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, 1998
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, 1998 was 136,254,958
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, 1998 and 1997 3-4
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1998 and 1997 6
Net Sales and Operating Income by Segment for the
Nine and Three Months Ended September 30, 1998 and 1997 7-8
Notes to the Condensed Consolidated Financial Statements 9-14
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15-24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
<2>
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,
1998 1997
Net sales $ 3,879.2 $ 3,967.9
Cost of goods sold 1,892.1 2,005.9
Gross profit 1,987.1 1,962.0
Selling, general and administrative expenses 1,473.2 1,518.9
Restructuring charges, asset impairments and
(gains) losses on divestitures 129.6 1,473.3
Interest expense 52.7 67.5
Interest income (6.5) (4.7)
Foreign exchange loss - net 11.2 8.1
Income (loss) before income taxes 326.9 (1,101.1)
Provision (benefit) for income taxes 115.6 (144.6)
Net Income (Loss) 211.3 (956.5)
Preferred dividends - net of tax 2.5 2.7
Net Income (Loss) Available for Common $ 208.8 $ (959.2)
Per Common Share:
Net income (loss) $ 1.52 $ (7.00)
Net income (loss) - assuming dilution $ 1.47 $ (7.00)
Dividends declared $ .855 $ .855
Average Number of Common Shares Outstanding
(in thousands) 137,552 137,089
Reinvested Earnings:
Balance beginning of period $ 431.0 $ 1,521.3
Net income (loss) 211.3 (956.5)
Dividends (119.2) (119.3)
Balance end of period $ 523.1 $ 445.5
See accompanying notes to the condensed consolidated financial statements.
<3>
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,
1998 1997
Net sales $ 1,405.2 $ 1,370.7
Cost of goods sold 663.4 674.1
Gross profit 741.8 696.6
Selling, general and administrative expenses 521.8 506.9
Restructuring charges, asset impairments and
(gains) on divestitures 41.9 46.9
Interest expense 16.9 18.0
Interest income (2.5) (1.4)
Foreign exchange loss - net 2.3 3.1
Income before income taxes 161.4 123.1
Provision for income taxes 53.6 45.6
Net Income 107.8 77.5
Preferred dividends - net of tax 0.8 1.0
Net Income Available for Common $ 107.0 $ 76.5
Per Common Share:
Net income $ 0.78 $ 0.58
Net income - assuming dilution $ 0.75 $ 0.58
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares Outstanding
(in thousands) 136,394 138,064
Reinvested Earnings:
Balance beginning of period $ 454.2 $ 408.3
Net income 107.8 77.5
Dividends (38.9) (40.3)
Balance end of period $ 523.1 $ 445.5
See accompanying notes to the condensed consolidated financial statements.
<4>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
Dollars in Millions 1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 266.4 $ 84.2
Marketable securities 148.6 --
Trade accounts receivable - net of allowances 355.9 305.7
Inventories:
Finished goods 179.0 172.6
Grains and raw materials 50.3 59.0
Packaging materials and supplies 23.4 24.5
Total inventories 252.7 256.1
Other current assets 181.9 487.0
Total Current Assets 1,205.5 1,133.0
Property, plant and equipment 1,872.2 1,913.1
Less: accumulated depreciation 786.1 748.4
Property - net 1,086.1 1,164.7
Intangible assets - net of amortization 249.2 350.5
Other assets 70.4 48.8
Total Assets $ 2,611.2 $ 2,697.0
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 45.7 $ 61.0
Current portion of long-term debt 79.8 108.4
Trade accounts payable 212.9 191.3
Other current liabilities 695.5 585.0
Total Current Liabilities 1,033.9 945.7
Long-term debt 814.5 887.6
Other liabilities 551.6 578.9
Deferred income taxes -- 36.3
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 (48.4) (57.2)
Treasury Preferred Stock, at cost, 289,829
shares and 245,147 shares, respectively (28.0) (22.3)
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 73.9 29.0
Reinvested earnings 523.1 431.0
Cumulative translation adjustment (79.7) (82.4)
Unrealized gain on marketable securities 3.9 --
Deferred compensation (68.1) (91.0)
Treasury common stock, at cost, 31,723,834
shares and 29,165,692 shares, respectively (1,105.5) (898.6)
Total Common Shareholders' Equity 187.6 228.0
Total Liabilities and Shareholders' Equity $ 2,611.2 $ 2,697.0
See accompanying notes to the condensed consolidated financial statements.
<5>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Dollars in Millions September 30,
1998 1997
Cash Flows from Operating Activities:
Net income (loss) $ 211.3 $ (956.5)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 100.6 125.2
Deferred income taxes (38.8) 0.8
Loss on divestitures - net of tax benefit
of $265.1 in 1997 32.4 1,149.5
Restructuring charges 33.7 58.7
Asset impairment losses 63.5 39.8
Loss on disposition of property, plant
and equipment 8.0 30.9
Increase in trade accounts receivable (65.0) (101.0)
Increase in inventories (19.8) (26.8)
Decrease (increase) in other current assets 19.4 (8.0)
Increase in trade accounts payable 25.7 12.6
Increase in other current liabilities 93.0 77.5
Change in deferred compensation 31.7 24.7
Other items 17.5 16.0
Net Cash Provided by Operating Activities 513.2 443.4
Cash Flows from Investing Activities:
Capital gains tax recovery 240.0 --
Business divestitures 160.9 300.0
Purchase of marketable securities (159.1) --
Additions to property, plant and equipment (135.9) (144.1)
Proceeds on sale of property, plant and
equipment 4.2 --
Net Cash Provided by Investing Activities 110.1 155.9
Cash Flows from Financing Activities:
Cash dividends (119.2) (119.3)
Change in short-term debt (12.3) (457.4)
Proceeds from long-term debt 0.7 6.7
Reduction of long-term debt (103.0) (53.4)
Issuance of common treasury stock 96.9 91.7
Repurchases of common stock (300.2) (21.7)
Repurchases of preferred stock (5.7) (4.3)
Net Cash Used in Financing Activities (442.8) (557.7)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 1.7 (4.1)
Net Increase in Cash and Cash Equivalents 182.2 37.5
Cash and Cash Equivalents - Beginning of Period 84.2 110.5
Cash and Cash Equivalents - End of Period $ 266.4 $ 148.0
See accompanying notes to the condensed consolidated financial statements.
<6>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
Net Sales Operating Income (Loss) (a)
Nine Months Nine Months
Dollars in Millions Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian (b) $ 1,795.2 $ 1,793.1 $ 218.9 $ 227.9
International (c) 483.1 477.6 (26.4) (7.7)
Total Foods 2,278.3 2,270.7 192.5 220.2
Beverages
U.S. and Canadian (d) 1,186.3 1,050.5 237.8 208.9
International (e) 303.4 267.5 17.2 7.3
Total Beverages 1,489.7 1,318.0 255.0 216.2
Divested Businesses (f) 111.2 379.2 (39.1) (1,438.3)
Total Sales/Operating Income (Loss) $ 3,879.2 $ 3,967.9 408.4 (1,001.9)
Less: General corporate expenses 24.1 28.3
Interest expense - net 46.2 62.8
Foreign exchange loss - net 11.2 8.1
Income (loss) before income taxes $ 326.9 $(1,101.1)
</TABLE>
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1998 operating income includes pretax restructuring charges of $15.6
million for organization alignment and non-cash, pretax charges of $25.4
million for asset impairment losses. 1997 operating income includes pretax
restructuring charges of $40.2 million for plant consolidations and $4.9
million related to a staff restructuring.
(c) 1998 operating results include pretax restructuring charges of $7.8
million for organization alignment and non-cash, pretax charges of $38.1
million for asset impairment losses. 1997 operating results include pretax
restructuring charges of $10.7 million for plant consolidations in the
Brazilian pasta business and a pretax net charge of $4.8 million for an asset
impairment loss partly offset by a cash litigation settlement.
