UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 offices) (Zip Code)
Registrant's telephone number, including area code: (312) 222-7111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
Common Stock ($5.00 Par Value) New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
The Stock Exchange, London
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes[ X ] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
the registrant as of the close of business on February 27, 1998 was
$7,441,883,858. The liquidation value of Series B ESOP Convertible
Preferred Stock, all of which is held in The Quaker Employee Stock
Ownership Plan, at the close of business on February 27, 1998 totaled
$131,041,956, plus related dividends. The number of shares of Common
Stock, $5.00 par value, outstanding as of the close of business on February
27, 1998 was 138,132,415.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of The Quaker Oats Company Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (Annual Report) (Parts I, II and III
of Form 10-K)
2. Portions of The Quaker Oats Company Notice of Annual Meeting and Proxy
Statement (Proxy Statement) dated April 2, 1998 (Part III of Form 10-K)
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
The information set forth under the caption "Acquisitions and Divestitures,"
found on page 48 of the Company's Annual Report, is incorporated herein by
reference.
(b) Financial Information About Industry Segments
The information set forth under the captions "Operating Results,"
"Industry Segment Information," and "Industry Segment and Geographic Area
Information," found on pages 25, 35, and 36-37, respectively, of the
Company's Annual Report, is incorporated herein by reference.
(c) Description of Business
U.S. and Canadian Foods Description
The Company is a major participant in the competitive packaged food industry
in the United States and is a leading manufacturer of hot cereals, pancake
mixes, grain-based snacks, cornmeal, hominy grits and value-added rice
products. In addition, the Company is the second-largest manufacturer of
syrups and value-added pasta products and is among the five largest
manufacturers of ready-to-eat cereals and dry pasta products. The Company
competes with a significant number of large and small companies on the
basis of price, value, innovation, quality and convenience, among other
attributes. The Company's food products are purchased by consumers
through a wide range of food distributors. The Company utilizes both its
own and broker sales forces and has distribution centers throughout the
country, each of which carries an inventory of most of the Company's food
products. In addition, the Company markets a line of over 400 items to
the food service market, including Quaker hot and ready-to-eat cereals;
Continental coffee; and Ardmore Farms single serve frozen fruit juices;
a specialty line of custom-blended dry baking mixes, ready-to-bake
biscuits; and Burry cookies and crackers.
International Foods Description
The Company is broadly diversified in the packaged food industry,
both geographically and by product line. The Company manufactures and
markets its products in many countries throughout Europe, Latin
America and the Asia/Pacific region. It is the leading brand-name hot
cereals producer in many countries and has other leading market positions
for products in a number of countries. In Brazil, the Company is the
leading producer of ready-to-drink chocolate beverages and the leading
canned fish processor.
Worldwide Beverage Description
The Company is the world's leading manufacturer of sports beverages. It
sells its sports beverages in 47 countries around the world and is the
leading sports drink distributor in the United States, Canada, Mexico,
Italy, Argentina, Brazil, Venezuela, Colombia, Indonesia and the Philippine
Islands. It is also one of the leading sports drink brands in Korea and
Australia, where Gatorade is sold through licensee arrangements. In the
United States, Gatorade thirst quencher utilizes a combination of brokers
and the Company's own sales force and has distribution centers throughout
the country.
Raw Materials
Raw materials used in manufacturing include oats, wheat, soy products,
corn, rice, sweeteners, orange and other juice concentrates, almonds, coffee
beans, raisins, beef, chicken, shortening and fish, as well as a variety of
packaging materials. These products are purchased mainly in the open
market. Supplies of all raw materials have been adequate and continuous.
Trademarks
The Company and its subsidiaries own a number of trademarks and are not
aware of any circumstances that could materially adversely affect the
continued use of these trademarks. Among the most important of the domestic
trademarks owned by the Company are Quaker, Cap'n Crunch, Quaker Toasted
Oatmeal, Life, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast
cereals; Gatorade for thirst-quenching beverages; Quaker and Quaker Chewy
for grain-based snacks; Rice-A-Roni and Near East for value-added rice and
grain products; Pasta Roni for value-added pasta; Near East and Nile
Spice for meals in a cup; Golden Grain and Mission for pasta; Quaker and
Aunt Jemima for mixes, syrups and corn goods; Ardmore Farms for citrus
and fruit juices; and Continental, Maryland Club and Continental WB for
coffee. Many of the grocery product trademarks owned by the Company in
the United States are registered in foreign countries in which the Company
does substantial business. Internationally, key trademarks owned include:
Quaker, Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast
cereals; Coqueiro for fish; Toddy and ToddYnho for chocolate beverages;
Gatorade for thirst-quenching beverages; and Adria for pasta products.
Other
The information set forth under the captions "Management's Discussion
and Analysis," "Six-Year Selected Financial Data," "Eleven-Year Selected
Financial Data," "Lease and Other Commitments," "Supplementary Income
Statement Information," and "Quarterly Financial Data," found on pages 25-30,
40-41, 42-43, 55, 56, and 58, respectively, of the Company's Annual
Report, is incorporated herein by reference.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
The information set forth under the captions "Industry Segment
Information," and "Industry Segment and Geographic Area Information," found
on pages 35 and 36-37, respectively, of the Company's Annual Report, is
incorporated herein by reference.
ITEM 2. PROPERTIES.
As of December 31, 1997, the Company operated 55 manufacturing plants in 18
states and 14 foreign countries and owned or leased distribution centers and
sales offices in 21 states and 21 foreign countries.
Owned and Leased Owned and Leased Owned and Leased
Mfg. Locations Distribution Centers Sales Offices
Industry Segment U.S. Foreign U.S. Foreign U.S. Foreign
Foods 20 20 2 6 8 18
Beverages 7 7 -- 4 11 13
Shared -- 1 6 12 6 8
Total 27 28 8 22 25 39
The Company owns a research and development laboratory in Barrington,
Illinois and leases corporate office space in downtown Chicago, Illinois.
Management believes manufacturing, distribution and office space owned and
leased are suitable and adequate for the business, and productive
capacity is appropriately utilized.
ITEM 3. LEGAL PROCEEDINGS.
On November 1, 1995, the Company filed suit against Borden, Inc. in
Federal District Court in New York related to the Company's November 1994
acquisition of a Brazilian pasta business. The suit was settled in August
1997 for $35.0 million.
On November 10, 1994, two purported class actions were commenced in the
United States District Court for the District of New Jersey (the "District
Court") on behalf of all purchasers of the common stock of The Quaker Oats
Company (the "Company") during the period between September 1, 1994 and
November 2, 1994 (the "Weiner Action"). On January 20, 1995,
plaintiffs filed an amended consolidated class action complaint, and on
May 2, 1995, plaintiffs filed a second amended consolidated class action
complaint. As amended, the Weiner Action purports to be brought on
behalf of all purchasers of the Company's common stock during the period
between August 4, 1994 and November 1, 1994. Named as defendants are
the Company and William D. Smithburg. Plaintiffs allege, among other
things, that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 in connection with the Company's
disclosure concerning its earnings growth goals and indebtedness
guideline. Damages in an unspecified amount are sought. On May 23, 1996,
the District Court dismissed this action. On November 6, 1997, the United
States Court of Appeals for the Third Circuit issued a decision in
which it affirmed the District Court's dismissal of plaintiffs' claims
relating to Quaker's earnings growth goals, and reversed the District Court's
dismissal of plaintiffs' claims relating to Quaker's indebtedness guideline.
The Court of Appeals remanded the action to the District Court for
further proceedings in connection with plaintiffs' claims concerning
Quaker's indebtedness guideline, and the case now is pending in the District
Court.
The Company believes it has strong defenses to the action described
above. Although the ultimate outcome of the action described above
cannot be ascertained at this time and the results of legal
proceedings cannot be predicted with certainty, it is the opinion of the
management of the Company that the resolution of this action will not have
a material adverse effect on the financial condition or the results of
operations of the Company as set forth in the Consolidated Financial
Statements contained in the Company's Annual Report.
The Company is also a party to a number of other lawsuits and claims, which it
is vigorously defending. Such matters arise out of the normal course of
business and relate to the Company's past acquisition activity and
other issues. Certain of these actions seek damages in large amounts.
While the results of litigation cannot be predicted with certainty,
management believes that the final outcome of such litigation will not have
a material adverse effect on the Company's consolidated financial position or
results of operations. Changes in assumptions, as well as actual
experience, could cause the estimates made by management to change.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information set forth under the captions "Six-Year Selected Financial
Data," "Eleven-Year Selected Financial Data," "Quarterly Financial Data," and
"Corporate and Shareholder Information," found on pages 41, 44-45, 58 and 65,
respectively, of the Company's Annual Report, is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the captions "Six-Year Selected Financial
Data," and "Eleven-Year Selected Financial Data," found on pages 40-41 and
42-45, respectively, of the Company's Annual Report, is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information set forth under the caption "Management's Discussion
and Analysis," found on pages 25-30 of the Company's Annual Report, is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information set forth under the caption "Derivative Financial and
Commodity Instruments," found on pages 29-30 of the Company's Annual
Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following audited consolidated financial statements of The Quaker
Oats Company and its subsidiaries, and the report of the independent
public accountants thereon, found on the indicated pages in the Company's
Annual Report, are incorporated herein by reference.
1.) Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995 (page 31).
2.) Consolidated Balance Sheets as of December 31, 1997 and 1996 (pages 32-
33).
3.) Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 (page 34).
4.) Consolidated Statements of Common Shareholders' Equity as of December 31,
1997, 1996 and 1995 (pages 38-39).
5.) Notes to the Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995 (pages 46-58).
6.) Report of Independent Public Accountants (page 64).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The information set forth under the caption "Election of Directors," found
on pages 5-7 of the Company's Proxy Statement, is incorporated herein
by reference.
Executive Officers
The information set forth under the caption "Officers," found on pages 62-63
of the Company's Annual Report, lists the executive officers of the registrant
as of March 11, 1998, and is incorporated herein by reference.
On March 12, 1998, the Company announced organizational changes including
changes in executive officers. The following is a list of Executive Officers,
as defined by the Securities and Exchange Commission, of the Company as of
March 12, 1998:
Senior Officers
Robert S. Morrison Age 55 Chairman, President and CEO
John A. Boynton Age 44 Senior Vice President
Terrence B. Mohr Age 54 Senior Vice President-Customer Organization
John G. Jartz Age 44 Senior Vice President-General Counsel,
Business Development and Corporate Secretary
Douglas J. Ralston Age 52 Senior Vice President-Human Resources
Robert S. Thomason Age 53 Senior Vice President-Finance and
Chief Financial Officer
Russell A. Young Age 49 Senior Vice President-Supply Chain
Corporate Staff Officers
Janet K. Cooper Age 44 Vice President-Treasurer and Tax
Margaret M. Eichman Age 39 Vice President-Investor Relations and
Corporate Affairs
Thomas L. Gettings Age 41 Vice President and Corporate Controller
Other Officers
Cassian K. Cheung Age 43 Vice President and President-Quaker Asia
Harry M. Dent, III Age 40 Vice President and President-Ready-to-
Eat Cereals
Polly B. Kawalek Age 43 Vice President and President-Hot Breakfast
Charles I. Maniscalco Age 44 Vice President and President-Snacks
Mark A. Shapiro Age 42 Vice President and President-Golden Grain
Susan D. Wellington Age 39 Vice President and President-U.S. Beverages
Bernardo Wolfson Age 44 Vice President and President-Quaker Latin
America
All of the above Executive Officers, except for Robert S. Morrison and Cassian
K. Cheung, have been employed by The Quaker Oats Company in an executive
capacity for five years or more. Robert S. Morrison joined the Company
in October 1997, and was formerly the Chairman and CEO of Kraft Foods, Inc.,
a division of Philip Morris Companies, Inc., (1994-1997) and President of
General Foods U.S.A. of Philip Morris Companies, Inc., (1991-1994). Cassian K.
Cheung joined the Company in December 1994, and was formerly the Chief
Operating Officer, General Manager-China for Nestle China Ltd. of The Nestle
Company (1989-1994).
The information set forth under the caption "Compliance with Section 16(a),"
found on page 11 of the Company's Proxy Statement, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Executive Compensation,"
"Compensation Committee Report" and "Performance Graph," found on pages 11-17,
18-19 and 20, respectively, of the Company's Proxy Statement, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Ownership of Company's
Securities" found on pages 9-11 of the Company's Proxy Statement,
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The audited consolidated financial statements of The Quaker Oats Company
and its subsidiaries and the Report of Independent Public Accountants
thereon are listed in Item 8 of this Form 10-K, and are incorporated therein
by reference.
(a)(2) Financial Statement Schedules.
&(d)
All required financial statement schedules are included in the
audited consolidated financial statements or notes thereto as incorporated
under Item 8 of this Form 10-K.
(a)(3) Exhibits.
&(c)
The exhibits required to be filed are listed on the Exhibit Index
attached hereto, which is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed in the last quarter of the period covered
by this report.
<TABLE>
<CAPTION>
EXHIBIT INDEX
PAPER (P),
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE (IBRF)
<S> <C> <C>
3(a) Restated Certificate of Incorporation (incorporated
by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, file number 1-12) IBRF
3(b) Bylaws of The Quaker Oats Company (incorporated by
reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, file number 1-12) IBRF
4(a) Shareholder Rights Plan effective May 8, 1996
(incorporated by reference to the Company's Form 8-K
filed on May 20, 1996, file number 1-12) IBRF
4(b) Registrant undertakes to furnish to the Commission,
upon request, a copy of any instrument defining the
rights of holders of long-term debt of the registrant
and all of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be
filed IBRF
10(a)* 1984 Long Term Incentive Plan, as restated effective
September 1, 1996 (incorporated by reference to the
Company's Form 10-Q for the fiscal quarter ended
September 30, 1996, file number 1-12) IBRF
10(b)* Deferred Compensation Plan for Directors of The Quaker
Oats Company, as restated effective November 1, 1996
(incorporated by reference to the Company's Form 10-K
for the fiscal year ended December 31, 1996, file number
1-12) IBRF
10(c)* Deferred Compensation Plan for Executives of The Quaker
Oats Company, as restated effective November 1, 1996
(incorporated by reference to the Company's Form 10-K
for the fiscal year ended December 31, 1996, file
number 1-12) IBRF
10(d)* Management Incentive Bonus Plan of The Quaker Oats
Company as amended September 8, 1993 (incorporated by
reference to the Company's Form 10-K for the fiscal
year ended June 30, 1994, file number 1-12) IBRF
10(e)* Directors' Stock Compensation Plan, as restated effective
November 1,1996 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December
31, 1996, file number 1-12) IBRF
10(f)(1)* Executive Separation Agreements with certain Executive
Officers, first effective for the fiscal quarter ended
December 31, 1996 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December
31, 1996, file number 1-12) IBRF
10(f)(2)* Employment Agreement with Robert S. Morrison effective
as of October 22, 1997 E
10(f)(3)* Executive Separation Agreement with Robert S. Morrison
effective as of October 22, 1997 E
10(g)* The Quaker Supplemental Executive Retirement Program,
as restated effective November 1, 1996 (incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1996, file number 1-12) IBRF
10(h)(1)* The Quaker Oats Company Benefits Protection Trust
(incorporated by reference to the Company's Form 10-K
for the fiscal year ended June 30, 1989, file number 1-12) IBRF
10(h)(2)* First Amendment to The Quaker Oats Company Benefits
Protection Trust (incorporated by reference to the
Company's Form 10-K for the fiscal year ended June 30,
1992, file number 1-12) IBRF
10(h)(3)* Second Amendment to The Quaker Oats Company Benefits
Protection Trust (incorporated by reference to the
Company's Form 10-K for the fiscal year ended June 30,
1992, file number 1-12) IBRF
10(i)* The Quaker Eligible Earnings Adjustment Plan, as restated
effective November 1, 1996 (incorporated by reference to
the Company's Form 10-K for the fiscal year ended December
31, 1996, file number 1-12) IBRF
10(j)(1)* Agreement Upon Separation of Employment with William D.
Smithburg, effective as of October 22, 1997
(incorporated by reference to the Company's Form 10-Q for
the fiscal quarter ended September 30, 1997, file 1-12) IBRF
10(j)(2)* Quaker Officers Severance Program, as amended and restated
effective July 9, 1997 E
10(j)(3)* First Amendment to the Quaker Officers Severance Program,
as amended and restated, effective March 11, 1998 E
10(k)(1)* The Quaker Long Term Incentive Plan of 1990 (incorporated
by reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1996, file number 1-12) IBRF
10(k)(2)* The Quaker Long Term Incentive Plan of 1999, subject to
shareholder approval at the Annual Meeting of Shareholders
on May 13, 1998 E
10(l)* The Quaker 415 Excess Benefit Plan, as restated effective
November 1, 1996 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
1996, file number 1-12) IBRF
10(m)* Quaker Salaried Employees Compensation and Benefits
Protection Plan, as restated effective November 1, 1996
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended December 31, 1996, file number 1-12) IBRF
12 Statement re Computation of Ratios E
13 Annual Report to Shareholders of The Quaker Oats Company
for the fiscal year ended December 31, 1997 E
21 List of Subsidiaries of the Registrant E
23 Consent of Auditors E
27 Financial Data Schedules E
99(1) Announcement of Organization Changes on March 12, 1998 E
99(2) Announcement of $1 Billion Share Repurchase Plan E
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K.
</TABLE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE QUAKER OATS COMPANY
By /s/ ROBERT S. MORRISON
Robert S. Morrison, Chairman, President and
Chief Executive Officer
Date: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 11th day of March 1998, by the following
persons on behalf of the registrant and in the capacities indicated.
Signature Title
/s/ ROBERT S. MORRISON Chairman, President and Chief Executive Officer
Robert S. Morrison
/s/ ROBERT S. THOMASON Senior Vice President Finance and Chief
Robert S. Thomason Financial Officer
/s/ THOMAS L. GETTINGS Vice President and Corporate Controller
Thomas L. Gettings
/s/ FRANK C. CARLUCCI Director
Frank C. Carlucci
/s/ SILAS S. CATHCART Director
Silas S. Cathcart
/s/ KENNETH I. CHENAULT Director
Kenneth I. Chenault
/s/ JOHN H. COSTELLO Director
John H. Costello
/s/ W. JAMES FARRELL Director
W. James Farrell
/s/ JUDY C. LEWENT Director
Judy C. Lewent
/s/ VERNON R. LOUCKS, JR. Director
Vernon R. Loucks, Jr.
/s/ THOMAS C. MacAVOY Director
Thomas C. MacAvoy
/s/ WALTER J. SALMON Director
Walter J. Salmon
/s/ WILLIAM L. WEISS Director
William L. Weiss
Exhibit 10(f)(2)
Employment Agreement
This Employment Agreement ("Agreement") is made and entered into by
and between Robert S. Morrison ("Morrison") and The Quaker Oats Company
("Quaker"), collectively "the parties." As soon as it is signed by both
parties, it shall become effective retroactive to October 22, 1997 (the "
Effective Date" ).
l. Position: During the term of this Agreement, Morrison shall be employed
by Quaker as its Chairman, President and Chief Executive Officer; shall
be elected a director of the Company; and shall be elected Chairman of
Ouaker's Board of Directors (the "Board").
2. Term:
(a) Quaker's Commitment to Morrison: The initial term shall commence on
the Effective Date and continue until December 31, 2000. Beginning
on January 1, 1999, the Agreement shall automatically renew every day
for a two year period, so that while this feature is in effect the
remaining term shall always be exactly two years (e.g., on July 1,
1999, the term would run from July l, 1999 through June 30, 2001);
provided, no renewals shall occur after any of the following: (i) at
any time, Quaker provides written notice to Morrison of its decision
to cancel the automatic renewal feature; (ii) at any time, Quaker
terminates Morrison's active employment; or (iii) at any time,
Morrison terminates his active employment.
(b) Morrison's Commitment to Quaker: Morrison commits to work exclusively
for Quaker during the initial term (i.e., from the Effective Date
through December 31, 2000). In addition, if he (i) voluntarily
terminates his employment Without Good Reason before December 31,
2000, and (ii) without the written consent of the Board is employed
by any other company (other than one which is wholly owned by
Morrison and/or members of his immediate family and which has annual
gross sales revenue of less than $1,000,000.00) during the one-year
period following his last day of active service for Quaker, then he
must promptly repay and/or return to Quaker all of the make-whole
compensation provided to him under section 8 (which includes cash
payments, restricted stock units, and stock options, whether vested
or unvested, exercised or unexercised). The intent of this repayment
provision is to avoid a situation where Quaker loses the substantial
make-whole compensation without receiving the benefit of Morrison's
services for more than a short time, without imposing a hardship on
Morrison in the event that, due to a personal tragedy or similar
circumstances, he ceases to work for any company for an extended
period of time (other than one of the size and type described above).
3. Annual Salary: From the Effective Date through December 31, 1998,
Morrison's annual salary shall be nine hundred and fifty thousand dollars
($950,000.00), paid in accordance with Quaker's standard payroll
practices. After December 31, 1998, it may be increased in the
discretion of the Board, but cannot be reduced.
4. Bonuses:
(a) Commencing with the bonus period that ends on December 31, 1998,
Morrison shall be eligible to receive an annual performance bonus
based on the terms and provisions of Quaker's Management Incentive
Bonus Plan (the "MIB Plan"). His target bonus shall be equal to
100% of his salary, and the maximum bonus shall be 200% of his
salary.
(b) For the bonus period that ends on December 31, 1998, if the
applicable MIB Plan formula produces a bonus of less than one
million dollars ($1,000,000.00), then Morrison shall receive a bonus
of $1,000,000.00; provided, this adjustment will not apply if
Morrison terminates his employment Without Good Reason or is
terminated for Cause on or before December 31, 1998.
(c) The Board shall have discretion to award additional bonuses to
Morrison, as it may deem appropriate.
5. Group/Executive Benefits: Except as otherwise specifically provided
herein, Morrison and his family shall participate, on terms no less favorable
than were provided to the immediately preceding Chief Executive Officer of
Quaker, in any group and/or executive life, hospitalization or disability
insurance plan, health program, pension, profit sharing, ESOP, 401(k) and
similar benefit plans (qualified, non-qualified and supplemental) that Quaker
sponsors for its officers or employees, and in other fringe benefits including
any automobile allowance or arrangement, club memberships and dues, and similar
programs (collectively referred to as the "Benefits"). All waiting periods
for such plans shall be waived, except with respect to the pension plan where
waiver of the one year waiting period is not permitted. It is understood that
participating on the "same terms" as the immediately preceding Chief Executive
Officer means the same rules and/or policies apply, recognizing that the result
upon applying them can be affected by differing credited years of service.
6. Supplemental Retirement Benefits:
(a) Subject to the proration provisions described in subsection (d)
below, upon termination of his employment with Quaker, Morrison will
receive a supplemental retirement benefit pursuant to this Agreement
which, in combination with any and all retirement benefits to which
Morrison is entitled or received under any qualified or non-qualified
defined benefit plans of Quaker and of any of Morrison's former
employers, will produce for him, upon commencement of benefits at or
after age 60, aggregate retirement benefits such that the annualized
amount, on a straight life annuity basis, is equal to the greater of:
(i) fifty percent (50%) of his average cash compensation (annualized
base salary plus annual performance bonus) for his five consecutive
calendar years of employment with Quaker that produce the highest
average cash compensation; or (ii) nine hundred and fifty thousand
dollars ($950,000.00). In determining the setoff for other
retirement benefits the value of those benefits will be calculated as
if Morrison had elected to receive each benefit on a straight life
annuity basis, regardless of the form of payment he actually elected
(including any lump sum payment).
(b) Morrison may elect to take the supplemental benefit described in
subsection 6(a) in any form permitted under either The Quaker
Supplemental Executive Retirement Program (the "SERP") or The
Quaker Retirement Plan, subject to the applicable actuarial
adjustment prescribed by the plan in question for electing such an
alternative form of payment instead of a straight life annuity.
(c) If Morrison commences receipt of the supplemental retirement
benefit described in subsection 6(a) before reaching age 60, then
that benefit shall be subject to actuarial reduction, calculated in
accordance with the terms of the SERP.
(d) If, before the fifth anniversary of the Effective Date,
Morrison's employment is terminated by Quaker for Cause or is
terminated by Morrison Without Good Reason, then the supplemental
retirement benefit described in subsection 6(a) shall be prorated
based on the number of months Morrison was actively employed with
Quaker, as follows: (i) multiply the formula figure determined under
subsection 6(a) (without subtracting any setoff for other retirement
benefits) by a fraction, the numerator of which is the number of
months Morrison was actively employed by Quaker, and the denominator
of which is sixty (60); and then (ii) subtract the setoff for other
retirement benefits, as described in section 6(a). Provided, if
Morrison does not accept a position with any other company (other
than one which is wholly owned by Morrison and/or members of his
immediate family and which has annual gross sales revenue of less
than $1,000,000.00) during the one-year period following his last day
of active service with Quaker, then the proration formula shall be
more favorable to Morrison, as follows: (i) calculate the net
supplemental retirement benefit under subsection 6(a), including
subtracting the setoff for other retirement benefits; and then (ii)
multiply that amount by a fraction, the numerator of which is the
number of months Morrison was actively employed by Quaker, and the
denominator of which is sixty (60).
(e) If Morrison dies before the supplemental retirement benefit
described in subsection 6(a) becomes payable, his wife will receive a
survivor annuity for the rest of her life equal in amount to the
straight life annuity which would have been payable to Morrison under
subsection 6(a) if, on the date immediately before his death, he had
terminated his employment For Good Reason, taking into account all
setoffs that would have applied to his benefit, except that if his
spouse only receives a reduced survivor annuity under The Quaker
Retirement Plan, then that amount, rather than the full straight life
annuity which would have been payable to Morrison, shall be setoff
with respect to The Quaker Retirement Plan.
7. Equity Based Incentive Compensation:
(a) On the Effective Date, and pursuant to the terms of The Quaker Long
Term Incentive Plan of 1990 (the "LTIP"), Quaker shall grant Morrison
a 10-year option with respect to 550,000 shares of Quaker common
stock. One-fifth (1/5) of these options shall vest each year for
five years, on the first five anniversaries of the Effective Date
(e.g., the first 110,000 options will vest on October 22, 1998, and
the last 110,000 options will vest on October 22, 2002). In
accordance with the terms of the LTIP, the exercise price for these
shares will be equal to the fair market value an the Effective Date.
(b) In each of 1998, 1999, and 2000, Quaker shall grant Morrison a
10-year option with respect to 300,000 shares of Quaker common stock,
at the time and consistent with the terms and vesting rules generally
applicable to awards to other senior executives under the LTIP. In
any subsequent years, annual option awards to Morrison shall be
consistent with Quaker's then-current practices and with awards made
to other senior executives of Quaker.
(c) If there is a generally applicable award of options or
restricted shares to senior executives of Quaker other than the
annual award of options under the LTIP, Morrison shall participate in
such award(s) on terms consistent with Quaker's then-current
practices and with awards made to other senior executives.
(d) In the event of a Change in Control of Quaker, as that term (or
any similar term) is defined in the LTIP, all of Morrison's awards of
stock options, restricted shares or similar equity-based interests
which have not already vested shall immediately vest in full.
8. Special Make-Whole Compensation:
(a) On the Effective Date, Quaker shall pay Morrison the following cash
amounts, which constitute a sign-on bonus, are not contingent on the
performance of services for Quaker and do not represent compensation
for services rendered:
(i) Seven hundred thousand dollars ($700,000.00), which is
intended to replace the 1997 bonus Morrison would have received
from his previous employer had he remained employed there; and
(ii) Two million, five hundred thousand dollars ($2,500,000.00),
which is intended to replace the 1995-97 long-term incentive
compensation payment Morrison would have received from his
previous employer had he remained employed there.
