KRAFT FOODS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2001

COMMISSION FILE NUMBER 1-16483
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KRAFT FOODS INC.
(Exact name of registrant as specified in its charter)
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Virginia 52-2284372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Three Lakes Drive,
Northfield, Illinois 60093
(Address of principal executive offices) (Zip Code)

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Registrant's telephone number, including area code: 847-646-2000
Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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The aggregate market value of the shares of Class A Common Stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on February 28, 2002, was approximately $11 billion. At such date,
there were 555,000,000 shares of the registrant's Class A Common Stock
outstanding, and 1,180,000,000 shares of the registrant's Class B Common Stock
outstanding.
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Documents Incorporated by Reference

Portions of the registrant's annual report to shareholders for the year
ended December 31, 2001 (the "2001 Annual Report") are incorporated in Part I,
Part II and Part IV hereof and made a part hereof. The registrant's definitive
proxy statement for use in connection with its annual meeting of shareholders to
be held on April 22, 2002, filed with the Securities and Exchange Commission on
March 8, 2002, is incorporated in Part III hereof and made a part hereof.

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PART I

Item 1. Business.

(a) General Development of Business

General

Kraft Foods Inc. ("Kraft") was incorporated in 2000 in the Commonwealth of
Virginia. Following Kraft's formation, Philip Morris Companies Inc. ("Philip
Morris") transferred to Kraft its ownership interest in Kraft Foods North
America, Inc., a Delaware corporation, through a capital contribution. During
2000, Philip Morris transferred management responsibility for its food
businesses in Latin America to Kraft Foods North America, Inc. and its
wholly-owned subsidiary, Kraft Foods International, Inc. In addition, on
December 11, 2000, Kraft acquired all of the outstanding shares of Nabisco
Holdings Corp. ("Nabisco"). Kraft, together with its subsidiaries (collectively
referred to as the "Company"), is engaged in the manufacture and sale of branded
foods and beverages in the United States, Canada, Europe, Latin America and Asia
Pacific.

Prior to June 13, 2001, the Company was a wholly-owned subsidiary of Philip
Morris. On June 13, 2001, the Company completed an initial public offering
("IPO") of 280,000,000 shares of its Class A common stock at a price of $31.00
per share. The IPO proceeds, net of the underwriting discount and expenses, of
$8.4 billion were used to retire a portion of an $11.0 billion long-term note
payable to Philip Morris incurred in connection with the acquisition of Nabisco.
After the IPO, Philip Morris owns approximately 83.9% of the outstanding shares
of the Company's capital stock through its ownership of 49.5% of the Company's
Class A common stock and 100% of the Company's Class B common stock. The
Company's Class A common stock has one vote per share while the Company's Class
B common stock has ten votes per share. Therefore, Philip Morris holds 97.7% of
the combined voting power of the Company's outstanding common stock.

Source of Funds--Dividends

Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.

(b) Financial Information About Industry Segments

The Company conducts its global business through its subsidiaries: Kraft
Foods North America, Inc. ("Kraft Foods North America") and Kraft Foods
International, Inc. ("Kraft Foods International"). The Company has operations in
68 countries and sells its products in more than 145 countries. Kraft Foods
North America operates in the United States, Canada and Mexico, and manages its
operations by product category, while Kraft Foods International manages its
operations by geographic region. Kraft Foods North America's reportable segments
are Cheese, Meals and Enhancers; Biscuits, Snacks and Confectionery; Beverages,
Desserts and Cereals; and Oscar Mayer and Pizza. Kraft Foods North America's
food service business within the United States and its businesses in Canada and
Mexico are reported through the Cheese, Meals and Enhancers segment. Kraft Foods
International's reportable segments are Europe, Middle East and Africa; and
Latin America and Asia Pacific.

Operating revenues and operating companies income (together with a
reconciliation to operating income) attributable to each such segment for each
of the last three years are set forth in Note 13 to the Company's consolidated
financial statements and are incorporated herein by reference to the 2001 Annual
Report.
1

The relative percentages of operating companies income attributable to each
reportable segment were as follows:

The inclusion of Nabisco's operating results in 2001 contributed to the
shift in relative percentages toward the Biscuits, Snacks and Confectionery and
Latin America and Asia Pacific segments.

(c) Narrative Description of Business

Acquisitions and Divestitures

Nabisco Acquisition

On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for $55 per share in cash. The purchase of the outstanding shares,
retirement of employee stock options and other payments totaled approximately
$15.2 billion. In addition, the acquisition included the assumption of
approximately $4.0 billion of existing Nabisco debt. The Company financed the
acquisition through the issuance of two long-term notes payable to Philip Morris
totaling $15.0 billion and short-term intercompany borrowings of $255 million.
The acquisition has been accounted for as a purchase. Nabisco's balance sheet
was consolidated with the Company as of December 31, 2000, and beginning January
1, 2001, Nabisco's earnings have been included in the consolidated operating
results of the Company; however, Nabisco's earnings from December 11, 2000 to
December 31, 2000 were not included in the consolidated operating results of the
Company since such amounts were insignificant. The Company's interest cost
associated with acquiring Nabisco has been included in interest and other debt
expense, net, on the Company's consolidated statements of earnings for the years
ended December 31, 2001 and 2000.

