UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission file number 1-12
THE QUAKER OATS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 36-1655315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Quaker Tower P.O. Box 049001 Chicago, Illinois 60604-9001
(Address of principal executive office) (Zip Code)
(312) 222-7111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file for such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES XX NO
The number of shares of Common Stock, $5.00 par value, outstanding as
of the close of business on June 30, 1998 was 136,313,888
THE QUAKER OATS COMPANY AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Income
and Reinvested Earnings for the Six and Three Months
Ended June 30, 1998 and 1997 3-4
Condensed Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1998 and 1997 6
Net Sales and Operating Income by Segment for the
Six and Three Months Ended June 30, 1998 and 1997 7-8
Notes to the Condensed Consolidated Financial Statements 9-14
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15-23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 4 - Submission of Matters to a Vote of
Security Holders 24-25
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
<2>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Six Months Ended
Dollars in Millions (Except Per Share Data) June 30,
1998 1997
Net sales $ 2,474.0 $ 2,597.2
Cost of goods sold 1,228.7 1,331.8
Gross profit 1,245.3 1,265.4
Selling, general and administrative expenses 951.4 1,012.0
Restructuring charges, asset impairments and
divestiture loss 87.7 1,426.4
Interest expense 35.8 49.5
Interest income (4.0) (3.3)
Foreign exchange loss -- net 8.9 5.0
Income (loss) before income taxes 165.5 (1,224.2)
Provision (benefit) for income taxes 62.0 (190.2)
Net Income (Loss) 103.5 (1,034.0)
Preferred dividends -- net of tax 1.7 1.7
Net Income (Loss) Available for Common $ 101.8 $ (1,035.7)
Per Common Share:
Net income (loss) $ 0.74 $ (7.58)
Net income (loss) -- assuming dilution $ 0.72 $ (7.58)
Dividends declared $ 0.57 $ 0.57
Average Number of Common Shares Outstanding
(in thousands) 138,036 136,572
Reinvested Earnings:
Balance beginning of period $ 431.0 $ 1,521.3
Net income (loss) 103.5 (1,034.0)
Dividends (80.3) (79.0)
Balance end of period $ 454.2 $ 408.3
See accompanying notes to the condensed consolidated financial statements.
<3>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)
Three Months Ended
Dollars in Millions (Except Per Share Data) June 30,
1998 1997
Net sales $ 1,381.7 $ 1,395.5
Cost of goods sold 676.5 704.1
Gross profit 705.2 691.4
Selling, general and administrative expenses 516.4 520.5
Restructuring charges, asset impairments and
divestiture loss 78.6 22.4
Interest expense 17.6 24.0
Interest income (1.8) (1.8)
Foreign exchange loss -- net 4.7 2.5
Income before income taxes 89.7 123.8
Provision for income taxes 33.2 48.0
Net Income 56.5 75.8
Preferred dividends -- net of tax 0.9 0.8
Net Income Available for Common $ 55.6 $ 75.0
Per Common Share:
Net income $ 0.41 $ 0.57
Net income -- assuming dilution $ 0.40 $ 0.57
Dividends declared $ 0.285 $ 0.285
Average Number of Common Shares Outstanding
(in thousands) 137,577 136,795
Reinvested Earnings:
Balance beginning of period $ 438.0 $ 372.0
Net income 56.5 75.8
Dividends (40.3) (39.5)
Balance end of period $ 454.2 $ 408.3
See accompanying notes to the condensed consolidated financial statements.
<4>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Dollars in Millions 1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 128.8 $ 84.2
Marketable securities 111.2 --
Trade accounts receivable -- net of allowances 400.5 305.7
Inventories:
Finished goods 192.8 172.6
Grains and raw materials 55.6 59.0
Packaging materials and supplies 29.1 24.5
Total inventories 277.5 256.1
Other current assets 192.4 487.0
Total Current Assets 1,110.4 1,133.0
Property, plant and equipment 1,941.5 1,913.1
Less: accumulated depreciation 807.6 748.4
Property -- net 1,133.9 1,164.7
Intangible assets -- net of amortization 282.3 350.5
Other assets 48.7 48.8
Total Assets $ 2,575.3 $ 2,697.0
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term debt $ 39.8 $ 61.0
Current portion of long-term debt 56.5 108.4
Trade accounts payable 265.3 191.3
Other current liabilities 661.6 585.0
Total Current Liabilities 1,023.2 945.7
Long-term debt 867.7 887.6
Other liabilities 564.6 578.9
Deferred income taxes 3.7 36.3
Preferred Stock, Series B, no par value,
authorized 1,750,000 shares; issued 1,282,051
of $5.46 cumulative convertible shares
(liquidating preference of $78 per share) 100.0 100.0
Deferred compensation (52.8) (57.2)
Treasury Preferred Stock, at cost, 270,659
shares and 245,147 shares, respectively (25.6) (22.3)
Common Shareholders' Equity:
Common stock, $5 par value, authorized 400
million shares; issued 167,978,792 shares 840.0 840.0
Additional paid-in capital 52.4 29.0
Reinvested earnings 454.2 431.0
Cumulative translation adjustment (77.5) (82.4)
Deferred compensation (90.3) (91.0)
Treasury common stock, at cost, 31,664,904
shares and 29,165,692 shares, respectively (1,084.3) (898.6)
Total Common Shareholders' Equity 94.5 228.0
Total Liabilities and Shareholders' Equity $ 2,575.3 $ 2,697.0
See accompanying notes to the condensed consolidated financial statements.