(d) 1998 operating income includes pretax restructuring charges of $7.0
million for organization alignment. 1997 operating income includes a pretax
restructuring charge of $1.8 million related to a staff restructuring.
(e) 1998 operating income includes pretax restructuring charges of $3.3
million for organization alignment. 1997 operating income includes pretax
restructuring charges of $1.1 million for the closing of an office in
Singapore.
(f) 1998 includes the sales and operating results of the Ardmore Farms and
Continental Coffee food service businesses that were divested in 1998.
Operating results for the nine months ended September 30, 1998, includes a
combined asset impairment and divestiture loss for the Continental Coffee
business net of a pretax gain for the sale of the Ardmore Farms business. See
Note 4 for further discussion. 1997 includes the sales and operating results
of the Snapple beverages business and the food service businesses that were
divested in 1997 and 1998. Operating results for the nine months ended
September 30, 1997, includes a pretax loss of $1.41 billion on the sale of the
Snapple beverages business.
<7>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
Net Sales Operating Income (Loss) (a)
Three Months Three Months
Dollars in Millions Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian (b) $ 644.4 $ 642.3 $ 72.2 $ 68.4
International (c) 163.7 163.2 (3.6) (0.5)
Total Foods 808.1 805.5 68.6 67.9
Beverages
U.S. and Canadian (d) 471.2 401.3 104.8 83.6
International 101.2 93.2 6.2 4.5
Total Beverages 572.4 494.5 111.0 88.1
Divested Businesses (e) 24.7 70.7 4.7 (3.1)
Total Sales/Operating Income $ 1,405.2 $ 1,370.7 184.3 152.9
Less: General corporate expenses 6.2 10.1
Interest expense - net 14.4 16.6
Foreign exchange loss - net 2.3 3.1
Income before income taxes $ 161.4 $ 123.1
</TABLE>
(a) Operating income (loss) includes certain allocations of overhead expenses.
(b) 1998 operating income includes pretax restructuring charges of $6.3
million for organization alignment and non-cash, pretax charges of $25.4
million for asset impairment losses. 1997 operating income includes pretax
restructuring charges of $40.2 million for plant consolidations and $4.9
million related to a staff restructuring.
(c) 1998 operating results include a non-cash, pretax charge of $15.1 million
for asset impairment losses. 1997 operating results include a pretax charge of
$4.8 million for an asset impairment loss partly offset by a cash litigation
settlement.
(d) 1998 operating income includes pretax restructuring charges of $2.7
million for organization alignment. 1997 operating income includes pretax
restructuring charges of $1.8 million related to a staff restructuring.
(e) 1998 includes the sales and operating results of the Ardmore Farms and
Continental Coffee food service businesses that were divested in 1998. See
Note 4 for further discussion. 1997 includes the sales and operating results
of the Snapple beverages business and the food service businesses that were
divested in 1997 and 1998.
<8>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
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, 1998 and 1997, the condensed consolidated balance sheet as of September 30,
1998, and the condensed consolidated statements of cash flows for the nine
months ended September 30, 1998 and 1997, 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, 1998, and for all
periods presented. All adjustments made have been of a normal and 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, 1997.
Certain previously reported amounts have been reclassified to conform to the
current presentation.
Note 2 - Litigation
The Company is 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 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.
Note 3 - Restructuring and Other Unusual Charges
The Company recorded pretax restructuring charges of $9.0 million during the
three months ended September 30, 1998 (current quarter). In the U.S. and
Canadian businesses, the Company announced plans to combine its foods and
beverages sales organizations in order to realize synergies and leverage scale.
This plan includes the elimination of positions and the consolidation of sales
offices. In addition, the U.S. Foods marketing organization was realigned.
Combined, these actions are expected to result in the elimination of about 90
positions. The charges are comprised of $5.8 million in severance and related
benefits, $1.0 million in loss on leases and $2.2 million in asset write-offs.
The charges are reflected in the operating results of the business segments as
follows: U.S. and Canadian Foods, $6.3 million, and U.S. and Canadian
Beverages, $2.7 million. Savings from these actions are estimated to be $7
million annually, primarily beginning in 1999, with approximately 90 percent of
such savings in cash. The Company's organization alignment activities are
expected to continue during the remainder of the year.
<9>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
During the current quarter, the Company continued to review its strategies
related to underperforming businesses in its portfolio. The Company evaluates
the recoverability of certain long-lived assets pursuant to the provisions of
Financial Accounting Standards Board (FASB) Statement #121 for impaired assets
held for use. In the U.S. and Canadian Foods business, a non-cash, pretax
charge of $25.4 million was recognized for an impaired business. The Company's
foods business in China was also included in this review. As a result of this
review, the Company concluded that this business was impaired and recorded a
non-cash, pretax charge of $15.1 million to adjust the carrying amount of the
long-lived assets to fair value. The estimated fair market value of these
businesses was based on various methodologies, including a discounted value of
the estimated future cash flows of the businesses.
In light of the recent downturn in the economic environment in the Asia/Pacific
region, the Company will continue to evaluate its strategies related to its
businesses in this region. Currently, the Company has decided to focus on
building its beverages business in China and is working on a plan to
restructure its other operations in the Asia/Pacific region for improved
profitability.
As the Company determines the course of action related to its Asia/Pacific
businesses, it is also scrutinizing its domestic assets. The continuation of
the worldwide organization alignment, manufacturing consolidations and other
cost-reduction actions could result in additional charges of up to $50 million
in the fourth quarter of 1998. Year-to-date restructuring charges total $33.7
million, including $9.0 million of current quarter charges.
Note 4 - Divestitures
During the current quarter, the Company completed the sale of its Ardmore Farms
juice and Continental Coffee food service businesses. These transactions
resulted in a combined pretax gain of $7.6 million in the current quarter. The
current quarter $7.6 million pretax gain reflects the sale of the Ardmore Farms
business and an adjustment upon sale of the Continental Coffee business. The
year-to-date combined impact of these transactions is a pretax loss of $32.4
million.
During the first quarter of 1998, the Company received cash proceeds of $73.2
million from the December 1997 sale of certain food service businesses and the
Company received $240.0 million from the recovery of income taxes paid on
previous capital gains related to divestitures. Cash provided by investing
activities for the nine months ended September 30, 1998 (current year) includes
these amounts.
On May 22, 1997, the Company completed the sale of 100 percent of its shares of
its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc
Companies, Inc. (Triarc) for $300 million in cash. The disposition was made
pursuant to the Stock Purchase Agreement dated March 27, 1997, between the
Company and Triarc. The Company realized a pretax loss on the sale of $10.6
million in the second quarter of 1997, which, combined with the previously
recorded impairment loss in the first quarter of 1997, resulted in a total
pretax loss on the sale of $1.41 billion.
<10>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
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.
Note 6 - Marketable Securities
During the current year, the Company made investments in marketable securities.
These marketable securities are available for sale and consist of investments
in mutual funds and preferred stock. The investments in mutual funds are
expected to be held less than twelve months and are classified as marketable
securities on the balance sheet, while the investments in preferred stock are
expected to be held to maturity, which is greater than twelve months, and are
classified as a component of other long-term assets on the balance sheet.
During the current quarter, the Company recorded a net unrealized gain of $3.9
million on its investment in mutual funds to adjust the carrying value of this
investment to fair value, in accordance with the provisions of FASB Statement
#115. This gain is classified as a separate component of shareholders' equity
and is included in comprehensive income.
Note 7 - Current and Pending Accounting Changes
In July 1997, the FASB issued Statement #131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain reporting
and disclosure requirements for segments from current standards. In February
1998, the FASB issued Statement #132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company is not
required to adopt these Statements until December 1998 and does not expect the
adoption of these standards to result in material changes to previously
reported amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," was issued. This
SOP provides guidance on the accounting for computer software costs. In April
1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued.
