As filed with the Securities and Exchange Commission on April 2, 2012

File No.            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Kraft Foods Group, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia		36-3083135
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
Three Lakes Drive, Northfield, Illinois		60093-2753
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(847) 646-2000

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class to be so Registered		Name of Each Exchange on Which Each Class is to be Registered
Common Stock, no par value

Securities to be registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (Do  not check if a smaller reporting company)		Smaller reporting company		¨

 

 

 

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Kraft Foods Group, Inc.

Information Required in Registration Statement

Cross-Reference Sheet Between the Information Statement and Items of Form 10

This Registration Statement on Form 10 incorporates by reference information contained in our Information Statement filed as Exhibit 99.1 to this Form 10. For your convenience, we have provided below a cross-reference sheet identifying where the items required by Form 10 can be found in the Information Statement.

 

Item No.		Caption		Location in Information Statement
1.		Business		See “Summary,” “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” “The Spin-Off,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Where You Can Find More Information”
1A.		Risk Factors		See “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements”
2.		Financial Information		See “Risk Factors,” “Capitalization,” “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
3.		Properties		See “Business—Properties”
4.		Security Ownership of Certain Beneficial Owners and Management		See “Security Ownership of Certain Beneficial Owners and Management”
5.		Directors and Executive Officers		See “Management”
6.		Executive Compensation		See “Management” and “Executive Compensation”
7.		Certain Relationships and Related Transactions, and Director Independence		See “Risk Factors,” “Management” and “Certain Relationships and Related Party Transactions”
8.		Legal Proceedings		See “Business—Legal Proceedings”
9.		Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters		See “The Spin-Off,” “Dividend Policy,” “Security Ownership of Certain Beneficial Owners and Management” and “Description of Our Capital Stock”
10.		Recent Sales of Unregistered Securities		See “Description of Our Capital Stock”
11.		Description of Registrant’s Securities to be Registered		See “Description of Our Capital Stock”
12.		Indemnification of Directors and Officers		See “Certain Relationships and Related Party Transactions” and “Description of Our Capital Stock”
13.		Financial Statements and Supplementary Data		See “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements” and “Index to Financial Statements” and the financial statements referenced therein

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Item No.		Caption		Location in Information Statement
14.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		None
15.		Financial Statements and Exhibits		(a) Financial Statements   See “Unaudited Pro Forma Combined Financial Statements” and “Index to Financial Statements” and the financial statements referenced therein   (b) Exhibits   See below

The following documents are filed as exhibits hereto:

 

Exhibit Number		Exhibit Description
2.1		Form of Separation and Distribution Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
3.1		Form of Amended and Restated Articles of Incorporation of Kraft Foods Group, Inc.*
3.2		Form of Amended and Restated Bylaws of Kraft Foods Group, Inc.*
10.1		Offer of Employment Letter between Kraft Foods Inc. and John T. Cahill, dated December 3, 2011.
10.2		364-Day Revolving Credit Agreement, by and among Kraft Foods Group, Inc., Kraft Foods Inc., as guarantor, and the agents and lenders party thereto, dated as of March 8, 2012.*
10.3		Form of Tax Sharing and Indemnity Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.4		Form of Employee Matters Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.5		Form of Canadian Transfer Agreement*
10.6		Form of Intellectual Property Ownership and/or License Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.7		Form of Transition Services Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.8		Form of Manufacturing and Supply Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
21.1		List of subsidiaries of Kraft Foods Group, Inc.*
99.1		Preliminary Information Statement of Kraft Foods Group, Inc., subject to completion, dated April 2, 2012.

 

*	To be filed by amendment.

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SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Registration Statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: April 2, 2012

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EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
2.1		Form of Separation and Distribution Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
3.1		Form of Amended and Restated Articles of Incorporation of Kraft Foods Group, Inc.*
3.2		Form of Amended and Restated Bylaws of Kraft Foods Group, Inc.*
10.1		Offer of Employment Letter between Kraft Foods Inc. and John T. Cahill, dated December 3, 2011.
10.2		364-Day Revolving Credit Agreement, by and among Kraft Foods Group, Inc., Kraft Foods Inc., as guarantor, and the agents and lenders party thereto, dated as of March 8, 2012.*
10.3		Form of Tax Sharing and Indemnity Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.4		Form of Employee Matters Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.5		Form of Canadian Transfer Agreement*
10.6		Form of Intellectual Property Ownership and/or License Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.7		Form of Transition Services Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
10.8		Form of Manufacturing and Supply Agreement between Kraft Foods Inc. and Kraft Foods Group, Inc.*
21.1		List of subsidiaries of Kraft Foods Group, Inc.*
99.1		Preliminary Information Statement of Kraft Foods Group, Inc., subject to completion, dated April 2, 2012.

 

*	To be filed by amendment.

Exhibit 10.1

 

PERSONAL AND CONFIDENTIAL

December 3, 2011

Mr. John T. Cahill

Dear John,

I am very pleased to confirm the verbal offer extended to you for the position of Executive Chairman, Kraft Foods North America reporting to Irene Rosenfeld, Chairman and Chief Executive Officer, Kraft Foods Inc. until the anticipated Spin-off of Kraft Foods Group, Inc. (a wholly-owned direct subsidiary of Kraft Foods Inc. currently named Kraft Foods Global Holdings, Inc.), planned for the second half of 2012. Following the Spin-off, you will hold the position of Executive Chairman of Kraft Foods Group, Inc. Both positions will be located in Northfield, Illinois, USA.

If you accept our offer, we anticipate your hire date to be January 2, 2012. This letter sets forth all of the terms and conditions of the offer.

Annualized Compensation (Range of Opportunity)

 

						Target
Annual Base Salary						$	750,000
Annual Incentive Plan (Target* – 100%)						$	750,000
Long-Term Incentives**						$	4,500,000
–    Restricted Stock Units (75%)		$	3,375,000
–    Stock Options (25%)		$	1,125,000
Total Annual Compensation						$	6,000,000

 

*	Target as a percent of base salary.

**	The value of the long-term incentive awards reflects the “economic value” of equity awards. For restricted stock units the value reflects grant value. For stock option value, the value approximates the Company’s Black-Scholes value.

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December 3, 2011

Page 2 of 6

 

Annual Incentive Plan

Beginning on your date of employment, you will be eligible to participate in the Kraft Management Incentive Plan (MIP), which is Kraft Foods Inc.’s annual incentive program. Your target award opportunity under the MIP is equal to 100% of your base salary.

The actual amount you will receive may be lower or higher depending on your individual performance and the performance of Kraft Foods North America and Kraft Foods Inc. prior to the Spin-off and of Kraft Foods Group, Inc. following the Spin-off. Your 2012 award will be payable in March 2013.

Additional Cash Allowance

You will receive an annual cash allowance of $125,000, less applicable deductions for taxes, payable by Kraft Foods Inc. on January 15 prior to the Spin-off, and by Kraft Foods Group, Inc. on January 15 of each year during which you serve a full year as Executive Chairman following the Spin-off.

Long-Term Incentives

Restricted Stock Units/Stock Option Program

On your date of hire, Kraft Foods Inc. will grant you a mix of restricted stock units and stock options at the target amount noted on page 1. You will receive dividend equivalents on the restricted stock units during the vesting period consistent in amount and timing with that of Kraft Foods Inc. Common Stock shareholders prior to the spin-off and Kraft Foods Group, Inc. Common Stock shareholders following the spin-off.

The awards will vest as follows:

 

•

Restricted stock units will vest 100% on January 2, 2015

 

•

Stock options will vest 33% on January 2, 2013, 33% on January 2, 2014 and 34% on January 2, 2015

The stock options granted you will have a term of 10 years from the date of grant.

Kraft Foods Inc. typically communicates the number of stock options granted as a ratio relative to the number of restricted stock units granted based on the “economic value” of the stock options. In December 2011, Kraft Foods Inc. Board’s Human Resources and Compensation Committee will determine the 2012 ratio. For reference, in 2011, Kraft Foods Inc. granted six stock options for every restricted stock unit awarded but the Committee may change this ratio from year to year.

The applicable stock award agreements will provide details regarding the vesting and other provisions of these awards. Below is a summary of the stock award treatment under several scenarios.

 

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December 3, 2011

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•

In the event that you no longer hold the position of Executive Chairman, Kraft Foods North America or Executive Chairman, Kraft Foods Group, Inc., the treatment of equity awards granted to you at hire or at any other future date (unless specifically stated otherwise in the applicable stock award agreement) will be as follows:

 

Reason Executive Chairman Position No Longer Held		Unvested Awards		Vested Restricted Stock Units		Vested Stock Options
Become a non-employee director		Awards granted as Executive Chairman will continue to vest as if you remained in that role through the vesting period (even if you terminate your Board service following the transition to non-employee director)		Shares owned by participant		Participant may exercise options for the full original term
Resignation from Executive Chairman Position		Forfeited		Shares owned by participant		Options may be exercised for a period of 30 days following date of resignation after which they will be canceled
Mutual Agreement		Awards will continue to vest as if you remained employed through vesting period		Shares owned by participant		Participant may exercise options for the full original term
Termination for cause		Forfeited		Depending on reason for termination, Company may claw back shares		Options will be canceled on the effective date of termination
Death/Long-Term Disability		Awards vest immediately		Shares owned by participant or designated beneficiary		Participant or designated beneficiary may exercise options for the full original term

 

•

For purposes of the stock awards, “cause” means:

1) continued failure to substantially perform the job’s duties (other than resulting from incapacity due to disability);

2) gross negligence, dishonesty, or violation of any reasonable rule or regulation of Kraft Foods Inc. prior to the Spin-off and Kraft Foods Group, Inc. following the Spin-off where the violation results in significant damage to Kraft Foods Inc. prior to the Spin-off and Kraft Foods Group, Inc. following the Spin-off; or

3) engaging in other conduct that materially adversely reflects on Kraft Foods Inc. prior to the Spin-off and Kraft Foods Group, Inc. following the Spin-off.

 

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•

If the anticipated Spin-off has not occurred by December 31, 2013, and you terminate your employment after that date, for reasons other than for cause, all outstanding awards will continue to vest on the originally-stated vesting dates. You will also have the full original term to exercise your stock options.

Perquisites

You will be eligible for:

 

•

an annual company car allowance of $15,000 under the executive perquisite policy.

 

•

an annual financial counseling allowance of $7,500. You may use any firm of your choosing and submit requests for payment directly to Kraft Foods Inc. prior to the Spin-off and Kraft Foods Group, Inc. following the Spin-off.

Stock Ownership Guidelines

You will be required to attain and then hold Kraft Foods Inc. and then Kraft Foods Group, Inc. Common Stock equal in value to five times your base salary. You will have five years from your date of employment to do so. Common Stock held for ownership determination includes:

 

•

common stock held directly or indirectly, and

 

•

unvested restricted stock units or share equivalents held in the Kraft Foods Inc. or Kraft Foods Group’s 401(k) plan; however the definition;

 

•

excludes shares represented by unexercised stock options.

Other Benefits

Your offer includes Kraft Foods Inc.’s comprehensive benefits package available to full-time salaried employees. The enclosed Kraft Benefits Summary brochure describes the 2012 benefits package. As the brochure points out, Kraft Foods Inc. is not obligated to maintain these benefits in the future. In addition, we anticipate that Kraft Foods Group, Inc. will continue to offer a comprehensive benefits package but that the components and costs to the employee may differ.

You will be a U.S. employee of Kraft Foods Global Holdings, Inc. until the Spin-off and Kraft Foods Group, Inc. following the Spin-off. The laws of Illinois, U.S.A will govern your employment status. As such, your status will be that of an “at will” employee. This means that either you or Kraft Foods Global Holdings, Inc. until the Spin-off and Kraft Foods Group, Inc. following the Spin-off is free to terminate the employment relationship at any time, for any reason.

If your employment ends due to an involuntary termination, you will not be eligible for any severance.

This offer is based on the role and time commitment you discussed with the Board of Directors. If there are any material changes to the role or time commitment in the future we will reevaluate this remuneration arrangement at that time.

 

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Although we do not anticipate significant changes to the total remuneration presented in this letter, please note that the management and directors of Kraft Foods Group, Inc. will have the right to make adjustments following the Spin-off.

Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)

If you are a “specified employee” (within the meaning of Code section 409A) as of your separation from service (within the meaning of Code section 409A):

 

(a)

payment of any amounts under this letter (or under any severance arrangement pursuant to this letter) which the Company (for purposes of this subsection, the “Company” shall be defined as Kraft Foods Inc. prior to the Spin-off and Kraft Foods Group, Inc. following the Spin-off) or the Company determines constitute the payment of nonqualified deferred compensation (within the meaning of Code section 409A) and which would otherwise be paid upon your separation from service shall not be paid before the date that is six months after the date of your separation from service and any amounts that cannot be paid by reason of this limitation shall be accumulated and paid on the first day of the seventh month following the date of your separation from service (within the meaning of Code section 409A); and

 

(b)

any welfare or other benefits (including under a severance arrangement) which the Company determines constitute the payment of nonqualified deferred compensation (within the meaning of Code section 409A) and which would otherwise be provided upon your separation from service shall be provided at your sole cost during the first six-month period after your separation from service and, on the first day of the seventh month following your separation from service, the Company shall reimburse you for the portion of such costs that would have been payable by the Company for that period if you were not a specified employee.

Payment of any reimbursement amounts and the provision of benefits by the Company pursuant to this letter (including any reimbursements or benefits to be provided pursuant to a severance arrangement) which the Company determines constitute nonqualified deferred compensation (within the meaning of Code section 409A) shall be subject to the following:

 

(a)

the amount of the expenses eligible for reimbursement or the in-kind benefits provided during any calendar year shall not affect the amount of the expenses eligible for reimbursement or the in-kind benefits to be provided in any other calendar year;

 

(b)

the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; and

 

(c)

your right to reimbursement or in-kind benefits is not subject to liquidation or exchange for any other benefit.

 

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Page 6 of 6

 

This offer is contingent upon successful completion of our pre-employment checks. Those may include a background screen, reference check, and post-offer drug test or procedures that we specify.

If you have any questions, you can reach me at (XXX) XXX-XXXX or Karen May at XXX-XXX-XXXX.

Sincerely,

/s/ Mark D. Ketchum

Mark D. Ketchum

Lead Director

Kraft Foods Inc.

I accept the offer as expressed above.

 

/s/ John T. Cahill		12/5/11
Signature		Date
John T. Cahill

 

Enclosure:		Kraft Foods Benefits Summary
		Management Incentive Plan Brochure
		Equity Brochure

 

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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

EXHIBIT 99.1

SUBJECT TO COMPLETION, DATED APRIL 2, 2012

INFORMATION STATEMENT

KRAFT FOODS GROUP, INC.

Three Lakes Drive

Northfield, IL 60093

Common Stock

(no par value)

We are sending you this Information Statement in connection with Kraft Foods Inc.’s spin-off of its wholly owned subsidiary, Kraft Foods Group, Inc., or “Kraft Foods Group.” To effect the spin-off, Kraft Foods Inc., or “Kraft ParentCo,” will distribute all of the shares of Kraft Foods Group common stock on a pro rata basis to the holders of Kraft ParentCo common stock. We expect that the distribution of Kraft Foods Group common stock will be tax-free to Kraft ParentCo’s U.S. shareholders for U.S. federal income tax purposes, except for cash that shareholders receive in lieu of fractional shares.

If you are a record holder of Kraft ParentCo common stock as of the close of business on                     , 2012, which is the record date for the distribution, you will be entitled to receive              shares of Kraft Foods Group common stock for every              shares of Kraft ParentCo common stock you hold on that date. Kraft ParentCo will distribute the shares of Kraft Foods Group common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of Kraft Foods Group common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each holder (net of any required withholding for taxes applicable to each holder) who would otherwise have been entitled to receive a fractional share in the distribution.

The distribution will be effective as of 5:00 p.m., New York City time, on                     , 2012. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.

Kraft ParentCo’s shareholders are not required to vote on or take any other action in connection with the spin-off. We are not asking you for a proxy, and you are requested not to send us a proxy. Kraft ParentCo’s shareholders will not be required to pay any consideration for the shares of Kraft Foods Group common stock they receive in the spin-off, surrender or exchange their shares of Kraft ParentCo common stock or take any other action in connection with the spin-off.

Kraft ParentCo currently owns all of the outstanding shares of Kraft Foods Group common stock. Accordingly, no trading market for Kraft Foods Group common stock currently exists. We expect, however, that a limited trading market for Kraft Foods Group common stock, commonly known as a “when-issued” trading market, will develop as early as two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Kraft Foods Group common stock will begin on the first trading day after the distribution date. We intend to list Kraft Foods Group common stock on the                      under the symbol “             .”

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 17 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this Information Statement is                     , 2012.

Kraft ParentCo first mailed a Notice of Internet Availability of Information Statement Materials containing instructions on how to access this Information Statement to its shareholders on or about                     , 2012.

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TABLE OF CONTENTS

 

		Page
SUMMARY			1
RISK FACTORS			17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS			32
THE SPIN-OFF			33
DIVIDEND POLICY			45
CAPITALIZATION			46
SELECTED HISTORICAL COMBINED FINANCIAL DATA			47
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS			49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			55
BUSINESS			85
MANAGEMENT			96
EXECUTIVE COMPENSATION			101
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			147
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			148
DESCRIPTION OF OUR CAPITAL STOCK			153
WHERE YOU CAN FIND MORE INFORMATION			157
INDEX TO FINANCIAL STATEMENTS			F-1

 

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RISK FACTORS

You should carefully consider all of the information in this Information Statement and each of the risks described below, which we believe are the principal risks that we face. Some of the risks relate to our business, others to the Spin-Off. Some risks relate principally to the securities markets and ownership of our common stock.

Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are made in this Information Statement. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition and results of operations in the future.

Risks Relating to Our Business

We face the following risks in connection with our business and the general conditions and trends of the food and beverage industry in which we operate:

We operate in a highly competitive industry.

The food and beverage industry is highly competitive. We compete based on product innovation, price, product quality, brand recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences.

We may need to reduce our prices in response to competitive and customer pressures. Competition and customer pressures may also restrict our ability to increase prices in response to commodity and other cost increases. We may also need to increase or reallocate spending on marketing, retail trade incentives, advertising and new product innovation to maintain market share. These expenditures are subject to risks, including uncertainties about trade and consumer acceptance of our efforts. If we reduce prices or face increased costs, but cannot increase sales volumes to offset those changes, then our financial condition and results of operations will suffer.

Maintaining our reputation and brand image is essential to our business success.

We have many iconic brands with long-standing consumer recognition. Our success depends on our ability to maintain brand image for our existing products, extend our brands to new platforms and expand our brand image with new product offerings.

We seek to maintain, extend and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Increasing media attention to the role of food marketing could adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices. Increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine our customers’ confidence and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. We increasingly rely on social media and online dissemination of advertising campaigns. Negative posts or comments about us on social networking Web sites or similar online activity could seriously damage our reputation and brand

 

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image. We are subject to a variety of legal and regulatory restrictions on how we market our products. These restrictions may limit our ability to maintain, extend and expand our brand image as the media and communications environment continues to evolve. If we do not maintain, extend and expand our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected.

We must leverage our value proposition to compete against retailer brands and other economy brands.

Retailers are increasingly offering retailer and other economy brands that compete with some of our products. Our products must provide higher value and/or quality to our consumers than less expensive alternatives, particularly during periods of economic uncertainty such as those we continue to experience. Consumers may not buy our products if relative differences in value and/or quality between our products and retailer or other economy brands change in favor of competitors’ products or if consumers perceive this type of change. If consumers prefer retailer or other economy brands, then we could lose market share or sales volumes or shift our product mix to lower margin offerings. These events could materially and adversely affect our financial condition and results of operations.

The consolidation of retail customers could adversely affect us.

Retail customers, such as supermarkets, warehouse clubs and food distributors in our major markets, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces larger retail customers that may seek to leverage their position to improve their profitability by demanding improved efficiency, lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retailer power could materially and adversely affect our product sales, financial condition and results of operations.

Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material and adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease or cancel purchases of our products, or delay or fail to pay us for previous purchases.

Changes in our relationships with significant customers or suppliers could adversely affect us.

During 2011, our five largest customers accounted for approximately 41% of our combined net revenues, with our largest customer, Wal-Mart Stores, Inc., accounting for approximately 24% of our combined net revenues. There can be no assurance that all significant customers will continue to purchase our products in the same quantities or on the same terms as in the past, particularly as increasingly powerful retailers may demand lower pricing and focus on developing their own brands. The loss of a significant customer or a material reduction in sales to a significant customer could materially and adversely affect our product sales, financial condition and results of operations.

Disputes with significant suppliers, including regarding pricing or performance, could adversely affect our ability to supply products to our customers and could materially and adversely affect our product sales, financial condition and results of operations.

We must correctly predict, identify and interpret changes in consumer preferences and demand, and offer new products to meet those changes.

Consumer preferences for food products change continually. Our success depends on our ability to predict, identify and interpret the tastes and dietary habits of consumers and to offer products that appeal to consumer preferences. If we do not offer products that appeal to consumers, our sales and market share will decrease and our profitability could suffer.

 

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We must distinguish between short-term fads, mid-term trends and long-term changes in consumer preferences. If we do not accurately predict which shifts in consumer preferences will be long-term, or if we fail to introduce new and improved products to satisfy those preferences, our sales could decline. In addition, because of our varied consumer base, we must offer an array of products that satisfy the broad spectrum of consumer preferences. If we fail to expand our product offerings successfully across product categories, or if we do not rapidly develop products in faster growing and more profitable categories, demand for our products will decrease and our profitability could suffer.

Prolonged negative perceptions concerning the health implications of certain food products could influence consumer preferences and acceptance of some of our products and marketing programs. We strive to respond to consumer preferences and social expectations, but we may not be successful in our efforts. Continued negative perceptions and failure to satisfy consumer preferences could materially and adversely affect our product sales, financial condition and results of operations.

We may be unable to drive revenue growth in our key product categories or add products that are in faster growing and more profitable categories.

The food and beverage industry’s overall growth is linked to population growth. Our future results will depend on our ability to drive revenue growth in our key product categories. Because our operations are concentrated in North America, where growth in the food and beverage industry has been moderate, our success also depends in part on our ability to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our failure to drive revenue growth in our key product categories or develop innovative products for new and existing categories could materially and adversely affect our profitability, financial condition and results of operations.

Commodity, energy and other input prices are volatile and may rise significantly, and increases in the costs of producing, transporting and distributing our products could materially and adversely affect our financial condition.

We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts and sugar and other sweeteners. In addition, we purchase and use significant quantities of resins and cardboard to package our products and natural gas to operate our factories and warehouses. We are also exposed to changes in oil prices, which influence both our packaging and transportation costs. Prices for commodities, other supplies and energy are volatile and can fluctuate due to conditions that are difficult to predict, including global competition for resources, currency fluctuations, severe weather or global climate change, consumer, industrial or commodity investment demand and changes in governmental regulation and trade, alternative energy and agricultural programs. Rising commodity, energy and other input costs could materially and adversely affect our cost of operations, including the manufacture, transportation and distribution of our products, which could materially and adversely affect our financial condition and results of operations.

Although we monitor our exposure to commodity prices as an integral part of our overall risk management program, and seek to hedge against input price increases to the extent we deem appropriate, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in raw materials costs. For example, hedging our costs for one of our key inputs, dairy products, is difficult because dairy futures markets are not as developed as many other commodities futures markets. Continued volatility or sustained increases in the prices of commodities and other supplies we purchase could increase the costs of our products, and our profitability could suffer. Moreover, increases in the prices of our products to cover these increased costs may result in lower sales volumes. If we are not successful in our hedging activities, or if we are unable to price our products to cover increased costs, then commodity and other input price volatility or increases could materially and adversely affect our financial condition and results of operations.

 

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We rely on our management team and other key personnel, and the loss of one or more key employees or any difficulty in attracting, training and retaining other talented personnel could materially and adversely affect our financial condition and results of operations.

We depend on the skills, working relationships and continued services of key personnel, including our experienced management team. In addition, our ability to achieve our operating goals depends on our ability to identify, hire, train and retain qualified individuals. We compete with other companies both within and outside of our industry for talented personnel, and we may lose key personnel or fail to attract, train and retain other talented personnel. Any such loss or failure could materially and adversely affect our financial condition and results of operations.

Following the Spin-Off, we will no longer operate as part of a globally diversified food and beverage company and therefore may be more vulnerable to adverse events and trends in North America.

As a globally diversified food and beverage company, Kraft ParentCo has historically been insulated against adverse events and trends in any particular region. After separating from Kraft ParentCo, however, we may be more susceptible to adverse regulations, economic climate, consumer trends, market fluctuations, including commodity price fluctuations or supply shortages for certain of our key ingredients, and other adverse events that are specific to the United States and Canada. For example, because a majority of our operations and product sales are in the United States, we expect that regulatory changes or changes in consumer food preferences in the United States will have a more significant impact on us than these changes would have had when we were part of Kraft ParentCo. The concentration of our operations in North America will present a challenge and may increase the likelihood that an adverse event in North America will materially and adversely affect our financial condition and results of operations.

Changes in regulations could increase our costs and affect our profitability.

