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, 1998
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
Preferred Stock Purchase Rights New York Stock Exchange
Chicago 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. [X]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of the close of business on February 26, 1999 was $7,398,346,362.
The liquidation value of Series B ESOP Convertible Preferred Stock, all of
which is held in The Quaker 401(k) Plan for Salaried Employees, at the close of
business on February 26, 1999 totaled $124,094,569, plus related dividends.
The number of shares of Common Stock, $5.00 par value, outstanding as of the
close of business on February 26, 1999 was 135,438,835.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of The Quaker Oats Company Annual Report to Shareholders for the
fiscal year ended December 31, 1998 (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) for the Annual Meeting to be held on May 12, 1999
(Part III of Form 10-K)
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
The information set forth under the captions "Restructuring Charges," "Asset
Impairments and Divestitures," and "Subsequent Event," found on pages 51-52,
52-53, and 64, respectively, of the Company's Annual Report, is incorporated
herein by reference.
(b) Financial Information About Operating Segments
The information set forth under the captions "Operating Segment Information,"
"Operating Segment Data," "Enterprise Information," and "Geographic
Information," found on pages 38-41, 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 syrups,
grain-based snacks, cornmeal, hominy grits and value-added rice products. In
addition, the Company is the second-largest manufacturer of pancake mixes and
value-added pasta products and is among the four largest manufacturers of ready-
to-eat cereals and five largest manufacturers of branded 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.
Latin American Foods Description
The Company manufactures and markets its products in many countries throughout
Latin America and is broadly diversified by product line. It is the leading
brand-name hot cereals producer in many countries and has other leading
category 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.
Other Foods Description
The Company is broadly diversified, both geographically and by product line, in
the packaged food industry. The Company manufactures and markets its products
in many countries throughout Europe and Asia. It is the leading brand-name
cereals producer in many European countries and has other leading category
positions for products in a number of countries.
U.S. and Canadian Beverages Description
The Company is the leading manufacturer and distributor of sports beverages in
the United States and Canada and accounts for more than 80 percent of sales in
the sports drink category. The Company uses both its own and broker sales
forces to sell Gatorade thirst quencher and has distribution centers around the
country. Over 60 percent of Gatorade sales occur in the second and third
quarters during the spring and summer beverage season.
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Latin American and Other Beverages Description
The Company also manufactures and markets Gatorade in Latin America, Europe and
Asia. Gatorade is sold in more than 45 countries outside of North America and
is the leading sports drink distributor in Mexico, Argentina, Brazil,
Venezuela, Colombia, the Philippine Islands and Italy. Gatorade is also one of
the leading sports drink brands in Korea and Australia, where it is sold
through license arrangements.
Raw Materials
Raw materials used in manufacturing include oats, wheat, corn, rice,
sweeteners, almonds, fruit, cocoa, vegetable oil 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 and
Gatorade Frost 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; Golden Grain and Mission for pasta;
Quaker and Aunt Jemima for mixes, syrups and corn goods. 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; and Gatorade for thirst-quenching beverages.
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 25-31, 42-43, 44-
45, 61, 61, and 64, 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 "Operating Segment Information,"
"Operating Segment Data," "Enterprise Information" and "Geographic
Information," found on pages 38-41, of the Company's Annual Report, is
incorporated herein by reference.
ITEM 2. PROPERTIES.
As of December 31, 1998, the Company operated 46 manufacturing plants in 13
states and 14 foreign countries and owned or leased distribution centers and
sales offices in 22 states and 20 foreign countries.
<TABLE>
<CAPTION>
Owned and Leased Owned and Leased Owned and Leased
Manufacturing Locations Distribution Centers Sales Offices
Operating U.S. and Latin U.S. and Latin U.S. and Latin
Segment Canadian American Other Canadian American Other Canadian American Other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foods 13 12 5 1 2 -- 11 4 6
Beverages 8 3 4 -- 1 2 13 3 7
Shared -- 1 -- 8 16 -- 6 13 --
Total 21 16 9 9 19 2 30 20 13
</TABLE>
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. Production capacity is appropriately
utilized. The Company is in the process of terminating certain sales office
leases in light of its recent restructuring actions.
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ITEM 3. LEGAL PROCEEDINGS.
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. On May 1, 1998,
the case was transferred to the United States District Court for the Northern
District of Illinois, where it is now pending.
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. 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.
None.
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 43, 46-47, 64 and 72-
73, 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 42-43 and 44-
47, 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 25-31 of the Company's Annual Report, is incorporated
herein by reference.
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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, 1998,
1997 and 1996 (page 32).
2.) Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 (page 33).
3.) Consolidated Balance Sheets as of December 31, 1998 and 1997
(pages 34-35).
4.) Consolidated Statements of Common Shareholders' Equity as of December 31,
1998, 1997 and 1996 (pages 36-37).
5.) Notes to the Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996 (pages 48-64).
6.) Report of Independent Public Accountants (page 65).
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 70-71 of
the Company's Annual Report, lists the executive officers of the registrant as
of March 10, 1999, and is incorporated herein by reference.
The information set forth under the caption "Compliance with Section 16(a),"
found on page 13 of the Company's Proxy Statement, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Nonemployee Directors'
Compensation and Benefits," "Executive Compensation," "Compensation Committee
Report" and "Performance Graph," found on pages 9-11, 14-19, 20-21 and 22,
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 12-13 of the Company's Proxy Statement, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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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.
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EXHIBIT INDEX
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED BY
NO. DESCRIPTION REFERENCE (IBRF)
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, as amended
effective September 9, 1998 E
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)(1)* 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(a)(2)* 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(a)(3)* The Quaker Long Term Incentive Plan of 1999,
(incorporated by reference to the Company's Form
10-K for the fiscal year ended December 31, 1997,
file number 1-12) IBRF
10(b)* 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(c)* 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(d)* Executive Incentive Bonus Plan of The Quaker Oats
Company, subject to shareholder approval at the
Annual Meeting of Shareholders on May 12, 1999 E
10(e)(1)* 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(e)(2)* First Amendment to the Deferred Compensation Plan
for Directors of The Quaker Oats Company effective
May 13, 1998 E
10(e)(3)* Second Amendment to the Deferred Compensation Plan
for Directors of The Quaker Oats Company effective
January 1, 1999 E
10(f)(1)* 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)(2)* First Amendment to the Directors' Stock Compensation
Plan effective May 13, 1998 E
10(f)(3)* Second Amendment to the Directors' Stock Compensation
Plan effective January 1, 1999 E
10(g)* The Quaker Oats Stock Option Plan for Outside
Directors effective January 1, 1999 E
10(h)(1)* Employment Agreement with Robert S. Morrison
effective as of October 22, 1997 (incorporated
by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1997, file
number 1-12) IBRF
10(h)(2)* Employment Agreement with Terence D. Martin, first
effective for the fiscal quarter ended
December 31, 1998 E
<7>
EXHIBIT INDEX CONTINUED
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED BY
NO. DESCRIPTION REFERENCE (IBRF)
10(h)(3)* Termination Benefits Agreements with certain
Executive Officers, first effective for the fiscal
quarter ended September 30, 1998 (incorporated by
reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1998, file number 1-12) IBRF
10(h)(4)* Termination Benefits Agreements with Robert S.
Morrison and Terence D. Martin, first effective
for the fiscal quarter ended December 31, 1998 and
thereafter E
10(h)(5)* Agreement Upon Separation of Employment with
Robert S. Thomason, first effective for the fiscal
quarter ended December 31, 1998 E
10(i)* 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(j)(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(j)(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(j)(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(k)* 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
10(l)* 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(m)(1)* Quaker Officers Severance Program, as amended and
restated, effective July 9, 1997(incorporated by
reference to the Company's Form 10-K for the
fiscal year ended December 31, 1997, file number
1-12) IBRF
10(m)(2)* First Amendment to the Quaker Officers Severance
Program, as amended and restated, effective
March 11, 1998 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended
December 31, 1997, file number 1-12) IBRF
10(n)* 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
12 Statement re Computation of Ratios E
13 Annual Report to Shareholders of The Quaker Oats
Company for the fiscal year ended December 31, 1998 E
21 List of Subsidiaries of the Registrant E
23 Consent of Auditors E
27 Financial Data Schedules E
* Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K.
<8>
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 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 10th day of March 1999, 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/ TERENCE D. MARTIN Senior Vice President and Chief
Terence D. Martin Financial Officer
/s/ RICHARD M. GUNST Vice President and Corporate Controller
Richard M. Gunst
/s/ FRANK C. CARLUCCI Director
Frank C. Carlucci
/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/ J. MICHAEL LOSH Director
J. Michael Losh
/s/ VERNON R. LOUCKS, JR. Director
Vernon R. Loucks, Jr.
/s/ WALTER J. SALMON Director
Walter J. Salmon
/s/ WILLIAM L. WEISS Director
William L. Weiss
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Exhibit 3(b)
B Y L A W S
OF
THE QUAKER OATS COMPANY
AS AMENDED - SEPTEMBER 9, 1998
EFFECTIVE - SEPTEMBER 9, 1998
B Y L A W S
OF
THE QUAKER OATS COMPANY
CORPORATE OFFICES AND SEAL
Bylaw 1 - The principal and registered office of this Corporation shall be
at 820 Bear Tavern Road, West Trenton, Mercer County, New Jersey.
Bylaw 2 - The Corporation shall also have and maintain a general office
and place of business at the City of Chicago in the State of Illinois, where it
may keep all books, records, documents, and papers; it may also establish
offices in such other states and foreign countries as the board shall from time
to time determine.
Bylaw 3 - The Corporate Seal shall have inscribed thereon the name of the
Corporation, the state of its organization, and the words "Corporate Seal."
CAPITAL STOCK AND TRANSFERS THEREOF
Bylaw 4 - Certificates of stock in the Corporation shall be in the form
adopted by the board, and be consecutively numbered; they shall be signed by
the Chairman of the Board of Directors, the President or a Vice President and
either the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary, whose signatures may be facsimiles. The names of the
owners of such shares, the dates of issue, and the certificate numbers thereof
shall be entered upon the Corporation's books. The board shall appoint one or
more transfer agents, and also one or more registrars of transfers, outside of
the State of New Jersey, and shall require all valid certificates of stock in
the Corporation to bear the countersignatures of one such agent, which may be a
facsimile, and one such registrar. The same bank or trust company may act as
both transfer agent and registrar.
Bylaw 5 - Transfers of shares of stock in the Corporation upon the books
of the Corporation shall be made only by the holders thereof in person or by
attorney thereunto duly authorized in writing. Outstanding certificates for a
like number of shares shall be surrendered and cancelled at the time of such
transfers, except as provided in Bylaw 8.
Bylaw 6 - For the purpose of determining the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or for the purpose of determining shareholders entitled to receive payment of
any dividend or allotment of any right, or for the purpose of any other action,
the board may fix, in advance, a date as the record date for any such
determination of shareholders. Such date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to
any other action.
Bylaw 7 - The Corporation shall be entitled to treat the record holder of
any share or shares of stock, as shown by its books, as the sole legal and
equitable owner and holder thereof, and shall not be bound to recognize any
interest or claim on the part of others, whether it shall have notice thereof
or not, save as expressly provided otherwise by the laws of New Jersey.
Bylaw 8 - The board may issue or cause to be issued new certificates of
stock to replace certificates of stock alleged to have been lost or destroyed,
upon such reasonable terms and conditions as may be prescribed by the board to
protect the interests of the Corporation.
SHAREHOLDERS
Bylaw 9 - Meetings of the shareholders of the Corporation shall be held at
such place, within or without the State of New Jersey, as may be fixed by the
board from time to time.
Bylaw 10 - The annual meeting of the shareholders for election of
directors and transaction of other business shall be held on the second
Wednesday of May in each year at the hour of nine-thirty o'clock in the
forenoon, or at such other time as may be fixed by the board. Directors shall
be elected by ballot and a plurality vote. Written notice of the time, place,
and purpose or purposes of every regular meeting of shareholders shall be given
not less than 10 nor more than 60 days before the date of the meeting, either
personally or by mail, to each shareholder of record entitled to vote at the
meeting.
Bylaw 11 - Special meetings of the shareholders for purposes allowed by
law may be held at any time when called by the Chairman of the Board or
President, or upon resolution or written request of a majority of the board or
of a majority of the executive committee. If a special meeting of shareholders
is duly called pursuant to this Bylaw 11 or by a court of competent
jurisdiction pursuant to statute, then the board shall set the record and
meeting date for such special meeting in accordance with applicable legal
requirements. Written notice of the time, place, and purposes of every special
meeting of shareholders shall be given not less than 10 nor more than 60 days
before the date of the meeting, either personally or by mail, to each
shareholder of record entitled to vote at the meeting. Only
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those matters set forth in the notice of the special meeting may be considered
or acted upon at such special meeting, unless otherwise provided by law.
Bylaw 12 - If a shareholder desires to submit a proposal for consideration
at an annual shareholders' meeting, written notice of such shareholder's intent
to make such a proposal must be given and received by the Secretary of the
Corporation at the principal executive offices of the Corporation either by
personal delivery or by United States mail not later than 90 days prior to the
anniversary date of the immediately preceding annual meeting. Each notice
shall describe the proposal in sufficient detail for the proposal to be
summarized on the agenda for the meeting and shall set forth (i) the name and
address, as it appears on the books of the Corporation, of the shareholder who
intends to make the proposal; (ii) a representation that the shareholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to present such
proposal; and (iii) the class and number of shares of the Corporation which are
beneficially owned by the shareholder. In addition, the notice shall set forth
the reasons for conducting such proposed business at the meeting and any
material interest of the shareholder in such business. The presiding officer
of the annual meeting shall, if the facts warrant, refuse to acknowledge a
proposal not made in compliance with the foregoing procedure, and any such
proposal not properly brought before the meeting shall not be transacted.
Nothing contained in this Section shall be deemed to decrease any time period
set forth in the Securities Exchange Act of 1934, as amended, or any rule or
regulation of the Securities and Exchange Commission thereunder.
Bylaw 13 - Unless otherwise provided in the certificate of incorporation
or the laws of New Jersey, the holders of shares entitled to cast a majority of
the votes at a meeting shall constitute quorum at such meeting. The
shareholders present in person or by proxy at a duly organized meeting may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. Less than a quorum may
adjourn the meeting. Whenever the holders of any class or series of shares are
entitled to vote separately on a specified item of business, the provisions of
this section shall apply in determining the presence of a quorum of such class
or series for the transaction of such specified item of business.
Bylaw 14 - The Chairman of the Board shall act as chairman of each
shareholders' meeting. If he is absent, the President or a Vice President
shall so act. If all of the foregoing are absent, then the meeting itself by a
majority vote in interest may select some shareholder present to preside, which
vote shall be recorded in the minutes. The Secretary of the Corporation, if
present, shall act as secretary of each shareholders' meeting. If the
Secretary of the Corporation is absent, an Assistant Secretary shall so act.
If all of the foregoing are absent, then
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the chairman of the meeting shall designate a person to act as secretary. A
declaration by the chairman that any resolution has been duly carried, and an
entry to that effect in the minutes of the meeting, shall, in all cases where a
poll in not demanded, be competent and sufficient evidence of the fact and
legality of adoption of such resolution.
Bylaw 15 - (a) At all elections of directors by the shareholders, two
independent inspectors of election shall be chosen by the presiding officer of
the meeting; they need not be shareholders, but in no case shall they be either
employees of the Corporation or candidates for the office of director. Each
inspector shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability, and shall perform such duties as are provided by the laws of New
Jersey.
(b) At all elections of directors by the shareholders, all proxies,
ballots, and voting tabulations that identify how shareholders voted will be
kept confidential and not be disclosed to any of the directors, officers or
employees of the Corporation except when disclosure is mandated by law,
expressly requested by a shareholder, or during a contested election for the
board.