(b) On the Effective Date, Quaker shall grant Morrison restricted stock
units pursuant to a deferred compensation program under the LTIP,
which are intended to compensate him for the market value on or
about the Effective Date of the restricted stock of Morrison's
previous employer which he will forfeit by terminating his previous
employment. Quaker will grant him stock units under the LTIP
equivalent to one hundred and fourteen thousand (114,000) shares of
Quaker common stock. These units shall vest over a period of three
years, with one-third (1/3) vesting on each of the first three
anniversaries of the Effective Date. They will be paid out by the
earlier of: (i) April 1 of the year that next follows the end of the
calendar year during which Morrison ceases to be employed by Quaker;
or (ii) thirteen (13) months following the earliest date when the
entire payment would be tax deductible under all pertinent federal
tax laws, including Section 162(m) of the Internal Revenue Code, as
determined by the reasonable belief of the Board's Compensation
Committee.
(c) On the Effective Date, Quaker shall grant Morrison restricted
stock units pursuant to a deferred compensation program under the
LTIP, which are intended to compensate him for the unvested intrinsic
value on or about the Effective Date of his unvested options on
shares of his previous employer, which will not vest due to
termination of his previous employment. Quaker will grant him stock
units under the LTIP equivalent to five thousand (5,000) shares of
Quaker common stock. These units shall fully vest on the first
anniversary of the Effective Date. They will be paid out by the
earlier of: (i) April 1 of the year that next follows the end of the
calendar year during which Morrison ceases to be employed by Quaker;
or (ii) thirteen (13) months following the earliest date when the
entire payment would be tax deductible under all pertinent federal
tax laws, including Section 162(m) of the Internal Revenue Code, as
determined by the reasonable belief of the Board's Compensation
Committee.
(d) On the Effective Date, Quaker shall grant Morrison a 10-year
stock option intended to compensate him for the estimated value, on
or about the Effective Date, of the future option privilege of his
vested options on shares of his previous employer, which he likely
will not be able to retain for their normal full duration. This
grant will be for four hundred and fifty thousand (450,000) options,
will be fully vested as of the Effective Date, and will have an
exercise price equal to the fair market value of the shares on the
Effective Date.
(e) Because the payments and shares described in subsections 8(a) - 8(d)
above are intended to make Morrison whole for losses he is
expected to incur by reason of leaving his present job, Morrison
agrees that if any or all of the expected forfeitures do not occur,
he will promptly repay and/or return to Quaker the applicable
consideration for the item(s) or portion of an item in question that
he did not lose.
9. Events Triggering Severance Benefits: Upon the termination of Morrison's
employment for any of the reasons described in subsections (a) - (c) below, he
will be entitled to receive the severance benefits described in section 10:
(a) Quaker terminates Morrison's employment without Cause.
(b) Morrison terminates his employment with Quaker "For Good
Reason," which means he terminates it within six months of any event
that constitutes Good Reason, as defined in subsection (d) below (the
phrase "Without Good Reason" means any termination by Morrison other
than within six months of an event constituting Good Reason).
(c) Morrison resigns during the thirteenth (13th) month following a
Change in Control of Quaker, as that term (or any similar term) is
defined under his Executive Separation Agreement ("ESA").
(d) Definitions:
(i) "Cause" will exist if it is established by clear and convincing
evidence that Morrison engaged in gross misconduct by committing
a significant violation of Quaker's Code Of Ethics, provided
that, if appropriate under the circumstances (taking into
account the nature of the offense), Quaker has called the
alleged misconduct to Morrison' s attention and allowed a
reasonable opportunity to cure it. A determination of Cause or
gross misconduct must be made by a two-thirds vote of the full
Board (excluding Morrison), and must be communicated in writing
to Morrison by a Notice of Termination, which shall include a
certification or a copy of the resolution duly adopted by the
Board by the required two-third vote.
(ii) "Good Reason" for Morrison to resign shall exist if any of
the following events occur without his consent: (A) Quaker
intentionally fails to pay or provide required compensation,
after the omission has been called to Quaker's attention and it
has been given a reasonable opportunity to cure the situation;
or (B) Quaker significantly reduces Morrison's titles, position,
duties and/or authority; or (C) Quaker notifies Morrison that it
has decided to terminate the automatic daily renewal feature
described in section 2; or (D) Quaker materially breaches the
terms of this Agreement, provided Morrison has called the breach
to Quaker's attention and allowed a reasonable opportunity to
cure it.
(iii) "Notice of Termination" shall mean a written notice which
(A) indicates the type of termination under this Agreement
(e.g., for Cause) and cites the applicable provision of this
Agreement, (B) briefly describes the facts and circumstances
claimed to provide a basis for the stated type of termination,
if applicable, and (C) specifies the date of termination from
active service.
(e) Termination because of Morrison's death or disability to work will
not require payment of the severance benefits described in section
10, nor will termination for Cause or termination by Morrison Without
Good Reason.
(i) For purposes of this Agreement, Morrison will be deemed to be
disabled from performing his duties upon the earlier of: (A) the
end of a six consecutive month period during which, for any
reason, he has been unable to substantially perform each of his
usual and customary duties as Chairman, President and Chief
Executive Officer; or (B) the date when it becomes apparent
that, for any reason, he will be unable to substantially perform
each of his usual and customary duties as Chairman, President
and Chief Executive Officer for a period of at least six
consecutive months, provided, in the case of a physical or
mental injury or disease, his disability must be determined in
writing by a reputable physician or psychologist, selected
jointly by the Board and Morrison (or his personal
representative). If any question arises as to whether Morrison
is physically or mentally disabled, upon written request by the
Board, Morrison shall promptly submit to a reasonable medical or
psychological examination for the purpose of determining the
existence, nature and extent of such disability. Quaker shall
promptly give Morrison written notice of any determination that
Morrison is disabled from working and of any decision by the
Board to terminate his employment by reason thereof. In the
event of disability, until the date of termination from active
service, the base salary payable to Morrison under section 3
hereof shall be reduced dollar-for-dollar by the amount of
disability benefits paid to Morrison in accordance with any
disability plan, policy or program of Quaker.
(f) Within thirty (30) days following Morrison's termination from
active service, regardless of the reason for termination, Quaker
shall pay him an amount equal to five (5) days of pay at his then
current salary rate.
10. Severance Benefits: If Morrison qualifies for severance benefits under
section 9, then the following terms and conditions shall apply:
(a) Quaker shall pay Morrison all Accrued Obligations in a lump sum
in cash within thirty (30) days following his last day of active
service; provided, however, that any portion of the Accrued
Obligations which consists of bonus, deferred compensation, or
incentive compensation shall be determined and paid in accordance
with the terms of the relevant plan or provision. "Accrued
Obligations" shall mean, as of Morrison's last day of active service,
the sum of: (i) his base salary under section 3 through the date of
termination from active service, to the extent not already paid; (ii)
the amount of any bonus, incentive compensation, deferred
compensation and other cash compensation accrued by Morrison as of
his last day of active service, to the extent not already paid; and
(iii) any vacation pay, expense reimbursements and other cash
entitlements accrued by Morrison as of his last day of active
service, to the extent not already paid. For purposes of this
section, amounts shall be deemed to accrue ratably over the period
during which they are earned, but no discretionary compensation shall
be deemed earned or accrued until it is specifically approved by the
Board in accordance with the applicable plan, program or policy.
(b) Within thirty (30) days after Morrison's last day of active service,
Quaker shall pay him a lump sum equal to the amount that results when
the fraction described in subsection (i) below is multiplied times
the sum described in subsection (ii) below (i.e., full payment of the
salary and bonus that would have been due during the remainder of the
term of this Agreement):
(i) A fraction, the numerator of which is the number of days
remaining from Morrison's last day of paid active service until
the last day of the term of this Agreement, and the denominator
of which is 365;
(ii) The sum of his: (A) final annual salary and (B) then-current
annual performance bonus target or, if greater, his most recent
annual bonus payment.
However, the payment to Morrison under this paragraph (b) shall be
conditioned upon his compliance with Quaker policy (as in effect on
the Effective Date or on his last day of active service, whichever is
more favorable to Morrison) regarding all salaried employees
executing a waiver and release prior to receiving severance
compensation.
(c) Within thirty (30) days after Morrison's last day of active service,
Quaker shall pay him a lump sum that represents a pro-rated annual
bonus for the year of termination. This amount shall be calculated
by taking his target bonus for the year of termination and
multiplying it times a fraction (i) whose numerator is the number of
days elapsed in the current calendar year from January 1 of that year
through his final day of active service, and (ii) whose denominator
is 365 (e.g., if his last day of active service was February 5, then
this fraction would be .10, calculated as follows: 36 days elapsed in
year divided by 365 days).
(d) Following Morrison's last day of active service and continuing
through the last day of the term of this Agreement, Quaker shall
treat him as employed on inactive service and, thus, shall continue
to credit him with service time and shall provide him and his
dependents with all welfare benefits that are provided to
participants in the Quaker Officers Severance Program (the "Program")
during their inactive service period, as determined by the Program
provisions in effect on the Effective Date or his final day of active
service, whichever produces greater benefits. Thereafter, Morrison
will be treated as a retired senior officer for purposes of benefits
Quaker provides to such retirees.
(e) All options and restricted stock (including both shares and units)
that were granted before the date of termination but have not yet
vested shall immediately vest upon Morrison's final day of active
service. All such options, and also ones that previously vested but
have not yet been exercised, shall remain exercisable in accordance
with the LTIP's terms for retirees (currently 5 years following
retirement, or until expiration of the underlying option term,
whichever is sooner).
Quaker may at any time discharge Morrison from active service without advance
notice, by providing a Notice of Termination; nothing in this Agreement shall
be construed as requiring Quaker to allow him to continue actively performing
the duties of Chairman, President or CEO. Regardless of the reason for such
termination or whether it constitutes a breach by Quaker, Morrison's exclusive
remedy shall be the severance benefits described in subsections 10(a) - 10(e);
he shall not be entitled to reinstatement, nor to any other damages for
wrongful termination; nor, after his termination from active service, shall he
be entitled to any other salary, benefits or other compensation under this
Agreement. Further, he shall not be entitled to participate in or recover
under any other severance plan, including without limitation the Program.
Notwithstanding anything to the contrary in the preceding sentences, Morrison
will receive an ESA, which applies to Change in Control situations, and any
severance benefits under his ESA shall be in addition to severance benefits
under this Agreement.
11. Obligations Of Quaker Upon Termination By Death, Disability, Discharge For
Cause, or Resignation Without Good Reason: In the event this Agreement
terminates due to the death or disability of Morrison, or due to termination
for Cause or resignation or retirement Without Good Reason, Quaker shall pay to
Morrison all Accrued Obligations in a lump sum in cash within thirty (30) days
after his last day of active service; provided, however, that any portion of
the Accrued Obligations which consists of bonus, deferred compensation, or
incentive compensation shall be determined and paid in accordance with the
terms of the relevant plan or provision. Nothing in this section shall limit
or otherwise adversely affect any rights Morrison may have under applicable
law, under any other agreement with Quaker, or under any compensation or
benefit plan or policy of Quaker.
12. Gross-Up Payment for Golden Parachute Taxes: If it is determined that any
payment Quaker makes to or for the benefit of Morrison, under this Agreement or
otherwise, is subject to the federal excise taxes imposed on golden parachute
payments, then regardless of whether Morrison has declared his ESA effective,
Quaker will make an additional payment to him (a "gross-up" payment) calculated
in accordance with the relevant terms of his ESA (presently Section 8 of the
ESA), as determined by the initial terms of the ESA or by the terms of the ESA
as in effect on the date of the payment in question, whichever is more
favorable to Morrison.
13. No Duty To Mitigate: With respect to the severance benefits provided under
section 10 of this Agreement, Morrison shall not have any duty to mitigate his
income loss after a termination by finding alternative employment, nor shall
amounts he earns from other employment be offset against those benefits. This
provision has no effect on Morrison's duty to mitigate, if any, in connection
with claims that may arise under anything other than this Agreement.
14. Termination By Executive: Executive shall have no personal liability for
damages to Quaker for voluntarily terminating his employment at any time, with
or Without Good Reason, so long as he gives at least thirty (30) days prior
written notice; provided, depending on the reasons for termination and
subsequent events, he may be subject to the repayment requirement set forth in
subsection 2(b).
15. Non-Competition: If Morrison's employment with Quaker is terminated for
any reason that entitles him to receive severance benefits pursuant to section
9 of this Agreement, then for a period of two years immediately following his
last day of active service, he shall abide by the following covenants and
restrictions:
(a) Non-competition: He shall not Participate in the management of a
business entity that deals in Covered Products, unless that entity
is merely a retailer or consumer of Covered Products, who does not
compete against Quaker in any way.
(b) Raiding Employees: He shall not directly or indirectly solicit or
encourage any Existing Quaker Employee to leave Quaker or to accept
any position with any other company.
(c) Non-disclosure: He shall not use or disclose to anyone any
Confidential Information regarding Quaker.
(d) Definitions: The following definitions shall apply to the italicized
terms used in subsections 15(a) - 15(c) above:
(i) "Covered Products" mean any product which falls into one or
more of the following categories, so long as Quaker is
producing, marketing, distributing, selling or licensing such
product anywhere in the world: sports drinks and beverages
marketed as thirst quenchers; hot cereals; ready-to-eat
cereals; grain-based snacks other than potato chips; value
added pasta products; dry pasta products; value-added rice
products; pancake mixes; pancake syrup; and items Quaker
produces for the food service market.
(ii) "Participate" shall be construed broadly to include,
without limitation: (A) holding a position in which Morrison
directly manages such a business entity; (B) holding a position
in which anyone else who directly manages such a business entity
is in Morrison's reporting chain or chain-of command, regardless
of the number of reporting levels between them; (C) providing
input, advice, guidance, or suggestions regarding the management
of such a business entity to anyone responsible therefor; (D)
providing a testimonial on behalf of such an operation or the
product it produces; or (E) doing anything else which falls
within a common sense definition of the term "participate" as
used in the present context.
(iii)"Existing Quaker Employee" means someone: (A) who became
employed by Quaker before Morrison's active service terminates;
and (B) who is still employed by Quaker as of the date when the
facilitating act or solicitation takes place; and (C) 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).
(iv) "Confidential Information" shall be construed as broadly as
Illinois law permits and shall include all non-public
information Morrison acquires 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 strategic or marketing plans;
its customers, suppliers, and distributors; its potential
acquisition targets; its business operations and structure; its
product lines, formulas and pricing; its processes, machines and
inventions; its research and know-how; or its financial data.
(e) Remedies: In the event of a breach or threatened breach of any
term of subsections 15(a) - l5(d), Quaker shall be entitled to
injunctive relief and/or damages. The parties agree that breach of
these provisions 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/consumers or measuring the exact impact of losing key
employees or having Confidential Information disclosed.
(f) Recitals: Morrison acknowledges that by virtue of the positions
he will hold, he will acquire Confidential Information, including
without limitation knowledge of operational plans, strategic long
range plans, new product development, marketing plans, sales plans,
and distribution plans. Morrison also acknowledges that by virtue of
his positions, he will learn which Existing Quaker Employees are
critical to Quaker's success and will develop relationships he
otherwise would not have had with such employees.
16. Choice Of Law And Forum:
(a) This Agreement shall be governed by and construed in accordance
with the laws of Illinois, without regard to choice of law
principles.
(b) In any litigation over this Agreement, both parties consent to
submit to the personal jurisdiction of any court, state or federal,
in the State of Illinois. Such courts in Illinois shall be the
exclusive jurisdiction for any litigation over this Agreement or an
alleged breach thereof.
17. Attorney Fees And Other Expenses:
(a) Quaker will pay all reasonable legal, accounting and other
professional fees and related expenses Morrison incurred in
connection with the negotiation and preparation of this Agreement.
(b) If Morrison becomes involved in litigation with his previous
employer regarding the termination of his previous employment and he
prevails in that litigation, Quaker will reimburse him for reasonable
attorney fees and expenses incurred in connection with such
litigation, but only to the extent that his former employer is not
ordered or required to reimburse him for such expenses.
(c) If Morrison and Quaker become involved in litigation regarding
the terms of his employment with Quaker or the termination thereof,
the party which prevails shall be entitled to reimbursement of all
reasonable litigation costs and expenses, including attorney fees.
If each party prevails on one or more litigated 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 such
factors as the significance of the issue(s) on which each party
prevailed, the reasonableness of each party's position(s), and
ability to pay.
18. Indemnification: To the fullest extent permitted by law and Quaker's by-
laws, Quaker shall indemnify Morrison (including the advancement of expenses)
for any judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, incurred by Morrison in connection with the defense
of any lawsuit or other claim to which he is made a party by reason of being an
officer, director or employee of Quaker or any of its subsidiaries.
19. Binding Effect: This Agreement shall be binding on and inure to the
benefit of the heirs and representatives of Morrison and the successors and
assigns of Quaker. Quaker shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a substantial portion of
its assets to assume and agree to perform this Agreement in the same manner and
to the same extent that Quaker would be required to perform it if no such
succession had taken place; provided, Morrison shall have the same obligations
to the successor as he would have had to Quaker. Regardless of whether such an
agreement is executed, this Agreement shall be binding on any successor of
Quaker in accordance with the operation of law, and such successor shall be
deemed "Quaker" for all purposes under this Agreement.
20. Notices: All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
anywhere by hand to the applicable party, or if delivered by recognized
commercial delivery service or if mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) If to the Board or Quaker, addressed to:
The Quaker Oats Company
321 North Clark Street
Chicago, Illinois 60610
Attention- General Counsel
with a copy to:
Martin Harris, Esq.
Connelly Sheehan Moran
150 South Wacker Drive - Suite 1600
Chicago, Illinois 60606
(b) If to Morrison, addressed to:
Robert S. Morrison
600 East Westminster
Lake Forest, Illinois 60045
with a copy to:
Robert J. Stucker, Esq.
Vedder Price
222 North LaSalle Street - Suite 2600
Chicago, Illinois 60601
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party. Failure to send a copy to the applicable
attorney shall not render a Notice ineffective, so long as it is actually
received by Quaker or Morrison, as applicable.
21. Scope of Agreement:
(a) This Agreement supersedes any other document or oral agreement that
conflicts with it regarding any of the matters set forth herein, and
completely supersedes the Summary Of Principal Terms Of Employment
Agreement between the parties (which was signed on or about October
22, 1997). However, it is not intended to pre-empt or supersede
other documents, including plan documents, that provide additional,
non-conflicting rules or terms. Without limitation, nothing in this
Agreement shall eliminate or reduce Morrison's obligation to comply
with the Code Of Ethics, to the extent that certain of its provisions
(such as rules regarding disclosure of confidential information)
remain applicable to employees after termination.
(b) No promises or inducements have been made other than those
reflected herein. This Agreement cannot be amended except by a
written agreement signed by the parties, and only the Board has
authority to authorize such an amendment on behalf of Quaker.
22. Severability: 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 unlawful or invalid, the remaining terms and
provisions shall remain in full force and effect. In addition, a court may re-
write the invalid provision(s) so as to be consistent with applicable law and
still, to the extent possible, achieve the intended effect of this Agreement.
23. Execution In Counterparts: This Agreement may be executed by the parties
hereto in two (2) or more counterparts, each of which shall be deemed to be an
original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
The Quaker Oats Company
/s/Douglas J. Ralston
Date: 1/13 , 1998 By an authorized signing officer
/s/Robert S. Morrison
Date: 1/12 , 1998 Robert S. Morrison
Exhibit 10(f)(3)
EXECUTIVE SEPARATION AGREEMENT
THIS AGREEMENT is made between The Quaker Oats Company, a New Jersey
corporation (the "Company"), and Robert S. Morrison (the "Executive"), dated
this 13th day of January, 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 30% or more of the combined voting power of the
Company's then outstanding voting securities; provided, however,
that this paragraph (a) shall not apply to any Person who
becomes such a beneficial owner of such Company securities
pursuant to an agreement with the Company approved by the Company's
Board of Directors (the "Board"), entered into before such Person
has become such a beneficial owner of Company securities
representing 5% or more of the combined voting power of the
Company's then outstanding voting securities; or
b. during any period of 24 consecutive months (not including any
period prior to October 22, 1997), individuals, who at the beginning
of such period constitute 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; or
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); (b) resignation of the Executive, which, notwithstanding anything
else herein to the contrary, may be declared by the executive during the
30-day period following the first anniversary of the effective date of
this Agreement; or (c) 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.
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 be incurred 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 theretofore 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, March 31, 2000.
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/Douglas J. Ralston
Assistant Secretary Its Senior Vice President
/s/Robert S. Morrison
EXECUTIVE
Exhibit 10(j)(2)
QUAKER OFFICERS SEVERANCE PROGRAM
(As Amended and Restated Effective July 9, 1997)
1. EFFECTIVE DATE AND PURPOSE. The Quaker Officers Severance Program
(the "Program") is established and maintained by The Quaker Oats Company
("Quaker"), effective July 9, 1997, and is an amendment and restatement of the
Program as adopted by Quaker's Board of Directors (the "Board") on March 8,
1989. The purpose of the Program is to promote the interests of Quaker, its
divisions and subsidiaries (the "Company"), and its stockholders, both by
attracting and retaining Company employees through assurances of continued
pay and welfare benefits to cushion the hardship of being out of work if their
employment with the Company is terminated in certain qualifying circumstances
and by encouraging the separation to be amicable.
2. ADMINISTRATION.
(a) The Program shall be administered by the Severance Program Committee
(the "Committee"), which shall initially consist of Quaker's Senior Vice
President-Human Resources, Vice President-Human Resources Worldwide Beverages
and Vice President-Human Resources Quaker Foods. The Chief Executive Officer
of Quaker shall have the authority to expand or reduce the number of Committee
members and to designate, remove or replace the Committee members.
(b) The Committee shall have the sole responsibility for the
administration of the Program and may adopt such rules and procedures as it
deems necessary, desirable or appropriate.
(c) The Committee shall have such powers as may be necessary to discharge
its responsibility to administer the Program, including but not limited to
the following:
(1) To construe and interpret the Program, decide all questions of
eligibility and determine the amount, manner and time of any
severance benefit hereunder.
(2) To prescribe procedures for employees to apply for Program
benefits, including written applications and forms, if any, and other
requests for information. If no procedures are prescribed, then the
Company or the Committee may, at their option, initiate consideration
of a claim for severance benefits, or any terminated employee may
initiate a claim by providing notice, in writing to the designated
Committee members. The Committee may reasonably rely upon all
information furnished to it in such applications, forms or notices.
(3) To receive from the Company such information as shall be
necessary for the proper administration of the Program. The
Committee may reasonably rely upon all such information so furnished.
(4) To appoint individuals to assist in the administration of the
Program as the Committee deems necessary, including but not limited
to, Company employees, agents, attorneys and accountants. The
Committee may reasonably rely upon all information and advice
furnished by such individuals.
(5) To receive, review and maintain, as it deems appropriate,
benefit payment and administrative expense reports.
(6) To issue directions to the Company concerning all benefits which
are to be paid from the Company's general assets pursuant to the
Program provisions.
(7) To prepare and distribute to Company employees, information
describing the Program in such manner as the Committee determines to
be required or appropriate.
(d) The Committee shall have the broadest discretion permitted by law to
make all determinations and decisions as to the right of any employee to
participate in the Program and eligibility for and the amount or form of a
benefit payable under the Program. The Committee's decision on any such
matter shall be final and binding. A final determination, based upon review
of an appeal from an initial denial, shall be made by persons designated as
Committee members. The Committee may, in its discretion, delegate any
other act or determination. Such delegation may be achieved by informal
agreement or practice and no written document or vote is required.
(e) The Committee shall be indemnified by Quaker to the full extent
allowed by law. This indemnity shall extend to all individuals appointed to
assist in the administration of the Program, as described in subparagraph (c)
(4) above.
3. ELIGIBILITY.
(a) An officer (as defined below) is eligible for severance benefits
under the Program (determined in accordance with paragraph 4) if the officer's
employment with the Company is terminated under any of the following
conditions:
(1) If all of the following requirements in subparagraphs (I) through
(IV) are satisfied:
(I) The officer's employment with the Company is
involuntarily terminated at any time; and
(II) Following notice of the final date of active
service, the officer continues to work for the Company
until the officer's inactive service period begins; and
(III) Termination is not based on the Company's
reasonable belief or reasonable determination that any
of the following applies:
(A) the officer died;
(B) the officer is physically or mentally
incapacitated from adequately performing the
officer's job duties;
(C) the officer voluntarily resigned,
voluntarily retired, or is deemed to have
constructively quit;
(D) the officer committed gross misconduct,
either actively or passively; or
(E) the officer permanently ceased to be
employed by the Company due to the sale, spin-off
or other disposition of a subsidiary, division,
plant, facility, function, profit center or line
of business as an ongoing entity; provided,
termination due to such a transaction shall not
disqualify the officer from severance benefits if
neither the new owner or the Company offers the
officer employment: (i) at no less than 100% of
the officer's base salary immediately prior to
such transaction; and (ii) at a location which
does not require relocation by the officer beyond
the added commuting distance allowed by Internal
Revenue Service Code Section 217 for excludable
relocation expenses reimbursement. In a situation
where Company employees are offered jobs by the
new owner, but are then terminated soon after the
transaction, the Committee may consider all facts
and circumstances it deems relevant, along with
the purposes of the Program, in determining
whether there was a failure to "offer" meaningful
employment; and
(IV) Within the time period indicated by the Company
when it tenders a waiver and release form after the
officer's termination, a general waiver is fully
executed by the officer (or the officer's
representative) and that in effect releases Quaker,
its officers, directors, stockholders, employees,
agents, assigns, subsidiaries, divisions, parent
companies, affiliates, and successors from all claims
that arise out of or relate in any way to the officer's
employment or termination of employment with the
Company, including claims under anti-discrimination
laws; except that claims for vested wages or vested
benefits shall not be waived. However, if the Company
fails to tender a waiver and release form within
fifteen (15) days after the Committee received a
written request for such a form from the officer (or
representative), then this requirement shall be deemed
satisfied even though no waiver is signed or in effect.
Nothing in this provision shall be construed as
requiring an officer to sign a waiver and release;
rather, when the waiver and release is tendered by the
Company, the officer shall be advised that he/she has
two options: sign the waiver and receive severance
benefits, or decline to sign the waiver and release and
thereby forego severance benefits.
(V) Notwithstanding anything to the contrary in
subparagraphs 3(a)(1)(I) through (IV), if the Committee
determines that an officer meets all requirements of
subparagraphs 3(a)(1)(I) through (III), but it is too
early to ascertain whether the officer will satisfy
subparagraph 3(a)(1)(IV) because the time for
considering or revoking the waiver and release has not
yet expired, then for the sake of administrative
convenience, the Committee may, in its sole discretion,
presume that the officer will satisfy subparagraph
3(a)(1)(IV) and commence providing severance benefits;
provided, if the officer fails to execute the waiver
and release by the required time, revokes it during the
prescribed period or otherwise indicates that he/she
will not satisfy subparagraph 3(a)(1)(IV), then all
payments of severance benefits must immediately cease,
but the Company shall not be entitled to reimbursement
for severance benefits already paid or provided.
(2) Notwithstanding anything in subparagraph (1) above to the
contrary, within two years following a Change in Control of Quaker
(as defined below), any termination of employment with the Company,
in lieu of the officer accepting continued employment with the Company
which involves a significant change in the officer's terms and
conditions of employment (as defined below). A "significant change
in the officer's terms and conditions or employment" shall be deemed
to have occurred when during such two year period:
(I) the total of the officer's salary and incentive
bonus target is to be reduced, based upon the amounts
equal to the officer's salary immediately prior to the
Change in Control of Quaker, and the most recent
incentive bonus target communicated to the officer
immediately prior to the Change in Control of Quaker;
(II) the location of continued employment if beyond a
30-mile radius of the officer's location of employment
immediately prior to the Change in Control of Quaker;
(III) the officer is to be paid on an hourly basis;
(IV) there is a significant change in the nature or
scope of any of the authorities and powers, which the
officer may exercise or is exercising, and duties and
functions which the officer may perform or is
performing immediately prior to the Change in Control
of Quaker; or
(V) a reasonable determination by the officer that,
as a result of the Change in Control of Quaker, the
officer's position is significantly affected so that
the officer is unable to exercise any authorities and
powers, or perform any duties and functions described
in subparagraph (IV) above.