Our activities are highly regulated and subject to government oversight. Various federal, state, provincial and local laws and regulations govern food production and marketing, as well as licensing, trade, tax and environmental matters. Governing bodies regularly issue new regulations and changes to existing regulations. Our need to comply with new or revised regulations or their interpretation and application, including proposed requirements designed to enhance food safety or to regulate imported ingredients, could materially and adversely affect our product sales, financial condition and results of operations.

Legal claims or other regulatory enforcement actions could subject us to civil and criminal penalties that affect our product sales, reputation and profitability.

We are a large food and beverage company operating in a highly regulated environment and a constantly evolving legal and regulatory framework. Consequently, we are subject to heightened risk of legal claims or other regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies and procedures. Moreover, the failure to maintain effective control environment processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition and results of operations.

 

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Product recalls or other product liability claims could materially and adversely affect us.

Selling products for human consumption involves inherent risks. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, spoilage or other adulteration, product misbranding, product tampering or other deficiencies. Any of these events could materially and adversely affect our reputation and product sales, financial condition and results of operations.

We may also suffer losses if our products or operations violate applicable laws or regulations, or if our products cause injury, illness or death. In addition, our marketing could face claims of false or deceptive advertising or other criticism. A significant product liability or other legal judgment or a related regulatory enforcement action against us, or a widespread product recall, may materially and adversely affect our reputation and profitability. Moreover, even if a product liability or consumer fraud claim is unsuccessful, has no merit or is not pursued, the negative publicity surrounding assertions against our products or processes could materially and adversely affect our product sales, financial condition and results of operations.

Unanticipated business disruptions could affect our ability to provide our products to our customers as well as maintain our back-office systems.

We have a complex network of suppliers, owned manufacturing locations, co-manufacturing locations, distribution networks and information systems that support our ability to consistently provide our products to our customers. Factors that are hard to predict or beyond our control, like weather, natural disasters, fire, terrorism, generalized labor unrest or health pandemics, could damage or disrupt our operations, or our suppliers’ or co-manufacturers’ operations. If we cannot respond to disruptions in our operations, whether by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or are unable to quickly repair damage to our information, production or supply systems, we may be late in delivering, or unable to deliver, products to our customers and may also be unable to track orders, inventory, receivables and payables. If that occurs, our customers’ confidence in us and long-term demand for our products could decline. Any of these events could materially and adversely affect our product sales, financial condition and results of operations.

Our acquisition and divestiture activities may present financial, managerial and operational risks.

From time to time, we may identify acquisition candidates that we believe strategically fit our business objectives or we may seek to divest businesses that do not meet our strategic objectives or growth or profitability targets. Our acquisition or divestiture activities may present financial, managerial and operational risks. Those risks include diversion of management attention from existing core businesses, difficulties integrating or separating personnel and financial and other systems, inability to effectively and immediately implement control environment processes across a diverse employee population, adverse effects on existing customer and supplier business relationships, inaccurate estimates of fair value made in the accounting for acquisitions and amortization of acquired intangible assets which would reduce future reported earnings, potential loss of acquired businesses’ customers or key employees and indemnities and potential disputes with the buyers or sellers. In addition, while we anticipate that Kraft Foods Group will be a North American business focused on traditional grocery categories, to the extent we undertake acquisitions or other developments outside our core geography or in new categories, we may face additional risks related to such acquisitions or developments. In particular, risks related to foreign operations include compliance with U.S. laws affecting operations outside of the United States, such as the Foreign Corrupt Practices Act, currency rate fluctuations, compliance with foreign regulations and laws, including tax laws, and exposure to politically and economically volatile developing markets. Any of these factors could materially and adversely affect our financial condition and results of operations.

 

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Weak financial performance, downgrades in our credit ratings, illiquid capital markets and volatile economic conditions could limit our access to the capital markets, reduce our liquidity or increase our borrowing costs.

From time to time we may need to access the short-term and long-term capital markets to obtain financing. Our financial performance, our short-term and long-term credit ratings, the liquidity of the overall capital markets and the state of the economy, including the food and beverage industry, will affect our access to, and the availability of, financing on acceptable terms and conditions in the future. There can be no assurance that, as a new public company, we will have access to the capital markets on terms we find acceptable.

In particular, we intend to access the commercial paper market for regular funding requirements. A downgrade in our credit ratings would increase our borrowing costs and could affect our ability to issue commercial paper. Disruptions in the commercial paper market or other effects of volatile economic conditions on the credit markets also could reduce the amount of commercial paper that we could issue and could raise our borrowing costs for both short-term and long-term debt offerings. In response to these conditions, we may reduce or eliminate dividends on our common stock in order to conserve cash. Further, our inability to access the capital markets or an increase in our borrowing costs could materially and adversely affect our financial condition and results of operations.

Adverse changes in the equity markets or interest rates, changes in actuarial assumptions and legislative or other regulatory actions could substantially increase our pension costs and materially and adversely affect our profitability and results of operations.

In connection with the Spin-Off, we expect to assume pension plan obligations and related expenses for plans that provide benefits to substantially all of Kraft ParentCo’s retired and other former North American employees at the time of the Spin-Off. The difference between plan obligations and assets, or the funded status of the plans, significantly affects the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, investment returns, minimum funding requirements and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic pension cost, and consequently volatility in our reported net income, and increase our future funding requirements. Legislative and other governmental regulatory actions may also increase funding requirements for our pension plans’ benefits obligations. See Note 10, “Pension and Other Postemployment Benefit Plans,” to our historical combined financial statements included in this Information Statement. Volatile economic conditions increase the risk that we will be required to make additional cash contributions to the pension plans and recognize further increases in our net pension cost in 2012 and beyond. A significant increase in our pension funding requirements could negatively affect our ability to pay dividends on our common stock or invest in our business or could require us to reduce spending on marketing, retail trade incentives, advertising and other similar activities.

Volatility in the market value of all or a portion of the derivatives we use to manage exposures to fluctuations in commodity prices will cause volatility in our gross profits and net earnings.

We use commodity futures and options to partially hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar and natural gas. For derivatives not designated as hedges, changes in the values of these derivatives are currently recorded in earnings, resulting in volatility in both gross profits and net earnings. We report these gains and losses in cost of sales in our combined statements of earnings to the extent we utilize the underlying input in our manufacturing process. We report these gains and losses in the unallocated corporate items line in our segment operating results until we utilize the underlying input in our manufacturing process, at which time we reclassify the gains and losses to segment operating profit. We also record our grain inventories at fair value. We may experience volatile earnings as a result of these accounting treatments.

 

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We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers and suppliers. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Furthermore, the separation of our information technology networks and systems from Kraft ParentCo’s, or the duplication of any of these networks or systems, in connection with the Spin-Off may significantly increase our susceptibility to damage, disruptions or shutdowns. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

In addition, if we are unable to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers or suppliers. In addition, the disclosure of non-public sensitive information through external media channels could lead to the loss of intellectual property or damage our reputation and brand image.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.

We consider our intellectual property rights, particularly and most notably our trademarks, but also our patents, trade secrets, copyrights and licensing agreements, to be a significant and valuable aspect of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements, third-party nondisclosure and assignment agreements and policing of third-party misuses of our intellectual property. Our failure to obtain or adequately protect our trademarks, products, new features of our products or our technology, or any change in law or other changes that serve to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business.

We may be unaware of intellectual property rights of others that may cover some of our technology, brands or products. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Third-party claims of intellectual property infringement might also require us to enter into costly license agreements. We also may be subject to significant damages or injunctions against development and sale of certain products.

 

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Risks Relating to the Spin-Off

We face the following risks in connection with the Spin-Off:

If the Contribution, Internal Distribution or Distribution were to fail to qualify for non-recognition treatment for U.S. federal income tax purposes, then Kraft ParentCo, we and our shareholders could be subject to significant tax liability.

The Distribution is conditioned on the receipt and continued validity of a private letter ruling from the IRS, which Kraft ParentCo has requested, and an opinion of tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares.

Notwithstanding the receipt of the private letter ruling and the opinion of tax counsel, the IRS could determine that the Contribution, Internal Distribution and/or Distribution should be treated as taxable transactions if it determines that any of the representations, assumptions or covenants on which the private letter ruling is based are untrue or have been violated. Furthermore, as part of the IRS’s policy, the IRS will not determine whether the Internal Distribution or Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment. Rather, the private letter ruling will be based on representations by Kraft ParentCo and us that these conditions have been satisfied. The opinion of tax counsel will address the satisfaction of these conditions. Similarly, the IRS generally will not rule on contributions of intellectual property that do not satisfy certain criteria. As a result, the private letter ruling will not address whether transfers of certain intellectual property included in the Contribution qualify for non-recognition treatment. Rather, the opinion of tax counsel will address such qualification.

The opinion of tax counsel is not binding on the IRS or the courts, and there is no assurance that the IRS or a court will not take a contrary position. In addition, the opinion of tax counsel will rely on certain representations and covenants to be delivered by Kraft ParentCo and us.

If the IRS ultimately determines that the Distribution is taxable, the Distribution could be treated as a taxable dividend or capital gain to you for U.S. federal income tax purposes, and you could incur significant U.S. federal income tax liabilities. In addition, if the IRS ultimately determines that the Contribution, Internal Distribution and/or Distribution are taxable, Kraft ParentCo and we could incur significant U.S. federal income tax liabilities, and we could have an indemnification obligation to Kraft ParentCo. For a more detailed discussion, see “—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition” and “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution.”

If the Canadian aspects of the Internal Reorganization were to fail to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes, then Kraft ParentCo’s

and/or our Canadian subsidiaries could be subject to significant tax liability.

The Internal Reorganization includes steps to separate the assets and liabilities in Canada held in connection with the Global Snacks Business from the assets and liabilities in Canada held in connection with the North American Grocery Business.

 

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The Distribution is conditioned on the receipt and continued validity of an advance income tax ruling from the CRA, which Kraft ParentCo’s Canadian subsidiary has applied for, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Canadian Tax Act, such separation will be treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or their respective shareholders.

Notwithstanding the receipt of the advance income tax ruling, the CRA could determine that the separation should be treated as a taxable transaction if it determines that any of the representations, assumptions or covenants on which the advance income tax ruling is based are untrue or have been violated. If the CRA ultimately determines that the separation is taxable, Kraft ParentCo’s and/or our Canadian subsidiaries could incur significant Canadian federal and provincial income tax liabilities, and we are generally obligated to indemnify Kraft ParentCo and its affiliates against such Canadian federal and provincial income taxes. For a more detailed discussion, see “—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.”

We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition.

Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Kraft ParentCo or Kraft ParentCo’s shareholders and, under the Tax Sharing and Indemnity Agreement, Kraft ParentCo is generally obligated to indemnify us against such taxes. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to indemnify Kraft ParentCo and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Sharing and Indemnity Agreement or any other agreement we enter into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause Kraft ParentCo to recognize a gain under Section 355(e) of the Code. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

Generally, taxes resulting from the failure of the Canadian steps of the Internal Reorganization to qualify for tax-deferred treatment for Canadian federal and provincial income tax purposes could be imposed on either Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or both. Under the Tax Sharing and Indemnity Agreement, we are generally obligated to indemnify Kraft ParentCo and its affiliates against such Canadian federal and provincial income taxes, other than in certain circumstances where Kraft ParentCo is obligated to indemnify us. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating flexibility.

Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be taxable to Kraft ParentCo, but not Kraft ParentCo’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our common stock or Kraft ParentCo’s common stock is acquired as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of Kraft ParentCo’s or our common stock within two years before or after the Distribution are presumed to be part of such a plan, although Kraft ParentCo

 

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or we may be able to rebut that presumption based on either applicable facts and circumstances or a “safe harbor” described in the tax regulations. As a consequence, we intend to agree in the Tax Sharing and Indemnity Agreement to covenants and indemnity obligations that address compliance with Section 355(e) of the Code. These covenants and indemnity obligations may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable.

Similarly, even if the Canadian aspects of the Internal Reorganization otherwise qualify for tax-deferred treatment in Canada under the butterfly reorganization provisions of the Canadian Tax Act, this tax-deferred treatment may be lost upon the occurrence of certain events after the Spin-Off. These would include an acquisition of control of our Canadian subsidiary (which may occur upon an acquisition of control of us) that occurs as part of (or in some cases in contemplation of) a series of transactions or events that includes the butterfly reorganization. These post-butterfly transaction restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that you may consider favorable.

We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.

We believe that, as an independent, publicly traded company, we will be able to, among other matters, better focus our financial and operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies and policies targeted to our operational focus and strategic priorities, streamline our processes and infrastructure to focus on our core “center of the store” strengths, implement and maintain a capital structure designed to meet our specific needs and more effectively respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. For example, in order to position ourselves for the Spin-Off, we are undertaking a series of strategic, structural and process realignment and restructuring actions within our operations, including significant cost-cutting initiatives. These actions may not provide the cost benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our businesses following the Spin-Off, weakening of our internal standards, controls or procedures and impairment of our key customer and supplier relationships. In addition, completion of the proposed Spin-Off will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our businesses. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition and results of operations could be materially and adversely affected.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company.

We have historically operated as part of Kraft ParentCo’s corporate organization, and Kraft ParentCo has assisted us by providing various corporate functions. Following the Spin-Off, Kraft ParentCo will have no obligation to provide us with assistance other than the transition services described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo.” These services do not include every service we have received from Kraft ParentCo in the past, and Kraft ParentCo is only obligated to provide these services for limited periods from the date of the Spin-Off. Accordingly, following the Spin-Off, we will need to provide internally or obtain from unaffiliated third parties the services we currently receive from Kraft ParentCo. These services include information technology, research and development, managerial, financial and human resource activities, the effective and appropriate performance of which is critical to our operations. We may be unable to

 

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replace these services in a timely manner or on terms and conditions as favorable as those we receive from Kraft ParentCo. In particular, Kraft ParentCo’s information technology networks and systems are complex, and duplicating these networks and systems will be challenging. Because our business previously operated as part of the wider Kraft ParentCo organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or we may incur additional costs that could adversely affect our business. If we fail to obtain the quality of administrative services necessary to operate effectively or incur greater costs in obtaining these services, our profitability, financial condition and results of operations may be materially and adversely affected.

We have no operating history as an independent, publicly traded company, and our historical and pro forma financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

We derived the historical and pro forma financial information included in this Information Statement from Kraft ParentCo’s consolidated financial statements and this information does not necessarily reflect the results of operations, financial position and cash flows we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:

 

•

Prior to the Spin-Off, we operated as part of Kraft ParentCo’s broader corporate organization, rather than as an independent company. Kraft ParentCo performed various corporate functions for us, including, but not limited to, information technology functions, tax administration, treasury activities, accounting, human resources and legal functions and ethics and compliance program administration. Our historical and pro forma financial information reflects allocations of corporate expenses from Kraft ParentCo for these and similar functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent company.

 

•

We will enter into transactions with Kraft ParentCo that did not exist prior to the Spin-Off.

 

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Our historical financial information does not reflect changes that we expect to experience in the future as a result of our separation from Kraft ParentCo, including changes in our cost structure, personnel needs, tax structure, financing and business operations. As part of Kraft ParentCo, we enjoyed certain benefits from Kraft ParentCo’s operating diversity, size, purchasing power and available capital for investments, and we will lose these benefits after the Spin-Off. After the Spin-Off, as an independent entity, we may be unable to purchase goods, services and technologies, such as insurance and health care benefits and computer software licenses, on terms as favorable to us as those we obtained as part of Kraft ParentCo prior to the Spin-Off.

Following the Spin-Off, we will also be responsible for the additional costs associated with being an independent, publicly traded company, including costs related to corporate governance, investor and public relations and public reporting. Therefore, our financial statements may not be indicative of our future performance as an independent company. While we have been profitable as part of Kraft ParentCo, we cannot assure you that our profits will continue at a similar level when we are a stand-alone company. For additional information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

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Kraft ParentCo has a significant understanding of our business and may be uniquely positioned to compete against us following the Spin-Off.

Prior to the Spin-Off, we have operated as part of Kraft ParentCo, and many of its officers, directors and employees have participated in the development and execution of our corporate strategy and the management of our day-to-day operations. Following the Spin-Off, Kraft ParentCo will have significant knowledge of our products, operations, strengths, weaknesses and strategies. It will also be one of the largest food and beverage companies in the world, with a strong presence in North America, and thus may be uniquely positioned to develop grocery products that compete against our products in North America. Though, following the Spin-Off, Kraft ParentCo generally will not have rights to use trademarks related to the North American Grocery Business in North America and will be restricted from using certain shared patents and trade secrets in North America, it will not be restricted from developing products in the same product categories as our products and marketing these products under trademarks related to the Global Snacks Business or under new trademarks. Because of Kraft ParentCo’s competitive insight into our operations, competition from Kraft ParentCo may materially and adversely affect our product sales, financial condition and results of operations.

We will incur substantial indebtedness in connection with the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off may materially and adversely affect our business, financial condition and results of operations.

We are incurring substantial indebtedness in connection with the Spin-Off. We have historically relied upon Kraft ParentCo for working capital requirements on a short-term basis and for other financial support functions. After the Spin-Off, we will not be able to rely on Kraft ParentCo’s earnings, assets or cash flow, and we will be responsible for servicing our own debt, obtaining and maintaining sufficient working capital and paying dividends.

Our ability to make payments on and to refinance our indebtedness, including the debt retained or incurred pursuant to the Spin-Off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take disadvantageous actions, including reducing spending on marketing, retail trade incentives, advertising and new product innovation, reducing financing in the future for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the food and beverage industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt.

In addition, our substantial leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our substantial leverage could also impede our ability to withstand downturns in our industry or the economy in general.

We may increase our debt or raise additional capital in the future, which could affect our financial health and may decrease our profitability.

We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. In addition, our Board may issue shares of preferred stock without further action by holders of our common stock. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity

 

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financing may not be available to us on terms we find acceptable, if at all. If we incur additional debt or raise equity through the issuance of our preferred stock, the terms of the debt or our preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. If we raise funds through the issuance of additional equity, your ownership in us would be diluted. Also, regardless of the terms of our debt or equity financing, our agreements and obligations under the Tax Sharing and Indemnity Agreement may limit our ability to issue stock. For a more detailed discussion, see “—We intend to agree to numerous restrictions to preserve the non-recognition treatment of the transactions, which may reduce our strategic and operating flexibility.” If we are unable to raise additional capital when needed, our financial condition, and thus your investment in us, could be materially and adversely affected.

After the Spin-Off, certain of our directors and officers may have actual or potential conflicts of interest because of their Kraft ParentCo equity ownership or their former Kraft ParentCo positions.

Certain of the persons we expect to become our executive officers and directors will be Kraft ParentCo officers, directors or employees until the Spin-Off and thus have professional relationships with Kraft ParentCo’s executive officers, directors or employees. In addition, because of their former Kraft ParentCo positions, following the Spin-Off, certain of our directors and executive officers may own Kraft ParentCo common stock or options to acquire shares of Kraft ParentCo common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. These relationships and financial interests may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Kraft ParentCo and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Kraft ParentCo and us regarding the terms of the agreements governing the Spin-Off and the relationship thereafter between the companies.

Risks Relating to Our Common Stock and the Securities Market

You face the following risks in connection with ownership of our common stock:

No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off, our stock price may fluctuate significantly.

There is currently no public market for our common stock. We intend to apply to list our common stock on the                    . We anticipate that before the Distribution Date for the Spin-Off, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue up to and including the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for you to sell our shares and could lead to our share price being depressed or volatile.

We cannot predict the prices at which our common stock may trade after the Spin-Off. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

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actual or anticipated fluctuations in our operating results due to factors related to our business;

 

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success or failure of our business strategies;

 

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our quarterly or annual earnings, or those of other companies in our industry;

 

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our ability to obtain financing as needed;

 

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•

announcements by us or our competitors of significant new business awards;

 

•

announcements of significant acquisitions or dispositions by us or our competitors;

 

•

changes in accounting standards, policies, guidance, interpretations or principles;

 

•

the failure of securities analysts to cover our common stock after the Spin-Off;

 

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changes in earnings estimates by securities analysts;

 

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the operating and stock price performance of other comparable companies;

 

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investor perception of our company and the food and beverage industry;

 

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natural or environmental disasters that investors believe may affect us;

 

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overall market fluctuations;

 

•

results from any material litigation or government investigation;

 

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changes in laws and regulations, including tax laws and regulations, affecting our business;

 

•

changes in capital gains taxes and taxes on dividends affecting shareholders; and

 

•

general economic conditions and other external factors.

Furthermore, our business profile and market capitalization may not fit the investment objectives of some Kraft ParentCo shareholders and, as a result, these Kraft ParentCo shareholders may sell our shares after the Distribution. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could also adversely affect the trading price of our common stock.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause our stock price to decline.

Kraft ParentCo shareholders receiving shares of our common stock in the Distribution generally may sell those shares immediately in the public market. Although we have no actual knowledge of any plan or intention of any significant shareholder to sell our common stock following the Spin-Off, it is possible that some Kraft ParentCo shareholders, including some of our larger shareholders, will sell our common stock received in the Distribution if, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives, or – in the case of index funds – we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock relating to the above events or the perception in the market that such sales will occur may decrease the market price of our common stock.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

Following the Spin-Off, we expect to pay regular cash dividends, although the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future

 

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may limit or prohibit the payment of dividends. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends, and there can be no assurance that, in the future, the combined annual dividends on Kraft ParentCo common stock, if any, and our common stock, if any, after the Spin-Off will equal the annual dividends on Kraft ParentCo common stock prior to the Spin-Off.

Your percentage ownership in Kraft Foods Group may be diluted in the future.

Your percentage ownership in Kraft Foods Group may be diluted in the future because of equity awards that we expect to grant to our directors, officers and employees. Prior to the Spin-Off, we expect to approve equity incentive plans that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments we may make in the future.

Provisions of Virginia law and our Articles of Incorporation and Bylaws may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Several provisions of Virginia law and our Articles of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that you may consider favorable. These include provisions that:

 

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provide that our directors can be removed only for cause;

 

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authorize our Board to adopt a shareholder rights plan;

 

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authorize our Board to establish one or more series of undesignated preferred stock without shareholder approval, and to determine the terms of such preferred stock at the time of issuance;

 

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do not provide for cumulative voting in the election of directors;

 

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limit the persons who may call special meetings of shareholders;

 

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do not authorize our shareholders to act by less-than-unanimous written consent;

 

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establish advance notice requirements for shareholder nominations and proposals; and

 

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limit our ability to enter into business combination transactions with certain shareholders.

These and other provisions of Virginia law and our Articles of Incorporation and Bylaws may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Kraft Foods Group, including unsolicited takeover attempts, even though the transaction may offer our shareholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. See “Description of Our Capital Stock—Certain Provisions of Virginia Law and Our Articles of Incorporation and Bylaws” for more information.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Information Statement contains “forward-looking statements.” Words such as “anticipates,” “estimates,” “expects,” “projects,” “forecasts,” “intends,” “plans,” “believes,” “may,” “will” and variations of such words and similar expressions are intended to identify our forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements made regarding business strategies, market potential, future financial performance and other events or developments that we expect or anticipate will occur in the future and statements expressing general views about future operating results. These forward-looking statements are subject to a number of important factors, including those factors discussed in detail under “Risk Factors” in this Information Statement, that could cause our actual results to differ materially from those indicated in any such forward-looking statements. These factors include, but are not limited to, increased competition; our ability to differentiate our products from retailer and economy brands; our ability to maintain our reputation and brand image; increasing consolidation of retail customers; changes in relationships with our significant customers and suppliers; continued volatility of, and sharp increases in, commodity and other input costs; pricing actions; increased costs of sales; regulatory or legal changes, restrictions or actions; unanticipated expenses such as litigation or legal settlement expenses; product recalls and product liability claims; unanticipated business disruptions; unexpected safety or manufacturing issues; our ability to predict, identify and interpret changes in consumer preferences and demand; a shift in our product mix to lower margin offerings; our ability to complete proposed divestitures or acquisitions; our ability to realize the expected benefits of acquisitions if they are completed; our indebtedness and our ability to pay our indebtedness; disruptions in our information technology networks and systems; our inability to protect our intellectual property rights; continued consumer weakness; weakness in economic conditions and tax law changes. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this Information Statement, except as required by applicable law or regulation.

 

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THE SPIN-OFF

Background

On August 4, 2011, Kraft ParentCo announced plans to create two independent public companies: the Global Snacks Business and the North American Grocery Business. To effect the separation, Kraft ParentCo will undertake the Internal Reorganization described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement,” following which Kraft ParentCo will hold the Global Snacks Business and Kraft Foods Group, Kraft ParentCo’s wholly owned subsidiary, will hold the North American Grocery Business.

Following the Internal Reorganization, Kraft ParentCo will distribute all of its equity interest in us, consisting of all of the outstanding shares of our common stock, to Kraft ParentCo’s shareholders on a pro rata basis. Following the Spin-Off, Kraft ParentCo will not own any equity interest in us, and we will operate independently from Kraft ParentCo. No approval of Kraft ParentCo’s shareholders is required in connection with the Spin-Off, and Kraft ParentCo’s shareholders will not have any appraisal rights in connection with the Spin-Off.