This SOP provides guidance on accounting for the cost of start-up activities.
The Company is not required to adopt these Statements until January 1999 and
does not expect the adoption of these standards to result in material changes
to previously reported amounts or disclosures.
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments imbedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The accounting provisions for qualifying hedges allow a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that the Company must formally document, designate, and
assess the effectiveness of transactions that qualify for hedge accounting.
The Company is not required to adopt this Statement until January 2000. The
Company has not determined its method or timing of adopting this Statement or
the impact on its financial statements. However, when adopted, this Statement
could increase volatility in reported earnings and other comprehensive income
of the Company.
<11>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Note 8 - Comprehensive Income (Loss)
Total comprehensive income for the three months ended September 30, 1998 and
1997, was $109.5 million and $72.9 million, respectively. For the nine months
ended September 30, 1998 and 1997, total comprehensive income (loss) was $217.9
million and $(964.5) million, respectively. Total comprehensive income (loss)
for the Company includes net income (loss), foreign currency translation
adjustments and unrealized gains on securities.
Note 9 - Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price, foreign currency
exchange rate and interest rate risks and uses derivative financial and
commodity instruments to manage the impact of certain of these risks. The
Company uses derivatives only for purposes of managing risk associated with
underlying exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where there are
not underlying exposures. Complex instruments involving leverage or
multipliers are not used. Management believes that its use of these
instruments to manage 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.
Summarized below are the specific accounting policies by market risk category.
Commodity Price Risk
The Company uses commodity futures and options to manage price exposures on
commodity inventories or anticipated purchases of commodities. The deferral
method is used to account for those instruments which effectively hedge the
Company's price exposures. For hedges of anticipated transactions, 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
sheets as a component of other current assets (if a loss) or other current
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 statements of income 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 statements of income as a component of cost of goods sold.
<12>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Foreign Currency Exchange Rate Risk
The Company uses forward contracts, purchased options, and currency swap
agreements to manage foreign currency exchange rate risk related to projected
operating income from foreign operations and net investments in foreign
subsidiaries. The fair value method is used to account for these instruments.
Under the fair value method, the instruments are carried at fair value on the
condensed consolidated balance sheets as a component of other current assets
(deferred expense) or other current liabilities (deferred income). Changes in
the fair value of derivative instruments which are used to manage exchange rate
risk in foreign-currency denominated operating income and net investments in
highly inflationary economies are recognized in the condensed consolidated
statements of income as foreign exchange loss or gain. Changes in the fair
value of such instruments used to manage exchange rate risk on net investments
in economies that are not highly inflationary are recognized in the condensed
consolidated balance sheets as a component of the cumulative translation
adjustment in common shareholders' equity and are included in comprehensive
income. 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 statements of income as
foreign exchange loss or gain.
Interest Rate Risk
The Company has used interest rate swap agreements to reduce its exposure to
changes in interest rates and to balance the mix of its fixed and floating rate
debt. Currently, there are no interest swap agreements outstanding. The
settlement costs of terminated swap agreements are reported in the condensed
consolidated balance sheets 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 statements of
income as a component of interest expense.
Note 10 - Share Repurchases
During the current year, the Company repurchased 5.5 million shares of its
outstanding common stock for $300.2 million, completing its 10 million share
repurchase program announced in August 1993 and initiating the March 1998 $1
billion repurchase program. Of the total shares repurchased, approximately
912,000 shares were repurchased during the current quarter for $50.0 million.
<13>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Note 11 - Earnings Per Share
Reconciliations of basic earnings per share (EPS) to diluted EPS were as follows:
Dollars in Millions (Except Per Share Data) Nine Months Ended September 30,
1998 1997
Income Shares Income Shares
<S> <C> <C> <C> <C>
Net income (loss) $ 211.3 $ (956.5)
Less: Preferred dividends - net of tax 2.5 2.7
Net income (loss) available for common $ 208.8 137,552 $ (959.2) 137,089
Net income (loss) per common share $ 1.52 $ (7.00)
Net income (loss) available for common $ 208.8 137,552 $ (959.2) 137,089
Effect of dilutive securities:
Stock options -- 3,551 -- --
Non-vested awards -- 218 -- --
ESOP Convertible Preferred Stock 2.3 2,198 -- --
$ 211.1 143,519 $ (959.2) 137,089
Net income (loss) per common share -
assuming dilution $ 1.47 $ (7.00)
</TABLE>
The increase in average common shares outstanding at September 30, 1998,
compared to September 30, 1997, reflects the exercise of a significant number
of employee stock options, partly offset by share repurchases.
As of September 30, 1998, certain stock options were excluded from the
computation of diluted EPS because the exercise prices were higher than the
average market price. As the Company incurred a net loss for the nine months
ended September 30, 1997, there were no adjustments for potentially dilutive
securities as the adjustments would have been antidilutive. Adjustments to
income and shares for such potentially dilutive securities in the nine months
ended September 30, 1997, had the Company earned net income, would have
resulted in a $2.1 million increase to net income available for common and an
increase of 5.4 million shares. Historical adjustments for potentially
dilutive securities are not necessarily indicative of future trends.
<14>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared with
Nine Months Ended September 30, 1997
Consolidated Operating Results
The following tables summarize the net sales and operating results of the
Company for the nine months ended September 30, 1998 (current year) and
September 30, 1997 (prior year):
<TABLE>
<CAPTION>
NET SALES
for the
Nine Months Ended September 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 1,795.2 $ 483.1 $ 2,278.3 $ 1,793.1 $ 477.6 $ 2,270.7
Beverages 1,186.3 303.4 1,489.7 1,050.5 267.5 1,318.0
Ongoing Businesses 2,981.5 786.5 3,768.0 2,843.6 745.1 3,588.7
Divested Businesses 111.2 -- 111.2 372.4 6.8 379.2
Total Company $ 3,092.7 $ 786.5 $ 3,879.2 $ 3,216.0 $ 751.9 $ 3,967.9
<CAPTION>
OPERATING INCOME (LOSS)
for the
Nine Months Ended September 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 218.9 $ (26.4) $ 192.5 $ 227.9 $ (7.7) $ 220.2
Beverages 237.8 17.2 255.0 208.9 7.3 216.2
Ongoing Businesses 456.7 (9.2) 447.5 436.8 (0.4) 436.4
Losses on divestitures (32.4) -- (32.4) (1,414.6) -- (1,414.6)
Divested Businesses (6.7) -- (6.7) (22.0) (1.7) (23.7)
Total Divested (39.1) -- (39.1) (1,436.6) (1.7) (1,438.3)
Total Company $ 417.6 $ (9.2) $ 408.4 $ (999.8) $ (2.1) $(1,001.9)
<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.
"Ongoing Businesses": includes the net sales and operating results of all
company businesses not reported as Divested Businesses (see below).
"Losses on divestitures": 1998 includes a combined asset impairment and
divestiture loss for the Continental Coffee business net of a pretax gain
for the sale of the Ardmore Farms business. 1997 includes the loss
on divestiture for the Snapple beverages business.
"Divested Businesses": 1998 includes the net sales and operating results
(through the divestiture date) for the Ardmore Farms (August 1998) and
Continental Coffee (September 1998) food service businesses. 1997 includes
net sales and operating results (through the divestiture date) for the
Snapple beverages business (May 1997), certain food service businesses
(December 1997) and the businesses divested in 1998.
</FN>
</TABLE>
<15>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales decreased 2 percent from the prior year, primarily due
to the absence of divested businesses. Excluding divested businesses, sales
increased 5 percent from the prior year led by 13 percent growth in the U.S.
and Canadian Gatorade business. Price changes did not significantly affect the
comparison of current and prior-year net sales. Weaker exchange rates impacted
sales, particularly in the Canadian and Asia/Pacific businesses.
