UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number 1-12
THE QUAKER OATS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 36-1655315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Quaker Tower P.O. Box 049001 Chicago, Illinois 60604-9001
(Address of principal executive office) (Zip Code)
(312) 222-7111
(Registrant's telephone number, including area code)
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 for such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES XX NO
The number of shares of Common Stock, $5.00 par value, outstanding as
of the close of business on September 30, 1997 was 138,481,548.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Income
and Reinvested Earnings for the Nine and Three Months
Ended September 30, 1997 and 1996 3-4
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1997 and 1996 6
Net Sales and Operating Income by Segment for the Nine and
Three Months Ended September 30, 1997 and 1996 7-8
Notes to Condensed Consolidated Financial Statements 9-13
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14-21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
EXHIBIT 11 25
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Nine Months Ended
Dollars in Millions (Except Per Share Data) September 30,
1997 1996
Net sales $3,967.9 $4,140.8
Cost of goods sold 2,005.9 2,208.9
Gross profit 1,962.0 1,931.9
Selling, general and administrative expenses 1,518.9 1,575.8
Loss (gain) on divestitures and restructuring
charges - net 1,473.3 (113.4)
Interest expense 67.5 83.3
Interest income (4.7) (5.2)
Foreign exchange loss - net 8.1 6.5
(Loss) income before income taxes (1,101.1) 384.9
(Benefit) provision for income taxes (144.6) 155.1
Net (Loss) Income (956.5) 229.8
Preferred dividends - net of tax 2.7 2.9
Net (Loss) Income Available for Common $ (959.2) $ 226.9
Per Common Share:
Net (loss) income $ (7.00) $ 1.68
Dividends declared $ 0.855 $ 0.855
Average Number of Common Shares
Outstanding (in thousands) 137,089 135,315
Reinvested Earnings:
Balance beginning of period $1,521.3 $1,433.6
Net (loss) income (956.5) 229.8
Dividends (119.3) (117.6)
Common stock issued for stock purchase
and incentive plans -- (2.9)
Balance end of period $ 445.5 $1,542.9
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Three Months Ended
Dollars in Millions (Except Per Share Data) September 30,
1997 1996
Net sales $1,370.7 $1,436.2
Cost of goods sold 674.1 754.3
Gross profit 696.6 681.9
Selling, general and administrative expenses 506.9 545.2
Gain on divestiture and restructuring charges - net 46.9 (110.6)
Interest expense 18.0 25.6
Interest income (1.4) (2.2)
Foreign exchange loss - net 3.1 2.9
Income before income taxes 123.1 221.0
Provision for income taxes 45.6 88.0
Net Income 77.5 133.0
Preferred dividends - net of tax 1.0 0.9
Net Income Available for Common $ 76.5 $ 132.1
Per Common Share:
Net income $ 0.58 $ 0.98
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares
Outstanding (in thousands) 138,064 135,528
Reinvested Earnings:
Balance beginning of period $ 408.3 $1,449.0
Net income 77.5 133.0
Dividends (40.3) (39.2)
Common stock issued for stock purchase
and incentive plans -- 0.1
Balance end of period $ 445.5 $1,542.9
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
Dollars in Millions 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 148.0 $ 110.5
Trade accounts receivable - net of allowances 348.3 294.9
Inventories:
Finished goods 171.0 181.8
Grains and raw materials 68.5 62.1
Packaging materials and supplies 25.0 31.0
Total inventories 264.5 274.9
Other current assets 429.9 209.4
Total Current Assets 1,190.7 889.7
Property, plant and equipment 1,950.4 1,943.3
Less accumulated depreciation 785.4 742.6
Property - net 1,165.0 1,200.7
Intangible assets - net of amortization 371.0 2,237.2
Other assets 65.9 66.8
Total Assets $2,792.6 $4,394.4
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 57.8 $ 517.0
Current portion of long-term debt 104.0 51.1
Trade accounts payable 209.5 210.2
Income taxes payable 114.4 42.4
Other current liabilities 545.6 534.0
Total Current Liabilities 1,031.3 1,354.7
Long-term debt 891.1 993.5
Other liabilities 536.9 558.9
Deferred income taxes 64.1 238.4
Preferred Stock, Series B, no par value,
authorized 1,750,000 shares; issued 1,282,051
of $5.46 cumulative convertible shares
(liquidating preference of $78 per share) 100.0 100.0
Deferred compensation (57.2) (64.9)
Treasury Preferred Stock, at cost, 229,609
shares and 187,810 shares, respectively (20.4) (16.1)
Common Shareholders' Equity:
Common stock, $5 par value, authorized 400
million shares; issued 167,978,792 shares 840.0 840.0
Additional paid-in capital 20.8 --
Reinvested earnings 445.5 1,521.3
Cumulative translation adjustment (76.2) (68.2)
Deferred compensation (86.4) (103.4)
Treasury common stock, at cost, 29,497,244
shares and 31,885,727 shares, respectively (896.9) (959.8)
Total Common Shareholders' Equity 246.8 1,229.9
Total Liabilities and Shareholders' Equity $2,792.6 $4,394.4
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Dollars in Millions September 30,
1997 1996
Cash Flows from Operating Activities:
Net (loss) income $(956.5) $229.8
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 125.2 151.1
Deferred income taxes 0.8 17.6
Loss (gain) on divestitures - net of tax of $(265.1)
and $54.6 in 1997 and 1996, respectively 1,149.5 (81.8)
Restructuring charges 58.7 23.0
Asset impairment loss 39.8 --
Loss on disposition of property and equipment 30.9 18.2
Increase in trade accounts receivable (101.0) (34.6)
(Increase) decrease in inventories (26.8) 3.3
(Increase) decrease in other current assets (8.0) 17.4
Increase (decrease) in trade accounts payable 12.6 (33.5)
Increase in other current liabilities 77.5 97.2
Change in deferred compensation 24.7 22.9
Other items 16.0 32.9
Net Cash Provided by Operating Activities 443.4 463.5
Cash Flows from Investing Activities:
Additions to property, plant and equipment (144.1) (164.8)
Business divestitures - net of tax of $54.6 in 1996 300.0 174.4
Change in other assets -- (0.6)
Net Cash Provided by Investing Activities 155.9 9.0
Cash Flows from Financing Activities:
Cash dividends (119.3) (117.6)
Change in short-term debt (457.4) (254.8)
Proceeds from long-term debt 6.7 3.4
Reduction of long-term debt (53.4) (74.8)
Issuance of common treasury stock 91.7 20.2
Repurchases of common stock (21.7) --
Repurchases of preferred stock (4.3) (3.7)
Net Cash Used in Financing Activities (557.7) (427.3)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (4.1) 2.4
Net Increase in Cash and Cash Equivalents 37.5 47.6
Cash and Cash Equivalents - Beginning of Period 110.5 93.2
Cash and Cash Equivalents - End of Period $ 148.0 $140.8
See accompanying notes to the condensed consolidated financial statements.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
Operating Income
Net Sales (Loss) (a)
Nine Months Nine Months
Ended Ended
Dollars in Millions September 30, September 30,
1997 1996 1997 1996
Foods
U.S. and Canadian (b) $1,999.8 $1,922.3 $ 219.3 $251.8
International (c) 477.6 456.6 (7.7) 7.9
Total Foods $2,477.4 $2,378.9 $ 211.6 $259.7
Beverages
U.S. and Canadian (d) $1,050.5 $ 984.5 $ 208.9 $188.3
International (e) 267.5 227.0 7.3 (15.3)
Total Beverages $1,318.0 $1,211.5 $ 216.2 $173.0
Divested (f) $ 172.5 $ 550.4 $(1,429.7) $ 67.7
Total Sales/Operating (Loss) Income $3,967.9 $4,140.8 $(1,001.9) $500.4
Less: General corporate expenses 28.3 30.9
Interest expense - net 62.8 78.1
Foreign exchange loss - net 8.1 6.5
(Loss) income before income taxes $(1,101.1) $384.9
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1997 operating income includes pretax restructuring charges of $40.2
million for plant consolidations and $4.9 million related to a staff
restructuring. 1996 operating income includes pretax restructuring charges of
$6.4 million for plant consolidations.