The integration of Nabisco into the Company has continued throughout 2001.
The closure of a number of Nabisco domestic and international facilities
resulted in severance and other exit costs of $379 million, which are included
in the adjustments for the allocation of purchase price. The closures will
result in the termination of approximately 7,500 employees and will require
total cash payments of $373 million, of which approximately $74 million has been
spent through December 31, 2001. Substantially all of the closures will be
completed by the end of 2002.

The integration of Nabisco into the operations of the Company will also
result in the closure or reconfiguration of several of the Company's existing
facilities. The aggregate charges to the Company's consolidated statement of
earnings to close or reconfigure its facilities and integrate Nabisco are
estimated to be in the range of $200 million to $300 million. During 2001, the
Company incurred pre-tax integration costs of $53 million for site
reconfigurations and other consolidation programs in the United

2

States. In October 2001, the Company announced that it was offering a voluntary
retirement program to certain salaried employees in the United States. The
program is expected to terminate approximately 750 employees and will result in
an estimated pre-tax charge of approximately $140 million upon final employee
acceptance in the first quarter of 2002. This pre-tax charge is part of the
previously discussed $200 million to $300 million in pre-tax charges related to
the integration of Nabisco. For a detailed discussion of the Nabisco
acquisition, see Note 5 to the Company's consolidated financial statements,
incorporated herein by reference to the 2001 Annual Report.

By combining Nabisco's operations with the operations of Kraft Foods North
America and Kraft Foods International, the Company achieved net cost synergies
of over $100 million in 2001 and expects to generate net cost synergies of $300
million in 2002, $475 million in 2003 and ongoing annual cost savings of $600
million thereafter.

Other Acquisitions and Divestitures

During 2001, the Company purchased coffee businesses in Romania, Morocco
and Bulgaria and also acquired confectionery businesses in Russia and Poland.
The total cost of these and other smaller acquisitions was $194 million. During
2000, the Company purchased the outstanding common stock of Balance Bar Co., a
maker of energy and nutrition snack products. In a separate transaction, the
Company also acquired Boca Burger, Inc., a privately held manufacturer and
marketer of soy-based meat alternatives. The total cost of these and other
smaller acquisitions was $365 million. During 1999, the Company purchased
several small North American and international food businesses for $14 million.

During 2001, the Company sold several small food businesses. The aggregate
proceeds received in these transactions were $21 million, on which the Company
recorded a pre-tax gain of $8 million. During 2000, the Company sold a French
confectionery business for proceeds of $251 million, on which a pre-tax gain of
$139 million was recorded. Several small international and domestic food
businesses were also sold in 2000. The aggregate proceeds received in these
transactions were $300 million, on which the Company recorded pre-tax gains of
$172 million. During 1999, the Company sold several small international and
domestic food businesses. The aggregate proceeds received in these transactions
were $175 million, on which the Company recorded pre-tax gains of $62 million.
Pre-tax gains on these divestitures were included in marketing, administration
and research costs on the Company's consolidated statements of earnings.

The impact of these acquisitions and divestitures, excluding Nabisco, has
not had a material effect on the Company's results of operations.

Markets and Products

The Company's portfolio of brands includes 61 brands with 2001 revenues
over $100 million, accounting for 78% of the Company's 2001 revenues. Six of
these brands--Kraft, Nabisco, Oscar Mayer, Post, Maxwell House, and
Philadelphia--had 2001 revenues over $1 billion, accounting for 39% of the
Company's 2001 revenues.

The Company's brands span five consumer sectors, as follows:

- Snacks--primarily cookies, crackers, salty snacks and confectionery;

- Beverages--primarily coffee, aseptic juice drinks and powdered soft
drinks;

- Cheese--primarily natural, process and cream cheeses;

- Grocery--primarily ready-to-eat cereals, enhancers and desserts; and

- Convenient Meals--primarily frozen pizza, packaged dinners, lunch
combinations and processed meats.

3

The following table shows each reportable segment's participation in these
five core consumer sectors.

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(1) The amounts of operating revenues, total assets and long-lived assets
attributable to each of the Company's geographic regions and the amounts of
operating revenues and operating companies income of each of the Company's
reportable segments for each of the last three fiscal years are set forth in
Note 13 to the Company's consolidated financial statements, incorporated
herein by reference to the 2001 Annual Report.
(2) The Cheese, Meals and Enhancers segment includes the Company's United States
food service business and its businesses in Canada and Mexico which sell
products across all consumer sectors.
(3) Percentages are calculated based upon dollars rounded to millions.

