ITEM 1. BUSINESS.
(a) General Development of Business
The information set forth under the caption "Acquisitions and Divestitures," found on page 48 of the Company's Annual Report, is incorporated herein by reference.
(b) Financial Information About Industry Segments
The information set forth under the captions "Operating Results," "Industry Segment Information," and "Industry Segment and Geographic Area Information," found on pages 25, 35, and 36-37, respectively, of the Company's Annual Report, is incorporated herein by reference.
(c) Description of Business
U.S. and Canadian Foods Description The Company is a major participant in the competitive packaged food industry in the United States and is a leading manufacturer of hot cereals, pancake mixes, grain-based snacks, cornmeal, hominy grits and value-added rice products. In addition, the Company is the second-largest manufacturer of syrups and value-added pasta products and is among the five largest manufacturers of ready-to-eat cereals and dry pasta products. The Company competes with a significant number of large and small companies on the basis of price, value, innovation, quality and convenience, among other attributes. The Company's food products are purchased by consumers through a wide range of food distributors. The Company utilizes both its own and broker sales forces and has distribution centers throughout the country, each of which carries an inventory of most of the Company's food products. In addition, the Company markets a line of over 400 items to the food service market, including Quaker hot and ready-to-eat cereals; Continental coffee; and Ardmore Farms single serve frozen fruit juices; a specialty line of custom-blended dry baking mixes, ready-to-bake biscuits; and Burry cookies and crackers.
International Foods Description The Company is broadly diversified in the packaged food industry, both geographically and by product line. The Company manufactures and markets its products in many countries throughout Europe, Latin America and the Asia/Pacific region. It is the leading brand-name hot cereals producer in many countries and has other leading market positions for products in a number of countries. In Brazil, the Company is the leading producer of ready-to-drink chocolate beverages and the leading canned fish processor.
Worldwide Beverage Description The Company is the world's leading manufacturer of sports beverages. It sells its sports beverages in 47 countries around the world and is the leading sports drink distributor in the United States, Canada, Mexico, Italy, Argentina, Brazil, Venezuela, Colombia, Indonesia and the Philippine Islands. It is also one of the leading sports drink brands in Korea and Australia, where Gatorade is sold through licensee arrangements. In the United States, Gatorade thirst quencher utilizes a combination of brokers and the Company's own sales force and has distribution centers throughout the country.
Raw Materials Raw materials used in manufacturing include oats, wheat, soy products, corn, rice, sweeteners, orange and other juice concentrates, almonds, coffee beans, raisins, beef, chicken, shortening and fish, as well as a variety of packaging materials. These products are purchased mainly in the open market. Supplies of all raw materials have been adequate and continuous.
Trademarks The Company and its subsidiaries own a number of trademarks and are not aware of any circumstances that could materially adversely affect the continued use of these trademarks. Among the most important of the domestic trademarks owned by the Company are Quaker, Cap'n Crunch, Quaker Toasted Oatmeal, Life, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade for thirst-quenching beverages; Quaker and Quaker Chewy for grain-based snacks; Rice-A-Roni and Near East for value-added rice and grain products; Pasta Roni for value-added pasta; Near East and Nile Spice for meals in a cup; Golden Grain and Mission for pasta; Quaker and Aunt Jemima for mixes, syrups and corn goods; Ardmore Farms for citrus and fruit juices; and Continental, Maryland Club and Continental WB for coffee. Many of the grocery product trademarks owned by the Company in the United States are registered in foreign countries in which the Company does substantial business. Internationally, key trademarks owned include: Quaker, Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast cereals; Coqueiro for fish; Toddy and ToddYnho for chocolate beverages; Gatorade for thirst-quenching beverages; and Adria for pasta products.
Other The information set forth under the captions "Management's Discussion and Analysis," "Six-Year Selected Financial Data," "Eleven-Year Selected Financial Data," "Lease and Other Commitments," "Supplementary Income Statement Information," and "Quarterly Financial Data," found on pages 25-30, 40-41, 42-43, 55, 56, and 58, respectively, of the Company's Annual Report, is incorporated herein by reference.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The information set forth under the captions "Industry Segment Information," and "Industry Segment and Geographic Area Information," found on pages 35 and 36-37, respectively, of the Company's Annual Report, is incorporated herein by reference.