<5>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
Dollars in Millions June 30,
1998 1997
Cash Flows from Operating Activities:
Net income (loss) $ 103.5 $ (1,034.0)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 67.7 89.4
Deferred income taxes (22.1) 1.9
Loss on divestiture -- net of tax benefit
of $265.1 -- 1,149.5
Restructuring charges 24.7 11.8
Asset impairment losses 63.0 --
Loss on disposition of property, plant and
equipment 2.1 22.0
Increase in trade accounts receivable (99.4) (133.1)
Increase in inventories (28.1) (52.4)
Decrease in other current assets 17.1 7.9
Increase in trade accounts payable 74.8 63.8
Increase in other current liabilities 59.6 110.7
Change in deferred compensation 5.1 3.2
Other items 4.8 18.2
Net Cash Provided by Operating Activities 272.8 258.9
Cash Flows from Investing Activities:
Capital gains tax recovery 240.0 --
Business divestitures 73.2 300.0
Purchase of marketable securities (111.2) --
Additions to property, plant and equipment (84.6) (93.5)
Proceeds on sale of property, plant and
equipment 3.5 --
Net Cash Provided By Investing Activities 120.9 206.5
Cash Flows from Financing Activities:
Cash dividends (80.3) (79.0)
Change in short-term debt (21.1) (425.6)
Proceeds from long-term debt 0.8 4.3
Reduction of long-term debt (73.0) (9.1)
Issuance of common treasury stock 68.0 39.1
Repurchases of common stock (250.2) --
Repurchases of preferred stock (3.3) (2.3)
Net Cash Used In Financing Activities (359.1) (472.6)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 10.0 (2.7)
Net Increase (Decrease) in Cash and Cash
Equivalents 44.6 (9.9)
Cash and Cash Equivalents -- Beginning of Period 84.2 110.5
Cash and Cash Equivalents -- End of Period $ 128.8 $ 100.6
See accompanying notes to the condensed consolidated financial statements.
<6>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
Net Sales Operating Income (Loss)(a)
Six Months Six Months
Dollars in Millions Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian (b) $ 1,237.3 $ 1,239.7 $ 102.9 $ 154.8
International (c) 319.4 314.4 (22.8) (7.2)
Total Foods $ 1,556.7 $ 1,554.1 $ 80.1 $ 147.6
Beverages
U.S. and Canadian (d) $ 715.1 $ 649.2 $ 133.0 $ 125.3
International (e) 202.2 174.3 11.0 2.8
Total Beverages $ 917.3 $ 823.5 $ 144.0 $ 128.1
Divested Businesses (f) -- $ 219.6 -- $(1,430.5)
Total Sales/Operating Income (Loss) $ 2,474.0 $ 2,597.2 $ 224.1 $(1,154.8)
Less: General corporate expenses 17.9 18.2
Interest expense -- net 31.8 46.2
Foreign exchange loss -- net 8.9 5.0
Income (loss) before income taxes $ 165.5 $(1,224.2)
</TABLE>
(a) Operating income (loss) includes certain allocations of overhead
expenses.
(b) 1998 operating income includes pretax restructuring charges of
$9.3 million for organization alignment and non-cash, pretax charges
of $40.0 million for asset impairment losses.
(c) 1998 operating results include pretax restructuring charges of
$7.8 million for organization alignment and non-cash, pretax charges
of $23.0 million for asset impairment losses. 1997 operating results
include pretax restructuring charges of $10.7 million for plant
consolidations in the Brazilian pasta business.
(d) 1998 operating income includes pretax restructuring charges of
$4.3 million for organization alignment.
(e) 1998 operating income includes pretax restructuring charges of
$3.3 million for organization alignment. 1997 operating income
includes pretax restructuring charges of $1.1 million for the closing
of an office in Singapore.
(f) 1997 includes the sales and operating results of the Snapple
beverages and certain food service businesses that were divested in
1997. Operating results for the six months ended June 30, 1997,
includes a pretax loss of $1.41 billion on the sale of the Snapple
beverages business. See Note 3 for further discussion.
<7>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NET SALES AND OPERATING INCOME BY SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
Net Sales Operating Income (Loss)(a)
Three Months Three Months
Dollars in Millions Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Foods
U.S. and Canadian (b) $ 601.1 $ 597.0 $ 20.5 $ 76.9
International (c) 158.1 159.2 (25.5) (8.0)
Total Foods $ 759.2 $ 756.2 $ (5.0) $ 68.9
Beverages
U.S. and Canadian (d) $ 509.4 $ 435.6 $ 119.3 $ 90.6
International (e) 113.1 103.3 6.0 3.1
Total Beverages $ 622.5 $ 538.9 $ 125.3 $ 93.7
Divested Businesses (f) -- $ 100.4 -- $ (5.7)
Total Sales/Operating Income $ 1,381.7 $ 1,395.5 $ 120.3 $ 156.9
Less: General corporate expenses 10.1 8.4
Interest expense -- net 15.8 22.2
Foreign exchange loss -- net 4.7 2.5
Income before income taxes $ 89.7 $ 123.8
</TABLE>
(a) Operating income (loss) includes certain allocations of overhead
expenses.
(b) 1998 operating income includes pretax restructuring charges of
$6.0 million for organization alignment and non-cash, pretax charges
of $40.0 million for asset impairment losses.
(c) 1998 operating results include pretax restructuring charges of
$6.5 million for organization alignment and non-cash, pretax charges
of $23.0 million for asset impairment losses. 1997 operating results
include pretax restructuring charges of $10.7 million for plant
consolidations in the Brazilian pasta business.
(d) 1998 operating income includes pretax restructuring charges of
$1.0 million for organization alignment.
(e) 1998 operating income includes pretax restructuring charges of
$2.1 million for organization alignment. 1997 operating income
includes pretax restructuring charges of $1.1 million for the closing
of an office in Singapore.
(f) 1997 includes the sales and operating results of the Snapple
beverages and certain food service businesses that were divested in
1997. Operating results for the three months ended June 30, 1997,
includes a pretax loss of $10.6 million related to the sale of the
Snapple beverages business. See Note 3 for further discussion.
<8>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 1 - Basis of Presentation
The condensed consolidated financial statements include The Quaker
Oats Company and its subsidiaries (the Company). The condensed
consolidated statements of income and reinvested earnings for the six
and three months ended June 30, 1998 and 1997, the condensed
consolidated balance sheet as of June 30, 1998, and the condensed
consolidated statements of cash flows for the six months ended June
30, 1998 and 1997, have been prepared by the Company without audit.