Additional Product Disclosure

Products or similar products contributing 10% or more of the Company's
consolidated operating revenues for each of the three years in the period ended
December 31, 2001, were as follows:

The inclusion of Nabisco's operating results in 2001 contributed to the
shift in relative percentages toward biscuits.

4

The Company's major brands within each reportable segment are as follows:

Kraft Foods North America:

Cheese, Meals and Enhancers (includes U.S. food service, Canada and Mexico sales
within each consumer sector)

Snacks: Oreo and Chips Ahoy! cookies in Mexico; Ritz
crackers in Mexico; and Life Savers sugar
confectionery products in Mexico.

Beverages: Maxwell House, Sanka and Nabob coffees in Canada;
Kool-Aid and Tang powdered soft drinks in Canada
and Mexico; and Capri Sun aseptic juice drinks in
Canada and Mexico.

Cheese: Kraft and Cracker Barrel natural cheeses;
Philadelphia cream cheese; Kraft and Velveeta
process cheeses; Kraft grated cheeses; Cheez Whiz
process cheese sauce; Easy Cheese aerosol cheese
spread; and Knudsen and Breakstone's cottage cheese
and sour cream.

Grocery: Kraft and Miracle Whip spoonable dressings; Kraft
salad dressings; A.1. steak sauce; Kraft and
Bull's-Eye barbecue sauces; Grey Poupon premium
mustards; and Shake 'N Bake coatings.

Convenient Meals: Kraft macaroni & cheese dinners; Taco Bell, It's
Pasta Anytime and Stove Top Oven Classics meal
kits; Stove Top stuffing mix; Minute rice; and
Delissio frozen pizzas in Canada.

Biscuits, Snacks and Confectionery

Snacks: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter,
Stella D'Oro and SnackWell's cookies; Ritz,
Premium, Triscuit, Wheat Thins, Cheese Nips, Better
Cheddars, Honey Maid Grahams and Teddy Grahams
crackers; Planters nuts and salty snacks;
Handi-Snacks two compartment snacks; Life Savers,
Creme Savers, Altoids, Gummi Savers and Fruit
Snacks sugar confectionery products; and Terry's
and Toblerone chocolate confectionery products.

Grocery: Milk-Bone pet snacks.

Beverages, Desserts and Cereals

Snacks: Balance Bar nutrition and energy snacks; Jell-O
refrigerated gelatin and pudding snacks; and
Handi-Snacks shelf-stable pudding snacks.

Beverages: Maxwell House, General Foods International Coffees,
Starbucks, Yuban, Sanka and Gevalia coffees; Capri
Sun, Kool-Aid, Tang and Crystal Light aseptic juice
drinks; and Kool-Aid, Tang, Capri Sun, Crystal
Light and Country Time powdered soft drinks.

Grocery: Jell-O dry packaged desserts; Cool Whip frozen
whipped topping; Post ready-to-eat cereals; and
Cream of Wheat and Cream of Rice hot cereals.

5

Oscar Mayer and Pizza

Convenient Meals: DiGiorno, Tombstone, Jack's and California Pizza
Kitchen frozen pizzas; Lunchables lunch
combinations; Oscar Mayer and Louis Rich cold cuts,
hot dogs and bacon; and Boca soy-based meat
alternatives.

Kraft Foods International:

Europe, Middle East and Africa

Snacks: Milka, Suchard, Cote d'Or, Marabou, Toblerone,
Freia, Terry's, Daim, Figaro, Korona, Poiana,
Prince Polo and Siesta chocolate confectionery
products; and Estrella, Maarud and Lux salty
snacks.

Beverages: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee
HAG, Grand' Mere, Kenco, Saimaza, Maxwell House,
Dadak, Onko and Nova Brasilia coffees; Tang
powdered soft drinks; and Suchard Express, O'Boy
and Kaba chocolate drinks.

Cheese: Kraft, Dairylea, Sottilette, El Caserio and
Invernizzi cheeses; and Philadelphia cream cheese.

Grocery: Kraft pourable and spoonable salad dressings; and
Miracel Whip spoonable dressing.

Convenient Meals: Lunchables lunch combinations; Kraft and Miracoli
pasta dinners and sauces; and Simmenthal canned
meats.

Latin America and Asia Pacific

Snacks: Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale, Club
Social, Cerealitas, Trakinas and Lucky biscuits;
Milka, Lacta and Gallito chocolate confectionery
products; and Sugus and Artic sugar confectionery
products.

Beverages: Maxwell House and Maxim coffee; Tang, Clight,
Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko
and Ki-Suco powdered soft drinks; and Maguary juice
concentrate.

