. Since the market-related value of assets recognizes
gains or losses over a five-year period, the future value of assets will be
impacted as previously deferred gains or losses are recorded. As of May 26,
2002, we had cumulative losses of approximately $334 million which remain to be
recognized in the calculation of the market-related value of assets on our
pension plans, and $154 million on our postretirement plans. These unrecognized
net actuarial losses could result in decreases in our future pension income
depending on several factors, including whether such losses at each measurement
date exceed the corridor in accordance with SFAS No. 87. As of May 26, 2002, the
losses did not exceed the corridor.
For our fiscal 2003 pension and other postretirement income and expense
estimate, we have reduced the discount rate to 7.50%, based on interest rates as
of May 26, 2002. Based on this discount rate, the expected rate of return on
assets (10.4% for pension plan assets and 10.0% for other postretirement plan
assets), and various other assumptions, we estimate that our net pension and
postretirement income, exclusive of curtailments, if any, will approximate $48
million in fiscal 2003. Actual future net pension and postretirement income will
depend on future investment performance, changes in future discount rates and
various other factors related to the populations participating in our pension
and postretirement plans.
Lowering the expected long-term rate of return on assets by 50 basis points
would reduce our net pension and postretirement income for fiscal 2003 by
approximately $16 million. Lowering the discount rate by 50 basis points would
decrease our net pension and postretirement income for fiscal 2003 by
approximately $7 million.
Our pension plans were overfunded by $571 million as of May 26, 2002. Based
on our actuarial assumptions, we will not be required to make any cash
contributions to our plans for at least the next three years, and we made
contributions of $7 million in 2002 and $11 million in 2001. Our other
postretirement benefit plans were underfunded by $378 million. Based on our
actuarial assumptions, we expect to make cash contributions of approximately $30
million for each of the next three years, which compares to actual cash
contributions of $29 million in 2002 and $28 million in 2001.
CORPORATE ITEMS
Interest expense roughly doubled in fiscal 2002 to $416 million, as we
incurred additional debt related to our Pillsbury acquisition and our repurchase
of 55 million shares from Diageo. We have entered into interest rate swap
contracts to lock in our interest rate on floating-rate debt. These contracts
total a net $3.5 billion in notional amount and convert floating-rate debt to an
average fixed rate of approximately 6 percent with maturities averaging three
years. Because the Pillsbury acquisition was delayed from its anticipated
closing, and because interest rates declined during that period, we have
incurred approximately $435 million unrealized pretax losses from these interest
rate swap contracts classified as cash flow hedges. These losses were recorded
in Accumulated Other Comprehensive Income and are being reclassified into
interest expense over the life of the hedges. Taking into account the effect of
these interest rate swaps, the average interest rate on our total debt is
approximately 6 1/2 percent. For fiscal 2003, we estimate our interest expense
will be approximately $600 million. Our effective tax rate in fiscal 2002 was 36
percent. We expect our tax rate for fiscal 2003 to be a maximum of 35 1/2
percent, and we may be able to reduce it further during the year.
JOINT VENTURE EARNINGS
(AFTER TAX, DOLLARS IN MILLIONS)
[BAR CHART]
<Table>
98 -9 99 -15 00 3 01 17 02 33
</Table>
15
JOINT VENTURES
General Mills' proportionate share of joint venture net sales grew to $777
million, compared to $666 million in fiscal 2001. Total after-tax earnings from
joint venture operations reached $33 million in fiscal 2002, compared with $17
million reported a year earlier. Profits for Cereal Partners Worldwide (CPW),
our joint venture with Nestle, and Snack Ventures Europe (SVE), our joint
venture with PepsiCo, together grew to $31 million. In addition, Haagen-Dazs
joint ventures established by Pillsbury in Asia contributed profits for the six
months included in our results. These profit gains were partially offset by
introductory marketing expense of 8th Continent, the Company's soymilk joint
venture with DuPont.
FISCAL 2001 RESULTS VS. 2000
In fiscal 2001, net sales grew 5 percent to $5.45 billion. Earnings after
tax grew 8 percent to $665 million. Diluted earnings per share comparable for
goodwill grew 14 percent to $2.35, up from $2.07 in fiscal 2000. Net earnings
per diluted share as reported were $2.28 vs. $2.00 in fiscal 2000.
Total U.S. Retail unit volume grew 4 percent in fiscal 2001, led by gains
in Big G cereals, Yoplait-Colombo and Snacks. Net sales grew 5 percent to $4.79
billion. Operating profits grew 4 percent to $1.06 billion. Foodservice results
in 2001 included 9 percent unit volume growth. Net sales and operating profit
each grew 12 percent, to $397 million and $91 million, respectively.
International unit volume grew 10 percent with gains across our business. Net
sales were up 2 percent to $263 million and operating profit was essentially
flat at $17 million.
Fiscal 2000 earnings after tax grew 15 percent to $614 million, compared to
$535 million for fiscal 1999. Net earnings per diluted share comparable for
goodwill grew to $2.07 from $1.75. Net earnings per diluted share as reported
increased to $2.00 from $1.70 in fiscal 1999. Net sales grew 7 percent to reach
$5.2 billion.
It is our view that changes in the general rate of inflation have not had a
significant effect on profitability over the three most recent years. We attempt
to minimize the effects of inflation through appropriate planning and operating
practices. Our market risk management practices are discussed later in this
section.
CASH FLOWS
Sources and uses of cash in the past three years are shown in the following
table. Over the most recent three-year period, General Mills' operations have
generated $2.4 billion in cash. In 2002, cash flow from operations totaled $916
million. That was up from the previous year due to: (1) a $32 million increase
in earnings before depreciation, amortization, restructuring and other exit
costs, including the change in deferred income taxes, (2) the receipt of $55
million of insurance settlement proceeds, and (3) a $110 million decrease in the
use of working capital, partially offset by components of our earnings which did
not generate operating cash flows: pension income (up $26 million) and joint
venture earnings (up $36 million).
CASH FLOW FROM OPERATIONS
(DOLLARS IN MILLIONS)
[BAR CHART]
<Table>
98 805 99 713 00 725 01 740 02 916
</Table>
16
CASH SOURCES
(USES)
<Table>
<Caption>
FISCAL YEAR
-----------------------
2002 2001 2000
------- ----- -----
(IN MILLIONS)
From continuing operations................................. $ 916 $ 740 $ 725
From discontinued operations............................... (3) (3) (3)
Fixed assets, net.......................................... (485) (306) (262)
Investments in businesses, intangibles and affiliates,
net...................................................... (3,688) (96) (295)
Change in marketable securities............................ 24 (28) (6)
Proceeds from disposition of businesses.................... 939 -- --
Other investments, net..................................... (61) (30) (1)
Increase in outstanding debt, net.......................... 5,746 183 956
Proceeds from minority investors........................... 150 -- --
Common stock issued........................................ 139 107 76
Treasury stock purchases................................... (2,436) (226) (820)
Dividends paid............................................. (358) (312) (329)
Other...................................................... 28 10 (20)
------- ----- -----
Increase in Cash and Cash Equivalents...................... $ 911 $ 39 $ 21
======= ===== =====
</Table>
In fiscal 2002, capital investment for fixed assets grew to $540 million,
including seven months of Pillsbury fixed asset spending. We expect capital
expenditures to increase in fiscal 2003, to approximately $750 million. Regular
capital investment will grow as we support a full year of Pillsbury-related
fixed asset spending. We also plan to add capacity for fast-growing businesses
such as Yoplait yogurt. In addition, we have two acquisition-related projects
requiring capital expenditures in 2003. We have construction costs to expand our
headquarters so that we can consolidate at one location. We also are integrating
Pillsbury into General Mills' information systems.
In order to obtain regulatory clearance for the acquisition of Pillsbury,
we arranged to divest certain businesses as described more fully in Note Two to
the consolidated financial statements. In addition, Nestle USA exercised its
right, triggered by the change of ownership of Pillsbury, to purchase our stake
in a joint venture. Net cash proceeds from these dispositions of $939 million
were used to reduce our debt level.
Dividends in 2002 totaled $1.10 per share, a payout of 82 percent of
diluted earnings per share. We intend to maintain the prevailing $1.10 annual
dividend rate per share in fiscal 2003. We currently estimate that average
diluted shares outstanding in fiscal 2003 will increase to 382 million.
Cash used for share repurchases in 2002 totaled $2.44 billion. Of that,
$2.32 billion was used to repurchase 55 million shares from Diageo at a price of
$42.14 per share. The company repurchased an additional 3.2 million shares on
the open market at an average price of approximately $28, net of put and call
option premiums. We do not expect to repurchase any significant number of shares
in fiscal 2003.
FINANCIAL CONDITION
Our balance sheet changed significantly with the acquisition of Pillsbury.
As shown in the table below, our adjusted debt plus minority interest grew to
over $9 billion, and our stockholders' equity grew to $3.6 billion due to the
net 79 million shares issued to Diageo. The market value of General Mills
stockholders' equity increased as well, due to price appreciation and the
increase in shares outstanding. As of May 26, 2002, our equity market
capitalization was $16.6 billion, based on a price of $45.10 per share with 367
million basic shares outstanding. Our total market capitalization, including
debt, minority interest and equity capital, is shown in the chart at right.
17
TOTAL CAPITALIZATION
(AT FISCAL YEAR-END, DOLLARS IN BILLIONS)
[BAR CHART]
<Table>
<Caption>
ADJUSTED DEBT
MARKET VALUE OF EQUITY PLUS MINORITY INTEREST
---------------------- ----------------------
2000........................................... 11.7 3.5
2001........................................... 12.0 3.6
2002........................................... 16.6 9.1
</Table>
CAPITAL STRUCTURE
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
Notes payable............................................... $ 3,600 $ 858
Current portion of long-term debt........................... 248 349
Long-term debt.............................................. 5,591 2,221
Deferred income taxes -- tax leases......................... 71 74
------- ------
Total debt.................................................. 9,510 3,502
Debt adjustments:
Leases -- debt equivalent................................. 423 266
Certain cash and cash equivalents......................... (894) --
Marketable investments, at cost........................... (135) (143)
------- ------
Adjusted debt............................................... 8,904 3,625
Minority interest........................................... 153 --
------- ------
Adjusted debt plus minority interest........................ 9,057 3,625
Stockholders' equity........................................ 3,576 52
------- ------
Total Capital............................................... $12,633 $3,677
======= ======
</Table>
On October 31, 2001, when we acquired Pillsbury, the associated debt we
took on was $3.83 billion, of which all but $0.2 billion was short term. In
February 2002, we issued $3.5 billion in five- and 10-year bonds, replacing a
portion of that short-term debt. As discussed earlier, we have entered into
interest rate swap contracts to lock in our interest rate on our floating-rate
debt. Combined, nearly 90 percent of our debt is now fixed rate. We consider our
leases and deferred income taxes related to tax leases as part of our debt
structure, and both are fixed-rate obligations. The next table, when reviewed in
conjunction with the capital structure table, shows the composition of our debt
structure including the impact of using derivative instruments.
DEBT STRUCTURE
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
------------- ------------
(IN MILLIONS)
Floating-rate......................................... $ 602 7% $1,974 55%
Fixed-rate............................................ 7,961 88% 1,311 36%
Leases -- debt equivalent............................. 423 4% 266 7%
Deferred income taxes -- tax leases................... 71 1% 74 2%
------ ---- ------ ---
Adjusted Debt plus Minority Interest.................. $9,057 100% $3,625 100%
====== ==== ====== ===
</Table>
18
At the end of fiscal 2002, approximately half of our debt was long term, 41
percent was short term (excluding the impact of reclassification from our
long-term credit facility), and the balance was leases and tax-benefit leases.
We plan to refinance the majority of our short-term debt with long-term debt in
fiscal 2003.
Commercial paper is a continuing source of short-term financing. We can
issue commercial paper in the United States and Canada, as well as in Europe
through a program established in fiscal 1999. The table below details the
fee-paid credit lines we had available as of May 26, 2002. We have $4 billion in
committed credit lines available to us, $2.1 billion as part of our core
facilities and $1.9 billion as part of a bridge facility we set up at the time
of the acquisition. Additionally, we have $45 million in uncommitted credit
lines available.
COMMITTED CREDIT FACILITIES
<Table>
<Caption>
AMOUNT EXPIRATION
------------- ----------
Core Facilities.......................................... $1.05 billion January 2003
$1.05 billion January 2006
Bridge Facility.......................................... $1.90 billion October 2002
-------------
Total Credit Lines....................................... $4.00 billion
=============
</Table>
We believe that two important measures of financial strength are the ratios
of fixed charge coverage and cash flow to debt. With the increased debt
associated with our acquisition, our fixed charge coverage in fiscal 2002 was
2.5 times compared to 5.3 times in fiscal 2001, and cash flow to debt was 10
percent compared to 24 percent in 2001. We do not expect to pay down any
significant amount of debt in 2003. However, given the cash generating nature of
our business, we expect that stronger cash flow over the following years will
allow us to reduce our debt and significantly strengthen our ratios. Our goal is
to return to a mid single-A rating for our long-term debt, and to the top tier
short-term rating, where we were prior to our announcement of the Pillsbury
acquisition.
Currently, Standard and Poor's Corporation has ratings of "BBB+" on our
publicly held long-term debt and "A-2" on our commercial paper. Moody's
Investors Services, Inc. has ratings of "Baa1" for our long-term debt and "P-2"
for our commercial paper. Fitch Ratings, Inc. rates our long-term debt "BBB+"
and our commercial paper "F-2." Dominion Bond Rating Service in Canada currently
rates General Mills as "A-low."