The Spin-Off described in this Information Statement is subject to the satisfaction, or Kraft ParentCo’s waiver, of a number of conditions. In addition, Kraft ParentCo has the right not to complete the Spin-Off if, at any time, the Kraft ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable. For a more detailed description, see “—Conditions to the Spin-Off.”

Reasons for the Spin-Off

The Kraft ParentCo Board has regularly reviewed Kraft ParentCo’s businesses to ensure that Kraft ParentCo’s resources are utilized in a manner that is in the best interests of Kraft ParentCo and its shareholders. In this review process, the Kraft ParentCo Board, with input and advice from Kraft ParentCo’s management, has evaluated different alternatives, including potential opportunities for dispositions, acquisitions, business combinations and separations, with the goal of enhancing shareholder value. Because of the differences in the operations, geographical scope and strategic focus of the two businesses, a separation of the North American Grocery Business from the Global Snacks Business was one of the alternatives that the Kraft ParentCo Board evaluated from time to time. As part of this evaluation of a possible separation, the Kraft ParentCo Board considered a number of factors, including the strategic focus of and flexibility for the Global Snacks Business and the North American Grocery Business, the ability of the Global Snacks Business and the North American Grocery Business to compete and operate efficiently and effectively as separate public companies, the financial profile of the Global Snacks Business and the North American Grocery Business, the potential reaction of investors and the probability of successful execution of the various structural alternatives and the risks associated with those alternatives.

In 2011, the Kraft ParentCo Board again reviewed potential strategic alternatives, including a separation of the North American Grocery Business and the Global Snacks Business. As a result of this evaluation, after considering various factors in light of Kraft ParentCo’s businesses at that time and input from Goldman, Sachs & Co. and Centerview Partners, the Kraft ParentCo Board determined that proceeding with a spin-off of the North American Grocery Business at this time would be in the best interests of Kraft ParentCo and its shareholders. The Kraft ParentCo Board believes that creating two public companies will present a number of opportunities:

 

•

The Spin-Off will allow each company to focus on its distinct growth profile, product categories, distribution systems and strategic priorities, with customized cultures, organizational structures, operating models and financial targets that best fit its own business, markets and unique opportunities.

 

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•

The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

 

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The Spin-Off will allow investors to value Kraft ParentCo and Kraft Foods Group based on their particular operational and financial characteristics and thus invest accordingly.

In determining whether to effect the Spin-Off, the Kraft ParentCo Board considered the costs and risks associated with the transaction, including the costs associated with preparing Kraft Foods Group to become an independent, publicly traded company, the risk of volatility in our stock price immediately following the Spin-Off due to sales by Kraft ParentCo’s shareholders whose investment objectives may not be met by our common stock, the time it may take for Kraft Foods Group to attract its optimal shareholder base, any potential negative impact on Kraft ParentCo’s credit ratings as a result of the divestiture of our assets, the possibility of disruptions in our business as a result of the Spin-Off, the risk that the combined trading prices of our common stock and Kraft ParentCo’s common stock after the Spin-Off may drop below the trading price of Kraft ParentCo’s common stock before the Spin-Off and the loss of synergies and scale from operating as one company. Notwithstanding these costs and risks, taking into account the factors discussed above, the Kraft ParentCo Board determined that the Spin-Off was the best alternative to achieve the above objectives and enhance shareholder value.

When and How You Will Receive Kraft Foods Group Shares

Kraft ParentCo will distribute to its shareholders, pro rata,              shares of our common stock for every              shares of Kraft ParentCo common stock outstanding as of                     , 2012, the Record Date of the Distribution.

Prior to the Spin-Off, Kraft ParentCo will deliver all of the issued and outstanding shares of our common stock to the distribution agent. Wells Fargo Shareowner Services will serve as distribution agent in connection with the distribution of our common stock and as transfer agent and registrar for our common stock.

If you own Kraft ParentCo common stock as of the close of business on                     , 2012, the shares of our common stock that you are entitled to receive in the Distribution will be issued to your account as follows:

 

•

Registered shareholders. If you own your shares of Kraft ParentCo common stock directly, either through an account with Kraft ParentCo’s transfer agent or if you hold physical stock certificates, you are a registered shareholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Distribution by way of direct registration in book-entry form to your Wells Fargo account on or shortly after the Distribution Date. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to shareholders, as is the case in the Distribution. You will be able to access information regarding your book-entry account holding the Kraft Foods Group shares at www.shareowneronline.com using the same credentials that you use to access your Kraft ParentCo account or via our transfer agent’s interactive voice response system at (866) 655-7238.

About one week after the Distribution Date, the distribution agent will mail to you a Wells Fargo account statement and a check for any cash in lieu of fractional shares you are entitled to receive. See “—Treatment of Fractional Shares.” The Wells Fargo account statement will indicate the number of whole shares of our common stock that have been registered in book-entry form in your name.

 

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•

“Street name” or beneficial shareholders. Most Kraft ParentCo shareholders own their shares of Kraft ParentCo common stock beneficially through a bank, broker or other nominee. In these cases, the bank, broker or other nominee holds the shares in “street name” and records your ownership on its books. If you own your shares of Kraft ParentCo common stock through a bank, broker or other nominee, your bank, broker or other nominee will credit your account with the whole shares of our common stock that you receive in the Distribution on or shortly after the Distribution Date. We encourage you to contact your bank, broker or other nominee if you have any questions concerning the mechanics of having shares held in street name.

If you sell any of your shares of Kraft ParentCo common stock on or before the Distribution Date, the buyer of those shares, and not you, may in some circumstances be entitled to receive the shares of our common stock issuable in respect of the shares sold. See “—Trading Prior to the Distribution Date” for more information.

We are not asking Kraft ParentCo shareholders to take any action in connection with the Spin-Off. No shareholder approval of the Spin-Off is required. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to surrender any of your shares of Kraft ParentCo common stock for shares of our common stock. The number of outstanding shares of Kraft ParentCo common stock will not change as a result of the Spin-Off.

Number of Shares You Will Receive

On the Distribution Date, you will receive              shares of our common stock for every              shares of Kraft ParentCo common stock you owned as of the Record Date.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of Kraft ParentCo shareholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). We anticipate that the distribution agent will make these sales in the “when-issued” market, and when-issued trades will generally settle within four trading days following the Distribution Date. See “—Trading Prior to the Distribution Date” for additional information regarding when-issued trading. The distribution agent will, in its sole discretion, without any influence by Kraft ParentCo or us, determine when, how, through which broker-dealer and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either Kraft ParentCo or us.

The distribution agent will send to each registered holder of Kraft ParentCo common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about one week after the Distribution Date to complete the distribution of cash in lieu of fractional shares to Kraft ParentCo shareholders. If you hold your shares through a bank, broker or other nominee, your bank, broker or nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of fractional shares. The cash you receive in lieu of fractional shares will generally be taxable to you. See “—Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution” below for more information.

 

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Material U.S. Federal Income Tax Consequences of the Contribution, Internal Distribution and Distribution

The following is a summary of the material U.S. federal income tax consequences of the Contribution, Internal Distribution and Distribution. This discussion is based on the Code, the Treasury Regulations promulgated under the Code and judicial and administrative interpretations of these laws, in each case as in effect and available as of the date of this Information Statement, all of which are subject to change at any time, possibly with retroactive effect. Any change of this nature could affect the tax consequences described below.

The Distribution is conditioned on the receipt and continued validity of a private letter ruling from the IRS, which Kraft ParentCo has requested, and an opinion of Sutherland Asbill & Brennan LLP, or “Sutherland,” Kraft ParentCo’s tax counsel, each to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except, in the case of the private letter ruling, to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares.

Although a private letter ruling is generally binding on the IRS, the continued validity of a ruling is subject to the accuracy of and compliance with the representations, assumptions and covenants made by Kraft ParentCo and us in the ruling request. If the representations or assumptions made in the private letter ruling request are untrue or incomplete in any material respect, then Kraft ParentCo will not be able to rely on this ruling. Furthermore, as part of IRS policy, the IRS will not determine whether the Internal Distribution or Distribution satisfies certain conditions that are necessary to qualify for non-recognition treatment under Section 355 of the Code, including the requirements that the distributions have a valid corporate-level business purpose and that the distributions not be used principally as a device for the distribution of earnings and profits. Rather, the private letter ruling will be based on representations by Kraft ParentCo and us that these conditions have been satisfied. Any inaccuracy in these representations could invalidate the private letter ruling. The opinion of tax counsel will address the satisfaction of these conditions. Similarly, the IRS generally will not rule on contributions of intellectual property that do not satisfy certain criteria. As a result, the private letter ruling will not address whether transfers of certain intellectual property included in the Contribution qualify for non-recognition treatment. Rather, the opinion of tax counsel will address such qualification.

The opinion of tax counsel will rely on the private letter ruling as to matters covered by the ruling. The opinion will assume that the Contribution, Internal Distribution and Distribution will be completed according to the terms of the Separation and Distribution Agreement and that the parties will report the transactions in a manner consistent with the opinion. The opinion will rely on the facts as stated in the Separation and Distribution Agreement, the Tax Sharing and Indemnity Agreement and ancillary agreements, this Information Statement and a number of other documents. In rendering the opinion, Sutherland will require and rely on representations and covenants from Kraft ParentCo and us to be delivered at the time of closing (and will assume that any such representation that is qualified by belief, knowledge or materiality is true, correct and complete without such qualification). If any of the representations or assumptions were untrue or incomplete in any material respect, any covenants were not complied with, or the facts on which the opinion is based were materially different from the facts at the time of the transactions, the conclusions in the opinion may not be correct. Sutherland will have no obligation to advise us or our shareholders of changes in its opinion after the Distribution Date due to any subsequent changes in the matters stated, represented or assumed in the opinion or any subsequent changes in the applicable law. Opinions of tax counsel are not binding on the IRS. As a

 

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result, the IRS could challenge the conclusions expressed in the opinion of tax counsel, and if the IRS prevails in its challenge, the tax consequences to you could be materially less favorable than those described below.

The opinion will be based on statutory, regulatory and judicial authority existing as of the date of the opinion, any of which may be changed at any time with retroactive effect. Neither the opinion nor the ruling will address any state, local or foreign tax consequences of the Contribution, Internal Distribution or Distribution. The Distribution may be taxable to you under state, local or foreign tax laws.

Tax consequences of the Distribution for U.S. holders

This discussion is limited to holders of Kraft ParentCo common stock that are U.S. holders, as defined immediately below, that hold their Kraft ParentCo common stock as a capital asset. A U.S. holder is a beneficial owner of Kraft ParentCo common stock that is, for U.S. federal income tax purposes:

 

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an individual who is a citizen or a resident of the United States;

 

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a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

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an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

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a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (ii) it was treated as a domestic trust under the law in effect before 1997 and a valid election is in place under applicable Treasury Regulations.

This discussion does not address all tax considerations that may be relevant to U.S. holders in light of their particular circumstances, nor does it address the consequences to U.S. holders subject to special treatment under the U.S. federal income tax laws, including but not limited to:

 

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dealers or traders in securities or currencies;

 

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tax-exempt entities;

 

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banks, financial institutions or insurance companies;

 

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real estate investment trusts, regulated investment companies or grantor trusts;

 

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persons who acquired Kraft ParentCo common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

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holders who own, or are deemed to own, at least 10% or more, by voting power or value, of Kraft ParentCo equity;

 

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holders who own Kraft ParentCo common stock as part of a position in a straddle or as part of a hedging, conversion or other risk reduction transaction for U.S. federal income tax purposes;

 

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former citizens or long-term residents of the United States;

 

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holders who are subject to the alternative minimum tax; or

 

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persons that own Kraft ParentCo common stock through partnerships or other pass-through entities.

This discussion does not address any state, local or foreign tax consequences or any estate, gift or other non-income tax consequences.

 

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If a partnership, or any other entity treated as a partnership for U.S. federal income tax purposes, holds Kraft ParentCo common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its own tax advisor as to its tax consequences.

THIS SUMMARY IS FOR GENERAL INFORMATION PURPOSES ONLY, AND IT IS NOT INTENDED TO BE, AND IT SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL, AS WELL AS FOREIGN, INCOME AND OTHER TAX CONSEQUENCES OF THE DISTRIBUTION.

Assuming the receipt and continued validity of the private letter ruling and subject to qualifications and limitations described in this Information Statement (including the discussion below relating to the receipt of cash in lieu of fractional shares) and the tax opinion, Sutherland, Kraft ParentCo’s tax counsel, is of the opinion that for U.S. federal income tax purposes the consequences of the Distribution will be as described below.

 

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A U.S. holder will not recognize any gain or loss, and will not include any amount in income, upon receiving our common stock in the Distribution;

 

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Each U.S. holder’s aggregate basis in its Kraft ParentCo common stock and our common stock received in the Distribution (including any fractional shares to which the U.S. holder would be entitled) will equal the aggregate basis the U.S. holder had in the Kraft ParentCo common stock immediately prior to the Distribution, allocated in proportion to the fair market value of each; and

 

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Each U.S. holder’s holding period in our common stock received in the Distribution will include the U.S. holder’s holding period in its Kraft ParentCo common stock on which the Distribution was made, provided that the Kraft ParentCo common stock is owned as a capital asset on the date of the Distribution.

U.S. holders that have acquired different blocks of Kraft ParentCo common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, shares of our common stock distributed with respect to such blocks of Kraft ParentCo common stock. Fair market value generally is the price at which a willing buyer and a willing seller, neither of whom is under any compulsion to buy or to sell and both having reasonable knowledge of the facts, would exchange property. U.S. federal income tax law does not specifically prescribe how U.S. holders should determine the fair market values of Kraft ParentCo common stock and our common stock for purposes of allocating basis. You should consult your tax advisor to determine what measure of fair market value is appropriate. For purposes of reporting to the IRS, Kraft ParentCo and we will calculate the fair market value of our respective common stock based on the mean of the highest and lowest trading prices of the stock on the first full trading day after the Distribution.

Cash in lieu of fractional shares

If a U.S. holder receives cash in lieu of a fractional share of common stock in the Distribution, the U.S. holder will be treated as though it first received a distribution of the fractional share in the Distribution and then sold it for the amount of cash it actually receives. Provided the fractional share is considered to be held as a capital asset, the U.S. holder will generally recognize capital gain or loss measured by the difference between the cash received for the fractional share and the tax basis in that fractional share, determined as described above. The capital gain or loss will be a long-term capital gain or loss if the U.S. holder’s holding period for the Kraft ParentCo common stock, with respect to which the U.S. holder received the fractional share, is more than one year on the Distribution Date.

 

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Tax consequences for U.S. holders if the Distribution fails to qualify for non-recognition treatment

If the Distribution does not qualify for non-recognition treatment, each U.S. holder who receives our common stock in the Distribution would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock it receives (including any fractional shares received), which would generally result in:

 

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a taxable dividend to the extent of the U.S. holder’s ratable share of Kraft ParentCo’s current and accumulated earnings and profits, as increased to reflect any gain recognized by Kraft ParentCo on a taxable distribution;

 

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a reduction in the U.S. holder’s basis (but not below zero) in Kraft ParentCo common stock to the extent the amount received exceeds the U.S. holder’s share of Kraft ParentCo’s earnings and profits; and

 

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a taxable gain from the exchange of Kraft ParentCo common stock to the extent the amount it receives exceeds both the U.S. holder’s share of Kraft ParentCo’s earnings and profits and the basis in the U.S. holder’s Kraft ParentCo common stock.

Any amounts withheld in respect of taxes from the payments of cash in lieu of fractional shares will be taken into account in determining each U.S. holder’s tax liability if the Distribution does not qualify for non-recognition treatment.

Information reporting and backup withholding

Payments of cash in lieu of a fractional share of our common stock may, under certain circumstances, be subject to “backup withholding,” unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations and non-U.S. holders will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding does not constitute an additional tax, but is merely an advance payment that may be refunded or credited against a holder’s U.S. federal income tax liability if the required information is supplied to the IRS.

U.S. Treasury Regulations require each U.S. holder that immediately before the Distribution owned 5% or more (by vote or value) of the total outstanding stock of Kraft ParentCo to attach to its U.S. federal income tax return for the year in which our common stock is received a statement setting forth certain information related to the Distribution.

Tax consequences for Kraft ParentCo, the New Snacks Company (as defined under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement”) and us of the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” and the Distribution

Assuming the receipt and continued validity of the private letter ruling and subject to qualifications and limitations set forth therein and in the tax opinion, Sutherland, Kraft ParentCo’s tax counsel, is of the opinion that, for U.S. federal income tax purposes, the consequences of the transactions will be as described below:

 

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Kraft ParentCo will not recognize any gain or loss on the Internal Distribution and the Distribution;

 

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We will not recognize any gain or loss on the Contribution and the Internal Distribution; and

 

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The New Snacks Company will not recognize any gain or loss on the Contribution.

 

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Tax consequences for Kraft ParentCo, the New Snacks Company and us if the Contribution and Internal Distribution fail to qualify for non-recognition treatment

If the Contribution and the Internal Distribution do not qualify for non-recognition treatment, we (or Kraft ParentCo, as the common parent of the consolidated group) would recognize taxable gain equal to the excess of the fair market value of the assets transferred to the New Snacks Company in the Contribution over our tax basis in those assets. Under the Tax Sharing and Indemnity Agreement, to the extent that we were liable for any such tax on the Contribution or Internal Distribution, Kraft ParentCo would generally be obligated to indemnify us against such tax liability. See, however, “—Indemnification obligation” below.

Tax consequences for Kraft ParentCo, the New Snacks Company and us if the Distribution fails to qualify for non-recognition treatment

If the Distribution does not qualify for non-recognition treatment, Kraft ParentCo would recognize taxable gain equal to the excess of the fair market value of our common stock distributed to Kraft ParentCo’s shareholders over Kraft ParentCo’s tax basis in our common stock. In that case, the gain recognized by Kraft ParentCo would be substantial.

Indemnification obligation

Even if the Distribution otherwise qualifies for non-recognition of gain or loss under Section 355 of the Code, it may be taxable to Kraft ParentCo, but not Kraft ParentCo’s shareholders, under Section 355(e) of the Code if 50% or more (by vote or value) of our common stock or Kraft ParentCo common stock is acquired as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of Kraft ParentCo’s or our common stock within two years before or after the Distribution are presumed to be part of such a plan, although Kraft ParentCo or we may be able to rebut that presumption based on either applicable facts and circumstances or a “safe harbor” described in the tax regulations. If such an acquisition of Kraft ParentCo’s or our common stock triggers the application of Section 355(e) of the Code, Kraft ParentCo would recognize a gain equal to the excess of the fair market value of our common stock it holds immediately before the completion of the Distribution over Kraft ParentCo’s tax basis in that stock.

Generally, taxes resulting from the failure of the Spin-Off to qualify for non-recognition treatment for U.S. federal income tax purposes would be imposed on Kraft ParentCo or Kraft ParentCo’s shareholders, and Kraft ParentCo would generally be obligated to indemnify us against such taxes under the Tax Sharing and Indemnity Agreement. However, under the Tax Sharing and Indemnity Agreement, we could be required, under certain circumstances, to indemnify Kraft ParentCo and its affiliates against all tax-related liabilities caused by those failures, to the extent those liabilities result from an action we or our affiliates take or from any breach of our or our affiliates’ representations, covenants or obligations under the Tax Sharing and Indemnity Agreement or any other agreement we enter into in connection with the Spin-Off. Events triggering an indemnification obligation under the agreement include events occurring after the Distribution that cause Kraft ParentCo to recognize a gain under Section 355(e) of the Code. See “Risk Factors—Risks Relating to the Spin-Off—We could have an indemnification obligation to Kraft ParentCo if the transactions we undertake in the Spin-Off do not qualify for non-recognition treatment, which could materially adversely affect our financial condition” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement.”

Results of the Spin-Off

After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately              holders of shares of our common stock and approximately              million shares of our common stock outstanding, based on the number of Kraft ParentCo shareholders and shares of Kraft ParentCo common stock outstanding on                    , 2012. The actual number of shares of our common stock Kraft ParentCo will distribute in the Spin-Off will depend on the actual number of shares of Kraft ParentCo common stock outstanding on the Record

 

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Date, and will reflect any issuance of new shares or exercises of outstanding options pursuant to Kraft ParentCo’s equity plans on or prior to the Record Date. The Spin-Off will not affect the number of outstanding shares of Kraft ParentCo common stock or any rights of Kraft ParentCo shareholders, although we expect the trading price of shares of Kraft ParentCo common stock immediately following the Distribution to be lower than immediately prior to the Distribution because Kraft ParentCo’s trading price will no longer reflect the value of the North American Grocery Business. Furthermore, until the market has fully analyzed the value of Kraft ParentCo without the North American Grocery Business, the price of shares of Kraft ParentCo common stock may fluctuate.

Before our separation from Kraft ParentCo, we intend to enter into a Separation and Distribution Agreement and several other agreements with Kraft ParentCo related to the Spin-Off. These agreements will govern the relationship between Kraft ParentCo and us up to and after completion of the Spin-Off and allocate between Kraft ParentCo and us various assets, liabilities, rights and obligations, including employee benefits, intellectual property and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo.”

Listing and Trading of our Common Stock

As of the date of this Information Statement, we are a wholly owned subsidiary of Kraft ParentCo. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Distribution. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We intend to list our shares of common stock on the                  under the symbol “             .” Following the Spin-Off, Kraft ParentCo common stock will trade on the                      under the symbol “MDLZ.”

Neither we nor Kraft ParentCo can assure you as to the trading price of Kraft ParentCo common stock or our common stock after the Spin-Off, or as to whether the combined trading prices of Kraft ParentCo common stock and our common stock after the Spin-Off will be less than, equal to or greater than the trading prices of Kraft ParentCo common stock prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off. See “Risk Factors—Risks Relating to our Common Stock and the Securities Market” for more detail.

The shares of our common stock distributed to Kraft ParentCo shareholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act of 1933, or the “Securities Act,” or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.

Trading Prior to the Distribution Date

We expect a “when-issued” market in our common stock to develop as early as two trading days prior to the Record Date for the Distribution and continue up to and including the Distribution Date. When-issued trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of Kraft ParentCo common stock on the Record Date, you will be entitled to receive shares of our common stock in the Distribution. You may trade this entitlement to receive shares of our common stock, without the shares of Kraft ParentCo common stock you own, on the when-issued market. We expect when-issued trades of our common stock to settle within four trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that when-issued trading of our common stock will end and “regular-way” trading will begin.

 

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We also anticipate that, as early as two trading days prior to the Record Date and continuing up to and including the Distribution Date, there will be two markets in Kraft ParentCo common stock: a “regular-way” market and an “ex-distribution” market. Shares of Kraft ParentCo common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Distribution. Therefore, if you sell shares of Kraft ParentCo common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Distribution. However, if you own shares of Kraft ParentCo common stock on the Record Date and sell those shares in the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Distribution.

Following the Distribution Date, we expect shares of our common stock to be listed on the                      under the trading symbol “            .” If when-issued trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our when-issued trading symbol when and if it becomes available. If the Spin-Off does not occur, all when-issued trading will be null and void.