In the opinion of management, these financial statements include all
adjustments necessary to present fairly the financial position,
results of operations and cash flows as of June 30, 1998, and for all
periods presented. All adjustments made have been of a normal
recurring nature. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles (GAAP) have been condensed
or omitted. The Company believes that the disclosures included are
adequate and provide a fair presentation of interim period results.
Interim financial statements are not necessarily indicative of the
financial position or operating results for an entire year. It is
suggested that these interim financial statements be read in
conjunction with the audited financial statements and the notes
thereto included in the Company's report to shareholders for the year
ended December 31, 1997.
Certain previously reported amounts have been reclassified to conform
to the current presentation.
Note 2 - Litigation
The Company is a party to a number of lawsuits and claims, which it
is vigorously defending. Such matters arise out of the normal course
of business and relate to the Company's past acquisition activity and
other issues. Certain of these actions seek damages in large
amounts. While the results of litigation cannot be predicted with
certainty, management believes that the final outcome of such
litigation will not have a material adverse effect on the Company's
consolidated financial position or results of operations. Changes in
assumptions, as well as actual experience, could cause the estimates
made by management to change.
Note 3 - Divestitures
Cash proceeds of $73.2 million from the December 1997 sale of certain
food service businesses were received in January 1998. In March
1998, the Company received $240.0 million from the recovery of income
taxes paid on previous capital gains related to divestitures. Cash
provided by investing activities for the six months ended June 30,
1998 (current year) includes these amounts.
On May 22, 1997, the Company completed the sale of 100 percent of its
shares of its wholly-owned subsidiary, Snapple Beverage Corp.
(Snapple), to Triarc Companies, Inc. (Triarc) for $300 million in
cash. The disposition was made pursuant to the Stock Purchase
Agreement dated March 27, 1997, between the Company and Triarc. The
Company realized a pretax loss on the sale of $10.6 million in the
second quarter of 1997, which, combined with the previously recorded
impairment loss in the first quarter of 1997, resulted in a total
pretax loss on the sale of $1.41 billion.
<9>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 4 - Restructuring and Other Unusual Charges
The Company recorded pretax restructuring charges of $15.6 million
during the three months ended June 30, 1998 (current quarter),
related to the continuation of the strategic alignment activities
announced in March 1998. During the current quarter, the Company
announced plans for consolidating its food and beverage operations
and other cost-reduction opportunities within the Latin America,
Canada, Asia and Golden Grain businesses. These actions are expected
to result in the elimination of approximately 400 positions. The
charges are primarily comprised of severance and related benefits and
are reflected in the operating results of the business segments as
follows: U.S. and Canadian Foods $6.0 million, International Foods
$6.5 million, U.S. and Canadian Beverages $1.0 million and
International Beverages $2.1 million. Year-to-date restructuring
charges are $24.7 million. Annualized cash savings from
the current-year restructuring actions taken to date will begin in
1998 and are estimated to be about $26 million.
During the current year, the Company continued to review its
strategies related to underperforming businesses in its portfolio.
As a part of this review, the Company evaluated the recoverability of
certain long-lived assets pursuant to the provisions of Financial
Accounting Standards Board (FASB) Statement #121 for impaired assets
held for use. As a result of this review, the Company recorded non-
cash, pretax charges of $63.0 million for asset impairment losses and
adjusted the carrying amount of the impaired assets to fair value.
Note 5 - Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Note 6 - Marketable Securities
In January 1998, the Company purchased $103.3 million of marketable
securities. The marketable securities are available for sale and
consist of investments in a mutual fund that holds U.S. Treasury
instruments with maturities of less than twelve months. An additional
$7.9 million of marketable securities were purchased in April 1998.
At June 30, 1998, the carrying value of the Company's investment
in marketable securities approximated fair value.
Note 7 - Current and Pending Accounting Changes
In July 1997, the FASB issued Statement #131,
"Disclosures about Segments of an Enterprise and Related
Information." This Statement expands certain reporting and
disclosure requirements for segments from current standards.
In February 1998, the FASB issued Statement #132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
Statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement
<10>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
or recognition of those plans. The Company is not required to adopt
these Statements until December 1998 and does not expect the adoption
of these standards to result in material changes to previously
reported amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use," was issued. This SOP provides guidance on the accounting for
computer software costs. In April 1998, SOP #98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides
guidance on accounting for the cost of start-up activities. The
Company is not required to adopt these Statements until January 1999
and does not expect the adoption of these standards to result in
material changes to previously reported amounts or disclosures.
In June 1998, the FASB issued Statement #133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that all
derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. The accounting provisions for qualifying hedges
allow a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that the
Company must formally document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting.
The Company is not required to adopt this Statement until January
2000. The Company has not determined its method or timing of
adopting this Statement or the impact on its financial statements.
However, when adopted this Statement could increase volatility in
reported earnings and other comprehensive income of the Company.
Note 8 - Comprehensive Income (Loss)
Total comprehensive income for the three months ended June 30, 1998
and 1997, was $53.0 million and $75.8 million, respectively. For the
six months ended June 30, 1998 and 1997, total comprehensive income
(loss) was $108.4 million and $(1,037.4) million, respectively. Total
comprehensive income (loss) for the Company includes net income
(loss) and foreign currency translation adjustments.
Note 9 - Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price,
foreign currency exchange rate and interest rate risks and uses
derivative financial and commodity instruments to manage the impact
of certain of these risks. The Company uses derivatives only for
purposes of managing risk associated with underlying exposures. The
Company does not trade or use instruments with the objective of
earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where
there are not underlying exposures. Complex instruments involving
leverage or multipliers are not used. Management believes that its
use of these instruments to manage risk is in the Company's best
interest.
<11>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Instruments used as hedges must be effective at reducing the risks
associated with the underlying exposure and must be designated as a
hedge at the inception of the contract. Accordingly, changes in the
market value of the instruments must have a high degree of inverse
correlation with changes in market values or cash flows of the
underlying hedged item.
Summarized below are the specific accounting policies by market risk
category.