In fiscal 2002, we sold a minority interest in a subsidiary to a
third-party investor for $150 million and we used the net proceeds to refinance
some of our short-term debt. This subsidiary holds some of our manufacturing
assets and trademarks. All assets, liabilities and results of operations of the
subsidiary are reflected in our financial statements, and the third party's
investment is reflected as minority interest on our balance sheet. We did not
have any preferred distribution obligations to the third-party investor in
fiscal 2002. We may sell additional minority interests, as this structure may
provide favorable financing terms, be viewed more positively by the rating
agencies and generate tax efficiencies. Subsequent to fiscal year end, we sold a
minority interest in another subsidiary for $150 million. For more information
on these minority interests, refer to Note Nine to the consolidated financial
statements.
19
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
LONG-TERM FINANCIAL OBLIGATIONS
<Table>
<Caption>
LESS THAN
PAYMENTS DUE BY PERIOD TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ---------------------- ------ --------- --------- --------- -------------
(IN MILLIONS)
Long-term debt, including current
maturities...................... $5,839 $248 $329 $1,590 $3,672
Operating leases.................. 287 59 79 53 96
------ ---- ---- ------ ------
Total........................... $6,126 $307 $408 $1,643 $3,768
====== ==== ==== ====== ======
</Table>
Our other commercial commitments as of May 26, 2002, include:
- Guarantees of approximately $212 million of debt and other obligations of
unconsolidated affiliates, primarily CPW and SVE.
- Commitments for the purchase of goods, services and equipment to be used
in the production of our products for approximately $500 million with
terms up to three years. These commitments do not exceed projected
requirements over the related terms and are in the normal course of
business.
We are contingently liable for the payment of up to $395 million to Diageo,
depending on the General Mills stock price during the 20-day period preceding
April 30, 2003.
We expect these commitments will be fully covered by normal operating cash
flow including, with respect to the guarantees of unconsolidated affiliates, the
operating cash flow of the affiliates. In addition, as of May 26, 2002, we had
$975 million of cash and cash equivalents.
EURO CONVERSION
Twelve of the 15 member countries of the European Economic and Monetary
Union adopted the euro as a common legal currency in January 2002. General
Mills' operating subsidiaries affected have addressed the systems and business
issues raised by the euro currency conversion. These issues included, among
others (1) the need to adapt computer and other business systems and equipment
to accommodate euro-denominated transactions; and (2) the competitive impact of
cross-border price transparency. The euro conversion has not had material impact
on General Mills' operations or financial results.
MARKET RISK MANAGEMENT
Our Company is exposed to market risk stemming from changes in interest
rates, foreign exchange rates and commodity prices. Changes in these factors
could cause fluctuations in our earnings and cash flows. In the normal course of
business, we actively manage our exposure to these market risks by entering into
various hedging transactions, authorized under company policies that place clear
controls on these activities. The counterparties in these transactions are
highly rated financial institutions. Our hedging transactions include (but are
not limited to) the use of a variety of derivative financial instruments. We use
derivatives only where there is an underlying exposure; we do not use them for
trading or speculative purposes. Additional information regarding our use of
financial instruments is included in Note Seven to the consolidated financial
statements.
Interest Rates -- We manage our debt structure and our interest rate risk
through the use of fixed-and floating-rate debt, and through the use of
derivatives. We use interest rate swaps to hedge our exposure to interest rate
changes, and also to lower our financing costs. Generally under these swaps, we
agree with a counterparty to exchange the difference between fixed-rate and
floating-rate interest amounts based on an agreed notional principal amount. Our
primary exposure is to U.S. interest rates. As of May 26, 2002, we had $9.506
billion of agreed notional principal amounts (the principal amount on which the
fixed or floating interest rate is calculated) outstanding.
20
Foreign Currency Rates -- Foreign currency fluctuations can affect our net
investments and earnings denominated in foreign currencies. We primarily use
foreign currency forward contracts and option contracts to selectively hedge our
cash flow exposure to changes in exchange rates. These contracts function as
hedges, since they change in value inversely to the change created in the
underlying exposure as foreign exchange rates fluctuate. Our primary exchange
rate exposure is with the Canadian dollar, the euro, the Japanese yen and the
British pound against the U.S. dollar.
Commodities -- Certain ingredients used in our products are exposed to
commodity price changes. We manage this risk through an integrated set of
financial instruments, including purchase orders, noncancelable contracts,
futures contracts, futures options and swaps. Our primary commodity price
exposures are to cereal grains, sugar, vegetables, fruits, other agricultural
products, vegetable oils, packaging materials and energy costs.
Value at Risk -- These estimates are intended to measure the maximum
potential fair value General Mills could lose in one day from adverse changes in
market interest rates, foreign exchange rates or commodity prices, under normal
market conditions. A Monte Carlo (VAR) methodology was used to quantify the
market risk for our exposures. The models assumed normal market conditions and
used a 95 percent confidence level.
The VAR calculation used historical interest rates, foreign exchange rates
and commodity prices from the past year to estimate the potential volatility and
correlation of these rates in the future. The market data were drawn from the
RiskMetrics(TM) data set. The calculations are not intended to represent actual
losses in fair value that we expect to incur. Further, since the hedging
instrument (the derivative) inversely correlates with the underlying exposure,
we would expect that any loss or gain in the fair value of our derivatives would
be generally offset by an increase or decrease in the fair value of the
underlying exposures. The positions included in the calculations were: debt;
investments; interest rate swaps; foreign exchange forwards and options; and
commodity swaps, futures and options. The calculations do not include the
underlying foreign exchange and commodities-related positions that are hedged by
these market-risk-sensitive instruments.
The table below presents the estimated maximum potential one-day loss in
fair value for our interest rate, foreign currency and commodity
market-risk-sensitive instruments outstanding on May 26, 2002. The amounts were
calculated using the VAR methodology described earlier.
<Table>
<Caption>
FAIR VALUE IMPACT
-------------------------------------------------------
AT MAY 26, 2002 AVERAGE DURING 2002 AT MAY 27, 2001
--------------- ------------------- ---------------
(IN MILLIONS)
Interest rate instruments............. $39 $36 $28
Foreign currency instruments.......... 1 1 1
Commodity instruments................. 1 1 1
=== === ===
</Table>
21
FORWARD-LOOKING STATEMENTS
Throughout this report to shareholders, we discuss some of our expectations
regarding the Company's future performance. All of these forward-looking
statements are based on our current expectations and assumptions. Such
statements are subject to certain risk and uncertainties that could cause actual
results to differ.
In particular, our predictions about future volume and earnings could be
affected by difficulties resulting from the Pillsbury acquisition, such as
integration problems; failure to achieve synergies; unanticipated liabilities;
inexperience in new business lines; and changes in the competitive environment.
Our future results also could be affected by a variety of additional factors
such as: competitive dynamics in the U.S. ready-to-eat cereal market, including
pricing and promotional spending levels by competitors; the impact of
competitive products and pricing; product development; actions of competitors
other than as described above; acquisitions or disposals of business assets;
changes in capital structure; changes in laws and regulations, including changes
in accounting standards; customer demand; effectiveness of advertising and
marketing spending or programs; consumer perception of health-related issues;
and economic conditions including currency rate fluctuations. The Company
undertakes no obligation to publicly revise any forward-looking statements to
reflect future events or circumstances.
22
GENERAL MILLS, INC. 2002
SIX-YEAR FINANCIAL SUMMARY
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001 MAY 28, 2000 MAY 30, 1999 MAY 31, 1998 MAY 25, 1997
------------ ------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
FINANCIAL RESULTS
Earnings per share -- basic... $ 1.38 $ 2.34 $ 2.05 $ 1.74 $ 1.33 1.41
Earnings per
share -- diluted............ 1.34 2.28 2.00 1.70 1.30 1.38
Dividends per share........... 1.10 1.10 1.10 1.08 1.06 1.02
Return on average total
capital..................... 9.1% 23.6% 24.4% 23.7% 20.0% 23.3%
Net sales..................... 7,949 5,450 5,173 4,834 4,736 4,398
Costs and expenses:
Cost of sales............... 4,771 2,841 2,698 2,593 2,538 2,475
Selling, general and
administrative........... 1,961 1,393 1,376 1,223 1,240 1,064
Interest, net............... 416 206 152 119 117 101
Restructuring and other exit
costs.................... 134 12 -- 41 164 --
SFAS No. 121 adoption....... -- -- -- -- -- 48
Earnings before taxes and
earnings (losses) of joint
ventures.................... 667 998 947 858 677 710
Income taxes.................. 239 350 336 308 246 259
Earnings (losses) of joint
ventures.................... 33 17 3 (15) (9) (6)
Earnings before accounting
changes..................... 461 665 614 535 422 445
Accounting changes............ (3) -- -- -- -- --
Earnings including accounting
changes..................... 458 665 614 535 422 445
Earnings as a % of sales...... 5.8% 12.2% 11.9% 11.1% 8.9% 10.1%
Average common shares:
Basic....................... 331 284 299 306 316 316
Diluted..................... 342 292 307 315 325 323
------- ------- ------- ------- ------- -------
FINANCIAL POSITION
Total assets.................. 16,540 5,091 4,574 4,141 3,861 3,902
Land, buildings and equipment,
net......................... 2,764 1,501 1,405 1,295 1,186 1,279
Working capital at year-end... (2,310) (801) (1,339) (598) (408) (281)
Long-term debt, excluding
current portion............. 5,591 2,221 1,760 1,702 1,640 1,530
Stockholders' equity.......... 3,576 52 (289) 164 190 495
------- ------- ------- ------- ------- -------
OTHER STATISTICS
Total dividends............... 358 312 329 331 336 321
Purchases of land, buildings
and equipment............... 506 307 268 281 184 163
Research and development...... 131 83 77 70 66 61
Advertising media
expenditures................ 489 358 361 348 366 306
</Table>
23
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001 MAY 28, 2000 MAY 30, 1999 MAY 31, 1998 MAY 25, 1997
------------ ------------ ------------ ------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Wages, salaries and employee
benefits.................... 1,105 666 644 636 608 564
Number of employees
(actual).................... 29,859 11,001 11,077 10,664 10,228 10,200
------- ------- ------- ------- ------- -------
Common stock price:
High for year............... 52.86 46.35 43.94 42.34 39.13 34.38
Low for year................ 41.61 31.38 29.38 29.59 30.00 26.00
Year-end.................... 45.10 42.20 41.00 40.19 34.13 32.13
</Table>
- ---------------
All share and per share data have been adjusted for the two-for-one stock
split in November 1999.
All sales-related and selling, general and administrative information prior
to fiscal 2002 has been restated for the adoption of EITF Issue 01-09.
24
INDEPENDENT AUDITORS' REPORT
The Stockholders and the Board of Directors of General Mills, Inc.:
We have audited the accompanying consolidated balance sheets of General
Mills, Inc. and subsidiaries as of May 26, 2002 and May 27, 2001, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the fiscal years in the three-year period ended May 26, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of General
Mills, Inc. and subsidiaries as of May 26, 2002 and May 27, 2001, and the
results of their operations and their cash flows for each of the fiscal years in
the three-year period ended May 26, 2002 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Minneapolis, Minnesota
June 24, 2002
25
GENERAL MILLS, INC. 2002
CONSOLIDATED STATEMENTS OF EARNINGS
<Table>
<Caption>
FISCAL YEAR ENDED
---------------------------
MAY 26, MAY 27, MAY 28,
2002 2001 2000
------- ------- -------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
Net Sales................................................... $7,949 $5,450 $5,173
Costs and Expenses:
Cost of sales............................................. 4,771 2,841 2,698
Selling, general and administrative....................... 1,961 1,393 1,376
Interest, net............................................. 416 206 152
Restructuring and other exit costs........................ 134 12 --
------ ------ ------
Total Costs and Expenses............................... 7,282 4,452 4,226
------ ------ ------
Earnings before Taxes and Earnings from Joint Ventures...... 667 998 947
Income Taxes................................................ 239 350 336
Earnings from Joint Ventures................................ 33 17 3
------ ------ ------
Earnings before Cumulative Effect of Change in Accounting
Principle................................................. 461 665 614
Cumulative Effect of Change in Accounting Principle......... (3) -- --
------ ------ ------
Net Earnings................................................ $ 458 $ 665 $ 614
====== ====== ======
Earnings per Share -- Basic:
Earnings before cumulative effect of change in accounting
principle.............................................. $ 1.39 $ 2.34 $ 2.05
Cumulative effect of change in accounting principle....... (.01) -- --
------ ------ ------
Net Earnings per Share -- Basic........................ $ 1.38 $ 2.34 $ 2.05
====== ====== ======
Average Number of Common Shares............................. 331 284 299
====== ====== ======
Earnings per Share -- Diluted:
Earnings before cumulative effect of change in accounting
principle.............................................. $ 1.35 $ 2.28 $ 2.00
Cumulative effect of change in accounting principle....... (.01) -- --
------ ------ ------
Net Earnings per Share -- Diluted...................... $ 1.34 $ 2.28 $ 2.00
====== ====== ======
Average Number of Common Shares -- Assuming Dilution........ 342 292 307
====== ====== ======
</Table>
See accompanying notes to consolidated financial statements.