Consolidated gross profit margin was 51.2 percent in the current year compared
to 49.4 percent in the prior year. The gross profit margin improvement
reflects the divestiture of the lower-margin Snapple beverages business in May
1997 and improved margins across all ongoing business segments.
Selling, general and administrative (SG&A) expenses decreased $45.7 million, or
3 percent, due to the absence of divested businesses. For ongoing businesses,
SG&A expenses increased $65.0 million, or 5 percent, primarily due to higher
advertising and merchandising expenses (A&M).
Consolidated operating income was $408.4 million in the current year compared
to a loss of $1.0 billion in the prior year. The current-year operating
results include $33.7 million of restructuring charges, $63.5 million of non-
cash asset impairment losses for ongoing businesses and a combined pretax
charge of $32.4 million related to divested businesses for asset impairments
and losses on divestitures (see Restructuring and Other Unusual Charges and
Divestitures for further discussion). The prior-year operating results include
a $1.41 billion loss on the sale of the Snapple beverages business,
restructuring charges of $58.7 million and net charge of $4.8 million for a
non-cash asset impairment loss partly offset by a separate cash litigation
settlement.
Excluding the restructuring charges, asset impairment losses and operating
results from divested businesses, operating income of $544.7 million increased
9 percent, primarily driven by growth in U.S. Gatorade and Foods and Gatorade
in Latin America and Europe.
Net financing costs (net interest expense and foreign exchange loss) decreased
$13.5 million in the current year, due to lower interest expense as a result of
lower debt levels, partly offset by higher foreign exchange costs. Excluding
the impact of restructuring charges, loss on divestitures and asset impairment
losses, the effective tax rate in the current year was 36.6 percent versus 38.4
percent in the prior year. The decrease was primarily due to the absence of
non-deductible amortization expense related to Snapple intangibles.
Industry Segment Operating Results
Foods - U.S. and Canadian volume increased 1 percent on nearly flat sales.
Sales increased for ready-to-eat cereals and snacks, reflecting volume growth
in boxed and bagged cereals, granola bars and a new product, Quaker Fruit &
Oatmeal bars. This increase was partially offset by sales declines in hot
cereals and Canadian Foods. The sales decline in hot cereals was driven, in
part, by unusually mild winter weather, while the sales decline in Canadian
Foods was primarily due to a weaker exchange rate. Excluding current and
prior-year restructuring charges of $15.6 million and $45.1 million,
respectively, and current-year asset impairment losses of $25.4 million, U.S.
and Canadian operating income decreased 5 percent from the prior year as the
favorable impact of lower supply chain costs was offset by increased A&M
spending, primarily on ready-to-eat cereals and new snacks.
<16>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International volume and sales increased 4 percent and 1 percent, respectively.
Sales gains in Latin America and Europe were partly offset by a sales decline
in Asia/Pacific Foods. Increases in the canned fish and chocolate beverages
businesses, partly offset by a weaker exchange rate, drove 2 percent sales
growth in Latin America, while the European cereals business grew 1 percent.
Excluding restructuring charges of $7.8 million and $10.7 million and asset
impairment losses of $38.1 million and $4.8 million, in the current and prior
year, respectively, International Foods operating income increased $11.7
million, primarily due to improved profitability in the European business.
Results in the Asia/Pacific business were disappointing and underwriting
continued.
Beverages - U.S. and Canadian Gatorade volume and sales grew 17 percent and 13
percent, respectively. New packaging and flavors and strong growth outside of
the traditional retail market, along with more favorable weather versus the
prior year contributed to the volume and sales increase. Excluding current and
prior-year restructuring charges of $7.0 million and $1.8 million,
respectively, operating income of $244.8 million, increased 16 percent from the
prior year. The increase in operating income was driven by strong sales growth
and efficiencies within manufacturing and A&M expenditures.
International Gatorade volume and sales increased 22 percent and 13 percent,
respectively, driven by double-digit sales gains in Latin America and Europe.
The Latin American sales increase reflects the successful new product launch of
Gatorade Xplosive and improved cold-channel distribution. Warmer weather
contributed to Europe's volume gain, while a sales decline in the Asia/Pacific
region reflected lower volumes and a weaker exchange rate. Excluding current
and prior-year restructuring charges of $3.3 million and $1.1 million,
respectively, operating income of $20.5 million increased $12.1 million from
the prior year. Operating income improved in the Latin American and European
businesses, while results in the Asia/Pacific business were disappointing.
<17>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared with
Three Months Ended September 30, 1997
Consolidated Operating Results
The following tables summarize the net sales and operating results of the
Company for the three months ended September 30, 1998 (current year) and
September 30, 1997 (prior year):
<TABLE>
<CAPTION>
NET SALES
for the
Three Months Ended September 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 644.4 $ 163.7 $ 808.1 $ 642.3 $ 163.2 $ 805.5
Beverages 471.2 101.2 572.4 401.3 93.2 494.5
Ongoing Businesses 1,115.6 264.9 1,380.5 1,043.6 256.4 1,300.0
Divested Businesses 24.7 -- 24.7 70.7 -- 70.7
Total Company $ 1,140.3 $ 264.9 $ 1,405.2 $ 1,114.3 $ 256.4 $ 1,370.7
<CAPTION>
OPERATING INCOME (LOSS)
for the
Three Months Ended September 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 72.2 $ (3.6) $ 68.6 $ 68.4 $ (0.5) $ 67.9
Beverages 104.8 6.2 111.0 83.6 4.5 88.1
Ongoing Businesses 177.0 2.6 179.6 152.0 4.0 156.0
Gain on divestitures 7.6 -- 7.6 -- -- --
Divested Businesses (2.9) -- (2.9) (3.1) -- (3.1)
Total Divested 4.7 -- 4.7 (3.1) -- (3.1)
Total Company $ 181.7 $ 2.6 $ 184.3 $ 148.9 $ 4.0 $ 152.9
<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.
"Ongoing Businesses": includes the net sales and operating results of all
company businesses not reported as Divested Businesses (see below).
"Gain on divestitures": represents combined pretax gain for the sale of the
Ardmore Farms and Continental Coffee businesses.
"Divested Businesses": 1998 includes the net sales and operating results
(through the divestiture date) for the Ardmore Farms (August 1998) and
Continental Coffee (September 1998) food service businesses. 1997 includes
net sales and operating results (through the divestiture date) for the
Snapple beverages business (May 1997), certain food service businesses
(December 1997) and the businesses divested in 1998.
</FN>
</TABLE>
<18>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales increased 3 percent from the prior year. Excluding
divested businesses, sales increased 6 percent from the prior year primarily
driven by U.S. and Canadian Gatorade growth. Price changes did not
significantly affect the comparison of current and prior-year net sales.
Weaker exchange rates impacted sales, particularly in the Canadian and
Asia/Pacific business.
Consolidated gross profit margin was 52.8 percent in the current year compared
to 50.8 percent in the prior year. The gross profit margin improved across all
ongoing business segments primarily due to supply chain efficiencies.
SG&A expenses increased $14.9 million, or 3 percent, primarily due to higher
A&M expenses, which were partly offset by lower overhead costs. Total Company
A&M expenses were 25.7 percent of sales in the current year, up from 24.3
percent in the prior year, reflecting increased spending in the U.S. and
Canadian Foods business.
Consolidated operating income was $184.3 million in the current year, an
increase of 21 percent from the prior year. The current-year operating results
include $9.0 million of restructuring charges, $40.5 million of non-cash asset
impairment losses and a combined gain of $7.6 million on divested businesses
(see Restructuring and Other Unusual Charges and Divestitures for further
discussion). Prior-year operating results include restructuring charges of
$46.9 million and a net charge of $4.8 million for a non-cash asset impairment
loss partly offset by a separate cash litigation settlement.
Excluding the restructuring charges, asset impairment losses, gains on
divestitures and operating results from divested businesses, operating income
of $229.1 million increased 10 percent compared to the prior year, primarily
due to growth in the U.S. and Canadian Gatorade business.