(3) "Change in Control of Quaker" shall be deemed to have occurred if:
(I) 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 Quaker, any trustee or
other fiduciary holding securities under an employee
benefit plan of Quaker, or any company owned, directly
or indirectly, by the stockholders of Quaker in
substantially the same proportions as their ownership
of stock of Quaker), is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of Quaker
representing 30% or more of the combined voting power
of Quaker's then outstanding voting securities;
provided, however, that this paragraph (a) shall not
apply to any Person who becomes such a beneficial owner
of such Company securities pursuant to an agreement
with the Company approved by the Board, entered into
before such Person has become such a beneficial owner
of Company securities representing 5% or more of the
combined voting power of the Company's then outstanding
voting securities;
(II) during any period of 24 consecutive months (not
including any period prior to November 13, 1996),
individuals, who at the beginning of such period
constitute the Board, and any new director (other
than a director designated by a Person who has entered
into an agreement with Quaker to effect a transaction
described in subparagraph (I), (III) (B) or (IV)) whose
election by the Board, or whose nomination for election
by Quaker's stockholder, 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;
(III) the stockholders of Quaker approve (A) a plan of
complete liquidation of Quaker or (B) the sale or
disposition by Quaker of all or substantially all of
Quaker's assets unless the acquirer of the assets or
its directors shall meet the conditions for a merger or
consolidation in subparagraphs (IV) (A) or (IV) (B); or
(IV) the stockholders of Quaker approve a merger or
consolidation of Quaker with any other company other
than:
(A) such a merger or consolidation which would
result in the voting securities of Quaker
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 Quaker's or such surviving
entity's outstanding voting securities immediately
after such merger or consolidation; or
(B) such a merger or consolidation which would
result in the directors of Quaker 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 subparagraph (IV), "surviving entity"
shall mean only an entity in which all of Quaker's
stockholders immediately before such merger or
consolidation become stockholders by the terms of
such merger or consolidation, and the phrase
"directors of Quaker who were directors
immediately prior thereto" shall include only
individuals who were directors of Quaker 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 Quaker to effect a
transaction described in subparagraph (I), (III)
(B), (IV) (A) or (IV) (B)) whose election by the
Board, or whose nomination for election by
Quaker's stockholders, was approved by a vote of
at least two-thirds (2/3) of the directors before
the beginning of such period.
(4) Notwithstanding anything in subparagraphs (1) through (3) above
to the contrary, the voluntary resignation of the Chief Executive
Officer, as declared by such officer during the 30-day period
following the first anniversary following a change in control of
Quaker, in accordance with any consistent with the terms of the Chief
Executive Officer's Executive Separation Agreement then in effect.
(b) An "officer" shall mean any employee of the Company who is a Chief
Executive Officer, President or Vice President (including Senior and Executive
Vice Presidents) of Quaker, and any other Company employees designated by the
Committee as an officer for purposes of the Program. Prior to a Change in
Control of Quaker an officer shall be considered eligible under the Program,
subject to subparagraph 3(a)(1), for so long as the officer holds such office
while the Program is in effect. After a Change in Control of Quaker, an
officer shall continue to be considered eligible under the Program, subject to
paragraph 3(a)(2).
4. SEVERANCE BENEFITS.
(a) An eligible officer pursuant to paragraph 3 will be provided the
following severance benefits:
(1) Compensation - Payment to an officer shall be made in
the form of a single lump sum, or equal monthly installments
over the Severance Period (as defined below), at the
Committee's sole discretion. The total amount payable in
either form shall equal: (I) the officer's current
annualized salary at the time of termination (or, if
greater, the officer's annualized salary in effect
immediately prior to a Change in Control), plus (II) the
average of the officer's two most recent years' fully paid
management incentive bonuses (or in the event of a Change in
Control the bonus shall not be less than the Section 4(a)(1)
of the Quaker Salaried Employees Compensation and Benefits
Protection Plan) (the "Plan") at the time of termination
(on an annualized basis, if necessary); and the officer's
Severance Period shall be the one year period commencing
with the date following termination of employment (the
"Severance Period"). The single sum payment shall be made,
or the monthly installments shall commence, at the officer's
usual payroll date next following his date of termination.
(2) Welfare Benefits
(I) During the officer's Severance Period the officer
shall be entitled to continued eligibility for health,
medical, dental, life insurance, and accidental death
and dismemberment benefits equivalent to those to which
the officer was entitled prior to the officer's
termination of employment (regardless of the form of
compensation benefit to be provided under subparagraph
(1) above). The officer shall not be required to
contribute more than the normal cost (including those
attributable to changes in levels of benefits) for such
benefits as existed immediately prior to the officer's
termination of employment. The Severance Period for
purposes of this subparagraph (2) shall not be applied
to reduce the benefit extension period required by the
Consolidated Omnibus Budget Reconciliation Act of 1985
or any amendment thereto.
(II) If the officer's Severance Period above ends
within one-year before the officer attains age 55, the
officer's inactive service period for purposes of
continued eligibility for the welfare benefits
described in subparagraph 3(a)(2)(I) shall be continued
until the latter of: (A) the date the officer reaches
age 55, and (B) the date the officer completes 10 years
of service as required under The Quaker Retiree Medical
Plan. However, no such continuation will be provided
if the officer's Severance Period including such
continuation would be greater than 24 months.
(III) If at the end of the officers' Severance Period
the officer's age is at least 50 but below 55, and the
officer's years of service and age (including any
completed months) totals 70 or more, the officer will
continue to be eligible for the welfare benefits
described in subparagraph 3(a)(2)(I) until the earlier
(A) of the date the employee attains age 55, and (B)
the date one year after the end of the officer's
Severance Period. Also, if the benefit extension
period required by the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") ends before the
officer attains age 55, the officer will be provided
continued medical and dental benefit coverage under
the same terms as the COBRA benefit extension until
the officer attains age 55. Also, when the officer
attains age 55, the officer will be deemed eligible
for the Retiree Medical Plan offered to other Quaker
salaried employees retiring at that time.
Notwithstanding the foregoing, this subparagraph
3(a)(2)(III) will only be effective for employees
receiving notices of termination during the period
January 1, 1994 through December 31, 1998.
(IV) Any period for which an officer is provided
welfare benefits at normal cost under this
subparagraph (2) shall not be applied to reduce
the benefit extension period required by COBRA or
any amendment thereto.
(b) All benefits to be paid or provided pursuant to subparagraph 4(a)
shall be in addition to, and shall not be reduced by, any other benefits
payable or provided by separate agreement with the officer, or plan or
arrangement of the Company, except as follows. If an officer is also
eligible for severance benefits to be paid and provided pursuant to
the Plan, and/or The Quaker Severance Pay Plan (the "Severance Plan"),
the greater amount of compensation and longer severance period with respect
to welfare benefits, shall be provided in accordance with and pursuant to the
terms of the Plan, the Severance Plan or Program as the case may be.
In no event will an officer be entitled to duplicative benefits under the
Plan, the Severance Plan and the Program.
(c) Any severance benefits payable under the Program to an officer who
dies prior to full payment of such benefits shall be paid to the officer's
estate.
(d) Notwithstanding any other provision of the Program, severance benefits
furnished hereunder shall be subject to the following terms and conditions:
(1) If the making of severance benefit payments pursuant
to subparagraph 4(a) would subject the officer to an excise
tax under Section 4999 of the Internal Revenue Code of 1986,
as amended, or would result in the Company's loss of a
federal income tax deduction for those payments (either of
these consequences is referred to individually herein as a
"Tax Penalty"), then such severance benefit payments shall
be reduced to the extent necessary to avoid the imposition
of such Tax Penalty. The preceding sentence shall not apply
if such officer: (I) is entitled to a tax reimbursement for
such Tax Penalty under any other agreement, plan or program
of the Company, or (II) may disclaim any portion of or all
benefits payable under this or any other agreement, plan or
program of the Company in order to avoid such Tax Penalty.
(2) If the officer and the Company shall disagree as to
whether the furnishing or a benefit under the Program would
result in the imposition of a Tax Penalty, the matter shall
be resolved by an opinion of counsel chosen by the employee
and reasonably satisfactory to the Company. The Company
shall pay the fees and expenses of such counsel and shall
make available to counsel such information as may be
reasonably necessary to prepare the opinion.
5. NONASSIGNMENT. No benefits payable under the Program shall be subject
in any manner to assignment, anticipation, alienation, sale, transfer,
pledge, encumbrance, or charge, and any such attempted action shall be void and
no such benefit shall be in any manner liable for or subject to debts,
contract, liabilities, engagements, or torts of any officer. If any officer
shall become bankrupt or shall attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any amount or benefit payable
under the plan, then the Committee in its discretion may hold or apply such
benefit or any part thereof to or for the benefit of such officer or
officer's beneficiary, spouse, children, blood relatives, or other dependents,
in such manner and in such proportions as the administrator may consider
proper.
6. AMENDMENT AND TERMINATION. Quaker, by action of its Board, or the
Compensation Committee thereof, shall have the right to amend or terminate this
Program; provided, however, that no such amendment shall alter, modify, or
rescind coverage or benefits with respect to terminated officers eligible for
severance benefits under paragraph 3 of the Program; and in no event shall the
Program be amended or terminated during the five-year period following a Change
in Control of Quaker in a manner which would reduce payments or benefit
extension periods.
7. CONTINUED EMPLOYMENT. Neither the Program nor any of its provisions
shall be construed as giving any officer of the Company a right to continue in
the employ of the Company, or as a limitation of the Company's right to
discharge any of its employees, with or without cause.
8. SUCCESSORS. The Program shall be binding upon any successor of the
Company whether by merger, consolidation, or sale of all or substantially all
of the Company's assets.
9. GOVERNING LAW. The Program 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 preempted by ERISA.
IN WITNESS WHEREOF, this Program is executed by a duly authorized
officer of Quaker.
THE QUAKER OATS COMPANY
July 15, 1997 By: /s/Douglas J. Ralston
Its Senior Vice President
Exhibit 10(j)(3)
FIRST AMENDMENT
TO THE
QUAKER OFFICERS SEVERANCE PROGRAM
(As Amended and Restated Effective July 9, 1997)
WHEREAS, the Quaker Officers Severance Program, as amended and restated
effective July 9, 1997 (the "Program"), was established by The Quaker Oats
Company (the "Company") for the benefit of its eligible officers; and
WHEREAS, amendment of the Program is desirable;
NOW, THEREFORE, the Program is hereby amended effective March 11, 1998 as
follows:
1. By substituting the following for subparagraphs 3(a)(1)(IV) and (V) of the
Program and adding the following new subparagraph (VI):
(IV) Within the time period indicated by the Company when it tenders a
waiver, release and separation agreement form after the officer's
termination, such document is fully executed by the officer (or the
officer's representative) and contains, at a minimum, provisions to
implement the following requirements:
A. Waiver and Release: releases the Company, its officers,
directors, stockholders, employees, agents, assigns,
subsidiaries, divisions, parent companies, affiliates, and
successors from all claims that arise out of or relate in any
way to the officer's employment or termination of employment
with the Company, including claims under anti-discrimination
laws (except that claims for vested wages or vested benefits
shall not be waived);
B. Restrictive Covenants: prohibits the officer from competing
against the Company while receiving severance benefits under the
Program; prohibits the officer from "raiding" Company employees
or disclosing confidential information about the Company for a
specified period that ends not less than one year following the
end of the officer's severance benefits under the Program; and
provides for injunctive enforcement of these provisions, among
other potential remedies; and
C. Non-Disparagement and Cooperation: prohibits the officer from
disparaging the Company for a specified period that ends not
less than one year following the end of the officer's severance
benefits under the Program and requires him to reasonably
cooperate with the Company in the defense or prosecution of
litigation, provided that truthful testimony compelled under
oath shall not be deemed a breach of either of these
requirements.
The Committee shall have broad and complete discretion to interpret these
requirements and to fix the specific enforcement provisions, collateral
provisions and language of such a waiver, release and separation
agreement; and without limitation, the use of any such provision or
language the Company has used in a past separation agreement with another
officer shall be deemed reasonable. However, if the Company fails to
tender a waiver, release and separation agreement form within fifteen (15)
days after the Committee received a written request for such a form from
the officer (or representative), then this requirement shall be deemed
satisfied even though no such form is signed or in effect. Nothing in
this provision shall be construed as requiring an officer to sign a
waiver, release and separation agreement; rather, when the waiver, release
and separation agreement is tendered by the Company, the officer shall be
advised that he/she has two options: sign the waiver, release and
separation agreement, and receive severance benefits, or decline to sign
the waiver, release and separation agreement and thereby forego severance
benefits.
(V) Notwithstanding anything to the contrary in subparagraphs 3(a)(1)(I)
through (IV), if the Committee determines that an officer meets all
requirements of subparagraphs 3(a)(1)(I) through (III), but it is too
early to ascertain whether the officer will satisfy subparagraph
3(a)(1)(IV) because the time for considering or revoking the waiver,
release and separation agreement has not yet expired, then for the sake of
administrative convenience, the Committee may, in its sole discretion,
presume that the officer will satisfy subparagraph 3(a)(1)(IV) and
commence providing severance benefits; provided if the officer fails to
execute the waiver, release and separation agreement by the required time,
revokes it during the prescribed period or otherwise indicates that he/she
will not satisfy subparagraph 3(a)(1)(IV), then all payments of severance
benefits must immediately cease, but the Company shall not be entitled to
reimbursement for severance benefits already paid or provided.
(VI) If an officer competes against the Company, raids Company employees,
discloses confidential information about the Company, disparages the
Company, or refuses to reasonably cooperate in defense or prosecution of
litigation, as determined by the Committee in its sole discretion without
regard to the enforceability of the separation agreement described in
subparagraph 3(a)(1)(IV) or factual findings made by a court in connection
with proceeding to enforce subparagraph 3(a)(1)(IV), then the Committee
may immediately and permanently terminate all further benefits under the
Program; provided, if the Company obtains and enforces injunctive relief,
then during the period while an injunction is in effect, Program benefits
cannot be interrupted or terminated."
2. By substituting the following for subparagraph 4(b) of the Program:
"(b) All benefits to be paid or provided pursuant to subparagraph 4(a)
shall be in addition to, and shall not be reduced by, any other benefits
payable or provided by separate agreement with the officer, or plan or
arrangement of the Company, except as follows. If an officer is also
eligible for severance benefits to be paid and provided pursuant to the
Plan, and/or The Quaker Severance Pay Plan (the Severance Plan), the
greater amount of compensation and longer severance period with respect to
welfare benefits, as determined pursuant to the terms of the Plan, the
Severance Plan or Program (without regard as to whether the officer has
signed any waiver, release and/or separation agreement as required under
the terms of the Plan, the Severance Plan or Program) shall be applicable
to the officer. Such greater amount or longer severance period shall then
apply subject to and in accordance with all terms of the applicable Plan,
the Severance Plan or Program (including the officer's signing the waiver,
release and agreement as required under the terms of the Plan, the
Severance Plan or Program). In no event will an officer be entitled to
duplicative benefits under the Plan, the Severance Plan and the Program."
IN WITNESS WHEREOF, this Amendment is executed below by a duly authorized
officer of the Company.
THE QUAKER OATS COMPANY
Dated: March 11, 1998 By: /s/Douglas J. Ralston
Its Vice President
Exhibit 10(k)(2)
ATTACHMENT III
THE QUAKER LONG TERM INCENTIVE PLAN OF 1999
ARTICLE I
NAME AND PURPOSE
1.1 Name. The Quaker Long Term Incentive Plan of 1999 (the "Plan") is
established by The Quaker Oats Company (the "Company").
1.2 Purpose. The Company has established the Plan to promote the
interests of the Company and its shareholders by providing designated employees
of the Company and its related affiliates with additional incentive and the
opportunity, through stock ownership, to increase their proprietary interest in
the Company and their personal interest in its continued success and progress.
ARTICLE II
DEFINITIONS
2.1 General Definitions. The following words and phrases, when used
herein, unless otherwise specifically defined or unless the context clearly
indicates otherwise, shall have the following meanings:
(a) Affiliate. Any trade or business entity, or a predecessor of
such entity, if any, which is a member of a controlled group of business
entities of which the Company is also a member.
(b) Agreement. The document which evidences the grant of any
Benefit under the Plan and which sets forth the Benefit and the terms,
conditions and provisions of, and restrictions relating to, such Benefit.
(c) Benefit. Any benefit granted to a Participant under the Plan.
(d) Board. The Board of Directors of the Company.
(e) Change in Control. Occurrence upon events describe in Section
9.2.
(f) Code. The Internal Revenue Code of 1986, as amended, and
including the regulations promulgated pursuant thereto.
(g) Committee. The Committee described in Section 5.1.
(h) Common Stock. The Company's $5.00 par value common stock.
(i) Company. The Quaker Oats Company.
(j) Effective Date. The date that the Plan is approved by the
shareholders of the Company, which must occur within one year before or
after original adoption by the Board. Any grants of Benefits prior to the
approval by the shareholders of the Company shall be void if such approval
is not obtained.
(k) Employee. Any person employed by the Employer.
(l) Employer. The Company and all Affiliates.
(m) Exchange Act. The Securities Exchange Act of 1934, as amended.
(n) Fair Market Value. The average of the high and low sales price
of shares on the New York Stock Exchange (composite transactions) on a
given date, or, in the absence of sales on a given date, the closing price
(as so reported) on the New York Stock Exchange on the last previous day
on which a sale occurred prior to such date.
(o) ISO. An Option that meets the requirements of Section 422 of
the Code.
(p) NSO. An Option that does not qualify as an ISO.
(q) Option. An option to purchase Shares granted under ARTICLE XIII
of the Plan.
(r) Other Stock Based Award. An award under ARTICLE XVI that is
valued in whole or in part by reference to, or is otherwise based on,
Common Stock.
(s) Participant. An individual who is granted a Benefit under the
Plan. Benefits may be granted only to Employees.
(t) Performance Goals. The goals described under Article XVII of
the Plan that may be applied by the Committee with respect to Performance
Shares and Other Stock Based Awards.
(u) Performance Share. A Share awarded to a Participant under
ARTICLE XV of the Plan.
(v) Plan. The Quaker Long Term Incentive Plan of 1999 and all
amendments and supplements thereto.
(w) 1990 Plan. The Quaker Long Term Incentive Plan of 1990 and all
amendments and supplements thereto.
(x) Restricted Stock. Shares issued under ARTICLE XIV of the Plan.
(y) Rule 16b-3. Rule 16b-3 promulgated by the SEC, as amended, or
any successor rule in effect from time to time.
(z) SEC. The Securities and Exchange Commission.
(aa) Share. A share of Common Stock..
2.2 Other Definitions. In addition to the above definitions, certain
words and phrases used in the Plan and any Agreement may be defined elsewhere
in the Plan or in such Agreement.
ARTICLE III
COMMON STOCK
3.1 Number of Shares. The maximum number of Shares that may be delivered
to Participants under the Plan shall be equal to the sum of: (a) 8,000,000
Shares; (b) any Shares available for future awards under the 1990 Plan as of
the Effective Date; and (c) any Shares represented by awards granted under the
1990 Plan, which are forfeited, expire, or are canceled without delivery of the
Shares after the Effective Date or which result in the forfeiture of Shares
back to the Company, subject to the provisions of Sections 3.2 and 3.3. Such
Shares may be authorized but unissued Shares, Shares held in the treasury, or
both.
3.2 Reusage. If an Option expires or is terminated, surrendered, or
canceled without having been fully exercised; if Restricted Stock or
Performance Shares are forfeited; or if any other grant results in any Shares
not being issued, the Shares covered by such Option, grant of Restricted Stock,
Performance Shares or other grant, as the case may be, shall again be available
for use under the Plan. If an Option is exercised by tendering Shares to the
Company as full or partial payment in connection with the exercise of an
Option, only the number of Shares issued net of the Shares tendered shall be
deemed delivered for purposes of determining the maximum number of Shares
available for delivery under the Plan.
3.3 Adjustments. If there is any change in the Common Stock by reason of
any stock dividend, spin-off, split-up, spin-out, recapitalization, merger,
consolidation, reorganization, combination or exchange of Shares, the
limitations on the number of Shares specified under Section 3.4, the number of
Shares then available under Section 3.1 of the Plan for Options and grants of
Restricted Stock, Performance Shares and Other Stock Based Awards, the number
of Shares subject to outstanding Options, Restricted Stock, Performance Shares
and Other Stock Based Awards, and the price thereof, as applicable, shall be
appropriately adjusted by the Committee. Shares issued under the Plan through
the settlement, assumption or substitution of outstanding awards or obligations
to grant future awards as a condition of the Company acquiring another entity
shall not reduce the maximum number of Shares available for delivery under the
Plan.
3.4 Limitations.
(a) Options. The total number of Options (ISOs and NSOs combined)
which may be granted to a single Participant shall not exceed 1,000,000
during any calendar year, subject to the adjustments provided under
Section 3.3.
(b) ISOs. The total number of Shares for which ISOs may be granted
on or after the Effective Date shall not exceed 8,000,000 Shares, subject
to the limitations, reusage and adjustments provided in ARTICLE III of the
Plan.
(c) Restricted Stock, Performance Shares and Other Stock Based
Awards. The total number of Shares which may be granted as Restricted
Stock, Performance Shares and Other Stock Based Awards shall not exceed
3,000,000 during the term of the Plan, subject to the adjustments provided
in Section 3.3. The total number of Shares which may be granted as
Performance Shares to a single Participant shall not exceed 350,000 during
any calendar year, subject to the adjustments under Section 3.3. The
total number of Shares which may be granted as Other Stock Based Awards to
a single Participant shall not exceed 350,000 during any calendar year,
subject to the adjustments under Section 3.3.
ARTICLE IV
ELIGIBILITY
The Participants and the Benefits they receive under the Plan shall be
determined solely by the Committee. In making its determinations, the
Committee shall consider past, present and expected future contributions of
Employees and Participants to the Employer.
ARTICLE V
ADMINISTRATION
5.1 Committee. The Plan shall be administered by the Committee (also
known as the Compensation Committee of the Board). The Committee shall consist
of no less than three members of the Board, all of whom shall not be (nor
formerly have been) employees of the Company and who shall not be eligible to
participate in the Plan. The members of the Committee shall be appointed by
and shall serve at the pleasure of the Board, which may from time to time
appoint members in substitution for members previously appointed and fill
vacancies, however caused, in the Committee.
5.2 Authority. Subject to the terms of the Plan, the Committee shall
have complete authority to:
(a) determine the Employees to whom Benefits are granted, the type
and amounts of Benefits to be granted and the time of all such grants;
(b) determine the terms, conditions and provisions of, and
restrictions relating to, each Benefit granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to
the Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Benefits under the Plan;
(g) maintain accounts, records and ledgers relating to Benefits;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for such
purposes as the Committee considers necessary or desirable;
(j) take, at anytime, any action permitted by Section 9.1
irrespective of whether any Change in Control has occurred or is imminent;
and
(k) do and perform all acts which it may deem necessary or
appropriate for the administration of the Plan and carry out the purposes
of the Plan.
5.3 Determinations. All determinations of the Committee shall be final.
5.4 Delegation. Except as required by Rule 16b-3 with respect to
Benefits to individuals who are subject to Section 16 of the Exchange Act or as
otherwise required for compliance with Rule 16b-3 or other applicable law, the
Committee may delegate all or any part of its authority under the Plan to any
Employee, Employees or committee.
ARTICLE VI
AMENDMENT
6.1 Power of Board. Except as hereinafter provided, the Board shall have
the sole right and power to amend the Plan at any time and from time to time.
6.2 Limitation. The Board may not amend the Plan without approval of the
shareholders of the Company:
(a) in a manner which would increase the number of Shares which may
be issued or sold or for which Options, Performance Shares, or Other Stock
Based awards may be granted under the plan; or
(b) in a manner which would violate applicable law.
ARTICLE VII
TERM AND TERMINATION
7.1 Term. The Plan shall commence as of the Effective Date and, subject
to the terms of the Plan, including those requiring approval by the
shareholders of the Company and those limiting the period over ISOs or any
other Benefits may be granted, shall continue in full force and effect until
December 31, 2007.
7.2 Termination. The Plan may be terminated at any time by the Board.
ARTICLE VIII
MODIFICATION OR TERMINATION OF BENEFITS
8.1 General. Subject to the provisions of Section 8.2, the amendment or
termination of the Plan shall not adversely affect a Participant's right to any
Benefit granted prior to such amendment or termination.
8.2 Committee's Right. Except as hereinafter provided, any Benefit
granted may be converted, modified, forfeited or canceled, in whole or in part,
by the Committee if and to the extent permitted in the Plan or applicable
Agreement or with the consent of the Participant to whom such Benefit was
granted. The Committee may not cancel or permit the surrender of Options and
reissue new Options, or reprice Options, at a lower purchase price.
ARTICLE IX
CHANGE IN CONTROL
9.1 Benefit Cancellation and Payment.
(a) Options. Upon the occurrence of a Change in Control, Options
outstanding on the date on which the Change in Control occurs shall be
canceled, and an immediate lump sum cash payment shall be paid to the
Participant equal to the product of (1) the higher of (i) the closing
price of the Common Stock as reported on the New York Stock Exchange
Composite Index on or nearest the date of payment (or, if not listed on
such exchange, on a nationally recognized exchange or quotation system on
which trading volume in the Common Stock is highest), or (ii) the highest
per Share price for the Common Stock actually paid in connection with the
Change in Control, over the per Share Option price of each such Option
held (whether or not then fully exercisable), and (2) the number of Shares
covered by each such Option.
(b) Restricted Stock. Upon the occurrence of a Change in Control,
Restricted Stock outstanding on the date on which the Change in Control
occurs shall be canceled and an immediate lump sum cash payment shall be
paid to the Participant equal to the product of (1) the higher (i) the
closing price of Common Stock as reported on the New York Stock Exchange
Composite Index on or nearest the date of payment (or, if not listed on
such exchange, on a nationally recognized exchange or quotation system on
which trading volume in the Common Stock is highest) or (ii) the highest
per share price for Common Stock actually paid in connection with the
Change in Control and (2) the number of Shares of such Restricted Stock;
plus the value of any related Cash Award relating to such Restricted
Stock.
(c) Performance Shares. Upon the occurrence of a Change in Control,
any Performance Shares previously granted, but still considered
outstanding (as a right to received Shares or cash equal to the Fair
Market Value of such Shares at a future date), shall be canceled and any
profit and/or performance objectives with respect to such Performance
Shares shall be deemed to have been attained to the full and maximum
extent; and an immediate lump sum cash payment shall be paid to the
Participant in an amount determined in accordance with the terms and
conditions set forth in the applicable Agreement.
(d) Other Stock Based Awards. Upon the occurrence of a Change in
Control, Other Stock Based Awards previously granted under the Plan, but
still considered outstanding, shall be canceled and an immediate lump sum
cash payment shall be paid to the Participant in an amount determined in
accordance with the terms and conditions set forth in the applicable
Agreement.
(e) Tax Penalties. If the making of payments pursuant to the
foregoing paragraphs of this Section 9.1 would subject the Participant to
an excise tax under Section 4999 of the Code, or would result in the
Company's loss of a federal income tax deduction for those payments
(either of these consequences is referred to individually herein as a "Tax
Penalty"), then the Company shall reduce the amount of Benefits to be
canceled to the extent necessary to avoid the imposition of such Tax
Penalty, and shall establish procedures necessary to maintain for the
Participants any form of benefit which may be provided under the Plan so
that such Participant will be in the same financial position with respect
to those Benefits not canceled as he would have been in the ordinary
course, absent a Change in Control and assuming his continued employment;
except that the foregoing provisions of this paragraph (e), with respect
to the cancellation of Benefits, shall not apply if such Participant (i)
is entitled to a tax reimbursement for such Tax Penalty under any other
agreement, plan or program of the Company, or (ii) may disclaim any
portion of or all payments to be made pursuant to or under any other
agreement, plan or program of the Company in order to avoid such Tax
Penalty. Disagreements as to whether payments pursuant to the foregoing
would result in the imposition of a Tax Penalty shall be resolved by an
opinion of counsel chosen by the Participant and reasonably satisfactory
to the Company.