(c) The same voting procedure shall be followed with regard to other
matters submitted to shareholders for their vote.
Bylaw 16 - The officer or agent having charge of the stock transfer books
for shares of the Corporation shall make and certify a complete list of the
shareholders entitled to vote at a shareholders' meeting or any adjournment
thereof. Such list shall
(a) be arranged alphabetically within each class and
series, with the address of, and the number of shares
held by, each shareholder;
(b) be produced at the time and place of the meeting;
(c) be subject to the inspection of any shareholder during the
whole time of the meeting; and
(d) be prima facie evidence as to who are the shareholders
entitled to examine such list or to vote at any
meeting.
Bylaw 17 - Except as otherwise provided by law, if any shareholder desires
to solicit written consents for action to be taken by shareholders of the
Corporation without a meeting, prior written notice of any such solicitation
must be given and received by the Secretary of the Corporation at the principal
executive offices of the Corporation either by personal delivery or by United
States mail not later than 45 days prior to the date such written consents, or
soliciting material relating thereto, are
<4>
first published, sent or given to any shareholder. Such notice shall describe
the matter for which written consent is being sought and shall set forth (i)
the name and address, as it appears on the books of the Corporation, of the
shareholder who seeks the written consent; (ii) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
on the matter for which written consent is being sought and intends to vote
on the matter for which written consent is being sought; and (iii) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder. In addition, the notice shall set forth the reasons for conducting
such proposed business by means of the written consent and any material
interest of the shareholder in such business. No action taken by written
consent shall be valid unless taken in accordance with the foregoing
procedures.
BOARD OF DIRECTORS
Bylaw 18 - The property, affairs, and business of the Corporation shall be
managed and controlled by a board of directors. The number of directors shall
be determined in accordance with the provisions of the certificate of
incorporation. The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as
possible, of one-third of the total number of directors constituting the entire
board of directors. At each annual meeting of shareholders beginning in 1984,
successors to directors whose terms expire at that annual meeting shall be of
the same class as the directors they succeed, and shall be elected for three-
year terms.
Bylaw 19 - A director shall hold office until the annual meeting for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, or removal from office. Any newly created directorship resulting
from an increase in the number of directors and any other vacancy on the board
of directors, however caused, may be filled by a majority of the directors then
in office, although less than a quorum, or by a sole remaining director;
provided that if the number of directors is increased, not more than two such
newly created directorships may be filled by the directors in any period
between annual meetings of shareholders. Any director so elected to fill a
vacancy shall, without regard to the class in which such vacancy occurred, hold
office until the next succeeding annual meeting of shareholders and until his
or her successor shall have been elected and qualified. The term of a director
elected by shareholders to fill a newly created directorship or other vacancy
shall expire at the same time as the terms of the other directors of the class
in which the vacancy occurred.
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Bylaw 20 - Regular meetings of the board shall be held six times each year
at such time and place as the board may determine, subject to the right of the
Chairman of the Board, the President, or the executive committee, by notice
required for a special meeting of the board, to change the time or place of a
regular meeting. Except as aforesaid, no notice of a regular meeting is
required.
Bylaw 21 - Special meetings of the board may be held at any time and place
whenever called by the Chairman of the Board, the President, or any three of
the directors. Notice to each director of the time and place of the meeting
shall be mailed not less than three calendar days before the meeting, or
telegraphed or telephoned or delivered to his office not less than 24 hours
before the meeting.
Bylaw 22 - A majority of the board shall constitute a quorum for the
transaction of business, but any less number present may adjourn the meeting
from time to time.
Bylaw 23 - In addition to the powers specifically enumerated in these
Bylaws, the board shall also have, and may exercise, all other and further
powers, privileges, and authority expressly or impliedly conferred upon them by
the Statues of New Jersey and the articles of incorporation of the Corporation.
EXECUTIVE COMMITTEE
Bylaw 24 - The board shall appoint from among its members an executive
committee of not less than four and not more than 10 regular members. The
board may also designate one or more of its members as alternates to serve as
members of the executive committee in the absence of a quorum of that committee
at any regular or special meeting.
(a) The executive committee shall have the powers of the
board in the management of the business, affairs, and
property of the Corporation during the intervals
between the meetings of the board, except that the
executive committee shall not:
(i) make, alter or repeal any Bylaw of the
Corporation;
(ii) elect or appoint any director, or remove
any officer or director;
(iii) submit to shareholders any action that
requires shareholders' approval; or
(iv) amend or repeal any resolution theretofore
adopted by the board which by its terms
is amendable or repealable only by the board.
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(b) Regular meetings of the executive committee may be
held without notice at such time and place as shall
from time to time be determined by the executive
committee or by the board.
(c) Special meetings of the executive committee
may be called by the President, or the Chairman of
the Board, or by any two regular members of the committee
by causing 24 hours' notice of the time and place thereof
to be given to each regular member by mail or by
telegram or by telephone, or by delivery to his
office, but any regular member may waive such notice.
The purpose of the meeting need not be stated in the
notice or waiver of notice.
(d) Whenever it appears that a quorum of regular members
will not present at a meeting, the Secretary may
request the attendance of an alternate member, who,
if he attends, and if his attendance is necessary
to obtain quorum, shall be deemed a regular member
of the executive committee for the purposes of such
meeting.
(e) Any regular or special meeting of the executive
committee may be adjourned and no notice need be
given of the adjourned meeting whether or not a
quorum shall be present.
(f) A majority of members of the executive committee shall
constitute a quorum. Actions taken at a meeting of
the executive committee shall be reported to the board
at its next meeting following such executive committee
meeting; except that, when the meeting of the board is
held within two days after the executive committee
meeting, such report shall, if not made at the first
meeting, be made to the board at its second meeting
following such executive committee meeting.
OTHER COMMITTEES
Bylaw 25 - The board by resolution adopted by a majority of the entire
board may appoint from among its members one or more other committees, each of
which shall have one or more members.
MEETINGS AND ACTION OF DIRECTORS WITHOUT A MEETING
Bylaw 26 - Any or all directors may participate in a meeting of the board
or executive committee by means of conference telephone or any means of
communication by which all persons participating in the meeting are able to
hear each other.
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Any action required or permitted to be taken pursuant to authorization
voted at a meeting of the board or executive committee may be taken without a
meeting if, prior or subsequent to such action, all members of the board or of
the executive committee, as the case may be, consent thereto in writing and
such written consents are filed with the minutes of the proceedings of the
board or executive committee.
OFFICERS
Bylaw 27 - The officers of the Corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary,
and such additional officers and such assistant officers as may be deemed
necessary from time to time by the board or the executive committee. One or
more Vice Presidents may be designated as Executive Vice Presidents or as
Senior Vice Presidents or as other types of Vice Presidents. The Chairman of
the Board, President, Treasurer, Secretary and any Vice President reporting
directly to the Chairman of the Board or President shall either be elected by
the board or the executive committee. Any other officers shall be elected by
the board or the executive committee or be appointed by the Chairman of the
Board. Each officer shall hold office for a term expiring at the first board
meeting following the annual meeting of the shareholders and until his
successor is elected, but subject to removal by the board, the executive
committee or Chairman of the Board at any time. Salaries of officers who must
be elected by the board or executive committee shall be fixed by the board or
the executive committee. Salaries of other officers and assistant officers
shall be fixed by the board, the executive committee, or the Chairman of the
Board.
Bylaw 28 - The Chairman of the Board shall be the Chief Executive Officer
of the Corporation and shall have general supervision of its business and
affairs, subject, however, to control of the board and the executive committee.
He shall be a regular member of the executive committee and shall preside at
all meetings of the shareholders, the board, and the executive committee.
Bylaw 29 - The President shall serve as a regular member of the executive
committee and shall have such other powers and duties as shall be assigned to
him by the board or the executive committee or the Chairman of the Board. In
the absence of the Chairman of the Board, he shall preside at meetings of the
board and of the executive committee.
Bylaw 30 - The Vice Presidents shall have such powers and duties as shall
be assigned to them by the board, the executive committee, or the Chairman of
the Board. The President or the Senior or Executive Vice President with the
longest service with the Corporation who is a member of the executive committee
and who is present and able to act shall have the powers and duties
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of the Chairman of the Board during his absence or inability to act.
Bylaw 31 - The Treasurer shall have custody of the corporate funds and
securities. He shall keep full and accurate accounts of all receipts and
disbursements and generally shall perform all the duties usually incident to
the office of Treasurer and shall have such other powers and duties as shall be
assigned to him by the board, the executive committee or the Chairman of the
Board.
Each Assistant Treasurer shall have power to act in the place and stead of
the Treasurer in case of his absence or inability to act, and shall have such
other powers and duties as shall be assigned to him by the board, the executive
committee or the Chairman of the Board.
Bylaw 32 - The Secretary shall have custody of the corporate seal and
shall be present at and make a true record of the votes and proceedings of all
meetings of the shareholders, the board, and the executive committee. He shall
supervise the giving and mailing of all notices of shareholders' and directors'
meetings; shall have charge of the certificate books, transfer books, and
capital stock ledgers; and generally shall perform all the duties and have
charge of all other books and papers usually incident to the office of
Secretary. He shall have such other powers and duties as shall be assigned to
him by the board, the executive committee or the Chairman of the Board.
Each Assistant Secretary shall have power to act in the place and stead of
the Secretary in case of his absence or inability to act, and shall have such
other powers and duties as shall be assigned to him by the board, the executive
committee or the Chairman of the Board.
Bylaw 33 - Unless otherwise ordered by the board or the executive
committee, the Secretary, and in case of his absence or inability to act an
Assistant Secretary, shall have the power, and it shall be his duty, to vote in
the name and behalf of the Corporation all stock held by it in other companies;
and the Chairman of the Board, President, or a Vice President, and the
Secretary or an Assistant Secretary, shall have the power to execute an deliver
proxies for the purpose of voting such stock; but the board or the executive
committee may by resolution confer such power to vote and to execute proxies
upon any other person or persons, and in all cases may instruct how such stock
shall be voted at any meeting or election.
Bylaw 34 - The board or the executive committee shall by resolution
designate one or more banks as authorized principal depositories of the funds
and securities of the Corporation and appoint and authorize officers of other
persons to sign checks thereon and otherwise control and dispose of such funds
and securities. The Treasurer or any two other elected officers of the
Corporation may designate other banks as secondary
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depositories in connection with the business of the Corporation, and appoint
and authorize officers or other persons to sign checks thereon or otherwise
control and dispose of funds therein.
All notes payable issued by the Corporation shall be signed in its behalf
by such officer or officers of the Corporation authorized for that purpose by
the board or the executive committee.
FISCAL YEAR AND DIVIDENDS
Bylaw 35 - The fiscal year of the Corporation shall begin on the first day
of January in each year.
Bylaw 36 - Dividends may be declared by the board, from the profits, at
any regular or special meeting of the board, whenever in their judgment it
shall be consistent with the best interests of the Corporation. The executive
committee shall also have power, between sessions of the board, to declare the
usual quarterly dividends on all classes of stock.
AMENDMENTS
Bylaw 37 - These Bylaws may be amended, altered or repealed, and new
Bylaws may be enacted, only by the affirmative vote of the holders of not less
than two-thirds of the outstanding shares of capital stock of the Corporation
or by a vote of not less than two-thirds of the entire board of directors.
INDEMNIFICATION
Bylaw 38 - The Corporation shall indemnify any person who is or was a
director, officer, employee or agent of the Corporation or of any constituent
corporation absorbed by the Corporation in a consolidation or merger, and any
person who is or was a director, officer, trustee, employee or agent of any
other domestic or foreign corporation and any partnership, joint venture, sole
proprietorship, trust or other enterprise, whether or not for profit, served by
a person covered by this Bylaw, serving at the request of the Corporation, or
of any such constituent corporation, or the legal representative of any such
director, officer, trustee, employee or agent, against his reasonable costs,
disbursements and counsel fees and amounts paid or incurred in satisfaction of
settlements, judgments, fines and penalties in connection with any pending,
threatened or completed civil, criminal administrative or arbitrative action,
suit or proceeding, and any appeal therein and any inquiry, or investigation
which could lead to such action, suit or proceeding, to the fullest extent now
or hereafter permitted by New Jersey law.
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The Corporation shall pay expenses as they are incurred by any person
covered by this Bylaw in connection with any proceeding covered by this Bylaw
in advance of the final disposition of the proceeding to the fullest extent now
or hereafter permitted by New Jersey law.
Any determination required to be made pursuant to Section 14A3-5(5) of the
New Jersey Business Corporation Act shall be made only by either (a) the Board
or a committee thereof, acting by a majority vote of a quorum consisting of
directors who were not parties to or otherwise involved in the proceeding, or
(b) if such a quorum is not obtainable, or even if obtainable and such quorum
of the Board or committee by a majority vote of the disinterested directors so
directs, by independent legal counsel in a written opinion, such counsel to be
designated by the Board and reasonably satisfactory to the person who is being
indemnified.
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Exhibit 10(d)
THE QUAKER OATS COMPANY
EXECUTIVE INCENTIVE BONUS PLAN
(To be effective as of January 1, 1999,
subject to shareholder approval on May 12, 1999)
ARTICLE I
PURPOSE
The purposes of the Plan are to promote the success of the
Company; to provide designated Executive Officers with an
opportunity to receive incentive compensation dependent upon that
success; to attract, retain and motivate such individuals; and to
provide Awards that are "performance-based compensation" under
Code Section 162(m).
ARTICLE II
DEFINITIONS
2.1 General Definitions
(a) Adjusting Operating Income. Operating Income
adjusted for rent on leased assets and certain costs and/or
benefits of international businesses, as defined by the
Company's Policies and Procedures Manual, which are not
included in Operating Income.
(b) Award. An incentive award made pursuant to the
Plan.
(c) Award Schedule. The Award Schedule established
pursuant to Section 4.1.
(d) Beneficiary. The person(s) designated by the
Participant, in writing on a form provided by the Committee,
to receive payments under the Plan in the event of his death
while a Participant or, in the absence of such designation,
the Participant's estate.
(e) Board. The Board of Directors of the Company.
(f) Cause. Cause as defined in a Participant's
employment agreement with the Company, as in effect at the
applicable time or if there is no such contract in effect at
the applicable time, (i) a felony conviction of a Participant
or (ii) the willful misconduct or gross negligence materially
detrimental to the Company.
(g) Code. The Internal Revenue Code of 1986, as
amended.
(h) Committee. The Compensation Committee of the
Board.
(i) Company. The Quaker Oats Company and its
successors.
(j) Controllable Earnings. Controllable Earnings
is equal to Adjusted Operating Income minus Capital Usage
Charge. The Capital Usage Charge is calculated by multiplying
the Average Invested Capital, as defined by the Company's
Policies and Procedures Manual, by the Capital Usage Rate,
which is the Company's pre-tax Cost of Capital. Controllable
Earnings will exclude any unusual one-time items (such as
restructuring charges, asset impairments, and/or gains or
losses from divestitures).
(k) Covered Employee. A covered employee within
the meaning of Code Section 162(m)(3).
(l) Disability. Total disability within the
meaning of the Company's long-term disability plan as in
effect at the applicable time or if there is no such plan at
the applicable time, physical or mental incapacity as
determined solely by the Committee.
(m) Earnings Per Share. Basic or diluted earnings
per common share of the Company, as set forth in the audited
consolidated financial statements of the Company and its
subsidiaries,adjusted to exclude the effects of extraordinary
items, restructuring and tax and/or accounting changes,as set
forth therein.
(n) Executive Officer. A person who is an
executive officer of the Company for purposes of the
Securities Exchange Act of 1934, as amended.
(o) Net Sales. Net sales as set forth in the
audited consolidated financial statements of the Company and
its subsidiaries.
(p) Operating Income. The consolidated operating
income of the Company and its subsidiaries, as determined in
accordance with generally accepted accounting principles
consistently applied by the Company and reported to its
shareholders.