26
GENERAL MILLS, INC. 2002
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 975 $ 64
Receivables, less allowance for doubtful accounts of $21
in 2002 and $6 in 2001................................. 1,010 664
Inventories............................................... 1,055 519
Prepaid expenses and other current assets................. 156 99
Deferred income taxes..................................... 241 62
------- ------
Total Current Assets................................... 3,437 1,408
Land, Buildings and Equipment at cost, net.................. 2,764 1,501
Goodwill.................................................... 8,473 804
Other Intangible Assets..................................... 90 66
Other Assets................................................ 1,776 1,312
------- ------
Total Assets........................................... $16,540 $5,091
======= ======
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.......................................... $ 1,217 $ 619
Current portion of long-term debt......................... 248 349
Notes payable............................................. 3,600 858
Other current liabilities................................. 682 383
------- ------
Total Current Liabilities.............................. 5,747 2,209
Long-term Debt.............................................. 5,591 2,221
Deferred Income Taxes....................................... 336 349
Deferred Income Taxes -- Tax Leases......................... 71 74
Other Liabilities........................................... 1,066 186
------- ------
Total Liabilities...................................... 12,811 5,039
------- ------
Minority Interest........................................... 153 --
Stockholders' Equity:
Cumulative preference stock, none issued.................. -- --
Common stock, 502 shares issued in 2002 and 408 shares
issued in 2001......................................... 5,733 745
Retained earnings......................................... 2,568 2,468
Less common stock in treasury, at cost, 135 shares in 2002
and 123 shares in 2001................................. (4,292) (3,014)
Unearned compensation..................................... (57) (54)
Accumulated other comprehensive income.................... (376) (93)
------- ------
Total Stockholders' Equity............................. 3,576 52
------- ------
Total Liabilities and Equity........................... $16,540 $5,091
======= ======
</Table>
See accompanying notes to consolidated financial statements.
27
GENERAL MILLS, INC. 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FISCAL YEAR ENDED
---------------------------
MAY 26, MAY 27, MAY 28,
2002 2001 2000
------- ------- -------
(IN MILLIONS)
Cash Flows -- Operating Activities:
Net earnings.............................................. $ 458 $ 665 $ 614
Adjustments to reconcile net earnings to cash flow:
Depreciation and amortization.......................... 296 223 209
Deferred income taxes.................................. 93 49 44
Changes in current assets and liabilities, excluding
effects from businesses acquired...................... 37 (73) (126)
Tax benefit on exercised options....................... 46 33 34
Cumulative effect of change in accounting principle.... 3 -- --
Pension and other postretirement activity.............. (105) (102) (61)
Restructuring and other exit costs..................... 134 12 --
Other, net............................................. (46) (67) 11
------- ----- -----
Cash provided by continuing operations.................... 916 740 725
Cash used by discontinued operations...................... (3) (3) (3)
------- ----- -----
Net Cash Provided by Operating Activities......... 913 737 722
------- ----- -----
Cash Flows -- Investment Activities:
Purchases of land, buildings and equipment................ (506) (307) (268)
Investments in businesses, intangibles and affiliates, net
of investment returns and dividends.................... (3,688) (96) (295)
Purchases of marketable securities........................ (46) (98) (18)
Proceeds from sale of marketable securities............... 70 70 12
Proceeds from disposal of land, buildings and equipment... 21 1 6
Proceeds from disposition of businesses................... 939 -- --
Other, net................................................ (61) (30) (1)
------- ----- -----
Net Cash Used by Investment Activities............ (3,271) (460) (564)
------- ----- -----
Cash Flows -- Financing Activities:
Change in notes payable................................... 2,688 295 566
Issuance of long-term debt................................ 3,485 296 501
Payment of long-term debt................................. (427) (408) (111)
Proceeds from minority investors.......................... 150 -- --
Common stock issued....................................... 139 107 76
Purchases of common stock for treasury.................... (2,436) (226) (820)
Dividends paid............................................ (358) (312) (329)
Other, net................................................ 28 10 (20)
------- ----- -----
Net Cash Provided (Used) by Financing
Activities..................................... 3,269 (238) (137)
------- ----- -----
Increase in Cash and Cash Equivalents....................... 911 39 21
Cash and Cash Equivalents -- Beginning of Year.............. 64 25 4
------- ----- -----
Cash and Cash Equivalents -- End of Year.................... $ 975 $ 64 $ 25
======= ===== =====
Cash Flows from Changes in Current Assets and Liabilities,
Excluding Effects from Businesses Acquired:
Receivables............................................... $ 265 $ (94) $ 11
Inventories............................................... (12) (9) (51)
Prepaid expenses and other current assets................. 12 (17) (5)
Accounts payable.......................................... (90) 7 (50)
Other current liabilities................................. (138) 40 (31)
------- ----- -----
Changes in Current Assets and Liabilities................... $ 37 $ (73) $(126)
======= ===== =====
</Table>
See accompanying notes to consolidated financial statements
28
GENERAL MILLS, INC. 2002
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
$.10 PAR VALUE COMMON STOCK
(ONE BILLION SHARES AUTHORIZED)
---------------------------------- ACCUMULATED
ISSUED TREASURY OTHER
--------------- ---------------- RETAINED UNEARNED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT EARNINGS COMPENSATION INCOME TOTAL
------ ------ ------ ------- -------- ------------ ------------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE AT MAY 30, 1999.................. 408 $ 658 (104) $(2,195) $1,828 $(69) $ (57) $ 165
=== ====== ==== ======= ====== ==== ===== =======
Comprehensive Income:
Net earnings........................... 614 614
Other comprehensive income, net of tax:
Unrealized losses on securities...... (8) (8)
Foreign currency translation......... (22) (22)
Minimum pension liability
adjustment......................... 1 1
--- ------ ---- ------- ------ ---- ----- -------
Other comprehensive income............. (29) (29)
----- -------
Total comprehensive income............... 585
--- ------ ---- ------- ------ ---- ----- -------
Cash dividends declared ($1.10 per
share), net of income taxes of $1...... (328) (328)
Stock compensation plans (includes income
tax benefits of $39)................... -- 25 4 101 126
Shares purchased......................... (23) (848) (848)
Put and call option premiums/settlements,
net.................................... -- (2) -- 7 5
Unearned compensation related to
restricted stock awards................ (13) (13)
Earned compensation and other............ 19 19
--- ------ ---- ------- ------ ---- ----- -------
BALANCE AT MAY 28, 2000.................. 408 $ 681 (123) $(2,935) $2,114 $(63) $ (86) $ (289)
=== ====== ==== ======= ====== ==== ===== =======
Comprehensive Income:
Net earnings........................... 665 665
Other comprehensive income, net of tax:
Unrealized losses on securities...... 5 5
Foreign currency translation......... (7) (7)
Minimum pension liability
adjustment......................... (5) (5)
--- ------ ---- ------- ------ ---- ----- -------
Other comprehensive income............. (7) (7)
----- -------
Total comprehensive income............... 658
--- ------ ---- ------- ------ ---- ----- -------
Cash dividends declared ($1.10 per
share), net of income taxes of $1...... (311) (311)
Stock compensation plans (includes income
tax benefits of $38)................... -- 34 5 124 158
Shares purchased......................... (5) (198) (198)
Put and call option premiums/settlements,
net.................................... -- 30 -- (5) 25
Unearned compensation related to
restricted stock awards................ (13) (13)
Earned compensation and other............ 22 22
--- ------ ---- ------- ------ ---- ----- -------
BALANCE AT MAY 27, 2001.................. 408 $ 745 (123) $(3,014) $2,468 $(54) $ (93) $ 52
=== ====== ==== ======= ====== ==== ===== =======
Comprehensive Income:
Net earnings........................... 458 458
Other comprehensive income, net of tax:
Cumulative effect of adopting SFAS
No. 133............................ (158) (158)
Unrealized losses on hedge
derivatives........................ (114) (114)
Unrealized losses on securities...... (11) (11)
Foreign currency translation......... (4) (4)
Minimum pension liability
adjustment......................... 4 4
--- ------ ---- ------- ------ ---- ----- -------
Other comprehensive income............. (283) (283)
----- -------
Total comprehensive income............... 175
--- ------ ---- ------- ------ ---- ----- -------
Cash dividends declared ($1.10 per
share), net of income taxes of $1...... (358) (358)
Shares issued for acquisition............ 94 4,902 40 992 5,894
Shares repurchased from Diageo........... (55) (2,318) (2,318)
Stock compensation plans (includes income
tax benefits of $53)................... -- 46 6 176 222
Shares purchased......................... (3) (119) (119)
Put and call option premiums/settlements,
net.................................... -- 40 -- (9) 31
Unearned compensation related to
restricted stock awards................ (29) (29)
Earned compensation and other............ 26 26
--- ------ ---- ------- ------ ---- ----- -------
BALANCE AT MAY 26, 2002.................. 502 $5,733 (135) $(4,292) $2,568 $(57) $(376) $ 3,576
=== ====== ==== ======= ====== ==== ===== =======
</Table>
See accompanying notes to consolidated financial statements.
29
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Preparing our consolidated financial statements in conformity with
generally accepted U.S. accounting principles requires us to make estimates and
assumptions that affect reported amounts of assets, liabilities, disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from our estimates. Certain prior years' amounts
have been reclassified to conform with the current year presentation.
(A) Principles of Consolidation -- Our consolidated financial statements
include parent company operations and majority-owned subsidiaries as well as
General Mills' investment in and share of net earnings or losses of 20- to
50-percent-owned companies, which are recorded on an equity basis.
Our fiscal year ends on the last Sunday in May. Years 2002, 2001 and 2000
each consisted of 52 weeks. Our wholly owned international operations, with the
exception of Canada and our export operations, are reported for the 12 calendar
months ending April 30. The results of the acquired Pillsbury operations are
reflected in our financial results from Nov. 1, 2001.
(B) Land, Buildings, Equipment and Depreciation -- Buildings and equipment
are depreciated over estimated useful lives, primarily using the straight-line
method. Buildings are usually depreciated over 40 to 50 years, and equipment is
depreciated over three to 15 years. Depreciation charges for 2002, 2001 and 2000
were $283 million, $194 million and $183 million, respectively. Accelerated
depreciation methods generally are used for income tax purposes. When an item is
sold or retired, the accounts are relieved of its cost and related accumulated
depreciation; the resulting gains and losses, if any, are recognized.
(C) Inventories -- Inventories are valued at the lower of cost or market.
We generally use the LIFO method of valuing inventory because we believe that it
is a better match with current revenues. However, FIFO is used for most foreign
operations, where LIFO is not recognized for income tax purposes and the
operations often lack the staff to handle LIFO complexities accurately.
(D) Intangible Assets -- Goodwill represents the difference between the
purchase prices of acquired companies and the related fair values of net assets
acquired and accounted for by the purchase method of accounting. On May 28,
2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Intangible Assets." This Statement eliminates the amortization of
goodwill and instead requires that goodwill be tested annually for impairment.
See Note One (O) for the effects of this adoption. We capitalize the costs of
software internally developed or externally purchased for internal use. The
costs of patents, copyrights and other amortizable intangible assets are
amortized evenly over their estimated useful lives.
(E) Recoverability of Long-Lived Assets -- We review long-lived assets,
including identifiable intangibles and goodwill, for impairment when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An asset is deemed impaired and written down to its fair value
if estimated related future cash flows are less than its carrying amount.
(F) Foreign Currency Translation -- For most of our foreign operations,
local currencies are considered the functional currency. Assets and liabilities
are translated using exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rates prevailing
throughout the period. Translation effects are classified within Accumulated
Other Comprehensive Income in Stockholders' Equity.
(G) Financial Instruments -- See Note One (O) for a description of our
adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." See Note Seven for a description of our accounting policies related
to financial instruments.
30
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(H) Revenue Recognition -- We recognize sales upon shipment to our
customers consistent with sales terms. We generally do not allow a right of
return. Reported sales are net of certain coupon and trade promotion costs.
Coupons are expensed when distributed based on estimated redemptions. Trade
promotions are expensed based on estimated participation and performance levels
for offered programs.
(I) Shipping and Handling -- Shipping and handling costs associated with
internal movement of inventories are recorded as cost of sales and recognized
when the related finished product is shipped to the customer. Shipping costs
associated with the distribution of finished product to our customers are
recorded as selling, general and administrative expense and recognized when the
related finished product is shipped to the customer. The amount recorded in
selling, general and administrative expense was $243 million, $161 million and
$141 million in fiscal 2002, 2001 and 2000, respectively.
(J) Research and Development -- All expenditures for research and
development are charged against earnings in the year incurred. The charges for
2002, 2001 and 2000 were $131 million, $83 million and $77 million,
respectively.
(K) Advertising Costs -- Advertising expenses (including production and
communication costs) for 2002, 2001 and 2000 were $489 million, $358 million and
$361 million, respectively. Prepaid advertising costs (including syndication
properties) of $36 million and $34 million were reported as assets at May 26,
2002, and May 27, 2001, respectively. We expense the production costs of
advertising the first time that the advertising takes place.
(L) Stock-Based Compensation -- We use the intrinsic value method for
measuring the cost of compensation paid in Company common stock. This method
defines our cost as the excess of the stock's market value at the time of the
grant over the amount that the employee is required to pay. Our stock option
plans require that the employee's payment (i.e., exercise price) be the market
value as of the grant date.
(M) Earnings per Share -- Basic Earnings per Share (EPS) is computed by
dividing net earnings by the weighted average number of common shares
outstanding. Diluted EPS includes the effect of all dilutive potential common
shares (primarily related to outstanding in-the-money stock options).
(N) Cash and Cash Equivalents -- We consider all investments purchased with
an original maturity of three months or less to be cash equivalents. Cash and
cash equivalents totaling $77 million are designated as collateral for certain
derivative liabilities.
(O) Accounting Rules Adopted -- On the first day of fiscal 2002, we adopted
three new accounting rules. SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," requires all derivatives to be recorded at fair value
on the balance sheet and establishes new accounting rules for hedging. We
recorded the cumulative effect of adopting this accounting change, as follows:
<Table>
<Caption>
INCLUDED IN
ACCUMULATED
INCLUDED OTHER
IN COMPREHENSIVE
EARNINGS INCOME
-------- -------------
(IN MILLIONS, EXCEPT PER
SHARE DATA)
Pretax...................................................... $ (5) $(251)
Income tax effects.......................................... 2 93
----- -----
Total..................................................... $ (3) (158)
===== =====
Per Diluted Share Net Earnings Effect....................... $(.01)
=====
</Table>
31
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This cumulative effect was primarily associated with the impact of lower
interest rates on the fair-value calculation for delayed-starting interest rate
swaps we entered into in anticipation of our Pillsbury acquisition and other
financing requirements. Refer to Note Seven and Note Ten for more information.