Conditions to the Spin-Off

We expect that the Spin-Off will be effective on the Distribution Date, provided that the following conditions have been satisfied or the Kraft ParentCo Board has waived the conditions:

 

•

the Kraft ParentCo Board will, in its sole and absolute discretion, have authorized and approved:

 

(i)

the Internal Reorganization,

 

(ii)

any other transfers of assets and assumptions of liabilities contemplated by the Separation and Distribution Agreement and any related agreements, and

 

(iii)

the Distribution,

and will not have withdrawn that authorization and approval;

 

•

the Kraft ParentCo Board will have declared the Distribution of all outstanding shares of our common stock to Kraft ParentCo’s shareholders;

 

•

the SEC will have declared our Registration Statement on Form 10, of which this Information Statement is a part, effective under the Exchange Act, no stop order suspending the effectiveness of the Registration Statement will be in effect, no proceedings for that purpose will be pending before or threatened by the SEC and notice of Internet availability of this Information Statement or this Information Statement will have been mailed to Kraft ParentCo’s shareholders;

 

•

or another national securities exchange approved by the Kraft ParentCo Board will have accepted our common stock for listing, subject to official notice of issuance;

 

•

the Internal Reorganization will have been completed;

 

•

Kraft ParentCo will have received a private letter ruling from the IRS, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code (except to the extent the IRS generally will not rule on certain transfers of intellectual property, which will be covered solely by the opinion) and

 

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(ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares, and that private letter ruling will remain in effect as of the Distribution Date;

 

•

Kraft ParentCo will have received an opinion from its tax counsel, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, that, subject to the accuracy of and compliance with certain representations, assumptions and covenants, (i) the Contribution and Internal Distribution described under “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” will qualify for non-recognition of gain or loss to Kraft ParentCo and us pursuant to Sections 368 and 355 of the Code and (ii) the Distribution will qualify for non-recognition of gain or loss to Kraft ParentCo and Kraft ParentCo’s shareholders pursuant to Section 355 of the Code, except to the extent of cash received in lieu of fractional shares;

 

•

Kraft ParentCo will have received an advance income tax ruling from the CRA, in form and substance satisfactory to Kraft ParentCo in its sole and absolute discretion, to the effect that, subject to the accuracy of and compliance with certain representations, assumptions and covenants and based on the current provisions of the Canadian Tax Act, the separation of the assets and liabilities in Canada held in connection with the Global Snacks Business from the assets and liabilities in Canada held in connection with the North American Grocery Business will be treated for purposes of the Canadian Tax Act as resulting in a “butterfly” reorganization with no material Canadian federal income tax payable by Kraft ParentCo’s Canadian subsidiary, our Canadian subsidiary or their respective shareholders, and that advance income tax ruling will remain in effect as of the Distribution Date;

 

•

no order, injunction or decree that would prevent the consummation of the Distribution will be threatened, pending or issued (and still in effect) by any governmental entity of competent jurisdiction, no other legal restraint or prohibition preventing the consummation of the Distribution will be in effect, and no other event outside the control of Kraft ParentCo will have occurred or failed to occur that prevents the consummation of the Distribution;

 

•

no other events or developments will have occurred prior to the Distribution that, in the judgment of the Kraft ParentCo Board, would result in the Distribution having a material adverse effect on Kraft ParentCo or its shareholders;

 

•

Kraft ParentCo and we will have executed and delivered the Separation and Distribution Agreement, Transition Services Agreements, Tax Sharing and Indemnity Agreement, Employee Matters Agreement, Intellectual Property Ownership and/or License Agreements, Manufacturing and Supply Agreements, Canadian Transfer Agreement and all other ancillary agreements related to the Spin-Off;

 

•

Kraft ParentCo will have duly elected the individuals to be listed as members of our post-Distribution Board in this Information Statement, and those individuals will be members of our Board immediately prior to the Distribution Date; provided, however, that to the extent required by law or any requirement of                 , our current directors will appoint one independent director and this director will begin his or her term prior to the Distribution in accordance with such law or requirement;

 

•

each individual who will be an employee of Kraft ParentCo after the Distribution and who is a director or officer of Kraft Foods Group will have resigned or been removed from the directorship and/or office held by that person, effective no later than immediately prior to the Distribution; and

 

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•

immediately prior to the Distribution, our Articles of Incorporation and Bylaws, each in substantially the form filed as an exhibit to the Registration Statement on Form 10 of which this Information Statement is a part, will be in effect.

The fulfillment of the above conditions will not create any obligation on Kraft ParentCo’s part to effect the Spin-Off. We are not aware of any material federal, foreign or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the                      approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Distribution. Kraft ParentCo has the right not to complete the Spin-Off if, at any time, the Kraft ParentCo Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of Kraft ParentCo or its shareholders or is otherwise not advisable.

Reasons for Furnishing this Information Statement

We are furnishing this Information Statement solely to provide information to Kraft ParentCo’s shareholders who will receive shares of our common stock in the Distribution. You should not construe this Information Statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Kraft ParentCo. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither Kraft ParentCo nor we undertake any obligation to update the information except in the normal course of Kraft ParentCo’s and our public disclosure obligations and practices.

 

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DIVIDEND POLICY

Following the Spin-Off, we expect to pay regular cash dividends, though the timing, declaration, amount and payment of future dividends to shareholders will fall within the discretion of our Board. Our Board’s decisions regarding the payment of future dividends will depend on many factors, including our financial condition, earnings, capital requirements and debt service obligations, as well as legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. In addition, the terms of the agreements governing our new debt or debt that we may incur in the future may limit or prohibit the payment of dividends. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. See “Risk Factors—Risks Relating to Our Common Stock and the Securities Market—We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.”

 

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CAPITALIZATION

The following table sets forth the unaudited cash and capitalization of Kraft Foods Group as of December 31, 2011, on an historical basis and on a pro forma basis to give effect to the Spin-Off and the transactions related to the Spin-Off as if they occurred on December 31, 2011. You can find an explanation of the pro forma adjustments made to our historical combined financial statements under “Unaudited Pro Forma Combined Financial Statements.” You should review the following table in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

		As of December 31, 2011
		Historical				Pro Forma (unaudited)
		(in millions)
Cash and cash equivalents		$	—			$	—
Indebtedness:
Capital leases		$	35			$	35
Other indebtedness			—				10,000
Total indebtedness		$	35			$	10,035
Equity:
Common stock, no par value		$	—			$	—
Additional paid-in capital			—				7,014
Parent company investment			16,976				—
Accumulated other comprehensive earnings (losses)			(377	)			(3,204	)
Total equity		$	16,599			$	3,810
Total capitalization		$	16,634			$	13,845

We have not yet finalized our post-Spin-Off capitalization, and these adjustments are subject to change.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents our selected historical combined financial data as of and for each of the fiscal years in the five-year period ended December 31, 2011. We derived the selected historical combined financial data as of December 31, 2011 and 2010, and for each of the fiscal years in the three-year period ended December 31, 2011, from our audited combined financial statements included elsewhere in this Information Statement. We derived the selected historical combined financial data as of December 31, 2009, and as of and for the fiscal years ended December 31, 2008 and 2007, from our unaudited combined financial statements that are not included in this Information Statement. In our management’s opinion, the unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and include all adjustments, consisting only of ordinary recurring adjustments, necessary for a fair presentation of the information for the periods presented.

Our combined financial statements include certain expenses of Kraft ParentCo that were allocated to us for certain functions, including general corporate expenses related to finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These costs may not be representative of the future costs we will incur as an independent public company. In addition, our historical financial information does not reflect changes that we expect to experience in the future as a result of our Spin-Off from Kraft ParentCo, including changes in the financing, operations, cost structure and personnel needs of our business. Our combined financial statements also do not reflect the allocation of certain net liabilities between Kraft ParentCo and us as reflected under “Unaudited Pro Forma Combined Financial Statements” included elsewhere in this Information Statement. Consequently, the financial information included here may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

 

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You should read the selected historical combined financial data presented below in conjunction with our audited combined financial statements and accompanying notes, “Unaudited Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information Statement.

 

		2011				2010				2009				2008				2007
		(in millions)
Year Ended December 31(1)(2) :
Net revenues		$	18,655			$	17,797			$	17,278			$	17,708			$	17,023
Cost of sales			12,761				11,778				11,281				12,298				11,467
Gross profit			5,894				6,019				5,997				5,410				5,556
Selling, general and administrative expenses			2,973				3,066				3,031				2,999				2,855
Asset impairment and exit costs			(2	)			(8	)			(9	)			244				269
Operating income			2,923				2,961				2,975				2,167				2,432
Operating margin			15.7	%			16.6	%			17.2	%			12.2	%			14.3	%
Interest and other expense, net			9				7				34				24				20
Royalty (income) from affiliates			(55	)			(43	)			(47	)			(38	)			(46	)
Earnings from continuing operations before income taxes			2,969				2,997				2,988				2,181				2,458
Provision for income taxes			1,130				1,110				1,036				728				841
Earnings from continuing operations(1)			1,839				1,887				1,952				1,453				1,617
Earnings and gains from discontinued operations, net of income taxes(2)			—				1,644				218				1,209				371
Net earnings		$	1,839			$	3,531			$	2,170			$	2,662			$	1,988
Net cash provided by operating activities		$	2,664			$	828			$	3,017			$	2,920			$	2,277
Capital expenditures			401				448				513				533				623
Depreciation and amortization			364				354				348				356				404
As of December 31(1)(2):
Inventories, net		$	1,943			$	1,773			$	1,795			$	1,828			$	1,995
Property, plant and equipment, net			4,278				4,283				4,521				4,425				4,837
Total assets			21,539				21,598				22,189				22,052				24,339
Long-term debt			27				31				48				227				193
Total debt			35				39				55				231				200
Total long-term liabilities			2,368				2,193				2,247				2,356				2,505
Total equity			16,599				17,039				17,512				17,297				19,649

 

(1)

Significant items affecting comparability of earnings from continuing operations include a 53rd week of operating results in 2011 and not in any of the other fiscal years presented; the cessation of the Starbucks CPG business in 2011; and cost savings initiatives that we began in 2009 and that are included in cost of sales and selling, general and administrative expenses. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information and the notes to our historical combined financial statements, including Note 2, “Summary of Significant Accounting Policies,” Note 14, “Segment Reporting,” and Note 7, “Cost Savings Initiatives.” Costs incurred in connection with a 2004 - 2008 restructuring program are reflected within asset impairment and exit costs in 2007 and 2008.

 

(2)

Earnings and gains from discontinued operations include the results and gains on the sales of our Frozen Pizza business in 2010 and our Post cereals business in 2008. Refer to Note 3, “Divestitures,” to our historical combined financial statements for more information on the Frozen Pizza business divestiture. In connection with the Post cereals divestiture, we reported earnings and a gain from discontinued operations, net of tax, of $1,039 million in 2008 and $232 million in 2007. Assets divested in the Post cereals divestiture included $94 million of inventory, $425 million of net property, plant and equipment and $1,234 million of goodwill. In addition, $11 million of other assets and $3 million of other liabilities were divested, totaling $1,761 million of divested net assets.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements as of and for the year ended December 31, 2011, were derived from our audited combined financial statements included elsewhere in this Information Statement.

The unaudited pro forma combined financial statements reflect adjustments to our historical financial results in connection with the Spin-Off and related transactions. The unaudited pro forma combined statement of earnings gives effect to these events as if they occurred on January 1, 2011, the beginning of our last fiscal year. The unaudited pro forma combined balance sheet gives effect to these events as if they occurred as of December 31, 2011, our latest balance sheet date. The pro forma adjustments are described in the accompanying notes and include the following:

 

•

Incurrence of $10 billion of debt as part of our plan to capitalize our company and secure an investment grade credit rating.

 

•

Distribution of cash, including proceeds from debt, to Kraft ParentCo in connection with our capitalization plans.

 

•

Transfer of net liabilities between Kraft ParentCo and us, including certain employee benefit plan and other obligations, net of any related assets.

 

•

Removal of royalty income received from Kraft ParentCo’s affiliates that we will no longer receive following the Distribution Date. The royalty income relates to rights to intellectual property that we will not retain following the Distribution Date.

 

•

Issuance of approximately              million shares of our common stock. This number of shares is based on the number of Kraft ParentCo common shares outstanding on December 31, 2011 and a distribution ratio of              shares of our common stock for every              shares of Kraft ParentCo common stock.

The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying notes. Our management believes that these assumptions and adjustments are reasonable under the circumstances and given the information available at this time. However, these adjustments are subject to change as Kraft ParentCo and we finalize the terms of the Spin-Off and our agreements related to the Spin-Off.

The unaudited pro forma financial information is for illustrative and informational purposes only and is not intended to represent, or be indicative of, what our financial position or results of operations would have been had the Spin-Off and related transactions occurred on the dates indicated. The unaudited pro forma financial information also should not be considered representative of our financial position, and you should not rely on the financial information presented below as a representation of our future performance.

The unaudited pro forma combined statement of earnings does not reflect non-recurring costs of our transition to becoming an independent company. We expect to recognize non-recurring expenses related to restructuring, including employee and manufacturing facility costs, and costs to start up certain stand-alone functions and information technology systems. On March 14, 2012, the Kraft ParentCo Board approved $1.7 billion of non-recurring expenses (excluding costs to incur debt) and $0.4 billion in capital expenditures to facilitate the Spin-Off. The non-recurring costs include Spin-Off transaction and transition costs of approximately $0.6 billion and restructuring and implementation costs of approximately $1.1 billion. The program is expected to be completed by the end of 2014. At this time, the timing and our portion of the $1.7 billion of non-recurring costs are not reasonably determinable. Based on our estimates at this time, we expect to fund our portion of the transition costs with cash from operations and financing activities.

 

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We also expect to experience changes in our ongoing cost structure when we become an independent, publicly traded company. For example, Kraft ParentCo currently provides many corporate functions on our behalf, including, but not limited to, finance, legal, information technology, human resources, compliance, shared services and insurance program administration. Our historical combined financial statements include allocations of these expenses from Kraft ParentCo. However, these costs may not be representative of the future costs we will incur as an independent public company. Due to the anticipated changes in our cost structure related to our restructuring program, we have not reflected the change in our annual costs associated with our providing these functions in the future in the unaudited pro forma combined statement of earnings. We describe the allocation of Kraft ParentCo’s general and administrative corporate expenses in Note 1, “Background and Basis of Presentation,” and Note 2, “Summary of Significant Accounting Policies,” to our historical combined financial statements included in this Information Statement.

The unaudited pro forma combined financial statements should be read in conjunction with our audited combined financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Information Statement.

 

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Kraft Foods Group, Inc.

Unaudited Pro Forma Combined Statement of Earnings

Year Ended December 31, 2011

(in millions, except per share amounts)

 

		Historical Kraft Foods Group, Inc.				Pro Forma Adjustments(1)				Notes		Pro Forma Kraft Foods Group, Inc.
Net revenues		$	18,655									$	18,655
Cost of sales			12,761				48			(c)			12,809
Gross profit			5,894										5,846
Selling, general and administrative expenses			2,973				50			(c)			3,023
Asset impairment and exit costs			(2	)									(2	)
Operating income			2,923										2,825
Interest and other expense, net			9				580			(a)			589
Royalty income from affiliates			(55	)			55			(e)			—
Earnings before income taxes			2,969										2,236
Provision for income taxes			1,130				(276	)		(i)			854
Net earnings		$	1,839									$	1,382
Pro forma earnings per share:
Basic										(g)
Diluted										(h)
Pro forma weighted average shares outstanding:
Basic										(g)
Diluted										(h)

 

(1)	The change in our annual costs related to our becoming an independent, publicly traded company is not reflected above.

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Kraft Foods Group, Inc.

Unaudited Pro Forma Combined Balance Sheet

As of December 31, 2011

(in millions)

 

		Historical Kraft Foods Group, Inc.				Pro Forma Adjustments				Notes		Pro Forma Kraft Foods Group, Inc.
ASSETS
Cash and cash equivalents		$	—				—			(a), (b)		$	—
Receivables, net			903				210			(d)			1,113
Inventories, net			1,943										1,943
Deferred income taxes			232										232
Other current assets			194										194
Total current assets			3,272										3,482
Property, plant and equipment, net			4,278										4,278
Goodwill			11,316										11,316
Intangible assets, net			2,630										2,630
Prepaid pension assets			14										14
Deferred income taxes			—				68			(c), (d), (i)			68
Other assets			29										29
TOTAL ASSETS		$	21,539									$	21,817
LIABILITIES
Current portion of long-term debt		$	8									$	8
Accounts payable			1,447				320			(d)			1,767
Accrued marketing			575										575
Accrued employment costs			242										242
Other current liabilities			300				273			(c), (d)			573
Total current liabilities			2,572										3,165
Long-term debt			27				10,000			(a)			10,027
Deferred income taxes			1,603				(1,603	)		(i)			—
Accrued pension costs			117				1,365			(c)			1,482
Accrued postretirement costs			—				2,834			(c)			2,834
Other liabilities			621				(122	)		(c), (d)			499
TOTAL LIABILITIES			4,940										18,007
EQUITY
Common stock, no par value			—				—			(f)			—
Additional paid-in capital			—				7,014			(f)			7,014
Parent company investment			16,976				(16,976	)		(b), (c), (d), (f)			—
Accumulated other comprehensive losses			(377	)			(2,827	)		(c)			(3,204	)
TOTAL EQUITY			16,599										3,810
TOTAL LIABILITIES AND EQUITY		$	21,539									$	21,817

See accompanying notes to the unaudited pro forma combined financial statements.

 

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Kraft Foods Group, Inc.

Notes to Unaudited Pro Forma Combined Financial Statements

The unaudited pro forma combined financial data as of and for the year ended December 31, 2011, includes the following adjustments:

 

(a)

Adjustment reflects our incurring an estimated $10 billion of borrowings in 2012 prior to the Spin-Off. Incurring this debt is part of our capitalization plan to redistribute debt between Kraft ParentCo and us so that both Kraft ParentCo and we may obtain investment grade credit ratings following the Spin-Off. We currently expect to effect this redistribution through a combination of some or all of the following: long-term and short-term debt issuances, borrowings under bank credit facilities or debt exchanges with respect to certain of Kraft ParentCo’s existing debt obligations. In the pro forma combined balance sheet, we have assumed that all of the debt is long-term and generated cash proceeds. The actual mix of our debt, and the amount of cash proceeds we receive, are directly related and will depend on a number of factors, including market conditions at the time we incur the debt. In connection with our capitalization plan, on March 8, 2012, we entered into a $4 billion 364-day senior unsecured revolving credit facility. As of March 31, 2012, no amounts were borrowed or outstanding under the credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

In connection with the $10 billion of debt we expect to incur, we have assumed an annual interest expense of approximately $580 million based on the weighted-average 5.8% interest rate on Kraft ParentCo’s outstanding U.S. dollar long-term bonds as of December 31, 2011. The actual interest rate we secure will depend on the final debt structure that we execute prior to the Spin-Off and financial market conditions at that time. A change of one-eighth of 1% (12.5 basis points) in the assumed 5.8% interest rate would increase or decrease the annual interest expense by approximately $13 million.

 

(b)

Prior to the Spin-Off, we expect to distribute cash, including proceeds from debt, to Kraft ParentCo as part of our capitalization plan. Under the plan, Kraft ParentCo will apply the cash distributions to reduce its debt while we increase our debt to the planned capital structure. We have reflected a $10 billion cash distribution to Kraft ParentCo prior to the Spin-Off based on the assumed proceeds of the debt described in note (a). The amount of cash proceeds we receive from debt we incur prior to the Spin-Off, and thus the amount of cash distributed to Kraft ParentCo, will depend on the manner in which we incur the debt, which is not certain at this time and will depend on a number of factors, including market conditions at the time we incur the debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

(c)

Certain of our eligible employees participate in the pension, postretirement and postemployment benefit plans offered by Kraft ParentCo. When we become a stand-alone, independent company, we intend to assume these obligations and provide the benefits directly. Kraft ParentCo will transfer to us the plan liabilities and assets associated with our active and retired and other former employees. Additionally, we intend to assume certain net benefit plan liabilities for most of the Global Snacks Business’ retired and other former North American employees as of the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Employee Matters Agreement.” The net benefit obligations we intend to assume will result in our recording estimated net benefit plan liabilities of $4,431 million, accumulated other comprehensive losses, net of tax, of $2,827 million, and $1,666 million of related deferred tax assets. The estimated incremental expense we expect to recognize is approximately $98 million, which reflects our estimate of the 2012 annual expense and is based on market conditions and benefit plan assumptions as of December 31, 2011. Our estimates may change as we approach the Distribution Date and continue to refine our estimates of the net liability transfers as of that date.

 

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(d)

While our historical financial statements reflect the allocation to us of certain assets and liabilities related to our North American Grocery Business, as of the Distribution Date, we anticipate assuming from, and transferring to, Kraft ParentCo certain obligations in their entirety to facilitate management of these obligations. In total, based on our estimates and the value of these net liabilities as of December 31, 2011, we anticipate assuming approximately $24 million of net liabilities from Kraft ParentCo as follows:

 

•

We plan to assume an estimated $110 million of net liabilities for certain North American trade accounts payable and receivables of the Global Snacks Business.

 

•

We plan to assume an estimated $47 million of primarily U.S. state and Canadian net tax liabilities and related deferred taxes. The obligation for U.S. state income taxes and Canadian federal and provincial income taxes attributable to the tax periods prior to the Spin-Off will be transferred to us, while the obligation for U.S. federal income taxes and substantially all foreign income taxes (excluding Canadian income taxes) attributable to the tax periods prior to the Spin-Off will be retained by Kraft ParentCo. Related deferred tax assets or deferred tax liabilities will also be transferred.

 

•

We plan to transfer an estimated $133 million of our workers’ compensation reserves and other accrued insurance liabilities to Kraft ParentCo.

The transfers of these obligations to and from Kraft ParentCo will not impact our net earnings. The estimated net liability amounts as of December 31, 2011 will change as we approach the Distribution Date and continue to update our estimates of the net transfers that we expect to occur as of the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement” for additional detail.

 

(e)

Adjustment reflects the removal of royalty income Kraft ParentCo’s affiliates paid to us under various royalty arrangements. After the Spin-Off, we will no longer receive royalty income under these arrangements because we will not retain the rights to the intellectual property underlying this royalty income. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Intellectual Property Ownership and/or License Agreements” for more information.

 

(f)

Adjustment reflects the pro forma recapitalization of our equity. As of the Distribution Date, Kraft ParentCo’s net investment in our business will be exchanged to reflect the Distribution of our common stock to Kraft ParentCo’s shareholders. Kraft ParentCo’s shareholders will receive shares based on a distribution ratio of              shares of our common stock for every              shares of Kraft ParentCo common stock owned as of the Record Date for the Distribution.

 

(g)

Pro forma basic earnings per share, or “EPS,” and pro forma weighted-average basic shares outstanding are based on the number of Kraft ParentCo weighted-average shares outstanding for basic EPS for the year ended December 31, 2011, adjusted for the distribution ratio of              shares of our common stock for every              shares of Kraft ParentCo common stock outstanding.

 

(h)

Pro forma diluted earnings per share and pro forma weighted-average diluted shares outstanding give effect to the potential dilution from common shares related to equity awards granted to our employees under Kraft ParentCo’s stock-based compensation programs. The actual effect on a go-forward basis will depend on various factors, including changes in the employment of our personnel from one company to another and the value of the equity awards at the time of the Spin-Off. We cannot fully estimate the dilutive effects at this time, though we believe an estimate based on applying the distribution ratio to the Kraft ParentCo weighted-average shares outstanding for diluted EPS provides a reasonable approximation of the potential dilutive effect of the equity awards.

 

(i)

The tax effects of adjustments made within the unaudited pro forma combined statement of earnings were estimated using a 37.6% marginal U.S. income tax rate for our primarily U.S.-related pro forma adjustments. On our unaudited pro forma combined balance sheet, long-term net deferred tax liabilities reflected on our historical combined balance sheet were reclassified to partially offset the long-term deferred tax assets recorded in connection with the pro forma adjustments described in notes (c) and (d).

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the other sections of this Information Statement, including our audited historical combined financial statements and the related notes, “Business” and “Unaudited Pro Forma Combined Financial Statements” and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. The forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements,” that could cause our actual results to differ materially from those indicated in the forward-looking statements.

Introduction

Management’s discussion and analysis of financial condition and results of operations accompanies our combined financial statements and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:

 

•

Overview. This section provides a brief description of the Spin-Off, our business, accounting basis of presentation and a brief summary of our results of operations.

 

•

Discussion and analysis. This section highlights items affecting the comparability of our financial results and provides an analysis of our combined and segment results of operations for the three years ended December 31, 2011.

 

•

Critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and which require significant judgment or estimates to be made in their application. We also discuss commodity cost trends impacting our historical results and which we expect will continue in 2012.

 

•

Liquidity and capital resources. This section provides an overview of our historical and anticipated cash and financing activities in connection with the Spin-Off. We also review our historical sources and uses of cash in our operating, investing and financing activities. We summarize our current and planned debt and other long-term financial commitments.

 

•

Non-GAAP financial measures. This section discusses certain operational performance measures we use internally to evaluate our operating results and to make important decisions about our business. We also provide a reconciliation of these measures to the financial measures we have reported in our historical combined financial statements so you understand the adjustments we make to further evaluate our underlying operating performance.

 

•

Quantitative and qualitative disclosures about market risk. This section discusses how we monitor and manage market risk related to changing commodity prices, currency and interest rates. We also provide an analysis of how adverse changes in market conditions could impact our results based on certain assumptions we have provided. We discuss how we hedge certain of these risks to mitigate unplanned or adverse impacts to our operating results and financial condition.

 

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Overview

Spin-Off Transaction

On August 4, 2011, Kraft ParentCo announced plans to create two independent public companies: the Global Snacks Business and the North American Grocery Business. To effect the separation, Kraft ParentCo will undertake a series of transactions to separate net assets and entities. Following these transactions, Kraft ParentCo will hold the Global Snacks Business, and we, Kraft Foods Group, will hold the North American Grocery Business. Kraft ParentCo will then distribute our common stock pro rata to its shareholders. After the Spin-Off, we will operate as an independent, publicly traded company.

The Spin-Off is subject to a number of conditions, including the receipt and continued validity of a private letter ruling from the IRS. See “The Spin-Off—Conditions to the Spin-Off” for more detail. We expect to complete the Spin-Off before the end of 2012; however, we cannot assure you that the Spin-Off will be completed on the anticipated timeline, or at all, or that the terms of the Spin-Off will not change.

Description of the Company

Kraft Foods Group operates one of the largest consumer packaged food and beverage companies in North America. We manufacture and market convenient meals, refreshment beverages and coffee, cheese and other grocery products, primarily in the United States and Canada. Our product categories span all major meal occasions, both at home and in foodservice locations.

Over the last several years, we have made significant investments in product quality, marketing and innovation behind our iconic North American brands and have implemented a series of cost saving initiatives. The Spin-Off provides us the opportunity to further tailor our strategies for the North American Grocery Business to achieve greater operational focus and drive our return on investment. Our goals are to drive revenue growth in our key product categories and leverage category-leading profit margins to deliver strong free cash flow and a highly competitive dividend payout.