(q) Participant. An Executive Officer selected
from time to time by the Committee to participate in the Plan.
(r) Performance Adjustment. The percentage, as set
forth in an Award Schedule, with respect to a Performance
Measure, used for purposes of determining an Award based on
the extent to which the applicable Performance Goal has been
achieved.
(s) Performance Measure. One or more of the
following selected by the Committee to measure performance
for a Plan Year: Adjusted Operating Income; Controllable
Earnings; Earnings Per Share; Net Sales; Operating Income;
Return on Assets; and Total Shareholder Return. The
Performance Measure(s) selected by the Committee may vary
from Plan Year to Plan Year and from Participant to
Participant. Performance Measures for a Plan Year may be
established on a stand-alone basis, in tandem or in the
alternative.
(t) Performance Goal. The level of performance
established as the Performance Goal. With respect to a
Performance Measure, Performance Goals may vary from Plan
Year to Plan Year and from Participant to Participant.
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(u) Plan. The Quaker Oats Company Executive
Incentive Bonus Plan.
(v) Plan Year. The calendar year.
(w) Retirement. Retirement from the employ of the
Company (other than for Cause) at or after the age 65 or,
with the advance consent of the Committee, at or after age 55.
(x) Return on Assets. Operating Income divided by
the average of the identifiable consolidated assets of the
Company and its subsidiaries (excluding corporate) as of the
end of the applicable Plan Year and as of the end of the then
immediately preceding Plan Year.
(y) Target Award. An amount established by the
Committee as a Participant's Target Award for purposes of the
Plan. Target Awards may vary from Plan Year to Plan Year and
from Participant to Participant.
(z) Total Shareholder Return. Total dividends per
common share of the Company for the Plan Year, plus the
closing price of a common share of the Company on the last
day of the Plan Year; divided by the closing price of a
common share of the Company on the last day of the preceding
Plan Year.
(aa) Weighting. The percentage, as set forth in an
Award Schedule, that a Performance Measure is weighted for
purposes of determining an Award. Weightings may vary from
Plan Year to Plan Year and from Participant to Participant.
ARTICLE III
PARTICIPATION
The Committee shall select Participants from among the
Executive Officers. The selection of an Executive Officer as a
Participant for a Plan Year shall not entitle such individual to
be selected as a Participant with respect to any other Plan Year.
Each Participant selected for the Plan Year shall not be eligible
for the Company's Management Incentive Bonus Plan for that Plan
Year and shall not receive payment of a bonus thereunder,
regardless of the provisions thereof, or any prior written or oral
agreement made with the Participant.
ARTICLE IV
AWARDS
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4.1 Performance Measures and Goals, Target Awards and Award
Schedules. On or before the 90th day of each Plan Year, the
Committee shall establish in writing for such Plan Year; (a) one
or more Performance Measures; (b) a Performance Goal and Weighting
for each such Performance Measure; and (c) a Target Award and an
Award Schedule for each Participant. The Award Schedule shall set
forth the Participant's Target Award and Performance Measure(s)
and shall include: (i) for each such Performance Measure, the
Performance Goal, Weighting and Performance Adjustments at
specified levels of performance; and (ii) such other information
as the Committee may determine. Once established for a Plan Year,
such items shall not be amended or otherwise modified.
4.2 Determination of Awards. As soon as practicable after
the close of the Plan Year for which it is made, the actual Award
payable to a Participant shall be determined in accordance with
the Participant's Award Schedule based on the extent to which the
Performance Goals have been achieved. The determination of Awards
and the achievement of the Performance Goals shall be certified in
writing by the Committee, which, in its discretion, may decrease
but not increase the amount of the Award otherwise payable based
on such performance. Anything in this Plan to the contrary
notwithstanding, the maximum Award payable to any Participant for
any Plan Year is $5,000,000.
4.3 Payment of Awards. Awards shall be paid in a lump sum
cash payment, as soon as practicable, after the amount thereof has
been determined and certified in accordance with Section 4.2.
Except as otherwise provided in ARTICLE V, no Award will be
payable to any Participant who is not an employee of the Company
on the last day of such Plan Year. The Committee may, subject to
such terms and conditions and within such limits as it may from
time to time establish, (a) permit one or more Participants to
defer the receipt of amounts due under the Plan or (b) defer the
payment of amounts due under the Plan to the extent that and for
so long as payment thereof would not be, in the opinion of counsel
to the Company, deductible by the Company for income tax purposes.
ARTICLE V
TERMINATION OF EMPLOYMENT
5.1 Death, Disability, Retirement and Other Than Cause. If
a Participant's employment with the Company terminates due to
death, Disability or Retirement, or if the Participant is
terminated by the Company other than for Cause, the Participant or
his Beneficiary, as the case may be, will be paid a prorated Award
in cash at the same time that Awards are otherwise paid under the
Plan. For purposes of the foregoing, a prorated Award will be
determined by multiplying the amount of the Award that would
otherwise have been payable to the Participant (determined in
accordance with Section 4.2) if such Participant's employment had
not so terminated by a fraction, the numerator of which is the
number of days in the period commencing with the start of the
applicable Plan Year and ending with the date as of which the
Participant's employment with the Company so terminated, and the
denominator of which is 365.
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5.2 Cause. If a Participant's employment with the Company
is terminated for Cause, his right to the payment of an Award and
all other rights under this Plan will be forfeited, and no amount
will be paid or payable hereunder to or in respect of such
Participant.
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ARTICLE VI
ADMINISTRATION
6.1. In General. The Committee shall have full and
complete authority, in its sole and absolute discretion, (a) to
exercise all of the powers granted to it under the Plan, (b) to
construe, interpret and implement the Plan and any related
document, (c) to prescribe, amend and rescind rules relating to
the Plan, (d) to make all determinations necessary or advisable in
administering the Plan, and (e) to correct any defect, supply any
omission and reconcile any inconsistency in the Plan.
6.2 Determinations. The actions and determinations of the
Committee or others to whom authority is delegated under the Plan
on all matters relating to the Plan and any Awards shall be final
and conclusive. Such determinations need not be uniform and may
be made selectively among persons who receive, or are eligible to
receive, Awards under the Plan, whether or not such persons are
similarly situated.
6.3 Appointment of Experts. The Committee may appoint such
accountants, counsel, and other experts as it deems necessary or
desirable in connection with the administration of the Plan.
6.4 Delegation. The Committee may delegate to others the
authority to execute and deliver such instruments and documents,
to do all such acts and things, and to take all such other steps
deemed necessary, advisable or convenient for the effective
administration of the Plan in accordance with its terms and
purposes, except that the Committee shall not delegate any
authority with respect to decisions regarding Plan eligibility or
the amount, timing or other material terms of Awards.
6.5 Books and Records. The Committee and others to whom the
Committee has delegated such duties shall keep a record of all
their proceedings and actions and shall maintain all such books of
account, records and other data as shall be necessary for the
proper administration of the Plan.
6.6 Payment of Expenses. The Company shall pay all
reasonable expenses of administering the Plan, including, but not
limited to, the payment of professional and expert fees.
6.7 Code Section 162(m). It is the intent of the Company
that this Plan and Awards satisfy the applicable requirements of
Code Section 162(m) so that the Company's tax deduction for
remuneration in respect of this Plan for services performed by
Participants who are or may be Covered Employees is not disallowed
in whole or in part by the operation of such Code Section. If any
provision of this Plan or if any Award would otherwise frustrate
or conflict with such intent, that provision to the extent
possible shall be interpreted and deemed amended so as to avoid
such conflict, and, to the extent of any remaining irreconcilable
conflict with such intent, that provision shall be deemed void as
applicable to such Covered Employees.
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ARTICLE VII
MISCELLANEOUS
7.1. Nonassignability. No Award shall be assignable or
transferable (including pursuant to a pledge or security interest)
other than by will or by laws of descent and distribution.
7.2 Withholding Taxes. Whenever payments under the Plan are
to be made or deferred, the Company will withhold therefrom, or
from any other amounts payable to or in respect of the
Participant, an amount sufficient to satisfy any applicable
governmental withholding tax requirements related thereto.
7.3 Amendment or Termination of the Plan. The Plan may be
amended or terminated by the Board in any respect except that: (a)
no amendment may be made after the date on which an Employee is
selected as a Participant for a Plan Year that would adversely
affect the rights of such Participant with respect to such Plan
Year; and (b) no amendment shall be effective without the approval
of the stockholders of the Company to increase the maximum Award
payable under the Plan or if, in the opinion of counsel to the
Company, such approval is necessary to satisfy the intent set
forth in Section 6.7.
7.4 Payments to Other Persons. If payments are legally
required to be made to any person other than the person to whom
any amount is payable under the Plan, such payments will be made
accordingly. Any such payment will be a complete discharge of the
liability of the Company under the Plan.
7.5 Unfunded Plan. Nothing in this Plan will require the
Company to purchase assets or place assets in a trust or other
entity to which contributions are made or otherwise to segregate
any assets for the purpose of satisfying any obligations under the
Plan. Participants will have no rights under the Plan other than
as unsecured general creditors of the Company.
7.6 Limits of Liability. Neither the Company nor any other
person participating in any determination of any question under
the Plan, or in the interpretation, administration or application
of the Plan, will have any liability to any party for any action
taken or not taken in good faith under the Plan.
7.7 No Right of Employment. Nothing in this Plan will be
construed as creating any contract of employment or conferring
upon any Employee or Participant any right to continue in the
employ or other service of the Company or limit in any way the
right of the Company to terminate the employment or other service
of such person with or without Cause.
7.8 Section Headings. The section headings contained herein
are for convenience only, and in the event of any conflict, the
text of the Plan, rather than the section headings, will control.
<7>
7.9 Invalidity. If any term or provision contained herein
is to any extent invalid or unenforceable, such term or provision
will be reformed so that it is valid, and such invalidity or
unenforceability will not affect any other provision or part
hereof.
7.10 Applicable Law. The Plan will be governed by the laws
of the State of Illinois, as determined without regard to the
conflict of law principles thereof.
7.11 Effective Date. The Plan shall be effective as of
January 1, 1999, subject to approval by the Company's
shareholders.
Date: March 17, 1999 By: /s/Pamela S. Hewitt
Senior Vice President
Exhibit 10(e)(2)
FIRST AMENDMENT
TO THE
DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF THE QUAKER OATS COMPANY
(As Amended and Restated Effective as of November 1, 1996)
WHEREAS, the Deferred Compensation Plan for Directors of The Quaker
Oats Company, as amended and restated effective as of November 1,
1996 (the "Plan"), was established by The Quaker Oats Company (the
"Company") for the benefit of its eligible directors; and
WHEREAS, amendment of the Plan is desirable;
NOW, THEREFORE, the Plan is hereby amended effective as of May 13,
1998, by substituting the following for Section 7 of the Plan:
"7. 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 Securities
Exchange Act of 1934, as amended (the 'Exchange Act')
(other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of
the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership
of stock of the Company), is or becomes the 'beneficial
owner' (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting
power of the Company's then outstanding voting
securities;
(b) during any period of 24 consecutive months (not
including any period prior to May 13, 1998),
individuals, who at the beginning of such period
constitute the Board, and any new director (other than
a Director designated by a Person who has entered into
an agreement with the Company to effect a transaction
described in paragraph (a), (c) (2) or (d) of this
Section) whose election by the Board, or whose
nomination for election by the Company's stockholders,
was approved by a vote of at least two-thirds (2/3) of
the directors before the beginning of the period cease
for any reason to constitute at least a majority
thereof;
(c) the stockholders of the Company approve (1) a plan of
complete liquidation of the Company or (2) the sale or
disposition by the Company of all or substantially all
of the Company's assets unless the acquirer of the
assets or its directors shall meet the conditions for a
merger or consolidation in subparagraphs (d) (1) or (d)
(2) of this Section or
(d) the stockholders of the Company approve a merger or
consolidation of the Company with any other company
other than:
(1) such a merger or consolidation which would result
in the voting securities of the Company outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted
into voting securities of the surviving entity) more
than 70% of the combined voting power of the Company's
or such surviving entity's outstanding voting
securities immediately after such merger or
consolidation; or
(2) such a merger or consolidation which would result
in the directors of the Company who were directors
immediately prior thereto continuing to constitute at
least 50% of the directors of the surviving entity
immediately after such merger or consolidation.
In this paragraph (d), 'surviving entity' shall mean only an
entity in which all of the Company's stockholders
immediately before such merger or consolidation become
stockholders by the terms of such merger or consolidation,
and the phrase 'Directors of the Company who were Directors
immediately prior thereto' shall include only individuals
who were Directors of the Company at the beginning of the 24
consecutive month period preceding the date of such merger
or consolidation, or who were new Directors (other than any
Director designated by a Person who has entered into an
agreement with the Company to effect a transaction described
in paragraph (a), (c) (2), (d) (1) or (d) (2) of this
Section) whose election by the Board, or whose nomination
for election by the Company's stockholders, was approved by a
vote of at least two-thirds (2/3) of the Directors before the
beginning of such period."
IN WITNESS WHEREOF, this Amendment is executed below by a
duly authorized officer of the Company.
THE QUAKER OATS COMPANY
Dated: March 17, 1999 By: /s/ John G. Jartz
Its Senior Vice President
Exhibit 10(e)(3)
SECOND AMENDMENT
TO THE
DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF THE QUAKER OATS COMPANY
(As Amended and Restated Effective as of November 1, 1996)
WHEREAS, the Deferred Compensation Plan for Directors of The
Quaker Oats Company, as amended and restated effective as of November
1, 1996, (the "Plan"), was established by The Quaker Oats Company (the
"Company") for the benefit of its eligible directors; and
WHEREAS, certain amendments to the Plan are necessary in order to
implement changes to the compensation package for nonemployee
directors previously approved by the Board;
NOW, THEREFORE, the Plan is hereby amended effective January 1,
1999, as follows:
1. By substituting the following for the last sentence of
Section 3 of the Plan:
"Any election for deferrals effective on and after January 1,
1999 shall result in Deferred Amounts being carried as Common
Stock Units during the period of deferral."
2. By substituting the following for Section 4.c. of the Plan:
"c. Transfer Between Accounts. Participants may transfer
Deferred Amounts within their account from Cash Units into Common
Stock Units upon application to the Secretary of the Company and
approval by the Company's legal advisors. Participants with
Common Stock Units credited to their account as of December 31,
1998, may transfer such Deferred Amounts to Cash Units on or
prior to December 31, 1999, upon application to the Secretary of
the Company and approval by the Company's legal advisors. With
respect to a Participant whose Termination of Service has
occurred before January 1, 1999, Deferred Amounts may be
transferred within their account from Cash Units to Common Stock
Units or from Common Stock Units to Cash Units upon application
to the Secretary of the Company and approved by the Company's
legal advisors. Any such transfers normally shall be made during
the ten business days commencing on the third and ending on the
twelfth business day following the release of quarterly and
annual summary statements of the Company's sales and earnings."
3. By substituting the following for the second paragraph of
Section 5 of the Plan:
"All payments of Deferred Amounts carried as Cash Units under
this Plan shall be made in cash out of the general assets of the
Company. The amount of each annual installment payment to a
Participant shall be determined by dividing the Cash Units in the
Participant's account by the number of installments remaining to
be paid. All payments of Deferred Amounts carried as Common
Stock Units under this Plan shall be made in shares of the
Company's Common Stock. The number of shares of each annual
installment payment to a Participant shall be determined by
dividing the Common Stock Units in the Participant's account by
the number of installments remaining to be paid."
IN WITNESS WHEREOF, this Amendment is executed below by a duly
authorized officer of the Company.