(c) 1997 operating loss includes a pretax restructuring charge of $10.7 million
for plant consolidations and a pretax net charge of $4.8 million for an asset
impairment loss partly offset by a cash litigation settlement.
(d) 1997 operating income includes a pretax restructuring charge of $1.8
million related to a staff restructuring.
(e) 1997 operating income includes a pretax restructuring charge of $1.1
million for the closing of an office in Singapore.
(f) Total sales and operating income for the Italian products business
(divested January 1996) for the nine months ended September 30, 1996, were $4.0
million and $3.3 million, respectively. Operating income includes a pretax
gain of $2.8 million on the sale of the Italian products business. Total sales
and operating income for the U.S. and Canadian frozen foods business (divested
July 1996) for the nine months ended September 30, 1996, were $81.6 million and
$141.5 million, respectively. Operating income includes a pretax gain of
$133.6 million on the sale of the U.S. and Canadian frozen foods business.
Total sales for the Snapple beverages business (divested May 1997) for the nine
months ended September 30, 1997 and 1996, were $172.5 million and $464.8
million, respectively. Operating losses of the Snapple beverages business for
the nine months ended September 30, 1997 and 1996, were $1.43 billion and $77.1
million, respectively. The 1997 operating loss includes a pretax loss of $1.41
billion on the sale of the Snapple beverages business. The 1996 operating loss
includes a pretax restructuring charge of $16.6 million.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
Operating Income
Net Sales (Loss) (a)
Three Months Three Months
Ended Ended
Dollars in Millions September 30, September 30,
1997 1996 1997 1996
Foods
U.S. and Canadian (b) $ 713.0 $ 687.3 $ 65.3 $ 86.2
International (c) 163.2 152.9 (0.5) 2.8
Total Foods $ 876.2 $ 840.2 $ 64.8 $ 89.0
Beverages
U.S. and Canadian (d) $ 401.3 $ 360.7 $ 83.6 $ 76.6
International 93.2 73.9 4.5 (5.3)
Total Beverages $ 494.5 $ 434.6 $ 88.1 $ 71.3
Divested (e) $ -- $ 161.4 $ -- $ 95.9
Total Sales/Operating Income $1,370.7 $1,436.2 $ 152.9 $256.2
Less: General corporate expenses 10.1 8.9
Interest expense - net 16.6 23.4
Foreign exchange loss - net 3.1 2.9
Income before income taxes $ 123.1 $221.0
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1997 operating income includes pretax restructuring charges of $40.2
million for plant consolidations and $4.9 million related to a staff
restructuring. 1996 operating income includes pretax restructuring charges of
$6.4 million for plant consolidations.
(c) 1997 operating loss includes a pretax net charge of $4.8 million for an
asset impairment loss partly offset by a cash litigation settlement.
(d) 1997 operating income includes a pretax restructuring charge of $1.8
million related to a staff restructuring.
(e) Total sales and operating income for the U.S. and Canadian frozen foods
business (divested July 1996) for the three months ended September 30, 1996,
were $2.6 million and $133.2 million, respectively. Operating income includes
a pretax gain of $133.6 million on the sale of the U.S. and Canadian frozen
foods business. Total sales and operating loss for the Snapple beverages
business (divested May 1997) for the three months ended September 30, 1996 were
$158.8 million and $37.3 million, respectively. The 1996 operating loss
includes a pretax restructuring charge of $16.6 million.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note 1 - Basis of Presentation
The condensed consolidated financial statements include The Quaker Oats Company
and its subsidiaries (the Company). The condensed consolidated statements of
income and reinvested earnings for the nine and three months ended September
30, 1997 and 1996, the condensed consolidated balance sheet as of September 30,
1997, and the condensed consolidated statements of cash flows for the nine
months ended September 30, 1997 and 1996, have been prepared by the Company
without audit. In the opinion of management, these financial statements
include all adjustments necessary to present fairly the financial position,
results of operations and cash flows as of September 30, 1997, and for all
periods presented. All adjustments made have been of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) have been condensed or omitted. The Company believes that
the disclosures included are adequate and provide a fair presentation of
interim period results. Interim financial statements are not necessarily
indicative of the financial position or operating results for an entire year.
It is suggested that these interim financial statements be read in conjunction
with the audited financial statements and the notes thereto included in the
Company's report to shareholders for the year ended December 31, 1996.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
Note 2 - Litigation
On November 1, 1995, the Company filed suit against Borden, Inc. in Federal
District Court in New York arising out of the Company's November 1994
acquisition of a Brazilian pasta business. The suit was settled during the
quarter ended September 30, 1997, for $35.0 million. The settlement amount is
reflected in selling, general and administrative expense on the condensed
consolidated statement of income for the nine and three months ended September
30, 1997. Refer to Note 3 for further discussion of the Brazilian pasta
business.
The Company is also a party to a number of lawsuits and claims, which it is
vigorously defending. Such matters arise out of the normal course of business
and relate to the Company's 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.
Note 3 - Asset Impairment
The Company has taken numerous actions relative to the Brazilian pasta business
(the Business) in light of continuing operating losses of the Business. Among
these actions, the Company announced plant consolidations in the Business
during the three months ended June 30, 1997, and recorded a related
restructuring charge of $10.7 million. During the three months ended September
30, 1997 (the current quarter), as a part of the Company's operating planning
process, an updated review of the strategies, actions taken to date and
expected financial prospects of the Business was undertaken.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
As a part of this process the Company evaluated the recoverability of the long-
lived assets of the Business, including intangible assets, pursuant to
Financial Accounting Standards Board (FASB) Statement #121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
In performing its review for recoverability, the Company compared the estimated
undiscounted future cash flows to the carrying value of the long-lived assets
of the Business, including intangible assets. As the carrying value of the
long-lived assets exceeded the estimated undiscounted future cash flows, the
Company was required to reduce the carrying value of the net assets of the
Business to fair market value during the current quarter. The Company's
estimate of fair market value was based on various methodologies including a
discounted value of the estimated future cash flows of the Business and a
fundamental analysis of the Business' value. The asset impairment resulted in
a pretax charge of $39.8 million to reduce the carrying value of intangible
assets. The charge is reflected in selling, general and administrative expense
on the condensed consolidated statement of income for the three and nine months
ended September 30, 1997.
Note 4 - Restructuring Charges
During the three months ended September 30, 1997, the Company recorded pretax
restructuring charges of $46.9 million. Of the total charges, $40.2 million
related to plant consolidations in the U.S. Foods business, including $30.7
million for the closing of a rice cakes plant in Gridley, California, $5.9
million for the closing of a Golden Grain/Near East plant in Leominster,
Massachusetts and $3.6 million for the plant consolidations in a food service
business. In addition, the Company recorded $6.7 million of restructuring
charges related to staffing reductions. The charges are comprised of asset
write-offs, loss on lease, severance and termination benefits and other shut-
down costs. Savings from the restructuring actions are estimated to be about
$22 million annually, primarily beginning in 1997 and 1998, of which
approximately 90 percent will be in cash.
Note 5 - Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note 6 - Pending Accounting Changes
In March 1997, the Financial Accounting Standards Board (the FASB) issued
Statement #128, "Earnings Per Share." This Statement simplifies the
computation of earnings per share and makes the computation more consistent
with those of International Accounting Standards. The Company will adopt this
Statement during the fourth quarter of 1997. The Company does not expect the
adoption of this new standard to significantly impact previously reported
earnings per share or earnings per share trends.