Basis of Presentation

Our historical combined financial statements have been prepared on a stand-alone basis and are derived from Kraft ParentCo’s consolidated financial statements and accounting records. These historical combined financial statements reflect our financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States, or “U.S. GAAP.” The North American Grocery Business consists of Kraft ParentCo’s current U.S. and Canadian grocery, beverages, cheese, convenient meals, Planters and Corn Nuts businesses, including the related foodservice operations and certain of the grocery operations in Puerto Rico, as well as portions of its grocery export operations from the United States and Canada. See “Summary” and “Business” for additional information.

Our historical combined financial statements include certain expenses of Kraft ParentCo which were allocated to us for certain functions, including general corporate expenses related to finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenue, operating income or headcount. We consider the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as an independent public company or of the costs we will incur in the future.

 

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Certain of our eligible employees participate in the pension, postretirement and postemployment benefit plans offered by Kraft ParentCo. When we become a stand-alone, independent company, we intend to assume these obligations and provide the benefits directly. Kraft ParentCo will transfer to us the plan liabilities and assets associated with our active and retired and other former employees. Additionally, we intend to assume certain net benefit plan liabilities for most of the Global Snacks Business’ retired and other former North American employees as of the Distribution Date. The net benefit obligations we intend to assume will result in our recording estimated net benefit plan liabilities of $4,431 million, accumulated other comprehensive losses, net of tax, of $2,827 million, and $1,666 million of related deferred tax assets. The estimated incremental expense we expect to recognize is approximately $98 million, which reflects our estimate of the 2012 annual expense and is based on market conditions and benefit plan assumptions as of December 31, 2011. Our estimates may change as we approach the Distribution Date and continue to refine our estimates of the net liability transfers as of that date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Employee Matters Agreement” and “Unaudited Pro Forma Combined Financial Statements” for additional information.

While our historical financial statements reflect the allocation to us of certain assets and liabilities related to our North American Grocery Business, as of the Distribution Date, we anticipate assuming from, and transferring to, Kraft ParentCo certain obligations in their entirety to facilitate management of these obligations. In total, based on our estimates and the value of these net liabilities as of December 31, 2011, we anticipate assuming approximately $24 million of net liabilities from Kraft ParentCo. We plan to assume an estimated $110 million of net liabilities for certain North American trade accounts payable and receivables of the Global Snacks Business. We plan to assume an estimated $47 million of primarily U.S. state and Canadian net tax liabilities and related deferred taxes. The obligation for U.S. state income taxes and Canadian federal and provincial income taxes attributable to the tax periods prior to the Spin-Off will be transferred to us, while the obligation for U.S. federal income taxes and substantially all foreign income taxes (excluding Canadian income taxes) attributable to the tax periods prior to the Spin-Off will be retained by Kraft ParentCo. Related deferred tax assets or deferred tax liabilities will also be transferred. We plan to transfer an estimated $133 million of our workers’ compensation reserves and other accrued insurance liabilities to Kraft ParentCo. The transfers of these obligations to and from Kraft ParentCo will not impact our net earnings in any period. The estimated net liability amounts as of December 31, 2011 will change as we approach the Distribution Date and continue to update our estimates of the net transfers that we expect to occur as of the Distribution Date. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Separation and Distribution Agreement,” “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Tax Sharing and Indemnity Agreement” and “Unaudited Pro Forma Combined Financial Statements” for additional information.

Also, in connection with the Spin-Off, Kraft ParentCo and we intend to redistribute Kraft ParentCo’s current debt between Kraft ParentCo and us such that both companies may obtain investment grade credit ratings following the Spin-Off. To effect this redistribution, we currently expect to incur an estimated $10 billion of debt through a combination of some or all of the following: long-term and short-term debt issuances, borrowings under bank credit facilities, including our 364-day unsecured revolving credit facility, or debt exchanges with respect to certain of Kraft ParentCo’s existing debt obligations. In addition, we expect to distribute cash, including proceeds from any debt we incur, to Kraft ParentCo to allow Kraft ParentCo to reduce its debt while we increase our debt to the planned capital structure.

On March 14, 2012, the Kraft ParentCo Board approved $1.7 billion of non-recurring expenses (excluding the costs to incur debt) and $0.4 billion in capital expenditures to facilitate the Spin-Off. The non-recurring costs include Spin-Off transaction and transition costs of approximately $0.6 billion and restructuring and implementation costs of approximately $1.1 billion. The program is expected to be completed by the end of 2014. At this time, the timing and our portion of the $1.7 billion of non-recurring costs are not

 

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reasonably determinable. Based on our estimates at this time, we expect to fund our portion of the transition costs with cash from operations and financing activities. See “Unaudited Pro Forma Combined Financial Statements” for additional information.

Kraft ParentCo and its affiliates pay royalties to us under various royalty arrangements. Amounts outstanding under these arrangements are considered settled for cash at the end of each reporting period and, as such, are included in parent company investment. Royalty income from affiliates was $55 million in 2011, $43 million in 2010 and $47 million in 2009. Following the Distribution Date, we will no longer receive this royalty income because we will not retain the rights to the intellectual property underlying this royalty income. See “Unaudited Pro Forma Combined Financial Statements” and “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo—Intellectual Property Ownership and/or License Agreements” for additional information.

Due to these and other changes we anticipate in connection with the Spin-Off, the historical financial information included in this Information Statement may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented.

Summary of Operating Results

The following summary is intended to provide a few highlights of the discussion and analysis that follows.

 

•

Net revenues in 2011 increased 4.8% to $18.7 billion. In 2010, net revenues increased 3.0% to $17.8 billion.

 

•

Organic net revenues, a non-GAAP financial measure we use to evaluate our underlying results, increased 5.8% to $18.2 billion in 2011 and increased 2.0% to $17.6 billion in 2010. See “—Non-GAAP Financial Measures” below for a discussion of this financial measure and a reconciliation of organic net revenues to net revenues.

 

•

Net earnings in 2011 decreased 47.9% to $1.8 billion. In 2010, net earnings increased 62.7% to $3.5 billion. The 2011 decrease primarily related to the 2010 earnings and gain related to discontinued operations from the sale of the assets of our North American frozen pizza business.

 

•

Earnings from continuing operations in 2011 decreased 2.5% to $1.8 billion. In 2010, earnings from continuing operations decreased 3.3% to $1.9 billion.

Discussion and Analysis

Items Affecting Comparability of Financial Results

Pizza Divestiture

On March 1, 2010, we completed the sale of the assets of our North American frozen pizza business, or “Frozen Pizza,” to Nestlé USA, Inc., or “Nestle,” for $3.7 billion. Our Frozen Pizza business was a component of our U.S. Convenient Meals and Canada & N.A. Foodservice segments. The sale included the DiGiorno, Tombstone and Jack’s brands in the United States, the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also included two Wisconsin manufacturing facilities (Medford and Little Chute) and the leases for the pizza depots and delivery trucks. Approximately 3,600 of our employees transferred with the business to Nestlé. Accordingly, the results of our Frozen Pizza business have been reflected as discontinued operations on the combined statement of earnings, and prior period results of our continuing operations have been revised to exclude Frozen Pizza in a consistent manner. As a result of the divestiture, we recorded a gain on discontinued operations of $1,596 million, net of taxes, in 2010.

 

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Pursuant to the Frozen Pizza business Transition Services Agreement, we agreed to provide certain sales, co-manufacturing, distribution, information technology, accounting and finance services to Nestlé for up to two years. As of December 31, 2011, these service agreements were substantially complete.

Summary results of operations for the Frozen Pizza business through March 1, 2010 were as follows:

 

		For the Years Ended December 31,
		2010				2009
		(in millions)
Net revenues		$	335			$	1,632
Earnings from continuing operations before income taxes			73				341
Provision for income taxes			(25	)			(123	)
Gain on discontinued operations, net of income taxes			1,596				—
Earnings and gain from discontinued operations, net of income taxes		$	1,644			$	218

Earnings from continuing operations before income taxes exclude allocated overheads related to the Frozen Pizza business of $25 million in 2010 and $108 million in 2009. The 2010 gain on discontinued operations from the sale of the Frozen Pizza business included tax expense of $1.2 billion.

The following assets of the Frozen Pizza business were divested (in millions):

 

			000000000
Inventories, net		$	102
Property, plant and equipment, net			317
Goodwill			475
Divested assets of the Frozen Pizza business		$	894

Cost Savings Initiatives

Within our cost savings initiatives, we include certain costs along with exit and disposal costs that are directly attributable to those activities but that do not qualify for treatment as exit or disposal costs under U.S. GAAP. These costs, which we commonly refer to as other project costs or implementation costs, generally include the reorganization of operations and facilities, the discontinuance of product lines and the incremental expenses related to the closure of facilities. We believe the disclosure of these charges within our operating income provides greater transparency of the impact of these programs and initiatives on our operating results.

In connection with our cost savings initiatives in 2011, we reversed $18 million of cost savings initiative program costs across all segments. These reversals were primarily related to severance benefits that were accrued and not paid due to natural attrition or employees who accepted other open positions within Kraft ParentCo or our company.

In 2010, we recorded $33 million of charges, primarily severance costs for benefits for terminated employees, associated benefit plan costs and other related activities. These charges were recorded across all segments.

In 2009, we recorded $110 million of charges, primarily severance costs for benefits for terminated employees, associated benefit plan costs and other related activities. These charges were recorded across all segments.

 

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Starbucks CPG Business

On March 1, 2011, the Starbucks Coffee Company, or “Starbucks,” without our authorization and in what we contend is a violation and breach of our agreements with Starbucks, took control of the Starbucks packaged coffee business, or the “Starbucks CPG business,” in grocery stores and other channels. The dispute is pending arbitration in Chicago, Illinois. We are seeking appropriate remedies, including but not limited to payment of the fair market value of our supply and license agreement with Starbucks relating to the Starbucks CPG business, plus the premium this agreement specifies. Starbucks has counterclaimed for unspecified damages. The arbitration proceeding is set to begin on July 11, 2012. The results of the Starbucks CPG business were included primarily in our U.S. Beverages and Canada & N.A. Foodservice segments through March 1, 2011.

Favorable Accounting Calendar Impact in 2011

Our fiscal year end is December 31. Our operating subsidiaries report results on the last Saturday of the fiscal year. Because we report results on the last Saturday of the year, and December 31, 2011 fell on a Saturday, our 2011 results included an extra week, or the “53^rd week,” of operating results than in the prior two years which had 52 weeks. We estimate that the extra week positively impacted net revenues by approximately $225 million and operating income by approximately $63 million in 2011. The favorable impact to operating income was reinvested in the business.

Provision for Income Taxes

Our effective tax rate was 38.1% in 2011, 37.0% in 2010 and 34.7% in 2009. Our 2011 effective tax rate included net tax costs of $52 million from discrete one-time events, primarily from various U.S. federal and U.S. state tax audit developments during the year as well as the revaluation of state deferred tax assets and liabilities resulting from state tax legislation enacted in 2011.

Our 2010 effective tax rate included net tax costs of $32 million, primarily due to a $79 million write-off of deferred tax assets as a result of the U.S. health care legislation enacted in March 2010, partially offset by the federal and state impacts from the favorable resolution of a federal tax audit.

Our 2009 effective tax rate included net tax benefits of $52 million, primarily due to settlements with various state tax authorities and an agreement we reached with the IRS on specific matters related to years 2000 through 2003.

 

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Combined Results of Operations

The following discussion compares our combined results of operations for 2011 with 2010 and 2010 with 2009.

2011 compared with 2010

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	18,655			$	17,797			$	858				4.8%
Operating income			2,923				2,961				(38	)			(1.3%	)
Earnings from continuing operations			1,839				1,887				(48	)			(2.5%	)
Net earnings			1,839				3,531				(1,692	)			(47.9%	)

Net Revenues. Net revenues increased $858 million (4.8%) to $18,655 million in 2011, and organic net revenues ⁽¹⁾ increased $997 million (5.8%) to $18,247 million in 2011, as follows.

 

Change in net revenues (by percentage point)
Higher net pricing			6.7pp
Unfavorable volume/mix			(0.9)pp
Total change in organic net revenues(1)			5.8%
Impact of divestitures			(2.8)pp
Impact of the 53rd week of shipments			1.3pp
Favorable foreign currency			0.5pp
Total change in net revenues			4.8%

 

(1)	See “—Non-GAAP Financial Measures” for a reconciliation of organic net revenues to net revenues.

Organic net revenue growth was driven by higher net pricing, partially offset by unfavorable volume/mix. Higher net pricing was reflected across all reportable segments as we increased pricing to offset higher input costs. Unfavorable volume/mix was driven primarily by lower shipments in all reportable business segments except U.S. Beverages. Divestitures (including for reporting purposes the Starbucks CPG business) had an unfavorable impact on net revenues. The 53^rd week of shipments in 2011 increased net revenues by $225 million. Favorable foreign currency increased net revenues by $91 million, due to the strength of the Canadian dollar relative to the U.S. dollar.

 

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Operating Income. Operating income decreased $38 million (1.3%) to $2,923 million in 2011, due to the following:

 

		Operating Income				Change
		(in millions)				(percentage point)
Operating Income for the Year Ended December 31, 2010		$	2,961
Change in operating income
Higher pricing			1,163				41.4pp
Higher input costs			(956	)			(34.0)pp
Unfavorable volume/mix			(151	)			(5.4)pp
Lower selling, general and administrative expense			56				2.0pp
Increased operating income from the 53rd week of shipments			63				2.2pp
Decreased operating income from divestitures (including for reporting purposes the Starbucks CPG business)			(130	)			(4.5)pp
Change in unrealized gains/losses on hedging activities			(92	)			(3.3)pp
Favorable foreign currency			15				0.5pp
Other			(6	)			(0.2)pp
Total change in operating income			(38	)			(1.3)%
Operating Income for the Year Ended December 31, 2011		$	2,923

Higher pricing outpaced increased input costs during 2011. The increase in input costs was driven by significantly higher raw material costs, partially offset by lower manufacturing costs. Unfavorable volume/mix was driven by declines in all reportable segments except U.S. Beverages. Total selling, general and administrative expenses decreased $93 million from 2010. Excluding the impact of the 53^rd week of shipments, divestitures (including for reporting purposes the Starbucks CPG business) and foreign currency, selling, general and administrative expenses decreased $56 million from 2010. The 53^rd week of shipments in 2011 added $63 million in operating income which was reinvested in the business. The impact of divestitures (including for reporting purposes the Starbucks CPG business) decreased operating income by $130 million. The change in unrealized gains/losses on hedging activities decreased operating income by $92 million, as we recognized unrealized losses of $63 million in 2011, versus unrealized gains of $29 million in 2010. Favorable foreign currency increased operating income by $15 million, due to the strength of the Canadian dollar versus the U.S. dollar. As a result of the net effect of these drivers, operating income margin decreased 0.9 percentage points, from 16.6% in 2010 to 15.7% in 2011. The margin decline was driven primarily by a decline in gross profit margin, reflecting the impact of the higher revenue base on the margin calculation, the unfavorable change in unrealized gains and the impact of divestitures (including for reporting purposes the Starbucks CPG business), partially offset by overhead leverage.

 

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2010 compared with 2009

 

		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	17,797			$	17,278			$	519				3.0%
Operating income			2,961				2,975				(14	)			(0.5%	)
Earnings from continuing operations			1,887				1,952				(65	)			(3.3%	)
Net earnings			3,531				2,170				1,361				62.7%

Net Revenues. Net revenues increased $519 million (3.0%) to $17,797 million in 2010, and organic net revenues⁽¹⁾ increased $341 million (2.0%) to $17,589 million in 2010 as follows.

 

Change in net revenues (by percentage point)
Higher net pricing			1.6pp
Favorable volume/mix			0.4pp
Total change in organic net revenues(1)			2.0%
Favorable foreign currency			1.1pp
Impact of divestitures			(0.1)pp
Total change in net revenues			3.0%

 

(1)	See “—Non-GAAP Financial Measures” for a reconciliation of organic net revenues to net revenues.

Organic net revenue growth was driven by higher net pricing and favorable volume/mix. Higher net pricing was reflected across all reportable segments as we increased pricing to offset higher input costs. Favorable volume/mix was driven by higher shipments in U.S. Beverages, U.S. Convenient Meals and Canada & N.A. Foodservice, partially offset by lower shipments in U.S. Cheese and U.S. Grocery. Favorable foreign currency increased net revenues by $194 million, due to the strength of the Canadian dollar relative to the U.S. dollar. Divestitures during 2010 also had a small unfavorable impact on net revenues.

 

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Operating Income. Operating income decreased $14 million (0.5%) to $2,961 million in 2010, due to the following:

 

		Operating Income				Change
		(in millions)				(percentage point)
Operating Income for the Year Ended December 31, 2009		$	2,975
Change in operating income
Higher pricing			273				9.2pp
Higher input costs			(196	)			(6.5)pp
Favorable volume/mix			23				0.7pp
Higher selling, general and administrative expense			(16	)			(0.6)pp
Impact of divestitures			6				0.2pp
Change in unrealized gains on hedging activities			(136	)			(4.6)pp
Favorable foreign currency			33				1.1pp
Other			(1	)			—
Total change in operating income			(14	)			(0.5)%
Operating Income for the Year Ended December 31, 2010		$	2,961

Higher pricing outpaced increased input costs during 2010. The increase in input costs was driven by significantly higher raw material costs, partially offset by lower manufacturing costs. Favorable volume/mix was driven by gains in U.S. Beverages, U.S. Convenient Meals and Canada & N.A. Foodservice, partially offset by declines in U.S. Grocery and U.S. Cheese. Total selling, general and administrative expenses increased $35 million from 2009. Excluding the impacts of divestitures and foreign currency, selling, general and administrative expenses increased $16 million versus the prior year due primarily to higher advertising and consumer promotion expenses. The change in unrealized gains on hedging activities decreased operating income by $136 million, as we recognized unrealized gains of $29 million in 2010, versus unrealized gains of $165 million in 2009. Favorable foreign currency increased operating income by $33 million, due to the strength of the Canadian dollar relative to the U.S. dollar. As a result of the net effect of these drivers, operating income margin decreased 0.6 percentage points, from 17.2% in 2009 to 16.6% in 2010. The margin decline was driven primarily by the decline in gross profit margin, reflecting the unfavorable change in unrealized gains on hedging activities, partially offset by overhead leverage.

 

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Results of Operations by Reportable Segment

Our reportable segments are U.S. Beverages, U.S. Cheese, U.S. Convenient Meals, U.S. Grocery and Canada & N.A. Foodservice. In conjunction with the Spin-Off, we include the Planters and Corn Nuts businesses within our U.S. Grocery segment and our Puerto Rico and export operations within our Canada & N.A. Foodservice segment.

The following discussion compares our results of operations for each of our reportable segments for 2011 with 2010 and 2010 with 2009.

 

		For the Years Ended December 31,
		2011				2010				2009
		(in millions)
Net revenues:
U.S. Beverages		$	3,028			$	3,236			$	3,081
U.S. Cheese			3,832				3,548				3,632
U.S. Convenient Meals			3,337				3,133				3,032
U.S. Grocery			4,593				4,333				4,298
Canada & N.A. Foodservice			3,865				3,547				3,235
Net revenues		$	18,655			$	17,797			$	17,278
		For the Years Ended December 31,
		2011				2010				2009
		(in millions)
Operating income:
U.S. Beverages		$	450			$	564			$	511
U.S. Cheese			629				598				667
U.S. Convenient Meals			319				268				234
U.S. Grocery			1,316				1,246				1,187
Canada & N.A. Foodservice			482				474				405
Unrealized gains / (losses) on hedging activities			(63	)			29				165
Certain U.S. pension plan costs			(155	)			(144	)			(133	)
General corporate expenses			(55	)			(74	)			(61	)
Operating income		$	2,923			$	2,961			$	2,975

As discussed in Note 14, “Segment Reporting,” to our historical combined financial statements, management uses segment operating income to evaluate segment performance and allocate resources. We believe it is appropriate to disclose this measure to help investors analyze segment performance and trends. Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of our U.S. pension plan cost (which are a component of cost of sales and selling, general and administrative expenses) and general corporate expenses (which are a component of selling, general and administrative expenses). We exclude the unrealized gains and losses on hedging activities from segment operating income in order to provide better transparency of our segment operating results. Once realized, the gains and losses on hedging activities are recorded within segment operating results. We exclude certain components of our U.S. pension plan cost from segment operating income because we centrally manage pension plan funding decisions and the determination of discount rate, expected rate of return on plan assets and other actuarial assumptions. Therefore, we allocate only the service cost component of our U.S. pension plan expense to segment operating income.

 

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Included within our segment results are intercompany sales with Kraft ParentCo subsidiaries which totaled $100 million in 2011, $79 million in 2010 and $83 million in 2009.

In 2011, the unfavorable $63 million net change in unrealized gains/(losses) on hedging activities primarily resulted from higher commodity hedge losses, partially offset by gains on currency forward contracts. In 2010, the favorable $29 million net change in unrealized gains/(losses) on hedging activities primarily resulted from gains associated with commodity hedge contracts. In 2009, the favorable $165 million net change in unrealized gains/(losses) on hedging activities primarily resulted from the transfer of unrealized losses on energy derivatives that were realized and reflected in segment operating income in 2009.

 

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U.S. Beverages

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	3,028			$	3,236			$	(208	)			(6.4%	)
Segment operating income			450				564				(114	)			(20.2%	)
		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	3,236			$	3,081			$	155				5.0%
Segment operating income			564				511				53				10.4%

2011 compared with 2010

Net revenues decreased $208 million (6.4%) in 2011, due to the impact of the Starbucks CPG business cessation (14.3 pp) and unfavorable volume/mix (0.2 pp), partially offset by higher net pricing (6.8 pp) and the impact of the 53^rd week of shipments (1.3 pp). Unfavorable volume/mix was driven primarily by lower shipments in mainstream coffee, primarily Maxwell House and Gevalia coffee (in our direct-to-consumer business), partially offset by the introduction of MiO liquid concentrate and higher shipments in ready-to-drink beverages, primarily Capri Sun and Kool-Aid, and Tassimo coffee. Higher net pricing was due primarily to input cost-driven pricing in coffee.

Segment operating income decreased $114 million (20.2%) due primarily to the impact of the Starbucks CPG business cessation. Segment operating income benefited from the remaining effects of higher net pricing, lower manufacturing costs, favorable volume mix, the impact of the 53^rd week of shipments and lower advertising and consumer promotion costs, which more than offset higher raw material costs.

2010 compared with 2009

Net revenues increased $155 million (5.0%) in 2010, due to favorable volume/mix (4.4 pp) and higher net pricing (0.6 pp). Favorable volume/mix was driven primarily by higher shipments in ready-to-drink beverages, primarily Kool-Aid and Capri Sun; coffee, primarily Maxwell House, Starbucks and Tassimo; and powdered beverages, primarily Tang.

Segment operating income increased $53 million (10.4%) due to favorable volume/mix, lower manufacturing costs, higher net pricing and lower other selling, general and administrative expenses, partially offset by higher raw material costs and higher advertising and consumer promotion costs.

 

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U.S. Cheese

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	3,832			$	3,548			$	284				8.0%
Segment operating income			629				598				31				5.2%
		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	3,548			$	3,632			$	(84	)			(2.3%	)
Segment operating income			598				667				(69	)			(10.3%	)

2011 compared with 2010

Net revenues increased $284 million (8.0%) in 2011, due to higher net pricing (8.2 pp) and the impact of the 53^rd week of shipments (1.3 pp), partially offset by unfavorable volume/mix (1.1 pp) and the impact of divestitures (0.4 pp). Higher net pricing, across most major cheese categories, was due to input cost-driven pricing. Unfavorable volume/mix was driven primarily by lower shipments in sandwich, cream cheese and recipe cheese categories, partially offset by higher shipments in cultured, natural cheese and grated cheese categories.

Segment operating income increased $31 million (5.2%) due primarily to higher net pricing, lower other selling, general and administrative expenses (including a termination fee received due to the restructuring of a service contract), lower manufacturing costs, the impact of the 53^rd week of shipments and the 2010 loss on the divestiture of our Bagelfuls operations, partially offset by higher raw material costs (primarily higher dairy costs), unfavorable volume/mix and higher advertising and consumer promotion costs.

2010 compared with 2009

Net revenues decreased $84 million (2.3%) in 2010, due to unfavorable volume/mix (4.9 pp) and the impact of divestitures (0.4 pp), partially offset by higher net pricing (3.0 pp). Unfavorable volume/mix was driven by lower shipments across most cheese categories. Higher net pricing, across all cheese categories, was due to input cost-driven pricing, partially offset by increased promotional spending.

Segment operating income decreased $69 million (10.3%) due to higher raw material costs (primarily higher dairy costs), unfavorable volume/mix, higher advertising and consumer promotion costs and a loss on the divestiture of our Bagelfuls operations, partially offset by higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses and the impact of divestitures.