THE QUAKER OATS COMPANY
Date: March 17, 1999 By: /s/ John G. Jartz
Its Senior Vice President
Exhibit 10(f)(2)
FIRST AMENDMENT
TO THE
QUAKER OATS COMPANY STOCK COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
(As Amended and Restated Effective as of November 1, 1996)
WHEREAS, The Quaker Oats Company Stock Compensation Plan for
Outside Directors, as amended and restated effective as of November 1,
1996 (the "Plan"), was established by The Quaker Oats Company (the
"Company") for the benefit of its eligible directors; and
WHEREAS, amendment of the Plan is desirable;
NOW, THEREFORE, the Plan is hereby amended effective as of
May 13, 1998, by substituting the following for Section 7 of the Plan
"7. 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 Securities
Exchange Act of 1934, as amended (the 'Exchange Act')
(other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of
the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership
of stock of the Company), is or becomes the 'beneficial
owner' (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting
power of the Company's then outstanding voting
securities:
(b) during any period of 24 consecutive months (not
including any period prior to May 13, 1998),
individuals, who at the beginning of such period
constitute the Board, and any new director (other than
a director designated by a Person who has entered into
an agreement with the Company to effect a transaction
described in paragraph (a), (c) (2) or (d) of this
Section) whose election by the Board, or whose
nomination for election by the Company's stockholders,
was approved by a vote of at least two-thirds (2/3) of
the directors before the beginning of the period cease
for any reason to constitute at least a majority
thereof;
(c) the stockholders of the Company approve (1) a plan of
complete liquidation of the Company or (2) the sale or
disposition by the Company of all or substantially all
of the Company's assets unless the acquirer of the
assets or its directors shall meet the conditions for a
merger or consolidation in paragraphs (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."
IN WITNESS WHEREOF, this Amendment is executed below by a
duly authorized officer of the Company.
THE QUAKER OATS COMPANY
Dated: March 17, 1999 By: /s/ John G. Jartz
Its Senior Vice President
Exhibit 10(f)(3)
SECOND AMENDMENT
TO THE
QUAKER OATS COMPANY STOCK COMPENSATION PLAN
FOR OUTSIDE DIRECTORS
(As Amended and Restated Effective as of November 1, 1996)
WHEREAS, The Quaker Oats Company Stock Compensation Plan for
Outside Directors, as amended and restated effective as of November 1,
1996 (the "Plan"), was established by The Quaker Oats Company (the
"Company") for the benefit of its eligible directors; and
WHEREAS, certain amendments to the Plan are necessary in order to
implement changes to the compensation package for nonemployee
directors previously approved by the Board;
NOW, THEREFORE, the Plan is hereby amended effective January 1,
1999, by substituting the following for Section 2 of the Plan:
"2. Common Stock Units.
(a) The Company shall establish and maintain a Deferred Stock
Account in the name and for the benefit of each outside
director of the Company. On the first Trading Day of each
calendar year, the Company shall allocate an Annual Award of
Common Stock Units to the Deferred Stock Account of each
outside director then serving on the Board. Such Annual
Award shall consist of the number of Common Stock Units
determined by dividing $35,000 (or $40,000 in the case of a
Board Committee chairperson that has elected to receive
his/her chair fees under the Plan) by the Fair Market Value
of the Company's Common Stock on such Trading Day. Each
director may elect in advance of the allocation date for an
Annual Award to forego all or a portion of such award and to
receive in lieu thereof stock options of equivalent value
under the terms of The Quaker Oats Company Stock Option Plan
for Outside Directors. For purposes of this Section 2(a),
the term "Trading Day" shall mean a day on which shares of
the Company's Common Stock are traded on the New York Stock
Exchange, and the term "Fair Market Value" shall mean the
average of the high and low share prices of the Company's
Common Stock as reported by the New York Stock Exchange -
Composite Transaction Reporting System for a particular day.
(b) In the event a new outside director is elected to the Board,
the Company shall establish and maintain a Deferred Stock
Account in the name and for the benefit of such director.
As of such outside director's election date, his/her
Deferred Stock Account shall be credited with the number of
Common Stock Units equal to one-twelfth of the Annual Award
allocated to other outside directors during such calendar
year (as determined under (a) above), multiplied by the
number of full or partial calendar months which remain in
such year.
(c) In the event an outside director leaves the Board for any
reason, the number of Common Stock Units credited to such
director's Deferred Stock Account shall be reduced by the
number of Common Stock Units equal to one-twelfth of the
Annual Award allocated during the calendar year of his/her
departure from the Board (as determined under (a) above),
multiplied by the number of full calendar months which
remain in such year following such director's last date of
service."
IN WITNESS WHEREOF, this Amendment is executed below by a duly
authorized officer of the Company.
THE QUAKER OATS COMPANY
Dated: March 17, 1999 By: /s/ John G. Jartz
Its Senior Vice President
Exhibit 10(g)
THE QUAKER OATS COMPANY
STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
ARTICLE I
NAME AND PURPOSE
1.1 Name. The Quaker Oats Company Stock Option Plan for
Outside Directors is established by The Quaker Oats Company.
1.2 Purpose. The Company has established the Plan to
promote the interests of the Company and its shareholders by
providing nonemployee members of the Board of Directors with
additional incentive and the opportunity, through stock
ownership, to increase their proprietary and personal interest in
its continued success and progress through stock ownership.
ARTICLE II
DEFINITIONS
2.1 General Definitions. The following words and phrases,
when used herein, unless the context clearly indicates otherwise,
shall have the following meanings:
(a) Agreement. The document which evidences the grant
of any Option hereunder and sets forth the terms,
conditions, provisions and restrictions of such Option.
(b) Board. The Board of Directors of the Company.
(c) Change in Control. Occurrence upon events
describe in Section 6.2.
(d) Code. The Internal Revenue Code of 1986, as
amended, and including the regulations promulgated pursuant
thereto.
(e) Common Stock. The Company's $5.00 par value
common stock.
(f) Company. The Quaker Oats Company.
(g) Director. A member of the Board who is not an
Employee.
(h) Effective Date. January 1, 1999.
(i) Employee. Any person employed by the Company or
its controlled group of businesses.
(j) Exchange Act. The Securities Exchange Act of
1934, as amended.
(k) 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 on the New York
Stock Exchange on the last previous day on which a sale
occurred prior to such date.
(l) Immediate Family. The Participant, the
Participant's spouse, parents, children, stepchildren,
sisters, brothers and grandchildren, including adoptive
relationships.
(m) ISO. An Option that meets the requirements of
Section 422 of the Code.
(n) NSO. An Option that does not qualify as an ISO.
(o) Option. An option to purchase Shares granted
under ARTICLE IX of the Plan.
(p) Participant. A Director who is granted an Option
under the Plan.
(q) Plan. The Quaker Oats Company Stock Option Plan
for Outside Directors, and all amendments and supplements
thereto.
(r) Share. A share of Common Stock.
(s) Trading Day. A day on which Shares are traded on
the New York Stock Exchange.
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
SHARES AND COMMON STOCK
3.1 Shares Available Under Plan. Shares delivered to
Participants under the Plan may be authorized but unissued
Shares, Shares held in the treasury, or both.
3.2 Adjustments. In the event of any change in the Common
Stock through stock dividends, splits, spin-offs,
recapitalizations, reclassifications, or otherwise, or in the
event that any other stock shall be substituted for the Common
Stock as the result of any merger, consolidation, or
reorganization, then the Board shall make appropriate adjustment
or substitution in the number, kind, and price of shares subject
to outstanding Options.
ARTICLE IV
ADMINISTRATION
4.1 Authority and Administration. The Plan shall be
administered by the Board and, subject to the terms of the Plan,
the Board shall have complete authority to:
(a) determine the terms, conditions and provisions of,
and restrictions relating to, each option granted;
(b) interpret and construe the Plan and all
Agreements;
(c) prescribe, amend and rescind rules and regulations
relating to the Plan;
(d) determine the content and form of all Agreements;
(e) determine all questions relating to Options;
(f) maintain accounts, records and ledgers relating to
Options;
(g) maintain records concerning its decisions and
proceedings;
(h) employ agents, attorneys, accountants or other
persons for such purposes as the Board considers necessary
or desirable;
(i) take, at any time, any action permitted by Section
6.1, irrespective of whether any Change in Control has
occurred or is imminent; and
(j) 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.
4.2 Determinations. All determinations of the Board shall
be final.
4.3 Delegation. The Board may delegate all or any part of
its authority under the Plan to any Employee, Employees or
committee.
ARTICLE V
TERMINATION AND AMENDMENT
5.1 General. The Plan shall commence as of the Effective
Date and may be terminated or amended at any time by the Board.
Subject to the provisions of Section 5.2, the termination or
amendment of the Plan shall not adversely affect a Participant's
right to any Option granted prior to such termination or
amendment.
5.2 Board's Right. Except as hereinafter provided, any
Option granted may be converted, modified, forfeited,
surrendered, replaced or canceled, in whole or in part, by the
Board if and to the extent permitted in the Plan or applicable
Agreement or with the consent of the Participant to whom such
Option was granted. The Board may not cancel or permit the
surrender of Options and reissue new Options, or reprice Options,
at a lower purchase price.
ARTICLE VI
CHANGE IN CONTROL
6.1 Option Cancellation and Payment. 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 amount by which 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, exceeds the per Share Option price of each such Option
held (whether or not then fully exercisable), times (2) the
number of Shares covered by each such Option.
6.2 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;
(b) during any period of 24 consecutive months (not
including any period prior to the Effective Date),
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 shareholders 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 VII
AGREEMENTS AND PROVISIONS
7.1 Grant Evidenced by Agreement. The grant of any Option
under the Plan may be evidenced by an Agreement which shall
describe the specific Option granted and the terms and conditions
of the Option. The granting of any Option may be subject to, and
conditioned upon, the recipient's execution of any Agreement
required by the Board. 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.
7.2 Provisions of Agreement. Each Agreement shall contain
such provisions that the Board shall determine to be necessary,
desirable and appropriate for the Option granted. Each Agreement
may include, but shall not be limited to, the following with
respect to any Option: description of the type of Option; the
Option's duration; its transferability; the exercise price; the
exercise period; the person or persons who may exercise the
Option; the effect upon such Option of the Participant's death or
termination of service; the Option's conditions; when, if and how
any Option may be forfeited, converted into another benefit,
modified, exchanged for another benefit, or replaced.
ARTICLE VIII
PAYMENT AND WITHHOLDING
8.1 Payment. Upon the exercise of an Option, 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 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 Board, or if and to
the extent so provided in the applicable Agreement.
8.2 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 IX
OPTIONS
9.1 Grant and Option Price.
(a) Annual Grant. On the first Trading Day of each
calendar year, each Director shall be granted an Option to
purchase the number of Shares determined by dividing
$105,000 by the Fair Market Value of the Shares on such
Trading Day. In the event a New Director is elected to the
Board after the annual Option grant has been awarded for the
year of such Director's election, such Director shall be
granted an Option to purchase the number of shares
determined by dividing $8,750 by the Fair Market Value of
the Shares on the Director's election date (if a Trading
Day, or if not, the first Trading Day following such date of
election); multiplied by the number of full or partial
calandar months which remain in such year. The purchase
price for Shares under any Option shall equal the Fair
Market Value of the Shares on the grant date of the Option.
Each Option may not have a term that exceeds 10 years from
the date of grant and may only be granted to a Director.
(b) Annual Election. Each calendar year, in
accordance with procedures established by the Board, each
Director may elect to have additional Options granted to him
in lieu of any or all of the following: (i) the Director's
annual cash retainer as established by the Board from time
to time; (ii) the Director's Board committee chair fee;
(iii) the Director's annual common stock unit award under
The Quaker Oats Company Stock Compensation Plan for Outside
Directors; or (iv) any other Director compensation
established by the Board. Based on the Director's election,
such awards shall be converted into an Option to purchase
the number of Shares determined by dividing three times the
dollar value of the converted award by the Fair Market Value
of the Shares on the grant date of the Option. All terms of
such elected Options shall be the same as Options granted
and described in (a) above on the same grant date.
9.2 Early Termination of Option. If a Participant
terminates service as a Director for any reason, including death,
all rights to exercise an Option terminate within a period not
exceeding five years following his death or termination, but not
later than the date the Option expires pursuant to its terms.
The terms of Options outstanding may also be amended at any time
by the Board to extend the Option's duration period following a
Participant's death or termination, subject to the limitations
stated in the preceding sentence. In the meantime, the Option
may be exercised subject to the limitations in the applicable
Agreement.
9.3 Transferability. Except as otherwise provided in this
Section 9.3, an Option is not transferable other than as
designated by the Participant by will or by the laws of descent
and distribution, and during the Participant's life, may be
exercised only by the Participant. However, the Participant may
transfer an Option for no consideration to or for the benefit of
the Participant's Immediate Family (including, without
limitation, to a trust for the benefit of the Participant or the
Participant's Immediate Family or to a partnership or limited
liability company for the Participant or one or more members of
the Participant's Immediate Family), subject to such limits as
the Board may establish, and the transferee shall remain subject
to all the terms and conditions applicable to the Option prior to
such transfer.
9.4 Other Requirements. It is intended that only NSOs may
be granted under the Plan. The terms of each Option shall
provide that such Option will not be treated as an ISO.
9.5 Determination by Board. Except as otherwise provided
in Section 9.1 through Section 9.4, all Option terms shall be
determined by the Board.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Underscored References. The underscored references
contained in the Plan are included only for convenience, and
shall not be construed as a part of the Plan or in any respect
affecting or modifying its provisions.
10.2 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.
10.3 Governing Law. This Plan shall be construed and
administered in accordance with the laws of the State of
Illinois.
10.4 Purchase for Investment. The Board may require each
Participant purchasing Shares pursuant to an Option to represent
to and agree with the Company in writing that such Participant 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 Board 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 Board may deem advisable
under all applicable laws, rules and regulations, and the Board
may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions.
10.5 No Service Contract. The adoption of the Plan or the
granting of an Option shall not confer upon any Participant any
right to continued service as a Director nor shall it interfere
in any way with the right of the Company or Board to terminate
the service of any Director at any time.
10.6 No Effect on Other Benefits. Except as specified
herein, the receipt of Options under the Plan shall have no
effect on any compensation or benefits to which a Participant may
be entitled from the Company, under another plan or otherwise, or
preclude a Participant from receiving any such compensation or
benefits.
IN WITNESS WHEREOF, this Plan is executed by a duly
authorized officer of the Company.
THE QUAKER OATS COMPANY
Dated: March 17, 1999 By: /s/ John G. Jartz
Its Senior Vice President
Exhibit 10(h)(2)
Employment Agreement
This Employment Agreement ("Agreement") is made and entered into by and
between Terence D. Martin ("Martin") and The Quaker Oats Company ("Quaker"),
collectively the "parties." The "Effective Date" of this Agreement shall be
Martin's first day of active service with Quaker, which is presently expected
to be November 11, 1998.
1. Position: On the Effective Date, Martin will commence employment with
Quaker as Senior Vice President and Chief Financial Officer ("CFO").
2. Relocation Expenses: To reimburse Martin for the expense of moving his
primary residence to Chicago, Quaker shall provide Martin with the relocation
benefits described in the Quaker Relocation Policy For Transferring Employees,
and shall reimburse him for any other reasonable expenses approved by Quaker's
Chief Executive Officer ("CEO").
3. Base Salary: From the Effective Date through December 31, 1999, Martin's
annual base salary shall be four hundred seventy five thousand dollars
($475,000), paid in accordance with Quaker's standard payroll practices. After
that date, his salary shall be determined by Quaker through its normal
compensation practices; provided, during active service, his salary cannot be
reduced below four hundred seventy five thousand dollars ($475,000). Whenever
used in this Agreement, the phrase "normal compensation practices" refers to
practices in effect on the date a decision is made; this phrase is not intended
to freeze Quaker's current practices.
4. Bonuses: Martin is eligible to receive an annual performance bonus based
on the terms and provisions of Quaker's Management Incentive Bonus Plan (the
"MIB" plan).