Net financing costs (net interest expense and foreign exchange loss) decreased
$3.0 million in the current year, primarily due to lower interest expense as a
result of reduced debt levels. Excluding the impact of restructuring charges,
asset impairment losses and gains on divestitures in the current year, the
effective tax rate in the current quarter was 36.1 percent versus 37.7 percent
in the same quarter last year.
Industry Segment Operating Results
Foods - U.S. and Canadian volume increased 1 percent on nearly flat sales.
Sales increased in ready-to-eat cereals, driven by 1 percent volume growth in
boxed cereals and 10 percent growth in bagged cereals. In addition, continued
expansion of Quaker Fruit & Oatmeal Bars drove an increase in snacks sales.
These sales increases were partly offset by declines in the Canadian Foods,
rice cakes and the flavored rice and pasta businesses. The decline in Canadian
foods sales was primarily driven by a weaker exchange rate. Excluding current
and prior-year restructuring charges of $6.3 million and $45.1 million,
respectively, and current-year asset impairment losses of $25.4 million, U.S.
and Canadian operating income decreased 9 percent from the prior year. The
decline in operating income was primarily driven by increased A&M expenses,
partly offset by improved gross margins. Higher A&M expenses reflect increased
spending for cereals to support the beginning of the hot cereal season and the
continued growth of boxed cereals.
<19>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International volume increased 6 percent on flat sales reflecting weaker
exchange rates. Volume growth of 8 percent and 9 percent in Latin America and
Europe, respectively, was partly offset by a decrease in Asia/Pacific Foods.
Excluding current and prior-year asset impairment losses of $15.1 million and
$4.8 million, respectively, International Foods operating income increased $7.2
million reflecting significant profitability improvement in Europe and modest
improvement in Latin America and Asia/Pacific.
Beverages - U.S. and Canadian Gatorade volume and sales increased 22 percent
and 17 percent, respectively, driven by new packaging and flavors, strong
growth outside of the traditional retail market and favorable weather versus
last year. Excluding current and prior-year restructuring charges of $2.7
million and $1.8 million, respectively, operating income was $107.5 million, up
26 percent from the prior year. The increase in operating income was due to
strong sales growth and manufacturing and A&M efficiencies.
International Gatorade volume and sales increased 16 percent and 9 percent,
respectively, primarily due to 31 percent sales growth in Europe. Volume
growth in Europe was partly driven by warmer weather compared to the prior
year. Volume increased 12 percent in Latin America due to improved cold-
channel distribution. Sales declined in the Asia/Pacific region, reflecting
lower volumes and a weaker exchange rate. Operating income was $6.2 million,
compared to $4.5 million in the prior year. Operating income increased in
Latin America and Europe, while underwriting continued in the Asia/Pacific
business.
Restructuring and Other Unusual Charges
The Company recorded pretax restructuring charges of $9.0 million during the
three months ended September 30, 1998 (current quarter). In the U.S. and
Canadian businesses, the Company announced plans to combine its foods and
beverages sales organizations in order to realize synergies and leverage scale.
This plan includes the elimination of positions and the consolidation of sales
offices. In addition, the U.S. Foods marketing organization was realigned.
Combined, these actions are expected to result in the elimination of about 90
positions. The charges are comprised of $5.8 million in severance and related
benefits, $1.0 million in loss on leases and $2.2 million in asset write-offs.
The charges are reflected in the operating results of the business segments as
follows: U.S. and Canadian Foods, $6.3 million, and U.S. and Canadian
Beverages, $2.7 million. Savings from these actions are estimated to be $7
million annually, primarily beginning in 1999, with approximately 90 percent of
such savings in cash. The Company's organization alignment activities are
expected to continue during the remainder of the year.
During the current quarter, the Company continued to review its strategies
related to underperforming businesses in its portfolio. The Company evaluates
the recoverability of certain long-lived assets pursuant to the provisions of
Financial Accounting Standards Board (FASB) Statement #121 for impaired assets
held for use. In the U.S. and Canadian Foods business, a non-cash, pretax
charge of $25.4 million was recognized for an impaired business. The Company's
foods business in China was also included in this review. As a result of this
review, the Company concluded that this business was impaired and recorded a
non-cash, pretax charge of $15.1 million to adjust the carrying amount of the
long-lived assets to fair value. The estimated fair market values of these
businesses were based on various methodologies, including a discounted value of
the estimated future cash flows of the businesses.
<20>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In light of the recent downturn in the economic environment in the Asia/Pacific
region, the Company will continue to evaluate its strategies related to its
businesses in this region. Currently, the Company has decided to focus on
building its beverages business in China and is working on a plan to
restructure its other operations in the Asia/Pacific region for improved
profitability.
As the Company determines the course of action related to its Asia/Pacific
businesses, it is also scrutinizing its domestic assets. The continuation of
the worldwide organization alignment, manufacturing consolidations and other
cost-reduction actions could result in additional charges of up to $50 million
in the fourth quarter of 1998. Year-to-date restructuring charges total $33.7
million, including $9.0 million of current quarter charges.
Divestitures
During the current quarter, the Company completed the sale of its Ardmore Farms
juice and Continental Coffee food service businesses. These transactions
resulted in a combined pretax gain of $7.6 million in the current quarter. The
current-quarter $7.6 million pretax gain reflects the sale of the Ardmore Farms
business and an adjustment upon sale of the Continental Coffee business. The
year-to-date combined impact of these transactions is a pretax loss of $32.4
million.
Liquidity and Capital Resources
Net cash provided by operating activities was $513.2 million, an increase of
$69.8 million from the prior year, primarily reflecting improved operating
profitability. Capital expenditures for the current and prior year were $135.9
million and $144.1 million, respectively. The rate of capital expenditures is
expected to increase during the remainder of the current year as the Company
continues its expansion of production capacity for U.S. and International
Beverages and for certain Foods businesses in the United States. The Company
expects that capital expenditures and cash dividends for the remainder of the
year will be financed through cash flow from operating activities and proceeds
from investing activities.
Cash provided by investing activities includes a $240.0 million tax recovery
and divestiture proceeds of $160.9 million. These cash flows were partly
offset by the Company's purchase of marketable securities of $159.1 million
during the current year. Cash provided by investing activities in the prior
year includes the proceeds from the Snapple divestiture.
<21>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing activities used cash of $442.8 million in the current year primarily
to pay down debt and to repurchase shares. During the current year, the
Company repurchased 5.5 million shares of its outstanding common stock for
$300.2 million, completing its 10 million share repurchase program announced in
August 1993, and initiating the $1 billion share repurchase program announced
in March 1998. During the current year, approximately 2.9 million employee
stock options were exercised which provided cash of $97.5 million.
Short-term and long-term debt (total debt) as of September 30, 1998 was $940.0
million, a decrease of $117.0 million from December 31, 1997.
Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price, foreign currency
exchange rate and interest rate risks and uses derivative financial and
commodity instruments to manage the impact of certain of these risks. The
Company uses derivatives only for purposes of managing risk associated with
underlying exposures. The Company does not trade or use instruments with the
objective of earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where there are
not underlying exposures. Complex instruments involving leverage or
multipliers are not used. Management believes that its use of these
instruments to manage risk is in the Company's best interest.
The Company has estimated its market risk exposures using sensitivity analyses.
Market risk exposure has been defined as the change in fair value of a
derivative commodity or financial instrument assuming a hypothetical 10 percent
adverse change in market prices or rates. Fair value was determined using
quoted market prices, if available. The results of the sensitivity analyses as
of September 30, 1998 did not differ materially from the amounts reported as of
December 31, 1997. Actual changes in market prices or rates may differ from
hypothetical changes.