Commodity Price Risk
The Company uses commodity futures and options to manage price
exposures on commodity inventories or anticipated purchases of
commodities. The deferral method is used to account for those
instruments which effectively hedge the Company's price exposures.
For hedges of anticipated transactions, the significant
characteristics and terms of the anticipated transaction must be
identified, and the transaction must be probable of occurring to
qualify for deferral method accounting.
Under the deferral method, gains and losses on derivative instruments
are deferred in the condensed consolidated balance sheets as a
component of other current assets (if a loss) or other current
liabilities (if a gain) until the underlying inventory being hedged
is sold. As the hedged inventory is sold, the deferred gains and
losses are recognized in the condensed consolidated statements of
income as a component of cost of goods sold. Derivative instruments
that do not meet the above criteria required for deferral treatment
are accounted for under the fair value method with gains and losses
recognized currently in the condensed consolidated statements of
income as a component of cost of goods sold.
Foreign Currency Exchange Rate Risk
The Company uses forward contracts, purchased options, and currency
swap agreements to manage foreign currency exchange rate risk related
to projected operating income from foreign operations and net
investments in foreign subsidiaries. The fair value method is used to
account for these instruments. Under the fair value method, the
instruments are carried at fair value on the condensed consolidated
balance sheets as a component of other current assets (deferred
charges) or other current 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 condensed consolidated statements of income as foreign
exchange loss or gain. Changes in the fair value of such instruments
used to manage exchange rate risk on net investments in economies
that are not highly inflationary are recognized in the condensed
consolidated balance sheets as a component of the cumulative
translation adjustment in common shareholders' equity and are
included in comprehensive income. To the extent an instrument is no
longer effective as a hedge of a net investment due to a change in
the underlying exposure, gains and losses are recognized currently in
the condensed consolidated statements of income as foreign exchange
loss or gain.
<12>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Interest Rate Risk
The Company has used interest rate swap agreements to reduce its
exposure to changes in interest rates and to balance the mix of its
fixed and floating rate debt. Currently, there are no interest swap
agreements outstanding. The settlement costs of terminated swap
agreements are reported in the condensed consolidated balance sheets
as a component of other assets and are being amortized over the life
of the original swap agreements. The amortization of the settlement
amounts is reported in the condensed consolidated statements of
income as a component of interest expense.
Note 10 - Revolving Credit Facilities
During the current quarter, the Company reduced the level of its
revolving credit facilities from $675 million to $500 million. The
Company now has a $335 million annually extendible five-year
revolving credit facility and a $165 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.
Note 11 - Share Repurchases
During the current year, the Company repurchased 4.6 million shares
of its outstanding common stock for $250.2 million, completing its 10
million share repurchase program announced in August 1993 and
initiating the March 1998 repurchase program. Of the total shares
repurchased, 2.8 million shares were repurchased during the current
quarter for $150.7 million.
<13>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
<TABLE>
<CAPTION>
Note 12 - Earnings Per Share
Reconciliations of basic earnings per share (EPS) to diluted EPS were as follows:
Dollars in Millions (Except Per Share Data) Six Months Ended June 30,
1998 1997
Income Shares Income Shares
<S> <C> <C> <C> <C>
Net income (loss) $ 103.5 $ (1,034.0)
Less: Preferred dividends 1.7 1.7
Net income (loss) available for common $ 101.8 138,036 $ (1,035.7) 136,572
Net income (loss) per common share $ 0.74 $ (7.58)
Net income (loss) available for common $ 101.8 138,036 $ (1,035.7) 136,572
Effect of dilutive securities:
Stock options -- 3,661 -- --
Non-vested awards -- 98 -- --
ESOP Convertible Preferred Stock 1.4 2,214 -- --
$ 103.2 144,009 $ (1,035.7) 136,572
Net income (loss) per common share --
assuming dilution $ 0.72 $ (7.58)
</TABLE>
The increase in common shares outstanding at June 30, 1998, compared
to June 30, 1997, reflects the exercise of a significant number of
employee stock options, partly offset by share repurchases.
As of June 30, 1998 and 1997, certain stock options were excluded
from the computation of diluted EPS because the exercise prices were
higher than the average market price. As the Company incurred a net
loss for the six months ended June 30, 1997, there were no
adjustments for potentially dilutive securities as the adjustments
would have been antidilutive. Adjustments to income and shares for
such potentially dilutive securities in the six months ended June 30,
1997, had the Company earned net income, would have resulted in a
$1.4 million increase to net income available for common and an
increase of 4.3 million shares. Historical adjustments for
potentially dilutive securities are not necessarily indicative of
future trends.
Note 13 - Subsequent Event
On July 16, 1998, the Company announced that it had signed a
definitive agreement to sell its Ardmore Farms juice and juice drinks
business to Country Pure Foods, Inc. The sale of this business
is not expected to have a material impact on the Company's operating
results.
<14>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared with
Six Months Ended June 30, 1997
Consolidated Operating Results
The following tables summarize the net sales and operating results of
the Company for the six months ended June 30, 1998 (current year) and
June 30, 1997 (prior year):
<TABLE>
<CAPTION>
NET SALES
for the
Six Months Ended June 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $1,237.3 $ 319.4 $1,556.7 $ 1,239.7 $ 314.4 $ 1,554.1
Beverages 715.1 202.2 917.3 649.2 174.3 823.5
Ongoing Businesses 1,952.4 521.6 2,474.0 1,888.9 488.7 2,377.6
Divested Businesses -- -- -- 212.8 6.8 219.6
Total Company $1,952.4 $ 521.6 $2,474.0 $ 2,101.7 $ 495.5 $ 2,597.2
<CAPTION>
OPERATING INCOME (LOSS)
for the
Six Months Ended June 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 102.9 $ (22.8) $ 80.1 $ 154.8 $ (7.2) $ 147.6
Beverages 133.0 11.0 144.0 125.3 2.8 128.1
Ongoing Businesses 235.9 (11.8) 224.1 280.1 (4.4) 275.7
Loss on divestiture -- -- -- (1,414.6) -- (1,414.6)
Divested Businesses -- -- -- (14.2) (1.7) (15.9)
Total Divested -- -- -- (1,428.8) (1.7) (1,430.5)
Total Company $ 235.9 $ (11.8) $ 224.1 $(1,148.7) $ (6.1) $(1,154.8)
<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).