Cheese: Kraft and Eden process cheeses; Philadelphia cream
cheese; and Cheez Whiz process cheese spread.

Grocery: Royal dry packaged desserts; Kraft spoonable and
pourable salad dressings; Kraft and ETA peanut
butters; and Vegemite yeast spread.

Convenient Meals: Kraft macaroni & cheese dinners.

Distribution, Competition and Raw Materials

Kraft Foods North America's products are generally sold to supermarket
chains, wholesalers, supercenters, club stores, mass merchandisers,
distributors, convenience stores, gasoline stations and other retail food
outlets. In general, the retail trade for food products is consolidating. Food
products are distributed through distribution centers, satellite warehouses,
company-operated and public cold-storage facilities, depots and other
facilities. Most distribution in North America is in the form of warehouse
delivery, but snacks and frozen pizza are distributed through two
direct-store-delivery systems. Selling

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efforts are supported by national and regional advertising on television and
radio as well as outdoor media such as billboards and in magazines and
newspapers, as well as by sales promotions, product displays, trade incentives,
informative material offered to customers and other promotional activities.
Subsidiaries and affiliates of Kraft Foods International sell their food
products primarily in the same manner and also engage the services of
independent sales offices and agents.

Kraft Foods North America, Kraft Foods International and their subsidiaries
are subject to competitive conditions in all aspects of their business.
Competitors include large national and international companies and numerous
local and regional companies. Some competitors may have different profit
objectives and some international competitors may be less susceptible to
currency exchange rates. In addition, certain international competitors benefit
from government subsidies. Products of Kraft Foods North America and Kraft Foods
International also compete with generic products and private-label products of
food retailers, wholesalers and cooperatives. Kraft Foods North America, Kraft
Foods International and their subsidiaries compete primarily on the basis of
product quality, brand recognition, brand loyalty, service, marketing,
advertising and price. Substantial advertising and promotional expenditures are
required to maintain or improve a brand's market position or to introduce a new
product.

Kraft Foods North America, Kraft Foods International and their subsidiaries
are major purchasers of milk, cheese, nuts, green coffee beans, cocoa, corn
products, wheat, rice, pork, poultry, beef, vegetable oil, and sugar and other
sweeteners. They also use significant quantities of glass, plastic and cardboard
to package their products. They continuously monitor worldwide supply and cost
trends of these commodities to enable them to take appropriate action to obtain
ingredients and packaging needed for production.

Kraft Foods North America, Kraft Foods International and their subsidiaries
purchase a substantial portion of their milk requirements from independent
agricultural cooperatives and individual producers, and a substantial portion of
their cheese requirements from independent sources. The prices for milk and
other dairy product purchases are substantially influenced by government
programs, as well as by market supply and demand. Dairy commodity costs on
average have been higher in 2001 than those seen in 2000.

The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. In 2001, coffee bean prices have been
lower than in 2000. A significant cost item in chocolate confectionery products
is cocoa, which is purchased on world markets, and the price of which is
affected by the quality and availability of supply and changes in the value of
the British pound sterling and the United States dollar relative to certain
other currencies. In 2001, cocoa bean prices have been higher than in 2000.

The prices paid for raw materials and agricultural materials used in the
products of Kraft Foods North America and Kraft Foods International generally
reflect external factors such as weather conditions, commodity market
fluctuations, currency fluctuations and the effects of governmental agricultural
programs. Although the prices of the principal raw materials can be expected to
fluctuate as a result of these factors, the Company believes such raw materials
to be in adequate supply and generally available from numerous sources. However,
the Company and its subsidiaries use hedging techniques to minimize the impact
of price fluctuations in their principal raw materials. They do not fully hedge
against changes in commodity prices and these strategies may not protect the
Company or its subsidiaries from increases in specific raw material costs.

7

Regulation

All of Kraft Foods North America's United States food products and
packaging materials are subject to regulations administered by the Food and Drug
Administration ("FDA") or, with respect to products containing meat and poultry,
the United States Department of Agriculture ("USDA"). Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish safety standards for food processing, establish ingredients and
manufacturing procedures for certain foods, establish standards of identity for
certain foods, determine the safety of food additives and establish labeling
standards and nutrition labeling requirements for food products.

In addition, various states regulate the business of Kraft Foods North
America's operating units by licensing dairy plants, enforcing federal and state
standards of identity for selected food products, grading food products,
inspecting plants, regulating certain trade practices in connection with the
sale of dairy products and imposing their own labeling requirements on food
products.

Many of the food commodities on which Kraft Foods North America's United
States businesses rely are subject to governmental agricultural programs. These
programs have substantial effects on prices and supplies and are subject to
Congressional and administrative review.