We also adopted SFAS No. 141, "Business Combinations," which requires use
of the purchase method of accounting for all business combinations initiated
after June 30, 2001.
The third Statement we adopted at the start of the year was SFAS No. 142,
"Goodwill and Intangible Assets." This Statement eliminates the amortization of
goodwill and instead requires that goodwill be tested annually for impairment.
Goodwill amortization expense in fiscal 2001 totaled $23 million pretax, $22
million after tax. Transitional impairment tests of our goodwill did not require
adjustment to any of our goodwill carrying values.
The following table adjusts earnings and earnings per share for the
adoption of SFAS No. 142.
<Table>
<Caption>
FISCAL YEAR ENDED
------------------------------------------
MAY 26, 2002 MAY 27, 2001 MAY 28, 2000
------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Reported Net Earnings:......................... $ 458 $ 665 $ 614
Add back goodwill amortization............... -- 22 21
----- ----- -----
Adjusted Net Earnings........................ $ 458 $ 687 $ 635
===== ===== =====
Basic Earnings per Share:
Reported EPS -- basic........................ $1.38 $2.34 $2.05
Add back goodwill amortization............... -- .08 .07
----- ----- -----
Adjusted Basic EPS........................... $1.38 $2.42 $2.12
===== ===== =====
Diluted Earnings per Share:
Reported EPS -- diluted...................... $1.34 $2.28 $2.00
Add back goodwill amortization............... -- .07 .07
----- ----- -----
Adjusted Diluted EPS......................... $1.34 $2.35 $2.07
===== ===== =====
</Table>
The Financial Accounting Standard Board's (FASB's) Emerging Issues Task
Force (EITF) Issue 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products," requires recording certain
coupon and trade promotion expenses as reductions of revenues and was effective
for us in our fourth quarter 2002. Since adopting this requirement resulted only
in the reclassification of certain expenses from selling, general and
administrative expense to a reduction of net sales, it did not affect our
financial position or net earnings. The impact was a reduction of net sales, and
a corresponding reduction in selling, general and administrative expense, of
$2,246 million, $1,628 million and $1,527 million in 2002, 2001 and 2000,
respectively.
(P) New Accounting Rules -- In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
requires that a single accounting model be used for long-lived assets to be
disposed of by sale, and broadens the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 is effective for us with the
beginning of fiscal 2003. We do not expect the adoption of SFAS No. 144 to have
a material impact on the Company's financial statements.
32
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
On Oct. 31, 2001, we acquired the worldwide Pillsbury operations from
Diageo plc (Diageo). Pillsbury, based in Minneapolis, Minn., has built a
portfolio of leading food brands, such as Pillsbury refrigerated dough, Green
Giant, Old El Paso, Progresso and Totino's. Pillsbury had sales of $6.1 billion
(before EITF Issue 01-09 reclassification) in its fiscal year ended June 30,
2001, including businesses subsequently divested. We believe the addition of
Pillsbury's businesses will enhance our future growth and generate significant
cost synergies.
The transaction was accounted for as a purchase. Under terms of the
agreement between General Mills and Diageo, we acquired Pillsbury in a stock and
cash transaction. Consideration to Diageo included 134 million General Mills
common shares. Under a stockholders' agreement, Diageo had a put option to sell
directly to us 55 million shares of General Mills common stock at a price of
$42.14 per share, which Diageo exercised on Nov. 1, 2001. Therefore, those 55
million shares were valued at a total of $2,318 million. The 79 million shares
of General Mills common stock retained by Diageo were valued at $3,576 million
based on the three-day average trading price prior to the closing of $45.27 per
share. Therefore, the total stock consideration was $5,894 million. The cash
paid to Diageo and assumed debt of Pillsbury totaled $3,830 million. As a
result, the total acquisition consideration (exclusive of direct acquisition
costs) was approximately $9,724 million.
Under terms of the agreement, Diageo holds contingent value rights that may
require payment to Diageo on April 30, 2003, of up to $395 million, depending on
the General Mills stock price and the number of General Mills shares that Diageo
continues to hold on that date. If the General Mills stock price averages less
than $49 per share for the 20 trading days prior to that date, Diageo will
receive an amount per share equal to the difference between $49 and the General
Mills stock trading price, up to a maximum of $5 per share.
The stockholders' agreement between General Mills and Diageo includes a
standstill provision, under which Diageo is precluded from buying additional
shares in General Mills for a 20-year period following the close of the
transaction, or for three years following the date on which Diageo owns less
than 5 percent of General Mills' outstanding shares, whichever is earlier. The
agreement also generally requires pass-through voting by Diageo, so its shares
will be voted in the same proportion as the other General Mills shares are
voted. So long as Diageo owns at least 50 percent of the 134 million shares it
originally received in this transaction, Diageo may designate two individuals to
the General Mills Board of Directors.
Our preliminary estimate of the allocation of the purchase price as of May
26, 2002, was as follows:
<Table>
<Caption>
(IN MILLIONS)
Current Assets.............................................. $ 1,258
Land, Buildings and Equipment............................... 1,103
Investments and Assets to be Sold........................... 1,006
Other Non-current Assets.................................... 263
Deferred Tax Assets......................................... 111
Goodwill and Intangibles.................................... 7,669
-------
Total Assets.............................................. 11,410
-------
Current Liabilities......................................... (1,235)
Other Non-current Liabilities............................... (451)
-------
Total Liabilities......................................... (1,686)
-------
Purchase Consideration...................................... $ 9,724
=======
</Table>
33
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation of the purchase price is based on preliminary estimates, subject
to revisions when appraisals and integration plans have been finalized.
Revisions to the allocation, which may be significant, will be reported as
changes to various assets and liabilities, including goodwill, other intangible
assets, and deferred income taxes. As of May 26, 2002, the goodwill balance
includes all of the excess purchase price of the Pillsbury acquisition, as the
valuation of specific intangible assets has not yet been completed. We expect
the valuation to result in a significant value for nonamortizable brands. We do
not anticipate significant amounts to be allocated to amortizable intangible
assets and, therefore, the amount of intangibles amortization is not expected to
be material to the results of operations in future periods.
In order to obtain regulatory clearance for the acquisition of Pillsbury,
we arranged to divest certain businesses. On Nov. 13, 2001, International
Multifoods Corporation (IMC) purchased the Pillsbury dessert and specialty
products businesses as well as certain General Mills brands and the General
Mills Toledo production facilities for $316 million. After-tax cash proceeds
from this transaction were used to reduce General Mills debt. Under the
agreement with IMC, General Mills expects to spend approximately $70 million for
the purchase and installation of certain production assets at the Toledo plant,
of which $47 million has been expended through May 26, 2002.
As part of the transaction, IMC received an exclusive royalty-free license
to use the Doughboy trademark and Pillsbury brand in the desserts and baking mix
categories. The licenses are renewable without cost in 20-year increments at
IMC's discretion. Since the sale of the assets to IMC was integral to the
Pillsbury acquisition, and because the assets sold were adjusted to fair market
value as part of the purchase of Pillsbury, there was no gain or loss recorded
on the sale in the Company's consolidated statement of earnings.
Pillsbury had a 50 percent equity interest in Ice Cream Partners USA LLC
(ICP), a joint venture Pillsbury formed with Nestle USA during fiscal 2000 for
the manufacture, marketing and distribution of Haagen-Dazs and Nestle ice cream
products in the United States. On Dec. 26, 2001, Nestle USA exercised its right,
triggered by the change of ownership of Pillsbury, to buy the 50 percent stake
of ICP that it did not already own. Nestle paid us $641 million for our 50
percent of the joint venture and a long-term, paid-in-full license for the
Haagen-Dazs brand in the United States. Net proceeds from this transaction also
were used to reduce our debt level.
We are reconfiguring our cereal production as a result of selling our
Toledo, Ohio, plant to IMC. We also incurred a number of one-time costs
associated with the acquisition of Pillsbury, and the associated divestiture of
certain businesses and assets to IMC. (See Note Three.)
In February 2002, we decided to close two Pillsbury facilities in order to
utilize the operating capacity of the newly combined companies more fully. We
closed the Geneva, Ill., plant, which produced frozen breakfast products; and
the Anthony, Texas, production facility, which produced various Mexican food
products. Our exit liabilities connected to these plant closures amount to $22
million and have been included in the purchase price allocation of Pillsbury.
Approximately 370 employees were affected by these two plant closures. We do not
anticipate any significant loss associated with the exit liabilities established
pursuant to the acquisition.
We continue to evaluate plans to consolidate manufacturing, warehouse and
distribution activities into fewer locations. The closure of additional
Pillsbury facilities could result in additional severance and other exit
liabilities, which would increase the excess purchase price. These amounts will
be recorded on our consolidated balance sheet as adjustments to the excess
purchase price when plans have been finalized and announced. The integration of
Pillsbury into General Mills' operations also may result in the restructuring of
certain General Mills activities. These actions could result in additional
unusual charges, which will be recorded as expense in our consolidated
statements of earnings in the period during which plans are finalized.
34
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual results of acquired business operations are included in the
consolidated statement of earnings for the period from Nov. 1, 2001 through May
26, 2002. The following unaudited pro forma information presents a summary of
our consolidated results of operations and the acquired Pillsbury operations as
if the acquisition had occurred on May 29, 2000.
<Table>
<Caption>
FISCAL YEAR ENDED
-------------------------------
MAY 26, 2002 MAY 27, 2001
-------------- --------------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
Net sales................................................... $9,936 $10,089
Earnings before cumulative effect of change in accounting
principle................................................. 495 849
Net earnings................................................ 492 849
Earnings per Share -- Basic
EPS before cumulative effect of change in accounting
principle.............................................. 1.36 2.34
Net EPS -- Basic.......................................... 1.35 2.34
Earnings per Share -- Diluted
EPS before cumulative effect of change in accounting
principle.............................................. 1.32 2.29
Net EPS -- Diluted........................................ 1.31 2.29
====== =======
</Table>
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as increased interest
expense on acquisition debt. They do not reflect the effect of synergies that
would have been expected to result from the integration of the Pillsbury
businesses. The pro forma information does not purport to be indicative of the
results of operations that actually would have resulted had the combination
occurred on May 29, 2000, or of future results of the consolidated entities.
On Jan. 13, 2000, we acquired Small Planet Foods of Sedro-Woolley, Wash.
Small Planet Foods is a leading producer of branded organic food products
marketed under the Cascadian Farm and Muir Glen trademarks. On Aug. 12, 1999, we
acquired Gardetto's Bakery, Inc. of Milwaukee, Wis. Gardetto's is a leading
national brand of baked snack mixes and flavored pretzels. On June 30, 1999, we
acquired certain grain elevators and related assets from Koch Agriculture
Company. The aggregate purchase price of these acquisitions, which were
accounted for using the purchase method, was approximately $227 million, and
associated goodwill was $153 million. The results of the acquired businesses
have been included in the consolidated financial statements since their
respective acquisition dates. Our fiscal 2000 financial results would not have
been materially different if we had made these acquisitions at the beginning of
the fiscal year.
Through fiscal 2001, the goodwill associated with the acquisitions made in
fiscal 2000 was amortized over 40 years on a straight-line basis. As described
in Note One (O), we adopted SFAS No. 142, which eliminated goodwill amortization
at the beginning of fiscal 2002.
3. RESTRUCTURING AND OTHER EXIT COSTS
In fiscal 2002, we recorded restructuring and other exit costs totaling
$134 million pretax expense, $84 million after tax, pursuant to approved plans
related to the acquisition of Pillsbury. These costs consisted of $87 million
pretax of cereal plant shutdown and reconfiguration charges, $38 million pretax
of severance costs primarily related to sales organization and headquarters
department realignment, and $9 million pretax of two flour mill
restructuring/closing charges. The cereal reconfiguration charges were for
severance costs and asset write-offs necessitated by the sale of our Toledo,
Ohio, plant as required to obtain regulatory clearance for the acquisition of
Pillsbury.
35
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These restructuring and other exit costs included severance costs related
to 1,078 employees. These employees included all levels and a variety of areas
within the Company, including management, supervisory, technical and production
personnel. These costs also included the write-off of $52 million of cereal
production assets and $6 million of flour production assets, primarily in our
U.S. Retail segment. The carrying value of these assets was $58 million, net of
amounts transferred to other facilities, and we expect to dispose of these
assets within 12 months.
In fiscal 2001, we made the decision to exit the Squeezit beverage
business. The charge associated with this action, primarily noncash write-downs
associated with asset disposals, totaled $12 million pretax, $7 million after
tax. At May 26, 2002, there was no remaining reserve balance related to these
exit costs.