9.2 Change in Control. A Change in Control 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 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 shareholders 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;
provided, however, that in determining whether any Person owns 25% or more
of such voting power, shares owned by such Person which were acquired by
that Person directly from the Company shall be treated as not owned by
such Person;
(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 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 shareholders, 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 shareholders 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); or
(d) the shareholders 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 shareholders 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 shareholders, was approved by a vote of at least two-thirds (2/3)
of the directors before the beginning of such period.
ARTICLE X
AGREEMENTS AND CERTAIN BENEFITS
10.1 Grant Evidenced by Agreement. The grant of any Benefit under the
Plan may be evidenced by an Agreement which shall describe the specific Benefit
granted and the terms and conditions of the Benefit. The granting of any
Benefit may be subject to, and conditioned upon, the recipient's execution of
any Agreement required by the Committee. Except as otherwise provided in an
Agreement, all capitalized terms used in the Agreement shall have the same
meaning as in the Plan, and the Agreement shall be subject to all of the terms
of the Plan.
10.2 Provisions of Agreement. Each Agreement shall contain such
provisions that the Committee shall determine to be necessary, desirable and
appropriate for the Benefit granted. Each Agreement may include, but shall not
be limited to, the following with respect to any Benefit: description of the
type of Benefit; the Benefit's duration; its transferability; if an Option, the
exercise price, the exercise period and the person or persons who may exercise
the Option; the effect upon such Benefit of the Participant's death or
termination of employment; the Benefit's conditions; when, if and how any
Benefit may be forfeited, converted into another Benefit, modified, exchanged
for another Benefit, or replaced; and the restrictions on any Shares purchased
or granted under the Plan.
ARTICLE XI
REPLACEMENT AND TANDEM AWARDS
11.1 Replacement. Subject to Section 8.2, the Committee may permit a
Participant to elect to surrender a Benefit in exchange for a new Benefit.
11.2 Tandem Awards. Benefits may be granted by the Committee in tandem.
However, no Benefit may be granted in tandem with an ISO.
ARTICLE XII
PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING
12.1 Payment. Upon the exercise of an Option or in the case of any other
Benefit that requires a payment to the Company, the amount due the Company is
to be paid:
(a) in cash;
(b) by the tender to the Company of Shares owned by the Participant
and registered his name having a Fair Market Value equal to the amount due
to the Company;
(c) in other property, rights and credits, including the
Participant's promissory note; or
(d) by any combination of the payment methods specified in (a), (b)
and (c) above.
Notwithstanding the foregoing, any method of payment other than (a) may be used
only with the consent of the Committee, or if and to the extent so provided in
the applicable Agreement.
12.2 Dividend Equivalents. Grants of Benefits in Shares or Share
equivalents may include dividend equivalent payments or dividend credit rights.
12.3 Deferral. The right to receive any Benefit under the Plan may, at
the request of the Participant, be deferred for such period and upon such terms
as the Committee shall determine, which may include crediting of interest on
deferrals of cash and crediting of dividends on deferrals denominated in
Shares.
12.4 Withholding. The Company, at the time any distribution is made
under the Plan, whether in cash or in Shares, may withhold from such
distribution any amount necessary to satisfy federal, state and local tax
withholding requirements with respect to such distribution. Such withholding
may be in cash or in Shares.
ARTICLE XIII
OPTIONS
13.1 Types of Options. It is intended that both ISOs and NSOs may be
granted by the Committee under the Plan.
13.2 Grant of Options and Option Price. Each Option may not have a
term that exceeds 10 years from the date of grant, must be granted to an
Employee and must be granted no later than December 31, 2007. The purchase
price for Shares under any Option shall be no less than the Fair Market Value
of the Shares at the time the Option is granted.
13.3 Early Termination of Option.
(a) Termination of Employment. All rights to exercise an Option
terminate when the Participant's employment terminates for any reason
other than his death or retirement. Transfer from the Company to an
Affiliate, or vice versa, or from one Affiliate to another, shall not be
deemed termination of employment. The Committee shall have the authority
to determine in each case whether an authorized leave of absence or
absence on military or government service shall be deemed a termination of
employment for purpose of this paragraph (a).
(b) Death or Retirement. If a Participant dies while an Employee or
his employment is terminated because of retirement, his Option shall
terminate within a period not exceeding five years following his death or
retirement, but not later than the date the Option expires pursuant to its
terms. The terms of Options outstanding, except for those Options
intended to qualify as an ISO, may also be amended at anytime by the
Committee or the Board to extend the Option's duration period following a
Participant's death or retirement, subject to the limitations stated in
the preceding sentence. In the meantime, subject to the limitations in
the applicable Agreement, it may be exercised by the Participant, the
executors or administrators of his estate, or by his legatee or heirs.
"Retirement" shall mean termination of employment at age 55 for older for
reasons other than death.
13.4 Other Requirements. The terms of each Option which is intended to
qualify as an ISO shall meet all requirements of Section 422 of the Code. The
terms of each NSO shall provide that such Option will not be treated as an ISO.
13.5 Determination by Committee. Except as otherwise provided in Section
13.2 through Section 13.4, the terms of all Options shall be determined by the
Committee.
ARTICLE XIV
RESTRICTED STOCK
14.1 Description. The Committee may grant Benefits in Shares available
under ARTICLE III of the Plan as Restricted Stock. Shares of Restricted Stock
shall be issued at the time of the grant but shall be subject to forfeiture
until provided otherwise in the applicable Agreement or the Plan.
14.2 Terms and Conditions of Restricted Stock Awards. All Shares of
Restricted Stock shall be subject to the following terms and conditions, and to
such other terms and conditions as may be provided under the Agreements
described in paragraph (f) next below:
(a) Payment of Par Value. The Committee, in its discretion, may
condition any grant of Shares of Restricted Stock on payment by the
Participant to the Company of an amount not in excess of the par value of
such Shares. If any such shares are subsequently forfeited by the
Participant, the Company shall pay an equivalent amount to the Participant
as soon as practicable after the forfeiture.
(b) Restricted Period. Shares of Restricted Stock granted to a
Participant may not be sold, assigned, transferred, pledged or otherwise
encumbered during a "Restricted Period" commencing on the date of the
grant and ending on such date as the Committee may designate, subject to
the following:
(1) The Committee may, at any time and in its sole discretion,
reduce or terminate the Restricted Period with respect to any
outstanding Shares of Restricted Stock and any accrued dividends in
accordance with paragraph (g) below.
(2) The Restricted Period applicable to any Participant's
Shares of Restricted Stock shall end as of the date on which the
Participant's employment with the Company and its Affiliates is
terminated by reason of the Participant's death, physical or mental
disability (as determined by the Committee), or for such other
reasons as the Committee may provide.
(3) The Committee may, at any time, and in its sole discretion,
allow a Participant to use his Restricted Stock during the Restricted
Period as payment of the Option purchase price (in accordance with
Section 12.1) for Options which he has been granted. In such an
event, a number of the Shares issued upon the exercise of the Option,
equal to the number of Shares of Restricted Stock used as payment
therefore, shall be subject to the same restrictions as the
Restricted Stock so used, plus any additional restrictions that may
be imposed by the Committee. Such terms and conditions relating to
such use of Restricted Stock shall be provided under the Agreements
described in paragraph (f) of this Section.
(c) Transfer of Restricted Stock. At the end of the Restricted
Period applicable to any Restricted Stock, such Shares, and any accrued
dividends will be transferred free of all restrictions to the Participant
(or, to the Participant's legal representative, beneficiary or heir).
(d) Forfeitures. Subject to paragraph (b) of this Section 14.2, a
Participant whose employment with the Company and its Affiliates is
terminated prior to the last day of the applicable Restricted Period shall
forfeit all shares of Restricted Stock and any accrued dividends.
(e) Certificate Deposited With Company. Each certificate issued in
respect of Shares of Restricted Stock granted to a Participant under the
Plan shall be registered in the name of the Participant and deposited,
together with a stock power endorsed in blank, with the Company. At the
discretion of the Committee, any such certificates may be deposited in a
bank designated by the Committee. Each such certificate shall bear the
following (or a similar) legend:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeitures) contained in The Quaker
Long Term Incentive Plan of 1999 and an Agreement entered
into between the registered owner and The Quaker Oats
Company. A copy of the Plan and Agreement is on file in
the office of the Secretary of The Quaker Oats Company, 321
North Clark Street, Chicago, Illinois 60610."
(f) Restricted Stock Agreement. The Participant shall enter into an
Agreement with the Company in a form specified by the Committee and
containing such additional terms and conditions, if any, as the Committee
in its sole discretion shall determine, which are not inconsistent with
the provisions of the Plan.
(g) Dividends. Regular cash dividends payable with respect to
shares of Restricted Stock shall, in accordance with the terms of the
applicable Agreement, be paid to the Participant currently or accrued. If
dividends are accrued, interest may be payable on such dividends at such
rate, if any, as is established from time to time by the Committee.
(h) Substitution of Rights. Prior to the end of the Restricted
Period with respect to any Shares of Restricted Stock awarded to a
Participant, the Committee may, with the consent of the Participant,
substitute an unsecured obligation of the Company to pay cash or stock
(on such reasonable terms and conditions as the Committee may, in its sole
discretion, determine) in lieu of its obligations under this ARTICLE XIV
to deliver unrestricted Shares plus accrued dividends.
(i) Shareholder Rights. Subject to the foregoing restrictions, each
Participant shall have all the rights of a shareholder with respect to
Shares of Restricted Stock including, but not limited to, the right to
vote such Shares.
ARTICLE XV
PERFORMANCE SHARES
15.1 Description. Performance Shares are the right of an individual to
whom a grant of such Shares is made to receive Shares or cash equal to the Fair
Market Value of such Shares at a future date in accordance with the terms of
such grant.
15.2 Grant. The Committee may grant an award of Performance Shares. The
number of Performance Shares and the terms and conditions of the grant shall be
set forth in the applicable Agreement, which may include Performance Goals as
described in Article XVII.
ARTICLE XVI
OTHER STOCK BASED AWARDS
16.1 Description. The Committee shall have the right to provide any other
form of stock based awards under the Plan, if the Committee believes that such
Other Stock Based Award would further the purposes for which the Plan was
established.
16.2 Grant. The Committee may grant an award of Other Stock Based Awards
which may include, without limitation, the grant of Shares based on certain
conditions, or the grant of securities convertible into Shares. The number of
Other Stock Based Awards and the terms and conditions of the grant shall be set
forth in the applicable Agreement, which may include Performance Goals as
described in Article XVII.
ARTICLE XVII
PERFORMANCE GOALS
Performance Shares and Other Stock Based Awards may be governed by the
achievement of Performance Goals as the Committee shall determine. Performance
Goals that may be used by the Committee for such grants shall consist of:
operating profits (which may include a determination based upon earnings before
income taxes, depreciation and amortization), net profits, earnings per share,
profit returns and margins, revenues, controllable earnings, shareholder return
and/or value, stock price and working capital. Performance Goals may be
measured solely on a corporate, subsidiary or business unit basis, or a
combination thereof and may reflect absolute entity performance or a relative
comparison of entity performance to the performance of a peer group of entities
or other external measure of the selected performance criteria. Profits,
earnings and revenues used for any Performance Goal measurement may exclude:
gains or loses on operating asset sales or dispositions; asset write-downs;
litigation or claim judgments or settlements; accruals for historic
environmental obligations; effect of changes in tax law or rate on deferred tax
liabilities; accruals for reorganization and restructuring programs; uninsured
catastrophic property losses; the cumulative effect of changes in accounting
principles; and any extraordinary non-recurring items as described in
Accounting Principles Board Opinion No. 30 and/or in management's discussion
and analysis of financial performance appearing in the Company's annual report
to shareholders for the applicable year.
ARTICLE XVIII
MISCELLANEOUS PROVISIONS
17.1 Underscored References. The underscored references contained in the
Plan are included only for convenience, and they shall not be construed as a
part of the Plan or in any respect affecting or modifying its provisions.
17.2 Number and Gender. The masculine and neuter, wherever used in the
Plan, shall refer to either the masculine, neuter or feminine; and, unless the
context otherwise requires, the singular shall include the plural and the
plural the singular.
17.3 Governing Law. This Plan shall be construed and administered in
accordance with the laws of the State of Illinois.
17.4 Purchase for Investment. The Committee may require each person
purchasing Shares pursuant to an Option or other award under the Plan to
represent to and agree with the Company in writing that such person is
acquiring the Shares for investment and without a view to distribution or
resale. The certificates for such Shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer. All
certificates for Shares delivered under the Plan shall be subject to such stock-
transfer orders and other restrictions as the Committee may deem advisable
under all applicable laws, rules and regulations, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
17.5 No Employment Contract. The adoption of the Plan or the granting of
a Benefit shall not confer upon any Employee any right to continued employment
nor shall it interfere in any way with the right of the Employer to terminate
the employment of any of its Employees at any time.
17.6 No Effect on Other Benefits. The receipt of Benefits under the Plan
shall have no effect on any benefits to which a Participant may be entitled
from the Employer, under another plan or otherwise, or preclude a Participant
from receiving any such benefits.
IN WITNESS WHEREOF, this Plan is executed by a duly authorized officer of
the Company.
THE QUAKER OATS COMPANY
Dated: May ___, 1998 By:
Its Senior Vice President
EXHIBIT 12
STATEMENTS RE COMPUTATION OF RATIOS
THE QUAKER OATS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions) Year Ended
Dec. 31, 1997 Dec. 31, 1996
Earnings:
(Loss) Income Before Income Taxes $(1,064.3) $ 415.6
Add Fixed Charges - net of capitalized
interest 97.0 118.2
Earnings $ (967.3) $ 533.8
Fixed Charges:
Interest on Indebtedness $ 88.3 $ 112.3
Portion of rents representative of the
interest factor 12.7 12.1
Fixed Charges $ 101.0 $ 124.4
Ratio of Earnings to Fixed Charges (a) (9.58) 4.29
(a) For purposes of computing the ratio of earnings to fixed charges, earnings
represent pretax (loss) income from continuing operations plus fixed charges
(net of capitalized interest). Fixed charges represent interest (whether
expensed or capitalized) and one-third (the portion deemed representative
of the interest factor) of rents.
Exhibit 13
Management's Discussion and Analysis
Operating Results
The following discussion addresses the operating results and financial condition
of the Company for the year ended December 31, 1997. Previously reported
amounts have been restated to conform to the current presentation. The
comparisons of 1997 operations to those of 1996, and of 1996 to 1995 are
affected by the changes the Company has made in its portfolio of businesses
during these years. 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. See Note 2 to the Consolidated
Financial Statements for further discussion of the Company's divestiture
activities.
The following tables summarize the net sales and operating results of the
Company for the years ended December 31, 1997 (current year), 1996 (prior year)
and 1995:
<TABLE>
<CAPTION>
Net Sales Dollars in Millions
Year Ended December 31 1997 1996 1995
U.S. and U.S. and U.S. and
Canadian International Total Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foods $2,572.8 $657.1 $3,229.9 $2,463.1 $625.5 $3,088.6 $2,510.6 $ 594.5 $3,105.1
Beverages 1,183.3 335.2 1,518.5 1,095.4 282.5 1,377.9 1,039.8 307.6 1,347.4
Ongoing Businesses 3,756.1 992.3 4,748.4 3,558.5 908.0 4,466.5 3,550.4 902.1 4,452.5
Divested Businesses 260.5 6.8 267.3 697.0 35.5 732.5 1,034.9 466.6 1,501.5
Total Company $4,016.6 $999.1 $5,015.7 $4,255.5 $943.5 $5,199.0 $4,585.3 $1,368.7 $5,954.0
<CAPTION>
Operating Income (Loss) Dollars in Millions
Year Ended December 31 1997 1996 1995
U.S. and U.S. and U.S. and
Canadian International Total Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foods $ 334.2 $ (4.0) $ 330.2 $ 366.3 $ 6.6 $ 372.9 $ 276.9 $ (22.7) $ 254.2
Beverages 177.8 3.2 181.0 176.3 (20.6) 155.7 108.4 (46.5) 61.9
Ongoing Businesses 512.0 (0.8) 511.2 542.6 (14.0) 528.6 385.3 (69.2) 316.1
(Losses) Gains on
divestitures (1,420.4) -- (1,420.4) 133.6 2.8 136.4 604.2 566.6 1,170.8
Divested Businesses (13.4) (1.7) (15.1) (90.5) (8.6) (99.1) (76.5) 4.6 (71.9)
(1,433.8) (1.7) (1,435.5) 43.1 (5.8) 37.3 527.7 571.2 1,098.9
Total Company $ (921.8) $ (2.5) $ (924.3) $ 585.7 $(19.8) $ 565.9 $ 913.0 $ 502.0 $1,415.0
<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.
"Ongoing Businesses": includes the net sales and operating results of all
Company businesses not reported as Divested Businesses (see below).
"(Losses) Gains on divestitures": 1997 includes a pretax loss of $1.41 billion
on the sale of the Snapple beverages business and a combined pretax loss of $5.8
million on the sale of certain food service businesses. 1996 includes pretax
gains related to the following divestitures: U.S. and Canadian frozen foods
($133.6 million) and Italian products ($2.8 million) businesses. 1995 includes
pretax gains on the following divestitures: U.S. and Canadian pet food ($513.0
million), U.S. bean and chili ($91.2 million), European pet food ($487.2
million), Mexican chocolate ($74.5 million) and Dutch honey ($4.9 million)
businesses.
"Divested Businesses": 1997 includes current year (through the divestiture
date) net sales and operating results for the Snapple beverages (May 1997) and
certain food service (December 1997) businesses. 1996 includes prior year
(through the divestiture date) net sales and operating results for the U.S. and
Canadian frozen foods (July 1996) and Italian products (January 1996) businesses
and the businesses divested in 1997. 1995 includes net sales and operating
results for the year ended December 31, 1995, for the following businesses
(through the divestiture dates): U.S. and Canadian pet food (March 1995), U.S.
bean and chili (June 1995), European pet food (April 1995), Mexican chocolate
(May 1995), Dutch honey (February 1995) and the businesses divested in 1996 and
1997.
25
</FN>
</TABLE>
1997 Compared with 1996
Consolidated net sales decreased 4 percent due to the absence of divested
businesses. For ongoing businesses, sales were up 6 percent driven by Worldwide
Gatorade thirst quencher, Latin American Foods and U.S. and Canadian Foods,
particularly ready-to-eat and hot cereals and flavored rice and pasta. With the
exception of a ready-to-eat cereals price reduction in June 1996, price and
currency exchange rate changes did not significantly affect the comparison of
current and prior year net sales.
Consolidated gross profit margin was 48.9 percent in 1997 compared to 46.0
percent in 1996, reflecting lower costs in most businesses and the divestiture
of the lower-margin Snapple beverages business in 1997.
Selling, general and administrative (SG&A) expenses decreased $42.1 million,
primarily due to the absence of divested businesses. For ongoing businesses,
SG&A increased $184.4 million, or 11 percent, driven by a 14 percent increase in
advertising and merchandising (A&M) expenses. A&M expenses were 24.5 percent of
sales, up from 23.1 percent in the prior year, driven, in part, by increased
media support for Gatorade Frost and spending for new snacks.
During 1997, the Company recorded restructuring charges totaling $65.9 million.
In the U.S. and Canadian Foods business, restructuring charges of $44.3 million
were recorded for various plant consolidations, including $30.7 million for the
closing of a rice cakes plant in Gridley, California, $5.9 million for the
closing of a Near East plant in Leominster, Massachusetts and $3.6 million and
$4.1 million for manufacturing consolidations in the food service and hot
cereals businesses, respectively. A Brazilian pasta plant consolidation in the
International Foods business resulted in restructuring charges of $10.7 million.
In Worldwide Beverages, restructuring charges of $3.1 million and $1.1 million
were recorded to reconfigure U.S. Gatorade manufacturing lines and to close an
office in Singapore, respectively. The Company also recorded $4.9 million and
$1.8 million of restructuring charges related to staffing reductions in the U.S.
and Canadian Foods and Beverages businesses, respectively. The restructuring
charges are comprised of asset write-offs, loss on leases, severance and
termination benefits and other shut-down costs. Savings from these actions
substantially began in 1997 and are estimated to be about $29 million annually,
with approximately 90 percent in cash. The Company is currently reviewing its
business strategies and may change its priorities, which could result in future
charges. While the restructuring actions taken during the current year are
expected to result in the elimination of much 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.
Current year operating results include a pretax loss of $1.41 billion on the
sale of the Snapple beverages business in May 1997. As a result of this
transaction, the Company expects to recover approximately $250 million in taxes
paid on previous capital gains from divestitures. The Company has recognized a
tax benefit and recorded an income tax receivable for this amount. In December
1997, the Company completed the sale of the Richardson toppings and condiments
business and signed a definitive agreement to sell its food service bagel
businesses. These transactions resulted in a combined pretax charge of $5.8
million, reflecting the sale and a write-down of assets to fair market value.
Cash proceeds from these transactions were received in January 1998. The
Company continues to review strategies related to its business portfolio, which
may result in future charges.
Excluding the losses and gains on divestitures, restructuring charges and
operating results from divested businesses in both years, operating income of
$577.1 million increased $42.1 million, or 8 percent, from the prior year,
reflecting improvement across the ongoing Foods and Beverages businesses. 1997
operating results from divested businesses primarily reflect the Snapple
beverages operating losses through its May divestiture, compared to a full year
of operating results in 1996.
Net financing costs (net interest expense and foreign exchange losses) decreased
$18.4 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 losses and gains on divestitures and restructuring
charges in both years, and a non-recurring foreign tax benefit of $7.2 million
in 1996, the effective tax rate was 38.1 percent in 1997 versus 41.0 percent in
1996. The decrease was primarily due to lower non-deductible goodwill
amortization in 1997.
Industry Segment Operating Results
Foods - U.S. and Canadian net sales and volume increased by 4 percent. Sales
increased in ready-to-eat and hot cereals, flavored rice and pasta, mixes, syrup
and new snacks. A 12 percent increase in ready-to-eat cereals sales was driven
by volume growth in bagged and box cereals. These sales increases more than
offset lower sales in rice cakes and food service, as well as the adverse effect
of the June 1996 ready-to-eat cereals price reduction. Competitive pressure in
the low-fat snacks category continued to adversely affect rice cakes sales and
profitability. Plant consolidation and new snack product development were among
the Company's actions taken to address this issue. Excluding restructuring
charges of $49.2 million and $6.4 million in 1997 and 1996, respectively, U.S.
and Canadian operating income increased 3 percent from the prior year, as the
favorable impact of the sales gain and lower costs was partly offset by
increases in A&M expenses. Higher A&M expenses reflect increased trade and
media spending to support hot cereals, grain-based snacks and flavored rice and
pasta.
26
International sales and volume were up 5 percent and 2 percent, respectively,
reflecting increases in Latin America, particularly Brazilian chocolate powder
and ready-to-drink beverages. Sales in Europe and the Asia/Pacific region were
stable. Excluding current year restructuring charges of $10.7 million and a non-
recurring net charge of $4.8 million related to the Brazilian pasta business,
International operating income increased $4.9 million. Sales gains in Latin
America and improved profitability in the European cereals business more than
offset continued underwriting in the Asia/Pacific region.
The Company has taken numerous actions relative to its Brazilian pasta business
in light of the continuing operating losses of this business. During the
Company's operating planning process, an updated review of the strategies,
actions taken to date, and the expected financial prospects of this business was
undertaken. As a part of this process, the Company evaluated the recoverability
of the long-lived assets of its Brazilian pasta 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." 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 its Brazilian pasta business to fair market
value. The Company's estimate of fair market value was based on various
methodologies including a discounted value of estimated future cash flows 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. Separately, the Company received a $35.0 million cash litigation
settlement related to this business.
Beverages - U.S. and Canadian net sales and volume increased 8 and 9 percent,
respectively, reflecting incremental sales from a new product, Gatorade Frost,
and strong execution of retail in-store initiatives, resulting in market share
gains. Excluding current year restructuring charges of $4.9 million, U.S. and
Canadian operating income increased 4 percent. Sales growth and lower packaging
costs were partly offset by a 15 percent increase in A&M expenses, driven, in
part, by media spending for Gatorade Frost, and the allocation of overhead costs
previously allocated to the Snapple beverages business.
International sales and volume increased 19 percent and 15 percent,
respectively. Sales were up in all regions, led by a 24 percent gain in Latin
America. The Company improved profitability in the Latin American and European
businesses and continued its underwriting in Asia/Pacific markets.
1996 Compared with 1995
Consolidated net sales decreased 13 percent, primarily due to divested
businesses. The absence of sales from the businesses divested in 1995 and a
$59.5 million sales decline in Snapple beverages resulted in a significant sales
decrease. A mid-summer change in advertising and promotion tactics and the lack
of volume momentum early in the beverage season contributed to the Snapple
beverages sales decline. Excluding divested businesses from the comparison,
sales rose slightly as increases in U.S. Gatorade thirst quencher and hot
cereals, Canadian and International Foods were offset by declines in ready-to-
eat cereals (due to a June 1996 price reduction) and rice cakes, as well as
declines in the food service coffee, flavored rice and pasta and European
beverages businesses. With the exception of a ready-to-eat cereals price
reduction, price changes did not have a significant impact on 1996 sales.
Consolidated gross profit margin was 46.0 percent in 1996 compared to 44.7
percent in 1995, reflecting lower costs in the U.S. and Canadian Beverages
business.
SG&A expenses declined 16 percent, driven by an 18 percent decrease in A&M
expenses. A&M expenses were 23.1 percent of sales, down from 24.6 percent in
1995. The Company spent $174.5 million in 1996 and $354.8 million in 1995 on
A&M to support businesses that have been divested. For ongoing businesses,
increased efficiency in A&M spending in the U.S. and Canadian Foods and Gatorade
thirst quencher businesses resulted in lower A&M expenses.
In 1996, the Company recorded restructuring charges of $23.0 million. These
charges included $16.6 million to change how the Company sold Snapple beverages
in certain Texas markets and $6.4 million for plant consolidations in the U.S.
and Canadian Foods business. In 1995, the Company recorded restructuring
charges totaling $117.3 million. These charges included $76.5 million for cost-
reduction and realignment activities, primarily in the corporate, U.S. shared
services and business unit structures, the European cereals business and the
U.S. distribution network. The 1995 charges also included $16.4 million to
realign the European beverage and Asia/Pacific grain-based food businesses and
$24.4 million to reduce the amount of contract manufacturing capacity for
Snapple beverages. Savings realized from the 1996 and 1995 restructuring
actions were in line with expectations. With the 1997 divestiture of the
Snapple beverages business, there are no remaining reserves and no recurring
savings to be realized from restructuring activities related to that business.
27
Consolidated operating income included $136.4 million and $1.17 billion in gains
on divestitures in 1996 and 1995, respectively. Excluding these gains,
restructuring charges and operating results from divested businesses in both
years, operating income of $535.0 million increased 31 percent from 1995,
reflecting improvement across the ongoing Foods and Beverages businesses.
Operating results from divested businesses reflect an increased loss in the U.S.
Snapple beverages business versus 1995, driven by the sales decline, higher
marketing and overhead expenses and increased A&M support, partly offset by
improved gross margin.
Net financing costs (net interest expense and foreign exchange losses) decreased
$25.5 million in 1996. Debt levels declined due to proceeds from the 1996 and
1995 divestitures, resulting in lower interest expense.
The effective tax rate in 1996 was 40.4 percent versus 40.7 percent in 1995.
Excluding the impact of the gains on divestitures and restructuring charges in
both years, and a non-recurring foreign tax benefit of $7.2 million in 1996, the
effective tax rate was 41.0 percent in 1996 versus 40.2 percent in 1995.
Industry Segment Operating Results
Foods - U.S. and Canadian net sales declined 2 percent on nearly flat volume.
During 1996, the Company implemented changes in the A&M programs of its U.S. and
Canadian businesses with the intention of removing less profitable promotions
from its merchandising mix. Operating income margins expanded both in
businesses with volume increases, including hot cereals, Canadian foods and
granola bars, as well as those with volume declines, including flavored rice and
pasta and food service, reflecting the success of these A&M program changes.