"Loss on divestiture": represents a pretax loss on the sale of the Snapple
beverages business.
"Divested Businesses": 1997 includes prior-year net sales and operating
income (through the divestiture date) for the Snapple beverages business
(May 1997) and certain food service businesses (December 1997).
</FN>
</TABLE>
<15>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales decreased 5 percent from the prior year,
primarily due to the absence of divested businesses in the current
year. Excluding divested businesses, sales increased 4 percent from
the prior year led by 10 percent growth in the U.S. and Canadian
Gatorade business. Price changes did not significantly affect the
comparison of current and prior-year net sales.
Consolidated gross profit margin was 50.3 percent in the current year
compared to 48.7 percent in the prior year. The gross profit margin
improvement reflects the divestiture of the lower-margin Snapple
beverages business in May 1997 and improved margins across all other
business segments.
Selling, general and administrative (SG&A) expenses decreased $60.6
million, or 6 percent, primarily due to the absence of divested
businesses. For ongoing businesses, SG&A expenses increased $38.4
million, or 4 percent, partly due to an increase in advertising and
merchandising expenses (A&M). Total Company A&M expenses represented
25.4 percent of sales during the current year, compared to 25.1
percent in the prior year.
Consolidated operating income was $224.1 million in the current year
compared to a loss of $1.15 billion in the prior year. The current-
year operating results include $24.7 million of restructuring charges
and $63.0 million of non-cash asset impairment losses. (See
Restructuring and Other Unusual Charges for further discussion.) The
prior-year operating results include a $1.41 billion loss on the sale
of the Snapple beverages business and restructuring charges of $11.8
million. Excluding the restructuring charges, asset impairment
losses and operating results from divested businesses, operating
income of $311.8 million was up 8 percent compared to the prior year,
primarily driven by growth in U.S. Gatorade and the Latin American
and European Foods and Gatorade businesses.
Net financing costs (net interest expense and foreign exchange loss)
decreased $10.5 million in the current year, primarily due to lower
interest expense. Debt levels declined from a year ago, as
divestiture proceeds, a $240.0 million tax recovery and cash flow
from operations were used to pay down debt.
Excluding the impact of restructuring charges, a loss on divestiture
in the prior year and current-year asset impairment losses, the
effective tax rate in the current year was 37.0 percent versus 39.0
percent in the prior year. The decrease was primarily due to the
absence of non-deductible amortization expense related to Snapple
intangibles.
Industry Segment Operating Results
Foods - U.S. and Canadian sales and volume were even with the prior
year. Sales increases in ready-to-eat cereals, snacks and Aunt
Jemima syrups and mixes were partially offset by a sales decline in
hot cereals, driven, in part, by unusually mild winter weather. The
ready-to-eat cereals sales increase reflects the continued growth of
bagged cereals, while snacks sales benefitted from growth in Chewy
granola bars and a new product introduction, Quaker Fruit & Oatmeal
Bars. Excluding current-year restructuring charges of $9.3 million
and asset impairment losses of $40.0 million, U.S. and Canadian
operating income decreased 2 percent from the prior year, primarily
due to increased A&M spending.
<16>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Higher A&M expenses reflect increased spending on ready-to-eat
cereals and new snacks, partly offset by lower spending for hot
cereals as compared to the prior year.
International sales and volume increased 2 percent, driven by 4
percent sales growth in Latin America, reflecting increases in the
canned fish and chocolate beverage businesses. The Latin America
increase was partly offset by declines in Europe and Asia/Pacific
Foods. Excluding current and prior year restructuring charges of
$7.8 million and $10.7 million, respectively, and current-year asset
impairment losses of $23.0 million, International Foods operating
income increased $4.5 million reflecting improved profitability in
the Latin American and European businesses and continued underwriting
in the Asia/Pacific business.
Beverages - U.S. and Canadian Gatorade sales and volume grew 10
percent and 14 percent, respectively, driven by new packaging and
flavors, and strong growth outside of the traditional retail market,
along with more favorable weather versus the prior year. Excluding
current-year restructuring charges of $4.3 million, operating income
was $137.3 million, up 10 percent from the prior year. The increase
in operating income was driven by strong sales growth and improved
efficiencies in manufacturing and A&M expenditures.
International Gatorade sales and volume increased 16 percent and 25
percent, respectively, primarily due to a 29 percent sales gain in
Latin America. The Latin American sales increase reflects strong
execution of marketing and selling initiatives, including improved
cold-channel distribution. Sales in Europe increased 7 percent,
while a sales decline in the economically-troubled Asia/Pacific
region reflected lower volumes and a weaker exchange rate. Excluding
current and prior-year restructuring charges of $3.3 million and $1.1
million, respectively, operating income was $14.3 million, compared
to $3.9 million in the prior year. Operating income improved in the
Latin American and European businesses, while underwriting continued
in the Asia/Pacific business.