 

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U.S. Convenient Meals

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	3,337			$	3,133			$	204				6.5%
Segment operating income			319				268				51				19.0%
		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	3,133			$	3,032			$	101				3.3%
Segment operating income			268				234				34				14.5%

2011 compared with 2010

Net revenues increased $204 million (6.5%) in 2011, due to higher net pricing (5.9 pp) and the impact of the 53^rd week of shipments (1.4 pp), partially offset by unfavorable volume/mix (0.8 pp). Higher net pricing was due to input cost-driven pricing primarily related to bacon, lunch meats, hot dogs and Lunchables combination meals. Unfavorable volume/mix was driven primarily by lower shipments in bacon and hot dogs, partially offset by higher shipments in lunch meats and Lunchables combination meals.

Segment operating income increased $51 million (19.0%) due primarily to higher net pricing, lower manufacturing costs, lower other selling, general and administrative expenses and the impact of the 53^rd week of shipments, partially offset by higher raw material costs, higher advertising and consumer promotion costs and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $101 million (3.3%) in 2010, due to favorable volume/mix (3.0 pp) and higher net pricing (0.3 pp). Favorable volume/mix was driven by higher shipments in hot dogs, Lunchables combination meals and lunch meats. Higher net pricing was driven by input-cost driven pricing, mostly offset by increased promotional spending.

Segment operating income increased $34 million (14.5%) due to lower manufacturing costs, lower other selling, general and administrative expenses, favorable volume/mix and higher net pricing, partially offset by higher raw material costs and higher advertising and consumer promotion costs.

 

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U.S. Grocery

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	4,593			$	4,333			$	260				6.0%
Segment operating income			1,316				1,246				70				5.6%
		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	4,333			$	4,298			$	35				0.8%
Segment operating income			1,246				1,187				59				5.0%

2011 compared with 2010

Net revenues increased $260 million (6.0%) in 2011, due to higher net pricing (6.9 pp) and the impact of the 53^rd week of shipments (1.3 pp), partially offset by unfavorable volume/mix (2.2 pp). Higher net pricing was reflected across most grocery categories including Planters nuts, spoonable dressings, Kraft macaroni & cheese dinners, dry packaged desserts and ready-to-eat desserts. Unfavorable volume/mix was driven by lower shipments, primarily spoonable dressings, Planters nuts, ready-to-eat desserts, barbecue sauces, dessert toppings and dry packaged desserts, partially offset by the introduction of Planters peanut butter and higher shipments in Kraft macaroni & cheese dinners.

Segment operating income increased $70 million (5.6%) due primarily to higher net pricing, the impact of the 53^rd week of shipments, lower other selling, general and administrative expenses, lower manufacturing costs and lower advertising and consumer promotion costs, partially offset by higher raw material costs and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $35 million (0.8%) in 2010, due to higher net pricing (1.4 pp), partially offset by unfavorable volume/mix (0.6 pp). Higher net pricing, across most key categories, was primarily related to Kraft macaroni & cheese dinners, pourable dressings, ready-to-eat desserts and dry packaged desserts. Unfavorable volume/mix was due primarily to lower shipments across most key categories, including pourable dressings, ready-to-eat desserts, spoonable dressings and dry packaged desserts, partially offset by higher shipments in Planters nuts.

Segment operating income increased $59 million (5.0%) due primarily to higher net pricing, lower manufacturing costs and lower other selling, general and administrative expenses, partially offset by unfavorable volume/mix and higher advertising and consumer promotion costs.

 

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Canada & N.A. Foodservice

 

		For the Years Ended December 31,
		2011				2010				$ Change				% Change
		(in millions)
Net revenues		$	3,865			$	3,547			$	318				9.0%
Segment operating income			482				474				8				1.7%
		For the Years Ended December 31,
		2010				2009				$ Change				% Change
		(in millions)
Net revenues		$	3,547			$	3,235			$	312				9.6%
Segment operating income			474				405				69				17.0%

2011 compared with 2010

Net revenues increased $318 million (9.0%) in 2011, due primarily to higher net pricing (5.9 pp), favorable foreign currency (2.6 pp) and the impact of the 53^rd week of shipments (1.3 pp), partially offset by the impact of the cessation of the Starbucks CPG business (0.5 pp) and unfavorable volume/mix (0.3 pp). In Canada, net revenues increased, driven primarily by higher net pricing, favorable foreign currency and the impact of the 53^rd week of shipments, partially offset by the impact of the cessation of the Starbucks CPG business. In N.A. Foodservice, net revenues increased, driven primarily by higher net pricing, the impact of the 53^rd week of shipments and favorable foreign currency, partially offset by unfavorable volume/mix. In Puerto Rico and U.S. exports, net revenue increased due to higher shipments.

Segment operating income increased $8 million (1.7%) due primarily to higher net pricing, favorable foreign currency and the impact of the 53^rd week of shipments, mostly offset by higher raw material costs, higher other selling, general and administrative expenses and unfavorable volume/mix.

2010 compared with 2009

Net revenues increased $312 million (9.6%) in 2010, due to the significant impact of favorable foreign currency (6.0 pp), higher net pricing (2.4 pp) and favorable volume/mix (1.2 pp). In Canada, net revenues increased, driven by favorable foreign currency, favorable volume/mix due to higher shipments in our Canadian grocery, cheese and convenient meals retail businesses and higher net pricing. In N.A. Foodservice, net revenues increased, driven by higher net pricing and favorable foreign currency, partially offset by unfavorable volume/mix (unfavorable product mix, net of higher shipments).

Segment operating income increased $69 million (17.0%) due primarily to higher net pricing, favorable volume/mix, favorable foreign currency and lower advertising and consumer promotion costs, partially offset by higher raw material costs.

 

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Critical Accounting Policies and Estimates

Note 2, “Summary of Significant Accounting Policies,” to our historical combined financial statements includes a summary of the significant accounting policies we used to prepare our combined financial statements. The following is a review of the more significant assumptions and estimates, as well as the accounting policies we used to prepare our combined financial statements.

Principles of Combination

The combined financial statements include our net assets and results of our operations as described above. All significant intracompany transactions and accounts within our combined businesses have been eliminated.

All significant intercompany transactions between Kraft ParentCo and us have been included in the historical combined financial statements. Intercompany transactions with Kraft ParentCo or its affiliates are reflected in the combined statements of cash flows as net transfers to Kraft ParentCo and its affiliates within financing activities and in the combined balance sheets within the parent company investment. The parent company investment equity balance represents Kraft ParentCo’s historical investment in us and the net effect of transactions with and allocations from Kraft ParentCo.

Our fiscal year end is December 31. Our operating subsidiaries report results on the last Saturday of the fiscal year. Because we report results on the last Saturday of the year, and December 31, 2011 fell on a Saturday, our 2011 results included the 53^rd week of operating results. We estimate that the extra week positively impacted net revenues by approximately $225 million and operating income by approximately $63 million in 2011. The favorable impact to operating income was reinvested in the business.

Use of Estimates

We prepare our combined financial statements in accordance with U.S. GAAP, which requires us to make accounting policy elections, estimates and assumptions that affect a number of amounts in our combined financial statements. Significant accounting policy elections, estimates and assumptions include, among others, allocation methods and allocated net assets and expenses from Kraft ParentCo, including defined benefit and stock-based compensation expenses; valuation assumptions of goodwill and intangible assets; useful lives of long-lived assets; marketing program accruals; insurance and self-insurance reserves and income taxes. We base our estimates on historical experience and other assumptions that we believe are reasonable. If actual amounts differ from estimates, we include the revisions in our combined results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our combined financial statements.

Inventories

Inventories are stated at the lower of cost or market. We value all our inventories using the average cost method. We also record inventory allowances for overstocked and obsolete inventories due to ingredient and packaging changes.

Long-Lived Assets

We review long-lived assets, including amortizable intangible assets, for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. We perform undiscounted operating cash flow analyses to determine if an impairment exists. When testing for impairment of assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. If we determine an impairment exists, we calculate the loss based on estimated fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

 

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Goodwill and Intangible Assets

We test goodwill and non-amortizable intangible assets for impairment at least once a year in the fourth quarter. We assess goodwill impairment risk by first performing a qualitative review of entity-specific, industry, market and general economic factors for each reporting unit. If significant potential goodwill impairment risk exists for a specific reporting unit, we apply a two-step quantitative test. The first step compares the reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using a 20-year projection of discounted cash flows which incorporates planned growth rates, market-based discount rates and estimates of residual value. We used a market-based, weighted-average cost of capital of 6.8% to discount the projected cash flows of those operations. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, industry and economic conditions and our actual results and conditions may differ over time. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. We test non-amortizable intangible assets for impairment by comparing the fair value of each intangible asset with its carrying value. We determine fair value of non-amortizable intangible assets using planned growth rates, market-based discount rates and estimates of royalty rates. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value.

Definite-lived intangible assets are amortized over their estimated useful lives and evaluated for impairment as long-lived assets.

In 2011, 2010 and 2009, there were no impairments of goodwill or non-amortizable intangible assets. In 2011, we noted one reporting unit in our goodwill testing, Planters and Corn Nuts within our U.S. Grocery segment, which continued to be sensitive primarily to ongoing significant input cost pressure. Planters and Corn Nuts had $1,170 million of goodwill as of December 31, 2011, and its excess fair value over the carrying value of its net assets improved from 12% in 2010 to 19% in 2011. While the reporting unit passed the first step of the impairment test by a substantial margin, if its operating income were to decline significantly in the future, it would adversely affect the estimated fair value of the reporting unit. If input costs were to continue to rise, we expect to take further pricing actions as we have done in 2011. However, if we are unsuccessful in these efforts, it would decrease profitability, negatively affect the estimated fair value of the Planters and Corn Nuts reporting unit and could lead to a potential impairment in the future.

Insurance and Self-Insurance

We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability, automobile liability, product liability and our obligation for employee health care benefits. Liabilities associated with the risks are estimated by considering historical claims experience and other actuarial assumptions.

Revenue Recognition

We recognize revenues when title and risk of loss pass to customers, which generally occurs upon shipment or delivery of goods. Revenues are recorded net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Provisions for product returns and customer allowances are also recorded as reductions to revenues within the same period that the revenue is recognized. Shipping and handling costs are classified as part of cost of sales.

 

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Marketing and Research and Development

We promote our products with advertising, consumer incentives and trade promotions. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. Consumer incentive and trade promotion activities are recorded as a reduction to revenues based on amounts estimated as being due to customers and consumers at the end of a period. We base these estimates principally on historical utilization and redemption rates. For interim reporting purposes, advertising and consumer incentive expenses are charged to operations as a percentage of volume, based on estimated volume and related expense for the full year. We do not defer costs on our year-end combined balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expense was $535 million in 2011, $540 million in 2010 and $477 million in 2009. We expense costs as incurred for product research and development. Research and development expense was $198 million in 2011, $185 million in 2010 and $194 million in 2009. We record marketing and research and development expenses within selling, general and administrative expenses.

Environmental Costs

We are subject to laws and regulations relating to the protection of the environment. We accrue for environmental remediation obligations on an undiscounted basis when amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change. Recoveries of environmental remediation costs from third parties are recorded as assets when recovery of those costs is deemed probable. As of December 31, 2011, we were involved in 67 active actions in the United States under the Superfund legislation (and other similar actions and legislation) related to our current operations and certain closed, inactive or divested operations for which we retain liability. We are subject to applicable multi-national, national and local environmental laws and regulations in the countries in which we do business. We have specific programs across our business units designed to meet applicable environmental compliance requirements.

As of December 31, 2011, we accrued an immaterial amount for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our financial condition. However, we cannot quantify with certainty the potential impact of future compliance efforts and environmental remediation actions.

Stock-based Compensation

Our employees have historically participated in Kraft ParentCo’s stock-based compensation plans. Stock-based compensation expense has been allocated to us based on the awards and terms previously granted to our employees. The stock-based compensation was initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards. The fair value of our option awards is measured on the grant date using the Black-Scholes option-pricing model. The fair value of performance awards of restricted stock is based on the Kraft ParentCo stock price at the grant date and the assessed probability of meeting future performance targets. The fair value of restricted and deferred stock awards is based on the number of units granted and Kraft ParentCo’s stock price on the grant date. See Note 9, “Stock Benefit Plans,” to our historical combined financial statements for additional information. Stock-based compensation expense allocated to us was $51 million in 2011, $49 million in 2010 and $52 million in 2009.

 

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Pension and Other Postemployment Benefit Plans

Kraft ParentCo provides defined benefit pension, postretirement health care, defined contribution and multiemployer pension and medical benefits to our eligible employees and retirees. As such, these liabilities are not reflected in our combined balance sheets. As of the Distribution Date, we expect to record the net benefit plan obligations related to these plans and reflect them in our combined balance sheet. See “Unaudited Pro Forma Combined Financial Statements” for additional information.

Our combined statements of earnings include expense allocations for these benefits which were determined based on a review of personnel by business unit and based on allocations of corporate and other shared functional personnel. We consider the expense allocation methodology and results to be reasonable for all periods presented.

Total Kraft ParentCo benefit plan net expenses allocated to us are detailed below and were $497 million in 2011, $486 million in 2010 and $464 million in 2009. These costs are reflected in our cost of sales and selling, general and administrative expenses. These costs were funded through intercompany transactions with Kraft ParentCo which are now reflected within the parent company investment equity balance.

 

		Allocated from Kraft ParentCo Plans
		2011				2010				2009
		(in millions)
Pension plan cost		$	261			$	248			$	235
Postretirement health care cost			160				166				157
Employee savings plan cost			54				52				52
Multiemployer pension plan cost			2				2				2
Multiemployer medical plan cost			20				18				18
Net expense		$	497			$	486			$	464

Certain pension plans in our Canadian operations, or the “Canadian Pension Plans,” and our postemployment benefit plans, or collectively, the “Kraft Foods Group Plans,” are our direct obligations and have been recorded within our combined financial statements. We record amounts relating to these Kraft Foods Group Plans based on calculations specified by U.S. GAAP. These calculations require the use of various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases and turnover rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. As permitted by U.S. GAAP, we generally amortize any effect of the modifications over future periods. We believe that the assumptions used in recording our Canadian Pension Plan obligations are reasonable based on our experience and advice from our actuaries. See Note 10, “Pension and Other Postemployment Benefit Plans,” to our historical combined financial statements for a discussion of the assumptions used.

We recorded the following amounts in earnings for the Kraft Foods Group Plans during the years ended December 31, 2011, 2010 and 2009:

 

			0				0				0
		Kraft Foods Group Plans
		2011				2010				2009
		(in millions)
Canadian Pension Plans costs		$	14			$	9			$	9
Postemployment benefit plans costs			19				4				5
Net expense		$	33			$	13			$	14

 

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The 2011 net expense of $33 million increased $20 million over the prior year. The cost increase primarily related to higher pension plan costs, including settlement costs and higher amortization of the net loss from experience differences, and the incorporation of a Canadian postemployment plan into our obligations. The 2010 net expense of $13 million decreased an insignificant amount over the 2009 amount.

In 2011, we contributed $22 million and our employees contributed $2 million to our Canadian Pension Plans. Based on current tax law and minimum funding requirements, we estimate that 2012 pension contributions would be approximately $39 million. Our actual contributions may be different due to many factors, including changes in tax and other benefit laws, significant differences between expected and actual pension asset performance or interest rates or other factors.

We expect our 2012 net expense for the Kraft Foods Group Plans to decrease, primarily due to the drop off of the one-time cost in 2011 of incorporating a Canadian postemployment plan into our obligations, partially offset by a weighted-average decrease of 75 basis points in our discount rate assumption for our Canadian Pension Plans.

Our 2012 expected rate of return on plan assets decreased to 6.80% from 7.36% for our Canadian Pension Plans. We determine our expected rate of return on plan assets from the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class. We attempt to maintain our target asset allocation by rebalancing between asset classes as we make contributions and monthly benefit payments.

While we do not anticipate further changes in the 2012 assumptions for our Canadian Pension Plans, as a sensitivity measure, a fifty basis point change in our discount rate or a fifty basis point change in the expected rate of return on plan assets would have the following effects, increase / (decrease) in cost, as of December 31, 2011:

 

		Fifty Basis Point
		Increase						Decrease
		(in millions)
Effect of change in discount rate on pension costs		$	(5	)				$	5
Effect of change in expected rate of return on plan assets on pension costs			(3	)					3

Financial Instruments

As we operate primarily in North America but source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use a variety of risk management strategies and financial instruments to manage commodity price, foreign currency exchange rate and interest rate risks. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. One way we do this is through actively hedging our risks through the use of derivative instruments.

Derivatives are recorded on our combined balance sheets at fair value, which fluctuates based on changing market conditions. Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive earnings / (losses) within equity until the underlying hedged items are recognized in net earnings. Accordingly, we record deferred cash flow hedge gains or losses in cost of sales when the related inventory is sold and in interest and other expense, net, when the related debt interest expense is recorded. Cash flows from derivative instruments are also classified in the same manner as the underlying hedged items in the combined statement of cash flows. For additional information on the location of derivative activity within our operating results, see Note 11, “Financial Instruments,” to our historical combined financial statements.

 

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To qualify for hedge accounting, a specified level of hedging effectiveness between the hedging instrument and the item being hedged must be achieved at inception and maintained throughout the hedged period. Any hedging ineffectiveness is recognized in net earnings when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. We formally document our risk management objectives, strategies for undertaking the various hedge transactions, the nature of and relationships between the hedging instruments and hedged items and method for assessing hedge effectiveness. Additionally, for qualified hedges of forecasted transactions, we specifically identify the significant characteristics and expected terms of the forecasted transactions. If it becomes probable that a forecasted transaction will not occur, the hedge will no longer be effective and all of the derivative gains or losses would be recognized in earnings in the current period.

When we use financial instruments, we are exposed to credit risk that a counterparty might fail to fulfill its performance obligations under the terms of our agreement. We minimize our credit risk by entering into transactions with counterparties with investment grade credit ratings, limiting the amount of exposure we have with each counterparty and monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange traded derivative contracts with a duration of greater than one year be governed by an International Swaps and Derivatives Association master agreement. We are also exposed to market risk as the value of our financial instruments might be adversely affected by a change in foreign currency exchange rates, commodity prices or interest rates. We manage market risk by incorporating monitoring parameters within our risk management strategy that limit the types of derivative instruments and derivative strategies we use and the degree of market risk that we hedge with derivative instruments.

Commodity cash flow hedges. We are exposed to price risk related to forecasted purchases of certain commodities that we primarily use as raw materials. We enter into commodity forward contracts primarily for coffee beans, meat products, sugar, wheat and dairy products. Commodity forward contracts generally are not subject to the accounting requirements for derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to hedge the price of certain input costs, including dairy products, coffee beans, meat products, wheat, corn products, soybean oils, sugar and natural gas. Some of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.

Foreign currency cash flow hedges. We use various financial instruments to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. These instruments may include forward foreign exchange contracts and foreign currency options. We primarily use these instruments to hedge our exposure to the Canadian dollar.

Interest rate cash flow hedges. We use derivative instruments, including interest rate swaps, as part of our interest rate risk management strategy. As a matter of policy, we do not use highly leveraged derivative instruments for interest rate risk management. We primarily use interest rate swaps to hedge the variability of interest payment cash flows on a portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge accounting treatment.

 

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Income Taxes

For purposes of the combined financial statements, our income tax expense and deferred tax balances have been estimated as if we filed income tax returns on a stand-alone basis separate from Kraft ParentCo. As a stand-alone entity, our deferred taxes and effective tax rate may differ from those in the historical periods.

We recognize tax benefits in our financial statements when our uncertain tax positions are more likely than not to be sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

We recognize deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

New Accounting Guidance

See Note 2, “Summary of Significant Accounting Policies,” to our historical combined financial statements for a discussion of new accounting standards.

Contingencies

See Note 12, “Commitments and Contingencies,” to our historical combined financial statements.

Commodity Trends

We purchase large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts and sugar and other sweeteners. In addition, we use significant quantities of resins and cardboard to package our products, and natural gas to operate our factories and warehouses. We continuously monitor worldwide supply and cost trends of these commodities so we can act quickly to obtain ingredients and packaging needed for production.

The most significant cost component of our cheese products are dairy commodities, including milk and cheese. We purchase our dairy raw material requirements from independent third parties such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, substantially influence the price for milk and other dairy products. The most significant cost component of our coffee products is green coffee beans, which we purchase on world markets. Quality and availability of supply, changes in the value of the U.S. dollar in relation to certain other currencies and consumer demand for coffee products impact coffee bean prices. Significant cost components in our meat business include pork, beef and poultry, which we purchase on domestic markets. Livestock feed costs and the global demand for U.S. meats influence the prices of these meat products. Other significant cost components in our grocery products are grains, including wheat, sugar and soybean oil.

During 2011, our aggregate commodity costs increased primarily due to the higher costs of dairy products, coffee beans, meat products, packaging material costs, grains and oils. We expect a higher cost environment and commodity cost volatility to continue in 2012. As noted earlier in our discussion of our historical operating results, we have addressed higher commodity costs primarily through higher pricing, lower manufacturing costs due to our end-to-end cost management program and lower discretionary spending. We expect to continue to use these measures to address further commodity cost increases.

 

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Liquidity and Capital Resources

Historically, Kraft ParentCo has provided financing, cash management and other treasury services to us. Our cash balances are swept by Kraft ParentCo and historically, we have received funding from Kraft ParentCo for our operating and investing cash needs. Cash transferred to and from Kraft ParentCo has historically been recorded as intercompany payables and receivables which are reflected in the parent company investment in the accompanying combined financial statements. 

In connection with the Spin-Off, we entered into a 364-day senior unsecured revolving credit facility on March 8, 2012, with borrowing capacity of $4.0 billion. Until the consummation of the Spin-Off, Kraft ParentCo guarantees our borrowings under the facility. We may borrow advances up to the aggregate amount of the unused commitments under the facility on or after March 8, 2012 and prior to the termination of the facility, which is scheduled for March 7, 2013. All committed borrowings under the facility will bear interest at a variable annual rate based on LIBOR or a defined base rate, at our election, plus an applicable margin based on (i) for any date prior to the consummation of the Spin-Off, the ratings of Kraft ParentCo’s long-term senior unsecured indebtedness and (ii) for any date on or following the consummation of the Spin-Off, the ratings of our long-term senior unsecured indebtedness. We intend to use the proceeds of this facility, as necessary, in connection with our capitalization plan, to support our working capital needs and for other general corporate purposes. As of March 31, 2012, no amounts were borrowed or outstanding under the credit facility.

Also, in connection with the Spin-Off, Kraft ParentCo and we intend to redistribute Kraft ParentCo’s current debt between Kraft ParentCo and us such that both companies may obtain investment grade credit ratings following the Spin-Off. To effect this redistribution, we currently expect to incur an estimated $10 billion of debt through a combination of some or all of the following: long-term and short-term debt issuances, borrowings under bank credit facilities, including our 364-day unsecured revolving credit facility described above, or debt exchanges with respect to certain of Kraft ParentCo’s existing debt obligations. In addition, we expect to distribute cash, including proceeds from any debt we incur, to Kraft ParentCo to allow Kraft ParentCo to reduce its debt while we increase our debt to the planned capital structure.

We believe that cash generated from our operating activities, the $4.0 billion revolving credit facility and financing available from Kraft ParentCo prior to the Distribution Date or other sources will provide sufficient liquidity to meet our working capital needs, planned capital expenditures and future contractual and other obligations.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $2.7 billion in 2011, $828 million in 2010 and $3.0 billion in 2009. The increase in operating cash flows in 2011 primarily related to the prior year payment of taxes in connection with the 2010 Frozen Pizza divestiture and the favorable timing of the collection of receivables and the payment of our accounts payable, partially offset by increased inventory levels. The decrease in operating cash flows in 2010 primarily related to payment of taxes in connection with the Frozen Pizza divestiture, the unfavorable timing of the collection of receivables and increased inventory levels, partially offset by increased earnings.

Net Cash Used in / Provided by Investing Activities

Net cash used in investing activities was $401 million in 2011, net cash provided by investing activities was $3.3 billion in 2010 and net cash used in investing activities was $513 million in 2009. In 2010, we received $3.7 billion of proceeds from the sale of the Frozen Pizza business. Capital expenditures funded by operating activities were $401 million in 2011, $448 million in 2010 and $513 million in 2009. The 2011 capital expenditures were primarily made to modernize manufacturing facilities and support new product and productivity initiatives. We expect 2012 capital expenditures to be approximately $500 million, including capital expenditures required for systems investments, which we expect to fund from operations.

 

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Net Cash Used in Financing Activities

Net cash used in financing activities was $2.3 billion in 2011, $4.1 billion in 2010 and $2.5 billion in 2009. Net transfers to Kraft ParentCo and its affiliates were $2.2 billion in 2011, $4.0 billion in 2010 and $2.3 billion in 2009. The net cash used in 2009 also included $205 million in repayments of long-term debt.

Debt

Our total debt was $35 million at December 31, 2011 and $39 million at December 31, 2010, which consisted entirely of capital lease obligations. At December 31, 2011, the weighted-average remaining term of our capital lease obligations was 8.6 years.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

We have no material off-balance sheet arrangements other than the guarantees and contractual obligations that are discussed below.

Guarantees

As discussed in Note 12, “Commitments and Contingencies,” to our historical combined financial statements, we have third-party guarantees primarily covering the long-term obligations of our vendors. As part of those transactions, we guarantee that third parties will make contractual payments or achieve performance measures. At December 31, 2011, the carrying amount of our third-party guarantees on our combined balance sheet and the maximum potential payments under these guarantees was $22 million. Substantially all of these guarantees expire at various times through 2018.