During 1996, the rice cakes and ready-to-eat cereals businesses faced
significant competitive issues which adversely affected sales. Rice cakes
volume declined due to increased competitive pressure in the low-fat snacks
category. In June 1996, the Company took price reductions averaging 15 percent
on 87 percent of its ready-to-eat cereals brands. These pricing actions, a
response to comparable actions taken by major competitors, resulted in
significantly lower ready-to-eat sales and operating income in 1996 as compared
to 1995. The adverse affect of the price reductions on ready-to-eat cereals
operating income was partially mitigated by a 3 percent volume gain in ready-to-
eat cereals. Excluding restructuring charges of $6.4 million and $39.1 million
in 1996 and 1995, respectively, U.S. and Canadian operating income increased
$56.7 million, or 18 percent. Operating results reflected a 2.5 percentage-
point improvement in operating margin, mainly the result of A&M efficiency
improvements.
International sales were up 5 percent while volume decreased 2 percent compared
to 1995. Price increases in the Latin American business, particularly in
Brazil, were the key driver of the International sales gain. Volume declines
were primarily in the Brazilian pasta and European foods businesses, which more
than offset volume gains in other foods businesses in Brazil and Venezuela. The
Brazilian pasta volume decline was due to competitive pricing pressures, while
the decrease in European foods volume reflects the business realignment in that
region. The absence of 1995 restructuring charges of $31.3 million was the key
driver of the improved operating results in 1996. Improved profits in Europe
were offset by operating income declines in Latin America, due to increased
operating losses in the Brazilian pasta business.
Beverages - U.S. and Canadian Gatorade thirst quencher net sales growth of 5
percent on a 4 percent volume gain was aided by successful new flavors and
packaging and retail shelf space gains. U.S. and Canadian operating income
increased $59.9 million, excluding 1995 restructuring charges of $8.0 million
from the comparison. Cost-reductions and efficiency gains in supply chain and
A&M costs were the key drivers of the operating profitability improvement.
International sales and volume decreased 8 percent and 7 percent, respectively,
primarily due to decreases in European Gatorade thirst quencher, reflecting 1995
restructuring actions. The improvement in International operating results was
mainly due to the absence of 1995 restructuring charges of $14.5 million and
overhead reductions, principally in Europe.
Liquidity and Capital Resources
Net cash provided by operating activities was $490.0 million in 1997, an
increase of $79.6 million compared to 1996, reflecting improvements in operating
profitability from ongoing businesses, excluding restructuring charges, and a
$35.0 million non-recurring cash litigation settlement. Net cash provided by
operating activities in 1996 and 1995 was $410.4 million and $407.1 million,
respectively.
Capital expenditures were $215.7 million, $242.7 million and $301.2 million for
1997, 1996 and 1995, respectively. Capital expenditures are expected to continue
in the mid-$200 million range in 1998, as the Company plans to continue its
expansion of production capacity in the United States. The Company expects
capital expenditures and cash dividends to be financed primarily through cash
flow from operating activities.
28
Cash proceeds from business divestitures in 1997, 1996 and 1995 were $300.0
million, $174.4 million and $1.28 billion, net of tax, respectively. Over the
last three years, cash proceeds from business divestitures were primarily used
to reduce short-term debt. Cash proceeds from the sale of certain food service
businesses of approximately $70 million were received in January 1998.
Anticipated cash proceeds of approximately $250 million from the recovery of
income taxes paid on previous capital gains are expected to be received in 1998.
Net cash outlays related to business acquisitions were $57.3 million in 1995.
Financing activities used cash of $593.4 million, $331.3 million and $1.34
billion in 1997, 1996 and 1995, respectively, primarily reflecting the use of
business divestiture proceeds to reduce short-term debt. Short-term and long-
term debt (total debt) as of December 31, 1997 was $1.06 billion, a decrease of
$504.6 million from December 31, 1996. Total debt at December 31, 1995 was
$1.76 billion. The total-debt-to-total capitalization ratio was 81.0 percent,
55.6 percent and 61.7 percent as of December 31, 1997, 1996 and 1995,
respectively. The loss on the Snapple beverages divestiture was the key reason
for the ratio change from the prior year.
In 1997, the Company reduced the level of its revolving credit facilities by a
total of $225.0 million. The Company now has a $450.0 million annually
extendible five-year revolving credit facility and a $225.0 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.
Credit facilities obtained by the Company have dramatically decreased over the
last three years as commercial paper borrowings supported by the revolving
credit facilities were reduced. The Company's levels of revolving credit
facilities at December 31, 1996 and 1995 were $900.0 million and $1.5 billion,
respectively.
The Company's current debt and commercial paper ratings are as follows:
Standard & Poor's (BBB+ and A2); Fitch (BBB and F2); and Moody's (Baa1 and P2).
During 1997, the Company repurchased 987,632 shares of its outstanding common
stock for $50.0 million under the 10 million share repurchase program announced
in August 1993. The Company has approximately 2.3 million shares remaining for
repurchase under this program.
Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to risk from changes in commodity
prices, foreign exchange rates and interest rates. Derivative financial and
commodity instruments are used to reduce the impact of these risks. The Company
does not use these instruments for trading purposes and does not use instruments
where there are no underlying exposures. Management believes that its use of
these instruments to reduce 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 are
summarized below. Actual changes in market prices or rates may differ from
hypothetical changes.
Commodities - The Company uses commodity futures and options to manage price
exposures on commodity inventories or anticipated commodity purchases. The
Company typically purchases certain commodities such as oats, corn, corn
sweetener, wheat, coffee beans and orange juice concentrate. The commodity
instruments sensitivity analysis excluded the underlying commodity positions
that are being hedged by derivative commodity instruments, which have a high
degree of inverse correlation with changes in the fair value of the commodity
instruments. Based on the results of the sensitivity analysis, the estimated
quarter-end market risk exposure during 1997 on an average, high and low basis
was $2.9 million, $4.2 million and $1.4 million, respectively.
Foreign Exchange - The Company uses foreign currency forwards and options
contracts and currency swap agreements to manage foreign currency exchange rate
risk related to projected operating income from foreign entities and net
investments in foreign subsidiaries. The Company's exposure to foreign currency
exchange rates exists primarily with the following currencies versus the U.S.
dollar: Mexican peso, Canadian dollar and Brazilian real. The foreign exchange
sensitivity analysis included currency forward and option contracts and other
financial instruments affected by foreign exchange risk, including cash and
foreign currency-denominated debt. The sensitivity analysis excluded the
underlying projected operating income and net investment exposures, which have a
high degree of inverse correlation with the financial investments used to hedge
them. Based on the results of the sensitivity analysis, the estimated quarter-
end market risk exposure in 1997 was $5.9 million, $8.9 million and $2.5 million
on an average, high and low basis, respectively.
29
Interest Rates - The Company occasionally uses interest rate swap agreements to
manage its exposure to fluctuations in interest rates. The Company's interest
rate-related financial instruments consist primarily of debt. No derivative
financial instruments related to interest rate risk were outstanding as of
December 31, 1997. Based on the results of the sensitivity analysis, the
estimated market risk exposure for interest rate-related financial instruments
was approximately $44 million as of December 31, 1997.
Current and Pending Accounting Changes and Other Matters
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 International Accounting Standards. The
Company's adoption of this new standard in December 1997 has not significantly
impacted previously reported earnings per share. As the Company incurred a net
loss in 1997, the adoption of this standard, specifically, the presentation of
earnings per share - assuming dilution, did not affect reported per share
results. As such, 1997 per share results may not be indicative of future trends.
See Note 17 to the Consolidated Financial Statements for further discussion.
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 and 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.
The Company's Brazilian operations were treated as a highly inflationary economy
through December 31, 1997. Thereafter, the Company will treat Brazil as non-
highly inflationary and accordingly, change the functional currency from the
U.S. dollar to the Brazilian real. The impact of this change is not expected to
have a material effect on the Company's financial statements. While the
Company's operations in the Asia/Pacific region are relatively small, the long-
term impact of the recent Asia/Pacific currency market declines on the Company's
operations is uncertain.
The Company uses software and other related technologies throughout its business
that will be affected by the date change in the Year 2000. With senior
management accountability and corporate staff guidance, the affected operating
units are in varying stages of assessment and implementation of a plan to
address the Company's Year 2000 issues. Overall, the Company has targeted Year
2000 compliance primarily by the end of 1998, with certain operating units
targeting compliance by no later than mid-1999. While the Company's plans are
underway, and the Company does not anticipate such, the consequences of non-
compliance by the Company, its customers or its suppliers, could have a material
adverse impact on the Company's operations. The Company will continue to incur
expenses related to these efforts; however, such expenses are not expected to
have a material impact on the Company's results of operations.
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.
30
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Consolidated Year Ended December 31 1997 1996 1995
Statements of Income <S> <C> <C> <C>
Net Sales $5,015.7 $5,199.0 $5,954.0
Cost of goods sold 2,564.9 2,807.5 3,294.4
Gross profit 2,450.8 2,391.5 2,659.6
Selling, general and administrative expenses 1,938.9 1,981.0 2,358.8
Losses (gains) on divestitures and restructuring charges - net 1,486.3 (113.4) (1,053.5)
Interest expense 85.8 106.8 131.6
Interest income (6.7) (7.4) (6.2)
Foreign exchange loss - net 10.8 8.9 8.4
(Loss) Income Before Income Taxes (1,064.3) 415.6 1,220.5
(Benefit) provision for income taxes (133.4) 167.7 496.5
Net (Loss) Income (930.9) 247.9 724.0
Preferred dividends - net of tax 3.5 3.7 4.0
Net (Loss) Income Available for Common $ (934.4) $ 244.2 $ 720.0
Per Common Share:
Net (loss) income $ (6.80) $ 1.80 $ 5.39
Net (loss) income - assuming dilution $ (6.80) $ 1.78 $ 5.23
Dividends declared $ 1.14 $ 1.14 $ 1.14
Average Number of Common Shares Outstanding (in thousands) 137,460 135,466 134,149
See accompanying notes to the consolidated financial statements.
31
The Quaker Oats Company and Subsidiaries
<CAPTION>
Consolidated December 31 1997 1996
Balance Sheets Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 84.2 $ 110.5
Trade accounts receivable - net of allowances 305.7 294.9
Inventories
Finished goods 172.6 181.8
Grains and raw materials 59.0 62.1
Packaging materials and supplies 24.5 31.0
Total inventories 256.1 274.9
Other current assets 487.0 209.4
Total Current Assets 1,133.0 889.7
Property, Plant and Equipment
Land 29.1 29.6
Buildings and improvements 417.2 389.5
Machinery and equipment 1,466.8 1,524.2
Property, plant and equipment 1,913.1 1,943.3
Less accumulated depreciation 748.4 742.6
Property - Net 1,164.7 1,200.7
Intangible Assets - Net of Amortization 350.5 2,237.2
Other Assets 48.8 66.8
Total Assets $2,697.0 $4,394.4
See accompanying notes to the consolidated financial statements.
32
<CAPTION>
Dollars in Millions
December 31 1997 1996
Liabilities and Shareholders' Equity
<S> <C> <C>
Current Liabilities
Short-term debt $ 61.0 $ 517.0
Current portion of long-term debt 108.4 51.1
Trade accounts payable 191.3 210.2
Accrued payroll, benefits and bonus 132.3 111.3
Accrued advertising and merchandising 123.0 130.2
Income taxes payable 73.8 42.4
Other accrued liabilities 255.9 292.5
Total Current Liabilities 945.7 1,354.7
Long-term Debt 887.6 993.5
Other Liabilities 578.9 558.9
Deferred Income Taxes 36.3 238.4
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, 245,147 and 187,810
shares, respectively (22.3) (16.1)
Common Shareholders' Equity
Common stock, $5 par value, authorized 400 million
shares 840.0 840.0
Additional paid-in capital 29.0 --
Reinvested earnings 431.0 1,521.3
Cumulative translation adjustment (82.4) (68.2)
Deferred compensation (91.0) (103.4)
Treasury common stock, at cost (898.6) (959.8)
Total Common Shareholders' Equity 228.0 1,229.9
Total Liabilities and Shareholders' Equity $2,697.0 $4,394.4
33
The Quaker Oats Company and Subsidiaries
<CAPTION>
Dollars in Millions
Consolidated Year Ended December 31 1997 1996 1995
Statements of Cash Flows Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net (loss) income $(930.9) $ 247.9 $ 724.0
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 161.4 200.6 204.0
Deferred income taxes (12.0) 14.3 22.5
Losses (gains) on divestitures - net of tax
of $(269.0), $54.6 and $476.2 in 1997, 1996
and 1995, respectively 1,151.4 (81.8) (694.6)
Restructuring charges 65.9 23.0 117.3
Asset impairment loss 39.8 -- --
Loss on disposition of property and equipment 41.6 29.0 27.4
(Increase) decrease in trade accounts receivable (61.0) 62.6 43.7
(Increase) decrease in inventories (24.5) 19.6 44.8
(Increase) decrease in other current assets (11.6) 65.1 (76.0)
(Decrease) increase in trade accounts payable (3.2) (53.7) 49.8
Increase (decrease) in other current liabilities 9.8 (164.2) (117.0)
Change in deferred compensation 20.1 21.5 21.4
Other items 43.2 26.5 39.8
Net Cash Provided by Operating Activities 490.0 410.4 407.1
Cash Flows from Investing Activities:
Additions to property, plant and equipment (215.7) (242.7) (301.2)
Business acquisitions -- -- (57.3)
Business divestitures - net of tax of $54.6 and $476.2
in 1996 and 1995, respectively 300.0 174.4 1,278.7
Change in other assets -- 0.2 4.2
Net Cash Provided by (Used in) Investing Activities 84.3 (68.1) 924.4
Cash Flows from Financing Activities:
Cash dividends (159.4) (157.0) (154.8)
Change in short-term debt (452.9) (124.5) (1,243.5)
Proceeds from long-term debt 8.3 2.4 212.6
Reduction of long-term debt (54.4) (77.7) (60.0)
Proceeds from short-term debt to be refinanced -- -- (112.0)
Issuance of common treasury stock 121.2 31.0 20.4
Repurchases of common stock (50.0) -- --
Repurchases of preferred stock (6.2) (5.5) (5.7)
Net Cash Used in Financing Activities (593.4) (331.3) (1,343.0)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (7.2) 6.3 1.7
Net (Decrease) Increase in Cash and Cash Equivalents (26.3) 17.3 (9.8)
Cash and Cash Equivalents - Beginning of Period 110.5 93.2 103.0
Cash and Cash Equivalents - End of Period $ 84.2 $ 110.5 $ 93.2
See accompanying notes to the consolidated financial statements.
34
<CAPTION>
Dollars in Millions (Except Per Share Data)
Industry Segment Net Sales Operating Income (Loss) (a)(b)(c)(d)(e)
Information Year Ended December 31 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Foods
U.S. and Canadian $2,572.8 $2,463.1 $2,510.6 $ 334.2 $ 366.3 $ 276.9
International 657.1 625.5 594.5 (4.0) 6.6 (22.7)
Total Foods 3,229.9 3,088.6 3,105.1 330.2 372.9 254.2
Beverages
U.S. and Canadian 1,183.3 1,095.4 1,039.8 177.8 176.3 108.4
International 335.2 282.5 307.6 3.2 (20.6) (46.5)
Total Beverages 1,518.5 1,377.9 1,347.4 181.0 155.7 61.9
Total Ongoing Businesses 4,748.4 4,466.5 4,452.5 511.2 528.6 316.1
Total Divested Businesses(f)(g)(h)(i) 267.3 732.5 1,501.5 (1,435.5) 37.3 1,098.9
Net Sales and Operating (Loss) Income $5,015.7 $5,199.0 $5,954.0 (924.3) 565.9 1,415.0
Less: General corporate expenses (j) 50.1 42.0 60.7
Interest expense - net 79.1 99.4 125.4
Foreign exchange loss - net 10.8 8.9 8.4
(Loss) Income before income taxes (1,064.3) 415.6 1,220.5
(Benefit) provision for income taxes (133.4) 167.7 496.5
Net (Loss) Income $(930.9) $ 247.9 $ 724.0
Per Common Share:
Net (loss) income $ (6.80) $ 1.80 $ 5.39
Net (loss) income - assuming dilution $ (6.80) $ 1.78 $ 5.23
<FN>
(a) 1997 operating results for Ongoing Businesses include pretax restructuring charges of $65.9 million,
or $.27 per share; $49.2 million, $4.9 million, $10.7 million and $1.1 million are included in U.S.
and Canadian Foods, U.S. and Canadian Beverages, International Foods and International Beverages,
respectively.
(b) 1997 operating results for International Foods include a pretax net charge of $4.8 million, or
$.02 per share, for an asset impairment loss partly offset by a cash litigation settlement.
(c) 1996 operating results for U.S. and Canadian Foods include pretax restructuring charges of
$6.4 million, or $.03 per share.
(d) 1995 operating results for Ongoing Businesses include pretax restructuring charges of $92.9 million,
or $.42 per share; $39.1 million, $8.0 million, $31.3 million and $14.5 million are included in U.S. and
Canadian Foods, U.S. and Canadian Beverages, International Foods and International Beverages,
respectively.
(e) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1995
through 1997 losses and gains on divestitures and restructuring charges.
(f) 1997 operating results for Divested Businesses include pretax losses of $1.42 billion, or $8.41
per share.
(g) 1996 operating results for Divested Businesses include pretax gains of $136.4 million, or
$.60 per share, and pretax restructuring charges of $16.6 million, or $.11 per share.
(h) 1995 operating results for Divested Businesses include pretax gains of $1.17 billion, or $5.20 per
share, and pretax restructuring charges of $24.4 million, or $.11 per share.
(i) 1997 includes current year (through the divestiture date) net sales and operating results for
the Snapple beverages and certain food service businesses. 1996 includes prior year (through the
divestiture date) net sales and operating results for the U.S. and Canadian frozen foods and Italian
products businesses and the businesses divested in 1997. 1995 includes net sales and operating
results for the year ended December 31, 1995, for the following businesses (through the divestiture date):
U.S. and Canadian pet food, U.S. bean and chili, European pet food, Mexican chocolate, Dutch honey and
the businesses divested in 1997 and 1996.
(j) 1995 general corporate expenses include a provision of $10.6 million, or $.05 per share, for estimated
litigation costs.
</FN>
35
The Quaker Oats Company and Subsidiaries
<CAPTION>
Industry Segment and Identifiable Assets
Geographic Area Information Year Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Industry Segment Information
Foods $1,636.7 $1,705.2 $1,728.2
Beverages 544.6 537.8 490.6
Total Ongoing Businesses 2,181.3 2,243.0 2,218.8
Divested Businesses (a) -- 1,930.6 2,133.0
Total Businesses 2,181.3 4,173.6 4,351.8
Corporate (b) 515.7 220.8 268.6
Total Consolidated $2,697.0 $4,394.4 $4,620.4
<CAPTION>
Identifiable Assets
Year Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Geographic Area Information
United States and Canada $1,672.3 $1,689.0 $1,673.9
Latin America 289.3 339.6 331.5
Europe and Asia/Pacific 219.7 214.4 213.4
International 509.0 554.0 544.9
Total Ongoing Businesses 2,181.3 2,243.0 2,218.8
Divested Businesses (a) -- 1,930.6 2,133.0
Total Businesses 2,181.3 4,173.6 4,351.8
Corporate (b) 515.7 220.8 268.6
Total Consolidated $2,697.0 $4,394.4 $4,620.4
<FN>
(a) Includes the following Divested Businesses: 1997 (Snapple beverages,
certain food service businesses); 1996 (Snapple beverages, certain food
service businesses, U.S. and Canadian frozen foods and Italian products);
1995 (Snapple beverages, certain food service businesses, U.S. and
Canadian frozen foods, U.S. and Canadian pet food, U.S. bean and chili,
Italian products, European pet food, Mexican chocolate and Dutch honey).
(b) Identifiable assets include corporate cash and cash equivalents,
short-term investments and miscellaneous receivables and investments.
</FN>
</TABLE>
36
<TABLE>
<CAPTION>
Dollars in Millions
Capital Expenditures Depreciation and Amortization
1997 1996 1995 1997 1996 1995
<C> <C> <C> <C> <C> <C>
$ 128.1 $ 131.3 $ 159.7 $ 100.2 $ 98.6 $ 95.5
84.9 97.3 90.4 39.4 32.2 29.0
213.0 228.6 250.1 139.6 130.8 124.5
2.7 14.1 45.9 20.1 68.3 77.5
215.7 242.7 296.0 159.7 199.1 202.0
-- -- 5.2 1.7 1.5 2.0
$ 215.7 $ 242.7 $ 301.2 $ 161.4 $ 200.6 $ 204.0
<CAPTION>
Net Sales (c) Operating Income (Loss) (d)(e)(f)(g)(h)
1997 1996 1995 1997 1996 1995
<C> <C> <C> <C> <C> <C>
3,756.1 $3,558.5 $3,550.4 $ 512.0 $ 542.6 $ 385.3
683.6 605.7 571.8 25.2 20.0 29.9
308.7 302.3 330.3 (26.0) (34.0) (99.1)
992.3 908.0 902.1 (0.8) (14.0) (69.2)
4,748.4 4,466.5 4,452.5 511.2 528.6 316.1
267.3 732.5 1,501.5 (1,435.5) 37.3 1,098.9
5,015.7 5,199.0 5,954.0 (924.3) 565.9 1,415.0
-- -- -- -- -- --
$5,015.7 $5,199.0 $5,954.0 $(924.3) $ 565.9 $1,415.0
<FN>
(c) Represents net sales to unaffiliated customers only. Net sales between
geographic areas have been eliminated.
(d) U.S. and Canada includes pretax restructuring charges of $54.1 million,
$6.4 million and $47.1 million in 1997, 1996 and 1995, respectively.
(e) Latin America includes pretax restructuring charges of $10.7 million
and $4.1 million in 1997 and 1995, respectively, and a pretax net charge
of $4.8 million for an asset impairment loss partly offset by a cash
litigation settlement in 1997.
(f) Europe and Asia/Pacific includes pretax restructuring charges of
$1.1 million and $41.7 million in 1997 and 1995, respectively.
(g) Divested Businesses includes pretax restructuring charges of $16.6
million and $24.4 million in 1996 and 1995, respectively, and pretax
(losses) gains on divestitures of $(1.42) billion, $136.4 million and
$1.17 billion in 1997, 1996 and 1995, respectively.
(h) See Notes 2 and 3 to consolidated financial statements for further
discussion of 1995 through 1997 losses and gains on divestitures and
restructuring charges.
</FN>
37
The Quaker Oats Company and Subsidiaries
<CAPTION>
Consolidated
Statements of Common Common Stock Issued Common Shares
Shareholders' Equity Shares Amount Outstanding
<S> <C> <C> <C>
Balance as of December 31, 1994 167,978,792 $ 840.0 133,686,796
Net income
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Common stock issued for stock purchase and incentive plans 1,119,259
Foreign currency adjustments (net of allocated
income tax benefits of $4.0)
Deferred compensation
Other
Balance as of December 31, 1995 167,978,792 840.0 134,806,055
Net income
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Common stock issued for stock purchase and incentive plans 1,287,010
Foreign currency adjustments (net of allocated
income tax benefits of $1.1)
Deferred compensation
Other
Balance as of December 31, 1996 167,978,792 840.0 136,093,065
Net loss
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Common stock issued for stock purchase and incentive plans 3,707,667
Repurchases of common stock (987,632)
Foreign currency adjustments (net of allocated income tax
provision of $0.4)
Deferred compensation
Other
Balance as of December 31, 1997 167,978,792 $ 840.0 138,813,100
See accompanying notes to the consolidated financial statements.
38
<CAPTION>
Dollars in Millions
Additional Cumulative
Paid-In Reinvested Translation Deferred Treasury Common Stock
Capital Earnings Adjustment Compensation Shares Amount Total
<C> <C> <C> <C> <C> <C> <C>
$ -- $ 867.6 $ (90.0) $(133.1) 34,291,996 $(1,031.8) $ 452.7
724.0 724.0
(150.8) (150.8)
(4.0) (4.0)
(2.7) (3.2) (1,119,259) 33.4 27.5
12.2 12.2
15.0 15.0
2.7 2.7
-- 1,433.6 (77.8) (118.1) 33,172,737 (998.4) 1,079.3
247.9 247.9
(153.3) (153.3)
(3.7) (3.7)
(3.0) (3.2) (1,287,010) 38.6 32.4
9.6 9.6
14.7 14.7
3.0 3.0
-- 1,521.3 (68.2) (103.4) 31,885,727 (959.8) 1,229.9
(930.9) (930.9)
(155.9) (155.9)
(3.5) (3.5)
11.2 (3,707,667) 111.2 122.4
987,632 (50.0) (50.0)
(14.2) (14.2)
12.4 12.4
17.8 17.8
$ 29.0 $ 431.0 $ (82.4) $ (91.0) 29,165,692 $ (898.6) $ 228.0
</TABLE>
39
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Six-Year Year Ended December 31 1997 1996 1995 1994 1993 1992
Selected Financial Operating Results (a)(b)(c)(d)(e)(f)(g)(h)
Data <S> <C> <C> <C> <C> <C> <C>
Net sales $5,015.7 $5,199.0 $5,954.0 $6,211.1 $5,791.9 $5,704.7
Gross profit 2,450.8 2,391.5 2,659.6 3,088.4 2,920.0 2,841.1
(Loss) income before income taxes and
cumulative effect of accounting changes (1,064.3) 415.6 1,220.5 320.4 495.0 465.3
(Benefit) provision for income taxes (133.4) 167.7 496.5 127.3 190.4 188.4
(Loss) income before cumulative
effect of accounting changes (930.9) 247.9 724.0 193.1 304.6 276.9
Cumulative effect of accounting
changes - net of tax -- -- -- (4.1) -- (115.5)
Net (loss) income $ (930.9) $ 247.9 $ 724.0 $ 189.0 $ 304.6 $ 161.4
Per common share:
(Loss) income before cumulative
effect of accounting changes $ (6.80) $ 1.80 $ 5.39 $ 1.41 $ 2.14 $ 1.85
Cumulative effect of accounting changes -- -- -- (0.03) -- (0.79)
Net (loss) income $ (6.80) $ 1.80 $ 5.39 $ 1.38 $ 2.14 $ 1.06
Net (loss) income - assuming dilution $ (6.80) $ 1.78 $ 5.23 $ 1.36 $ 2.09 $ 1.05
Dividends declared:
Common stock $ 155.9 $ 153.3 $ 150.8 $ 145.8 $ 138.2 $ 131.8
Per common share $ 1.14 $ 1.14 $ 1.14 $ 1.10 $ 1.01 $ 0.91
Convertible preferred and redeemable
preference stock $ 3.5 $ 3.7 $ 4.0 $ 4.0 $ 4.1 $ 4.2
Average number of common shares
outstanding (in thousands) 137,460 135,466 134,149 133,709 139,833 146,135
<FN>
(a) 1997 operating results include pretax restructuring charges of $65.9 million, or $.27 per share,
and pretax losses of $1.42 billion, or $8.41 per share, for business divestitures.
(b) 1996 operating results include pretax restructuring charges of $23.0 million, or $.14 per share,
and pretax gains of $136.4 million, or $.60 per share, for business divestitures.
(c) 1995 operating results include pretax restructuring charges of $117.3 million, or $.53 per share,
and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures.
(d) 1994 operating results include pretax restructuring charges of $118.4 million, or $.55 per share,
and a pretax gain of $9.8 million, or $.07 per share, for a business divestiture.
(e) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1995
through 1997 losses and gains on divestitures and restructuring charges.
(f) 1994 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for the
adoption of FASB Statement #112.
(g) Per share data reflect the 1994 two-for-one stock split-up.
(h) 1992 cumulative effect of accounting changes includes an after-tax charge of $125.4 million for
the adoption of FASB Statement #106 and a $9.9 million tax benefit for the adoption of FASB
Statement #109.