Almost all of the activities of the Company's food operations outside of
the United States are subject to local and national regulations similar to those
applicable to Kraft Foods North America's United States businesses and, in some
cases, international regulatory provisions, such as those of the European Union
relating to labeling, packaging, food content, pricing, marketing and
advertising and related areas.

The European Union and certain individual countries require that food
products containing genetically modified organisms or classes of ingredients
derived from them be labeled accordingly. Other countries may adopt similar
regulations. The FDA has concluded that there is no basis for similar mandatory
labeling under current United States law.

Other Matters

Customers

For the year ended December 31, 2001, the Company's five largest customers
accounted for approximately 26% of its operating revenues while the Company's
ten largest customers accounted for approximately 36% of its operating revenues.
One of the Company's customers, Wal-Mart Stores Inc., accounted for
approximately 10.1% of operating revenues for 2001.

Employees

At December 31, 2001, the Company employed approximately 114,000 people
worldwide. Approximately one-half of the Company's 30,000 hourly employees in
the United States are represented by labor unions. Most of the unionized workers
at the Company's domestic locations are represented under contracts with the
Bakery, Confectionery, Tobacco Workers and Grain Millers International Union;
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. Outside the United States, approximately 70%
of the Company's 40,000 hourly employees are represented by labor unions or
workers' councils. The Company's business units are subject to a number of laws
and regulations relating to their relationships with their employees. These laws
and regulations are specific to the location of each enterprise. In addition, in
accordance with European Union requirements, Kraft Foods International has
established European Works Councils composed of management and elected members
of its workforce. The Company and its subsidiaries believe that their relations
with employees and their representative organizations are good.

8

Research and Development

The Company pursues four objectives in research and development:
uncompromising product safety and quality; growth through new products; superior
consumer satisfaction; and reduced costs.

The Company's research and development resources include more than 2,000
food scientists, chemists and engineers, deployed primarily in five key
technology centers: East Hanover, New Jersey; Glenview, Illinois; Tarrytown, New
York; Banbury, United Kingdom and Munich, Germany. These technology centers are
equipped with pilot plants and state-of-the-art instruments. Research and
development expense was $358 million in 2001, $270 million in 2000 and $262
million in 1999.

Trademarks and Intellectual Property

Trademarks are of material importance to the Company's businesses and are
protected by registration or otherwise in the United States and most other
markets where the related products are sold. The Company has from time to time
granted various parties exclusive or non-exclusive licenses to use one or more
of its trademarks in particular locations. The Company does not believe that
these licensing arrangements have had a material effect on the conduct of its
business or operating results.

Some of the Company's products are sold under brands that have been
licensed from others on terms that are generally renewable at the Company's
discretion. These licensed brands include Starbucks bagged coffee for sale in
United States grocery stores, Capri Sun aseptic juice drinks for sale in North
America, Taco Bell Mexican style food products for sale in United States grocery
stores, Pebbles ready-to-eat cereals and Breyers yogurt products.

Similarly, the Company and its subsidiaries own thousands of patents
worldwide, and the patent portfolio as a whole is material to the Company's
business; however, no one patent or group of related patents is material to the
Company. In addition, the Company has proprietary trade secrets, technology,
know-how processes and other intellectual property rights that are not
registered.

Environmental Regulation

The Company and its subsidiaries are subject to various federal, state,
local and foreign laws and regulations concerning the discharge of materials
into the environment, or otherwise related to environmental protection,
including the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (commonly known as "Superfund"), which imposes joint and
several liability on each responsible party. In 2001, subsidiaries of the
Company were involved in 91 active Superfund and other actions in the United
States related to current operations and certain former or divested operations
for which the Company retains liability.

Outside the United States, the Company and its subsidiaries are subject to
applicable multi-national, national and local environmental laws and regulations
in the host countries in which the Company does business. The Company has
specific programs across its international business units designed to meet
compliance requirements in the environmental area.

Although it is not possible to predict precisely the estimated costs for
such environmental-related expenditures, compliance with such laws and
regulations, including the payment of any remediation costs and the making of
such expenditures, has not had, and is not expected to have, a material adverse
effect on the Company's results of operations, capital expenditures, financial
position, earnings or competitive position.

9

Forward-Looking and Cautionary Statements

The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
shareholders. One can identify these forward-looking statements by use of words
such as "strategy," "expects," "plans," "anticipates," "believes," "will,"
"estimates," "intends," "projects," "goals," "targets" and other words of
similar meaning. One can also identify them by the fact that they do not relate
strictly to historical or current facts. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
is hereby identifying important factors that could cause actual results and
outcomes to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company; any such statement is qualified
by reference to the following cautionary statements.