In addition, at December 31, 2011, we were contingently liable for $154 million of guarantees related to our own performance. These include letters of credit related to dairy commodity purchases and other letters of credit.

Guarantees do not have, and we do not expect them to have, a material effect on our liquidity.

Aggregate Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2011.

 

		Payments Due
		Total						2012						2013-14						2015-16						2017 and Thereafter
		(in millions)
Capital leases(1)		$	46					$	10					$	10					$	8					$	18
Operating leases(2)			503						118						175						93						117
Purchase obligations(3):
Inventory and production costs			3,144						2,791						348						5						—
Other			303						153						150						—						—
			3,447						2,944						498						5						—
Other long-term liabilities(4)			13						1						10						2						—
		$	4,009					$	3,073					$	693					$	108					$	135

 

(1)	Amounts represent the expected cash payments of our capital leases, which includes interest expenses.

(2)	Operating leases represent the minimum rental commitments under non-cancelable operating leases.

 

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(3)

Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 days). Any amounts reflected on the combined balance sheet as accounts payable and accrued liabilities are excluded from the table above.

(4)

The following long-term liabilities included on the combined balance sheet are excluded from the table above: accrued pension costs, income taxes, insurance accruals and other accruals. We are unable to reliably estimate the timing of the payments (or contributions beyond 2012, in the case of accrued pension costs) for these items. Based on current tax law and minimum funding requirements, we estimate that pension contributions to our Canadian Pension Plans would be approximately $39 million in 2012. We also expect that our net pension cost will increase to approximately $20 million in 2012. As of December 31, 2011, our total liability for income taxes, including uncertain tax positions and associated accrued interest and penalties, was $339 million. We estimate that approximately $127 million will be paid in the next 12 months. We are not able to reasonably estimate the timing of future cash flows related to accrued tax liabilities beyond 12 months due to uncertainties in the timing and outcomes of current and future tax audits. Amounts represented do not reflect the $10 billion of debt we expect to incur in connection with the Spin-Off described under “—Liquidity and Capital Resources,” and the allocation of certain net liabilities between Kraft ParentCo and us described under “Unaudited Pro Forma Combined Financial Statements.”

Non-GAAP Financial Measures

We use certain non-GAAP financial measures to budget, make operating and strategic decisions and evaluate our performance. We have disclosed the following measures so that you have the same financial data that we use to assist you in making comparisons to our historical operating results and analyzing our underlying performance.

We believe that the presentation of these non-GAAP financial measures, when considered together with our U.S. GAAP financial measures and the reconciliations to the corresponding U.S. GAAP financial measures, provides you with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Because non-GAAP financial measures may vary among companies, the non-GAAP financial measures presented in this Information Statement may not be comparable to similarly titled measures used by other companies. Our use of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for any U.S. GAAP financial measure. A limitation of the non-GAAP financial measures is that they exclude items detailed below which have an impact on our U.S. GAAP reported results. The best way this limitation can be addressed is by evaluating our non-GAAP financial measures in combination with our U.S. GAAP reported results and carefully evaluating the following tables which reconcile U.S. GAAP reported figures to the non-GAAP financial measures.

 

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Organic Net Revenues

We use the non-GAAP financial measure “organic net revenues” and corresponding growth measures. The difference between “organic net revenues” and “net revenues” (the most comparable U.S. GAAP financial measure) is that organic net revenues exclude the impact of divestitures (including for reporting purposes the Starbucks CPG business), the impact of the 53^rd week of shipments and currency. We believe that organic net revenues better reflect the underlying growth from the ongoing activities of our business and provide improved comparability of results.

 

		For the Years Ended December 31,
		2011						2010						$ Change				% Change
		(in millions)
Organic net revenues		$	18,247					$	17,250					$	997				5.8	%
Impact of divestitures(1)			92						547						(455	)			(2.8	)pp
Impact of the 53rd week of shipments			225						—						225				1.3	pp
Impact of foreign currency			91						—						91				0.5	pp
Net revenues		$	18,655					$	17,797					$	858				4.8	%
		For the Years Ended December 31,
		2010						2009						$ Change				% Change
		(in millions)
Organic net revenues		$	17,589					$	17,248					$	341				2.0	%
Impact of divestitures(2)			14						30						(16	)			(0.1	)pp
Impact of foreign currency			194						—						194				1.1	pp
Net revenues		$	17,797					$	17,278					$	519				3.0	%

 

(1)

Impact of divestitures includes for reporting purposes the Starbucks CPG business.

(2)

The Starbucks CPG business net revenues were included in 2009 and 2010 within our organic net revenues.

Adjusted Free Cash Flow

We use the non-GAAP financial measure “adjusted free cash flow.” The difference between “adjusted free cash flow” and “net cash provided by operating activities” (the most comparable U.S. GAAP financial measure) is that adjusted free cash flow includes the impact of capital expenditures and in 2010, excludes the impact of taxes paid on the divestiture of our Frozen Pizza business. We use adjusted free cash flow as our primary cash flow metric as it represents controllable cash flows from operations.

 

		For the Years Ended December 31,
		2011						2010						2009
		(in millions)
Adjusted free cash flow		$	2,263					$	1,556					$	2,504
Capital expenditures			401						448						513
Taxes paid on the Frozen Pizza divestiture			—						(1,176	)					—
Net cash provided by operating activities		$	2,664					$	828					$	3,017

 

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Quantitative and Qualitative Disclosures about Market Risk

As we operate primarily in North America but source our commodities on global markets and periodically enter into financing or other arrangements abroad, we use financial instruments to manage commodity price, foreign currency exchange rate and interest rate risks. We monitor and manage these exposures as part of our overall risk management program. Our risk management program focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We maintain commodity price, foreign currency and interest rate risk management policies that principally use derivative instruments to reduce significant, unanticipated earnings fluctuations that may arise from volatility in commodity prices, foreign currency exchange rates and interest rates. We also sell commodity futures to unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes. See Note 2, “Summary of Significant Accounting Policies,” and Note 11, “Financial Instruments,” to our historical combined financial statements for further details of our commodity price, foreign currency and interest rate risk management policies and the types of derivative instruments we use to hedge those exposures.

Value at Risk

We use a value at risk, or “VAR,” computation to estimate: 1) the potential one-day loss in pre-tax earnings of our commodity price and foreign currency-sensitive derivative financial instruments; and 2) the potential one-day loss in the fair value of our interest rate-sensitive financial instruments. We include our commodity futures, forwards and options, foreign currency forwards and interest rate swaps in our VAR computation. Excluded from the computation were anticipated transactions and foreign currency trade payables and receivables which the financial instruments are intended to hedge.

We made the VAR estimates assuming normal market conditions, using a 95% confidence interval. We used a “variance / co-variance” model to determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined by observing interest rate and forward currency rate movements over the prior quarter for the calculation of VAR amounts at December 31, 2011 and 2010, and over each of the four prior quarters for the calculation of average VAR amounts during each year. The values of commodity options do not change on a one-to-one basis with the underlying currency or commodity, and were valued accordingly in the VAR computation.

As of December 31, 2011, the estimated potential one-day loss in pre-tax earnings from our commodity and foreign currency instruments and the estimated potential one-day loss in fair value of our interest rate-sensitive instruments, as calculated in the VAR model, were:

 

		Pre-Tax Earnings Impact																Fair Value Impact
		At 12/31/11				Average				High				Low				At 12/31/11				Average				High				Low
		(in millions)
Instruments sensitive to:
Commodity prices		$	14			$	17			$	20			$	13
Foreign currency rates			1				2				2				1
Interest rates																		$	9			$	2			$	9			$	—

 

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		Pre-Tax Earnings Impact																Fair Value Impact
		At 12/31/10				Average				High				Low				At 12/31/10				Average				High				Low
						(in millions)
Instruments sensitive to:
Commodity prices		$	17			$	11			$	17			$	4
Foreign currency rates			2				1				2				1
Interest rates																		$	—			$	—			$	—			$	—

This VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in commodity prices, foreign currency rates and interest rates under normal market conditions. The computation does not represent actual losses in fair value or earnings to be incurred, nor does it consider the effect of favorable changes in market rates. We cannot predict actual future movements in such market rates and do not present these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on our future financial results.

 

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BUSINESS

Overview

Kraft Foods Group operates one of the most admired food and beverage businesses in North America. Upon our Spin-Off from Kraft ParentCo, we will be one of the largest consumer packaged food and beverage companies in North America and one of the largest worldwide among publicly traded consumer packaged food and beverage companies, based on our 2011 combined net revenues of $18.7 billion. We manufacture and market food and beverage products, including convenient meals, refreshment beverages and coffee, cheese and other grocery products, primarily in the United States and Canada, under a stable of iconic brands. Our product categories span breakfast, lunch and dinner meal occasions, both at home and in foodservice locations.

Our diverse brand portfolio consists of many of the most popular food brands in North America, including three brands with annual net revenues exceeding $1 billion each – Kraft cheeses, dinners and dressings; Oscar Mayer meats; and Maxwell House coffees – plus over 20 brands with annual net revenues of between $100 million and $1 billion each. In the United States, based on dollar share in 2011, we hold the number one branded share position in a majority of our 50 product categories, as well as in 18 of our top 20 product categories. These 18 product categories contributed approximately 75% of our 2011 U.S. retail net revenues. We hold the number two branded share position in the other two product categories.

As a result of our superior brands, quality, innovation and marketing capabilities, as well as our ongoing focus on productivity and operating efficiency, we believe we have achieved category-leading profit margins in almost all of our key product categories. Our business has generated significant cash flow, which we believe will allow us to continue to invest in the development and continual rejuvenation of our brands and return value to our shareholders. Our goal as an independent public company is to deliver superior operating income, strong cash flows and a highly competitive dividend payout while driving revenue growth in our key product categories.

Competitive Strengths

We believe the following competitive strengths support our leading positions in the categories we serve:

Superior Brand Portfolio

Our brand portfolio represents one of the strongest collections of consumer brands in the food and beverage industry. Our brands are among the most popular in North America and, according to ACNielsen, are enjoyed in 98% of households in the United States and Canada. Our core brands have been built through years – and in many cases decades – of significant investment in product innovation, advertising and promotion, and reflect a deep commitment to product quality. We believe that our remarkable stable of brands provides a foundation for us to maintain our category leadership positions and to drive profitability.

Significant Scale in North America

The North American food and beverage market is highly profitable, but is relatively mature and characterized by moderate growth in most categories. We believe that this environment favors competitors with the scale to drive operating efficiency and productivity. After the Spin-Off, we will be one of the largest consumer packaged food and beverage companies in North America based on our combined net revenues in 2011. Our significant scale in North America enables us to effectively serve our customers while keeping costs low and enhancing our margins. For example, we leverage our scale in distribution and our status as one of the largest buyers of food-related raw and packaging materials to drive efficiency and control costs. In addition, our scale across product categories helps to strengthen our relationships with our customers by allowing us to provide them with a diverse array of leading brands, as well as customized sales support to market those brands in their stores.

 

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Diverse Category Profile

We offer food and beverage products across an extensive array of grocery categories. Our wide variety of products include coffee, lunch meats, cream cheese, salad dressings, macaroni & cheese and refrigerated desserts. In 2011, our products covered 50 categories, with no single category accounting for more than 10% of our combined net revenues.

Our grocery categories provide some insulation against soft economic conditions, while the diversity of our categories protects us against weakness in any individual category. As a result, our category profile helps us generate stable cash flow.

Reputation for High Quality Products

We have a strong reputation for offering high quality products. This reputation, coupled with our strong brand positions, enables us to offer our products at a premium price relative to competitor products, and to capture high market shares across most of our categories. We are focused on producing high quality products and continuously monitor consumer preferences for our brands to ensure we deliver superior quality and value. Through our rigorous quality and product development process, we continually seek to improve our products and packaging to appeal to our consumers’ evolving preferences with respect to taste, texture, appearance, convenience and health and wellness benefits.

Strong Innovation Culture and Pipeline

We nurture the growth of our brands by developing new and innovative products and product line extensions that appeal to consumers. We have invested significantly, and expect to continue to invest significantly, in food and beverage product development, focusing on core and next generation technologies, products and platforms that address consumer needs. Our investments in developing and marketing new products have been significant drivers of our category leadership. In 2011, new products introduced in the last three years represented approximately 10% of our combined net revenues. New product platforms that we have recently launched include MiO (a liquid beverage enhancer) and Velveeta Skillets meal kits, and new product line extensions include Oscar Mayer Lunchables with fruit, Kraft shredded cheese with a Touch of Philadelphia and Jell-O Temptations.

Deep Consumer Knowledge

Understanding consumer needs and trends is essential to driving revenue growth in our key product categories. We have developed proprietary tools and work with third-party vendors, such as ACNielsen, to capture and analyze consumer buying patterns and category trends. We use our deep consumer insights to develop targeted marketing programs and merchandising activities that maximize return on investment, better predict the impact of pricing actions and trade incentives on volume, understand and anticipate long-term consumer trends and determine the best allocation of our resources for new product development and capital deployment.

Long-Standing Relationships with Major Retailers

We have long-standing relationships with all the major food retailers in North America, including grocery stores, such as Kroger, Supervalu and Loblaw; mass merchants, such as Wal-Mart and Target; and warehouse clubs, such as Sam’s Club. We also have long-standing relationships with retailers in other channels, including dollar/value, convenience and drug stores.

Due to our brand leadership positions, investments in market research, dedicated category business development teams and range of products, we are able to work closely with our customers to develop mutually beneficial marketing.

 

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Experienced Management Team

Our senior management team has substantial experience in managing large businesses, primarily in consumer products, and related operational, financial and sales and marketing experience. For example, our Executive Chairman, John Cahill, has over 20 years of experience in the food and beverage industry and has held a number of senior positions with The Pepsi Bottling Group, Inc., including Executive Chairman and Chairman and Chief Executive Officer. W. Anthony Vernon, who will be our Chief Executive Officer following the Spin-Off, led a number of Johnson & Johnson’s largest franchises during his 23-year career there and currently leads Kraft ParentCo’s business in North America. In addition, our senior management has a long history with Kraft ParentCo and us. Combined, our top 13 senior executives have over 160 years of service at Kraft ParentCo or its predecessor companies. They have a track record of strong operating performance, recognizing and capitalizing on attractive opportunities in the categories and markets we serve and driving operating efficiencies.

Goals and Strategies

Over the last several years, we have made significant investments in product quality, marketing and innovation behind our iconic North American brands and have implemented a series of cost saving initiatives to drive margin improvement and fund brand investments.

The Spin-Off will provide the North American Grocery Business the opportunity to achieve greater operational focus and drive our return on investment. Sales will be primarily driven by a “center of the store” warehouse distribution model, allowing us to streamline our organization, processes and systems to a single model.

Our goals are to drive profitable revenue growth in the categories in which we compete and leverage category-leading profit margins to deliver strong free cash flow and a highly competitive dividend payout. To achieve these goals, we will take the following actions:

Build on Leading Market Positions

We have one of the strongest portfolios of food and beverage brands in North America, and we believe that building on our leading market positions is essential to our success. Therefore, we will invest in our most attractive growth opportunities by disproportionately allocating our marketing and product development resources to those brands that we believe have a distinct competitive advantage and brand position.

Maintain a Sharp Focus on Cost Structure and Superior Execution

We will strive to achieve optimal levels of efficiency and effectiveness by streamlining and simplifying our supply chain operations, as well as by reducing overhead costs.

We will continue to implement Lean Six Sigma principles in our manufacturing, warehousing and transportation organizations. In addition, we announced a reorganization in the first quarter of 2012, which included realigning our U.S. sales organization, consolidating U.S. management centers and streamlining our corporate and business unit organizations.

We believe that our focus on productivity and lower cost structures will create favorable operating leverage as volumes increase, and that the gains from favorable operating leverage will both continue to fund higher investments in our brands and expand our profit margins.

 

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Invest in Employee and Organization Excellence

We will focus on attracting and hiring the best talent available, particularly to strengthen our sales, marketing and innovation capabilities. We will attract and retain our talent by offering attractive and fulfilling career paths and by investing in employee training and development programs to develop outstanding leaders.

Our Products and Reportable Segments

We manufacture and sell food and beverage products in 50 categories, with our top 20 product categories accounting for approximately 85% of our U.S. retail net revenues in 2011. We report our operating results through five reportable segments:

 

•

U.S. Beverages, which primarily manufactures packaged juice drinks, powdered beverages and coffee;

 

•

U.S. Cheese, which primarily manufactures processed, natural and cream cheeses;

 

•

U.S. Convenient Meals, which primarily manufactures processed meats and lunch combinations;

 

•

U.S. Grocery, which primarily manufactures spoonable and pourable dressings, condiments, desserts, packaged dinners and snack nuts; and

 

•

Canada & N.A. Foodservice, which sells products that span all of our segments and includes the Canadian and Puerto Rico grocery business, the North American foodservice operations and the North American Grocery Export Business.

The following table presents the relative percentages of total segment operating income attributable to each reportable segment for each of the last three fiscal years. See Note 14, “Segment Reporting,” to our historical combined financial statements for information regarding net revenues and total assets by reportable segment.

 

		For the Years Ended December 31,
		2011				2010				2009
U.S. Beverages			14%				18%				17%
U.S. Cheese			20%				19%				22%
U.S. Convenient Meals			10%				9%				8%
U.S. Grocery			41%				39%				40%
Canada & N.A. Foodservice			15%				15%				13%

Cheese products in our U.S. Cheese segment contributed 20% of our combined net revenues in 2011 and 2010 and 21% of our combined net revenues in 2009. Meat products in our U.S. Convenient Meals segment, including lunch meats, hot dogs and bacon, contributed 13% of our combined net revenues in 2011, 2010 and 2009.

U.S. Beverages

Our U.S. Beverages segment had net revenues of $3.028 billion in 2011 and contributed 16% of our combined net revenues. This segment primarily manufactures refreshment beverages, including Capri Sun (under license) and Kool-Aid packaged juice drinks, Kool-Aid, Crystal Light and Country Time powdered beverages and MiO liquid concentrate, and coffee products, including Maxwell House, Gevalia and Yuban coffees, Maxwell House International beverage mixers and Tassimo (under license) hot beverage system.

 

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U.S. Cheese

Our U.S. Cheese segment had net revenues of $3.832 billion in 2011 and contributed 20% of our combined net revenues. This segment primarily manufactures processed cheese, including Velveeta and Cheez Whiz processed cheeses, Kraft and Deli Deluxe processed cheese slices, Kraft grated cheeses and Polly-O and Athenos hummus and cheeses; natural cheese, including Kraft and Cracker Barrel natural cheeses; and cream cheese, including Philadelphia cream cheese and cooking crème.

U.S. Convenient Meals

Our U.S. Convenient Meals segment had net revenues of $3.337 billion in 2011 and contributed 18% of our combined net revenues. This segment’s principal brands and products include Oscar Mayer lunch meats, hot dogs and bacon, Lunchables lunch combinations, Boca soy-based meat alternatives and Claussen pickles.

U.S. Grocery

Our U.S. Grocery segment had net revenues of $4.593 billion in 2011 and contributed 25% of our combined net revenues. This segment’s principal brands and products include Kraft and Kraft Deluxe macaroni & cheese dinners, Planters nuts, trail mixes and peanut butter, Corn Nuts corn snacks, Jell-O dry packaged desserts and refrigerated gelatin and pudding snacks, Cool Whip whipped topping, Jet-Puffed marshmallows, Baker’s chocolate and baking ingredients, Kraft and Miracle Whip spoonable dressings, Kraft and Good Seasons salad dressings, A.1. steak sauce, Kraft and Bull’s-Eye barbecue sauces, Grey Poupon premium mustards, Shake N’ Bake coatings, Stove Top stuffing mix, Taco Bell Home Originals (under license) meal kits, Velveeta shells and cheese dinners and Velveeta Skillets meal kits.

Canada & N.A. Foodservice

Our Canada & N.A. Foodservice segment had net revenues of $3.865 billion in 2011 and contributed 21% of our combined net revenues. The principal products and brands in this segment span all of our segments. Canadian grocery offerings include Nabob coffee and Kraft peanut butter, as well as a range of products in the Grocery Business Lines bearing brand names similar to those marketed in the United States. The North American foodservice business sells primarily branded products, including Maxwell House coffee, A.1. steak sauce and a broad array of Kraft sauces, dressings and cheeses, and serves the needs of restaurants and other foodservice operations. Puerto Rico grocery offerings span all Grocery Business Lines, except for powdered and liquid concentrate beverages, such as Crystal Light, Tang and MiO. The North American Grocery Export Business products and brands span all Grocery Business Lines, except for powdered and liquid concentrate beverages and certain products sold under brands, such as Philadelphia cream cheese and Kraft mayonnaise, that will be marketed and sold locally by Kraft ParentCo in countries outside the United States and Canada.

Customers

We sell our products primarily to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, drug stores, gasoline stations, value stores and other retail food outlets in the United States and Canada.

Our five largest customers accounted for approximately 41% of our combined net revenues in 2011, while our ten largest customers accounted for approximately 53%. One of our customers, Wal-Mart Stores, Inc., accounted for approximately 24% of our combined net revenues in 2011.

 

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Sales

Our sales force has consistently been rated as one of the leading sales forces in customer and industry surveys. Our direct customer teams call on the headquarter operations of our customers and manage our customer relationships. These teams collaborate with customers on developing strategies for new item introduction, category and assortment management, shopper insights, shopper marketing, trade and promotional planning and strategic retail pricing solutions. We have a dedicated headquarter customer team covering all of our product lines for many of our largest customers, and we pool resources across our product lines to provide competitive support to regional retailers. As a leader in the industry, and in many of the categories in which we compete, we also provide many of our retail partners with strategic advice regarding product categories.

Our breadth of product lines and scale throughout the retail environment are supported by two leading sales agencies within our customers’ stores. Acosta Sales & Marketing supports our grocery and mass channel customers, while CROSSMARK supports our convenience store retail partners. Both Acosta and CROSSMARK are extensions of our direct customer teams and are managed by our sales leadership. Both sales agencies provide in-store support of product placement, distribution and promotional execution. We believe our agency relationships will complement our headquarter customer teams and allow us to provide top-tier customer support.

We also utilize sales agencies, distributors or other similar arrangements to sell our products in Puerto Rico and in markets outside of the United States and Canada.

Marketing and Advertising

We support our brands with strong marketing and advertising campaigns and invest heavily in consumer promotions to stimulate demand for our products. We work with third-party vendors, such as ACNielsen, to capture and analyze consumer buying patterns and product trends, and we use our deep consumer knowledge to develop targeted marketing programs and merchandising activities. As one of the largest food and beverage advertisers in North America, we leverage our large marketing budget and brand portfolio to negotiate attractive prices and terms for advertising campaigns and to pursue national multi-brand marketing campaigns.

Raw Materials and Packaging

We use large quantities of commodities, including dairy products, coffee beans, meat products, wheat, corn products, soybean and vegetable oils, nuts and sugar and other sweeteners, to manufacture our products. In addition, we use significant quantities of resins and cardboard to package our products and natural gas to operate our factories and warehouses. For commodity inputs that we use across many of our product categories, such as corrugated paper and energy, we coordinate sourcing requirements and centralize procurement to leverage our scale. In addition, some of our product lines and brands separately source raw materials that are specific to their operations, such as the peanuts requirements of Planters.

We purchase from numerous sources, from large, international producers to smaller, local independent sellers. We have preferred purchaser status and/or have developed strategic partnerships with many of our suppliers, and consequently enjoy favorable pricing and dependable supply for many of our inputs. The prices of raw materials and agricultural materials that we use in our products are affected by external factors such as global competition for resources, currency fluctuations, severe weather or global climate change, consumer or industrial demand and changes in governmental regulation and trade, alternative energy and agricultural programs.

 

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The most significant cost component of our cheese products are dairy commodities, including milk and cheese. We purchase our dairy raw material requirements from independent third parties such as agricultural cooperatives and independent processors. Market supply and demand, as well as government programs, substantially influence the prices for milk and other dairy products. The most significant cost component of our coffee products is green coffee beans, which we purchase on world markets. Quality and availability of supply, changes in the value of the U.S. dollar in relation to certain other currencies and consumer demand for coffee products impact coffee bean prices. Significant cost components in our meat business include pork, beef and poultry, which we purchase on domestic markets. Livestock feed costs and the global demand for U.S. meats influence the prices of these meat products. Other significant cost components in our grocery products are grains, including wheat, sugar and soybean oil.

Our risk management groups, each of which focuses on particular commodities, work with our procurement teams to continuously monitor worldwide supply and cost trends so we can act quickly to obtain ingredients and packaging needed for production on favorable terms. Although the prices of our principal raw materials can be expected to fluctuate, we believe there will be an adequate supply of the raw materials we use and that they are generally available from numerous sources. Our risk management groups use a range of hedging techniques to limit the impact of price fluctuations in our principal raw materials. However, we do not fully hedge against changes in commodity prices, and our hedging strategies may not protect us from increases in specific raw material costs. We closely monitor any exposure we have to increased input costs so that we can quickly adjust our pricing to offset any higher costs.