</FN>
40
<CAPTION>
Dollars in Millions (Except Per Share Data)
Year Ended December 31 1997 1996 1995 1994 1993 1992
Financial Statistics
<S> <C> <C> <C> <C> <C> <C>
Current ratio 1.2 0.7 0.6 0.5 0.9 1.2
Working capital $ 187.3 $ (465.0) $ (621.6) $(1,616.9) $ (89.4) $ 177.6
Property, plant and equipment - net $1,164.7 $1,200.7 $1,167.8 $ 1,333.1 $1,222.0 $1,217.2
Depreciation expense $ 122.0 $ 119.1 $ 115.3 $ 133.1 $ 132.3 $ 131.7
Total assets $2,697.0 $4,394.4 $4,620.4 $ 5,061.1 $2,805.2 $2,783.2
Long-term debt $ 887.6 $ 993.5 $1,051.8 $ 1,025.9 $ 708.4 $ 673.8
Convertible preferred stock (net of
deferred compensation) and redeemable
preference stock $ 20.5 $ 19.0 $ 17.7 $ 17.0 $ 13.1 $ 9.5
Common shareholders' equity $ 228.0 $1,229.9 $1,079.3 $ 452.7 $ 437.4 $ 780.0
Net cash provided by operating activities $ 490.0 $ 410.4 $ 407.1 $ 415.8 $ 506.6 $ 503.7
Operating return on assets (a) (29.1%) 13.3% 30.9% 13.1% 24.0% 21.9%
Gross profit as a percentage of sales 48.9% 46.0% 44.7% 49.7% 50.4% 49.8%
Advertising and merchandising as a
percentage of sales 24.5% 23.1% 24.6% 27.2% 25.9% 25.6%
(Loss) income before cumulative effect of
accounting changes as a percentage sales (18.6%) 4.8% 12.2% 3.1% 5.3% 4.9%
Total debt-to-total capitalization ratio (b) 81.0% 55.6% 61.7% 86.3% 69.9% 49.6%
Common dividends as a percentage of (loss)
income available for common shares (excluding
cumulative effect of accounting changes) (16.8%) 63.3% 21.2% 78.0% 47.2% 49.2%
Number of common shareholders 27,838 29,690 30,353 28,142 28,237 33,721
Number of employees worldwide 14,123 14,800 16,100 20,753 20,207 20,792
Market price range of common stock:
High (c) $ 55 1/8 $ 39 1/2 $ 37 1/2 $ 42 1/2 $ 38 1/2 $ 37 3/16
Low (c) $ 34 3/8 $ 30 3/8 $ 30 1/4 $ 29 3/4 $ 30 3/16 $ 25 1/8
<FN>
(a) Operating income divided by average identifiable assets of the consolidated total (excluding corporate).
(b) Total debt divided by total debt plus total shareholders' equity including convertible preferred stock
(net of deferred compensation) and redeemable preference stock.
(c) Per share data reflect the 1994 two-for-one stock split-up.
</FN>
</TABLE>
41
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Eleven-Year Transition
Selected Financial Data Period Ended
Year Ended December 31 December 31
1997 1996 1995
<S> <C> <C> <C>
Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)(j)(k)
Net sales $5,015.7 $5,199.0 $2,733.1
Gross profit 2,450.8 2,391.5 1,203.8
(Loss) income from continuing operations before income
taxes and cumulative effect of accounting changes (1,064.3) 415.6 25.6
(Benefit) provision for income taxes (133.4) 167.7 11.9
(Loss) income from continuing operations before
cumulative effect of accounting changes (930.9) 247.9 13.7
(Loss) income from discontinued operations - net of tax -- -- --
Income from the disposal of discontinued operations - net of tax -- -- --
Cumulative effect of accounting changes - net of tax -- -- --
Net (loss) income $ (930.9) $ 247.9 $ 13.7
Per common share:
(Loss) income from continuing operations before cumulative
effect of accounting changes $ (6.80) $ 1.80 $ 0.09
(Loss) income from discontinued operations -- -- --
Income from the disposal of discontinued operations -- -- --
Cumulative effect of accounting changes -- -- --
Net (loss) income $ (6.80) $ 1.80 $ 0.09
Net (loss) income - assuming dilution $ (6.80) $ 1.78 $ 0.09
Dividends declared:
Common stock $ 155.9 $ 153.3 $ 75.7
Per common share $ 1.14 $ 1.14 $ 0.57
Convertible preferred and redeemable preference stock $ 3.5 $ 3.7 $ 2.0
Average number of common shares outstanding (in thousands) 137,460 135,466 134,355
<FN>
(a) 1997 operating results include pretax restructuring charges of $65.9 million, or $.27 per share, and
pretax losses of $1.42 billion, or $8.41 per share, for business divestitures.
(b) 1996 operating results include pretax restructuring charges of $23.0 million, or $.14 per share, and
pretax gains of $136.4 million, or $.60 per share, for business divestitures.
(c) 1995 transition period reflects only six months of operating results.
(d) 1995 transition period operating results include pretax restructuring charges of $40.8 million, or
$.18 per share.
(e) Fiscal 1995 operating results include pretax restructuring charges of $76.5 million, or $.35 per share,
and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures.
</FN>
42
<CAPTION>
Dollars in Millions (Except Per Share Data)
Fiscal
Year Ended
June 30
1995 1994 1993 1992 1991 1990 1989 1988 1987
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$6,365.2 $5,955.0 $5,730.6 $5,576.4 $5,491.2 $5,030.6 $4,879.4 $4,508.0 $3,823.9
2,983.7 3,028.8 2,860.6 2,745.3 2,652.7 2,350.3 2,229.0 2,114.6 1,750.7
1,359.9 378.7 467.6 421.5 411.5 382.4 239.1 314.6 295.9
553.8 147.2 180.8 173.9 175.7 153.5 90.2 118.1 141.3
806.1 231.5 286.8 247.6 235.8 228.9 148.9 196.5 154.6
-- -- -- -- (30.0) (59.9) 54.1 59.2 33.5
-- -- -- -- -- -- -- -- 55.8
(4.1) -- (115.5) -- -- -- -- -- --
$ 802.0 $ 231.5 $ 171.3 $ 247.6 $ 205.8 $ 169.0 $ 203.0 $ 255.7 $ 243.9
$ 6.00 $ 1.68 $ 1.96 $ 1.63 $ 1.53 $ 1.47 $ 0.94 $ 1.23 $ 0.98
-- -- -- -- (0.20) (0.40) 0.34 0.37 0.22
-- -- -- -- -- -- -- -- 0.35
(0.03) -- (0.79) -- -- -- -- -- --
$ 5.97 $ 1.68 $ 1.17 $ 1.63 $ 1.33 $ 1.07 $ 1.28 $ 1.60 $ 1.55
$ 5.80 $ 1.65 $ 1.14 $ 1.59 $ 1.30 $ 1.05 $ 1.25 $ 1.57 $ 1.51
$ 150.8 $ 140.6 $ 136.1 $ 128.6 $ 118.7 $ 106.9 $ 95.2 $ 79.9 $ 63.2
$ 1.14 $ 1.06 $ 0.96 $ 0.86 $ 0.78 $ 0.70 $ 0.60 $ 0.50 $ 0.40
$ 4.0 $ 4.0 $ 4.2 $ 4.2 $ 4.3 $ 3.6 -- -- --
133,763 135,236 143,948 149,762 151,808 153,074 158,614 159,670 157,624
<FN>
(f) Fiscal 1994 operating results include pretax restructuring charges of $118.4 million, or $.55 per
share, and a pretax gain of $9.8 million, or $.07 per share, for a business divestiture.
(g) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1995
through 1997 losses and gains on divestitures and restructuring charges.
(h) Fiscal 1995 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for
the adoption of FASB Statement #112.
(i) Fiscal 1993 cumulative effect of accounting changes includes an after-tax charge of $125.4 million
for the adoption of FASB Statement #106 and a $9.9 million tax benefit for the adoption of FASB
Statement #109.
(j) Fiscal 1989 operating results include pretax restructuring charges of $124.3 million, or
$.50 per share, for plant consolidations and overhead reductions and a pretax charge of $25.6
million, or $.10 per share, for a change to the LIFO method of accounting for the majority of U.S.
Foods and Beverages inventories.
(k) Per share data and average number of common shares outstanding reflect the fiscal 1995
two-for-one stock split-up.
</FN>
43
The Quaker Oats Company and Subsidiaries
<CAPTION>
Eleven-Year Transition
Selected Financial Data Period Ended
Year Ended December 31 December 31
1997 1996 1995
<S> <C> <C> <C>
Financial Statistics(a)(b)(c)
Current ratio 1.2 0.7 0.6
Working capital $ 187.3 $ (465.0) $ (621.6)
Property, plant and equipment - net $1,164.7 $1,200.7 $1,167.8
Depreciation expense $ 122.0 $ 119.1 $ 59.2
Total assets $2,697.0 $4,394.4 $4,620.4
Long-term debt $ 887.6 $ 993.5 $1,051.8
Convertible preferred stock (net of deferred
compensation) and redeemable preference stock $ 20.5 $ 19.0 $ 17.7
Common shareholders' equity $ 228.0 $1,229.9 $1,079.3
Net cash provided by operating activities $ 490.0 $ 410.4 $ 84.3
Operating return on assets (d) (29.1%) 13.3% 2.4%
Gross profit as a percentage of sales 48.9% 46.0% 44.0%
Advertising and merchandising as a percentage of sales 24.5% 23.1% 24.1%
(Loss) income from continuing operations before cumulative
effect of accounting changes as a percentage of sales (18.6%) 4.8% 0.5%
Total debt-to-total capitalization ratio (e) 81.0% 55.6% 61.7%
Common dividends as a percentage of (loss) income
available for common shares (excluding cumulative
effect of accounting changes) (16.8%) 63.3% 633.3%
Number of common shareholders 27,838 29,690 30,353
Number of employees worldwide 14,123 14,800 16,100
Market price range of common stock:
High (f) $ 55 1/8 $ 39 1/2 $ 37 3/8
Low (f) $ 34 3/8 $ 30 3/8 $ 30 3/4
<FN>
(a) Income-related statistics exclude the results of businesses reported as discontinued
operations. Balance sheet amounts and related statistics have not been restated for discontinued
operations, other than Fisher-Price, due to materiality.
(b) 1995 transition period reflects only six months of results.
(c) Effective fiscal 1991, common shareholders' equity and number of employees worldwide were
reduced as a result of the Fisher-Price spin-off.
</FN>
44
Dollars in Millions (Except Per Share Data)
<CAPTION>
Fiscal
Year Ended
June 30
1995 1994 1993 1992 1991 1990 1989 1988 1987
<C> <C> <C> <C> <C> <C> <C> <C> <C>
0.7 1.0 1.0 1.2 1.3 1.3 1.8 1.4 1.4
$ (496.3) $ (5.5) $ (37.5) $ 168.7 $ 317.8 $ 342.8 $ 695.8 $ 417.5 $ 507.9
$1,113.4 $1,214.2 $1,228.2 $1,273.3 $1,232.7 $1,154.1 $ 959.6 $ 922.5 $ 898.6
$ 125.4 $ 133.3 $ 129.9 $ 129.7 $ 125.2 $ 103.5 $ 94.2 $ 88.3 $ 81.6
$4,826.9 $3,043.3 $2,815.9 $3,039.9 $3,060.5 $3,377.4 $3,125.9 $2,886.1 $3,136.5
$1,103.1 $ 759.5 $ 632.6 $ 688.7 $ 701.2 $ 740.3 $ 766.8 $ 299.1 $ 527.7
$ 18.8 $ 15.3 $ 11.4 $ 7.9 $ 4.8 $ 1.8 -- -- --
$1,128.8 $ 445.8 $ 551.1 $ 842.1 $ 901.0 $1,017.5 $1,137.1 $1,251.1 $1,087.5
$ 475.5 $ 450.8 $ 558.2 $ 581.3 $ 543.2 $ 460.0 $ 408.3 $ 320.8 $ 375.1
42.3% 19.9% 21.1% 18.9% 18.8% 20.4% 14.4% 18.3% 22.1%
46.9% 50.9% 49.9% 49.2% 48.3% 46.7% 45.7% 46.9% 45.8%
26.3% 26.6% 25.7% 26.0% 25.6% 23.8% 23.4% 24.9% 22.9%
12.7% 3.9% 5.0% 4.4% 4.3% 4.6% 3.1% 4.4% 4.0%
59.0% 68.8% 59.0% 48.7% 47.4% 52.3% 44.2% 33.8% 50.2%
19.0% 63.1% 48.9% 52.9% 58.9% 65.1% 46.9% 31.3% 25.9%
29,148 28,197 33,154 33,580 33,603 33,859 34,347 34,231 32,358
17,300 20,000 20,200 21,100 20,900 28,200 31,700 31,300 30,800
$ 42 1/2 $41 $38 1/2 $ 37 7/8 $32 7/16 $34 7/16 $ 33 1/8 $28 11/16 $28 13/16
$ 29 3/4 $30 15/16 $28 1/16 $ 25 1/8 $ 20 7/8 $22 9/16 $21 5/16 $ 15 1/2 $ 16 5/16
<FN>
(d) Operating income divided by average identifiable assets of the consolidated total (excluding corporate).
(e) Total debt divided by total debt plus total shareholders' equity including convertible preferred
stock (net of deferred compensation) and redeemable preference stock.
(f) Per share data reflect the fiscal 1995 two-for-one stock split-up.
</FN>
</TABLE>
45
Notes to the Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
Consolidation - The consolidated financial statements include The Quaker Oats
Company and all of its subsidiaries (the Company). All significant
intercompany transactions have been eliminated. Acquired businesses are
included in the results of operations since their acquisition dates. Divested
businesses are included in the results of operations until their divestiture
dates.
Cash and Cash Equivalents - Cash equivalents are composed of all highly liquid
investments with an original maturity of three months or less. As a result of
the Company's cash management system, checks issued but not presented to the
banks for payment may create negative book cash balances. Such negative
balances are included in trade accounts payable and amounted to $45.1 million
and $45.5 million as of December 31, 1997 and 1996, respectively.
Inventories - Inventories are valued at the lower of cost or market, using
various cost methods, and include the cost of raw materials, labor and
overhead. The percentages of year-end inventories valued using each of the
methods were as follows:
December 31 1997 1996
Last-in, first-out (LIFO) 65% 53%
Average quarterly cost 30% 39%
First-in, first-out (FIFO) 5% 8%
If the LIFO method of valuing these inventories was not used, total inventories
would have been $8.6 million and $15.3 million higher than reported as of
December 31, 1997 and 1996, respectively.
Long-lived Assets - Long-lived assets are comprised of intangible assets and
property, plant and equipment. Long-lived assets, including certain
identifiable intangibles and goodwill related to those assets to be held and
used, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. An
estimate of undiscounted future cash flows produced by the asset, or the
appropriate grouping of assets, is compared to the carrying value to determine
whether an impairment exists. If an asset is determined to be impaired, the
loss is measured based on quoted market prices in active markets, if available.
If quoted market prices are not available, the estimate of fair value is based
on various valuation techniques, including a discounted value of estimated
future cash flows and fundamental analysis. The Company reports an asset to be
disposed of at the lower of its carrying value or its estimated net realizable
value.
In March 1997, the Company announced that it had reached a definitive agreement
to sell 100 percent of its shares of its wholly-owned subsidiary Snapple
Beverage Corp. (Snapple) for $300.0 million. Under the provisions of Financial
Accounting Standards Board (FASB) Statement #121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
Snapple was then considered an asset held for sale and as such, the Company was
required to reduce the carrying value of Snapple net assets to fair market
value. Accordingly, in March 1997, the Company recognized a pretax impairment
loss of $1.40 billion and established a valuation reserve for the write-down of
the excess carrying value over the fair market value (based on the sale price).
The impairment loss, combined with a pretax loss on the sale of $10.6 million,
is reflected in losses (gains) on divestitures on the consolidated statement of
income for the year ended December 31, 1997.
The Company has taken numerous actions relative to its Brazilian pasta business
in light of the continuing operating losses of this business. Among these
actions, the Company announced plant consolidations in this business during the
second quarter of 1997 and recorded a related restructuring charge of $10.7
million. During the Company's operating planning process, an updated review of
the strategies, actions taken to date, and expected financial prospects of this
business was undertaken. As a part of this process, the Company evaluated the
recoverability of the long-lived assets of its Brazilian pasta business,
including intangible assets, pursuant to FASB Statement #121. 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 its Brazilian pasta business to fair market value. The Company's estimate
of fair market value was based on various methodologies including a discounted
value of the estimated future cash flows 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 expenses on the consolidated
statement of income for the year ended December 31, 1997.
Intangibles - Intangible assets consist principally of excess purchase price
over net tangible assets of businesses acquired (goodwill) and trademarks.
Intangible assets are amortized on a straight-line basis over periods ranging
from two to 40 years.
46
Intangible assets, net of amortization, and their estimated useful lives
consist of the following:
Estimated Useful
Dollars in Millions Lives (In Years) 1997 1996
Goodwill 10 to 40 $500.6 $1,887.1
Trademarks and other 2 to 40 20.4 586.8
Intangible assets 521.0 2,473.9
Less: accumulated amortization 170.5 236.7
Intangible assets - net of amortization $350.5 $2,237.2
Property and Depreciation - Property, plant and equipment are carried at cost
and depreciated on a straight-line basis over their estimated useful lives.
Useful lives range from 20 to 50 years for buildings and improvements and from
three to 17 years for machinery and equipment.
Software Costs - The Company defers significant software development project
costs. No software costs were deferred during 1997 or 1996. Software costs of
$0.2 million were deferred during 1995. Amounts deferred are amortized over a
three-year period beginning with a project's completion. Net deferred software
costs as of December 31, 1997 and 1996 were $0.1 million and $1.5 million,
respectively.
Derivative Financial and Commodity Instruments - The Company uses a variety of
futures, swaps, options and forward contracts in its management of foreign
currency exchange rate, commodity price and interest rate exposures.
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 the market value
or cash flows of the underlying hedged item. Summarized below are the specific
accounting policies by market risk category.
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 consolidated balance sheets as a
component of other current assets (deferred charges) or other accrued
liabilities (deferred revenue). 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 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 consolidated balance sheets as a component
of 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, losses and gains are recognized
currently in the consolidated statements of income as foreign exchange loss or
gain.
Commodity Price Risk - The Company uses commodity futures and options to reduce
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
consolidated balance sheets 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 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 consolidated statements of
income 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 the mix of 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 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 consolidated
statements of income as a component of interest expense.
Foreign Currency Translation - Assets and liabilities of the Company's foreign
subsidiaries, other than those located in highly inflationary countries, are
translated at current exchange rates, while income and expense are translated
at average rates for the period. For entities in highly inflationary
countries, a combination of current and historical rates is used to determine
foreign currency gains and losses resulting from financial statement
translation. Translation gains and losses are reported as a component of
common shareholders' equity, except for those associated with highly
inflationary countries, which are reported directly in the consolidated
statements of income.
Advertising Costs - In accordance with Statement of Position No. 93-7,
"Reporting on Advertising Costs," the Company expenses all advertising expenses
as incurred except for production costs which are deferred and expensed when
47
advertisements air for the first time. The amount of production costs deferred
and included in the consolidated balance sheets as of December 31, 1997 and
1996 was $5.4 million and $7.5 million, respectively.
Income Taxes - The Company uses an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income taxes are provided
when tax laws and financial accounting standards differ with respect to the
amount of income for a year and the bases of assets and liabilities. Income
taxes have been provided on $170.6 million of the $188.8 million of unremitted
earnings from foreign subsidiaries. Taxes are not provided on earnings
expected to be indefinitely reinvested.
Current and 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 International Accounting Standards. The Company's adoption of this new
standard at December 31, 1997 has not significantly impacted previously
reported earnings per share. See Note 17 for related disclosures.
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 and 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.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles (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 2
Acquisitions and Divestitures
In December 1997, the Company completed the sale of the Richardson toppings and
condiments business and signed a definitive agreement to sell its food service
bagel businesses. These transactions resulted in a combined pretax charge of
$5.8 million, reflecting the sale and a write-down of assets to fair market
value. Cash proceeds from these transactions were received in January 1998.
On May 22, 1997, the Company completed the sale of 100 percent of its shares of
Snapple to Triarc Companies, Inc. for $300.0 million. Of the total loss on
divestiture of $1.41 billion, $10.6 million was recorded at the date of sale
and $1.40 billion for a related impairment loss was recorded in the first
quarter of 1997. See Note 1 for discussion of the impairment loss.
On January 15, 1996, the Company completed the sale of its Italian products
business and realized a gain of $2.8 million. On July 9, 1996, the Company
completed the sale of its U.S. and Canadian frozen foods business for $185.8
million and realized a gain of $133.6 million.
On March 14, 1995, the Company completed the sale of its U.S. and Canadian pet
food business to H.J. Heinz Company for $725.0 million and realized a gain of
$513.0 million. On April 24, 1995, the Company completed the sale of its
European pet food business to Dalgety PLC for $700.0 million and realized a
gain of $487.2 million. Other divestitures in 1995 included the Dutch honey
business in February 1995, the Mexican chocolate business in May 1995 and the
U.S. bean and chili businesses in June 1995. The Company realized gains on
these divestitures of $4.9 million, $74.5 million and $91.2 million,
respectively. In 1995, the Company purchased the Nile Spice variety soup-in-a-
cup business in the United States. Pro forma information for this acquisition
was not material.
The following table presents sales and operating (loss) income from the
businesses divested in 1997, 1996 and 1995 through the divestiture dates.
Operating (loss) income includes certain allocations of overhead expenses and
excludes losses and gains on divestitures and restructuring charges in all
years.
Dollars in Millions 1997 1996 1995
Sales:
U.S. and Canadian $260.5 $ 697.0 $1,034.9
International 6.8 35.5 466.6
Sales from divested businesses $267.3 $ 732.5 $1,501.5
Operating (loss) income:
U.S. and Canadian $(13.4) $(73.9) $ (52.1)
International (1.7) (8.6) 4.6
Operating (loss) from divested businesses $(15.1) $(82.5) $ (47.5)
48
Note 3
Restructuring Charges
During 1997, the Company recorded pretax restructuring charges totaling $65.9
million. In the U.S. and Canadian Foods business restructuring charges of
$44.3 million were recorded for various plant consolidations, including $30.7
million for the closing of a rice cakes plant in Gridley, California, $5.9
million for the closing of a Near East plant in Leominster, Massachusetts and
$3.6 million and $4.1 million for manufacturing consolidations in the food
service and hot cereals businesses, respectively. A Brazilian pasta plant
consolidation in the International Foods business resulted in restructuring
charges of $10.7 million. In Worldwide Beverages, restructuring charges of
$3.1 million and $1.1 million were recorded to reconfigure U.S. Gatorade
manufacturing lines and to close an office in Singapore, respectively. The
Company also recorded $4.9 million and $1.8 million of restructuring charges
related to staffing reductions in the U.S. and Canadian Foods and Beverages
businesses, respectively. The restructuring charges are comprised of asset
write-offs, loss on leases, severance and termination benefits and other shut-
down costs. Savings from these actions substantially began in 1997 and are
estimated to be about $29 million annually, with approximately 90 percent in
cash. While the restructuring actions taken during the current year are
expected to result in the elimination of much 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.
In 1996, the Company recorded restructuring charges of $23.0 million. These
charges included $16.6 million to change how the Company sold Snapple beverages
in certain Texas markets and $6.4 million for plant consolidations in the U.S.
and Canadian Foods business. Savings realized from these restructuring actions
have been in line with expectations.
In December 1995, the Company recorded restructuring charges of $40.8 million.
These charges included $24.4 million to reduce the amount of contract
manufacturing capacity for Snapple beverages and $16.4 million to realign the
European beverage and Asia/Pacific grain-based food businesses. The
realignment in Europe and Asia/Pacific resulted in the elimination of about 80
positions and allowed the Company to focus on more attractive growth areas in
Southern Europe for beverages and China for foods. In June 1995, the Company
recorded restructuring charges of $76.5 million for cost-reduction and
realignment activities in order to address the changes in its business
portfolio and to allow it to more quickly and effectively respond to the needs
of trade customers and consumers. These changes resulted in the elimination of
approximately 850 positions and primarily included the realignment of the
corporate, U.S. shared services and business unit structures, the European
cereal business and the U.S. distribution center network. Savings realized
from these restructuring activities have been in line with expectations.
With the 1997 divestiture of the Snapple beverages business, there are no
remaining reserves and no recurring savings to be realized from the
restructuring activities related to that business.
Restructuring provisions were determined based on estimates prepared at the
time the restructuring actions were approved by management and the Board of
Directors. The 1997 and 1996 restructuring reserve balances are considered
adequate to cover committed restructuring actions.
The restructuring charges and utilization to date were as follows:
<TABLE>
<CAPTION>
As of December 31, 1997
Amounts Charged Amounts Remaining
Dollars in Millions Cash Non-Cash Total Utilized Reserve
1997
<S> <C> <C> <C> <C> <C>
Severance and termination benefits $ 12.6 $ -- $ 12.6 $ 4.0 $ 8.6
Asset write-offs -- 49.1 49.1 35.9 13.2
Loss on lease and other 4.2 -- 4.2 0.9 3.3
Subtotal 16.8 49.1 65.9 40.8 25.1
1996
Severance and termination benefits 1.4 -- 1.4 1.2 0.2
Asset write-offs -- 18.9 18.9 18.2 0.7
Loss on lease and other 2.6 0.1 2.7 2.5 0.2
Subtotal 4.0 19.0 23.0 21.9 1.1
1995
Severance and termination benefits 48.8 -- 48.8 48.8 --
Loss on reduction of contract
manufacturing capacity 22.5 1.9 24.4 24.4 --
Asset write-offs 0.1 22.8 22.9 22.9 --
Contract cancellation fees, loss
on leases and other 21.2 -- 21.2 14.4 6.8
Subtotal 92.6 24.7 117.3 110.5 6.8
Total $113.4 $92.8 $206.2 $173.2 $33.0
</TABLE>
49
Operating income excluding restructuring charges, losses and gains on
divestitures and divested businesses in all periods was as follows:
Dollars in Millions 1997 1996 1995
Operating (loss) income as reported $ (924.3) $ 565.9 $1,415.0
Restructuring charges:
Foods 59.9 6.4 70.4
Beverages 6.0 -- 22.5
Ongoing Businesses 65.9 6.4 92.9
Divested Businesses -- 16.6 24.4
Subtotal 65.9 23.0 117.3
Losses (gains) on divestitures 1,420.4 (136.4) (1,170.8)
Operating loss from Divested Businesses 15.1 82.5 47.5
Subtotal 1,435.5 (53.9) (1,123.3)
Operating income excluding restructuring
charges, losses, gains and Divested Businesses $ 577.1 $ 535.0 $ 409.0
Note 4
Trade Accounts Receivable Allowances
Dollars in Millions 1997 1996
Balance at beginning of year $29.3 $26.8
Provision for doubtful accounts 4.2 12.3
Provision for discounts and allowances 25.0 32.2
Write-offs of doubtful accounts - net of recoveries (5.5) (8.4)
Discounts and allowances taken (26.5) (28.0)
Effect of divestitures (3.8) (5.3)
Effect of exchange rate changes (0.4) (0.3)
Balance at end of year $22.3 $29.3
Note 5
Financial Instruments
The Company uses various financial instruments in the course of its operations,
including certain components of working capital such as cash and cash
equivalents, trade accounts receivable and trade accounts payable. In
addition, the Company uses short-term and long-term debt to fund operating
requirements and derivative financial and commodity instruments to manage its
exposure to foreign currency exchange rate, commodity price and interest rate
risk. The counterparties to the Company's financial instruments are primarily
major financial institutions. The Company continually evaluates the
creditworthiness of these major financial institutions and has never
experienced, nor does it anticipate, nonperformance by any of these
institutions.
Debt Instruments -
Revolving Credit Facilities and Short-term Debt - In 1997, the Company reduced
the level of its revolving credit facilities by a total of $225.0 million. The
Company now has a $450.0 million annually extendible five-year revolving credit
facility and a $225.0 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 facilities support the Company's
commercial paper borrowings and are also available for direct borrowings.
