MIDYEAR REPORT 2003 BUILDING OUR BRANDS SEE PAGE 1 DEAR SHAREHOLDERS: General Mills reported strong results for flexibility. As a result, we have increased the second quarter of fiscal 2003, our fiscal 2003 earnings target to a range providing the clearest signal yet of the of $2.60 to $2.62 per share before unusual power of combining Pillsbury and items. This goal represents strong General Mills. Net sales in the quarter recovery from last year’s $1.70 earnings grew 60 percent, per share before unusual items. For more reflecting a full detailed financial results, turn to pages 4 13-week through 8 of this report. contribution At its December meeting, your board of from the directors elected a new member. Hilda Pillsbury Ochoa-Brillembourg, CFA, is president and businesses chief executive officer of Strategic compared to just Investment Group (SIG) and managing three weeks included in last year’s second director, Emerging Markets Investment quarter. Earnings per share increased Corporation and Emerging Markets 22 percent to 77 cents before unusual Management. With the addition of Ochoa- items. Including unusual items, which Brillembourg, the General Mills board will primarily reflect expenses associated have 14 members, three of whom are with the Pillsbury acquisition, earnings officers of the company. The board also per share totaled 73 cents, a 78 percent declared a quarterly dividend at the increase. Through the first half of fiscal prevailing rate of $.275 per share, payable 2003, our earnings per share before Feb. 3, 2003, to shareholders of record on unusual items were up 7 percent to $1.33. Jan. 10, 2003. General Mills has now paid Strong unit volume performance is uninterrupted dividends without reduction driving our growth. On a comparable basis, for 104 years. as if we had owned Pillsbury for all of last Our increasing momentum reflects the year, unit volume for our U.S. Retail efforts of our 28,000 employees around businesses was up 3 percent for the half. the globe. Their talent and commitment Bakeries and Foodservice volume was up make General Mills a great company. 1 percent, outpacing the broader foodservice industry. And international Sincerely, volumes were up 2 percent, including continued growth by our joint ventures. In addition to delivering solid operating performance through the first half, we also successfully refinanced much of the short- STEPHEN W. SANGER term debt added with the Pillsbury Chairman of the Board and transaction. We did so at favorable rates, Chief Executive Officer which has given us added financial January 8, 2003 This report to shareholders contains forward-looking statements based on management’s current views and assumptions. Actual events may differ. Please refer to our 2002 Form 10-K for further discussion of these matters. GETTING GROWTH WHAT’S THE REAL KEY to keeping General Mills’ expanded portfolio of leading brands healthy? “Listening to the con- sumer is what it’s all about,” says Natalia Franco, marketing director in the Pillsbury USA division. “We’ve grown the Pillsbury brand by creating new products con- sumers want and by improv- ing our existing product lines.” Most recently, Franco worked with Vivian Milroy Callaway, director of Consumer Insights, to make a better ready-to-bake chocolate chip cookie. “Consumers like to see Natalia Franco (left) and Vivian Milroy Callaway Pillsbury USA the chips in their cook- ies,” Callaway says, “so we worked closely with manufacturing to put the chips on top of the dough. This might seem like a small change, but we made a significant capital investment to do it, and it is reaping big benefits.” We made this improvement to our Ready To Bake! cookies and to several flavors of Big Deluxe Classics, a line of larger- sized, ready-to-bake cookies. Since making the change, sales for these cookies have increased 50 percent. And the Pillsbury brand has captured the No. 1 dollar share 1 position in the ready-to-bake cookie segment, where retail sales have grown 20 percent this fiscal year. Product improvements are driving sales growth for Progresso soup, too. Research and Development Manager Erica Flynn and her team are focusing on improving existing fla- vors to suit changing tastes. “Consumers like the quality and convenience of our ready- to-serve soup. But we’re working to make them even better,” Flynn explains. “We’ve made our New England Clam Chowder and our Beef and Vegetable soup thicker with a more robust taste. In testing, consumers told us they prefer these improved soups over the leading condensed soup.” We’ve also added several new flavors to the line, includ- ing Grilled Steak and Grilled Chicken Italiano. These new flavors, along with product improvements, are driving 5 percent sales growth for the entire Progresso