The analysis of our restructuring and other exit cost reserve activity is
as follows:
<Table>
<Caption>
PENSION AND
POSTRETIREMENT
ASSET CURTAILMENT
SEVERANCE WRITE-OFF COSTS OTHER TOTAL
--------- --------- -------------- ----- -----
(IN MILLIONS)
Manufacturing/Distribution Streamlining
Reserve Balance at May 30, 1999........ $ 3 $ 14 -- $ 27 $ 44
Amounts Utilized in 2000............... (2) (14) -- (18) (34)
---- ---- ---- ---- ----
Reserve Balance at May 28, 2000........ 1 -- -- 9 10
Amounts Utilized in 2001............... -- -- -- (5) (5)
---- ---- ---- ---- ----
Reserve Balance at May 27, 2001........ 1 -- -- 4 5
Amounts Utilized in 2002............... -- (2) -- (2) (4)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ $ 1 $ (2) -- $ 2 $ 1
Squeezit Business Exit
2001 Charges........................... -- $ 12 -- -- $ 12
Amounts Utilized in 2001............... -- (8) -- -- (8)
---- ---- ---- ---- ----
Reserve Balance at May 27, 2001........ -- 4 -- -- 4
2002 Charges, net of credits........... 4 (4) -- -- --
Amounts Utilized in 2002............... (4) -- -- -- (4)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ -- -- -- -- $ --
Cereal Reconfiguration
2002 Charges........................... $ 24 $ 52 $ 11 -- $ 87
Amounts Utilized in 2002............... (3) (5) (11) -- (19)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ $ 21 $ 47 -- -- $ 68
Flour Mills Consolidation
2002 Charges........................... $ 2 $ 6 -- $ 1 $ 9
Amounts Utilized in 2002............... -- -- -- (1) (1)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ $ 2 $ 6 -- -- $ 8
</Table>
36
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PENSION AND
POSTRETIREMENT
ASSET CURTAILMENT
SEVERANCE WRITE-OFF COSTS OTHER TOTAL
--------- --------- -------------- ----- -----
(IN MILLIONS)
Sales and Headquarters Severance
2002 Charges........................... $ 38 -- -- -- $ 38
Amounts Utilized in 2002............... (8) -- -- -- (8)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ $ 30 -- -- -- $ 30
Consolidated
Reserve Balance at May 30, 1999........ $ 3 $ 14 $ -- $ 27 $ 44
Amounts Utilized in 2000............... (2) (14) -- (18) (34)
---- ---- ---- ---- ----
Reserve Balance at May 28, 2000........ 1 -- -- 9 10
2001 Charges........................... -- 12 -- -- 12
Amounts Utilized in 2001............... -- (8) -- (5) (13)
---- ---- ---- ---- ----
Reserve Balance at May 27, 2001........ 1 4 -- 4 9
2002 Charges, net of credits........... 68 54 11 1 134
Amounts Utilized in 2002............... (15) (7) (11) (3) (36)
---- ---- ---- ---- ----
Reserve Balance at May 26, 2002........ $ 54 $ 51 -- $ 2 $107
</Table>
4. INVESTMENTS IN JOINT VENTURES
We have a 50 percent equity interest in Cereal Partners Worldwide (CPW), a
joint venture with Nestle that manufactures and markets ready-to-eat cereals
outside the United States and Canada. We have a 40.5 percent equity interest in
Snack Ventures Europe (SVE), our joint venture with PepsiCo that manufactures
and markets snack foods in continental Europe. We have a 50 percent equity
interest in 8th Continent, LLC, a domestic joint venture formed in 2001 with
DuPont to develop and market soy foods and beverages. As a result of the
Pillsbury acquisition, we have 50 percent interests in the following joint
ventures for the manufacture, distribution and marketing of Haagen-Dazs frozen
ice cream products and novelties: Haagen-Dazs Japan K.K., Haagen-Dazs Korea
Company Limited, Haagen-Dazs Taiwan Limited, Haagen-Dazs Distributors (Thailand)
Company Limited, and Haagen-Dazs Marketing & Distribution (Philippines) Inc. We
also have a 50 percent interest in Seretram, a joint venture with Co-op de Pau
for the production of Green Giant canned corn in France.
The joint ventures are reflected in our financial statements on an equity
accounting basis. We record our share of the earnings or losses of these joint
ventures. (The table that follows reflects the joint ventures on a 100 percent
basis.) We also receive royalty income from certain of these joint ventures,
incur various expenses (primarily research and development) and record the tax
impact of certain of the joint venture operations that are structured as
partnerships.
Our cumulative investment in these joint ventures (including our share of
earnings and losses) was $326 million, $218 million and $198 million at the end
of 2002, 2001 and 2000, respectively. We made aggregate investments in the joint
ventures of $38 million, $25 million and $29 million (net of a $6 million loan
repayment) in 2002, 2001 and 2000, respectively. We received aggregate dividends
from the joint ventures of $17 million, $3 million and $5 million in 2002, 2001
and 2000, respectively.
Summary combined financial information for the joint ventures on a 100
percent basis follows. Since we record our share of CPW results on a two-month
lag, CPW information is included as of and for the 12 months ended March 31. The
Haagen-Dazs and Seretram joint ventures are reported as of and for the
37
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
six months ended April 30, 2002. The SVE and 8th Continent information is
consistent with our May year-end.
COMBINED FINANCIAL INFORMATION -- JOINT VENTURES -- 100% BASIS
<Table>
<Caption>
FISCAL YEAR
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Net Sales.................................................. $1,693 $1,468 $1,429
Gross Profit............................................... 755 664 619
Earnings (losses) before Taxes............................. 94 61 (4)
Earnings (losses) after Taxes.............................. 78 48 (22)
====== ====== ======
</Table>
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
------------ ------------
(IN MILLIONS)
Current Assets.............................................. $587 $476
Noncurrent Assets........................................... 712 614
Current Liabilities......................................... 630 585
Noncurrent Liabilities...................................... 9 2
==== ====
</Table>
Our proportionate share of joint venture sales was $777 million, $666
million and $652 million for 2002, 2001 and 2000, respectively.
38
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BALANCE SHEET INFORMATION
The components of certain balance sheet accounts are as follows:
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
------------ ------------
(IN MILLIONS)
Land, Buildings and Equipment:
Land...................................................... $ 54 $ 25
Buildings................................................. 1,151 636
Equipment................................................. 2,916 2,226
Construction in progress.................................. 497 292
------- -------
Total land, buildings and equipment.................... 4,618 3,179
Less accumulated depreciation............................. (1,854) (1,678)
------- -------
Net land, buildings and equipment...................... $ 2,764 $ 1,501
======= =======
Goodwill:
Total goodwill............................................ $ 8,559 $ 892
Less accumulated amortization............................. (86) (88)
------- -------
Goodwill............................................... $ 8,473 $ 804
======= =======
Intangible Assets:
Intangible assets, primarily capitalized software......... $ 129 $ 93
Less accumulated amortization............................. (39) (27)
------- -------
Intangible assets...................................... $ 90 $ 66
======= =======
Other Assets:
Prepaid pension........................................... $ 1,001 $ 677
Marketable securities, at market.......................... 160 187
Investments in and advances to affiliates................. 320 214
Miscellaneous............................................. 295 234
------- -------
Total other assets..................................... $ 1,776 $ 1,312
======= =======
</Table>
The changes in the carrying amount of goodwill for the fiscal year ended
May 26, 2002, are as follows:
<Table>
<Caption>
PILLSBURY
UNALLOCATED
EXCESS
BAKERIES AND PURCHASE
U.S. RETAIL FOODSERVICE INTERNATIONAL CORPORATE PRICE TOTAL
----------- ------------ ------------- --------- ----------- ------
(IN MILLIONS)
Balance at May 27,
2001............... $745 $59 $ -- $ -- $ -- $ 804
Pillsbury
transaction........ -- -- -- -- 7,669 7,669
---- --- ----- ----- ------ ------
Balance at May 26,
2002............... $745 $59 $ -- $ -- $7,669 $8,473
==== === ===== ===== ====== ======
</Table>
The Pillsbury acquisition valuation and purchase price allocation has not
yet been completed. (See Note Two.) Therefore, all the excess purchase price is
currently accounted for in goodwill. When the purchase price allocation is
completed, the amount allocated to goodwill will change and the remaining
goodwill will be allocated to our operating segments.
39
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible asset amortization expense was $13 million, $6 million and $5
million for fiscal 2002, 2001 and 2000, respectively. Excluding amortization for
intangible assets acquired as part of the Pillsbury acquisition, estimated
amortization expense for the next five fiscal years (in millions) is as follows:
$15 in 2003, $12 in 2004, $11 in 2005, $9 in 2006 and $8 in 2007.
As of May 26, 2002, a comparison of cost and market values of our
marketable securities (which are debt and equity securities) was as follows:
<Table>
<Caption>
MARKET GROSS GROSS
COST VALUE GAIN LOSS
---- ------ ----- -----
(IN MILLIONS)
Held to maturity:
Debt securities....................................... $ 3 $ 3 $-- $ --
Equity securities..................................... 2 2 -- --
---- ---- --- -----
Total.............................................. $ 5 $ 5 $-- $ --
==== ==== === =====
Available for sale:
Debt securities....................................... $130 $155 $25 $ --
Equity securities..................................... -- -- -- --
---- ---- --- -----
Total.............................................. $130 $155 $25 $ --
==== ==== === =====
</Table>
Realized gains from sales of marketable securities were $15 million, $4
million and $3 million in 2002, 2001 and 2000, respectively. The aggregate
unrealized gains and losses on available-for-sale securities, net of tax
effects, are classified in Accumulated Other Comprehensive Income within
Stockholders' Equity.
Scheduled maturities of our marketable securities are as follows:
<Table>
<Caption>
HELD TO
MATURITY AVAILABLE FOR SALE
-------------- -------------------
MARKET MARKET
COST VALUE COST VALUE
----- ------ ------- ---------
(IN MILLIONS)
Under one year (current)............................... $ -- $ -- $ -- $ --
From 1 to 3 years...................................... -- -- 45 52
From 4 to 7 years...................................... -- -- 5 5
Over 7 years........................................... 3 3 80 98
Equity securities...................................... 2 2 -- --
----- ----- ---- ----
Totals............................................... $ 5 $ 5 $130 $155
===== ===== ==== ====
</Table>
40
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
Raw materials, work in process and supplies................. $ 234 $129
Finished goods.............................................. 753 326
Grain....................................................... 99 94
Reserve for LIFO valuation method........................... (31) (30)
------ ----
Total inventories......................................... $1,055 $519
====== ====
</Table>
At May 26, 2002, and May 27, 2001, respectively, inventories of $720
million and $282 million were valued at LIFO. LIFO accounting had negligible
impact on 2002, 2001 and 2000 earnings. Results of operations were not
materially affected by a liquidation of LIFO inventory. The difference between
replacement cost and the stated LIFO inventory value is not materially different
from the reserve for LIFO valuation method.
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The carrying amounts and fair values of our financial instruments (based on
market quotes and interest rates at the balance sheet dates) were as follows:
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
Assets:
Cash and cash equivalents....................... $ 975 $ 975 $ 64 $ 64
Receivables..................................... 1,010 1,010 664 664
Marketable securities........................... 160 160 187 187
Liabilities:
Accounts payable................................ 1,217 1,217 619 619
Debt............................................ 9,439 9,507 3,428 3,500
Derivatives relating to:
Debt............................................ (435) (435) -- (250)
Commodities..................................... 9 9 -- (3)
Foreign currencies.............................. (6) (6) -- 4
</Table>
The Company is exposed to certain market risks as a part of its ongoing
business operations and uses derivative financial and commodity instruments,
where appropriate, to manage these risks. Derivatives are financial instruments
whose value is derived from one or more underlying financial instruments.
Examples of underlying instruments are currencies, equities, commodities and
interest rates. In general, instruments used as hedges must be effective at
reducing the risk associated with the exposure being hedged, and must be
designated as a hedge at the inception of the contract.
With the adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as of May 28, 2001, we record the fair value of all
outstanding derivatives in receivables or other liabilities. Gains and losses
related to the ineffective portion of any hedge are recorded in various costs
and expenses, depending on the nature of the derivative.
41
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each derivative transaction we enter into is designated at inception as a
hedge of risks associated with specific assets, liabilities or future
commitments, and is monitored to determine if it remains an effective hedge.
Effectiveness is based on changes in the derivative's market value or cash flows
being highly correlated with changes in market value or cash flows of the
underlying hedged item. We do not enter into or hold derivatives for trading or
speculative purposes. None of our derivative instruments is excluded from our
assessment of hedge effectiveness.
We use derivative instruments to reduce financial risk in three areas:
interest rates, foreign currency and commodities. The notional amounts of
derivatives do not represent actual amounts exchanged by the parties and, thus,
are not a measure of the Company's exposure through its use of derivatives. We
enter into interest rate swap, foreign exchange, and commodity swap agreements
with a diversified group of highly rated counterparties. We enter into commodity
futures transactions through various regulated exchanges. These transactions may
expose the Company to credit risk to the extent that the instruments have a
positive fair value, but we have not experienced any material losses nor do we
anticipate any losses. The Company does not have a significant concentration of
risk with any single party or group of parties in any of its financial
instruments.
Qualifying derivatives are reported as part of hedge arrangements as
follows:
Cash Flow Hedges -- Gains and losses on these instruments are recorded in
Other Comprehensive Income until the underlying transaction is recorded in
earnings. When the hedged item is realized, gains or losses are reclassified
from Accumulated Other Comprehensive Income to the Consolidated Statements of
Earnings on the same line item as the underlying transaction risk. When we issue
fixed rate debt, the corresponding interest rate swaps are dedesignated as
hedges and the amount related to those swaps within accumulated other
comprehensive income will be reclassified into earnings over the life of the
interest rate swaps.
Foreign Exchange Transaction Risk -- The Company is exposed to fluctuations
in foreign currency cash flows related primarily to third-party purchases,
intercompany product shipments, and intercompany loans. Forward contracts of
generally less than 12 months duration are used to hedge some of these risks.
Effectiveness is assessed based on changes in forward rates.
Interest Rate Risk -- The Company is exposed to interest rate volatility
with regard to existing variable-rate debt and planned future issuances of
fixed-rate debt. The Company uses interest rate swaps, including
forward-starting swaps, to reduce interest rate volatility, and to achieve a
desired proportion of variable vs. fixed-rate debt, based on current and
projected market conditions.
Variable-to-fixed interest rate swaps are accounted for as cash flow
hedges, with effectiveness assessed based on either the hypothetical derivative
method or changes in the present value of interest payments on the underlying
debt. The amount of hedge ineffectiveness was less than $1 million.