Each of the Company's segments is subject to intense competition, changes
in consumer preferences, the effects of changing prices for its raw materials
and local economic conditions. Their results are dependent upon their continued
ability to promote brand equity successfully, to anticipate and respond to new
consumer trends, to develop new products and markets and to broaden brand
portfolios in order to compete effectively with lower priced products in a
consolidating environment at the retail and manufacturing levels, to improve
productivity, and to respond to changing prices for raw materials. The Company's
results are also dependent on its ability to successfully integrate and derive
cost savings from the integration of Nabisco's operations with the Company. In
addition, the Company is subject to the effects of foreign economies, currency
movements and fluctuations in levels of customer inventories. The food industry
continues to be subject to the possibility that consumers could lose confidence
in the safety and quality of certain food products. Developments in any of these
areas could cause the Company's results to differ materially from results that
have been or may be projected by or on behalf of the Company. The Company
cautions that the foregoing list of important factors is not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.

(d) Financial Information About Foreign and Domestic Operations and Export Sales

The amounts of operating revenues and long-lived assets attributable to
each of the Company's geographic segments for each of the last three fiscal
years are set forth in Note 13 to the Company's consolidated financial
statements, incorporated herein by reference to the 2001 Annual Report.

Subsidiaries of the Company export coffee products, grocery products,
cheese and processed meats. In 2001, the value of all exports from the United
States by these subsidiaries amounted to approximately $232 million.

10

Item 2. Properties.

The Company has 218 manufacturing and processing facilities worldwide. In
North America, the Company has 100 facilities, and outside of North America
there are 118 facilities located in 45 countries. These manufacturing and
processing facilities are located throughout the following territories:

The Company owns 205 and leases 13 of these manufacturing and processing
facilities. All of the Company's plants and properties are maintained in good
condition, and the Company believes that they are suitable and adequate for its
present needs.

The integration of Nabisco into the operations of the Company has resulted
in the closure of seven Nabisco facilities during 2001. During 2002, the Company
anticipates closing seven additional Nabisco facilities.

As of December 31, 2001, the Company's distribution facilities consisted of
459 distribution centers and depots worldwide. In North America, the Company had
397 distribution centers and depots, more than 75% of which support the
Company's direct-store-delivery systems. Outside North America, the Company had
62 distribution centers and depots in 27 countries. The Company owns 89 of these
distribution centers and two of these depots and leases 173 of these
distribution centers and 195 of these depots. The Company believes that all of
these facilities are in good condition and have sufficient capacity to meet the
Company's distribution needs for the foreseeable future.

Item 3. Legal Proceedings.

The Company's subsidiaries are parties to a variety of legal proceedings
arising out of the normal course of business, including the matters discussed
below. While the results of litigation cannot be predicted with certainty,
management believes that the final outcome of these proceedings will not have a
material adverse effect on the Company's results of operations or financial
position.

National Cheese Exchange Cases: Since 1996, seven putative class actions
have been filed by various dairy farmers alleging that the Company and others
engaged in a conspiracy to fix and depress the prices of bulk cheese and milk
through their trading activity on the National Cheese Exchange. Plaintiffs seek
injunctive and equitable relief and unspecified treble damages. Two of the
actions were voluntarily dismissed by plaintiffs after class certification was
denied. Three cases were consolidated in state court in Wisconsin, and in
November 1999, the court granted the Company's motion for summary judgment. In
June 2001, the Wisconsin Court of Appeals affirmed the trial court's ruling, but
on October 23, 2001, the Wisconsin Supreme Court granted plaintiffs' petition
for further review. The Company's motion to dismiss was granted in a case
pending in the United States District Court for the Central District of
California. The Court of Appeals for the Ninth Circuit reversed and remanded for
further proceedings. A case in Illinois state court has been settled and
dismissed. No classes have been certified in any of the cases.

11

Environmental Matters: In May 2001, the State of Ohio notified the Company
that it may be subject to an enforcement action for alleged past violations of
the Company's wastewater discharge permit at its production facility in
Farmdale, Ohio. The State has offered to attempt to negotiate a settlement of
this matter, and the Company has accepted the offer to do so. The State has not
yet identified the relief it may seek in this matter.

In December 2001, the Company settled a civil enforcement action in which
the State of Missouri alleged that the Company had violated state solid waste
and clean water laws in its handling of spent wiener casings. The Company paid a
civil penalty of $300,000 and completed remediation of the site where the spent
casings had been sent.