Current and Pending Accounting Changes
In July 1997, the FASB issued Statement #131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement expands certain reporting
and disclosure requirements for segments from current standards. In February
1998, the FASB issued Statement #132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. The Company is not
required to adopt these Statements until December 1998 and does not expect the
adoption of these standards to result in material changes to previously
reported consolidated amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," was issued. This
SOP provides guidance on the accounting for computer software costs. In April
1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued.
This SOP provides guidance on accounting for the cost of start-up activities.
The Company is not required to adopt these Statements until January 1999 and
does not expect the adoption of these standards to result in material changes
to previously reported amounts or disclosures.
<22>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
accounting provisions for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that the Company must formally document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. The Company
is not required to adopt this Statement until January 2000. The Company has
not determined its method or timing of adopting this Statement or the impact on
its financial statements. However, when adopted this Statement could increase
volatility in reported earnings and other comprehensive income of the Company.
Year 2000
The Company uses software and other related technologies throughout its
business that will be affected by the date change in year 2000. The three areas
where year 2000 issues may affect the Company, include (1) the computer
systems, both hardware and software, (2) imbedded systems, as in computer chips
in machinery and process controls, and (3) third parties with material
relationships with the Company, such as vendors, customers and suppliers.
To address the year 2000 issue, the Company has developed and is executing a
detailed comprehensive readiness plan. The first phase of the readiness plan,
the assessment of the Company's internal systems, has been completed. The
second phase involves the remediation, replacement and testing of computer
systems and imbedded systems and is scheduled for completion by mid-1999. The
third phase will continue through mid-1999 and includes the Company taking
steps to assess the year 2000 plans of its material third parties. These
steps include contacting the Company's major service providers, vendors,
suppliers, and customers that are believed to be critical to the business
operations after January 1, 2000, to determine their stage of year 2000
compliance through questionnaires, interviews, on-site visits, testing and
other available means. The fourth phase involves the development of contingency
plans in the event of year 2000 non-compliance and is also expected to be
completed by mid-1999.
While the Company's year 2000 readiness plans are underway, the consequences of
non-compliance by the Company, its major service providers, vendors, suppliers
or customers, could have a material adverse impact on the Company's
operations. Although the Company does not anticipate any major non-compliance
issues, it currently believes that the greatest risk of disruption in its
business exists in the event of non-compliance by its material third parties.
Some of the possible consequences of non-compliance by the Company or its
material third parties include, among other things, temporary plant closings,
delays in the delivery and receipt of products and supplies, invoice and
collection errors, and inventory obsolescence. Given this risk, the Company is
<23>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
developing contingency plans intended to mitigate the possible disruption in
business operations that may result from non-year 2000 compliance. Contingency
plans may include stockpiling raw and packaging materials, increasing finished
goods inventory levels, securing alternate suppliers, or other appropriate
measures. It is currently estimated that the aggregate cost of the Company's
year 2000 efforts will be approximately $12 million to $15 million, of which
approximately $4 million has been incurred to date. All of these costs are
being funded through operating cash flow. These amounts do not include any
costs associated with the implementation of contingency plans, which are in the
process of being developed.
The Company's year 2000 readiness plan is an ongoing process and the estimates
of costs and completion dates for various components of the program as
described above are subject to change.
Cautionary Statement on Forward-Looking Statements
Forward-looking statements, within the meaning of Section 21E of the Securities
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 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; weather; and the ability of the Company, and its major service
providers, vendors, suppliers and customers, to adequately address the year
2000 issue.
<24>
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.
All other items in Part II are either inapplicable to the Company
during the quarter ended September 30, 1998, 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.
<25>
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 9, 1998 /s/ Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date: November 9, 1998 /s/ Richard M. Gunst
Richard M. Gunst
Vice President and
Corporate Controller
<26>
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
10(e) Termination Benefits
Agreement with certain
Executive Officers, first
effective for the quarter
ended ended September 30,
1998 E
27 Financial Data Schedule E
<27>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 266
<SECURITIES> 149
<RECEIVABLES> 388
<ALLOWANCES> 32
<INVENTORY> 253
<CURRENT-ASSETS> 1206
<PP&E> 1872
<DEPRECIATION> 786
<TOTAL-ASSETS> 2611
<CURRENT-LIABILITIES> 1034
<BONDS> 814
0
100
<COMMON> 840
<OTHER-SE> (729)
<TOTAL-LIABILITY-AND-EQUITY> 2611
<SALES> 3879
<TOTAL-REVENUES> 3879
<CGS> 1892
<TOTAL-COSTS> 1892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 327
<INCOME-TAX> 116
<INCOME-CONTINUING> 211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.47
</TABLE>
Exhibit 10(e)
EXECUTIVE SEPARATION AGREEMENT
THIS AGREEMENT is made between The Quaker Oats Company,
a New Jersey corporation (the "Company"), and Penelope C. Cate
(the "Executive"), dated this 23rd day of August, 1998.
WITNESSETH THAT:
WHEREAS, the Company wishes to attract and retain well-
qualified executive personnel and to assure both itself and the
Executive of continuity of management in the event of any actual
or threatened change in control of the Company;
NOW, THEREFORE, it is hereby agreed by and between the
parties as follows:
1. Operation of Agreement. The "effective date of this
Agreement" shall be the date on which the Executive declares
it effective, by notice to the Company in writing, but only
if a change in control of the Company (as defined in Section
2) has occurred on or before the date of the notice.
2. Change in Control. A "change in control of the Company"
shall be deemed to have occurred if:
a. any "Person," which shall mean a "person" as such term is
used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the
Company, or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company),
is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding
voting securities;
b. during any period of 24 consecutive months (not including
any period prior to May 13, 1998), individuals, who at
the beginning of such period constitute the Company's
Board of Directors (the "Board"), and any new director
(other than a director designated by a Person who has
entered into an agreement with the Company to effect
a transaction described in paragraph a., c. (2) or
d. of this Section) whose election by the Board, or whose
nomination for election by the Company's stockholders,
was approved by a vote of at least two-thirds (2/3) of
the directors before the beginning of the period cease
for any reason to constitute at least a majority thereof;
c. the stockholders of the Company approve (1) a plan
of complete liquidation of the Company or (2) the sale or
disposition by the Company of all or substantially all of
the Company's assets unless the acquirer of the assets or
its directors shall meet the conditions for a merger or
consolidation in subparagraphs d. (1) or d. (2) of this
Section; or
d. the stockholders of the Company approve a merger or
consolidation of the Company with any other company other
than:
(1) such a merger or consolidation which would result
in the voting securities of the Company outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) more than 70% of the combined voting power of
the Company's or such surviving entity's outstanding
voting securities immediately after such merger
or consolidation; or
(2) such a merger or consolidation which would result
in the directors of the Company who were directors
immediately prior thereto continuing to constitute at
least 50% of the directors of the surviving entity
immediately after such merger or consolidation.
In this paragraph d., "surviving entity" shall mean only
an entity in which all of the Company's stockholders
immediately before such merger or consolidation become
stockholders by the terms of such merger or
consolidation, and the phrase "directors of the Company
who were directors immediately prior thereto" shall
include only individuals who were directors of the
Company at the beginning of the 24 consecutive month
period preceding the date of such merger or
consolidation, or who were new directors (other than any
director designated by a Person who has entered into an
agreement with the Company to effect a transaction
described in paragraph a., c. (2), d. (1) or d. (2) of
this Section) whose election by the Board, or whose
nomination for election by the Company's stockholders,
was approved by a vote of at least two-thirds (2/3) of
the directors before the beginning of such period.
3. Employment Period. The Company hereby agrees to continue
the Executive in its employ, and the Executive hereby agrees
to remain in the employ of the Company, for the period
commencing on the effective date of this Agreement and
ending on the earlier to occur of the third anniversary of
such effective date or the 65th birthday of the Executive
(the "employment period"), to exercise such authorities and
powers, and perform such duties and functions, as are
commensurate with the authorities and powers being
exercised, and duties and functions being performed, by the
Executive immediately prior to the effective date of this
Agreement, which services shall be performed at the current
location where the Executive was employed immediately prior
to the effective date of this Agreement or at such other
location within a 30-mile radius of such current location.