<17>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared with
Three Months Ended June 30, 1997
Consolidated Operating Results
The following tables summarize the net sales and operating results of
the Company for the three months ended June 30, 1998 (current year)
and June 30, 1997 (prior year):
<TABLE>
<CAPTION>
NET SALES
for the
Three Months Ended June 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 601.1 $ 158.1 $ 759.2 $ 597.0 $ 159.2 $ 756.2
Beverages 509.4 113.1 622.5 435.6 103.3 538.9
Ongoing Businesses 1,110.5 271.2 1,381.7 1,032.6 262.5 1,295.1
Divested Businesses -- -- -- 97.9 2.5 100.4
Total Company $1,110.5 $ 271.2 $1,381.7 $1,130.5 $ 265.0 $1,395.5
<CAPTION>
OPERATING INCOME (LOSS)
for the
Three Months Ended June 30,
Dollars in Millions 1998 1997
U.S. and U.S. and
Canadian International Total Canadian International Total
<S> <C> <C> <C> <C> <C> <C>
Foods $ 20.5 $ (25.5) $ (5.0) $ 76.9 $ (8.0) $ 68.9
Beverages 119.3 6.0 125.3 90.6 3.1 93.7
Ongoing Businesses 139.8 (19.5) 120.3 167.5 (4.9) 162.6
Loss on divestiture -- -- -- (10.6) -- (10.6)
Divested Businesses -- -- -- 4.6 0.3 4.9
Total Divested -- -- -- (6.0) 0.3 (5.7)
Total Company $ 139.8 $ (19.5) $ 120.3 $ 161.5 $ (4.6) $ 156.9
<FN>
Note: Operating results include certain allocations of overhead expenses.
"Foods": includes all food lines as well as the food service business.
"Beverages": includes Gatorade thirst quencher sports beverages.
"Ongoing Businesses": includes the net sales and operating results of all
company businesses not reported as Divested Businesses (see below).
"Loss on divestiture": represents a pretax loss related to the sale of the
Snapple beverages business.
"Divested Businesses": 1997 includes prior-year net sales and operating
income (through the divestiture date) for the Snapple beverages business
(May 1997) and certain food service businesses (December 1997).
</FN>
</TABLE>
<18>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated net sales decreased 1 percent from the prior year,
primarily due to the absence of divested businesses in the current
year. Excluding divested businesses, sales increased 7 percent from
the prior year driven by 17 percent growth in the U.S. and Canadian
Gatorade business and 1 percent growth in U.S. and Canadian Foods
business. Price changes did not significantly affect the comparison
of current and prior-year net sales.
Consolidated gross profit margin was 51.0 percent in the current year
compared to 49.5 percent in the prior year. The gross profit margin
improvement reflects the divestiture of the lower-margin Snapple
beverages business in May 1997 and improved margins across all other
business segments.
SG&A expenses decreased $4.1 million, or 1 percent, primarily due to
the absence of divested businesses. For ongoing businesses, SG&A
expenses increased $31.6 million, or 7 percent. Total Company A&M
expenses were 25.1 percent of sales during the current year, up from
24.9 percent in the prior year.
Consolidated operating income was $120.3 million in the current year
as compared to $156.9 in the prior year. The current-year operating
results include $15.6 million in restructuring charges and $63.0
million in non-cash asset impairment losses. (See Restructuring and
Other Unusual Charges for further discussion.) The prior-year
operating results include a $10.6 million loss related to the sale of
the Snapple beverages business and restructuring charges of $11.8
million related to plant consolidations in the Brazilian pasta
business and the closing of a beverages office in Singapore.
Excluding the restructuring charges, asset impairment losses and
operating results from divested businesses, operating income of
$198.9 million was up 14 percent compared to $174.4 million in the
prior year.
Net financing costs (net interest expense and foreign exchange loss)
decreased $4.2 million in the current year, primarily due to lower
interest expense reflecting reduced debt levels.
Excluding the impact of restructuring charges, a loss on divestiture
in the prior year and current-year asset impairment losses, the
effective tax rate in the current quarter was 36.4 percent versus
39.0 percent in the same quarter last year.
Industry Segment Operating Results
Foods - U.S. and Canadian sales and volume increased 1 percent.
Sales increased in ready-to-eat cereals, snacks and Aunt Jemima
syrups and mixes. These increases were partly offset by a decline in
hot cereals in its off-season. Ready-to-eat cereals sales increased
5 percent reflecting the continued growth of both bagged and boxed
cereals, while continued growth in Chewy granola bars and the
expansion of Quaker Fruit & Oatmeal Bars drove an increase in snacks
sales. Excluding current-year restructuring charges of $6.0 million
and asset impairment losses of $40.0 million, U.S. and Canadian
operating income decreased 14 percent from the prior year. The
decline in operating income was primarily driven by increased A&M
expenses, partly offset by improved gross margins. Higher A&M
expenses reflect increased spending on ready-to-eat cereals and new
snacks, partly offset by lower spending on hot cereals compared to
the prior year.
<19>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
International sales decreased 1 percent on flat volume, driven by
sales declines of 1 percent and 2 percent in Latin America and
Europe, respectively, partly offset by a sales increase in
Asia/Pacific Foods off of a small base. Excluding current and
prior-year restructuring charges of $6.5 million and $10.7
million, respectively, and current-year asset impairment losses of
$23.0 million, International Foods operating income increased $1.3
million reflecting improvement in Europe, partly offset by continued
underwriting in the Asia/Pacific region.
Beverages - U.S. and Canadian Gatorade sales and volume increased 17
percent and 22 percent, respectively, driven by new packaging and
flavors, and strong growth outside of the traditional retail market,
along with more favorable weather versus the prior year. Excluding
current-year restructuring charges of $1.0 million, operating income
was $120.3 million, compared to $90.6 million in the prior year. The
33 percent increase in operating income was due to sales growth and
greater operating and marketing efficiencies.
International Gatorade sales and volume increased 9 percent and 16
percent respectively, primarily due to 27 percent sales growth in
Latin America. Latin American sales reflected strong execution of
marketing and selling initiatives, including improved cold-channel
distribution. Sales in Europe were up 6 percent, while a sales
decline in the economically-troubled Asia/Pacific region was partly
driven by lower volumes and a weaker exchange rate. Excluding
current and prior-year restructuring charges of $2.1 million and $1.1
million, respectively, operating income was $8.1 million, compared to
$4.2 million in the prior year. Operating income improved in the
Latin American and European businesses, while underwriting continued
in the Asia/Pacific business.