A. 1998 & 1999 MIB Bonuses: For 1998 and 1999, Martin's target bonus
shall be seventy percent (70%) of his annualized base salary, and the
maximum award will be two hundred percent (200%) of his target. The
actual amount of any bonus award shall be determined by applying the
terms of the MIB plan; provided, any award for 1998 shall be prorated
based on the percentage of the year that Martin was employed by
Quaker in active service.
B. Subsequent MIB Bonuses: Any bonus targets and awards for years after
1999 shall be determined by Quaker in its discretion through its
normal compensation practices and the terms of the MIB and/or any
other applicable plan.
C. Additional Bonuses: Quaker shall have discretion to award additional
bonuses to Martin, as it may deem appropriate.
5. Group/Executive Benefits: Except as specifically provided herein, and
subject to its normal compensation practices and the terms and conditions of
any applicable plans, Quaker shall provide Martin and his family with benefits
comparable to those enjoyed by other Quaker officers at a similar level, such
as group and/or executive life, hospitalization and disability insurance;
health program; pension, 401(k), and similar benefit plans; perquisite
allowance; financial counseling reimbursement; and similar programs. All
waiting periods shall be waived except with respect to the pension plan, where
waiver of the one year waiting period is not permitted.
6. Supplemental Retirement Benefit: Subject to the terms and conditions
described below, including vesting requirements, upon termination of his
employment with Quaker, Martin will receive a supplemental retirement benefit
pursuant to this Agreement.
A. Amount Of Supplemental Benefit: This supplemental retirement benefit
is expressed as an annualized figure. The annualized amount of this
benefit shall be calculated by taking the Base Amount and subtracting
the Setoff from it.
i. Base Amount: The Base Amount shall be an annualized figure
equal to the greater of three hundred thousand dollars
($300,000.00) or the amount Martin would receive under the
formula in The Quaker Supplemental Executive Retirement Program
("SERP"), were he eligible for SERP benefits; provided, this
figure may be prorated or actuarially reduced, as described
below. It is understood that under the SERP's present terms,
for an executive who retired at age 60 after 5 years of active
service, the SERP formula would produce a benefit equal to
average annual earnings (as defined in the SERP) times forty
five percent (45%) times five divided by fifteen (5/15).
ii. Setoff: The Setoff shall be an amount equal to the annualized
value of any and all other retirement benefits to which Martin
is entitled (or which he receives) under any defined benefit
plan(s) (qualified or non-qualified), including Quaker's plans
and those of Martin's former employers.
iii. "Annualized" Value: All annualized calculations of this
supplemental retirement benefit and of other retirement benefits
shall assume that Martin elects to receive each benefit on a
straight line annuity basis, without regard to the form of
payment he actually elects or elected (including any lump sum
payment), and without regard to any actuarial reduction that may
apply based on the date he elects to commence receiving a
benefit.
B. Form Of Payment: Martin may elect to take this supplemental benefit
in any form permitted under either 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. Actuarial Reduction: If Martin commences receipt of this
supplemental retirement benefit before reaching age 60, the Base
Amount shall be actuarially reduced to adjust for this early receipt,
in accordance with the terms of the SERP.
D. Vesting:
i. Full Vesting: This supplemental retirement benefit shall vest
when Martin completes sixty (60) months of active service with
Quaker.
ii.Prorated Vesting: If, before Martin completes sixty (60) months
of active service with Quaker, his employment terminates for any
reason that triggers the payment of supplemental separation
benefits and/or benefits under The Quaker Officers' Severance
Program ("Program"), or due to his death or his retirement
immediately following an approved long term disability leave,
then this supplemental retirement benefit shall vest on Martin's
last day of employment with Quaker (i.e., at the end of his
inactive service period, if applicable), but shall be prorated
based on the number of months he was actively employed. To
prorate this benefit, both the Base Amount and the Setoff shall
be multiplied by a fraction: (a) whose numerator is the number
of full months Martin was employed in active service by Quaker or
thirty (30) months, whichever is lower; and (b) whose denominator
is thirty (30) months.
iii. No Vesting: If Martin's employment with Quaker terminates
before he completes sixty (60) months of active service with
Quaker for any reason that does not result in a prorated benefit
under subsection (D)(ii), this supplemental retirement benefit
shall not vest.
E. Survivor Benefit: If Martin dies before payment of this supplemental
retirement benefit commences, then subject to the vesting and
proration rules in subsections (D)(i) and (D)(ii), and commencing on
the first day of the month following the date of death, his wife will
receive a survivor annuity for the rest of her life equal in amount
to seventy five percent (75%) of the straight life annuity which
would have been payable to Martin 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 Martin,
shall be setoff with respect to The Quaker Retirement Plan.
7. Equity Based Incentive Compensation:
A. Signing Bonus: As of the Effective Date, and pursuant to the
terms of The Quaker Long Term Incentive Plan of 1999 (the
"LTIP"), Quaker shall grant Martin a 10-year option with respect
to two hundred fifty thousand (250,000) shares of Quaker common
stock. In accordance with the terms of the LTIP, the exercise
price for these shares will be equal to the fair market value on
the Effective Date. The following vesting rules shall apply to
these options:
i.While Martin is employed in active service or on an approved
disability leave, or if his active service terminates due to
his death, 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 50,000 options will vest on
November 11, 1999, and the last 50,000 options
will vest on November 11, 2003, based on the expected
Effective Date);
ii. If Martin's employment terminates in circumstances that
trigger an award of Program benefits and/or supplemental
separation benefits, a prorated number of these options shall
vest (the "Prorated Award"). The Prorated Award will be
calculated by multiplying two hundred fifty thousand
(250,000) options by a fraction: (a) whose numerator is the
number of full months Martin was employed in active service
by Quaker or thirty (30) months, whichever is lower; and (b)
whose denominator is thirty (30) months. These options shall
vest according to the schedule in subsection (A)(i) (i.e., in
increments of up to 50,000, and on anniversaries of the
Effective Date) until the Prorated Award is exhausted;
iii. If Martin's employment terminates in circumstances not
covered by subsection (A)(ii), then any of these options that
have not yet vested by his last day of active service shall
not vest.
B. Subsequent Stock Option Awards: Martin shall be eligible to receive
an award of options under the LTIP commencing in 1999. In 1999,
Martin shall be awarded at least fifty thousand (50,000) options, so
long as he is actively employed by Quaker on the date when Quaker
grants options to its executives. In subsequent years, the actual
number of options granted to Martin shall be determined by Quaker
pursuant to its normal compensation practices.
C. ESOP: Martin shall immediately be eligible to participate in any
award of stock under The Quaker Employee Stock Ownership Plan
("ESOP"). The size, terms, and conditions of any award to him shall
be determined by the provisions of the ESOP. Martin's first award,
to be allocated as of June 1999, will be prorated in accordance with
the terms of the ESOP.
D. Other: Quaker may, in its discretion, grant Martin additional equity
incentive compensation, pursuant to its normal compensation practices
and the terms and conditions of any applicable plans.
8. Vacation: Beginning in 1999, Martin shall be entitled to four (4) weeks
of vacation per calendar year. He is subject to Quaker's standard plans and
policies regarding related issues, such as unused vacation days.
9. Events Triggering Supplemental Separation Benefits: The employment
relationship between Quaker and Martin may be terminated at-will by either
party (i.e., at any time, for any reason). The following rules shall determine
whether, upon termination, Martin qualifies for supplemental separation
benefits:
A. Eligibility: Martin shall qualify for supplemental separation
benefits under this Agreement if, but only if, he qualifies for
severance benefits under the Program; provided, if he resigns within
six (6) months following any event that constitutes "Good Reason" (as
defined below), then for purposes of the Program and this Agreement,
Quaker shall treat him as involuntarily terminated due to job
elimination. The determination as to whether Martin qualifies for
Program benefits shall be made by the Committee that administers the
Program ("Committee"), pursuant to its regular procedures and
practices; provided, if the Committee denies benefits based on gross
misconduct, then the CEO and the Compensation Committee of Quaker's
Board of Directors ("Compensation Committee") shall review that
decision, and benefits will be denied only if the CEO and a majority
of the Compensation Committee vote to deny benefits; and further
provided, this internal review process shall not eliminate Martin's
right to judicial review of the Committee's decision, so long as he
first allows a reasonable time for the CEO and the Compensation
Committee to review it. Martin understands that based on the current
terms of the Program, eligibility is contingent not only on the reason
for termination (e.g., not discharged for "gross misconduct"), but
also on executing a waiver and release of claims, among other
conditions. Martin is not hereby committing to execute such a waiver
and release in the future; rather, if terminated, he will have the
option of doing so to qualify for Program benefits and for
supplemental separation benefits. Nothing in this provision,
including its non-exhaustive summary of the Program's eligibility
rules, shall be construed as modifying, superseding or limiting the
Program's terms, except that the procedure for deciding claims under
the Program is modified by adding the internal review process
described above.
B. Termination Due To Change In Control:
i. Notwithstanding any other provision in this Agreement, if Martin
qualifies for benefits under his ESA, he will not receive
supplemental separation benefits under this Agreement. In that
event, his separation benefits would be limited to what is
provided under the ESA and the Program.
ii. Notwithstanding anything to the contrary in section 9(A), Martin
shall be paid double (2 times) the separation benefit described
in section 10(A) if, but only if, all of the following occur:
(a) there is a change in control of Quaker (as that term, or any
similar term, is defined under his ESA); and (b) Martin fails to
qualify for benefits under both his ESA and the Program; and (c)
he resigns or retires for any reason during the thirteenth (13th)
month following the change in control.
C. Definition Of "Good Reason": "Good Reason" for Martin to resign
shall exist if any of the following events occur without his consent:
(i) Quaker intentionally fails to pay or provide required
compensation, and does not cure the situation despite a reasonable
opportunity after Martin calls the omission to Quaker's attention in
writing; (ii) Quaker reduces Martin's title, duties or authority
(compared to what they were on the Effective Date) so significantly
that his position is materially diminished; or (iii) Quaker
materially breaches the terms of this Agreement and fails or refuses
to cure the situation, provided that Martin calls the breach to
Quaker's attention in writing and allows a reasonable opportunity to
cure it.
10. Supplemental Separation Benefits: If, due to an involuntary termination,
Martin qualifies for supplemental separation benefits under section 9 of this
Agreement, then the following terms and conditions shall apply:
A. One Additional Year Of Benefits: In addition to benefits under the
Program, and subject to section 11(E), Quaker shall pay Martin an
amount equal to one (1) year of Program payments. This sum shall be
paid in a lump sum within thirty (30) days following his last day of
active service or within thirty (30) days following a determination
of his eligibility for Program benefits, whichever is later. This
payment is consideration for the covenants and other provisions in
section 11, not for anything else.
B. Calculating His Annual Compensation: Both under the Program and
under this Agreement, in calculating the bonus component of Martin's
annual compensation, Quaker shall use his MIB bonus target at the
time of termination or his most recent MIB bonus payment, whichever
is greater.
C. Pro-Rata Bonus For Final Year: Within thirty (30) days after
Martin'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 bonus target for the
year of termination and multiplying it times a fraction: (i) whose
numerator is the number of days elapsed in the fiscal year during
which Martin is terminated, from the first day of that fiscal year
through his final day of active service; and (ii) whose denominator
is 365 (e.g., based on Quaker's current fiscal year, which is the
same as the calendar year, if Martin's last day of active service was
February 5, then this fraction would be 0.10, calculated as follows:
36 days elapsed in current fiscal year divided by 365 days).
D. Five Days Of Salary: Within thirty (30) days following Martin's
termination from active service, Quaker shall pay him an amount equal
to five (5) days of pay at his then-current base salary rate.
11. Prohibited Conduct:
A. Covenants: Martin covenants and agrees that during the periods
specified below, he shall not engage in any of the following
activities anywhere in the world:
i. Non-competition. During the two (2) year period immediately
following the termination of Martin's employment in
circumstances that qualify him for supplemental separation
benefits under sections 9 and 10, or during the one (1) year
period immediately following his termination in any other
circumstances, Martin shall not undertake any employment,
consulting position or ownership interest which involves his
Participation in the management of a business entity that
markets, sells, distributes, licenses or produces Covered
Products, unless that business entity's sole involvement with
Covered Products is that it makes retail sales or consumes
Covered Products, without competing in any way against Quaker.
ii. Raiding Employees. During the three (3) year period immediately
following the termination of Martin's employment in circumstances
that qualify him for supplemental separation benefits under
sections 9 and 10, or during the two (2) year period immediately
following his termination in any other circumstances, Martin
shall not in any way, directly or indirectly (including through
someone else acting on Martin's recommendation, suggestion,
identification or advice), facilitate or solicit any Existing
Quaker Employee to leave the employment of Quaker or to accept
any position with any other company or corporation.
iii. Non-disclosure. During the three (3) year period immediately
following the termination of Martin's employment in circumstances
that qualify him for supplemental separation benefits under
sections 9 and 10, or during the two (2) year period immediately
following his termination in any other circumstances, Martin
shall not use or disclose to anyone any Confidential Information.
B. Definitions: For purposes of section 11 of this Agreement, the
following definitions shall apply:
i. "Participation" shall be construed broadly to include, without
limitation: (1) holding a position in which he directly manages
such a business entity; (2) holding a position in which anyone
else who directly manages such a business entity is in Martin's
reporting chain or chain-of-command (regardless of the number of
reporting levels between them); (3) providing input, advice,
guidance, or suggestions regarding the management of such a
business entity to anyone responsible therefor; (4) providing a
testimonial on behalf of such an operation or the product it
produces; or (5) doing anything else which falls within a common
sense definition of the term "participation," as used in the
present context.
ii. "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 beverages; thirst quenching
beverages; hot cereals; ready-to-eat cereals; pancake mixes;
grain-based snacks; value-added rice products; pancake syrup;
value-added pasta products; dry pasta products; and items Quaker
produces for the food service market. In addition, if Quaker
adds to its portfolio a new business or category of products with
annual sales exceeding fifty million dollars ($50,000,000)
worldwide, such product(s) shall be included within this
definition.
iii. "Existing Quaker Employee" means someone: (1) who is
employed by Quaker on or before the date when Martin's employment
terminates; (2) who is still employed by Quaker as of the date
when the facilitating act or solicitation takes place; and (3)
who holds a manager, director or officer level position at Quaker
(or an equivalent position based on job duties and/or Hay points,
regardless of the employee's title).
iv. "Confidential Information" shall be construed as broadly as
Illinois law permits and shall include all non-public information
Martin acquired by virtue of his relationship 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 Confidential
Information include, without limitation, non-public information
about Quaker's customers, suppliers, distributors and potential
acquisition targets; its business operations and structure; its
product lines, formulas and pricing; its processes, machines and
inventions; its research and know-how; its financial data; and
its plans and strategies.
C. Injunctive Relief: In the event of a breach, threatened breach or
situation that creates an inevitable breach by Martin of any covenant
in section 11(A), Quaker shall be entitled to an injunction
compelling specific performance, restraining any future violations
and/or requiring affirmative acts to undo or minimize the harm to
Quaker, in addition to damages for any actual breach that occurs.
The parties stipulate and represent that breach of any covenant in
section 11(A) would cause irreparable injury to Quaker, for which
there would be no adequate remedy at law, due among other reasons to
the inherent difficulty of determining the precise causation for loss
of customers, confidential information and/or employees and of
determining the amount and ongoing effects of such losses.
D. Other Remedies: In the event Martin breaches any covenant contained
in section 11(A), Quaker shall have the option of seeking injunctive
relief or cancelling the supplemental separation payments due under
sections 9 and 10 of this Agreement. Quaker's right to terminate
Program benefits is spelled out in the Program, and is not affected
by this provision.