Price Risk -- The Company is exposed to price fluctuations primarily as a
result of anticipated purchases of ingredient and packaging materials. The
Company uses a combination of long cash positions with suppliers,
exchange-traded futures and option contracts and over-the-counter hedging
mechanisms to reduce price fluctuations in a desired percentage of forecasted
purchases over a period of generally less than one year. Commodity contracts are
accounted for as cash flow hedges, with effectiveness assessed based on changes
in futures prices. The amount of hedge ineffectiveness was less than $1 million.
We use a grain merchandising operation to provide us efficient access to
and more informed knowledge of various commodities markets. This operation uses
futures and options to hedge its net inventory position to minimize market
exposure. As of May 26, 2002, our grain merchandising operation had futures and
options contracts that essentially hedged its net inventory position. None of
the contracts extended beyond May 2003. All futures contracts and futures
options are exchange-based instruments with
42
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ready liquidity and determinable market values. Neither results of operations
nor the year-end positions from our grain merchandising operation were material
to the Company's overall results.
Unrealized losses from cash flow hedges recorded in Accumulated Other
Comprehensive Income as of May 26, 2002, totaled $432 million pretax, primarily
related to interest rate swaps we entered into in contemplation of future
borrowings and other financing requirements (primarily related to the Pillsbury
acquisition), which are being reclassified into interest expense over the life
of the interest rate hedge. (See Note Eight regarding swaps settled or
neutralized.) The estimated net amount of the existing gains and losses in
accumulated other comprehensive income as of May 26, 2002 that is expected to be
reclassified into earnings within the next twelve months is $171 million.
Fair Value Hedges -- Fair value hedges involve recognized assets,
liabilities or firm commitments as the hedged risks.
Foreign Exchange Translation Risk -- The Company is exposed to fluctuations
in the value of foreign currency investments in subsidiaries and cash flows
related primarily to repatriation of these investments. Forward contracts,
generally less than 12 months duration, are used to hedge some of these risks.
Effectiveness is assessed based on changes in forward rates. Effective gains and
losses on these instruments are recorded as a foreign currency translation
adjustment in Other Comprehensive Income.
The Company enters into foreign currency forward contracts to reduce
volatility in the translation of foreign currency earnings to U.S. dollars.
Gains and losses on these instruments are recorded in selling, general and
administrative expense, generally reducing the exposure to translation
volatility during a full-year period.
Our net balance sheet exposure consists of the net investment in foreign
operations, translated using the exchange rates in effect at the balance sheet
date. The components of our net balance sheet exposure by geographic region are
as follows:
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
Europe...................................................... $363 $181
North/South America......................................... 248 37
Asia/Other.................................................. 101 16
---- ----
Net Balance Sheet Exposure................................ $712 $234
==== ====
</Table>
Interest Rate Risk -- The Company currently uses interest rate swaps to
reduce funding costs associated with certain debt issues and to achieve a
desired proportion of variable vs. fixed-rate debt, based on current and
projected market conditions.
Fixed-to-variable interest rate swaps are accounted for as fair value
hedges with effectiveness assessed based on changes in the fair value of the
underlying debt, using incremental borrowing rates currently available on loans
with similar terms and maturities. Effective gains and losses on these
derivatives and the underlying hedged items are recorded as interest expense.
43
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the types of swaps used to hedge various
assets and liabilities, and their weighted average interest rates. Average
variable rates are based on rates as of the end of the reporting period. The
swap contracts mature during time periods ranging from 2003 to 2014.
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
------------------ ------------------
ASSET LIABILITY ASSET LIABILITY
----- --------- ----- ---------
(IN MILLIONS)
Pay floating swaps -- notional amount.............. -- $2,692 -- $ 340
Average receive rate............................. -- 5.4% -- 7.1%
Average pay rate................................. -- 1.8% -- 4.0%
Pay fixed swaps -- notional amount................. -- $6,814 -- $5,766
Average receive rate............................. -- 1.8% -- 4.1%
Average pay rate................................. -- 6.4% -- 6.6%
==== ====== ==== ======
</Table>
The interest rate differential on interest rate swaps used to hedge
existing assets and liabilities is recognized as an adjustment of interest
expense or income over the term of the agreement.
8. DEBT
Notes Payable -- The components of notes payable and their respective
weighted average interest rates at the end of the periods are as follows:
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOTES INTEREST NOTES INTEREST
PAYABLE RATE PAYABLE RATE
------- -------- ------- --------
(IN MILLIONS)
U.S. commercial paper.......................... $ 3,288 2.1% $ 733 4.4%
Canadian commercial paper...................... 34 2.3 27 4.6
Euro commercial paper.......................... 809 2.2 768 4.9
Financial institutions......................... 519 2.1 330 4.4
Amounts reclassified to long-term debt......... (1,050) -- (1,000) --
------- --- ------- ---
Total Notes Payable.......................... $ 3,600 $ 858
======= === ======= ===
</Table>
See Note Seven for a description of related interest-rate derivative
instruments.
To ensure availability of funds, we maintain bank credit lines sufficient
to cover our outstanding short-term borrowings. As of May 26, 2002, we had $4.0
billion in committed lines and $45 million in uncommitted lines.
We have revolving credit agreements expiring in January 2006 covering the
fee-paid credit lines that provide us with the ability to refinance short-term
borrowings on a long-term basis; accordingly, a portion of our notes payable has
been reclassified to long-term debt. The revolving credit agreements provide for
borrowings of up to $1.05 billion.
Long-Term Debt -- During fiscal 2002, General Mills filed a Registration
Statement with the Securities and Exchange Commission covering the sale of up to
$8.0 billion in debt securities. In February 2002, we issued $3.5 billion of
notes: $2.0 billion of 6 percent notes due 2012 with an effective interest rate
of 7.75 percent; and $1.5 billion of 5 1/8 percent notes due 2007 with an
effective interest rate of 5.90 percent. Interest is payable semiannually on
February 15 and August 15, beginning August 15, 2002. Proceeds from the notes
were used to repay short-term debt incurred in connection with the Pillsbury
44
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition. Following the February offering, $4.5 billion remains available
under the Registration Statement for future use.
In anticipation of the Pillsbury acquisition and other financing needs, we
entered into interest rate swap contracts during fiscal 2001 and fiscal 2002
totaling $7.1 billion to attempt to lock in our interest rate on associated
debt. In September 2001, $100 million of these swaps expired. In connection with
the February notes offering, we closed out $3.5 billion of these swaps. The
notional amount of the swaps settled for cash totaled $1.1 billion and the net
cash payment was $13 million. The notional amount of the swaps that were
neutralized with offsetting swaps totaled $2.4 billion. These swaps had been
designated as cash flow hedges. Therefore, the mark-to-market value for these
swaps has been recorded in Other Comprehensive Income. The amount currently
recorded in Accumulated Other Comprehensive Income ($242 million pretax) will be
reclassified to interest expense over the lives of the swap contracts (primarily
five to 10 years). The remaining $3.5 billion of these interest rate swap
contracts continue to fix our interest rate on certain of our notes payable,
primarily our commercial paper program.
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
6% notes due 2012........................................... $2,000 $ --
5 1/8% notes due 2007....................................... 1,500 --
Medium-term notes, 4.8% to 9.1%, due 2003 to 2078........... 922 1,274
7.0% notes due Sept. 15, 2004............................... 150 157
Zero coupon notes, yield 11.1%, $261 due Aug. 15, 2013...... 78 70
Zero coupon notes, yield 11.7%, $54 due Aug. 15, 2004....... 42 38
8.2% ESOP loan guaranty, due through June 30, 2007.......... 21 30
Notes payable, reclassified................................. 1,050 1,000
Other....................................................... 76 1
------ ------
5,839 2,570
Less amounts due within one year............................ (248) (349)
------ ------
Total Long-term Debt...................................... $5,591 $2,221
====== ======
</Table>
See note seven for a description of related interest-rate derivative
instruments.
In 2001, we issued $284 million of debt under our medium-term note program
with maturities up to two years and interest rates varying from 7.0 to 7.4
percent.
The Company has guaranteed the debt of the Employee Stock Ownership Plan;
therefore, the loan is reflected on our consolidated balance sheets as long-term
debt with a related offset in Unearned Compensation in Stockholders' Equity.
The sinking fund and principal payments due on long-term debt are (in
millions) $248, $104, $225, $54 and $1,536 in 2003, 2004, 2005, 2006 and 2007,
respectively. The 2005 and 2006 amounts are exclusive of $12 million and $5
million, respectively, of interest yet to be accreted on zero coupon notes. The
notes payable that are reclassified under our revolving credit agreement are not
included in these principal payments.
Our marketable securities (see Note Five) include zero coupon U.S. Treasury
and other top-rated securities. These investments are intended to provide funds
for the payment of principal and interest for the zero coupon notes due Aug. 15,
2004, and Aug. 15, 2013.
45
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. MINORITY INTEREST
In April 2002, the Company and certain of its wholly owned subsidiaries
contributed assets with an aggregate fair market value of approximately $4
billion to another subsidiary (GMC), a limited liability company. GMC is a
separate and distinct legal entity from the Company and its subsidiaries, and
has separate assets, liabilities, businesses and operations. The contributed
assets consist primarily of manufacturing assets and intellectual property
associated with the production and retail sale of Big G ready-to-eat cereals,
Progresso soups and Old El Paso products. In exchange for the contribution of
these assets, GMC issued the managing membership interest and Class A and Class
B preferred membership interests to wholly owned subsidiaries of the Company.
The managing member directs the business activities and operations of GMC and
has fiduciary responsibilities to GMC and its members. Other than rights to vote
on certain matters, holders of the Class A and Class B interests have no right
to direct the management of GMC.
In May 2002, GMC sold approximately 30 percent of the Class A interests to
an unrelated third-party investor in exchange for $150 million. The Class A
interests receive quarterly preferred distributions at a floating rate equal to
the three-month LIBOR plus 90 basis points. The GMC limited liability company
agreement requires that the rate of the preferred distributions for the Class A
interests be reset by agreement between the third-party investors and GMC every
five years, beginning in May 2007. If GMC and the investors fail to mutually
agree on a new rate of preferred distributions, GMC must remarket the
securities. Upon a failed remarketing, the rate over LIBOR will be increased by
75 basis points (up to a maximum total of 300 basis points following a scheduled
reset date). In the event of four consecutive failed remarketings, the
third-party investors can force a liquidation and winding up of GMC.
GMC has a scheduled duration of 20 years. However, GMC, through the
managing member, may elect to redeem all of the Class A interests held by
third-party investors at any time for an amount equal to the investors' capital
accounts, plus an optional retirement premium if such retirement occurs prior to
June 2007. Under certain circumstances, GMC also may be dissolved and liquidated
earlier. Events requiring liquidation include, without limitation, the
bankruptcy of GMC or its subsidiaries, failure to deliver the preferred
quarterly return, failure to comply with portfolio requirements, breaches of
certain covenants, and four consecutive failed attempts to remarket the Class A
interests. In the event of a liquidation of GMC, the third-party investors that
hold the Class A interests would be entitled to repayment from the proceeds of
liquidation prior to the subsidiaries of the Company that are members of GMC.
The managing member may avoid liquidation in most circumstances by exercising an
option to purchase the preferred interests. An election to redeem the preferred
membership interests could impact the Company's liquidity by requiring the
Company to refinance the redemption price or liquidate a portion of GMC assets.
Currently, all of the Class B interests are held by a subsidiary of the
Company. The Company may offer the Class B interests and the remaining, unsold
Class A interests to third-party investors on terms and conditions to be
determined.
For financial reporting purposes, the assets, liabilities, results of
operations, and cash flows of GMC are included in the Company's consolidated
financial statements. The third-party investor's Class A interest in GMC is
reflected as a minority interest on the consolidated balance sheet of the
Company.
Subsequent to fiscal year end, General Mills Capital, Inc. (GM Capital), a
wholly owned subsidiary, sold $150 million of its Series A preferred stock to an
unrelated third-party investor. GM Capital regularly enters into transactions
with the Company to purchase receivables of the Company. These receivables are
included in the consolidated balance sheet and the $150 million purchase price
for the Series A preferred stock will be reflected as additional minority
interest on the balance sheet. The proceeds from the issuance of the preferred
stock were used to pay down commercial paper.
46
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKHOLDERS' EQUITY
Cumulative preference stock of 5 million shares, without par value, is
authorized but unissued.
We have a shareholder rights plan that entitles each outstanding share of
common stock to one right. Each right entitles the holder to purchase one
two-hundredths of a share of cumulative preference stock (or, in certain
circumstances, common stock or other securities), exercisable upon the
occurrence of certain events. The rights are not transferable apart from the
common stock until a person or group has acquired 20 percent or more, or makes a
tender offer for 20 percent or more, of the common stock. Then each right will
entitle the holder (other than the acquirer) to receive, upon exercise, common
stock of either the Company or the acquiring company having a market value equal
to two times the exercise price of the right. The initial exercise price is $120
per right. The rights are redeemable by the Board of Directors at any time prior
to the acquisition of 20 percent or more of the outstanding common stock. The
shareholder rights plan has been specifically amended so that the Pillsbury
transaction described in Note Two does not trigger the exercisability of the
rights. The rights expire on Feb. 1, 2006. At May 26, 2002, there were 367
million rights issued and outstanding.
The Board of Directors has authorized the repurchase, from time to time, of
common stock for our treasury, provided that the number of treasury shares shall
not exceed 170 million.
Through private transactions in fiscal 2002 and 2001 that were a part of
our stock repurchase program, we issued put options and purchased call options
related to our common stock. In 2002 and 2001, we issued put options for 7
million and 17 million shares for $17 million and $36 million in premiums paid
to the Company, respectively. As of May 26, 2002, put options for 10 million
shares remained outstanding at exercise prices ranging from $37.00 to $47.00 per
share with exercise dates from June 14, 2002, to May 20, 2003. In 2002 and 2001,
we purchased call options for 4 million and 8 million shares for $16 million and
$34 million in premiums paid by the Company, respectively. As of May 26, 2002,
call options for 9 million shares remained outstanding at exercise prices
ranging from $34.00 to $54.84 per share with exercise dates from June 17, 2002,
to Nov. 20, 2003.