In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income,"
and Statement #131, "Disclosures About Segments of an Enterprise and Related
Information." Statement #130 establishes standards for reporting comprehensive
income in financial statements. Statement #131 expands certain reporting and
disclosure requirements for segments from current standards. The Company is
not required to adopt these Statements until 1998 and does not expect the
adoption of these new standards to result in material changes to previously
reported amounts or disclosures.
Note 7 - Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to foreign currency exchange rate,
commodity price and interest rate risks. Derivative financial and commodity
instruments are used to reduce the impact of these risks. The Company uses
derivatives only for purposes of reducing risk associated with underlying
exposures. The Company does not trade or use these instruments with the
objective of earning financial gains on the exchange rate, commodity price or
interest rate fluctuations alone, nor does it utilize instruments where there
are not underlying exposures. Management believes that its use of derivative
financial and commodity instruments to reduce risk is in the Company's best
interest.
Instruments used as hedges must be effective at reducing the risks associated
with the underlying exposure and must be designated as a hedge at the inception
of the contract. Accordingly, changes in the market value of the instruments
must have a high degree of inverse correlation with changes in market values or
cash flows of the underlying hedged item. Foreign currency derivatives that
meet these hedge criteria are accounted for under the fair value method (as
discussed below in Foreign Currency Exchange Rate Risk). Commodity derivatives
that meet these hedge criteria are accounted for under the deferral method (as
discussed below in Commodity Price Risk). Derivatives that do not meet these
hedge criteria are accounted for under the fair value method with gains or
losses recognized currently in the condensed consolidated income statement.
Summarized below are the specified accounting policies by market risk category.
Foreign Currency Exchange Rate Risk
The Company uses forwards, purchased options, and currency swap agreements to
reduce foreign currency exchange rate risk related to projected cash flows from
foreign operations and net investments in foreign subsidiaries. Complex
instruments involving leverage or multipliers are not used. The fair value
method is used to account for these instruments. Under the fair value method,
the instruments
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
are carried at fair value on the condensed consolidated balance sheet as a
component of other current assets (if a loss) or other accrued liabilities (if
a gain). Changes in the fair value of derivative instruments which are used to
reduce exchange rate risk in foreign currency denominated operating income and
net investments in highly inflationary economies are recognized in the
condensed consolidated income statement as foreign exchange loss - net.
Changes in the fair value of derivative instruments which are used to reduce
exchange rate risk in net investments in economies that are not highly
inflationary are recognized in the condensed consolidated balance sheet as part
of the cumulative translation adjustment in common shareholders' equity. To
the extent an instrument is no longer effective as a hedge of a net investment
due to a change in the underlying exposure, gains and losses are recognized
currently in the condensed consolidated income statement as foreign exchange
loss - net.
Commodity Price Risk
The Company uses commodity futures and options to reduce price exposures on
purchased or anticipated purchases of commodities. Complex instruments
involving leverage or multipliers are not used. The deferral method is used to
account for those instruments which effectively hedge the Company's price
exposures. For hedges of anticipated transactions, the Company has a policy
that the significant characteristics and terms of the anticipated transaction
must be identified and the transaction must be probable of occurring to qualify
for deferral method accounting.
Under the deferral method, gains and losses on derivative instruments are
deferred in the condensed consolidated balance sheet as a component of other
current assets (if a loss) or other accrued liabilities (if a gain) until the
underlying inventory being hedged is sold. As the hedged inventory is sold,
the deferred gains and losses are recognized in the condensed consolidated
income statement as a component of cost of goods sold. Derivative instruments
that do not meet the above criteria required for deferral treatment, are
accounted for under the fair value method with gains and losses recognized
currently in the condensed consolidated income statement as a component of cost
of goods sold.
Interest Rate Risk
The Company has used interest rate swap agreements to reduce its exposure to
changes in interest rates and to balance its fixed and floating rate debt.
Currently there are no interest rate swap agreements outstanding. The
settlement costs of terminated swap agreements are reported in the condensed
consolidated balance sheet as a component of other assets and are being
amortized over the life of the original swap agreements. The amortization of
the settlement amounts is reported in the condensed consolidated income
statement as a component of interest expense.
Note 8 - Revolving Credit Facilities
The Company renegotiated and reduced the level of its revolving credit
facilities during the three months ended September 30, 1997. The Company has
replaced its $900 million annually extendible five-year revolving credit
facility with a $450 million annually extendible five-year revolving credit
facility and a $225 million 364-day extendible revolving credit facility which
may, at the Company's option be converted into a two-year term loan. Both
facilities are with various banks. The facility supports the Company's
commercial paper borrowings and is also available for direct borrowings.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note 9 - Share Repurchases
During the three months ended September 30, 1997, the Company repurchased
441,000 shares of outstanding common stock for $21.7 million under a 10 million
share repurchase program announced in August 1993.
Note 10 - Subsequent Events
On October 2, 1997, the Company announced that it had signed a definitive
agreement to sell its Richardson's dessert toppings and condiment business to
Tri-Star Industries, Inc. Terms of the sale were not disclosed.
On October 23, 1997, the Company announced its Board of Directors had named
Robert S. Morrison as Chairman, President and Chief Executive Officer. Mr.
Morrison succeeds William D. Smithburg who, in April 1997, announced his
intention to retire once a successor was selected.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
The following discussion addresses the operating results and financial
condition of the Company for the nine and three months ended September 30,
1997. The comparison of 1997 operations to those of 1996 is affected by the
changes the Company has made in its portfolio of businesses during these years,
specifically the divestiture of the Snapple beverages, U.S. and Canadian frozen
foods and Italian products businesses. As a result of these changes,
comparative results are difficult to analyze. To assist in the analysis of
operating results, this discussion will address the financial results as
reported, describe the impact of divested businesses, where applicable, and
review the results of the ongoing businesses by industry segment.
Restructuring Charges
During the quarter ended September 30, 1997, the Company recorded pretax
restructuring charges of $46.9 million. Of the total charges, $40.2 million
related to plant consolidations in the U.S. Foods business, including $30.7
million for the closing of a rice cakes plant in Gridley, California, $5.9
million for the closing of a Golden Grain/Near East plant in Leominster,
Massachusetts and $3.6 million for plant consolidations in a food service
business. In addition, the Company recorded $6.7 million of restructuring
charges related to staffing reductions. The charges are comprised of asset
write-offs, loss on lease, severance and termination benefits and other shut-
down costs. Savings from the restructuring actions are estimated to be about
$22 million annually, primarily beginning in 1997 and 1998, of which
approximately 90 percent will be in cash.
While the restructuring actions taken during the quarter are expected to result
in the elimination of most of the overhead costs previously allocated to the
Snapple beverages business, certain costs will remain. These costs have been
reallocated to the ongoing businesses and represent resources for future
growth.