E. Repayment Of Supplemental Separation Benefit: If Martin breaches any
covenant(s) set forth in section 11(A), then in addition to any
injunctive relief or actual damages awarded by a court, Martin shall
repay to Quaker an amount equal to the lump sum payment he received
under section 10(A). Martin shall make this repayment within thirty
(30) days following a final judgment against him. For purposes of
this provision, a judgment shall not be considered final until all
potential appeals are exhausted or waived (expressly or by expiration
of the time for filing an appeal).
F. Recitals: Martin acknowledges that by virtue of the positions he
will hold, he will acquire Confidential Information, including
without limitation knowledge of financial details and plans,
operational plans, strategic long range plans, new product
development, marketing plans, sales plans, and distribution plans.
Martin 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.
12. Advance Determination Of Permitted/Prohibited Conduct: Martin may request
an advance written determination from Quaker's Chief Executive Officer as to
whether taking a proposed action or job would, in Quaker's opinion, constitute
a breach of any covenant in section 11(A). In that event, and provided that
Martin discloses in writing all material facts about the proposed action or
job, Quaker shall make a reasonable effort to respond to the request for an
advance written determination within ten (10) business days; PROVIDED, if
circumstances materially change after the advance determination is made (e.g.,
if the duties of a job change after Martin accepts it), the determination may
be reconsidered and revised or reversed upon thirty (30) days advance written
notice to Martin. Quaker shall treat as confidential any non-public
information that Martin communicates as part of a request for an advance
determination.
13. Choice Of Law And Forum
A. Law: This Agreement shall be governed by and construed in accordance
with the laws of Illinois, without regard to choice of law
principles.
B. Forum: 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.
14. Attorney Fees And Other Expenses:
A. For This Agreement: Quaker will pay all reasonable legal fees and
related expenses Martin incurred in connection with the negotiation
and preparation of this Agreement.
B. Subsequent Litigation: If Martin 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 and
number of the issue(s) on which each party prevailed, the
reasonableness of each party's position(s), and ability to pay.
15. Indemnification: To the fullest extent permitted by law and Quaker's
by-laws, Quaker shall indemnify Martin (including the advancement of expenses)
for any judgments, fines, amounts paid in settlement and/or reasonable
expenses, including attorneys' fees, incurred by Martin 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.
16. Gross-Up Payment for Golden Parachute Taxes: If it is determined
that any payment Quaker makes to or for the benefit of Martin, under this
Agreement or otherwise, is subject to the federal excise taxes imposed on
golden parachute payments, then regardless of whether Martin has declared his
ESA effective, Quaker will make an additional payment to him (a "gross-up"
payment) in accordance with the terms of his ESA (presently Section 8 of the
ESA), as determined by the terms of the ESA on the Effective Date or on the
date of the payment in question, whichever is more favorable to Martin.
17. Representation By Martin: Martin represents that he is not presently
subject to any non-competition agreement or employment agreement that prevents
him from accepting this job with Quaker and performing the duties of Chief
Financial Officer.
18. 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.
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 Martin's obligation to comply with Quaker's Code
Of Ethics.
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 both parties, and only Quaker's highest ranking
Human Resources officer or his/her direct superior has authority to
sign such an amendment on behalf of Quaker.
19. 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 illegal, unlawful or unenforceable, the
remaining terms and provisions shall not be affected thereby and 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.
Date: November 11, 1998 /s/ Robert S. Morrison
The Quaker Oats Company,
by an authorized signing officer
Date: November 11, 1998 /s/ Terence D. Martin
Terence D. Martin
Exhibit 10(h)(4)
Schedule of Termination Benefit Agreements with Certain Executive Officers
The attached Termination Benefit Agreement is identical in all material respects
to the executive Termination Benefit Agreement for the executive employee listed
below and which has been omitted from this filing:
Name Execution Date
Terence D. Martin December 31, 1998
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 6th day of January, 1999.
WITNESSETH THAT:
WHEREAS, the Company wishes to attract and retain well-qualified
executive personnel and to assure both itself and the Executive of
continuity of management in the event of any actual or threatened change in
control of the Company;
NOW, THEREFORE, it is hereby agreed by and between the parties as
follows:
1. Operation of Agreement. The "effective date of this Agreement" shall
be the date on which the Executive declares it effective, by notice to
the Company in writing, but only if a change in control of the Company
(as defined in Section 2) has occurred on or before the date of the
notice.
2. Change in Control. A "change in control of the Company" shall be
deemed to have occurred if:
a. any "Person," which shall mean a "person" as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (other than the Company, any
trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company),
is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power
of the Company's then outstanding voting securities;
b. during any period of 24 consecutive months (not including any
period prior to November 11, 1998), individuals, who at the
beginning of such period constitute the Company's Board of
Directors (the "Board"), and any new director (other than a
director designated by a Person who has entered into an agreement
with the Company to effect a transaction described in paragraph
a., c. (2) or d. of this Section) whose election by the Board, or
whose nomination for election by the Company's stockholders, was
approved by a vote of at least two-thirds (2/3) of the directors
before the beginning of the period cease for any reason to
constitute at least a majority thereof;
c. the stockholders of the Company approve (1) a plan of complete
liquidation of the Company or (2) the sale or disposition by the
Company of all or substantially all of the Company's assets unless
the acquirer of the assets or its directors shall meet the
conditions for a merger or consolidation in subparagraphs d. (1)
or d. (2) of this Section; or
d. the stockholders of the Company approve a merger or consolidation
of the Company with any other company other than:
(1) such a merger or consolidation which would result in the
voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than 70% of the combined voting
power of the Company's or such surviving entity's
outstanding voting securities immediately after such merger
or consolidation; or
(2) such a merger or consolidation which would result in the
directors of the Company who were directors immediately
prior thereto continuing to constitute at least 50% of the
directors of the surviving entity immediately after such
merger or consolidation.
In this paragraph d., "surviving entity" shall mean only an entity in
which all of the Company's stockholders immediately before such merger
or consolidation become stockholders by the terms of such merger or
consolidation, and the phrase "directors of the Company who were
directors immediately prior thereto" shall include only individuals
who were directors of the Company at the beginning of the 24
consecutive month period preceding the date of such merger or
consolidation, or who were new directors (other than any director
designated by a Person who has entered into an agreement with the
Company to effect a transaction described in paragraph a., c. (2), d.
(1) or d. (2) of this Section) whose election by the Board, or whose
nomination for election by the Company's stockholders, was approved by
a vote of at least two-thirds (2/3) of the directors before the
beginning of such period.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in
the employ of the Company, for the period commencing on the effective
date of this Agreement and ending on the earlier to occur of the third
anniversary of such effective date or the 65th birthday of the
Executive (the "employment period"), to exercise such authorities and
powers, and perform such duties and functions, as are commensurate
with the authorities and powers being exercised, and duties and
functions being performed, by the Executive immediately prior to the
effective date of this Agreement, which services shall be performed at
the current location where the Executive was employed immediately
prior to the effective date of this Agreement or at such other
location within a 30-mile radius of such current location. The
Executive shall not be required to accept any other location. The
Executive agrees that during the employment period he shall devote his
full business time exclusively to his executive duties as described
herein and perform such duties faithfully and efficiently.
<2>
4. Compensation, Compensation Plans, Benefit Plans, Perquisites. During
the employment period and prior to termination (as defined in Section
5) of the Executive, the Executive shall be compensated as follows:
a. He shall receive an annual salary which is not less than his
annual salary immediately prior to the effective date of this
Agreement, with the opportunity for increases, from time to time
thereafter, which are in accordance with the Company's regular
practices.
b. He shall be eligible to participate on a reasonable basis in
bonus, stock option, restricted stock and other incentive
compensation plans, which shall provide benefits comparable to
those to which he was provided immediately prior to the effective
date of this Agreement.
c. He shall be eligible to participate on a reasonable basis in tax-
qualified employee benefit plans (including but not limited to
pension, profit sharing and employee stock ownership plans), and
supplemental non-qualified employee benefit plans relating
thereto, which shall provide benefits comparable to those to
which he was provided immediately prior to the effective date of
this Agreement.
d. He shall be entitled to receive employee welfare benefits
(currently elected medical, dental and life insurance benefits)
and perquisites which are comparable to those to which he was
provided immediately prior to the effective date of this
Agreement.
5. Termination. "Termination" shall mean either (a) termination by the
Company of the employment of the Executive with the Company for any
reason other than death, physical or mental incapacity, or cause (as
defined below) or (b) resignation of the Executive, which,
notwithstanding anything else herein to the contrary, may only 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"
<3>
unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that the action or omission was in the
best interest of the Company.
For purposes of clarification, a mere transfer of the Executive to an
entity created in a Company initiated spin-off or reorganization,
without a subsequent Termination, shall not be treated as a
Termination of the employment of the Executive with the Company for
purposes of eligibility under this Agreement. The Company shall cause
the newly created entity to provide to the Executive an Executive
Separation Agreement substantially similar to this Agreement.
6. Confidentiality. The Executive agrees that during and after the
employment period, he will not divulge or appropriate to his own use
or the use of others any secret or confidential information or
knowledge pertaining to the business of the Company, or any of its
subsidiaries, obtained during his employment by the Company or any of
its subsidiaries.
7. Severance and Benefit Payments.
a. In the event of termination of the Executive during the
employment period, the Company shall pay the Executive a lump-sum
severance allowance equal to salary and bonus payments for the
following 24 calendar months. The initial salary rate shall not
be less than his annual salary immediately prior to termination,
or if greater, not less than his annual salary immediately prior
to the change in control of the Company; such salary shall be
increased every March 1, thereafter, according to the then
current Hewitt Associate's projection for movement in executive
base salaries. The initial bonus amount shall not be less than
the annual equivalent of the incentive bonus calculated under
Section 4(a)(1) of the Salaried Employees Compensation and
Benefits Protection Plan; such bonus amount shall be increased
every January 1, thereafter, according to the then current Hewitt
Associates' projection for movement in executive total cash
compensation. The lump-sum severance allowance shall not be
adjusted on a present value basis.
b. In the event of termination of the Executive during the
employment period, the Company shall also pay the Executive a
lump-sum benefit payment in an amount equivalent to (1) the
benefits he would have accrued or been allocated under any tax-
qualified employee benefit plan (including but not limited to
pension, profit sharing and employee stock ownership plans) and
any non-qualified supplemental benefit plan relating thereto,
maintained by the Company as if he had remained in the employ of
the Company for 24 calendar months after his termination, which
benefits will be paid in addition to the benefits provided under
such plans and (2) employee welfare benefits (currently elected
coverage under the medical, dental and life insurance programs)
to which he would have been entitled under all such employee
benefit plans, programs or arrangements maintained by the Company
as if he had remained in the employ of the company for 24
calendar months after his termination. Such a benefit payment
shall be adjusted to include expected increases to the
Executive's
<4>
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
<5>
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
<6>
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
<7>
entitled to recover from the Company his reasonable attorneys' fees
and costs and expenses in connection with enforcement of his rights
(including the enforcement of any arbitration award in court).
Payment shall be made to the Executive by the Company at the time
these attorneys' fees and costs and expenses are incurred by the
Executive. If, however, the arbitrators should later determine that
under the circumstances the Executive could have had no reasonable
expectation of prevailing on the merits at the time he initiated the
arbitration based on the information then available to him, he shall
repay any such payments to the Company in accordance with the order of
the arbitrators. Any award of the arbitrators shall include interest
at a rate or rates considered just under the circumstances by the
arbitrators.
11. Notices. Any notices, requests, demands, and other communications
provided for by this Agreement shall be sufficient if in writing and
if sent by registered or certified mail to the Executive at the last
address he has filed in writing with the Company or, in the case of
the Company, at its principal executive offices.
12. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts
provided under this Agreement; and no benefits payable hereunder shall
be assignable in anticipation of payment either by voluntary or
involuntary acts, or by operation of law. Nothing in this paragraph
shall limit the Executive's rights or powers which his executor or
administrator would otherwise have.
13. Governing Law. The Agreement shall be construed and enforced
according to the Employee Retirement Income Security Act of 1974
("ERISA"), and the laws of the State of Illinois, other than its laws
respecting choice of law, to the extent not pre-empted by ERISA.
14. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other
person and, so long as the Executive lives, no person, other than the
parties hereto, shall have any rights under or interest in this
Agreement or the subject matter hereof.
15. Term. Unless the Executive has declared this Agreement effective,
pursuant to Section 1 of this Agreement, this Agreement shall
terminate prior to a change in control of the Company when the
Executive has terminated employment or been placed on inactive service
by the Company, or, if later, May 14, 2001.
16. Successors to the Company. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the
Company and any successor of the Company.
17. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any
reason, the remaining provisions of this Agreement shall be unaffected
thereby and shall remain in full force and effect.
<8>
18. Prior Agreement. Any prior Executive Separation Agreement between
the Executive and the Company which has not yet terminated pursuant to
its terms, is canceled by mutual consent of the Executive and the
Company pursuant to execution of this Agreement, effective as of the
day and year first above written.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board, the Company has caused these
presents to be executed in its name on its behalf, and its corporate seal
to be hereunto affixed and attested by its Assistant Secretary, all as of
the day and year first above written.
ATTEST: THE QUAKER OATS COMPANY
/s/ Gerald A. Cassioppi /s/ Pamela S. Hewitt
Assistant Secretary Its Senior Vice President
EXECUTIVE
/s/ Robert S. Morrison
Exhibit 10(h)(5)
AGREEMENT UPON SEPARATION OF EMPLOYMENT
This Agreement Upon Separation Of Employment ("Agreement") is made and
entered into by and between Robert S. Thomason, his successors, heirs,
administrators, executors, personal representatives and assigns ("Thomason")
and The Quaker Oats Company, its officers, directors, shareholders,
employees, agents, assigns, subsidiaries, divisions, parents, affiliates and
successors ("Quaker"), collectively "the parties." The Agreement shall
become effective seven (7) days after it is executed by Thomason.
1. Economic Consideration to Thomason
Upon becoming effective, this Agreement shall satisfy the Quaker
Officers Severance Program's (the "Program") prerequisites that in order to
qualify for Program benefits, an officer must execute a valid waiver and
release of all potential claims and must sign an agreement containing
several covenants, including a non-competition provision. In addition,
Thomason shall receive the following consideration, to which he would not be
entitled in the absence of this Agreement:
A. Thomason's active employment with Quaker is terminating on
December 15, 1998. After severance payments under the Program have expired,
and subject to the provisions in Paragraph 5, Quaker shall pay Thomason an
amount equal to one year of Program payments (i.e., final salary plus
average bonus). This sum shall be paid in equal semi-monthly installments
commencing as soon as payments to him under the Program expire, and
terminating on December 15, 2000. Payments under this paragraph 1(A) are
consideration for the covenants in paragraph 5, not for anything else.
B. As soon as Program benefits end and continuing through December
15, 2000, Quaker shall provide Thomason with the same insurance coverage as
is provided under the Program. This benefit is part of the consideration
for the Waiver and Release in paragraph 3, and the Miscellaneous Agreements
in paragraph 4.
2. Termination of Employment
Thomason understands and agrees that his active employment relationship
with Quaker, its parent companies, affiliates and successors, will be
permanently and irrevocably severed as of December 15, 1998. Thomason
agrees he shall not apply or otherwise seek reinstatement or reemployment by
Quaker at any time, and that Quaker has no obligation, contractual or
otherwise, to rehire, reemploy or recall him in the future. Thomason
further stipulates that this agreement is sufficient cause for Quaker to
deny any request for rescission, rehire, reemployment or recall.
Thomason agrees that prior to the effective date of his termination
from active employment, he will return all Quaker property, including but
not limited to keys, office pass, credit cards, computers, office equipment,
sales records and data. Thomason further agrees that within sixty (60) days
after his termination date, he will submit all outstanding expenses and
clear all advances and his personal advance account, if any.