line so far this fiscal year. In addition to improving existing product lines, we also build our brands by introducing entirely new products. For example, Yoplait recently introduced several new yogurt lines with much success. Yoplait Whips!, a line of mousse-like yogurts, was rolled out last January, and it was so popular that supply couldn’t keep up with demand. Last fall, we installed additional production lines, so now there is enough Whips! yogurt to go around. Watch for new Blueberry Mist and Strawberry Banana Bliss flavors coming to stores in March. Yoplait Nouriche yogurt smoothies offer the nourish- ment of a meal in a bottle. This yogurt drink contains Erica Flynn 20 vitamins and minerals, plus protein and fiber, and Research & Development 2 has been well received by con- sumers in West Coast markets. Nouriche will be available nationally in March. Berry Burst Cheerios cereal is our latest addi- tion to the popular Cheerios line. This new cereal is available in two flavors featuring real strawberries, blueberries and raspberries. “Food retailers look to General Mills for innovative, new products Ellen Siebenborn-Forsyth and Pat Brennan Consumer Foods Sales and like it when we intro- duce a new version of a popular brand,” says Pat Brennan, director, National Retail Organization, Consumer Foods Sales. “Berry Burst Cheerios has been well received nationally by our accounts, and our retail sales representatives are working hard to secure great merchandising in stores across the country.” Ellen Siebenborn-Forsyth manages the Midwest region of the company’s National Retail Organization and says, “Whenever we introduce a new product or a new flavor, our retail sales reps are the ones that make sure it is displayed on your grocer’s shelves.” We know that good in-store merchandising can drive sales growth, so we have doubled the size of our organization to include 450 retail sales representatives. “We’ve introduced over 80 new products in the first half of this fiscal year, and we’ve got more coming in the second half,“ says Siebenborn-Forsyth, “so we’re going to be busy.” 3 CONSOLIDATED STATEMENTS OF EARNINGS Unaudited 13 Weeks Ended 26 Weeks Ended In Millions, Except Per Share Data Nov. 24, 2002 Nov. 25, 2001 Nov. 24, 2002 Nov. 25, 2001 Net Sales $ 2,953 $ 1,842 $ 5,315 $ 3,246 Costs and Expenses: Cost of sales 1,768 1,040 3,154 1,761 Selling, general and administrative 623 415 1,156 787 Interest, net 140 69 282 118 Unusual items 21 109 76 94 Total Costs and Expenses 2,552 1,633 4,668 2,760 Earnings before Taxes and Earnings from Joint Ventures 401 209 647 486 Income Taxes 139 81 226 176 Earnings from Joint Ventures 14 3 31 12 Earnings before Cumulative Effect of Change in Accounting Principle 276 131 452 322 Cumulative Effect of Change in Accounting Principle - - - (3) Net Earnings $ 276 $ 131 $ 452 $ 319 Earnings per Share - Basic Earnings before cumulative effect of change in accounting principle .75 .43 1.23 1.09 Cumulative effect of change in accounting principle - - - (.01) Earnings per Share - Basic $ .75 $ .43 $ 1.23 $ 1.08 Average Number of Common Shares 368 307 368 296 Earnings per Share - Diluted Earnings before cumulative effect of change in accounting principle .73 .41 1.20 1.05 Cumulative effect of change in accounting principle - - - (.01) Earnings per Share - Diluted $ .73 $ .41 $ 1.20 $ 1.04 Average Number of Common Shares - Assuming Dilution 377 318 376 307 Dividends per Share $ .275 $ .275 $ .55 $ .55 OPERATING SEGMENTS Unaudited 13 Weeks Ended 26 Weeks Ended In Millions Nov. 24, 2002 Nov. 25, 2001 Nov. 24, 2002 Nov. 25, 2001 Net Sales: U.S. Retail $ 2,145 $ 1,512 $ 3,755 $ 2,692 Bakeries and Foodservice 483 240 921 395 International 325 90 639 159 To tal 2,953 1,842 5,315 3,246 Operating Profit Before Unusual Items: U.S. Retail $ 494 $ 356 $ 855 $ 653 Bakeries and Foodservice 51 38 104 64 International 21 6 43 9 Unallocated Corporate Items (4) (13) 3 (28) To tal 562 387 1,005 698 Operating Profit Including Unusual Items: U.S. Retail $ 497 $ 272 $ 850 $ 589 Bakeries and Foodservice 50 38 70 64 International 21 6 43 9 Unallocated Corporate Items (27) (38) (34) (58) 4 To tal $ 541 $ 278 $ 929 $ 604 CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (Unaudited) In Millions Nov. 24, 2002 Nov. 25, 2001 May 26, 2002 ASSETS Current Assets: Cash and cash equivalents $ 1,747 $ 853 $ 975 Receivables 1,236 1,219 1,010 Inventories: Valued primarily at FIFO 419 423 335 Valued at LIFO (FIFO value exceeds LIFO by $31, $30 and $31, respectively) 861 656 720 Prepaid expenses and other current assets 155 223 156 Deferred income taxes 264 62 241 Assets held for sale - 641 - Total Current Assets 4,682 4,077 3,437 Land, Buildings and Equipment, at Cost 4,590 4,581 4,618 Less accumulated depreciation (1,867)