During the quarter ended June 30, 1997, the Company recorded pretax
restructuring charges of $11.8 million. These charges included $10.7 million
for plant consolidations in the Brazilian pasta business and $1.1 million for
the closing of a beverages office in Singapore. Savings from the restructuring
actions are estimated to be about $5 million annually, beginning mainly in
1998, of which approximately 80 percent will be in cash.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared with
Nine Months Ended September 30, 1996
The following tables summarize the net sales and operating results of the
Company for the nine months ended September 30, 1997 (current year) and
September 30, 1996 (prior year):
<TABLE>
NET SALES
for the
Nine Months Ended September 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $1,999.8 $477.6 $2,477.4 $1,922.3 $456.6 $2,378.9
Beverages 1,050.5 267.5 1,318.0 984.5 227.0 1,211.5
Ongoing Businesses 3,050.3 745.1 3,795.4 2,906.8 683.6 3,590.4
Divested Businesses 165.7 6.8 172.5 519.9 30.5 550.4
Total Company $3,216.0 $751.9 $3,967.9 $3,426.7 $714.1 $4,140.8
OPERATING INCOME (LOSS)
for the
Nine Months Ended September 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 219.3 $(7.7) $ 211.6 $251.8 $ 7.9 $259.7
Beverages 208.9 7.3 216.2 188.3 (15.3) 173.0
Ongoing Businesses 428.2 (0.4) 427.8 440.1 (7.4) 432.7
(Loss)Gain
on divestitures (1,414.6) -- (1,414.6) 133.6 2.8 136.4
Divested Businesses (13.4) (1.7) (15.1) (60.6) (8.1) (68.7)
(1,428.0) (1.7) (1,429.7) 73.0 (5.3) 67.7
Total Company $ (999.8) $(2.1) $(1,001.9) $513.1 $ (12.7) $500.4
<FN>
Note: Operating results include certain allocations of overhead
expenses.
"Foods": includes all food lines as well as the food service
business.
"Beverages": includes Gatorade thirst quencher sports beverages.
"(Loss)Gain on divestitures": 1997 includes a pretax loss of $1.41
billion on the sale of the Snapple beverages business. 1996
includes pretax gains of $2.8 million and $133.6 million on the sale
of the Italian products and the U.S. and Canadian frozen foods
businesses, respectively.
"Divested Businesses": 1997 includes current year net sales and
operating income (through the divestiture date) for the Snapple
beverages business (May 1997). 1996 includes prior year net sales
and operating income (through the divestiture date) for the Italian
products (January 1996), U.S. and Canadian frozen foods (July 1996)
and Snapple beverages businesses.
</FN>
</TABLE>
Consolidated net sales decreased 4 percent primarily due to the absence of
divested businesses in the current year. Excluding divested businesses, sales
and volume were 6 percent above the prior year driven by growth across the
Worldwide Gatorade and Worldwide Foods businesses. While the June 1996 ready-
to-eat cereals price reduction had an adverse impact on Foods sales, an
increase in U.S.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ready-to-eat cereals volume of over 23 percent mitigated the impact of the
price change. The Company expects its above-industry growth rate in ready-to-
eat cereals volume to continue to moderate in the near-term. There were no
other significant price changes that affected the comparison of current and
prior year net sales.
Consolidated gross profit margin was 49.4 percent in the current year compared
to 46.7 percent in the prior year. Excluding divested businesses, gross profit
margin increased to 49.8 percent in the current year from 48.0 percent in the
prior year reflecting improvement across all businesses, mainly due to lower
costs.
Selling, general and administrative (SG&A) expenses decreased $56.9 million, or
4 percent, primarily due to the absence of expenses of divested businesses.
Excluding divested businesses, SG&A expenses increased 9 percent driven by a 13
percent increase in advertising and merchandising (A&M) expenses. A&M expenses
excluding divested businesses were 24.8 percent of sales during the current
year, up from 23.2 percent in the prior year.
Consolidated operating loss of $1.0 billion for the current year included a
$1.41 billion pretax loss on the sale of the Snapple beverages business and
pretax restructuring charges of $58.7 million. Prior year operating income
included pretax gains on the sale of the Italian products and U.S. and Canadian
frozen foods businesses of $2.8 million and $133.6 million, respectively, and
pretax restructuring charges of $6.4 million in the U.S. and Canadian Foods
business and $16.6 million in the U.S. and Canadian Divested business.
Excluding the loss/gain on divestitures, operating results from divested
businesses and restructuring charges, operating income of $486.5 million
increased 11 percent from the prior year, primarily due to improvement in the
Beverages segment.
Net financing costs (net interest expense and foreign exchange losses)
decreased $13.7 million in the current year. Debt levels declined by over $500
million from December 31, 1996, due mainly to proceeds from the Snapple
beverages divestiture and cash from operations, resulting in lower interest
expense.
Excluding the impact of the loss/gain on divestitures and restructuring
charges, the current year effective tax rate was 38.4 percent compared to 41.0
percent in the prior year. The decrease was primarily due to the Snapple
divestiture.
Industry Segment Operating Results
Foods - Net sales were 4 percent above the prior year. U.S. and Canadian sales
and volume rose 4 percent. Sales increased in ready-to-eat and hot cereals,
Golden Grain, mixes and syrup and new snacks. These gains more than offset
lower sales in rice cakes and food service as well as the adverse impact of the
June 1996 ready-to-eat cereals price reduction. International sales increased
5 percent due to higher sales in Latin America.
Excluding restructuring charges of $45.1 million and $6.4 million in 1997 and
1996, respectively, U.S. and Canadian operating income increased 2 percent from
the prior year as the favorable impact of the volume increase was mostly offset
by the June 1996 ready-to-eat cereals price reduction, increases in
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A&M expenses and underwriting of new snacks. Higher A&M expenses in U.S. and
Canadian Foods were primarily due to increased trade and media spending across
the businesses including increased support of hot cereals, granola bars and
Golden Grain compared to the prior year and investment in new snacks. Excluding
the restructuring charge of $10.7 million in the current year, International
Foods operating income was $4.9 million below the prior year. The decline was
primarily due to the impact of a non-cash asset impairment loss partially
offset by a separate cash litigation settlement resulting in a net charge of
$4.8 million.
The Company has taken numerous actions relative to the Brazilian pasta business
(the Business) in light of continuing operating losses of the Business. Among
these actions, the Company announced plant consolidations in the Business
during the quarter ended June 30, 1997, and recorded a related restructuring
charge of $10.7 million, as previously discussed (See Restructuring Charges).
During the quarter ended September 30, 1997 (current quarter), as a part of the
Company's operating planning process, an updated review of the strategies,
actions taken to date and expected financial prospects of the Business was
undertaken. As a part of this process the Company evaluated the recoverability
of the long-lived assets of the Business, including intangible assets, pursuant
to Financial Accounting Standards Board (FASB) Statement #121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." In performing its review for recoverability, the Company compared the
estimated undiscounted future cash flows to the carrying value of the long-
lived assets of the Business, including intangible assets. As the carrying
value of the long-lived assets exceeded the estimated undiscounted future cash
flows, the Company was required to reduce the carrying value of the net assets
of the Business to fair market value during the current quarter. The Company's
estimate of fair market value was based on various methodologies including a
discounted value of the estimated future cash flows of the Business and a
fundamental analysis of the Business' value. The asset impairment resulted in
a non-cash charge of $39.8 million to reduce the carrying value of intangible
assets. The charge is reflected in selling, general and administrative expense
on the condensed consolidated statement of income for the three and nine months
ended September 30, 1997. Separately, during the current quarter the Company
settled litigation related to the acquisition of the Business, as discussed in
Note 2 to the condensed consolidated financial statements.
Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 9
percent and 8 percent, respectively. U.S. and Canadian sales and volume rose 7
percent, reflecting incremental sales from a new product, Gatorade Frost, and
core business growth resulting in market share gains. International sales
increased 18 percent on a 14 percent volume increase primarily due to double-
digit sales growth of Gatorade thirst quencher in Latin America and the
Asia/Pacific region and modest growth in Europe.