ITEM 2.
ITEM 2. PROPERTIES.
As of December 31, 1997, the Company operated 55 manufacturing plants in 18 states and 14 foreign countries and owned or leased distribution centers and sales offices in 21 states and 21 foreign countries.
Owned and Leased Owned and Leased Owned and Leased Mfg. Locations Distribution Centers Sales Offices Industry Segment U.S. Foreign U.S. Foreign U.S. Foreign Foods 20 20 2 6 8 18 Beverages 7 7 -- 4 11 13 Shared -- 1 6 12 6 8 Total 27 28 8 22 25 39
The Company owns a research and development laboratory in Barrington, Illinois and leases corporate office space in downtown Chicago, Illinois. Management believes manufacturing, distribution and office space owned and leased are suitable and adequate for the business, and productive capacity is appropriately utilized.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On November 1, 1995, the Company filed suit against Borden, Inc. in Federal District Court in New York related to the Company's November 1994 acquisition of a Brazilian pasta business. The suit was settled in August 1997 for $35.0 million.
On November 10, 1994, two purported class actions were commenced in the United States District Court for the District of New Jersey (the "District Court") on behalf of all purchasers of the common stock of The Quaker Oats Company (the "Company") during the period between September 1, 1994 and November 2, 1994 (the "Weiner Action"). On January 20, 1995, plaintiffs filed an amended consolidated class action complaint, and on May 2, 1995, plaintiffs filed a second amended consolidated class action complaint. As amended, the Weiner Action purports to be brought on behalf of all purchasers of the Company's common stock during the period between August 4, 1994 and November 1, 1994. Named as defendants are the Company and William D. Smithburg. Plaintiffs allege, among other things, that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with the Company's disclosure concerning its earnings growth goals and indebtedness guideline. Damages in an unspecified amount are sought. On May 23, 1996, the District Court dismissed this action. On November 6, 1997, the United States Court of Appeals for the Third Circuit issued a decision in which it affirmed the District Court's dismissal of plaintiffs' claims relating to Quaker's earnings growth goals, and reversed the District Court's dismissal of plaintiffs' claims relating to Quaker's indebtedness guideline. The Court of Appeals remanded the action to the District Court for further proceedings in connection with plaintiffs' claims concerning Quaker's indebtedness guideline, and the case now is pending in the District Court.
The Company believes it has strong defenses to the action described above. Although the ultimate outcome of the action described above cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of the management of the Company that the resolution of this action will not have a material adverse effect on the financial condition or the results of operations of the Company as set forth in the Consolidated Financial Statements contained in the Company's Annual Report.
The Company is also a party to a number of other lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to the Company's past acquisition activity and other issues. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information set forth under the captions "Six-Year Selected Financial Data," "Eleven-Year Selected Financial Data," "Quarterly Financial Data," and "Corporate and Shareholder Information," found on pages 41, 44-45, 58 and 65, respectively, of the Company's Annual Report, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the captions "Six-Year Selected Financial Data," and "Eleven-Year Selected Financial Data," found on pages 40-41 and 42-45, respectively, of the Company's Annual Report, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information set forth under the caption "Management's Discussion and Analysis," found on pages 25-30 of the Company's Annual Report, is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information set forth under the caption "Derivative Financial and Commodity Instruments," found on pages 29-30 of the Company's Annual Report, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following audited consolidated financial statements of The Quaker Oats Company and its subsidiaries, and the report of the independent public accountants thereon, found on the indicated pages in the Company's Annual Report, are incorporated herein by reference.
1.) Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 (page 31). 2.) Consolidated Balance Sheets as of December 31, 1997 and 1996 (pages 32- 33). 3.) Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 (page 34). 4.) Consolidated Statements of Common Shareholders' Equity as of December 31, 1997, 1996 and 1995 (pages 38-39). 5.) Notes to the Consolidated Financial Statements for the years ended December 31, 1997, 1996 and 1995 (pages 46-58). 6.) Report of Independent Public Accountants (page 64).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors The information set forth under the caption "Election of Directors," found on pages 5-7 of the Company's Proxy Statement, is incorporated herein by reference.
Executive Officers The information set forth under the caption "Officers," found on pages 62-63 of the Company's Annual Report, lists the executive officers of the registrant as of March 11, 1998, and is incorporated herein by reference.
