single-event benefits. We expect an ongoing rate for 2004 of approximately 35%. 2002 and 2003 and lower short-term market rates of interest. Since the acquisition of Keebler in early 2001, our Company has paid down over $1.6 billion of debt, even early-retiring $172.9 million of long-term debt in December 2003. The early retirement premium of $16.5 million, which primarily represents accelerated interest, is included in 2003 interest expense. Our principal source of liquidity is operating cash flow resulting from net earnings, supplemented by borrowings for major ac- quisitions and other significant transactions. This cash-generat- ing capability is one of our fundamental strengths and provides us with substantial financial flexibility in meeting operating and investing needs. Our measure of cash flow is defined as net cash provided by operat- ing activities reduced by expenditures for property additions. We use this measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases. Our cash flow met- ric is reconciled to GAAP-basis operating cash flow as follows: Liquidity and capital resources We currently expect total-year 2004 interest expense to be re- duced to approximately $320 million, as we continue to pay down our debt balances. Other income (expense), net includes non-operating items such as interest income, foreign exchange gains and losses, charitable do- nations, and gains on asset sales. Other income (expense), net for 2003 includes a credit of approximately $17 million related to fa- vorable legal settlements; a charge of $8 million for a contribution to the Kellogg’s Corporate Citizenship Fund, a private trust estab- lished for charitable giving; and a charge of $6.5 million to recog- nize the impairment of a cost-basis investment in an e-commerce business venture. Other income (expense), net for 2002 consists primarily of a $24.7 million credit related to legal settlements, of which $16.5 million was received in the first quarter with the re- mainder received throughout subsequent quarters. As a result of stronger than expected cash flow in both 2003 and 2002, we made voluntary contributions to several of our major pension and retiree health care plans. The after-tax impact of these contributions reduced cash flow by approximately $37 million in 2003 and $254 million in 2002. After adjusting for these differ- ences, 2003 cash flow was within $40 million of 2002 cash flow, as the higher earnings in 2003 were overshadowed by extremely strong working capital improvements in 2002. The fourth quarter of 2003 marked the tenth consecutive quarter in which our Company has achieved sequential improvement in the ra- tio of core working capital (inventory and trade receivables less trade payables) to net sales. For the year ended December 27, 2003, average core working capital as a percentage of sales was 8.2%, compared to 8.8% for 2002 and 9.9% for 2001. For 2004, we ex- pect continuing but more modest improvement in our core working capital metric. Expenditures for property additions represented 2.8% of 2003 net sales compared with 3.1% in 2002 and 3.7% in 2001. For 2004, expenditures for property additions are currently expected to remain at approximately 3% of net sales and cash flow (as de- fined) is expected to exceed the amount of net earnings. Despite significant voluntary contributions in 2002, several of our pension plans experienced shortfalls in market values of trust as- sets versus the year-end 2002 accounting measurement of accu- mulated obligation. As a result of this condition, we were required to record in our year-end 2002 balance sheet an incremental re- duction in equity of approximately $306 million. Due to market gains and incremental funding during 2003 (net of increased obli- gations), our plan position improved slightly at year-end 2003, and we reversed approximately $48 million of this equity charge. These balance sheet adjustments had no effect on our earnings and we The effective income tax rate for 2001 of approximately 40% re- flected the impact of the Keebler acquisition on nondeductible goodwill and the level of U.S. tax on foreign subsidiary earnings. As a result of our adoption of SFAS No. 142 on January 1, 2002 (refer to Note 1 within Notes to Consolidated Financial Statements), goodwill amortization expense – and the resulting impact on the effective income tax rate – has been eliminated in periods subsequent to adoption. Accordingly, the 2002 effective income tax rate was reduced to 37%. Due primarily to the implementation of various tax planning ini- tiatives and audit closures, our 2003 effective income tax rate was lowered to 32.7%, which includes over 200 basis points of Our consolidated effective tax rate has benefited from accounting changes, tax planning initiatives, and favorable audit closures over the past several years, declining from approximately 40% in 2001 to less than 33% in 2003. The resulting tax savings have been reinvested, in part, in cost-saving programs, brand-building expen- ditures, and other growth initiatives. Kellogg Company 25 Change vs. prior year (pts.) 2003 2002 2001 2003 2002 Effective income tax rate 32.7% 37.0% 40.1% -4.3 -3.1 (dollars in millions) Change vs. prior year 2003 2002 2001 2003 2002 Net cash provided by operating activities $1,171.0 $999.9 $1,132.0 Additions to properties (247.2) (253.5) (276.5) Cash flow $ 923.8 $746.4 $ 855.5 23.8% -12.8% (dollars in millions) Change vs. prior year 2003 2002 2001 2003 2002 Reported interest expense $371.4 $391.2 $351.5 Amounts capitalized – 1.0 2.9 Gross interest expense $371.4 $392.2 $354.4 -5.3% 10.7% Other income (expense), net Income taxes