Excluding current year restructuring charges of $1.8 million and $1.1 million
in the U.S. and Canadian and International businesses, respectively, operating
income increased $46.1 million from the prior year due to worldwide sales
growth and lower packaging costs in the U.S. and Canadian business, partly
offset by higher A&M expenses. A 12 percent increase in A&M expenses was
driven, in part, by media spending for Gatorade Frost. In the International
Beverages business, the Company continued its underwriting in Asia/Pacific
markets for Gatorade thirst quencher and improved the profitability of the
Latin American and European businesses.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared with
Three Months Ended September 30, 1996
The following tables summarize the net sales and operating results of the
Company for the three months ended September 30, 1997 (current year) and
September 30, 1996 (prior year):
<TABLE>
NET SALES
for the
Three Months Ended September 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 713.0 $163.2 $ 876.2 $ 687.3 $152.9 $ 840.2
Beverages 401.3 93.2 494.5 360.7 73.9 434.6
Ongoing Businesses 1,114.3 256.4 1,370.7 1,048.0 226.8 1,274.8
Divested Businesses -- -- -- 154.5 6.9 161.4
Total Company $1,114.3 $256.4 $1,370.7 $1,202.5 $233.7 $1,436.2
OPERATING INCOME (LOSS)
for the
Three Months Ended September 30,
<CAPTION>
Dollars in Millions 1997 1996
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 65.3 $(0.5) $ 64.8 $ 86.2 $ 2.8 $ 89.0
Beverages 83.6 4.5 88.1 76.6 (5.3) 71.3
Ongoing Businesses 148.9 4.0 152.9 162.8 (2.5) 160.3
Gain on divestiture -- -- -- 133.6 -- 133.6
Divested Businesses -- -- -- (36.1) (1.6) (37.7)
-- -- -- 97.5 (1.6) 95.9
Total Company $148.9 $ 4.0 $152.9 $260.3 $(4.1) $256.2
<FN>
Note: Operating results include certain allocations of overhead
expenses.
"Foods": includes all food lines as well as the food service
business.
"Beverages": includes Gatorade thirst quencher sports beverages.
"Gain on divestiture": 1996 includes a pretax gain of $133.6
million on the sale of the U.S. and Canadian frozen foods
business.
"Divested Businesses": 1996 includes prior year net sales and
operating income (through the divestiture date) for the U.S. and
Canadian frozen foods (July 1996) and Snapple beverages (May 1997)
businesses.
</FN>
</TABLE>
Consolidated net sales decreased 5 percent primarily due to the absence of
divested businesses in the current year. Excluding divested businesses, sales
were 8 percent above the prior year on a 10 percent volume gain reflecting
growth in the ongoing businesses. There were no significant price changes that
affected the comparison of current and prior year net sales.
Consolidated gross profit margin was 50.8 percent in the current year compared
to 47.5 percent in the prior year. For ongoing businesses, gross profit margin
increased to 50.8 percent from 48.9 percent in the prior year, primarily due to
lower packaging costs in the U.S. and Canadian businesses.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SG&A expenses decreased $38.3 million, or 7 percent, versus the prior year,
primarily due to the absence of expenses of divested businesses. Excluding
divested businesses, SG&A increased 9 percent, driven by an 8 percent increase
in A&M expenses. A&M expenses for ongoing businesses were 24.3 percent of
sales during the current year, up from 24.1 percent in the prior year.
Consolidated operating income of $152.9 million for the current quarter
included pretax restructuring charges of $46.9 million. Prior year operating
income included a pretax gain of $133.6 million on the sale of the U.S. and
Canadian frozen foods business and restructuring charges of $23.0 million.
Excluding the gain on divestiture, operating results from divested businesses
and restructuring charges, operating income of $199.8 million increased 20
percent from the prior year, reflecting improvement in the U.S. and Canadian
Foods and Worldwide Beverages businesses.
Net financing costs (net interest expense and foreign exchange losses)
decreased $6.6 million in the current year. Debt levels declined over $75
million from June 30, 1997, due mainly to cash from operations, resulting in
lower interest expense.
The effective tax rate in the current year was 37.0 percent versus 39.8 percent
in the prior year. The decrease was primarily due to the Snapple divestiture.
Industry Segment Operating Results
Foods - Net sales were 4 percent above the prior year. U.S. and Canadian sales
and volume rose 4 percent and 5 percent, respectively. Sales gains in ready-to-
eat and hot cereals, Golden Grain, and new snacks more than offset lower sales
in rice cakes. International sales increased 7 percent mainly due to higher
sales in Latin America.
U.S. and Canadian operating income, excluding restructuring charges of $45.1
million and $6.4 million in 1997 and 1996, respectively, increased 19 percent
from the prior year primarily due to the favorable impact of the volume
increase. International Foods operating income included the impact of a non-
cash asset impairment loss partly offset by a separate cash litigation
settlement resulting in a net charge of $4.8 million, as previously discussed.
International Foods operating income excluding these items was $1.5 million
ahead of the prior year.
Beverages - Worldwide sales and volume of Gatorade thirst quencher increased 14
percent. U.S. and Canadian sales and volume increased 11 and 12 percent,
respectively, driven by incremental sales of Gatorade Frost and strong
execution of retail in-store initiatives, including increased shelf space and
improved displays. International sales increased 26 percent, primarily due to
double-digit sales growth of Gatorade thirst quencher in Latin America offset
by declines in the Company's licensee markets in the Asia/Pacific region.
Operating income, excluding restructuring charges of $1.8 million, increased
$18.6 million or 26 percent from the prior year, primarily due to sales growth
and lower packaging costs in the U.S. and Canadian business, partly offset by
increases in A&M expenses to support growth initiatives.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Internationally, the Company continued to improve results in Latin America and
Europe and continued underwriting in the Asia/Pacific region.
Liquidity and Capital Resources
Net cash provided by operating activities was $443.4 million, a decrease of
$20.1 million from the prior year, primarily driven by an increase in accounts
receivable reflecting growth in the ongoing businesses. Capital expenditures
for the current and prior year were $144.1 million and $164.8 million,
respectively. Capital expenditures are expected to increase during the
remainder of the year as the Company continues to expand production capacity
for foods and beverages in the United States and China. The Company expects
capital expenditures and cash dividends for the remainder of the year to be
financed through cash flow from operating activities and liquidation of short-
term investments, and, if necessary, short-term debt.
Short-term and long-term debt (total debt) as of September 30, 1997, was $1.05
billion, a decrease of $508.7 million from December 31, 1996, mainly due to the
use of the $300 million of Snapple divestiture proceeds and cash from operating
activities. Anticipated cash proceeds from the recapture of income taxes paid
on previous capital gains of approximately $240 million are expected to be
received by the end of the first half of 1998, and an additional $10 million by
the end of 1998.
The Company renegotiated and reduced the level of its revolving credit
facilities during the third quarter. The Company has replaced its $900 million
annually extendible five-year revolving credit facility with a $450 million
annually extendible five-year revolving credit facility and a $225 million 364-
day extendible revolving credit facility which may, at the Company's option be
converted into a two-year term loan. Both facilities are with various banks.
The facility supports the Company's commercial paper borrowings and is also
available for direct borrowings.
During the current quarter the Company repurchased 441,000 shares of its
outstanding common stock for $21.7 million under the 10 million share
repurchase program announced in August 1993.
Pending Accounting Changes
In March 1997, the FASB issued Statement #128, "Earnings Per Share." This
Statement simplifies the computation of earnings per share and makes the
computation more consistent with those of International Accounting Standards.
The Company will adopt this Statement during the fourth quarter. The Company
does not expect the adoption of this new standard to significantly impact
previously reported earnings per share or earnings per share trends.
In July 1997, the FASB issued Statement #130, "Reporting Comprehensive Income,"
and Statement #131, "Disclosures About Segments of an Enterprise and Related
Information." Statement #130 establishes standards for reporting comprehensive
income in financial statements. Statement #131 expands certain reporting and
disclosure requirements for segments from current standards.