3. Waiver & Release
A. Thomason waives, releases and discharges Quaker from any and all
claims and liabilities, demands, actions and causes of action, including
attorneys' fees and costs and participation in a class action lawsuit,
whether known or unknown, fixed or contingent, that he may have or claim to
have against Quaker as of the date this Agreement becomes effective.
Thomason further covenants not to file a lawsuit or participate in a class
action lawsuit to assert such claims. Without limitation, Thomason
specifically waives all claims for back pay, future pay or any other form of
compensation or income, except as provided below. This waiver includes but
is not limited to claims arising out of or in any way related to Thomason's
employment or termination of employment with Quaker, including age
discrimination claims under the Age Discrimination In Employment Act (as
amended), discrimination claims under Title VII of the Civil Rights Act of
1964 (as amended) or the Americans with Disabilities Act, claims for breach
of contract, and any other statutory or common law cause of action under
state, federal or local law.
However, Thomason does not waive, release, discharge or covenant not to
sue for enforcement of any rights or claims under this Agreement, nor ones
that arise out of conduct or omissions which occur entirely after the date
this Agreement becomes effective. In addition, he does not waive any rights
he may have as an employee on inactive status and/or as a former employee,
as the case may be, under any of Quaker's fringe benefit or incentive plans
(e.g., its pension plan, the Program, the Long Term Incentive Plan of 1990,
etc.), nor does he waive his right to payment for unused vacation, if any,
pursuant to Quaker's vacation policy. Notwithstanding anything to the
contrary in Paragraph 8 of this Agreement, such benefits shall continue to
be governed by the ERISA plans, contracts and/or Quaker policies that exist
independent of this Agreement.
B. Quaker waives, releases and discharges Thomason from any and all
claims and liabilities, demands, actions and causes of action, including
attorneys'fees and costs, that it may have or claim to have against Thomason
as of the date this Agreement becomes effective; provided, this waiver,
release and discharge only apply to claims as to which Quaker's senior
officers were aware, on or before the effective date of this Agreement, of
all material facts necessary to establish Thomason's liability; and further
provided, Quaker does not waive, release, discharge or covenant not to sue
for enforcement of any rights or claims that arise out of conduct or
omissions which occur entirely after the date this Agreement becomes
effective.
C. The parties stipulate that nothing contained in this Agreement
shall be construed as an admission by either of them of any liability,
wrongdoing or unlawful conduct. It is understood that both Quaker and
Thomason deny any liability, wrongdoing or unlawful conduct, and each is
providing consideration for this waiver and release in order to resolve any
potential disputes between them amicably and to avoid the expense of
potential litigation.
4. Miscellaneous agreements
The covenants and agreements set forth in this paragraph shall remain
in effect until December 15, 2001. Covenants 4(A) and 4(B) are material
parts of this Agreement, so a material breach of either of them by Thomason
would entitle Quaker, at its discretion, to rescind this Agreement, in
addition to any other legal or equitable remedies it might have for breach:
A. Thomason shall provide accurate information or testimony or both in
connection with any legal matter if so requested by Quaker. He shall make
himself available upon request to provide such information and/or testimony,
in a formal and/or an informal setting in accordance with Quaker's request,
subject to reasonable accommodation of his schedule and reimbursement of
reasonable expenses, including reasonable and necessary attorney fees (if
independent legal counsel is reasonably necessary).
B. Thomason shall cooperate with media requests for interviews
regarding his termination and/or Quaker, unless directed otherwise by Quaker
in a particular instance. He shall not disparage The Quaker Oats Company,its
products, or any of its directors, officers or employees in these interviews,
nor in any other private or public setting; provided, if Thomason is
compelled to provide testimony under oath, he shall testify truthfully
without regard to whether his testimony is favorable or unfavorable to
Quaker, and such testimony shall be protected against claims under this
Agreement by the same privilege that would apply to a defamation claim.
C. The Quaker Oats Company, and any officer or director acting on its
behalf, shall answer all reference inquiries directed to The Quaker Oats
Company regarding Thomason by stating only his positions held, compensation
and dates of employment. No additional information shall be provided unless
authorized in advance, in writing, by Thomason. Thomason agrees to direct
all requests for references from Quaker to the highest ranking Human
Resources officer within Quaker.
5. Prohibited Conduct
A. Thomason covenants and agrees that through the dates set forth
below, he shall not engage in any of the following activities anywhere in
the world:
i. Non-competition. Thomason shall not undertake any employment,
consulting position or ownership interest which involves his Participation
in the management of a business entity that markets, sells, distributes,
licenses or produces Covered Products, unless that business entity's sole
involvement with Covered Products is that it makes retail sales or consumes
Covered Products, without competing in any way against Quaker. This covenant
shall remain in effect until December 15, 2000.
a. "Participation" shall be construed broadly to include,
without limitation: (1) holding a position in which he directly manages such
a business entity; (2) holding a position in which anyone else who directly
manages such a business entity is in Thomason's reporting chain or chain-of-
command (regardless of the number of reporting levels between them); (3)
providing input, advice, guidance, or suggestions regarding the management
of such a business entity to anyone responsible therefor; (4) providing a
testimonial on behalf of such an operation or the product it produces; or
(5) doing anything else which falls within a common sense definition of the
term "participation," as used in the present context.
b. "Covered Products" means any product which falls into one
or more of the following categories, so long as Quaker is producing,
marketing, distributing, selling or licensing such product anywhere in the
world: sports beverages; thirst quenching beverages; hot cereals; ready-to-
eat cereals; pancake mixes; grain-based snacks; value-added rice products;
pancake syrup; value-added pasta products; dry pasta products; and items
Quaker produces for the food service market.
ii. Raiding Employees. Thomason shall not in any way, directly or
indirectly (including through someone else acting on Thomason's
recommendation, suggestion, identification or advice), facilitate or solicit
any existing Quaker employee to leave the employment of Quaker or to accept
any position with any other company or corporation. This covenant shall
remain in effect until December 15, 2001. For purposes of this provision,
the following definitions apply:
a. "Existing Quaker employee" means someone: (1) who
is employed by Quaker on or before the date when Thomason's employment
terminates; (2) who is still employed by Quaker as of the date when the
facilitating act or solicitation takes place; and (3) who holds a manager,
director or officer level position at Quaker (or an equivalent position
based on job duties and/or Hay points, regardless of the employee's title).
b. The Terms "solicit" and "facilitate" shall be given the
ordinary, common sense meaning appropriate in the present context.
iii. Non-disclosure. Thomason shall not use or disclose to anyone
any confidential information regarding Quaker. For purposes of this
provision, the term "confidential information" shall be construed as broadly
as Illinois law permits and shall include all non-public information
Thomason acquired by virtue of his positions with Quaker which might be of
any value to a competitor or which might cause any economic loss (directly
or via loss of an opportunity) or substantial embarrassment to Quaker or
its customers, distributors or suppliers if disclosed. Examples of such
confidential information include, without limitation,non-public information
about Quaker's customers, suppliers, distributors and potential acquisition
targets; its business operations and structure; its product lines, formulas
and pricing; its processes, machines and inventions; its research and
know-how; its financial data; and its plans and strategies. This covenant
shall remain in effect until December 15, 2001.
B. In the event of a breach, threatened breach, or situation that
creates an inevitable breach of any term of this paragraph by Thomason,
Quaker shall be entitled to an injunction compelling specific performance,
restraining any future violations and/or requiring affirmative acts to undo
or minimize the harm to Quaker,in addition to damages for any actual breach
that occurs.The parties stipulate and represent that breach of any provision
of this paragraph would cause irreparable injury to Quaker, for which there
would be no adequate remedy at law, due among other reasons to the
inherent difficulty of determining the precise causation for loss of
customers, confidential information and/or employees and of determining the
amount and ongoing effects of such losses.
C. In the event Thomason breaches any term of this Paragraph 5,Quaker
shall have the option of seeking injunctive relief or canceling the
remaining payments due under paragraph 1(A) of this Agreement. Quaker's
right to terminate Program benefits is spelled out in the Program, and is
not affected by this provision.
D. In the event Quaker elects to pursue injunctive relief, then the
following rules shall apply:
i. While litigation over the requested injunction is pending,
Quaker may, in its discretion, withhold payments otherwise due to Thomason
under paragraph 1(A); provided, Quaker's right to terminate or suspend
Program benefits,which are separate from the benefits described in paragraph
1(A), is spelled out in the Program and is not affected by this provision.
ii. If, at the conclusion of the litigation, Quaker successfully
obtains full injunctive enforcement of all provisions in this paragraph 5
that it attempts to enforce, then Quaker shall pay Thomason all amounts
otherwise due under paragraph 1(A) that were withheld and shall resume
making all payments required under paragraph 1(A), and shall likewise pay
all Program payments that were withheld.
iii. If, at the conclusion of the litigation, Quaker obtains some,
but not all, of the injunctive relief it seeks under this paragraph, then
Quaker shall make an election. It may either accept the injunction and
proceed as specified in subparagraph (ii) above, or it may elect to
voluntarily vacate and/or not enforce the injunction, in which event it
shall have no obligation to resume paying Thomason under paragraph 1(A), nor
to pay withheld amounts.
iv. If a court entirely declines to enforce paragraph 5 of this
Agreement or holds it invalid or void, then Quaker shall have no further
obligation to pay Thomason under paragraph 1(A), including sums withheld
while litigation was pending.
v. If a court holds that the provisions of paragraph 5 are
enforceable, but further finds that Thomason did not breach any of them,then
Quaker shall pay all amounts otherwise due under paragraph 1(A) that were
withheld,and shall resume making all payments required under paragraph 1(A).
vi. Thomason shall have no claim for damages based on any delay
in the payments due under Paragraph 1(A) that results from a suspension of
payments or withholding in accordance with the preceding provisions;
PROVIDED, if payment of withheld amounts subsequently is required, then
along with such payment Quaker shall pay Thomason interest at an annualized
rate of 6.0%.
vii. For purposes of this paragraph,litigation shall not be deemed
to have concluded, and no payment shall be due, until all potential appeals
by all parties are waived or exhausted.
E. Recitals: Thomason stipulates and represents that the following
facts are true, and further understands and agrees that they are material
representations upon which Quaker is relying in entering into this
Agreement:
i. Thomason has been Senior Vice President - Finance and Chief
Financial Officer for several years, and in that capacity has been a member
of Quaker's Senior Leadership Team and Operating Committee. In these
positions, he participated in forming and/or was informed about the details
of operational plans and strategic long range plans for all of Quaker's
businesses. Without limitation, he has detailed knowledge financial plans
and data, business plans, new product development, pricing structure,
marketing plans, sales plans, distribution plans, and supply chain plans for
all of Quaker's products. This is: (1) information Thomason gained by virtue
of his employment at Quaker; (2) highly confidential and secret information
from which Quaker derives economic value, actual or potential, from its not
being generally known to other persons outside Quaker who might obtain
economic value from its disclosure or use;(3)information known within Quaker
only to key employees and those who need to know it to perform their jobs;
(4) information regarding which Quaker has taken reasonable measures to
preserve its confidentiality; (5) information that could not easily be
duplicated by others, and which Quaker required considerable time and effort
to develop; and (6)information which is likely to remain valuable and secret
for at least three years.
ii. By virtue of his employment at Quaker, Thomason has developed
personal and business relationships with existing Quaker employees, which he
otherwise would not have had. By virtue of his position as Quaker's most
senior financial officer,he also has acquired detailed knowledge as to which
existing Quaker employees are critical to Quaker's success and future plans,
and which ones have skills or contacts that would be valuable to a
competitor.
6. Advance Determination of Permitted/Prohibited Conduct
Thomason may request an advance written determination from Quaker's
Chief Executive Officer as to whether taking a proposed action or job would,
in Quaker's opinion, constitute a breach of this Agreement. In that event,
and provided that Thomason discloses in writing all material facts about the
proposed action or job, Quaker shall make a reasonable effort to respond to
Thomason's request for an advance written determination within ten (10)
business days after receiving it; PROVIDED, that if circumstances materially
change after the advance determination is made (e.g., if the duties of a job
change after Thomason accepts it), the determination may be reconsidered and
revised or reversed upon thirty days advance written notice to Thomason.
Quaker shall treat as confidential any non-public information Thomason
communicates as part of a request for an advance determination.
7.
Choice Of Law And Forum; Attorney Fees
A. This Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois, without giving effect of
choice of law principles.
B. In the event of any litigation over this Agreement or an alleged
breach thereof, Thomason consents to submit to the personal jurisdiction of
any court, state or federal, in the State of Illinois. The parties agree
that the Illinois courts, state or federal, shall be the exclusive
jurisdiction for any litigation over this Agreement or an alleged breach
thereof.
C. In the event of litigation between Thomason and Quaker regarding
any provision of this Agreement, the party which prevails in such contest
shall be entitled to receive from the other party, in addition to any
damages, injunction, or other relief awarded by a court,reimbursement of all
litigation costs and expenses, including reasonable attorney fees, which the
prevailing party reasonably incurred as a result of such litigation, plus
interest at the applicable federal rate provided for in 7872(f)(2)(A) of the
Internal Revenue Code of 1986, as amended. If,in a particular contest, each
party prevails on one or more issues, the court shall exercise its
equitable judgment to determine which, if either, should be considered the
prevailing party and the percentage of that party's expenses which should be
reimbursed, taking into account inter alia the significance of the issue(s)
on which each party prevailed and the reasonableness of each party's
position(s).
8. Full Agreement
This written document contains the entire understanding and agreement
of the parties on the subject matter set forth herein, and supercedes any
prior agreement relating to these matters. No promises or inducements have
been made other than those reflected herein, and no party is relying on any
statement or representation by any person except those set forth herein,
including without limitation oral or written summaries of this Agreement.
This Agreement cannot be modified or altered except by a subsequent
written agreement signed by the parties, and only Quaker's highest ranking
Human Resources officer or his direct superior shall have authority to sign
such an amendment on behalf of Quaker.
Without limitation, nothing in this document shall eliminate or reduce
Thomason's obligation to comply with the Quaker Oats Code of Ethics, to the
extent that certain provisions in the Code (such as non-disclosure rules)
remain applicable to employees after termination. Likewise, nothing in this
document shall eliminate or reduce Quaker's obligation to indemnify Thomason
in certain situations, pursuant to Quaker's by-laws or applicable law.
9. 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 illegal, unlawful or unenforceable, the
remaining terms and provisions shall not be affected thereby and shall
remain in full force and effect, except as expressly provided below.
Unless Quaker consents, the provisions in paragraph 5 of this Agreement
are not severable from each other or from Paragraph 1(A). If any provision
or aspect of paragraph 5 is held invalid, illegal, unlawful or unenforceable
in litigation between Thomason and Quaker, then there is no consideration
for payments under paragraph 1(A); PROVIDED, if any provision in paragraph 5
is invalid or broader than the law allows, a court is authorized to award
the broadest injunctive relief permitted by law, and Quaker shall thereafter
make its election pursuant to paragraph 5(D)(iii) - if Quaker elects to
accept the limited injunctive relief, then it shall consent to sever the
invalid provision(s). Quaker's consent to sever one or more provisions in
paragraph 5 may be given at any time: before, during, or after litigation,
in Quaker's sole discretion.
The Quaker Oats Company
/s/ Pamela S. Hewitt
By one of its officers
Thomason has been advised in writing, via this notice, to consult with an
attorney before signing this Agreement. He acknowledges that he originally
received it on November 19, 1998; subsequently, after Thomason consulted
with his attorney, several revisions were made at his request, and he was
given a revised draft containing those changes. Thomason understands that
he has twenty one (21) days from November 19, 1998 to consider and decide
whether to sign the Agreement, and that he may revoke the Agreement within
seven (7) days after signing it. Thomason further understands that he has
the right to request a different waiver, release and separation agreement,
which contains shorter non-compete, anti-raiding and non-disclosure periods.