The Company is potentially liable for certain environmental matters arising
from the operations of Nabisco's former wholly-owned subsidiary, Rowe
Industries. Rowe operated a small engine manufacturing facility in Sag Harbor,
New York in the 1950s, 1960s and early 1970s that used various solvents. About
20 homes downgradient from the site were connected to public drinking water in
the mid-1980s after solvents were detected in their individual wells. Since
1996, three toxic tort cases have been brought against Nabisco in New York state
court, collectively by or on behalf of approximately 80 individuals, including
17 minors. The first case was filed on March 6, 1996, in the Supreme Court of
the State of New York and was subsequently dismissed by the trial court. That
decision was affirmed on appeal. The other two cases both were filed on January
3, 2000, also in the Supreme Court of the State of New York. That court granted
defendant's summary judgment motion as to all but one of the plaintiffs in each
of the remaining cases, and the plaintiffs have now withdrawn their appeal of
this ruling. Discovery is proceeding as to the two remaining plaintiffs, who are
seeking unspecified damages for alleged personal injury and fear or risk of
cancer.

The Company is also potentially liable for certain environmental matters
arising from Nabisco's or a former affiliate's connection with Del Monte
Corporation in the 1970s and 1980s. Del Monte Corporation operated a plantation
on Oahu, Hawaii, which used various pesticides for crop application over an
extended time period. A pesticide spill at the site led to the closure of nearby
drinking water wells and an investigation, under the oversight of the United
States Environmental Protection Agency ("EPA"), of soil and groundwater
contamination associated with the site. Upon completion of this investigation,
the EPA will select a plan to remedy the contamination.

In addition, two lawsuits were filed in 1999 against Del Monte Corporation
and approximately six other Oahu growers and pesticide manufacturers seeking
unspecified compensatory and punitive damages for alleged pesticide
contamination of drinking water supplies. The Board of Water Supply of the City
and County of Honolulu filed the first lawsuit on September 27, 1999 in the
Circuit Court of the First Circuit of the State of Hawaii. This case was settled
and dismissed by the court in January 2002. The second lawsuit, which was filed
on October 7, 1999 in the same court, was brought by numerous area residents
alleging bodily injury, emotional distress and wrongful death. This case remains
pending. In June 2001, the Company entered into an agreement with a third party,
under which the third party will fully indemnify the Company for the Hawaii
matters described above.

Twelve lawsuits recently were filed against Del Monte Corporation (which
previously was affiliated with Nabisco or a former affiliate) and 6 other
pesticide users and manufacturers for alleged injuries to workers caused by
exposure to dibromochloropropane ("DBCP"). The complaints were served on Del
Monte Corporation on approximately February 21, 2002. The complaints allege that
Del Monte Corporation purchased DBCP in mid-1979 with the objective of using it
in Nicaragua. The lawsuits, which were instituted between September 17, 2001 and
October 1, 2001 with the Third Civil District Judge for Managua (Nicaragua),
collectively seek unspecified costs and expenses and compensatory and punitive
damages of approximately $720 million. The Company has sought full defense and
indemnity from a third party for each of these claims.

12

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Company

The following are the executive officers of the Company as of February 28,
2002:

All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 55 of
the 2001 Annual Report and made a part hereof.

13

Item 6. Selected Financial Data.

The information called for by this Item is hereby incorporated by reference
to the information with respect to 1997-2001 appearing under the caption
"Selected Financial Data" on page 38 of the 2001 Annual Report and made a part
hereof.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (the "MD&A") on pages 22 to 37 of the 2001
Annual Report and made a part hereof.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 34 to 36 of the 2001 Annual Report and made a part hereof.

Item 8. Financial Statements and Supplementary Data.

The information called for by this Item is hereby incorporated by reference
to the 2001 Annual Report as set forth under the caption "Quarterly Financial
Data (Unaudited)" on page 55 and in the Index to Consolidated Financial
Statements and Schedules (see Item 14) and made a part hereof.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions.

Except for the information relating to the executive officers of the
Company set forth in Part I of this Report, the information called for by Items
10-13 is hereby incorporated by reference to the Company's definitive proxy
statement for use in connection with its annual meeting of shareholders to be
held on April 22, 2002, filed with the Securities and Exchange Commission on
March 8, 2002, and, except as indicated therein, is made a part hereof.

14

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Index to Consolidated Financial Statements and Schedules

Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.

(b) Reports on Form 8-K. During the last quarter of 2001, the Company filed
Current Reports on Form 8-K on October 18, 2001, covering Item 5 (Other
Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits), which contained the press release announcing
the Company's financial results for the quarter ended September 30,
2001, and on November 2, 2001, covering Item 5 (Other Events) and Item
7 (Financial Statements, Pro Forma Financial Information and Exhibits),
which contained the terms agreement and certain other documents related
to the Company's public offering of debt. Subsequent to December 31,
2001, the Company filed a Current Report on Form 8-K on January 30,
2002, covering Item 5 (Other Events) and Item 7 (Financial Statements,
Pro Forma Financial Information and Exhibits), which contained the
Company's consolidated financial statements as of and for the year
ended December 31, 2001.