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is not required to adopt these Statements until 1998 and does not
expect the adoption of these new standards to result in material changes to
previously reported amounts or disclosures.
Subsequent Events
On October 2, 1997, the Company announced that it had signed a definitive
agreement to sell its Richardson's dessert toppings and condiment business to
Tri-Star Industries, Inc. Terms of the sale were not disclosed.
On October 23, 1997, the Company announced that its Board of Directors had
named Robert S. Morrison as Chairman, President and Chief Executive Officer.
Mr. Morrison succeeds William D. Smithburg who, in April 1997, announced his
intention to retire once a successor was selected.
Cautionary Statement on Forward-Looking Statements
Forward-looking statements, within the meaning of Section 21E of the Securities
and Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis. The Company's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on
management's current views and assumptions, and involve risks and uncertainties
that could significantly affect expected results. For example, operating
results may be affected by external factors such as: actions of competitors;
changes in laws and regulations, including changes in governmental
interpretations of regulations and changes in accounting standards; customer
demand; effectiveness of spending or programs; fluctuations in the cost and
availability of supply chain resources; and foreign economic conditions,
including currency rate fluctuations.
The Company continues to review strategies relative to underperforming and non-
core businesses which may result in future charges.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Note 2 in Part I is incorporated by reference herein.
Item 6 Exhibits and Reports on Form 8-K
Item 6(a) See Exhibit Index
Item 6(b) Reports on Form 8-K
All other items in Part II are either inapplicable to the Company
during the quarter ended September 30, 1997, the answer is negative
or a response has been previously reported and an additional report
of the information need not be made, pursuant to the Instructions to
Part II.
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Date November 7, 1997 Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date November 7, 1997 Thomas L. Gettings
Thomas L. Gettings
Vice President and
Corporate Controller
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
(10) (iii) Agreement Upon Separation of Employment E
with William D. Smithburg, effective
as of October 22, 1997
(11) Statement Re Computation E
of Per Share Earnings
(27) Financial Data Schedule E
(submitted to the Securities
and Exchange Commission
in electronic format)
(99) Announcement on October 23, 1997, that the E
Board of Directors had named Robert S. Morrison
as Chairman, President and Chief Executive Officer.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 148
<SECURITIES> 0
<RECEIVABLES> 374
<ALLOWANCES> 26
<INVENTORY> 265
<CURRENT-ASSETS> 1191
<PP&E> 1950
<DEPRECIATION> 785
<TOTAL-ASSETS> 2793
<CURRENT-LIABILITIES> 1031
<BONDS> 891
0
100
<COMMON> 840
<OTHER-SE> (671)
<TOTAL-LIABILITY-AND-EQUITY> 2793
<SALES> 3968
<TOTAL-REVENUES> 3968
<CGS> 2006
<TOTAL-COSTS> 2006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (1101)
<INCOME-TAX> (145)
<INCOME-CONTINUING> (956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (956)
<EPS-PRIMARY> (7.00)
<EPS-DILUTED> (7.00)
</TABLE>
EXHIBIT 10iii
AGREEMENT UPON SEPARATION OF EMPLOYMENT
This Agreement Upon Separation Of Employment ("Agreement") is made and
entered into by and between William D. Smithburg, his successors, heirs,
administrators, executors, personal representatives and assigns ("Smithburg")
and The Quaker Oats Company, its officers, directors, shareholders, employees,
agents, assigns, subsidiaries, divisions, parents, affiliates and successors
("Quaker"), collectively "the parties." The Agreement shall become effective
seven (7) days after it is executed by Smithburg and delivered to Quaker's
highest ranking Human Resources officer.
1. Consideration to Smithburg
A. Quaker shall treat Smithburg's retirement as "involuntary" for
purposes of The Quaker Officers' Severance Program ("the Program"). Upon the
effective date of his retirement, this will render him eligible for benefits
under the Program, including (but not limited to) payment of his salary at the
annual rate of $875,000 for a period of one year commencing on the first day of
the month immediately following the effective date of his retirement.
B. Immediately upon the date of Smithburg's retirement, which retirement
shall become effective on any date selected by Quaker's Board of Directors
("Board"), the Board and/or Compensation Committee shall exercise its discretion
under The Quaker Supplemental Executive Retirement Program ("SERP") to credit
Smithburg with a Supplemental SERP Benefit, the amount of which shall result in
providing Smithburg with a total annual retirement benefit of $971,033 when his
Basic Retirement Benefit (under the pension plans), his Supplemental Program
Benefit (i.e., his basic SERP benefit, "SPB"), and his Supplemental SERP Benefit
are added together. Provided, that prior to the commencement of payment of SERP
benefits, Smithburg may irrevocably elect any alternative form of payment
available under the SERP, subject to the specified reduction of the $971,033
annual payment he otherwise would have received: e.g., one such option, the
joint and 50% survivor benefit option, would provide an annual benefit of
$873,930 during Smithburg's lifetime (a 10% reduction of the $971,033 figure),
followed by an annual survivor benefit of $436,965 payable to his spouse for the
remainder of her lifetime (if she survives him). Payment of this Supplemental
SERP Benefit shall begin immediately after the expiration of Smithburg's salary
continuation under the Program.
C. Immediately upon the effective date of Smithburg's retirement, the
Board and/or Compensation Committee shall exercise its discretion under all
applicable equity incentive programs, including without limitation The Quaker
Long Term Incentive Plan of 1990 and Quaker's Investment Incentive Program,
such that all of Smithburg's previously awarded stock options and shares of
restricted stock which are still unvested on his last day of inactive service
under the Program shall become fully vested as of such date.
D. Commencing immediately upon the effective date of Smithburg's
retirement, Quaker shall provide Smithburg with offsite office space and
secretarial support for up to five years, both of his choosing, provided that
the total expense to Quaker shall not exceed $50,000.00 during any one year
period. To the extent that such office space and secretarial support are
treated as benefits on which Smithburg must pay taxes without being able to
take a corresponding deduction for business expenses, Quaker shall make an
additional cash payment in an amount sufficient to cover the increase in taxes
payable by Smithburg due to the combination of those benefits and that
additional cash payment.
2. Retirement
Smithburg hereby irrevocably agrees to retire from his position as
President and Chief Executive Officer of Quaker, his positions as Chairman of
the Board and as a Director of Quaker, and his employment with Quaker in all
other capacities, which retirement shall become effective on any date selected
by the Board. Smithburg agrees that prior to the effective date of his
retirement, he will return all Quaker property, including but not limited to
keys, office pass, credit cards, computers, office equipment, sales records and
data. Smithburg further agrees that within sixty (60) days after his
retirement date, he will submit all outstanding expenses and clear all advances
and his personal advance account, if any.
3. Waiver & Release
A. Smithburg waives, releases and discharges Quaker from any and all
claims and liabilities, demands, actions and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit, whether
known or unknown, fixed or contingent, that he may have or claim to have
against Quaker as of the effective date of this Agreement. Smithburg further
covenants not to file a lawsuit or participate in a class action lawsuit to
assert such claims. This waiver includes but is not limited to claims arising
out of or in any way related to Smithburg's employment or termination of
employment with Quaker, including age discrimination claims under the Age
Discrimination In Employment Act, discrimination claims under Title VII of the
Civil Rights Act of 1964 or the Americans with Disabilities Act, claims for
breach of contract, and any other statutory or common law cause of action under
state, federal or local law.
B. However, Smithburg does not waive, release, discharge or covenant not
to sue for enforcement of any rights or claims that arise out of conduct or
omissions which occur entirely after the date this Agreement becomes effective;
nor does he waive any vested rights he may have under any of Quaker's welfare,
pension or incentive plans, nor any right to payment for unused vacation
accrued during the year in which his retirement becomes effective.