There were no direct borrowings in 1997 or in 1996. The revolving credit
facilities require the Company and certain domestic subsidiaries to maintain
certain financial ratios.
Short-term debt consists primarily of commercial paper borrowings in the United
States and notes payable to banks in foreign countries. Commercial paper
borrowings outstanding as of December 31, 1997 and 1996 were $5.0 million and
$438.6 million, respectively. Notes payable to banks were $56.0 million and
$78.4 million as of December 31, 1997 and 1996, respectively. The carrying
value of short-term debt approximates fair value due to the short-term maturity
of the instruments. Weighted average interest rates on all short-term debt
outstanding as of December 31, 1997 and 1996 were 7.2 percent and 5.8 percent,
respectively. This increase in rates was due to a change in the mix of the
outstanding international and domestic debt. Nominal interest rates in highly
inflationary countries have been adjusted for currency devaluation to express
interest rates in U.S. dollar terms.
Long-term Debt - The carrying value of long-term debt, including current
maturities, as of December 31, 1997 and 1996 is summarized below.
Dollars in Millions 1997 1996
7.76% Senior ESOP notes due through 2001 $ 57.2 $ 64.9
8.0% Senior ESOP notes due through 2001 82.5 100.3
7.75%-7.9% Series A medium-term notes due through 2000 41.5 41.5
8.63%-9.34% Series B medium-term notes due through 2019 178.7 185.6
6.5%-7.48% Series C medium-term notes due through 2024 200.0 200.0
6.45%-7.78% Series D medium-term notes due through 2026 400.0 400.0
6.63% deutsche mark swap matured in 1997 -- 18.1
11.7% Chinese renmimbi notes due 2001 4.8 --
5.7%-6.63% Industrial Revenue Bonds due through 2009, tax-exempt 19.4 24.9
Non-interest bearing installment note due 2014 7.0 6.1
Other 4.9 3.2
Subtotal 996.0 1,044.6
Less: current portion of long-term debt 108.4 51.1
Long-term debt $887.6 $ 993.5
50
The fair value of long-term debt, including current maturities, was $1.06
billion and $1.07 billion as of December 31, 1997 and 1996, respectively, and
was based on market prices for the same or similar issues or on the current
rates offered to the Company for similar debt of the same maturities.
In January 1990, the Company filed a $600.0 million medium-term note shelf
registration with the SEC. In April 1995, the Company filed a prospectus
supplement for $400.0 million Series D medium-term notes in addition to the
$200.0 million Series C medium-term notes previously issued under the 1990
shelf registration. As of December 31, 1996, the Company had issued all of the
Series D medium-term notes.
The non-interest bearing installment note for $55.5 million had an unamortized
discount of $48.5 million and $49.4 million as of December 31, 1997 and 1996,
respectively, based on an imputed interest rate of 13 percent.
Aggregate required payments for long-term debt maturing over the next five
years are as follows:
Dollars in Millions 1998 1999 2000 2001 2002
Required payments $108.4 $95.4 $81.4 $53.2 $46.5
Derivative Instruments - The primary derivative instruments used by the Company
are foreign exchange forward contracts, purchased foreign currency options and
commodity options and futures contracts. The Company actively monitors its
exposure to foreign currency exchange rate, commodity price and interest rate
risks and uses derivative financial and commodity instruments to manage the
impact of these risks. The Company uses derivatives only for purposes of
managing 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. Complex
instruments involving leverage or multipliers are not used. Management
believes that its use of derivative financial and commodity instruments to
reduce risk is in the Company's best interest.
During 1997, the Company executed certain hedging instruments to manage
exposure to Canadian, European, Brazilian and Mexican currency movements. As
of December 31, 1997, there were no Brazilian, Canadian or Mexican currency
hedges outstanding. As of December 31, 1996, there were no Brazilian or
Mexican currency hedges outstanding; however, there were $9.5 million of
Canadian currency hedges outstanding at December 31, 1996. The Company will
continue to use foreign currency hedge instruments, where appropriate, to
manage exposure to potentially significant currency movements. Where hedging
opportunities are not available, the exposures are addressed through managing
net asset positions and borrowing or investing in a combination of local
currency and U.S. dollars.
Balance Sheet Hedges -
Net Investment Hedges - The Company's significant net investment hedges and the
related foreign currency net investments and net exposures as of December 31,
1997 were as follows:
Dollars in Millions Net Investment Net Hedge Net Exposure
Currency:
British pounds $ 17.9 $ 4.9 $ 13.0
Dutch guilders $ 17.8 $13.5 $ 4.3
German marks $ 17.5 $13.9 $ 3.6
Italian lira $ 23.5 $ 3.8 $ 19.7
The Company actively monitors its net exposures and adjusts the hedge amounts
as appropriate. The net hedges are stated above on an after-tax basis. The
net exposures are subject to gain or loss if foreign currency exchange rates
fluctuate.
As of December 31, 1997, the Company had net foreign exchange forward contracts
to sell various European currencies for $14.4 million to hedge its net
investments. These contracts will mature in 1998. As of December 31, 1996,
the Company had such contracts to sell various European and Canadian currencies
for $35.3 million, which matured in 1997. Unrealized losses as of December 31,
1997 and 1996 were $0.1 million and $0.2 million, respectively. The carrying
value of these contracts approximated fair value.
Foreign Currency Swaps - In 1987, the Company swapped $15.0 million of long-
term debt for 27.9 million in deutsche mark (DM) denominated long-term debt,
effectively hedging part of the German net investment. The DM swap agreement
required the Company to re-exchange DM 27.9 million for $15.0 million in August
1997 and to make semiannual interest payments of DM 0.9 million through August
1997. The DM swap was included in current long-term debt as of December 31,
1996 for $18.1 million.
Income Statement Hedges -
Foreign Currency Hedges - The Company uses foreign currency options and forward
contracts to manage the impact of foreign currency fluctuations recognized in
the Company's operating results. Included in the consolidated statements of
income were losses from foreign currency hedge instruments of $2.5 million,
$1.0 million and $3.5 million in 1997, 1996 and 1995, respectively.
51
Commodity Options and Futures - The Company uses commodity options and futures
contracts to manage price exposures on commodity inventories or anticipated
purchases of commodities. The Company regularly hedges purchases of oats,
corn, corn sweetener, wheat, coffee beans and orange juice concentrate. Of the
$2.56 billion in cost of goods sold, approximately $230 million to $280 million
is in commodities that may be hedged. The Company's strategy is typically to
hedge certain production requirements for various periods up to 12 months. As
of December 31, 1997 and 1996, approximately 36 percent and 32 percent,
respectively, of hedgeable production requirements for the next 12 months were
hedged. Deferred unrecognized losses related to commodity options and futures
contracts as of December 31, 1997 and 1996 were $0.1 million. Realized gains
charged to cost of goods sold in 1997, 1996 and 1995 were $6.6 million, $5.1
million and $0.3 million, respectively. The fair values of these commodity
instruments as of December 31, 1997 and 1996, based on quotes from brokers,
were net losses of $0.8 million and $2.9 million, respectively.
Interest Rate Hedges - The Company actively monitors its interest rate
exposure. In 1995, the Company entered into interest rate swap agreements with
a notional value of $150.0 million. The swap agreements were used to hedge
fixed interest rate risk related to anticipated issuance of long-term debt.
The swap agreements were subsequently terminated at a cost of $11.9 million as
long-term debt was issued. Included in the consolidated balance sheets as of
December 31, 1997 and 1996 were $7.1 million and $8.9 million, respectively, of
prepaid interest expense as settlement of all the interest rate swap
agreements. Prepaid interest expense is recognized in the consolidated
statements of income on a straight-line basis over the original term of the
swap agreements, which ranged from three to 10 years. The carrying value of
the settled interest rate swap agreements approximates the fair value of the
swap at the settlement date less amortized interest. Included in interest
expense was $1.8 million, $1.9 million and $1.1 million related to the interest
rate swap agreements in 1997, 1996 and 1995, respectively.
Note 6
Capital Stock
During 1997, the Company repurchased 987,632 shares of its outstanding common
stock for $50.0 million under a 10 million share repurchase program announced
in August 1993. The Company has approximately 2.3 million shares remaining for
repurchase under this program.
The Company is authorized to issue 10 million shares of preferred stock in
series, with terms fixed by resolution of the Board of Directors. One million
shares of Series A Junior Participating Preferred Stock had been reserved for
issuance in connection with the 1986 Shareholder Rights Plan. The 1986
Shareholder Rights Plan expired on July 30, 1996 and was replaced by a new
Shareholder Rights Plan adopted on May 8, 1996. As a result, the one million
shares of Series A Junior Participating Preferred Stock have been canceled and
four million shares of Series C Junior Participating Preferred Stock have been
reserved for issuance in connection with the new Shareholder Rights Plan. See
Note 9 for further discussion.
An additional 1,750,000 shares of Series B Employee Stock Ownership Plan (ESOP)
Convertible Preferred Stock (Series B Stock) have been reserved for issuance in
connection with the Company's ESOP. As of December 31, 1997, 1,282,051 shares
of the Series B Stock had been issued and are each convertible into 2.1576
shares of the Company's common stock. The Series B Stock will be issued only
for the ESOP and will not be traded on the open market.
The Company is also authorized to issue one million shares of redeemable
preference stock, none of which had been issued as of December 31, 1997.
Note 7
Deferred Compensation
The ESOP was established to issue debt and to use the proceeds of such debt to
acquire shares of the Company's stock for future allocation to ESOP
participants. The ESOP borrowings are included in long-term debt on the
Company's consolidated balance sheets. See Note 5 for further discussion on
the ESOP notes.
Deferred compensation of $148.2 million as of December 31, 1997, primarily
represents the Company's payment of future compensation expense related to the
ESOP. As the Company makes annual contributions to the ESOP, these
contributions, along with the dividends accumulated on the common and preferred
stock held by the ESOP, are used to repay the outstanding loans. As the loans
are repaid, common and preferred stock are allocated to ESOP participants and
deferred compensation is reduced by the amount of the principal payments on the
loans.
The following table presents the ESOP loan payments:
Dollars in Millions 1997 1996
Principal payments $25.5 $22.1
Interest payments 12.9 14.7
Total ESOP payments $38.4 $36.8
As of December 31, 1997, 4,272,906 shares of common stock and 494,217 shares of
preferred stock were held in the accounts of ESOP participants.
52
Note 8
Employee Stock Option and Award Plans
In November 1989, the Company's shareholders approved the adoption of The
Quaker Long Term Incentive Plan of 1990 (Plan). The purpose of the Plan is to
promote the interests of the Company and its shareholders by providing the
officers and other key employees with additional incentives and the
opportunity, through stock ownership, to increase their proprietary interest in
the Company and their personal interest in its continued success. The Plan
provides for benefits to be awarded in a variety of ways, with stock options
being used most frequently. Twenty-six million shares of common stock have
been authorized for grant under the Plan.
Stock options may be granted for the purchase of common stock at a price not
less than the fair market value on the date of grant. Generally, the exercise
price of each stock option equals the market price of the Company's stock on
the date of grant. Options are generally exercisable after one or more years
and expire no later than 10 years from the date of grant. As of December 31,
1997, 705 persons held such options.
The Company has elected to disclose the pro forma effects of FASB Statement
#123, "Accounting for Stock-Based Compensation." As allowed under the
provisions of the Statement, the Company will continue to apply APB Opinion #25
and related Interpretations in accounting for the stock options awarded under
the Plan. Accordingly, no compensation cost has been recognized for these
stock options. Had compensation cost for the Plan been determined consistent
with FASB Statement #123, the Company's net (loss) income and net (loss)
earnings per share would have been the pro forma amounts indicated below:
Dollars in Millions 1997 1996 1995
Net (Loss) Income:
As reported $(930.9) $247.9 $724.0
Pro forma $(940.7) $242.0 $720.7
Net (loss) earnings per share:
As reported $ (6.80) $ 1.80 $ 5.39
Pro forma $ (6.87) $ 1.76 $ 5.37
Net (loss) earnings per share - assuming dilution:
As reported $ (6.80) $ 1.78 $ 5.23
Pro forma $ (6.87) $ 1.74 $ 5.21
The fair value of each option granted during the year is estimated on the date
of grant using the Black-Scholes option-pricing model with the following range
of assumptions:
1997 1996 1995
Dividend yield 2.4% - 3.1% 3.3 % - 3.4 % 3.2 %
Expected volatility 16.3% - 22.5% 14.4 % - 20.1 % 20.6 % - 20.9 %
Risk-free interest rates 5.9% - 6.7% 5.7 % - 6.8 % 5.8 % - 6.2%
Expected lives 3 to 8 years 2 to 8 years 2 to 8 years
A summary of the status of the Company's option activity is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 14,264,030 $34.42 16,724,814 $33.99 14,706,033 $33.78
Granted 3,205,250 $40.61 152,150 $33.93 4,038,115 $33.13
Exercised 3,661,269 $33.00 1,260,977 $24.66 927,371 $22.97
Forfeited 790,390 $36.05 1,351,957 $38.14 1,091,963 $37.36
Outstanding at end of year 13,017,621 $36.25 14,264,030 $34.42 16,724,814 $33.99
Exercisable at end of year 9,403,675 $35.70 10,947,837 $34.33 10,150,528 $34.00
Weighted-average fair
value of options granted
during the year $9.03 $5.97 $6.38
</TABLE>
The following summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
$22.79-34.53 6,134,323 5.78 Years $31.60 5,075,327 $31.27
$35.35-48.03 6,883,298 7.10 Years $40.40 4,328,348 $40.88
$22.79-48.03 13,017,621 6.48 Years $36.25 9,403,675 $35.70
53
Under the Plan, restricted stock awards grant shares of the Company's common
stock to key officers and employees. These shares are subject to a restriction
period from the date of grant, during which time they may not be sold,
assigned, pledged or otherwise encumbered. The number of shares or stock units
of the Company's common stock awarded in 1997, 1996 and 1995 were 178,475,
55,600 and 19,400, respectively. Restrictions on these awards lapse after a
period of time designated by the Compensation Committee of the Board of
Directors.
Note 9
Shareholder Rights Plan
On May 8, 1996, the Company's Board of Directors adopted a new Shareholder
Rights Plan to replace the Shareholder Rights Plan originally adopted in 1986
which expired on July 30, 1996. The Company's Shareholder Rights Plan is
designed to deter coercive or unfair takeover tactics and to prevent a person
or group from gaining control of the Company without offering a fair price to
all shareholders.
Under the terms of the 1996 Shareholder Rights Plan, all common shareholders
own one "Right" per outstanding share of common stock entitling them to
purchase from the Company one one-hundredth of a share of Series C Junior
Participating Preferred Stock at an exercise price of $150. The Rights become
exercisable 10 days after a public announcement that a person or group has
acquired shares representing 15 percent or more of the outstanding shares of
common stock, or 15 business days following commencement of a tender offer for
15 percent or more of such outstanding shares of common stock.
The Company can redeem the Rights for $0.01 per Right at any time prior to
their becoming exercisable. The Rights will expire on July 31, 2006, unless
redeemed earlier by the Company or exchanged for common stock.
If after the Rights become exercisable the Company is involved in a merger or
other business combination at any time when there is a holder of 15 percent or
more of the Company's stock, the Rights will then entitle holders, upon
exercise of the Rights, to receive shares of common stock of the acquiring or
surviving company with a market value equal to twice the exercise price of each
Right. There is an exemption for any issuance of common stock by the Company
directly to any person, even if that person would become the beneficial owner
of 15% or more of the common stock, provided that such person does not acquire
any additional shares of common stock. The Rights described in this paragraph
shall not apply to an acquisition, merger or consolidation which is determined
by a majority of the Company's independent directors, after consulting one or
more investment banking firms, to be fair and otherwise in the best interest of
the Company and its shareholders.
Note 10
Pension Plans
The Company has various pension plans covering substantially all U.S. employees
and certain foreign employees. Plan benefits are based on compensation paid to
employees and their years of service. Company policy is to make contributions
to its U.S. plans within the maximum amount deductible for Federal income tax
purposes. Plan assets consist primarily of equity securities and government,
corporate and other fixed-income obligations.
The components of net pension costs for the plans were as follows:
Dollars in Millions 1997 1996 1995
Service cost (benefits earned during the year) $30.9 $34.0 $53.5
Interest cost on projected benefit obligation 74.5 70.0 63.3
Return on plan assets (86.3) (72.4) (69.0)
Net amortization and deferral (6.6) (8.7) (7.3)
Multi-employer plans 0.5 0.5 0.4
Net pension costs $13.0 $23.4 $40.9
The decline in the Company's 1997 and 1996 pension expense is due primarily to
an increase in the rate of return on the plans' net assets, a reduction in the
number of active employees and changes in certain actuarial assumptions to
better reflect the Company's actual experience.
Reconciliations of the funded status of the Company's U.S. plans to the accrued
pension costs were as follows:
<TABLE>
<CAPTION>
Overfunded Underfunded
Dollars in Millions 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Vested benefits $ 799.1 $702.5 $ 76.0 $ 65.6
Non-vested benefits 19.5 25.0 0.8 0.9
Accumulated benefit obligation 818.6 727.5 76.8 66.5
Effect of projected future salary increases 87.3 65.1 10.3 10.5
Projected benefit obligation 905.9 792.6 87.1 77.0
Plan assets at market value 1,045.4 880.4 29.7 26.9
Projected benefit obligation less
(greater) than plan assets 139.5 87.8 (57.4) (50.1)
Unrecognized net (gain) loss (193.8) (135.7) (1.8) 1.5
Unrecognized prior service cost 13.6 16.4 4.6 4.2
Unrecognized net (asset) liability at transition -- (9.9) 0.8 0.9
Accrued pension costs $ (40.7) $(41.4) $(53.8) $(43.5)
Assumptions (reflecting averages across all plans): Weighted average discount
rate: 7.0%, Rate of future compensation increases: 4.5%, Long-term rate of
return on plan assets: 9.75%.
</TABLE>
54
Reconciliations of the funded status of the Company's foreign plans to the
prepaid (accrued) pension costs were as follows:
<TABLE>
<CAPTION>
Overfunded Underfunded
Dollars in Millions 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Vested benefits $93.1 $95.1 $ 9.5 $ 14.0
Non-vested benefits -- -- 0.9 0.6
Accumulated benefit obligation 93.1 95.1 10.4 14.6
Effect of projected future salary increases 34.8 29.0 0.8 0.7
Projected benefit obligation 127.9 124.1 11.2 15.3
Plan assets at market value 143.9 139.0 0.2 0.1
Projected benefit obligation less
(greater) than plan assets 16.0 14.9 (11.0) (15.2)
Unrecognized net (gain) loss (7.1) (4.7) 0.8 0.5
Unrecognized prior service cost 4.1 2.7 -- --
Unrecognized net asset at transition (6.1) (7.3) (0.1) (0.1)
Prepaid (accrued) pension costs $ 6.9 $ 5.6 $(10.3) $(14.8)
Assumptions (reflecting averages across all plans): Weighted average discount
rate: 7.5%, Rate of future compensation increases: 6.0%, Long-term rate of
return on plan assets: 8.0%.
</TABLE>
Unrecognized prior service cost is being amortized over periods ranging from 10
to 18 years. The foreign pension plans included unfunded termination indemnity
reserves of $3.4 million and $6.7 million as of December 31, 1997 and 1996,
respectively.
Note 11
Postretirement Benefits Other Than Pensions and Other
Postemployment Benefits
The Company has various postretirement health care plans covering substantially
all U.S. employees and certain foreign employees. The plans provide for the
payment of certain health care and life insurance benefits for retired
employees who meet certain service-related eligibility requirements. The
Company funds only the plans' annual cash requirements.
The components of postretirement benefit costs were as follows:
Dollars in Millions 1997 1996 1995
Service cost (benefits earned during the year) $ 6.3 $ 6.7 $ 6.9
Interest cost on projected benefit obligation 18.6 17.3 19.4
Amortization 0.4 0.4 0.2
Total postretirement benefit costs $25.3 $24.4 $26.5
The Company's unfunded accumulated postretirement benefit obligations and
accrued postretirement benefit costs were as follows:
Dollars in Millions 1997 1996
Current retirees $166.3 $132.3
Current active employees - fully eligible 11.8 11.7
Current active employees - not fully eligible 102.6 105.1
Accumulated postretirement benefit obligations 280.7 249.1
Unrecognized net gain (loss) 5.9 27.1
Unrecognized prior service cost (4.7) (5.2)
Accrued postretirement benefit costs $281.9 $271.0
Assumptions:
Weighted average discount rate: 7.0%
Health care trend rates (varies by plan): 1998 2008 and Beyond
Pre-age 65 8-9% 4-5%
Age 65 and over 7-9% 4-5%
If the health care trend rates were increased one percentage point,
postretirement benefit costs for the year ended December 31, 1997 would have
been $3.9 million higher and the accumulated postretirement benefit obligation
as of December 31, 1997 would have been $40.2 million higher.
Note 12
Lease and Other Commitments
Certain equipment and operating properties are rented under non-cancelable and
cancelable operating leases. Total rental expense under operating leases was
$38.0 million, $36.4 million and $36.3 million for the years ended December 31,
1997, 1996 and 1995, respectively. The following is a schedule of future
minimum annual rentals on non-cancelable operating leases, primarily for sales
offices, distribution centers and corporate headquarters, in effect as of
December 31, 1997.
Dollars in Millions 1998 1999 2000 2001 2002 Thereafter Total
Total payments $27.5 $24.8 $23.4 $22.4 $17.5 $41.1 $156.7
The Company enters into executory contracts to obtain inventory and promote
various products. As of December 31, 1997, future commitments under these
contracts amounted to $145.8 million.
55
Note 13
Supplementary Income Statement Information
Dollars in Millions 1997 1996 1995
Advertising, media and production $ 292.7 $ 289.8 $ 271.5
Merchandising 933.7 913.5 1,192.7
Total advertising and merchandising $1,226.4 $1,203.3 $1,464.2
Depreciation expense $ 122.0 $ 119.1 $ 115.3
Amortization of intangibles $ 35.6 $ 78.5 $ 86.7
Research and development $ 34.9 $ 33.0 $ 40.4
Note 14
Interest Expense
Dollars in Millions 1997 1996 1995
Interest expense $89.8 $113.0 $135.9
Interest expense capitalized (4.0) (6.2) (4.3)
Subtotal 85.8 106.8 131.6
Interest income (6.7) (7.4) (6.2)
Interest expense - net $79.1 $ 99.4 $125.4
Interest paid in the years ended December 31, 1997, 1996 and 1995 was $83.2
million, $109.0 million and $129.9 million, respectively.
Note 15
Income Taxes
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes in accordance with FASB Statement #109, "Accounting
for Income Taxes." Income tax (benefits) provisions were as follows:
Dollars in Millions 1997 1996 1995
Currently (receivable) payable:
Federal $(140.1) $ 99.4 $339.1
Foreign 21.9 10.2 131.7
State 4.2 26.6 54.9
Total currently (receivable) payable (114.0) 136.2 525.7
Deferred - net:
Federal (3.0) 15.9 (19.8)
Foreign (13.6) 10.4 (7.3)
State (2.8) 5.2 (2.1)
Total deferred - net (19.4) 31.5 (29.2)
Income tax (benefit) provision $(133.4) $167.7 $496.5
As a result of the loss on the divestiture of Snapple in 1997, the Company
expects to recover approximately $250 million ($240 million Federal and $10
million State) in taxes paid on previous capital gains from business
divestitures. This tax benefit has been reflected in other current assets on
the consolidated balance sheet as of December 31, 1997.
The components of the deferred income tax (benefit) provision were as follows:
Dollars in Millions 1997 1996 1995
Accelerated tax depreciation $ 12.8 $ 3.7 $(23.8)
Postretirement benefits (10.9) 0.6 (6.5)
Accrued expenses including
restructuring charges -- 40.6 12.6
Loss carryforwards (4.6) (7.1) 3.5
Foreign gain deferral (4.3) 9.8 --
Other (12.4) (16.1) (15.0)
(Benefit) provision for deferred income taxes $(19.4) $ 31.5 $(29.2)
Total income tax (benefits) provisions were allocated as follows:
Dollars in Millions 1997 1996 1995
Continuing operations $(133.4) $167.7 $496.5
Items charged directly to
common shareholders' equity $ (21.0) $ (8.4) $(11.4)
The sources of pretax (loss) income were as follows:
Dollars in Millions 1997 1996 1995
U.S. sources $(1,087.7) $362.8 $ 925.4
Foreign sources 23.4 52.8 295.1
(Loss) income before income taxes $(1,064.3) $415.6 $1,220.5
56
Reconciliations of the statutory Federal income tax rates to the effective
income tax rates were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1997 1996 1995
% of % of % of
Pretax Pretax Pretax
Amount Loss Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) provision based
on the Federal statutory rate $(372.5) 35.0% $145.5 35.0% $427.2 35.0%
State and local income tax
(benefit) provision - net of
Federal income taxes (7.1) 0.7 20.7 5.0 34.3 2.8
Repatriation of foreign earnings 1.9 (0.2) (11.3) (2.7) 18.9 1.5
Foreign tax rate differential 0.1 -- 2.1 0.5 21.1 1.7
Snapple valuation allowance 253.1 (23.8) -- -- -- --
Miscellaneous items (8.9) 0.8 10.7 2.6 (5.0) (0.3)
Income tax (benefit) provision $(133.4) 12.5% $167.7 40.4% $496.5 40.7%
</TABLE>
Deferred tax assets and deferred tax liabilities were as follows:
Dollars in Millions 1997 1996
Assets Liabilities Assets Liabilities
Depreciation and amortization $ 20.3 $218.9 $ 56.9 $400.1
Postretirement benefits 129.8 -- 100.3 --
Other benefit plans 50.2 5.7 60.8 9.2
Accrued expenses including
restructuring charges 92.5 11.5 80.3 7.9
Loss carryforwards 328.5 -- 14.5 --
Other 4.1 15.9 13.3 33.2
Subtotal 625.4 252.0 326.1 450.4
Valuation allowance (319.2) -- (14.2) --
Total $ 306.2 $252.0 $311.9 $450.4
As of December 31, 1997, as a result of the loss on divestiture of Snapple, the
Company had approximately $790 million of capital loss carryforwards available
to reduce future capital gains in the United States for up to five years. A
valuation allowance has been provided for the full value of the deferred tax
assets related to these loss carryforwards.
As of December 31, 1997, the Company had $39.5 million of operating and capital
loss carryforwards available to reduce future taxable income of certain
international subsidiaries. These loss carryforwards must be utilized within
the carryforward periods of these international jurisdictions. The majority of
international loss carryforwards have no expiration restrictions. Those with
restrictions expire primarily in five years. A valuation allowance has been
provided for approximately one-half of the deferred tax assets related to the
loss carryforwards.
Included in other current assets were deferred tax assets of $90.5 million and
$99.9 million as of December 31, 1997 and 1996, respectively. Income taxes
paid during 1997, 1996 and 1995 were $92.9 million, $161.1 million and $434.7
million, respectively.
Note 16
Litigation
On November 1, 1995, the Company filed suit against Borden, Inc. in Federal
District Court in New York related to the Company's November 1994 acquisition
of a Brazilian pasta business. The suit was settled in August 1997 for $35.0
million.
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 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.
57
Note 17
Earnings per Share
Reconciliations of basic earnings per share (EPS) to diluted EPS were as
follows:
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
For the year ended December 31, 1997 1996 1995
Income Shares Income Shares Income Shares
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(930.9) $247.9 $724.0
Less: Preferred dividends 3.5 3.7 4.0
Net (loss) income available
for common $(934.4) 137,460 $244.2 135,466 $720.0 134,149
Net (loss) income per
common share $ (6.80) $ 1.80 $ 5.39
Net (loss) income available
for common $(934.4) 137,460 $244.2 135,466 $720.0 134,149
Effect of dilutive securities:
Stock options -- -- -- 1,000 -- 1,253
ESOP Convertible
Preferred Stock -- -- 2.9 2,441 2.9 2,586
Non-vested awards -- -- -- 83 -- 73
$(934.4) 137,460 $247.1 138,990 $722.9 138,061
Net (loss) income per
common share - assuming
dilution $ (6.80) $ 1.78 $ 5.23
</TABLE>
As the Company incurred a net loss for the year ended December 31, 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 1997, had the Company earned net income, would have
resulted in a $2.9 million increase to net income available for common and an
increase of 5.1 million shares.