Restructuring and Other Unusual Charges
The Company recorded pretax restructuring charges of $15.6 million
during the three months ended June 30, 1998 (current quarter),
related to the continuation of the strategic alignment activities
announced in March 1998. During the current quarter, the Company
announced plans for consolidating Foods and Beverages and other
cost-reduction opportunities within the Latin America, Canada,
Asia/Pacific and Golden Grain businesses. These actions are expected
to result in the elimination of approximately 400 positions. The
charges are primarily comprised of severance and related benefits and
are reflected in the operating results of the business segments as
follows: U.S. and Canadian Foods $6.0 million, International Foods
$6.5 million, U.S. and Canadian Beverages $1.0 million and
International Beverages $2.1 million. Year-to-date restructuring
charges are $24.7 million. Annualized cash savings from the
current-year restructuring actions taken to date will begin in 1998
and are estimated to be about $26 million.
The Company will continue to pursue cost-reduction activities,
including additional strategic alignment activities, some of which
could result in future charges. As a result, the Company expects to
take additional restructuring charges of $20 million to $30 million
in the second half of the year as it continues integrating its food
and beverage operations with a focus on reducing total costs. These
actions are expected to save the Company a comparable amount
annually, once completed.
<20>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the current year, the Company continued to review its
strategies related to underperforming businesses in its portfolio.
As a part of this review, the Company evaluated the recoverability of
certain long-lived assets pursuant to the provisions of Financial
Accounting Standards Board (FASB) Statement #121 for impaired assets
held for use. As a result of this review, the Company recorded non-
cash, pretax charges of $63.0 million for asset impairments and
adjusted the carrying amount of the impaired assets to fair value.
The Company continues to review its business strategies, including
strategies related to its business portfolio, and may change its
priorities, which could result in future charges.
Liquidity and Capital Resources
Net cash provided by operating activities was $272.8 million, an
increase of $13.9 million from the prior year, primarily reflecting
improved operating profitability. Capital expenditures for the
current and prior year were $84.6 million and $93.5 million,
respectively. The rate of capital expenditures is expected to
increase during the remainder of the current year as the Company
continues its expansion of production capacity for U.S. and
International Beverages and for certain Foods businesses in the
United States. The Company expects that capital expenditures and
cash dividends for the remainder of the year will be financed
primarily through cash flow from operating activities.
Cash provided by investing activities includes a $240.0 million tax
recovery and 1997 divestiture proceeds of $73.2 million received in
the current year. These cash flows were partly offset by the
Company's purchase of marketable securities of $103.3 million in
January 1998. Cash provided by investing activities in the prior
year includes the proceeds from the Snapple divestiture.
Financing activities used cash of $359.1 million in the current year
to pay down debt and to repurchase shares. During the current year,
the Company repurchased 4.6 million shares of its outstanding common
stock for $250.2 million, completing its 10 million share repurchase
program announced in August 1993 and initiating the March 1998
repurchase program. Separately, during the current year
approximately 2 million employee stock options were exercised which
provided cash of $68.6 million.
Short-term and long-term debt (total debt) as of June 30, 1998 was
$964.0 million, a decrease of $93.0 million from December 31, 1997.
During the three months ended June 30, 1998, the Company reduced the
level of its revolving credit facilities from $675 million to $500
million. The Company now has a $335 million annually extendible five-
year revolving credit facility and a $165 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 commerical paper
borrowings and are also available for direct borrowings.
<21>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Derivative Financial and Commodity Instruments
The Company actively monitors its exposure to commodity price,
foreign currency exchange rate and interest rate risks and uses
derivative financial and commodity instruments to manage the impact
of certain of these risks. The Company uses derivatives only for
purposes of managing risk associated with underlying exposures. The
Company does not trade or use instruments with the objective of
earning financial gains on the commodity price, exchange rate or
interest rate fluctuations alone, nor does it use instruments where
there are not underlying exposures. Complex instruments involving
leverage or multipliers are not used. Management believes that its
use of these instruments to manage risk is in the Company's best
interest.
The Company has estimated its market risk exposures using sensitivity
analyses. Market risk exposure has been defined as the change in
fair value of a derivative commodity or financial instrument assuming
a hypothetical 10 percent adverse change in market prices or rates.
Fair value was determined using quoted market prices, if available.
The results of the sensitivity analyses as of June 30, 1998 did not
differ materially from the amounts reported as of December 31, 1997.
Actual changes in market prices or rates may differ from hypothetical
changes.
Current and Pending Accounting Changes
In July 1997, the FASB issued Statement #131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement
expands certain reporting and disclosure requirements for segments
from current standards. In February 1998, the FASB issued Statement
#132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change
the measurement or recognition of those plans. The Company is not
required to adopt these Statements until December 1998 and does not
expect the adoption of these standards to result in material changes
to previously reported consolidated amounts.
In January 1998, Statement of Position (SOP) #98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use," was issued. This SOP provides guidance on the accounting for
computer software costs. In April 1998, SOP #98-5, "Reporting on the
Costs of Start-Up Activities," was issued. This SOP provides
guidance on accounting for the cost of start-up activities. The
Company is not required to adopt these Statements until January 1999
and does not expect the adoption of these standards to result in
material changes to previously reported amounts or disclosures.
In June 1998, the FASB issued Statement #133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that
all derivative instruments (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. The accounting provisions for qualifying
hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires
that the Company must formally document, designate, and assess
<22>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the effectiveness of transactions that qualify for hedge accounting.
The Company is not required to adopt this Statement until January
2000. The Company has not determined its method or timing of
adopting this Statement or the impact on its financial statements.
However, when adopted this Statement could increase volatility
in reported earnings and other comprehensive income of the Company.
Year 2000
The Company uses software and other related technologies throughout
its business that will be affected by the date change in the year
2000. With senior management accountability and corporate staff
guidance, the affected operating units have completed the assessment
phase and are in varying stages of plan implementation 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 continues 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.
Subsequent Event
On July 16, 1998, the Company announced that it had signed a
definitive agreement to sell its Ardmore Farms juice and juice drinks
business to Country Pure Foods, Inc. The sale of this business is not
expected to have a material impact on the Company's operating
results.
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.
<23>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Note 2 in Part I is incorporated by reference herein.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 13, 1998.
Represented at the Meeting, either in person or by proxy, were
128,900,446 voting shares, of a total below.