Notwithstanding anything to the contrary in paragraph 9, such benefits shall
continue to be governed by separate Quaker plans, existing contracts and/or
policies.
C. Quaker waives, releases and discharges Smithburg from any and all
claims and liabilities, demands, actions and causes of action, including
attorneys' fees and costs, that it may have or claim to have against Smithburg
as of the date this Agreement becomes effective; provided, this waiver, release
and discharge only apply to claims as to which the Board (excluding Smithburg)
was aware, on or before the effective date of this Agreement, of all material
facts necessary to establish Smithburg's liability; and further provided,
Quaker does not waive, release, discharge or covenant not to sue for
enforcement of any rights or claims that arise out of conduct or omissions
which occur entirely after the date this Agreement becomes effective.
D. The parties stipulate that nothing contained in this Agreement shall
be construed as an admission by either of them of any liability, wrongdoing or
unlawful conduct. It is understood that both Quaker and Smithburg deny any
liability, wrongdoing or unlawful conduct, and each is providing consideration
for this waiver and release solely in order to resolve any disputes between
them amicably and to avoid the expense of potential litigation.
4. Miscellaneous Agreements
The covenants and agreements set forth in this paragraph shall remain in
effect until three (3) years after the termination of Smithburg's active
employment.
A. Smithburg shall provide accurate information or testimony or both in
connection with any legal matter if so requested by Quaker. He shall make
himself available upon request to provide such information and/or testimony, in
a formal and/or an informal setting in accordance with Quaker's request,
subject to reasonable accommodation of his schedule and reimbursement of
reasonable expenses, including reasonable and necessary attorney fees (if
independent legal counsel is reasonably necessary).
B. Smithburg shall cooperate with media requests for interviews
regarding his termination and/or Quaker, unless directed otherwise by Quaker in
a particular instance. He shall not disparage The Quaker Oats Company, its
products, or any of its directors, officers or employees in these interviews,
nor in any other private or public setting; provided, if Smithburg is compelled
to provide testimony under oath, he shall testify truthfully and such testimony
shall be protected by the same privilege that would apply to a defamation
claim.
C. The Quaker Oats Company, and any officer or director acting on its
behalf, shall answer all reference inquiries directed to The Quaker Oats
Company regarding Smithburg by stating only his positions held, compensation
and dates of employment. No additional information shall be provided unless
authorized in advance, in writing, by Smithburg. Smithburg agrees to direct
all requests for references to Quaker's highest ranking Human Resources
officer.
5. Prohibited Conduct During First Two Years Following Termination
A. Smithburg covenants and agrees that during the two years immediately
following his termination from active service, the following restrictions shall
apply:
i. Non-competition. Smithburg shall not accept any employment,
consulting position or ownership interest which involves his Participation in
the management of a business entity that markets, sells, distributes or
produces Covered Products anywhere in the world, unless that business entity's
sole involvement with Covered Products is that it makes retail sales or
consumes Covered Products, without competing in any way against Quaker.
a. "Participation" shall be construed broadly to include,
without limitation: (1) holding a position in which he directly manages such a
business entity; (2) holding a position in which anyone else who directly
manages such a business entity is below Smithburg in the reporting chain or
chain-of-command (regardless of the number of reporting levels between them);
(3) providing input, advice, guidance, or suggestions regarding the management
of such a business entity to anyone responsible therefor; (4) providing a
testimonial on behalf of such a business entity or the product it produces; or
(5) doing anything else that falls within a common sense definition of the term
"participate" as used in the present context.
b. "Covered Products" means any product which falls into one or
more of the following categories, so long as Quaker is still producing,
marketing, distributing, selling or licensing such product anywhere in the
world: sports drinks; hot cereals; pancake mixes; grain-based snacks
(excluding potato chips); value-added rice products; pancake syrup; value-added
pasta products; ready-to-eat cereals; dry pasta products; items Quaker produces
for the food service market; and frozen waffles, pancakes and french toast.
ii. Raiding Employees. Smithburg shall not in any way, directly or
indirectly (including through someone else acting on Smithburg's
recommendation, suggestion, identification or advice), facilitate or solicit
any existing Quaker employee to leave the employment of Quaker or to accept any
position with any other company or corporation. For purposes of this
provision, "existing Quaker employee" means someone: (1) who is employed by
Quaker on the date when Smithburg's active employment terminates; (2) who is
still employed by Quaker as of the date when the facilitating act or
solicitation takes place; and (3) who holds a manager, director or officer
level position at Quaker (or an equivalent position based on job duties and/or
Hay points, regardless of the employee's title). The parties agree and
stipulate that by virtue of his employment at Quaker, Smithburg developed
personal and business relationships with existing Quaker employees which he
otherwise would not have had, and also acquired knowledge as to which existing
Quaker employees are critical to Quaker's success and future plans, and which
ones have skills or contacts that would be valuable to a competitor.
iii. Non-disclosure. Smithburg shall not use or disclose to anyone
any confidential information regarding Quaker, nor undertake any job or
assignment in which use of such information is inevitable. For purposes of
this provision, the term "confidential information" shall be construed as
broadly as Illinois law permits and shall include all non-public information
Smithburg acquired by virtue of his positions with Quaker which might be of any
value to a competitor or which might cause any economic loss (directly or via
loss of an opportunity) or substantial embarrassment to Quaker or its
customers, distributors or suppliers if disclosed. Examples of such
confidential information include, without limitation, non-public information
about Quaker's customers, suppliers, distributors and potential acquisition
targets; its business operations and structure; its product lines, formulas and
pricing; its processes, machines and inventions; its research and know-how; its
financial data; and its plans and strategies.
B. In the event of a breach or threatened breach of any term of this
paragraph 5 by Smithburg, Quaker shall be entitled to an injunction compelling
specific performance, restraining any future violations and/or requiring
affirmative acts to undo or minimize the harm to Quaker, in addition to damages
for any actual breach that occurs. The parties stipulate and represent that
breach of any provision of this paragraph would cause irreparable injury to
Quaker, for which there would be no adequate remedy at law, due among other
reasons to the inherent difficulty of determining the precise causation for
loss of customers, confidential information and/or employees and of determining
the amount and ongoing effects of such losses.
C. The parties stipulate that the preceding restrictive covenants do not
unduly interfere with or limit Smithburg's ability to earn a living or
comfortably support himself. Nonetheless, if (and only if) a court reaches a
contrary conclusion, it may condition the issuance of an injunction enforcing
the terms of paragraph 5(A) on Quaker's agreement, at Quaker's option, to
resume making payments under the SERP during the time the injunction is in
effect.
6. Advance Determination Of Permitted/Prohibited Conduct
Smithburg may request an advance written determination from Quaker's
highest ranking Human Resources officer as to whether taking a proposed action
or job would, in Quaker's opinion, constitute a breach of this Agreement or the
SERP. In that event, and provided that Smithburg discloses in writing all
material facts about the proposed action or job, the advance written
determination shall be made as soon as practicable in the circumstances,
without any unreasonable delay or withholding; PROVIDED, that if circumstances
materially change after the advance determination is made (e.g., if the duties
of a job change after Smithburg accepts it), the determination may be
reconsidered and revised/reversed upon thirty days advance written notice to
Smithburg.
7. Independence of SERP
Nothing in this Agreement shall limit, bind or in any way constrain the
Compensation Committee's right to terminate or interrupt SERP benefits
(including the SPB described in paragraph 1(B) of this Agreement) pursuant to
the present terms of the SERP; provided, however, that once this Agreement
becomes effective, any subsequent amendment of the Compensation Committee's
right to terminate or interrupt SERP benefits shall not adversely affect
Smithburg's rights under this Agreement.