As of December 31, 1996 and 1995, certain stock options were excluded from the
computation of diluted EPS because the exercise prices were higher than the
average market price. At the end of 1997, all exercise prices were lower than
the average market price. See Note 8 for more information on outstanding
options. Historical adjustments for potentially dilutive securities are not
necessarily indicative of future trends.
Note 18
Quarterly Financial Data (Unaudited)
Dollars in Millions (Except Per Share Data)
First Second Third Fourth
1997 Quarter(a) Quarter(b) Quarter(c) Quarter(d)
Net sales $ 1,201.7 $1,395.5 $1,370.7 $1,047.8
Cost of goods sold 627.7 704.1 674.1 559.0
Gross profit $ 574.0 $ 691.4 $ 696.6 $ 488.8
Net (loss) income $(1,109.8) $ 75.8 $ 77.5 $ 25.6
Per common share:
Net (loss) income $ (8.15) $ 0.57 $ 0.58 $ 0.20
Net (loss) income -
assuming dilution $ (8.15) $ 0.57 $ 0.58 $ 0.20
Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285
Market price range:
High $ 40 3/8 $ 45 1/8 $ 53 $ 55 1/8
Low $ 34 3/8 $ 35 7/8 $ 44 3/8 $42 1/16
(a) Includes a $1.40 billion pretax impairment loss ($1.14 billion after-tax or
$8.39 per share) for the Snapple beverages business.
(b) Includes a $10.6 million pretax loss ($5.5 million after-tax or $.02 per
share) for the sale of the Snapple beverages business and pretax restructuring
charges of $11.8 million ($7.9 after-tax or $.06 per share) for plant
consolidations in the International Foods business and the closing of an
International beverages office.
(c) Includes a $4.8 million pretax net charge ($3.4 million after-tax or $.02
per share) for an impairment loss partly offset by a litigation settlement in
the International Foods business and pretax restructuring charges of $46.9
million ($28.2 million after-tax or $.19 per share) for plant consolidations in
the U.S. and Canadian Foods business and staffing reductions.
(d) Includes a $5.8 million combined pretax loss ($1.9 million after-tax or an
immaterial per share impact) for the sale of certain food service businesses
and pretax restructuring charges of $7.2 million ($4.3 after-tax or $.02 per
share) for manufacturing reconfigurations in the U.S. and Canadian Foods and
Beverages business.
Dollars in Millions (Except Per Share Data)
First Second Third Fourth
1996 Quarter(a) Quarter Quarter(b) Quarter
Net sales $1,222.8 $1,481.8 $1,436.2 $1,058.2
Cost of goods sold 664.5 790.1 754.3 598.6
Gross profit $ 558.3 $ 691.7 $ 681.9 $ 459.6
Net income $ 32.2 $ 64.6 $ 133.0 $ 18.1
Per common share:
Net income $ 0.23 $ 0.47 $ 0.98 $ 0.12
Net income - assuming
dilution $ 0.23 $ 0.46 $ 0.97 $ 0.12
Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285
Market price range:
High $ 35 7/8 $ 37 5/8 $ 36 7/8 $ 39 1/2
Low $ 32 3/4 $ 32 3/8 $ 30 3/8 $ 34 1/8
(a) Includes a $2.8 million pretax gain ($1.7 million after-tax or $.01 per
share) for the sale of the Italian products business.
(b) Includes a $133.6 million pretax gain ($80.1 million after-tax or $.59
per share) for the sale of the U.S. and Canadian frozen foods business and
pretax restructuring charges of $23.0 million ($19.4 million after-tax or $.14
per share) for plant consolidations in the U.S. and Canadian Foods business and
a change in how the Company sold Snapple beverages in certain Texas markets.
58
Additional 10-K Information
Description of Property
As of December 31, 1997, the Company operated 55 manufacturing plants in 18
states and 14 foreign countries and owned or leased distribution centers and
sales offices in 21 states and 21 foreign countries.
Owned and Leased Owned and Leased Owned and Leased
Mfg. Locations Distribution Centers Sales Offices
Industry Segment U.S. Foreign U.S. Foreign U.S. Foreign
Foods 20 20 2 6 8 18
Beverages 7 7 -- 4 11 13
Shared -- 1 6 12 6 8
Total 27 28 8 22 25 39
The Company owns a research and development laboratory in Barrington, Illinois
and leases corporate office space in downtown Chicago, Illinois. Management
believes manufacturing, distribution and office space owned and leased are
suitable and adequate for the business and productive capacity is appropriately
utilized.
Trademarks
The Company and its subsidiaries own a number of trademarks and are not aware
of any circumstances that could materially adversely affect the continued use
of these trademarks. Among the most important of the domestic trademarks owned
by the Company are Quaker, Cap'n Crunch, Quaker Toasted Oatmeal, Life, Quaker
100% Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade for
thirst-quenching beverages; Quaker and Quaker Chewy for grain-based snacks;
Rice-A-Roni and Near East for value-added rice and grain products; Pasta Roni
for value-added pasta; Near East and Nile Spice for meals in a cup; Golden
Grain and Mission for pasta; Quaker and Aunt Jemima for mixes, syrups and corn
goods; Ardmore Farms for citrus and fruit juices; and Continental, Maryland
Club and Continental WB for coffee. Many of the grocery product trademarks
owned by the Company in the United States are registered in foreign countries
in which the Company does substantial business. Internationally, key
trademarks owned include: Quaker, Cruesli, Honey Monster, Sugar Puffs and
Scott's for breakfast cereals; Coqueiro for fish; Toddy and ToddYnho for
chocolate beverages; Gatorade for thirst-quenching beverages; and Adria for
pasta products.
U.S. and Canadian Foods Description
The Company is a major participant in the competitive packaged food industry in
the United States and is a leading manufacturer of hot cereals, pancake mixes,
grain-based snacks, cornmeal, hominy grits and value-added rice products. In
addition, the Company is the second-largest manufacturer of syrups and value-
added pasta products and is among the five largest manufacturers of ready-to-
eat cereals and dry pasta products. The Company competes with a significant
number of large and small companies on the basis of price, value, innovation,
quality and convenience, among other attributes. The Company's food products
are purchased by consumers through a wide range of food distributors. The
Company utilizes both its own and broker sales forces and has distribution
centers throughout the country, each of which carries an inventory of most of
the Company's food products. In addition, the Company markets a line of over
400 items to the food service market, including Quaker hot and ready-to-eat
cereals; Continental coffee; and Ardmore Farms single serve frozen fruit
juices; a specialty line of custom-blended dry baking mixes; ready-to-bake
biscuits; and Burry cookies and crackers.
International Foods Description
The Company is broadly diversified in the packaged food industry, both
geographically and by product line. The Company manufactures and markets its
products in many countries throughout Europe, Latin America and the Asia/
Pacific region. It is the leading brand-name hot cereals producer in many
countries and has other leading market positions for products in an number of
countries. In Brazil, the Company is the leading producer of ready-to-drink
chocolate beverages and the leading canned fish processor.
Worldwide Beverage Description
The Company is the world's leading manufacturer of sports beverages. It sells
its sports beverages in 47 countries around the world and is the leading sports
drink distributor in the United States, Canada, Mexico, Italy, Argentina,
Brazil, Venezuela, Colombia, Indonesia and the Philippine Islands. It is also
one of the leading sports drink brands in Korea and Australia, where Gatorade
is sold through licensee arrangements. In the United States, Gatorade thirst
quencher utilizes a combination of brokers and the Company's own sales force
and has distribution centers throughout the country.
Raw Materials
Raw materials used in manufacturing include oats, wheat, soy products, corn,
rice, sweeteners, orange and other juice concentrates, almonds, coffee beans,
raisins, beef, chicken, shortening and fish, as well as a variety of packaging
materials. These products are purchased mainly in the open market. Supplies
of all raw materials have been adequate and continuous.
59
Directors
Members of the
Board of Directors
Frank C. Carlucci 1*,5,6
Chairman
The Carlyle Group
(Banking)
Washington, D.C.
Silas S. Cathcart 2*,3,5
Retired Chairman
Illinois Tool Works, Inc.
(Diversified Products)
Chicago, Illinois
Kenneth I. Chenault 1,2,4,5
President and
Chief Operating Officer
American Express Company
(Financial and Travel Services)
New York, New York
John H. Costello 1,5,6
Senior Executive
Vice President - Marketing
Sears, Roebuck and Co.
(Retail Marketing)
Hoffman Estates, Illinois
Judy C. Lewent 1,4,5,6
Senior Vice President and
Chief Financial Officer
Merck & Co., Inc.
(Pharmaceuticals)
Whitehouse Station,
New Jersey
Vernon R. Loucks, Jr. 2,3,5*
Chairman and Chief
Executive Officer
Baxter International Inc.
(Medical Care Products)
Deerfield, Illinois
Thomas C. MacAvoy 1,5,6*
Paul M. Hammaker
Professor of Business
Administration
Darden Graduate
School of Business
Administration
University of Virginia
Charlottesville, Virginia
Robert S. Morrison 3,5
Chairman, President and
Chief Executive Officer
Walter J. Salmon 4,5,6
Stanley Roth, Sr.
Professor of Retailing
Emeritus
Harvard Business School
Boston, Massachusetts
William L. Weiss 2,3,4*,5
Chairman Emeritus
Ameritech Corporation
(Telecommunications)
Chicago, Illinois
Board Committees
1 Audit
2 Compensation
3 Executive
4 Finance
5 Nominating
(Robert S. Morrison
Ex. Officio Member)
6 Public Responsibility
* Denotes Committee Chairman
Officers
Senior Officers
Robert S. Morrison +
Age 55
Chairman, President and
Chief Executive Officer
Joined Quaker in October
1997.
Elected to present office in October 1997.
John G. Jartz +
Age 44
Senior Vice President
General Counsel, Business Development and Corporate Secretary
Joined Quaker in 1980.
Elected to present office in July 1997.
Douglas J. Ralston +
Age 52
Senior Vice President
Human Resources
Joined Quaker in 1981.
Elected to present
office in 1992.
Robert S. Thomason +
Age 53
Senior Vice President
Finance and Chief
Financial Officer
Joined Quaker in 1971.
Elected to present office
in 1995.
Corporate Staff
Officers
Michael D. Annes
Vice President
Business Development
and Counsel Law
John H. Calhoun
Vice President and Associate
General Corporate Counsel
Penelope C. Cate
Vice President
Public Affairs
Janet K. Cooper +
Age 44
Vice President
Treasurer and Tax
Joined Quaker in 1978.
Elected to present office in July 1997.
Margaret M. Eichman +
Age 39
Vice President
Investor Relations and
Corporate Affairs
Joined Quaker in 1980.
Elected to present office
in July 1997.
62
Thomas L. Gettings +
Age 41
Vice President and
Corporate Controller
Joined Quaker in 1987.
Elected to present office
in 1992.
Douglas A. James
Assistant Treasurer
James E. LeGere
Vice President
Information Services
U.S. Foods
I. Charles Mathews
Vice President
Diversity Management
Kenneth W. Murray
Vice President
Audit Services and
Chief Ethics Officer
Michael T. Welch
Vice President
U.S. Foods and
Litigation Counsel
U.S. and Canadian
Quaker Foods Products
Douglas W. Mills +
Age 52
Executive Vice President
Joined Quaker in 1969.
Elected to present office
in 1994.
John A. Boynton
Vice President and
Chief Customer Officer
Harry M. Dent III
Vice President
Ready-to-Eat Cereals
Polly B. Kawalek
President
Hot Breakfast
Charles I. Maniscalco
Vice President
Snacks
David L. Morton
President and
Chief Executive Officer
The Quaker Oats Company
of Canada Limited
Mark A. Shapiro
President
Golden Grain
Russell A. Young
Vice President
Supply Chain
Worldwide Beverages
James F. Doyle +
Age 45
Executive Vice President
Joined Quaker in 1981.
Elected to present office
in 1994.
Susan D. Wellington
Vice President
Gatorade Marketing
Bernardo Wolfson
President - Beverages,
Latin America and Europe
Quaker International
Food Products
Barbara R. Allen +
Age 45
Executive Vice President
Joined Quaker in 1975.
Elected to present office in 1995.
Europe
George F. Sewell
President
Cereals, Europe
Latin America
Otavio J. Franco
Regional Vice President
Latin America South
Pacific
Cassian K. Cheung
President - Pacific
+ also Executive Officers as defined by Securities and Exchange Commission
regulations. Such Executive Officers serve at the pleasure of the Board of
Directors. All Executive Officers (except Robert S. Morrison, who joined the
Company in October 1997, and was formerly the Chairman and CEO of Kraft Foods,
Inc. North America of Philip Morris Companies, Inc. [1994-1997] and President of
General Foods U.S.A. of Philip Morris Companies, Inc. [1991-1994], have been
employed by The Quaker Oats Company in an executive capacity for five years or
more.
63
Report of Independent Public Accountants
To the Shareholders of The Quaker Oats Company:
We have audited the accompanying consolidated balance sheets of The Quaker Oats
Company (a New Jersey corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, common shareholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Quaker Oats Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Chicago, Illinois
February 4, 1998
Report of Management
Management is responsible for the preparation and integrity of the Company's
financial statements. The financial statements have been prepared in
accordance with generally accepted accounting principles and necessarily
include some amounts that are based on management's estimates and judgment.
To fulfill its responsibility, management's goal is to maintain strong systems
of internal controls, supported by formal policies and procedures that are
communicated throughout the Company. Management regularly evaluates its
systems of internal controls, with an eye toward improvement. Management also
maintains a staff of internal auditors who evaluate the adequacy of and
investigate the adherence to these controls, policies and procedures.
Our independent public accountants, Arthur Andersen LLP, have audited the
financial statements and have rendered an opinion as to the statements'
fairness in all material respects. During the audit, they obtain an
understanding of the Company's internal control systems and perform tests and
other procedures to the extent required by generally accepted auditing
standards.
The Board of Directors pursues its oversight role with respect to the Company's
financial statements through the Audit Committee, which is composed solely of
non-management directors. The Audit Committee meets periodically with the
independent public accountants, internal auditors and management to assure that
all are properly discharging their responsibilities. The Audit Committee
approves the scope of the annual audit and reviews the recommendations the
independent public accountants have for improving internal accounting controls.
The Board of Directors, on recommendation of the Audit Committee, engages the
independent public accountants, subject to shareholder approval.
Both Arthur Andersen LLP and the internal auditors have unrestricted access to
the Audit Committee.
64
Corporate and Shareholder Information
Corporate Headquarters
Mailing Address:
The Quaker Oats Company
P.O. Box 049001
Chicago, Illinois 60604-9001
Street Address:
Quaker Tower
321 North Clark Street
Chicago, Illinois 60610-4714
(312) 222-7111
Internet Homepage
www.quakeroats.com
Consumer Affairs
Inquiries regarding our products
should be addressed to:
Consumer Affairs
The Quaker Oats Company
P.O. Box 049003
Chicago, Illinois 60604-9003
or call 1-800-494-7843
Media Relations
Copies of press releases are available at
no charge through PR Newswire's
Company News On-Call fax service.
1-800-758-5804, extension 103689
Press and media related inquiries
should be addressed to:
Media Relations - Suite 27-6
or call (312) 222-6914
Shareholder Services
Harris Trust and Savings Bank acts
as transfer agent and registrar for the Company stock and maintains all
primary shareholder records.
Shareholders may obtain information relating to their share positions,
dividends, stock transfer requirements,
lost certificates and other related matters
by telephoning the Shareholder Hotline
toll-free at 1-800-344-1198.
Harris DOCS (Direct Ownership
of Corporate Shares) Program
Quaker common stock may be purchased through automatic dividend reinvestment,
automatic checking/savings account debits, and/or optional cash investments
through the Harris DOCS Program. This program replaced the Quaker Dividend
Reinvestment and Stock Purchase Plan in January 1998. A brochure describing
the Program and an enrollment form are available by calling
1-800-524-8580. Current shareholders should call Harris Bank directly at
1-800-344-1198.
Harris DOCS
The Quaker Oats Company
Administrator
P.O. Box A3309
Chicago, Illinois 60690-3309
1-800-344-1198
Investor Relations
Security analysts, investment professionals and shareholders should direct
their business-related inquires to:
Investor Relations - Suite 27-7
or call (312) 222-7818
Form 10-K
This Annual Report includes all financial statements and notes required by Form
10-K. If you request a Form 10-K, you will receive the annual report, proxy
statement and certain additional Form 10-K information.
Transfer Agent, Registrar and
Dividend Disbursing Agent
Harris Trust and Savings Bank,
Shareholder Services Division
P.O. Box A3504, 311 West Monroe
Chicago, Illinois 60690-3504
1-800-344-1198
Independent Public Accountants
Arthur Andersen LLP
33 West Monroe
Chicago, Illinois 60603
(312) 580-0033
Annual Meeting
Shareholders are cordially invited to attend the Annual Meeting, which will be
held at the Rosemont Convention Center, 5555 North River Road, in Rosemont,
Illinois, May 13, 1998, at 9:30 a.m. (CDT).
Dividends
Cash dividends on Quaker common stock have been paid for 92 consecutive years.
Dividends are generally declared on a quarterly basis, with holders as of the
record date being entitled to receive the cash dividend on the payable date.
Shares Listed
New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
The Stock Exchange, London
Ticker Symbol: OAT
The Quaker Oats Company was incorporated in 1901 under the
laws of the state of New Jersey.
EXHIBIT 21
State of Subsidiary
Incorporation
THE QUAKER OATS COMPANY
ACTIVE DOMESTIC SUBSIDIARIES AS OF 12/31/97
Subsidiary State of Incorporation
Ardmore Farms, Inc. Pennsylvania
Arnie's Bagelicious Bagels, Inc. Delaware
Continental Coffee Products Company Delaware
The Gatorade Company Delaware
Gatorade Puerto Rico Company Delaware
Golden Grain Company California
Grocery International Holdings, Inc. Delaware
Liqui-Dri Foods, Inc. Kentucky
QO Acquisition Corp. Delaware
QO Coffee Holdings, Inc. Delaware
Quaker Custom Foods, Inc. Delaware
Quaker Latin America, Inc. Delaware
Quaker Oats Asia, Inc. Delaware
Quaker Oats Europe, Inc. Illinois
Quaker Oats Holdings, Inc. Delaware
Quaker Oats Music, Inc. Delaware
Quaker Oats Phillipines, Inc. Delaware
Quaker South Africa, Inc. Delaware
Stokely-Van Camp, Inc. Indiana
ACTIVE FOREIGN SUBSIDIARIES AS OF 12/31/97
Subsidiary Country
Elaboradora Argentina de Cereales, S.A. Argentina
The Gatorade Company of Australia Pty. Ltd. Australia
Quaker Oats Australia, Pty. Ltd. Australia
Quaker Oats Foreign Sales Corp. Barbados
QUIC Ltd. Bermuda
Quaker Brasil, Ltda. Brazil
The Quaker Oats Company of Canada Limited Canada
Quaker de (Chile) Ltda. Chile
Guangzhou Quaker Oats Food and Beverage Co. Ltd. China
Productos Quaker, S.A. Colombia
Quaker Oats Limited England
Quaker Trading Limited England
The Quaker Beverages GmbH Germany
Quaker Beverages Italia, S.p.A. Italy
Quaker Oats Japan, Ltd. Japan
Quaker Products (Malaysia) Sdn. Bhd. Malaysia
Productos Quaker de Mexico, S.A. de C.V. Mexico
Quaker de Mexico, S.A. de C.V. Mexico
Quaker Oats B.V. The Netherlands
QO Puerto Rico, Inc. Puerto Rico
Quaker Bebidas, S.L. Spain
Productos Quaker, C.A. Venezuela
DOMESTIC JOINT VENTURES
Rhone Poulenc The Quaker Oats Company 50%
Rhone Poulenc 50%
Uni-Quaker Ltd. South Africa Quaker South Africa, Inc. 50%
Uni-mill Pty. Ltd. 50%
FOREIGN JOINT VENTURES
P.T. Gatorade Indonesia The Quaker Oats Company 90%
P.T. AdeS Alfinda Putrasetia 10%
Shanghai Guan Sheng Yuan Quaker The Quaker Oats Company 70%
Oats Co. Ltd. Guan Sheng Yuan 30%
Shanghai Quaker Oats Beverages The Quaker Oats Company 80%
Co. Ltd. Shanghai Bomy Foodstuffs Co. Ltd. 10%
Chou Chin Industrial (H.K.) Ltd. 10%
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 4, 1998, included in this Form 10-K for
the year ended December 31, 1997 into the Company's previously filed
Registration Statement File Nos. 33-13980, 33-13981, 33-32970, 2-79503 and
33-33253.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 19, 1998
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 330
<ALLOWANCES> 24
<INVENTORY> 256
<CURRENT-ASSETS> 1133
<PP&E> 1913
<DEPRECIATION> 748
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0
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<COMMON> 840
<OTHER-SE> (692)
<TOTAL-LIABILITY-AND-EQUITY> 2697
<SALES> 5016
<TOTAL-REVENUES> 5016
<CGS> 2565
<TOTAL-COSTS> 2565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> (1064)
<INCOME-TAX> (133)
<INCOME-CONTINUING> (931)
<DISCONTINUED> 0
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<NET-INCOME> (931)
<EPS-PRIMARY> (6.80)
<EPS-DILUTED> (6.80)
</TABLE>
Exhibit 99(1)
News Release
The Quaker Oats Company
Further Information:
Investor : Media:
Quaker Tower Margaret Eichman, VP Mark Dollins, Director
P.O. Box 049001 Investor Relations Corp. Communications
Chicago, IL 60604-9001 and Corp. Affairs (312) 222-6914
(312) 222-7818
QUAKER CHAIRMAN ANNOUNCES ORGANIZATIONAL CHANGES;
USES COMPETITIVE STRENGTHS TO TARGET ACCELERATED PROFITABLE GROWTH
For immediate release
CHICAGO, March 12, 1998 -- (NYSE:OAT) Quaker Oats Chairman, President
and Chief Executive Officer Robert S. Morrison today announced
organizational changes designed to capitalize on Quaker's competitive
strengths in marketing, selling and manufacturing. Morrison said these
actions are designed to facilitate faster top-line growth and drive
greater cost savings and efficiencies throughout the Company's worldwide
operations.
"The realignment we're announcing today should allow us to exploit
the leading capabilities we've developed across all our divisions,"
Morrison said. "As a management team with a broad base of skills and cross-
functional talent, we can focus on accelerating profitable growth and use
our size as a competitive advantage."
Structural changes include removing a layer of executive management
from the Company's International and U.S. & Canadian operations, and
realigning domestic and international business leaders into direct
reporting relationships with the Chairman.
Under the new structure, two International presidents'
responsibilities will be expanded to include the foods and Gatorade
businesses in their respective regions, reporting directly to Morrison.
Promoted are Bernardo Wolfson, Vice President and President-Quaker Latin
America, and Cassian Cheung, Vice President and President-Quaker Asia.
The head of Quaker's European cereals division, George Sewell, will report
to Robert S. Thomason, Quaker's chief financial officer.
"Getting the results we want from our Asian and Latin American
businesses requires a single, integrated management effort, focused on the
combined scale of our Quaker and Gatorade equities," Morrison said. "These
two executives are aggressive, top performers who have local insight into
the consumer, as well as the changing infrastructures and economies in
their regions. This experience is critical in rapidly developing markets."
In U.S. and Canadian operations, several key marketing, supply chain
and customer organization executives also are being promoted. They
include: Susan D. Wellington to the position of Vice President and
President - U.S. Beverages; Harry M. Dent to the position of Vice
President and President - Ready-to-Eat Cereals; Charles I. Maniscalco to
the position of Vice President and President - Snacks; Polly B. Kawalek to
the position of Vice President and President - Hot Breakfast; Mark A.
Shapiro to the position of Vice President and President -Golden Grain;
Russell A. Young to the position of Senior Vice President - Supply Chain;
and Terrence B. Mohr to the position of Senior Vice President - Customer
Organization.
Additionally, John A. Boynton, formerly Vice President and Chief
Customer Officer of the domestic Foods business, is promoted to Senior
Vice President, reporting to the Chairman. In this role, Boynton will have
responsibility for helping lead the reorganization effort, with continuing
focus on integrating Quaker's Foodservice business into the U.S. Foods
organization. Dale Tremblay, Vice President and President - Foodservice,
will continue to report to Boynton.
"The leaders promoted today represent the nucleus of Quaker's highly
talented middle management group," Morrison said. "I have great confidence
in their abilities to step into senior executive management roles, and
profitably grow our businesses."
"This alignment allows us to apply our best talent and our best
practices broadly across Foods and Gatorade. At the same time we'll
reduce overhead costs, putting us in a position to pursue profitable
growth more aggressively," Morrison said. "The power of our brands. The
strength of our customer organization. The efficiency of our supply
chain. The will to win. These things form the foundation for Quaker's
future growth and our ability to create value for shareholders."
The Company's former structure, with executive division heads located
in the United States, is less relevant with Quaker's new focus on Foods
and Gatorade -- and its need to exploit best practices across each
continent. As a result, the individuals in those roles -- Barbara R.
Allen, Executive Vice President - International Foods, James F. Doyle,
Executive Vice President Worldwide Beverages, and Douglas W. Mills,
Executive Vice President - U.S. and Canadian Quaker Food Products -- will
be leaving the Company. "They are fine executives who have made many
contributions and helped groom the talented individuals being promoted
today," Morrison said.
The Company expects an estimated restructuring charge of $15-25
million will ultimately result, as realignment activities take place
during the year. These actions are expected to save the Company in the
range of $15 to $25 million annually, when completed.
Forward Looking Statements
This announcement contains "forward-looking statements" that are subject
to risks and uncertainties. The potential risks and uncertainties that
could cause actual results to differ materially from those expressed in
the forward-looking statements are discussed in the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
# # #
The Quaker Oats Company press releases are available at no charge through
PR Newswire's Company News On-Call Fax Service. For a menu of available
Quaker Oats Company press releases or to retrieve a specific release, call
1-800-758-5804, extension 103689. They are also available through the
Internet: http://www.quakeroats.com.
available at no charge through
PR Newswire's Company News On-Call Fax Service. For a menu of available
Quaker Oats Company press releases or to retrieve a specific release, call
1-800-758-5804, extension 103689. They are also available through the
Internet: http://www.quakeroats.com.
Exhibit 99(2)
News Release
The Quaker Oats Company
Further Information:
Investor Contact: Media Contact:
Quaker Tower Margaret M. Eichman, V.P. Mark Dollins, Director
P.O. Box 049001 Investor Relations Corp. Communications
Chicago, IL 60604-9001 (312) 222-7817 (312) 222-6914
QUAKER ANNOUNCES $1 BILLION STOCK REPURCHASE PROGRAM
For immediate release
CHICAGO, IL, March 12, 1998 -- The Quaker Oats Company (NYSE:OAT)
today reported that its Board of Directors has authorized the repurchase
of up to $1 billion of the Company's common stock. The Quaker shares may be
repurchased, from time to time, through open market purchases and
privately negotiated transactions, subject to the availability of shares
and other market and financial conditions. Quaker has approximately
138,132,000 shares outstanding.
Robert S. Morrison, Chairman, President and Chief Executive
Officer, said, "This new authorization gives us the flexibility to use
our strong cash flows over the next few years to supplement income
growth with sound financial engineering."
Since 1985, Quaker has repurchased approximately 49 million shares
of its stock through several repurchase programs.
# # #
The Quaker Oats Company press releases are available at no charge
through PR Newswire's Company News On-Call Fax Service. For a menu of
available Quaker Oats Company press releases or to retrieve a specific
release, call 1-800-758-5804, extension 103689. They are also available
through the Internet: http://www.quakeroats.com/
releases or to retrieve a specific
release, call 1-800-758-5804, extension 103689. They are also available
through the Internet: http://www.quakeroats.com/