The Executive shall not be required to accept any other
location. The Executive agrees that during the employment
period he shall devote his full business time exclusively to
his executive duties as described herein and perform such
duties faithfully and efficiently.
4. Compensation, Compensation Plans, Benefit Plans,
Perquisites. During the employment period and prior to
termination (as defined in Section 5) of the Executive, the
Executive shall be compensated as follows:
a. He shall receive an annual salary which is not less
than his annual salary immediately prior to the effective
date of this Agreement, with the opportunity for
increases, from time to time thereafter, which are in
accordance with the Company's regular practices.
b. He shall be eligible to participate on a reasonable basis
in bonus, stock option, restricted stock and other
incentive compensation plans, which shall provide
benefits comparable to those to which he was provided
immediately prior to the effective date of this
Agreement.
c. He shall be eligible to participate on a reasonable basis
in tax-qualified employee benefit plans (including but
not limited to pension, profit sharing and employee stock
ownership plans), and supplemental non-qualified employee
benefit plans relating thereto, which shall provide
benefits comparable to those to which he was provided
immediately prior to the effective date of this
Agreement.
d. He shall be entitled to receive employee welfare
benefits (currently elected medical, dental and life
insurance benefits) and perquisites which are comparable
to those to which he was provided immediately prior to
the effective date of this Agreement.
5. Termination. "Termination" shall mean either (a)
termination by the Company of the employment of the
Executive with the Company for any reason other than death,
physical or mental incapacity, or cause (as defined below)
or (b) resignation of the Executive upon the occurrence of
any of the following events:
(1) a significant change in the nature or scope of the
Executive's authorities, powers, functions, or duties
from those described in Section 3;
(2) a reduction in total compensation from that provided in
Section 4;
(3) the breach by the Company of any other provision of
this Agreement; or
(4) a reasonable determination by the Executive that, as a
result of a change in control of the Company his
position is significantly affected so that he is unable
to exercise the authorities, powers, functions or duties
attached to his position as described in Section 3.
"Cause" means gross misconduct or willful and material
breach of this Agreement by the Executive. No act, or
failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief
that the action or omission was in the best interest of the
Company.
For purposes of clarification, a mere transfer of the
Executive to an entity created in a Company initiated spin-
off or reorganization, without a subsequent Termination,
shall not be treated as a Termination of the employment of
the Executive with the Company for purposes of eligibility
under this Agreement. The Company shall cause the newly
created entity to provide to the Executive an Executive
Separation Agreement substantially similar to this
Agreement.
6. Confidentiality. The Executive agrees that during and
after the employment period, he will not divulge or
appropriate to his own use or the use of others any secret
or confidential information or knowledge pertaining to the
business of the Company, or any of its subsidiaries,
obtained during his employment by the Company or any of its
subsidiaries.
7. Severance and Benefit Payments.
a. In the event of termination of the Executive during
the employment period, the Company shall pay the
Executive a lump-sum severance allowance equal to salary
and bonus payments for the following 24 calendar months.
The initial salary rate shall not be less than his annual
salary immediately prior to termination, or if greater,
not less than his annual salary immediately prior to the
change in control of the Company; such salary shall be
increased every March 1, thereafter, according to the
then current Hewitt Associate's projection for movement
in executive base salaries. The initial bonus amount
shall not be less than the annual equivalent of the
incentive bonus calculated under Section 4(a)(1) of the
Salaried Employees Compensation and Benefits Protection
Plan; such bonus amount shall be increased every January
1, thereafter, according to the then current Hewitt
Associates' projection for movement in executive total
cash compensation. The lump-sum severance allowance
shall not be adjusted on a present value basis.
b. In the event of termination of the Executive during
the employment period, the Company shall also pay the
Executive a lump-sum benefit payment in an amount
equivalent to (1) the benefits he would have accrued or
been allocated under any tax-qualified employee benefit
plan (including but not limited to pension, profit
sharing and employee stock ownership plans) and any non-
qualified supplemental benefit plan relating thereto,
maintained by the Company as if he had remained in the
employ of the Company for 24 calendar months after his
termination, which benefits will be paid in addition to
the benefits provided under such plans and (2) employee
welfare benefits (currently elected coverage under the
medical, dental and life insurance programs) to which he
would have been entitled under all such employee benefit
plans, programs or arrangements maintained by the Company
as if he had remained in the employ of the company for 24
calendar months after his termination. Such a benefit
payment shall be adjusted to include expected increases
to the Executive's salary, bonus and other compensation
as specified in paragraph a. of this Section having an
effect on such benefits for such period. The lump-sum
benefit payment shall not be adjusted on a present value
basis (except for benefits accrued in a defined benefit
pension plan).
c. The amount of the severance allowance and benefit
payment described in this Section shall be determined and
such payment shall be made as soon as it is reasonably
practicable.
d. The severance allowance and benefit payment to be
provided pursuant to this Section 7 shall be in addition
to, and shall not be reduced by, any other amounts or
benefits provided by separate agreement with the
Executive, or plan or arrangement of the Company or its
subsidiaries, unless specifically stipulated in an
agreement which constitutes an amendment to this
Agreement as provided in Section 14.
8. Make-Whole Payments. If any amount payable to the
Executive by the Company or any subsidiary or affiliate
thereof, whether under this Agreement or otherwise (a
"Payment"), is subject to any tax under section 4999 of the
Internal Revenue Code of 1986, as amended, (the "Code"), or
any similar federal or state law (an "Excise Tax"), the
Company shall pay to the Executive an additional amount (the
"Make Whole-Amount")which is equal to (I) the amount of the
Excise Tax, plus (II) the aggregate amount of any interest,
penalties, fines or additions to any tax which are imposed
in connection with the imposition of such Excise Tax, plus
(III) all income, excise and other applicable taxes imposed
on the Executive under the laws of any Federal, state, or
local government or taxing authority by reason of the
payments required under clause (I) and clause (II) and this
clause (III).
a. For purposes of determining the Make-Whole Amount, the
Executive shall be deemed to be taxed at the highest
marginal rate under all applicable local, state, federal
and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable
with respect to an Excise Tax shall be paid by the
Company coincident with the Payment with respect to which
such Excise Tax relates.
b. All calculations under this Section 8 shall be made
initially by the Company and the Company shall provide
prompt written notice thereof to the Executive to timely
file all applicable tax returns. Upon request of the
Executive, the Company shall provide the Executive with
sufficient tax and compensation data to enable the
Executive or his tax advisor to independently make the
calculations described in subparagraph a. above and the
Company shall reimburse the Executive for reasonable fees
and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company
of any objection to the results of the Company's
calculations within 60 days of the Executive's receipt of
written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent
auditors of the Company ("Tax Counsel"). The Company
shall pay all fees and expenses of such Tax Counsel.
Pending such determination by Tax Counsel, the Company
shall pay the Executive the Make-Whole Amount as
determined by it in good faith. The Company shall pay
the Executive any additional amount determined by Tax
Counsel to be due under this Section 8 (together with
interest thereon at a rate equal to 120% of the Federal
short-term rate determined under section 1274(d) of the
Code) promptly after such determination.
d. The determination by Tax Counsel shall be conclusive
and binding upon all parties unless the Internal Revenue
Service, a court of competent jurisdiction, or such other
duly empowered governmental body or agency (a "Tax
Authority") determines that the Executive owes a greater
or lesser amount of Excise Tax with respect to any
Payment than the amount determine by Tax Counsel.
e. If a Tax Authority makes a claim against the Executive
which, if successful, would require the Company to make
a payment under this Section 8, the Executive agrees
to contest the claim on request of the Company subject
to the following conditions:
(1) The Executive shall notify the Company of any such
claim within 10 days of becoming aware thereof. In
the event that the Company desires the claim to be
contested, it shall promptly (but in no event more
than 30 days after the notice from the Executive or
such shorter time as the Tax Authority may specify
for responding to such claim) request the Executive
to contest the claim. The Executive shall not make
any payment of any tax which is the subject of the
claim before the Executive has given the notice or
during the 30-day period thereafter unless the
Executive receives written instructions from the
Company to make such payment together with an advance
of funds sufficient to make the requested payment
plus any amounts payable under this Section 8
determined as if such advance were an Excise Tax, in
which case the Executive will act promptly in
accordance with such instructions.