On March 12, 1998, the Company announced organizational changes including changes in executive officers. The following is a list of Executive Officers, as defined by the Securities and Exchange Commission, of the Company as of March 12, 1998:
Senior Officers Robert S. Morrison Age 55 Chairman, President and CEO John A. Boynton Age 44 Senior Vice President Terrence B. Mohr Age 54 Senior Vice President-Customer Organization John G. Jartz Age 44 Senior Vice President-General Counsel, Business Development and Corporate Secretary Douglas J. Ralston Age 52 Senior Vice President-Human Resources Robert S. Thomason Age 53 Senior Vice President-Finance and Chief Financial Officer Russell A. Young Age 49 Senior Vice President-Supply Chain
Corporate Staff Officers Janet K. Cooper Age 44 Vice President-Treasurer and Tax Margaret M. Eichman Age 39 Vice President-Investor Relations and Corporate Affairs Thomas L. Gettings Age 41 Vice President and Corporate Controller
Other Officers Cassian K. Cheung Age 43 Vice President and President-Quaker Asia Harry M. Dent, III Age 40 Vice President and President-Ready-to- Eat Cereals Polly B. Kawalek Age 43 Vice President and President-Hot Breakfast Charles I. Maniscalco Age 44 Vice President and President-Snacks Mark A. Shapiro Age 42 Vice President and President-Golden Grain Susan D. Wellington Age 39 Vice President and President-U.S. Beverages Bernardo Wolfson Age 44 Vice President and President-Quaker Latin America
All of the above Executive Officers, except for Robert S. Morrison and Cassian K. Cheung, have been employed by The Quaker Oats Company in an executive capacity for five years or more. Robert S. Morrison joined the Company in October 1997, and was formerly the Chairman and CEO of Kraft Foods, Inc., a division of Philip Morris Companies, Inc., (1994-1997) and President of General Foods U.S.A. of Philip Morris Companies, Inc., (1991-1994). Cassian K. Cheung joined the Company in December 1994, and was formerly the Chief Operating Officer, General Manager-China for Nestle China Ltd. of The Nestle Company (1989-1994).
The information set forth under the caption "Compliance with Section 16(a)," found on page 11 of the Company's Proxy Statement, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Executive Compensation," "Compensation Committee Report" and "Performance Graph," found on pages 11-17, 18-19 and 20, respectively, of the Company's Proxy Statement, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Ownership of Company's Securities" found on pages 9-11 of the Company's Proxy Statement, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The audited consolidated financial statements of The Quaker Oats Company and its subsidiaries and the Report of Independent Public Accountants thereon are listed in Item 8 of this Form 10-K, and are incorporated therein by reference.
(a)(2) Financial Statement Schedules. &(d)
All required financial statement schedules are included in the audited consolidated financial statements or notes thereto as incorporated under Item 8 of this Form 10-K.
(a)(3) Exhibits. &(c)
The exhibits required to be filed are listed on the Exhibit Index attached hereto, which is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Sections 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.
THE QUAKER OATS COMPANY
By /s/ ROBERT S. MORRISON Robert S. Morrison, Chairman, President and Chief Executive Officer
Date: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 11th day of March 1998, by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title /s/ ROBERT S. MORRISON Chairman, President and Chief Executive Officer Robert S. Morrison
/s/ ROBERT S. THOMASON Senior Vice President Finance and Chief Robert S. Thomason Financial Officer
/s/ THOMAS L. GETTINGS Vice President and Corporate Controller Thomas L. Gettings
/s/ FRANK C. CARLUCCI Director Frank C. Carlucci
/s/ SILAS S. CATHCART Director Silas S. Cathcart
/s/ KENNETH I. CHENAULT Director Kenneth I. Chenault
/s/ JOHN H. COSTELLO Director John H. Costello
/s/ W. JAMES FARRELL Director W. James Farrell
/s/ JUDY C. LEWENT Director Judy C. Lewent
/s/ VERNON R. LOUCKS, JR. Director Vernon R. Loucks, Jr.
/s/ THOMAS C. MacAVOY Director Thomas C. MacAvoy
/s/ WALTER J. SALMON Director Walter J. Salmon
/s/ WILLIAM L. WEISS Director William L. Weiss