47
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides details of Other Comprehensive Income:
<Table>
<Caption>
OTHER
TAX COMPRE-
PRETAX (EXPENSE) HENSIVE
CHANGE BENEFIT INCOME
------ --------- -------
(IN MILLIONS)
Fiscal year ended May 28, 2000
Foreign currency translation........................... $ (25) $ 3 $ (22)
Minimum pension liability.............................. 1 -- 1
Other fair value changes:
Securities.......................................... (13) 5 (8)
----- ---- -----
Other Comprehensive Income............................... $ (37) $ 8 $ (29)
===== ==== =====
Fiscal year ended May 27, 2001
Foreign currency translation........................... $ (8) $ 1 $ (7)
Minimum pension liability.............................. (8) 3 (5)
Other fair value changes:
Securities.......................................... 8 (3) 5
----- ---- -----
Other Comprehensive Income............................... $ (8) $ 1 $ (7)
===== ==== =====
Fiscal year ended May 26, 2002
Foreign currency translation........................... $ (4) $ -- $ (4)
Minimum pension liability.............................. 7 (3) 4
Other fair value changes:
Securities.......................................... (3) 1 (2)
Hedge derivatives................................... (343) 127 (216)
Reclassification to earnings:
Securities.......................................... (15) 6 (9)
Hedge derivatives................................... 163 (61) 102
Cumulative effect of adopting SFAS No. 133............. (251) 93 (158)
----- ---- -----
Other Comprehensive Income............................... $(446) $163 $(283)
===== ==== =====
</Table>
Except for reclassification to earnings, changes in Other Comprehensive
Income are primarily noncash items.
Accumulated Other Comprehensive Income balances were as follows:
<Table>
<Caption>
MAY 26, MAY 27,
2002 2001
------- -------
(IN MILLIONS)
Foreign currency translation adjustments.................... $(113) $(109)
Unrealized gain (loss) from:
Securities................................................ 16 27
Hedge derivatives......................................... (272) --
Pension plan minimum liability.............................. (7) (11)
----- -----
Accumulated Other Comprehensive Income...................... $(376) $ (93)
===== =====
</Table>
48
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK PLANS
The Company uses broad-based stock plans to help ensure alignment with
stockholders' interests. A total of 8,984,631 shares are available for grant
under the 1998 senior management plan through Oct. 1, 2005, the 1998 employee
plan (which has no specified duration) and the 2001 director plan through Sept.
30, 2006. Shares available for grant are reduced by shares issued, net of shares
surrendered to the Company in stock-for-stock exercises. Options may be priced
only at 100 percent of the fair market value at the date of grant. No options
now outstanding have been re-priced since the original date of grant. Options
now outstanding include some granted under the 1988, 1990, 1993 and 1995 option
plans, under which no further rights may be granted. All options expire within
10 years and one month after the date of grant. The stock plans provide for full
vesting of options upon completion of specified service periods, or in the event
there is a change of control.
Stock subject to a restricted period and a purchase price, if any (as
determined by the Compensation Committee of the Board of Directors), may be
granted to key employees under the 1998 employee plan. Restricted stock, up to
50 percent of the value of an individual's cash incentive award, may be granted
through the Executive Incentive Plan. Certain restricted stock awards require
the employee to deposit personally owned shares (on a one-for-one basis) with
the Company during the restricted period. The 2001 director plan allows each
nonemployee director to annually receive 1,000 restricted stock units
convertible to common stock at a date of the director's choosing following his
or her one-year term. In 2002, 2001 and 2000, grants of 691,115, 353,500 and
330,229 shares of restricted stock or units were made to employees and directors
with weighted average values at grant of $46.93, $37.61 and $38.49 per share,
respectively. On May 26, 2002, a total of 1,634,158 restricted shares and units
were outstanding under all plans.
The 1988 plan permitted the granting of performance units corresponding to
stock options granted. The value of performance units was determined by return
on equity and growth in earnings per share measured against preset goals over
three-year performance periods. For seven years after a performance period,
holders may elect to receive the value of performance units (with interest) as
an alternative to exercising corresponding stock options. On May 26, 2002, there
were 48,614 options outstanding with corresponding performance unit accounts.
The value of these options exceeded the value of the performance unit accounts.
We will not incur any additional compensation expense in connection with these
performance units.
49
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table contains information on stock option activity.
Approximately 33 percent of the options outstanding at May 26, 2002, were
granted under the Salary Replacement Option and Deposit Stock Option Plans, both
of which have been discontinued.
<Table>
<Caption>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE PER OPTIONS PRICE PER
EXERCISABLE SHARE OUTSTANDING SHARE
----------- --------- ----------- ---------
(THOUSANDS) (THOUSANDS)
Balance at May 30, 1999................... 24,232 $25.05 53,076 $28.17
Granted................................. 11,445 37.49
Exercised............................... (5,679) 21.82
Expired................................. (552) 33.42
------ ------ ------ ------
Balance at May 28, 2000................... 25,412 26.40 58,290 30.57
Granted................................. 11,600 38.07
Exercised............................... (5,651) 24.60
Expired................................. (741) 35.98
------ ------ ------ ------
Balance at May 27, 2001................... 27,724 27.79 63,498 32.40
Granted................................. 14,567 48.17
Exercised............................... (6,569) 27.64
Expired................................. (421) 39.44
------ ------ ------ ------
Balance at May 26, 2002................... 30,149 $29.18 71,075 $36.03
====== ====== ====== ======
</Table>
The following table provides information regarding options exercisable and
outstanding as of May 26, 2002:
<Table>
<Caption>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE REMAINING
OPTIONS PRICE PER OPTIONS PRICE PER CONTRACTUAL
RANGE OF EXERCISE PRICE PER SHARE EXERCISABLE SHARE OUTSTANDING SHARE LIFE
- --------------------------------- ----------- --------- ----------- --------- -----------
(THOUSANDS) (THOUSANDS) (YEARS)
Under $25....................... 4,976 $22.61 4,982 $22.61 2.26
$25-$30......................... 12,392 26.46 12,401 26.47 2.53
$30-$35......................... 9,822 32.24 19,836 33.28 6.65
$35-$40......................... 173 36.96 8,464 37.43 6.25
Over $40........................ 2,786 41.77 25,392 45.02 8.91
------ ------ ------ ------ ----
30,149 $29.18 71,075 $36.03 6.38
====== ====== ====== ====== ====
</Table>
Stock-based compensation expense related to restricted stock for 2002, 2001
and 2000 was $16 million, $11 million and $9 million, respectively, using the
intrinsic value-based method of accounting for stock-based compensation plans.
Effective with 1997, we adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 allows either a fair
value-based method or an intrinsic value-based method of accounting for such
compensation plans. Had compensation expense for our stock option plan grants
been determined using the fair value-based method, net earnings, basic earnings
per share and diluted earnings per share would have been approximately $384
million, $1.16 and $1.13, respectively, for 2002; $621 million, $2.19 and $2.15,
respectively, for 2001; and, $575 million, $1.92 and $1.89, respectively, for
2000. The weighted average fair values at grant date of the options
50
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted in 2002, 2001 and 2000 were estimated as $11.77, $8.78 and $8.89,
respectively, using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
Risk-free interest rate.................................. 5.1% 5.6% 6.3%
Expected life............................................ 7 years 7 years 7 years
Expected volatility...................................... 20% 20% 18%
Expected dividend growth rate............................ 8% 8% 8%
</Table>
The Black-Scholes model requires the input of highly subjective assumptions
and may not provide a reliable measure of fair value.
12. EARNINGS PER SHARE
Basic and diluted earnings per share (EPS) were calculated using the
following:
<Table>
<Caption>
FISCAL YEAR
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Net earnings................................................ $458 $665 $614
---- ---- ----
Average number of common shares -- basic EPS................ 331 284 299
---- ---- ----
Incremental share effect from:
Stock options............................................. 11 8 8
Restricted stock, stock rights and puts................... -- -- --
---- ---- ----
Average number of common shares -- diluted EPS.............. 342 292 307
==== ==== ====
</Table>
The diluted EPS calculation does not include 4 million, 8 million and 9
million average anti-dilutive stock options, nor does it include 13 million, 15
million and 8 million average anti-dilutive put options in 2002, 2001 and 2000,
respectively.
13. INTEREST EXPENSE
The components of net interest expense are as follows:
<Table>
<Caption>
FISCAL YEAR
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Interest expense............................................ $445 $223 $168
Capitalized interest........................................ (3) (2) (2)
Interest income............................................. (26) (15) (14)
---- ---- ----
Interest, net............................................. $416 $206 $152
==== ==== ====
</Table>
During 2002, 2001 and 2000, we paid interest (net of amount capitalized) of
$346 million, $215 million and $167 million, respectively.
14. RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
We have defined-benefit retirement plans covering most employees. Benefits
for salaried employees are based on length of service and final average
compensation. The hourly plans include various monthly amounts for each year of
credited service. Our funding policy is consistent with the requirements of
federal
51
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
law. Our principal retirement plan covering salaried employees has a provision
that any excess pension assets would vest in plan participants if the plan is
terminated within five years of a change in control.
We sponsor plans that provide health-care benefits to the majority of our
retirees. The salaried health-care benefit plan is contributory, with retiree
contributions based on years of service. We fund related trusts for certain
employees and retirees on an annual basis.
Trust assets related to the above plans consist principally of listed
equity securities, corporate obligations and U.S. government securities.
52
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation of the funded status of the plans and the amounts included
in the balance sheet are as follows:
<Table>
<Caption>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------- --------------
2002 2001 2002 2001
------ ------ ------ -----
(IN MILLIONS)
Fair Value of Plan Assets
Beginning fair value............................... $1,606 $1,578 $ 237 $230
Actual return on assets............................ (2) 83 (10) (2)
Acquisition........................................ 1,167 -- -- --
Company contributions.............................. 7 11 29 28
Plan participant contributions..................... -- -- 5 2
Benefits paid from plan assets..................... (107) (66) (28) (21)
------ ------ ----- ----
Ending Fair Value.................................... $2,671 $1,606 $ 233 $237
====== ====== ===== ====
Projected Benefit Obligation
Beginning obligations.............................. $1,077 $ 958 $ 286 $231
Service cost....................................... 34 18 11 6
Interest cost...................................... 122 79 33 21
Plan amendment..................................... 21 1 (13) --
Curtailment........................................ 5 -- 2 --
Plan participant contributions..................... -- -- 5 2
Actuarial loss (gain).............................. (15) 87 72 42
Acquisition........................................ 963 -- 248 --
Actual benefits paid............................... (107) (66) (33) (16)
------ ------ ----- ----
Ending Obligations................................... $2,100 $1,077 $ 611 $286
====== ====== ===== ====
Funded Status of Plans............................... $ 571 $ 529 $(378) $(49)
------ ------ ----- ----
Unrecognized actuarial loss........................ 334 106 154 59
Unrecognized prior service costs (credits)......... 49 36 (17) (5)
Unrecognized transition asset...................... (3) (18) -- --
------ ------ ----- ----
Net Amount Recognized................................ $ 951 $ 653 $(241) $ 5
====== ====== ===== ====
Amounts Recognized on Balance Sheets
Prepaid asset...................................... $1,001 $ 677 $ 82 $ 75
Accrued liability.................................. (62) (44) (323) (70)
Intangible asset................................... -- 1 -- --
Minimum liability adjustment in equity............. 12 19
------ ------ ----- ----
Net Amount Recognized................................ $ 951 $ 653 $(241) $ 5
====== ====== ===== ====
</Table>
53
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plans with obligations in excess of plan assets:
<Table>
<Caption>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
-------------- ---------------
2002 2001 2002 2001
----- ----- ------ ------
(IN MILLIONS)
Accumulated benefit obligation........................... $71 $44 $466 $166
Plan assets at fair value................................ 9 -- 45 41
</Table>
Assumptions as of year-end are:
<Table>
<Caption>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
------------- ---------------
2002 2001 2002 2001
----- ----- ------ ------
Discount rate.............................................. 7.50% 7.75% 7.50% 7.75%
Rate of return on plan assets.............................. 10.4 10.4 10.0 10.0
Salary increases........................................... 4.4 4.4 -- --
Annual increase in cost of benefits........................ -- -- 8.3 6.6
</Table>
The annual increase in cost of postretirement benefits is assumed to
decrease gradually in future years, reaching an ultimate rate of 5.2 percent in
the year 2007.
Components of net benefit (income) or expense each year are as follows:
<Table>
<Caption>
POSTRETIREMENT
PENSION PLANS BENEFIT PLANS
--------------------- ------------------
2002 2001 2000 2002 2001 2000
----- ----- ----- ---- ---- ----
(IN MILLIONS)
Service cost............................ $ 34 $ 18 $ 20 $11 $ 6 $ 6
Interest cost........................... 122 79 69 33 21 17
Expected return on plan assets.......... (241) (159) (142) (23) (23) (22)
Amortization of transition asset........ (15) (15) (14) -- -- --
Amortization of (gains) losses.......... 2 2 1 3 1 1
Amortization of prior service costs
(credits)............................. 8 6 6 (1) (2) (2)
Settlement or curtailment losses........ 5 -- -- 2 -- --
----- ----- ----- --- ---- ----
Net (income) expense.................. $ (85) $ (69) $ (60) $25 $ 3 $ --
===== ===== ===== === ==== ====
</Table>
Assumed trend rates for health-care costs have an important effect on the
amounts reported for the postretirement benefit plans. If the health-care cost
trend rate increased by 1 percentage point in each future year, the aggregate of
the service and interest cost components of postretirement expense would
increase for 2002 by $5 million, and the postretirement accumulated benefit
obligation as of May 26, 2002, would increase by $51 million. If the health-care
cost trend rate decreased by 1 percentage point in each future year, the
aggregate of the service and interest cost components of postretirement expense
would decrease for 2002 by $4 million, and the postretirement accumulated
benefit obligation as of May 26, 2002, would decrease by $44 million.