(2) If the Company so requests, the Executive will
contest the claim by either paying the tax claimed and
suing for a refund in the appropriate court or
contesting the claim in the United States Tax Court or
other appropriate court, as directed by the Company;
provided, however, that any request by the Company for
the Executive to pay the tax shall be accompanied by
an advance from the Company to the Executive of funds
sufficient to make the requested payment plus any
amounts payable under this Section 8 determined as if
such advance were an Excise Tax. If directed by the
Company in writing the Executive will take all action
necessary to compromise or settle the claim, but in no
event will the Executive compromise or settle the
claim or cease to contest claim without the written
consent of the Company; provided, however, that the
Executive may take any such action if the Executive
waives in writing his right to a payment under this
Section 8 for any amounts payable in connection with
such claim. The Executive agrees to cooperate in good
faith with the Company in contesting the claim and to
comply with any reasonable request from the Company
concerning the contest of the claim, including the
pursuit of administrative remedies, the appropriate
forum for any judicial proceedings, and the legal
basis for contesting the claim. Upon request of the
Company, the Executive shall take appropriate appeals
of any judgment or decision that would require the
Company to make a payment under this Section 8.
Provided that the Executive is in compliance with the
provisions of this section, the Company shall be liable
for and indemnify the Executive against any loss in
connection with, and all costs and expenses, including
attorney's fees, which may be incurred as a result of,
contesting the claim, and shall provide the Executive
within 30 days after each written request therefor by
the Executive cash advances or reimbursement for all
such costs and expenses actually incurred or reasonably
expected to beincurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an
additional Excise Tax is owed, then the Company shall pay
an additional Make-Up Amount to the Executive in a manner
consistent with this Section 8 with respect to any
additional Excise Tax and any assessed interest, fines,
or penalties. If any Excise Tax as calculated by the
Company or Tax Counsel, as the case may be, is finally
determined by a Tax Authority to exceed the amount
required to be paid under applicable law, then the
Executive shall repay such excess to the Company, but
such repayment shall be reduced by the amount of any
taxes paid by the Executive on such excess which are not
offset by the tax benefit attributable to the repayment.
9. Mitigation and Set Off. The Executive shall not be
required to mitigate the amount of any payment provided for
in this Agreement by seeking other employment or otherwise.
The Company shall not be entitled to set off against the
amounts payable to the Executive under this Agreement any
amounts owed to the Company by the Executive, any amounts
earned by the Executive in other employment after
termination of his employment with the Company, or any
amounts which might have been earned by the Executive in
other employment had he sought such other employment.
10. Arbitration of All Disputes. Any controversy or claim
arising out of or relating to this Agreement or the breach
thereof, except with respect to Section 8, shall be settled
by arbitration in the City of Chicago in accordance with the
laws of the State of Illinois by three arbitrators appointed
by the parties. If the parties cannot agree on the
appointment, one arbitrator shall be appointed by the
Company and one by the Executive, and the third shall be
appointed by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third
arbitrator, then the third arbitrator shall be appointed by
the Chief Judge of the United States Court of Appeals for
the Seventh Circuit. The arbitration shall be conducted in
accordance with the rules of the American Arbitration
Association, except with respect to the selection of
arbitrators which shall be as provided in this Section 10.
Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the
event that it shall be necessary or desirable for the
Executive to retain legal counsel or incur other costs and
expenses in connection with enforcement of his rights under
this Agreement, Executive shall be entitled to recover from
the Company his reasonable attorneys' fees and costs and
expenses in connection with enforcement of his rights
(including the enforcement of any arbitration award in
court). Payment shall be made to the Executive by the
Company at the time these attorneys' fees and costs and
expenses are incurred by the Executive. If, however, the
arbitrators should later determine that under the
circumstances the Executive could have had no reasonable
expectation of prevailing on the merits at the time he
initiated the arbitration based on the information then
available to him, he shall repay any such payments to the
Company in accordance with the order of the arbitrators.
Any award of the arbitrators shall include interest at a
rate or rates considered just under the circumstances by the
arbitrators.
11. Notices. Any notices, requests, demands, and other
communications provided for by this Agreement shall be
sufficient if in writing and if sent by registered or
certified mail to the Executive at the last address he has
filed in writing with the Company or, in the case of the
Company, at its principal executive offices.
12. Non-Alienation. The Executive shall not have any right to
pledge, hypothecate, anticipate or in any way create a lien
upon any amounts provided under this Agreement; and no
benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary
acts, or by operation of law. Nothing in this paragraph
shall limit the Executive's rights or powers which his
executor or administrator would otherwise have.
13. Governing Law. The Agreement shall be construed and
enforced according to the Employee Retirement Income
Security Act of 1974 ("ERISA"), and the laws of the State of
Illinois, other than its laws respecting choice of law, to
the extent not pre-empted by ERISA.
14. Amendment. This Agreement may be amended or canceled by
mutual agreement of the parties in writing without the
consent of any other person and, so long as the Executive
lives, no person, other than the parties hereto, shall have
any rights under or interest in this Agreement or the
subject matter hereof.
15. Term. Unless the Executive has declared this Agreement
effective, pursuant to Section 1 of this Agreement, this
Agreement shall terminate prior to a change in control of
the Company when the Executive has terminated employment or
been placed on inactive service by the Company, or, if
later, May 14, 2001.
16. Successors to the Company. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to
the benefit of the Company and any successor of the Company.
17. Severability. In the event that any provision or portion
of this Agreement shall be determined to be invalid or
unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall remain
in full force and effect.
18. Prior Agreement. Any prior Executive Separation Agreement
between the Executive and the Company which has not yet
terminated pursuant to its terms, is canceled by mutual
consent of the Executive and the Company pursuant to
execution of this Agreement, effective as of the day and
year first above written.
IN WITNESS WHEREOF, the Executive has hereunto set his
hand and, pursuant to the authorization from its Board, the
Company has caused these presents to be executed in its name on
its behalf, and its corporate seal to be hereunto affixed and
attested by its Assistant Secretary, all as of the day and year
first above written.
ATTEST: THE QUAKER OATS COMPANY
/s/ Gerald A. Cassioppi /s/ Pamela S. Hewitt
Assistant Secretary Its Senior Vice President
EXECUTIVE
/s/ Penelope C. Cate
Schedule of Termination Benefit Agreements with Certain Executive Officers
The attached Termination Benefit Agreement is identical in all material respects
to the executive Termination Benefit Agreements for those executive employees
listed below and which have been omitted from this filing:
Name Execution Date
Harry M. Dent August 28, 1998
Margaret M. Eichman August 18, 1998
Thomas L. Gettings August 23, 1998
Richard M. Gunst August 23, 1998
Pamela S. Hewitt August 23, 1998
John G. Jartz August 19, 1998
Polly B. Kawalek August 21, 1998
James E. LeGere August 23, 1998
Charles I. Maniscalco August 25, 1998
I. Charles Mathews August 18, 1998
Terrence B. Mohr August 23, 1998
Kenneth W. Murray August 23, 1998
Mark A. Shapiro September 8, 1998
Edward H. Stassen August 28, 1998
Robert S. Thomason August 23, 1998
Susan D. Wellington August 23, 1998
Russell A. Young August 24, 1998