Manufacturing and Processing

We manufacture our products in our network of manufacturing and processing facilities located throughout North America. As of December 31, 2011, we operated 37 manufacturing and processing facilities in the United States and three in Canada. We own all 40 of these facilities.

While some of our plants are dedicated to the production of specific products or brands – our Madison, Wisconsin plant, for example, manufactures only Oscar Mayer products – other plants can accommodate multiple product lines. We manufacture our U.S. Beverages products in five locations, our U.S. Cheese products in 12 locations, our U.S. Convenient Meals products in eight locations and our U.S. Grocery products in 12 locations. In many cases, our facilities are strategically located close to major supply sources. In managing our network of manufacturing and processing facilities, we focus on eliminating excess capacity through consolidation, harmonizing production practices and safety procedures and pursuing productivity opportunities that cut across multiple divisions and product lines. We maintain all of our manufacturing and processing facilities in good condition and believe they are suitable and adequate for our present needs.

From time to time, we strategically enter into co-manufacturing arrangements with third parties if we determine it is advantageous to outsource the production of any of our products. For example, we may outsource production of a new product before it reaches sufficient scale to be manufactured in our operated facilities.

Distribution

We distribute our products through our network of 44 owned and leased distribution centers, satellite warehouses and depots. As of December 31, 2011, we operated 40 distribution centers, satellite warehouses and depots in the United States and four in Canada. We own three and lease 41 of these distribution centers, satellite warehouses and depots. In addition, third-party logistics providers perform storage and distribution services for us to support our distribution network.

 

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We rely on common carriers and our private fleet to transport our products from our manufacturing and processing facilities to our distribution facilities. Our distribution facilities generally accommodate all of our product lines from each of our segments and have the capacity to store refrigerated, dry and frozen goods. We assemble customer orders for multiple products at the distribution facilities and deliver them by common carrier or our private fleet to our customers’ warehouses. This allows us to efficiently sell full truckloads to both our large and small customers. We focus on optimizing the number and location of our distribution facilities to minimize both transportation and facility maintenance costs, while meeting our customers’ needs and providing them with desired stock levels and delivery times. We maintain all of our distribution facilities in good condition and believe they have sufficient capacity to meet our present distribution needs.

Competition

We face competition in all aspects of our business. Competitors include large national and international companies and numerous local and regional companies. We also compete with generic products and retailer brands, wholesalers and cooperatives. We compete primarily on the basis of product quality and innovation, brand recognition and loyalty, service, effectiveness of marketing, advertising and other promotional activity, the ability to identify and satisfy consumer preferences and price. Improving our market position or introducing a new product requires substantial advertising and promotional expenditures.

Trademarks and Intellectual Property

Our trademarks are material to our business and are among our most valuable assets. Some of our most significant trademarks include Kraft, Kool-Aid, Crystal Light, MiO, Cracker Barrel, Velveeta, Cheez Whiz, Oscar Mayer, Lunchables, Planters, Jell-O, Cool Whip, Miracle Whip, A.1., Grey Poupon, Shake N’ Bake, Baker’s and Stove Top. We own the rights to these trademarks in the United States, Canada and many other countries throughout the world. In addition, we own the trademark rights to Maxwell House and Gevalia in the United States, Canada and the Caribbean, and we own the trademark rights to Philadelphia in the United States and Canada. We protect our trademarks by registration or otherwise in the United States, Canada and other markets. Trademark protection continues in some countries for as long as the mark is used and in other countries for as long as it is registered. Registrations generally are for renewable, fixed terms. From time to time, we grant third parties licenses to use one or more of our trademarks in particular locations. Similarly, we sell some products under brands we license from third parties, including at December 31, 2011:

 

•

Capri Sun packaged juice drinks for sale in the United States and Canada; and

 

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Taco Bell Home Originals Mexican-style food products for sale in U.S. grocery stores.

Following the Spin-Off, we will grant Kraft ParentCo licenses to use some of our trademarks in particular locations outside of the United States and Canada and will sell some products under brands we license from Kraft ParentCo. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo” for more detail.

Additionally, we own numerous patents worldwide. We consider our portfolio of patents, patent applications, patent licenses under patents owned by third parties, proprietary trade secrets, technology, know-how processes and related intellectual property rights to be material to our operations. While our patent portfolio is material to our business, the loss of one patent or a group of related patents would not have a material adverse effect on our business. We either have been issued patents or have patent applications pending that relate to a number of current and potential products, including products licensed to others. Patents, issued or applied for, cover inventions ranging from basic packaging techniques to processes relating to specific products and to the products themselves. Our issued patents extend for varying periods according to the date of patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage as determined by the patent office or courts in the country, and the availability of legal remedies in the country.

 

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Following the Spin-Off, we will grant Kraft ParentCo licenses to use some of our patents, and we will also license certain patents from Kraft ParentCo. See “Certain Relationships and Related Party Transactions—Agreements with Kraft ParentCo” for more detail.

Properties

Following the Spin-Off, our corporate headquarters will be located in Northfield, Illinois. Our headquarters are owned and will house our executive offices, our U.S. business units, except Oscar Mayer, and our administrative, finance and human resource functions. We maintain additional owned and leased offices in the United States and Canada.

We also operate 40 manufacturing and processing facilities, 44 distribution facilities and three technology centers. See “—Manufacturing and Processing,” “—Distribution” and “—Research and Development” for additional detail. We do not believe that any of these facilities are individually material to our business.

Research and Development

We pursue four main objectives in research and development:

 

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growth through new products and line extensions,

 

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uncompromising product safety and quality,

 

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superior customer satisfaction, and

 

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cost reduction.

Our research and development specialists have historically focused on both major product innovation and more modestly-scaled line extensions, such as the introduction of new flavors, colors or package designs for established products. We have approximately 810 food scientists, chemists and engineers, with teams dedicated to particular brands and products.

We maintain three key technology centers, each equipped with pilot plants and state-of-the-art instruments. We expended approximately $198 million on research and development activities in 2011, $185 million in 2010 and $194 million in 2009.

Seasonality

Overall sales of our products are fairly balanced throughout the year, although demand for certain products may be influenced by holidays, changes in seasons or other annual events.

Employees

We have approximately             employees, of whom approximately             are located in the United States and approximately             are located in Canada. We have hourly employees, some of whom are represented under contracts primarily with the United Food and Commercial Workers International Union and the International Brotherhood of Teamsters. These contracts expire at various times throughout the next several years. We believe that our relationships with employees and their representative organizations are generally good.

 

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Regulation

Our U.S. food products and packaging materials are primarily regulated by the U.S. Food and Drug Administration or, for products containing meat and poultry, the U.S. Food Safety and Inspection Service of the U.S. Department of Agriculture. These agencies enact and enforce regulations relating to the manufacturing, distribution and labeling of food products. We supported the Food Safety Modernization Act, a 2011 law that provided additional food safety authority to the U.S. Food and Drug Administration. We do not expect the cost of complying with that law, and implementing regulations expected over the next two to three years, to be material.

In addition, various states regulate our U.S. operations by licensing plants, enforcing federal and state standards for selected food products, grading food products, inspecting plants and warehouses, regulating trade practices related to the sale of dairy products and imposing their own labeling requirements on food products.

Many of the food commodities we use in our U.S. operations are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to periodic U.S. Congressional and administrative review.

Our food operations in Canada are subject to local and national regulations similar to those applicable to our business in the United States.

Environmental Regulation

We are subject to various federal, provincial, state and local laws and regulations in the United States and Canada relating to the protection of the environment, including those governing discharges to air and water, the management and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters.

These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and Superfund (the environmental program established in the Comprehensive Environmental Response, Compensation, and Liability Act to address abandoned hazardous waste sites), which imposes joint and severable liability on each potentially responsible party. We are not a party to any proceedings arising under these laws and regulations that we currently expect to have a material effect on our financial condition. As of December 31, 2011, we were involved in 67 active actions in the United States under the Superfund legislation (and other similar actions and legislation) related to our current operations and certain closed, inactive or divested operations for which we retain liability.

As of December 31, 2011, we accrued an immaterial amount for environmental remediation. Based on information currently available, we believe that the ultimate resolution of existing environmental remediation actions and our compliance in general with environmental laws and regulations will not have a material effect on our financial condition. However, it is difficult to predict with certainty the potential impact of future compliance efforts and environmental remedial actions and thus future costs associated with such matters may exceed current forecasts.

Legal Proceedings

We routinely are involved in legal proceedings, claims and governmental inspections or investigations, or “Legal Matters,” arising in the ordinary course of our business.

On March 1, 2011, Starbucks, without our authorization and in what we contend is a violation and breach of our agreements with Starbucks, took control of the Starbucks CPG business in grocery stores and other channels. The dispute is pending arbitration in Chicago, Illinois. We are seeking appropriate remedies, including but not limited to payment of the fair market value of our supply and license agreement with Starbucks relating to the Starbucks CPG business, plus the premium this agreement specifies. Starbucks has counterclaimed for unspecified damages. The arbitration proceeding is set to begin on July 11, 2012.

 

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While we cannot predict with certainty the results of our dispute with Starbucks or any other Legal Matters in which we are currently involved or may in the future be involved, we do not expect that the ultimate costs to resolve any of the Legal Matters that are currently pending will have a material adverse effect on our financial condition.

Foreign Operations

We sell our products to consumers in the United States and Canada, and export our products to over 35 countries and territories. We generated approximately 12% of our 2011 and 2010 combined net revenues and 11% of our 2009 combined net revenues outside the United States, primarily in Canada. For additional information about our foreign operations, see Note 14, “Segment Reporting,” to our historical combined financial statements included in this Information Statement.

 

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MANAGEMENT

The following table presents information, as of             , 2012, concerning our directors and executive officers following the Spin-Off, including their respective business experience. We are in the process of identifying the individuals who will serve on our Board along with our Executive Chairman and our Chief Executive Officer following the Spin-Off. We expect to provide details about these individuals in an amendment to this Information Statement.

 

Name		Age				Position with Kraft Foods Group
John T. Cahill			54			Executive Chairman
W. Anthony Vernon			56			Chief Executive Officer and Director
Timothy R. McLevish			57			Executive Vice President and Chief Financial Officer
Dino J. Bianco			50			Executive Vice President and President, Canada
Charles W. Davis			55			Executive Vice President, Research, Development, Quality & Innovation
Adrienne D. Elsner			49			Executive Vice President and President, Beverages
Georges El-Zoghbi			45			Executive Vice President and President, Cheese and Dairy
Michael D. Hsu			47			Executive Vice President and Chief Commercial Officer
Diane Johnson May			53			Executive Vice President, Human Resources
Nicholas E. Meriggioli			48			Executive Vice President and President, Oscar Mayer
Michael Osanloo			46			Executive Vice President and President, Grocery
Sam B. Rovit			54			Executive Vice President, Strategy
Thomas H. Sampson			53			Executive Vice President, Business Transformation

Mr. Cahill will be our Executive Chairman. He joined Kraft ParentCo on January 2, 2012 as the Executive Chairman Designate, North American Grocery. Prior to that, he served as an Industrial Partner at Ripplewood Holdings LLC, a private equity firm, from 2008 to 2011. Mr. Cahill spent nine years with The Pepsi Bottling Group, Inc., a beverage manufacturing company, most recently as Chairman and Chief Executive Officer from 2003 to 2006 and Executive Chairman until 2007. Mr. Cahill previously spent nine years with PepsiCo, Inc., a food and beverage company, in a variety of leadership positions. He also serves on the Boards of Directors of Colgate-Palmolive Company and Legg Mason, Inc.

Mr. Vernon will be our Chief Executive Officer and a member of our Board. He currently serves as Kraft ParentCo’s Executive Vice President and President, Kraft Foods North America. Prior to joining Kraft ParentCo in August 2009, he was the Healthcare Industry Partner of Ripplewood Holdings LLC, a private equity firm, since 2006. Mr. Vernon spent 23 years with Johnson & Johnson, a pharmaceutical company, in a variety of leadership positions, most recently serving as Company Group Chairman of DePuy Inc., an orthopedics company and subsidiary of Johnson & Johnson, from 2004 to 2005. Mr. Vernon also serves on the Boards of Directors of Medivation, Inc. and NovaCare, Inc.

Mr. McLevish will be our Executive Vice President and Chief Financial Officer. He has been serving as Kraft ParentCo’s Executive Vice President since August 15, 2011, leading the Spin-Off planning. Mr. McLevish also served as Kraft ParentCo’s Executive Vice President and Chief Financial Officer from October 2007 to May 2011. Prior to that, Mr. McLevish served as Senior Vice President and Chief Financial Officer at Ingersoll-Rand Company Limited, an industrial company, since June 2002. Mr. McLevish also serves on the Board of Directors of Kennametal Inc.

Mr. Bianco will be our Executive Vice President and President, Canada. He has been serving as Kraft ParentCo’s President, Kraft Foods Canada since November 2005. He has also served in various marketing, sales and finance capacities at Kraft ParentCo, including Vice President of Marketing, Kraft Foods Canada from January 2002 to November 2005. He joined Kraft ParentCo in 1990.

 

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Mr. Davis will be our Executive Vice President, Research, Development, Quality & Innovation. He has been serving as Kraft ParentCo’s Vice President, Research, Development & Quality, Kraft Foods Europe since 2007. Prior to that, Mr. Davis served as Kraft ParentCo’s Vice President, Research, Development & Quality, North American Convenient Meals Sector from 2004 to 2007. He joined Kraft ParentCo in 1984.

Ms. Elsner will be our Executive Vice President and President, Beverages. She has been serving as Kraft ParentCo’s President, Beverages since May 2010. She previously served as Vice President and President, Coffee, Kraft Foods Europe from 2007 to 2010, and as Vice President, Marketing Resources, Kraft Foods Europe from 2005 to 2007. Ms. Elsner joined Kraft ParentCo in 1992.

Mr. El-Zoghbi will be our Executive Vice President and President, Cheese and Dairy. He has been serving as Kraft ParentCo’s President, Cheese and Dairy since October 2009. Prior to that, he served as Kraft ParentCo’s Vice President and Area Director, Kraft Foods Australia & New Zealand from October 2007 to September 2009. Prior to joining Kraft ParentCo, Mr. El-Zoghbi served in various directorial and managerial capacities at Fonterra Co-operative Group, a multinational processor of dairy products, from July 1998 to September 2007.

Mr. Hsu will be our Executive Vice President and Chief Commercial Officer. He has been serving as Kraft ParentCo’s President, Sales and Customer Logistics since June 2010. Mr. Hsu joined Kraft ParentCo in March 2008 as President, Grocery. Prior to joining Kraft ParentCo, Mr. Hsu served as President of the USA Foodservice Division of H.J. Heinz Co., a global U.S.-based food company, from 2006 to 2008 and Vice President of the Frozen Foods Division of H.J. Heinz Co. from 2002 to 2006.

Ms. Johnson May will be our Executive Vice President, Human Resources. She has been serving as Kraft ParentCo’s Senior Vice President, Human Resources, Kraft Foods North America since September 2010. She joined Kraft ParentCo in 1980 and has served in various roles, including Vice President, Human Resources at various Kraft ParentCo units from December 2006 to September 2010 and Senior Director, Human Resources from 2002 to 2006.

Mr. Meriggioli will be our Executive Vice President and President, Oscar Mayer. He has been serving as Kraft ParentCo’s President, Oscar Mayer since January 2008. Prior to that, Mr. Meriggioli served as Kraft ParentCo’s Group Vice President and President, North American Convenient Meals Sector from March 2006 until January 2008 and as Senior Vice President and General Manager, Oscar Mayer from June 2002 to March 2006. He joined Kraft ParentCo in 1987.

Mr. Osanloo will be our Executive Vice President and President, Grocery. He has been serving as Kraft ParentCo’s President, Grocery since October 2010. Prior to that, Mr. Osanloo was Kraft ParentCo’s Executive Vice President, Strategy from April 2008 to September 2010. Prior to joining Kraft ParentCo, Mr. Osanloo served as Senior Vice President, Marketing at Harrah’s Entertainment, a provider of branded casino entertainment, from July 2005 to March 2008. Previously, he was a partner in the retail and consumer products practice at Bain & Co., a management consulting firm, from August 1996 to June 2005.

Mr. Rovit will be our Executive Vice President, Strategy. He has been serving as Kraft ParentCo’s Executive Vice President, Strategy since February 1, 2011. Prior to joining Kraft ParentCo, he served as a Director of Bain & Co., a management consulting firm, from January 2008 to January 2011 and from 1988 to June 2005. Mr. Rovit served as President, Chief Executive Officer and Director of Swift & Company, a meat processing company, from June 2005 to July 2007.

Mr. Sampson will be our Executive Vice President, Business Transformation. He has been serving as Kraft ParentCo’s Senior Vice President, Business Transformation since June 2011. Prior to that, Mr. Sampson served in various sales, marketing and strategy capacities at various Kraft ParentCo units, including President, North America Foodservice from January 2005 until June 2011. He joined Kraft ParentCo in 1985.

 

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We are also in the process of identifying the individuals who will serve as our Executive Vice President, Corporate and Legal Affairs and General Counsel and Executive Vice President, Integrated Supply Chain following the Spin-Off. We expect to provide details about these individuals in an amendment to this Information Statement.

Our Board of Directors Following the Spin-Off and Director Independence

Immediately following the Spin-Off, we expect that our Board will comprise              directors. The              rules require that our Board have a majority of independent directors. Immediately following the Distribution Date, our Board will have a majority of independent directors, and our Board committees will comprise only independent directors.

Committees of the Board

Effective upon the completion of the Spin-Off, our Board will have the following committees, each of which will operate under a written charter that will be posted on our Web site prior to the Spin-Off.

Audit Committee

The Audit Committee will be established in accordance with Section 3(a)(58)(A) and Rule 10A-3 under the Exchange Act. The responsibilities of our Audit Committee will be more fully described in our Audit Committee charter. We anticipate that our Audit Committee, among other duties, will oversee:

 

•

the integrity of our financial statements, our accounting and financial reporting processes, our systems of internal control over financial reporting and safeguarding our assets;

 

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our compliance with legal and regulatory requirements;

 

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the performance of our internal auditors and internal audit functions; and

 

•

our guidelines and policies with respect to risk assessment and risk management.

The Audit Committee will consist entirely of independent directors, each of whom will meet the independence requirements set forth in the listing standards of the             , Rule 10A under the Exchange Act and the Audit Committee charter. Each member of the Audit Committee will be financially literate and have accounting or related financial management expertise as such terms are interpreted by our Board in its business judgment. None of our Audit Committee members will simultaneously serve on more than two other public company audit committees unless our Board specifically determines that it would not impair the ability of an existing or prospective member to serve effectively on the Audit Committee. The initial members of the Audit Committee will be determined prior to the Spin-Off.

Compensation Committee

The responsibilities of our Compensation Committee will be more fully described in our Compensation Committee charter, and we anticipate that they will include, among other duties:

 

•

assessing the appropriateness and competitiveness of our executive compensation programs;

 

•

reviewing and approving our Executive Chairman’s and Chief Executive Officer’s goals and objectives, evaluating their performance in light of these goals and objectives and, based upon its evaluation, determine both the elements and amounts of their compensation;

 

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•

reviewing and approving the compensation of our Executive Chairman’s and Chief Executive Officer’s direct reports and other officers subject to Section 16(a) of the Exchange Act;

 

•

determining annual incentive compensation, equity awards and other long-term incentive awards granted under our equity and long-term incentive plans to eligible participants;

 

•

reviewing our compensation policies and practices for employees, including non-executive and executive officers, as they relate to our risk management practices and risk-taking incentives;

 

•

overseeing the management development and succession planning process (including succession planning for emergencies) for our Executive Chairman and Chief Executive Officer and their direct reports and, as appropriate, evaluating potential candidates;

 

•

monitoring our policies, objectives and programs related to diversity and reviewing periodically our diversity performance in light of appropriate measures;

 

•

assessing the appropriateness of, and advising our Board regarding, the compensation of non-employee directors for service on our Board and its committees; and

 

•

reviewing and discussing with management the Compensation Discussion and Analysis and preparing and approving the committee’s report to shareholders included in our annual proxy statement.

The Compensation Committee will consist entirely of independent directors, each of whom will meet the independence requirements set forth in the listing standards of the              and the Compensation Committee charter. The members of the Compensation Committee will be “non-employee directors” (within the meaning of Rule 16b-3 of the Exchange Act) and “outside directors” (within the meaning of Section 162(m) of the Code). The initial members of the Compensation Committee will be determined prior to the Spin-Off.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee will consist entirely of independent directors who our Board determines to be independent within the meaning of the              listing standards. We do not anticipate that any of the Compensation Committee’s members will be:

 

•

a current or former officer or employee of Kraft Foods Group;

 

•

a participant in a “related person” transaction occurring after January 1, 2009 (for a description of our policy on related person transactions, see “Certain Relationships and Related Party Transactions—Policy and Procedures Governing Related Person Transactions”); or

 

•

an executive officer of another entity at which one of our executive officers serves on the board of directors.

Governance Committee

The responsibilities of our Governance Committee will be more fully described in our Governance Committee charter, and we anticipate that they will include, among other duties:

 

•

identifying qualified individuals for Board membership consistent with criteria approved by our Board;

 

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considering incumbent directors’ performance and suitability in determining whether to recommend that our Board nominate them for re-election;

 

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making recommendations to our Board as to directors’ independence;

 

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recommending to our Board the appropriate size, function, needs and composition of our Board and its committees;

 

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•

recommending to our Board the committee structure and the membership of each committee;

 

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monitoring directors’ compliance with our stock ownership guidelines; and

 

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advising our Board on corporate governance matters, including developing and recommending to our Board corporate governance guidelines.

The Governance Committee will consist entirely of independent directors, each of whom will meet the independence requirements set forth in the listing standards of the              and the Governance Committee charter. The initial members of the Governance Committee will be determined prior to the Spin-Off.

Code of Ethics

Prior to the completion of the Spin-Off, we will adopt a written code of ethics that is designed to deter wrongdoing and to promote:

 

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honest and ethical conduct;

 

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full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the SEC and in our other public communications;

 

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compliance with applicable laws, rules and regulations, including insider trading compliance; and

 

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accountability for adherence to the code and prompt internal reporting of violations of the code, including illegal or unethical behavior regarding accounting or auditing practices.

A copy of our code of ethics will be posted on our Web site prior to the Spin-Off.

Director Nomination Process

Our initial Board will be selected through a process involving both Kraft ParentCo and us.

We intend to adopt corporate governance guidelines that will contain information concerning the responsibilities of the Governance Committee with respect to identifying and evaluating future director candidates.

The Governance Committee will evaluate future director candidates in accordance with the director membership criteria described in our corporate governance guidelines. The Governance Committee will evaluate a candidate’s qualifications to serve as a member of our Board based on the skills and characteristics of individual directors as well as the composition of our Board as a whole. In addition, the Governance Committee will evaluate a candidate’s professional skills and background, experience in relevant industries, age, diversity, geographic background and number of other directorships, along with qualities expected of all directors, including integrity, judgment, acumen and the time and ability to make a constructive contribution to our Board.

Communication with Non-Management Members of our Board of Directors

Information for shareholders and other parties interested in communicating with our Board or our independent directors, individually or as a group, will be posted on our Web site prior to the Spin-Off. Our corporate secretary will forward communications relating to matters within our Board’s purview to the independent directors; communications relating to matters within a board committee’s area of responsibility to the chair of the appropriate committee; and communications relating to ordinary business matters, such as suggestions, inquiries and consumer complaints, to the appropriate Kraft Foods Group executive or employee. Our corporate secretary will not forward solicitations, junk mail and obviously frivolous or inappropriate communications, but will make them available to any independent director who requests them.

 

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Table of Contents

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Prior to the Spin-Off, we have been a wholly owned subsidiary of Kraft ParentCo, and therefore Kraft ParentCo’s senior management and the Human Resources and Compensation Committee of Kraft ParentCo’s Board, which we refer to in this Compensation Discussion and Analysis as “Kraft ParentCo’s Committee,” determined our historical compensation strategy. Since the information presented in the compensation tables of this Information Statement relates to the 2011 fiscal year, which ended on December 31, 2011, this Compensation Discussion and Analysis focuses primarily on Kraft ParentCo’s compensation programs and decisions with respect to 2011 and the processes for determining 2011 compensation while we were part of Kraft ParentCo. Specifically, in this Compensation Discussion and Analysis, we:

 

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describe Kraft ParentCo’s goals for compensating our executive officers;

 

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describe how Kraft ParentCo designed our compensation program and explain how executive compensation decisions reflect both Kraft ParentCo’s business performance and the individual performance goals for each of our Named Executive Officers listed below; and

 

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explain the tables and other disclosures that follow.

In connection with the Spin-Off, our Board will form its own Compensation Committee. Following the Spin-Off, that committee will determine our executive compensation strategy.

This Compensation Discussion and Analysis presents historical compensation information for the following individuals, whom we refer to as our “Named Executive Officers;”

 

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Irene Rosenfeld, who served as our Chief Executive Officer, or “CEO,” in 2011;

 

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David Brearton, who served as our Chief Financial Officer since May 9, 2011;

 

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Timothy McLevish, who served as our Chief Financial Officer until May 9, 2011; and