(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.4-10.15 are management contracts, compensatory plans or
arrangements):

3.1 Articles of Incorporation of the Registrant(1)
3.2 Articles of Amendment to the Articles of Incorporation of
the Registrant(1)
3.3 Registrant's Amended and Restated By-Laws(4)
4.1 Indenture between the Registrant and The Chase Manhattan
Bank, Trustee, dated as of October 17, 2001(5)
4.2 The Registrant agrees to furnish copies of any instruments
defining the rights of holders of long-term debt of the
Registrant and its consolidated subsidiaries that does not
exceed 10 percent of the total assets of the Registrant and
its consolidated subsidiaries to the Commission upon
request.
10.1 Corporate Agreement between Philip Morris Companies Inc. and
the Registrant(4)
10.2 Services Agreement between Philip Morris Management Corp.
and the Registrant (including Exhibits)(3)

15

10.3 Tax-Sharing Agreement between Philip Morris Companies Inc.
and the Registrant(2)
10.4 2001 Kraft Foods Inc. Performance Incentive Plan(4)
10.5 2001 Kraft Foods Inc. Compensation Plan for Non-Employee
Directors(2)
10.6 Form of Employment Agreement entered into by Philip Morris
Companies Inc. with each of Betsy D. Holden and Roger K.
Deromedi(2)
10.7 Employment Agreement between Philip Morris Companies Inc.
and Calvin J. Collier(2)
10.8 Kraft Foods, Inc. Supplemental Benefits Plan I (including
First Amendment adding Supplement A)(2)
10.9 Kraft Foods, Inc. Supplemental Benefits Plan II(2)
10.10 Form of Employee Grantor Trust Enrollment Agreement(6)(10)
10.11 The Philip Morris Companies Inc. 1992 Incentive Compensation
and Stock Option Plan(7)(10)
10.12 The Philip Morris Companies Inc. 1987 Long Term Incentive
Plan(7)(10)
10.13 The Philip Morris Companies Inc. 1997 Performance Incentive
Plan(8)(10)
10.14 The Philip Morris Companies Inc. 2000 Performance Incentive
Plan(9)(10)
10.15 2001 Kraft Foods Inc. Compensation Plan for Non-Employee
Directors (Deferred Compensation)
12 Statements re: computation of ratios(11)
13 Pages 22-56 of the 2001 Annual Report, but only to the
extent set forth in Items 1, 3, 5-7, 7A, 8 and 14 hereof.
With the exception of the aforementioned information
incorporated by reference in this Annual Report on Form
10-K, the 2001 Annual Report is not to be deemed "filed" as
a part of this Report.
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24 Powers of Attorney

- ------------

(1) Incorporated by reference to the Registrant's Form S-1 filed with the
Securities and Exchange Commission on March 16, 2001 (No. 333-57162).

(2) Incorporated by reference to the Registrant's Amendment No. 1 to Form S-1
filed with the Securities and Exchange Commission on May 2, 2001 (No.
333-57162).

(3) Incorporated by reference to the Registrant's Amendment No. 2 to Form S-1
filed with the Securities and Exchange Commission on May 11, 2001 (No.
333-57162).

(4) Incorporated by reference to the Registrant's Amendment No. 5 to Form S-1
filed with the Securities and Exchange Commission on June 8, 2001 (No.
333-57162).

(5) Incorporated by reference to the Registrant's Form S-3 filed with the
Securities and Exchange Commission on August 16, 2001 (No. 333-67770).

(6) Incorporated by reference to the Annual Report on Form 10-K of Philip
Morris Companies Inc. ("Philip Morris") for the year ended December 31,
1995 (SEC File No. 1-8940).

(7) Incorporated by reference to the Annual Report on Form 10-K of Philip
Morris for the year ended December 31, 1997 (SEC File No. 1-8940).

(8) Incorporated by reference to the Proxy Statement of Philip Morris dated
March 10, 1997 (SEC File No. 1-8940).

(9) Incorporated by reference to the Proxy Statement of Philip Morris dated
March 10, 2000 (SEC File No. 1-8940).

(10) Compensation plans maintained by Philip Morris and its subsidiaries in
which officers of the Registrant have historically participated.

(11) Incorporated by reference to the Registrant's Report on Form 8-K filed with
the Securities and Exchange Commission on January 30, 2002.

16

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

KRAFT FOODS INC.

By: /s/ JAMES P. DOLLIVE
------------------------------------
(James P. Dollive,
Senior Vice President
and Chief Financial Officer)

Date: March 14, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:

17

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
KRAFT FOODS INC.:

Our audits of the consolidated financial statements referred to in our
report dated January 28, 2002 appearing in the 2001 Annual Report to
Shareholders of Kraft Foods Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
January 28, 2002

S-1

KRAFT FOODS INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000 and 1999
(in millions)

- ------------

Notes:

(a) Primarily related to divestitures, acquisitions and currency translation.

(b) Represents charges for which allowances were created.

S-2