8. Choice Of Law, Forum, and Attorney Fees
A. This Agreement shall be governed by and construed in accordance with
the laws of the State Of Illinois, without giving effect to choice of law
principles. In the event of any litigation over this Agreement or an alleged
breach thereof, Smithburg consents to submit to the personal jurisdiction of
any court, state or federal, in the State of Illinois. The parties agree that
the Illinois courts, state or federal, shall be the exclusive jurisdiction(s)
for any litigation over this Agreement or an alleged breach thereof.
B. In the event of any litigation between Smithburg and Quaker regarding
any provision of this Agreement, the party which prevails in such contest shall
be entitled to receive from the other party, in addition to any damages,
injunction, or other relief awarded by a court, reimbursement of all litigation
costs and expenses (including reasonable attorney fees) which the prevailing
party reasonably incurred as a result of such litigation, plus interest at the
applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal
Revenue Code of 1986, as amended. If, in a particular contest, each party
prevails on one or more issues, the court shall exercise its equitable judgment
to determine which, if either, should be considered the prevailing party and
the percentage of that party's expenses which should be reimbursed, taking into
account inter alia the significance of the issue(s) on which each party
prevailed and the reasonableness of each party's position(s).
9. Full Agreement and Severability
A. This written document contains the entire understanding and agreement
of the parties on the subject matter set forth herein, and supersedes any prior
agreement relating to these matters. No promises or inducements have been made
other than those reflected herein, and no party is relying on any statement or
representation by any person except those set forth herein, including without
limitation oral or written summaries of this Agreement.
B. This Agreement cannot be modified or altered except by a subsequent
written agreement signed by the parties; and only Quaker's highest ranking
Human Resources officer or his direct superior (other than Smithburg) shall
have authority to sign such an amendment on behalf of Quaker.
C. Nothing in this document shall eliminate or reduce Smithburg's
obligation to comply with the Quaker Code Of Ethics or Quaker's obligation to
indemnify Smithburg in certain situations, pursuant to Quaker's by-laws or
applicable law.
D. Each term of this Agreement is deemed severable, in whole or in part,
and if any provision of this Agreement or its application in any circumstance
is found to be illegal, unlawful or unenforceable, the remaining terms and
provisions shall not be affected thereby and shall remain in full force and
effect.
The Quaker Oats Company
/s/ Silas S. Cathcart
By Silas S. Cathcart,
Chairman of the Compensation Committee
of Quaker's Board of Directors
SMITHBURG HAS BEEN ADVISED IN WRITING, VIA THIS NOTICE, TO CONSULT WITH AN
ATTORNEY BEFORE SIGNING THIS AGREEMENT. HE ACKNOWLEDGES THAT HE RECEIVED IT ON
September 25, 1997, AND THAT SINCE THAT TIME HE HAS REVIEWED IT, CONSULTED WITH
AN ATTORNEY, AND NEGOTIATED SEVERAL CHANGES WITH QUAKER.
SMITHBURG UNDERSTANDS THAT HE HAS TWENTY ONE (21) DAYS AFTER RECEIVING THIS
DOCUMENT TO CONSIDER AND DECIDE WHETHER TO SIGN THE AGREEMENT. SMITHBURG
FURTHER UNDERSTANDS THAT HE MAY RESCIND THE AGREEMENT WITHIN SEVEN (7) DAYS
AFTER SIGNING IT. SMITHBURG AFFIRMS THAT HE HAS CAREFULLY READ AND FULLY
UNDERSTANDS ALL PROVISIONS OF THIS AGREEMENT, THAT THE CONSIDERATION HE IS
RECEIVING IS FAIR AND ADEQUATE, AND THAT HE HAS NOT BEEN THREATENED OR COERCED
INTO SIGNING IT.
Oct 22, 1997 /s/ William D. Smithburg
William D. Smithburg
EXHIBIT 99
News Release
The Quaker Oats Company
Further Information:
Media Contact: Investor Contact:
Quaker Tower Mark Dollins Margaret M. Eichman,V.P.
P.O. Box 049001 Director, Corp. Comm. Investor Relations&Corp. Affairs
Chicago, IL 60604-9001 (312) 222-6914 (312) 222-7818
QUAKER OATS NAMES ROBERT S. MORRISON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FOR IMMEDIATE RELEASE
Chicago, Illinois, October 23, 1997, The Quaker Oats Company
(NYSE:OAT) today announced that its Board of Directors has named Robert
S. Morrison as Chairman, President and Chief Executive Officer,
effective immediately. Mr. Morrison succeeds William D. Smithburg who,
in April, announced his intention to retire once a successor was
selected.
Since 1994, Mr. Morrison, 55, has served as Chairman and Chief
Executive Officer of Kraft Foods Inc., North America, the largest
branded food business in North America, which is a subsidiary of Philip
Morris Companies, Inc. During his tenure, Mr. Morrison led a successful
effort to increase growth and profitability by building a strong
organization, defining the company's long-term strategic direction and
concentrating resources on Kraft's core business and brands. Kraft's
unit volume and profitability grew substantially under his leadership.
"I am pleased and proud to have the opportunity to lead one of
America's great branded food and beverage companies into the next phase
of its growth and development," Mr. Morrison said. "As the earnings
announced this morning demonstrate, Quaker's grain-based products and
Gatorade thirst quencher businesses have performed very well, and I am
pleased to be taking the helm of a company with a talented management
team, powerhouse global brands and a solid infrastructure. My immediate
priority is to meet the entire senior management and as many employees
as possible, and I look forward to moving ahead as a unified team to
build and deliver value for our shareholders and create new
opportunities for our many dedicated employees."
"I am very pleased that the Board of Directors selected Mr.
Morrison to lead The Quaker Oats Company forward," Mr. Smithburg said.
"I know Bob as an individual with a proven track record of leadership
through periods of major strategic change and as a recognized team
builder. He is a seasoned industry executive with the right strategic
perspective, skills, and commitment to innovation necessary to lead this
Company forward and create greater value for all of our shareholders."
"Mr. Morrison is an executive of exceptional caliber and proven
leadership ability," said William L. Weiss, the outside Quaker director
who chaired the special committee of the Board of Directors that
conducted the search with the assistance of the Spencer Stuart executive
search firm. "I am extremely pleased that he is becoming the Chairman,
President and Chief Executive Officer of The Quaker Oats Company. He is
a fine individual of unquestionable integrity with sound, achievement-
oriented experience in the food and beverage industry. Under Bob's
leadership, I believe Quaker Oats' future is bright."
A veteran of the consumer products industry, Mr. Morrison began
his career serving in various brand management and marketing positions
at Procter & Gamble. Mr. Morrison joined Kraft, Inc. in 1983, and led
the company's Cheese Division until Kraft's acquisition by Philip
Morris. In early 1989, he became president of Kraft General Foods
Canada and was named president of General Foods in 1991. He assumed his
most recent position in late 1994.
Mr. Morrison earned his B.S. in English at Holy Cross College in
1963 and received an M.B.A. from Wharton in 1969. As a captain in the
United States Marine Corps, he was decorated with the Silver Star and
the Purple Heart for his service in Vietnam. Mr. Morrison is on the
Board of Directors of the Grocery Manufacturers of America. He also
serves on the Board of Trustees of the Chicago Urban League, the Lyric
Opera of Chicago, the Ravinia Festival and Lake Forest College. He is
active in the Commercial and Economic Clubs of Chicago and is a member
of the Dean's Council at J.L. Kellogg Graduate School of Management at
Northwestern University.
The Quaker Oats Company is an international marketer of foods
and beverages. Its major brands include Quaker cereals and grain-based
snacks, Aunt Jemima mixes and syrup, Rice-A-Roni and Pasta-Roni side
dishes and Gatorade thirst quencher.
# # #
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