(c) (i) To elect three directors in Class III to serve for three-year
terms expiring in the year 2001 or until their successors are
elected and qualified. All nominees are named below.
- Frank C. Carlucci
Votes For Election - 126,385,054
Votes Withheld - 2,515,392
- Vernon R. Loucks, Jr.
Votes For Election - 126,547,417
Votes Withheld - 2,353,029
- Robert S. Morrison
Votes For Election - 126,677,217
Votes Withheld - 2,223,229
(ii) To elect two directors in Class II to serve for two-year terms
expiring in the year 2000 or until their successors are
elected and qualified. All nominees are named below.
- W. James Farrell
Votes For Election - 126,584,357
Votes Withheld - 2,316,089
- William L. Weiss
Votes For Election - 126,344,909
Votes Withheld - 2,555,537
There were no votes against, abstentions or broker non-votes
with respect to the election of any nominee named above.
<24>
PART II - OTHER INFORMATION - (CONTINUED)
(iii) To ratify the Board of Directors' appointment of Arthur
Andersen LLP as independent public accountants for the
Company for 1998.
Votes For Proposal - 127,679,562
Votes Against Proposal - 804,178
Votes Abstaining - 416,703
Broker Non-Votes - 3
Votes Withheld - 0
(iv) To approve the adoption of The Quaker Long Term Incentive
Plan of 1999.
Votes For Proposal - 78,328,629
Votes Against Proposal - 40,109,165
Votes Abstaining - 948,408
Broker Non-Votes - 9,514,244
Votes Withheld - 0
(v) To consider a shareholder proposal regarding compensation
disclosure.
Votes For Proposal - 8,509,946
Votes Against Proposal - 109,149,643
Votes Abstaining - 1,722,612
Broker Non-Votes - 9,518,245
Votes Withheld - 0
(vi) To consider a shareholder proposal regarding reconsideration
of the Shareholder Rights Plan.
Votes For Proposal - 60,737,455
Votes Against Proposal - 56,845,763
Votes Abstaining - 1,803,184
Broker Non-Votes - 9,514,044
Votes Withheld - 0
Item 6 Exhibits and Reports on Form 8-K
Item 6(a) See Exhibit Index.
All other items in Part II are either inapplicable to the
Company during the quarter ended June 30, 1998, the answer is
negative or a response has been previously reported and an
additional report of the information need not be made,
pursuant to the Instructions to Part II.
<25>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
The Quaker Oats Company
(Registrant)
Date July 31, 1998 /s/Robert S. Thomason
Robert S. Thomason
Senior Vice President - Finance and
Chief Financial Officer
Date July 31, 1998 /s/Richard M. Gunst
Richard M. Gunst
Vice President and
Corporate Controller
<26>
EXHIBIT INDEX
Exhibit Paper (P) or
Number Description Electronic (E)
27 Financial Data Schedule E
99 Announcement of Sale of Ardmore
Farms Business E
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 129
<SECURITIES> 111
<RECEIVABLES> 430
<ALLOWANCES> 29
<INVENTORY> 278
<CURRENT-ASSETS> 1110
<PP&E> 1942
<DEPRECIATION> 808
<TOTAL-ASSETS> 2575
<CURRENT-LIABILITIES> 1023
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News Release
The Quaker Oats Company
Further Information:
Bob Gats/Connie Currier Alison Harmon
Quaker Tower Country Pure Foods The Quaker Oats Company
P.O. Box 049001 330-753-2293 (312)222-6914
Chicago, IL 60604-9001
COUNTRY PURE FOODS TO ACQUIRE THE QUAKER OATS COMPANY'S ARDMORE FARMS BUSINESS
For Immediate Release
AKRON, OHIO, and CHICAGO, July 16, 1998 -- Country Pure Foods Inc. announced
today that it has reached an agreement with The Quaker Oats Company (NYSE:OAT)
to acquire Quaker's Ardmore Farms juice and juice drinks business. Ardmore
Farms' product lines include frozen, single-serve fruit juices and Skigo
smoothies, both sold to food service customers in the United States. Under the
agreement, Country Pure Foods will purchase the formulas, trademarks and
inventories of the business, as well as the Deland, Florida plant. The Deland
plant employs approximately 160 people. Terms of the sale were not disclosed.
In announcing the transaction, Raymond K. Lee, Chief Executive Officer of
Country Pure Foods, said, "This is a strategic acquisition, adding
significantly to Country Pure Foods' size and resources. One of our goals has
been to provide the customers that we serve throughout 43 states with enhanced
national distribution--this purchase will definitely assist us with that goal."
Quaker Oats' Chairman, President and Chief Executive Officer Robert S.
Morrison, said, "While the Ardmore Farms operation has been with us since 1982
and has broadened our presence in the food service arena, it is a small non-
core business. This divestiture will allow us to focus on building the
consumer brands in our foods and Gatorade businesses."
The Quaker Oats Company, headquartered in Chicago, is an international
marketer of foods and beverages. Its major brands include: Gatorade thirst
quencher; Quaker cereals and grain-based snacks; Rice-A-Roni, Pasta Roni and
Near East side dishes; and Aunt Jemima mixes and syrup.
Country Pure Foods is one of the largest independent juice processors in
the United States, supplying portion juices to the healthcare and school food
service markets as well as chilled juices and juice drinks to the food service
and retail markets. The company also provides contract packaging for the large
nationally recognized juice brands. Country Pure Foods' own brands are Natural
Country and Glacier Valley, but a significant portion of its business comes
from the sale of products for private label to the food service and retail
grocery markets.
Country Pure Foods was founded in 1995 when Ohio Pure Foods of Akron,
Ohio, merged with Natural Country Farms of Ellington, Conn. The company has
processing and/or distribution centers in Ellington, Conn.; Cleveland, Ohio;
Edwardsville, Kan.; Modesto and Fullerton, Calif., in addition to its Akron,
Ohio, processing facility and corporate headquarters. The company's corporate
headquarters will remain in Akron, Ohio.
###