The General Mills Savings Plan is a defined contribution plan that covers
our salaried and nonunion employees. It had net assets of $1,666 million at May
26, 2002, and $1,071 million at May 27, 2001. This plan is a 401(k) savings plan
that includes a number of investment funds and an Employee Stock Ownership Plan
(ESOP). The ESOP's only assets are Company common stock and temporary cash
balances. Company expense recognized in 2002, 2001 and 2000 was $9 million, $8
million and $8 million,
54
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The ESOP's share of this expense was $3 million, $7 million and $7
million, respectively. The ESOP's expense is calculated by the "shares
allocated" method.
The ESOP uses Company common stock to convey benefits to employees and,
through increased stock ownership, to further align employee interests with
those of shareholders. The Company matches a percentage of employee
contributions to the ESOP with a base match plus a variable year-end match that
depends on annual results. Employees receive the Company match in the form of
common stock.
The ESOP originally purchased Company common stock principally with funds
borrowed from third parties (and guaranteed by the Company). The ESOP shares are
included in net shares outstanding for the purposes of calculating earnings per
share. The ESOP's third-party debt is described in Note Eight.
The Company treats cash dividends paid to the ESOP the same as other
dividends. Dividends received on leveraged shares (i.e., all shares originally
purchased with the debt proceeds) are used for debt service, while dividends
received on unleveraged shares are passed through to participants.
The Company's cash contribution to the ESOP is calculated so as to pay off
enough debt to release sufficient shares to make the Company match. The ESOP
uses the Company's cash contributions to the plan, plus the dividends received
on the ESOP's leveraged shares, to make principal and interest payments on the
ESOP's debt. As loan payments are made, shares become unencumbered by debt and
are committed to be allocated. The ESOP allocates shares to individual employee
accounts on the basis of the match of employee payroll savings (contributions),
plus reinvested dividends received on previously allocated shares. In 2002, 2001
and 2000, the ESOP incurred interest expense of $2 million, $3 million and $4
million, respectively. The ESOP used dividends of $8 million, $7 million and $9
million, along with Company contributions of $3 million, $6 million and $6
million to make interest and principal payments in the respective years.
The number of shares of Company common stock in the ESOP is summarized as
follows:
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
--------------- ---------------
(NUMBER OF SHARES, IN
THOUSANDS)
Unreleased shares........................................... 1,170 1,652
Committed to be allocated................................... 15 24
Allocated to participants................................... 5,500 5,680
----- -----
Total shares.............................................. 6,685 7,356
===== =====
</Table>
15. PROFIT-SHARING PLAN
The Executive Incentive Plan provides incentives to key employees who have
the greatest potential to contribute to current earnings and successful future
operations. All employees at the level of vice president and above participate
in the plan. These awards are approved by the Compensation Committee of the
Board of Directors, which consists solely of independent, outside directors.
Awards are based on performance against pre-established goals approved by the
Committee. Profit-sharing expense was $11 million, $12 million and $10 million
in 2002, 2001 and 2000, respectively.
55
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. INCOME TAXES
The components of earnings before income taxes and earnings of joint
ventures and the corresponding income taxes thereon are as follows:
<Table>
<Caption>
FISCAL YEAR
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Earnings before income taxes:
U.S. ..................................................... $653 $991 $919
Foreign................................................... 14 7 28
---- ---- ----
Total earnings before income taxes................... $667 $998 $947
---- ---- ----
Income taxes:
Current:
Federal................................................ $127 $283 $280
State and local........................................ 8 20 14
Foreign................................................ 11 (2) (2)
---- ---- ----
Total current........................................ 146 301 292
---- ---- ----
Deferred:
Federal................................................ 84 42 44
State and local........................................ 15 5 (5)
Foreign................................................ (6) 2 5
---- ---- ----
Total deferred....................................... 93 49 44
---- ---- ----
Total Income Taxes................................ $239 $350 $336
==== ==== ====
</Table>
During 2002, 2001 and 2000, we paid income taxes of $196 million, $231
million and $284 million, respectively.
In fiscal 1982 and 1983 we purchased certain income tax items from other
companies through tax lease transactions. Total current income taxes charged to
earnings reflect the amounts attributable to operations and have not been
materially affected by these tax leases. Actual current taxes payable relating
to 2002, 2001 and 2000 operations were increased by approximately $3 million,
$16 million and $22 million, respectively, due to the current effect of tax
leases. These tax payments do not affect taxes for statement of earnings
purposes since they repay tax benefits realized in prior years. The repayment
liability is classified as Deferred Income Taxes -- Tax Leases.
The following table reconciles the U.S. statutory income tax rate with the
effective income tax rate:
<Table>
<Caption>
FISCAL YEAR
------------------
2002 2001 2000
---- ---- ----
U.S. statutory rate......................................... 35.0% 35.0% 35.0%
---- ---- ----
State and local income taxes, net of federal tax benefits... 2.3 1.6 1.3
Other, net.................................................. (1.5) (1.6) (.8)
---- ---- ----
Effective Income Tax Rate................................. 35.8% 35.0% 35.5%
==== ==== ====
</Table>
56
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<Table>
<Caption>
MAY 26, 2002 MAY 27, 2001
--------------- ---------------
(IN MILLIONS)
Accrued liabilities......................................... $106 $ 65
Unusual charges............................................. 104 9
Compensation and employee benefits.......................... 111 73
Unrealized hedge losses..................................... 163 --
Tax credit carryforwards.................................... 51 8
Other....................................................... 23 14
---- ----
Gross deferred tax assets................................. 558 169
---- ----
Depreciation................................................ 281 134
Prepaid pension asset....................................... 289 255
Intangible assets........................................... 22 10
Other....................................................... 51 54
---- ----
Gross deferred tax liabilities............................ 643 453
---- ----
Valuation allowance......................................... 10 3
---- ----
Net Deferred Tax Liability................................ $ 95 $287
==== ====
</Table>
We have not recognized a deferred tax liability for unremitted earnings of
$87 million from our foreign operations because we do not expect those earnings
to become taxable to us in the foreseeable future and because a determination of
the potential liability is not practicable. If a portion were to be remitted, we
believe income tax credits would substantially offset any resulting tax
liability.
17. LEASES AND OTHER COMMITMENTS
An analysis of rent expense by property leased follows:
<Table>
<Caption>
FISCAL YEAR
------------------
2002 2001 2000
---- ---- ----
(IN MILLIONS)
Warehouse space............................................. $26 $25 $24
Equipment................................................... 23 11 8
Other....................................................... 19 7 7
--- --- ---
Total Rent Expense........................................ $68 $43 $39
=== === ===
</Table>
Some leases require payment of property taxes, insurance and maintenance
costs in addition to the rent payments. Contingent and escalation rent in excess
of minimum rent payments and sublease income netted in rent expense were
insignificant.
Noncancelable future lease commitments (in millions) are: $59 in 2003, $44
in 2004, $35 in 2005, $31 in 2006, $22 in 2007 and $96 after 2007, with a
cumulative total of $287. These future lease commitments will be partially
offset by future sublease receipts of $46 million.
We are contingently liable under guaranties and comfort letters for $212
million. The guaranties and comfort letters are principally issued to support
borrowing arrangements, primarily for our joint ventures.
57
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We remain the guarantor on certain leases and other obligations of Darden
Restaurants, Inc. (Darden), an entity we spun off as of May 28, 1995. However,
Darden has indemnified us against any related loss.
The Company is involved in various claims, including environmental matters,
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters, either individually or in aggregate, will
not have a material adverse effect on the Company's financial position or
results of operations.
18. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
We operate exclusively in the consumer foods industry, with multiple
operating segments organized generally by product categories.
Following the acquisition of Pillsbury, we restructured our management
organization. Consistent with our new organization and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," we have
aggregated our operating segments into three reportable segments: 1) U.S.
Retail; 2) Bakeries and Foodservice; and 3) International. U.S. Retail consists
of cereals, meals, refrigerated and frozen dough products, baking products,
snacks, yogurt and other. Our Bakeries and Foodservice segment consists of
products marketed to bakeries and offered to the commercial and noncommercial
foodservice sectors throughout the United States and Canada. The International
segment includes our retail business outside the United States and our
foodservice business outside of the United States and Canada.
During 2002, there was one individual customer that generated 12 percent of
our net sales. There were no individual customers that generated more than 10
percent of our net sales during 2001 and 2000.
Management reviews operating results to evaluate segment performance.
Operating profit for the reportable segments excludes general corporate items
and restructuring and other exit costs. Interest expense and income taxes are
centrally managed at the corporate level and, therefore, are not allocated to
segments since they are excluded from the measure of segment profitability
reviewed by the Company's management. Under our supply chain organization, our
manufacturing, warehouse, distribution and sales activities are substantially
integrated across our operations in order to maximize efficiency and
productivity. As a result, fixed assets, capital expenditures for long-lived
assets, and depreciation and amortization expenses are not maintained nor
available by operating segment.
58
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The measurement of operating segment results is generally consistent with
the presentation of the consolidated statements of earnings. Intercompany
transactions between reportable operating segments were not material in the
periods presented.
<Table>
<Caption>
FISCAL YEAR
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Net Sales:
U.S. Retail.............................................. $6,143 $4,790 $4,560
Bakeries and Foodservice................................. 1,028 397 355
International............................................ 778 263 258
------ ------ ------
Total................................................. $7,949 $5,450 $5,173
====== ====== ======
Operating Profit
U.S. Retail.............................................. $1,066 $1,057 $1,013
Bakeries and Foodservice................................. 146 91 81
International............................................ 45 17 18
------ ------ ------
Total................................................. 1,257 1,165 1,112
Unallocated corporate income (expense)................... (40) 51 (13)
Restructuring and other exit costs....................... (134) (12) --
Interest, net............................................ (416) (206) (152)
------ ------ ------
Earnings before taxes and earnings from Joint
Ventures............................................ 667 998 947
Income Taxes............................................... 239 350 336
Earnings from Joint Ventures............................... 33 17 3
------ ------ ------
Earnings before cumulative effect of change in accounting
principle................................................ 461 665 614
Cumulative effect of change in accounting principle........ (3) -- --
------ ------ ------
Net Earnings............................................... $ 458 $ 665 $ 614
====== ====== ======
</Table>
59
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides net sales information for our primary product
categories:
<Table>
<Caption>
FISCAL YEAR
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Product Categories:
U.S. Retail:
Big G Cereals......................................... $1,866 $1,963 $1,986
Meals................................................. 1,161 580 555
Pillsbury USA......................................... 793 -- --
Baking Products....................................... 786 824 804
Snacks................................................ 722 711 630
Yogurt/Health Ventures/Other.......................... 815 712 585
------ ------ ------
Total U.S. Retail................................... 6,143 4,790 4,560
------ ------ ------
Bakeries and Foodservice................................. 1,028 397 355
------ ------ ------
International:
Canada................................................ 283 177 178
Rest of World......................................... 495 86 80
------ ------ ------
Total International................................. 778 263 258
------ ------ ------
Consolidated Total............................... $7,949 $5,450 $5,173
====== ====== ======
</Table>
The following table provides earnings information for our joint venture
activities by operating segment:
<Table>
<Caption>
FISCAL YEAR
-------------------
2002 2001 2000
---- ---- -----
(IN MILLIONS)
Earnings (Loss) After Tax:
U.S. Retail............................................... $(6) $-- $ --
International............................................. 39 17 3
--- --- -----
Total.................................................. $33 $17 $ 3
=== === =====
</Table>
The following table provides financial information by geographic area:
<Table>
<Caption>
FISCAL YEAR
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Net sales:
U.S. .................................................... $7,139 $5,187 $4,915
Non-U.S. ................................................ 810 263 258
------ ------ ------
Consolidated Total.................................... $7,949 $5,450 $5,173
====== ====== ======
Long-lived assets:
U.S. .................................................... $2,549 $1,488 $1,395
Non-U.S. ................................................ 215 13 10
------ ------ ------
Consolidated Total.................................... $2,764 $1,501 $1,405
====== ====== ======
</Table>
60
GENERAL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY DATA (UNAUDITED)
Summarized quarterly data for 2002 and 2001 follows:
<Table>
<Caption>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
--------------- --------------- --------------- ---------------
2002 2001 2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AND MARKET PRICE AMOUNTS)
Net sales.......................... $1,404 $1,306 $1,842 $1,500 $2,379 $1,323 $2,324 $1,321
Gross profit....................... 680 653 802 747 881 615 815 594
Earnings before cumulative effect
of change in accounting
principle........................ 191 159 131 203 82 157 57 146
Net earnings....................... 188 159 131 203 82 157 57 146
Earnings per share before
cumulative effect of change in
accounting principle:
Basic............................ .67 .56 .43 .72 .23 .55 .16 .51
Diluted.......................... .65 .55 .41 .70 .22 .54 .15 .50
Net earnings per share:
Basic............................ .66 .56 .43 .72 .23 .55 .16 .51
Diluted.......................... .64 .55 .41 .70 .22 .54 .15 .50
Dividends per share................ .275 .275 .275 .275 .275 .275 .275 .275
Market price of common stock:
High............................. 45.36 41.75 51.16 43.44 52.86 45.40 50.39 46.35
Low.............................. 42.05 32.13 42.50 31.38 43.22 38.75 41.61 37.26
</Table>
61