Execution of such a document would satisfy the Program's prerequisites and
entitle him to Program benefits, but would not entitle him to the additional
benefits provided under this Agreement, nor entail the additional
obligations. Thomason affirms that he has carefully read and fully
understands all provisions of this Agreement, that the consideration he is
receiving is fair and adequate, and that he has not been threatened or
coerced into signing it.
November 25, 1998 /s/ Robert S. Thomason
Robert S. Thomason
EXHIBIT 12
STATEMENTS RE COMPUTATION OF RATIOS
THE QUAKER OATS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(Dollars in Millions) Year Ended
Dec. 31, 1998 Dec. 31, 1997
<S> <C> <C>
Earnings:
Income (Loss) Before Income Taxes $ 396.6 $(1,064.3)
Add Fixed Charges - net of capitalized interest 82.4 97.0
Earnings $ 479.0 $ (967.3)
Fixed Charges:
Interest on Indebtedness $ 72.0 $ 88.3
Portion of rents representative of the interest factor 12.8 12.7
Fixed Charges $ 84.8 $ 101.0
Ratio of Earnings to Fixed Charges (a) 5.65 (9.58)
</TABLE>
(a) For purposes of computing the ratio of earnings to fixed charges, earnings
represent pretax income (loss) 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
The following discussion addresses the operating results and financial
condition of the Company for the years ended December 31, 1998 (current year)
and 1997 (prior year). In these years, the Company divested several
businesses, including Snapple beverages, five food service businesses and a
soup-cup business. As a result of these divestitures, the year-to-year
financial comparisons do not easily provide the reader with an understanding of
the operating results of ongoing businesses. To assist in the understanding of
operating results, this discussion will address the total Company results as
reported, describe the impact of divested businesses and review the results of
ongoing businesses by operating segment. Previously reported amounts have been
restated to conform to the current presentation.
The discussion of business results by operating segment has been modified to
reflect the Company's December 1998 adoption of Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement requires that operating
segments are reported consistent with how management assesses segment
performance. As a result, the Company will separately report information on
the following seven operating segments: U.S. and Canadian Foods; Latin American
Foods; Other Foods; U.S. and Canadian Beverages; Latin American Beverages;
Other Beverages; and Total Divested Businesses. U.S. and Canadian Foods
includes hot and ready-to-eat cereals, mixes, syrups, snacks and flavored rice
and pasta. Other Foods and Other Beverages include businesses in the European
and Asia/Pacific regions. In determining the operating income or loss of each
segment, restructuring charges, asset impairment losses and certain other
expenses such as income taxes, general corporate expenses and financing costs,
are not allocated to operating segments. Comparative segment data is presented
in tabular form on page 38.
1998 Compared with 1997
Consolidated net sales decreased 3 percent because of the absence of divested
businesses. For ongoing businesses, volume and net sales were up 10 percent
and 4 percent, respectively, primarily driven by the U.S. and Canadian and
Latin American Beverages segments. Weaker exchange rates affected sales,
particularly in the Canadian, Latin American and Asia/Pacific businesses.
Price changes did not significantly affect the comparison of current and prior
year net sales.
The consolidated gross profit margin was 51.0 percent in 1998 compared to 48.9
percent in 1997, reflecting improvements across all ongoing segments and the
divestiture of lower-margin businesses in 1998.
Selling, general and administrative (SG&A) expenses decreased $66.4 million due
to the absence of divested businesses. For ongoing businesses, SG&A increased
$57.3 million, or 3 percent, driven by a 6 percent increase in advertising and
merchandising (A&M) expenses, partly offset by lower general corporate
expenses. Total Company A&M expenses were 25.6 percent of sales, up from 24.5
percent in the prior year, reflecting increased spending levels to support new
snacks growth and competitive pressures in ready-to-eat cereals in the U.S. and
Canadian Foods segment.
During 1998, the Company initiated numerous actions to improve future
profitability. These actions resulted in $89.7 million in restructuring
charges and are divided into three categories: organization alignment, plant
consolidations and Asian reorganization. Charges for organization alignment
activities totaled $41.5 million. The Company aligned its foods and beverages
businesses, combining sales, supply chain and certain administrative functions
to realize synergies and maximize scale. These actions resulted in the
elimination of approximately 550 positions worldwide, as a layer of executive
management was removed and sales and administrative offices and functions were
consolidated. Plant consolidations in the United States and Latin America
resulted in $19.2 million in charges. These actions will result in the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its
operational strategy for the Asia/Pacific region. The focus going forward is
on building the Gatorade business in China. Asia/Pacific restructuring
resulted in $29.0 million in charges for plant and sales and administrative
office closures, restructuring of certain joint ventures and the elimination of
approximately 450 positions.
The 1998 restructuring charges are composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs.
Savings from these actions are estimated to be $65 million annually, primarily
beginning in 1999, with approximately 90 percent of the savings in cash. 1998
and 1997 restructuring charges by operating segment were as follows:
Dollars in Millions 1998 1997
U.S. and Canadian Foods $ 38.4 $ 49.2
Latin American Foods 9.3 10.7
Other Foods 17.8 --
U.S. and Canadian Beverages 8.9 4.9
Latin American Beverages 2.8 --
Other Beverages 12.5 1.1
Total Charges $ 89.7 $ 65.9
<25>
In 1998,the Company recognized $38.1 million of asset impairment losses related
to ongoing businesses. In conjunction with the Company's ongoing review of
underperforming businesses, certain assets are reviewed for impairment pursuant
to the provisions of SFAS No. 121. During 1998, the China foods and Brazilian
pasta businesses were determined to be impaired. Accordingly, pretax losses of
$15.1 million and $23.0 million on these impaired Chinese and Brazilian
businesses, respectively, were recorded in order to adjust the carrying value
of the long-lived assets of these businesses to fair value. The estimated fair
value of these assets was based on various methodologies, including a
discounted value of estimated future cash flows and liquidation analyses. The
Company continues to review its business strategies and pursue cost-reduction
activities, some of which could result in future charges.
Charges for asset impairment losses related to divested businesses were also
recorded in 1998. The Company divested the following U.S. food businesses in
1998 for a total of $192.7 million and realized a combined pretax loss of $0.7
million, including related impairment losses:
(Gains) Total
Divestiture Impairment Losses (Gains)
Dollars in Millions Date Losses on Sale Losses
Ardmore Farms juice August 1998 $ -- $ (2.5) $ (2.5)
Continental Coffee September 1998 40.0 (5.1) 34.9
Nile Spice soup cup December 1998 25.4 3.1 28.5
Liqui-Dri biscuit December 1998 -- (60.2) (60.2)
Total Losses (Gains) $ 65.4 $(64.7) $ 0.7
Net financing costs (net interest expense and foreign exchange losses)
decreased $19.4 million in 1998, due to lower interest expense and higher
interest income as a result of lower debt levels and higher cash balances.
Debt levels declined by $125.4 million and cash balances increased by $242.4
million from December 31, 1997, due mainly to proceeds from divestitures, a
$240.0 million tax recovery related to the 1997 divestiture of the Snapple
beverages business and cash flow from operations.
Excluding the impact of restructuring and impairment charges and losses and
gains on divestitures, the effective tax rate was 36.3 percent in 1998 versus
38.1 percent in 1997. The decrease primarily was due to lower non-deductible
goodwill amortization as a result of business divestitures and a reduction in
effective state tax rates in 1998.
Operating Segment Results
Foods
U.S. and Canadian Foods - Volume and net sales decreased 1 percent as increases
in ready-to-eat cereals, granola bars and new snacks sales were offset by
declines in hot cereals and rice cakes. The sales decline in hot cereals was
driven by unusually mild winter weather and a change in merchandising strategy.
Competitive pressure in the snacks category continued to adversely affect rice
cakes sales, although profitability improved due to lower A&M expenses and
supply chain efficiencies. In addition, sales in Canada were adversely
affected by a weaker exchange rate. The sales increase in new snacks reflects
the introduction of a new snacks product, Quaker Fruit & Oatmeal bars.
Operating income decreased 5 percent from the prior year due to the sales
decline and increased A&M spending, reflecting support of new snacks growth and
competitive pressures in ready-to-eat cereals.
Latin American Foods - Volume was up 4 percent and net sales were down
slightly, reflecting sales increases in Brazilian canned fish and ready-to-
drink beverages, partly offset by a weaker exchange rate. Operating income
increased 19 percent, or $4.0 million, reflecting lower supply chain and
overhead costs, largely the result of restructuring actions. The recent
currency devaluation and anticipated slowdown in the Brazilian economy are
expected to negatively affect the Company's near-term financial results, while
the volatility in the Brazilian economy makes the long-term outlook uncertain.
Other Foods - Volume and net sales were down 7 percent and 1 percent,
respectively, primarily due to declines in Asia/Pacific Foods, particularly in
China. Operating losses decreased $8.7 million, reflecting improved
profitability in the European cereals business while losses continued in the
Asia/Pacific region. As a result of the restructuring actions, the Company
expects a reduced level of operating losses from its food business in the
Asia/Pacific region going forward. While restructuring actions have lowered
the Company's currency and economic exposure in the Asia/Pacific region, the
long-term outlook for the region remains uncertain.
Beverages
U.S. and Canadian Beverages - Volume and net sales increased 17 percent and 13
percent, respectively. New packaging and flavors and strong growth outside the
traditional retail market, along with more favorable weather versus the prior
year, contributed to the volume and sales increase, resulting in market share
gains. Strong sales growth and supply chain efficiencies drove an 18 percent
increase in operating income.
<26>
Latin American Beverages - Volume and net sales increased 22 percent and 15
percent, respectively, reflecting improved cold-channel distribution and the
successful new product launch of Gatorade X-plosive. Operating income
increased $6.3 million, driven by strong volumes and lower supply chain costs.
The recent currency devaluation and anticipated slowdown in the Brazilian
economy are expected to negatively affect the Company's near-term financial
results, while the volatility in the Brazilian economy makes the long-term
outlook uncertain.
Other Beverages - Volume was up 5 percent on nearly flat sales. Warmer weather
contributed to a sales gain in Europe, while lower volumes, particularly in
China, and weaker exchange rates led to lower sales in the Asia/Pacific region.
An operating income increase in Europe was more than offset by continued losses
in the Asia/Pacific region.
Divested
1998 operating results from divested businesses reflect the operating results
for the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri businesses
through their divestiture dates, compared to a full year of operating results
in 1997. For operating results from divested businesses see page 38.
1997 Compared with 1996
Consolidated net sales decreased 4 percent due to the absence of divested
businesses. For ongoing businesses, sales were up 7 percent driven by
increases in Gatorade thirst quencher in all beverages operating segments,
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 1997 and 1996 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.
SG&A expenses decreased $42.1 million, primarily due to the absence of divested
businesses. For ongoing businesses, SG&A increased $185.7 million, or 12
percent, driven by a 14 percent increase in A&M expenses. Total Company A&M
expenses were 24.5 percent of sales, up from 23.1 percent in 1996, driven, in
part, by increased media support for Gatorade Frost and spending for new
snacks.
In 1997, the Company initiated several restructuring actions resulting in
charges of $65.9 million. Three foods plants were closed, two in the U.S. and
one in Latin America. Combined with other manufacturing consolidation
activities in the U.S. and Canadian businesses, restructuring charges totaled
$58.1 million. Other actions taken included an office closure in the
Asia/Pacific region and staff reductions in the U.S. and Canadian businesses,
resulting in charges of $1.1 million and $6.7 million, respectively. In 1996,
the Company recorded restructuring charges of $23.0 million including $16.6
million related to the divested Snapple beverages business and $6.4 million for
plant consolidations in the U.S. and Canadian Foods businesses.
Savings realized from the 1997 and 1996 restructuring actions have been in line
with expectations. However, there are no recurring savings to be realized from
restructuring activities related to the divested Snapple beverages business.
Restructuring charges for 1997 and 1996 by operating segment were as follows:
Dollars in Millions 1997 1996
U.S. and Canadian Foods $ 49.2 $ 6.4
Latin American Foods 10.7 --
U.S. and Canadian Beverages 4.9 --
Other Beverages l.1 --
Divested Businesses -- 16.6
Total Charges $ 65.9 $ 23.0
The Company also took numerous actions in 1997 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
performed. As a part of this review, the Company evaluated the recoverability
of the long-lived assets of this business pursuant to SFAS No. 121 and recorded
a non-cash charge of $39.8 million to reduce the carrying value of the net
assets of the 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. Separately, the Company received a $35.0 million cash
litigation settlement related to this business. The combined charge of $4.8
million was not included in the operating segment results of Latin American
Foods.
<27>
Consolidated 1997 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 recognized a tax benefit and recorded an income tax
receivable of $250.0 million related to the expected recovery of taxes paid on
previous capital gains from 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. Consolidated 1996
operating results included $136.4 million in gains on divestitures. See Note 3
to the consolidated financial statements for further discussion of the
Company's divestiture activities.
Net financing costs (net interest expense and foreign exchange losses)
decreased $18.4 million in 1997. Debt levels declined by over $500 million
from December 31, 1996, due mainly to proceeds from the Snapple beverages
divestiture and cash flow from operations, resulting in lower interest expense.
Excluding the impact of restructuring charges and losses and gains on
divestitures 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 primarily was due to lower non-deductible
goodwill amortization in 1997, resulting from the Snapple beverages
divestiture.
Operating Segment Results
Foods
U.S. and Canadian Foods - Volume and net sales increased 6 percent and 5
percent, respectively. Sales increased in ready-to-eat and hot cereals,
flavored rice and pasta, mixes, syrup and new snacks. An 11 percent increase
in ready-to-eat cereals sales was driven by volume growth in bagged and boxed
cereals. These sales increases more than offset lower sales in rice cakes, as
well as the adverse effect of the June 1996 ready-to-eat cereals price
reduction. Competitive pressure in the 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. Operating income increased 4 percent from 1996, as the favorable effect
of the sales gains 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.
Latin American Foods - Volume and net sales were up 4 percent and 8 percent,
respectively, driven by increases in Brazilian chocolate powder and ready-to-
drink beverages. Operating income increased $7.3 million, reflecting strong
sales growth and improved supply chain costs driven by the Brazilian pasta
plant consolidation, partly offset by increased A&M spending.
Other Foods - Volume and net sales decreased 2 percent and 1 percent,
respectively. Improved profitability in the European cereals business was more
than offset by continued losses in the Asia/Pacific business, resulting in a
$2.4 million increase in operating losses.
Beverages
U.S. and Canadian Beverages - Volume and net sales increased 9 percent and 8
percent, respectively, reflecting incremental sales from a new product,
Gatorade Frost, and strong execution of retail in-store initiatives, resulting
in market share gains. Operating income increased 4 percent as sales growth
and lower packaging costs were partly offset by a 15 percent increase in A&M
expenses and the allocation of overhead costs previously allocated to the
Snapple beverages business. Higher A&M expenses were driven, in part, by media
spending for Gatorade Frost.
Latin American Beverages - Volume and net sales increased 24 percent reflecting
gains across all regions. As a result of the sales gains and lower supply
chain costs, operating profitability increased by $13.4 million.
Other Beverages - Volume decreased 3 percent, while net sales increased 8
percent reflecting a change in product mix. Operating losses were reduced by
$11.5 million due to improved profitability in Europe and less underwriting in
the Asia/Pacific business.
Divested
1997 operating results from divested businesses include: the Snapple beverages
business through its May divestiture; the operating results of the food service
businesses divested in December 1997; and the full-year operating results of
businesses divested in 1998. For operating results from divested businesses see
page 38.
<28>
Liquidity and Capital Resources
Net cash provided by operating activities was $513.5 million in 1998, an
increase of $23.5 million compared to 1997, reflecting improvements in
operating segment profitability. Net cash provided by operating activities in
1997 and 1996 was $490.0 million and $410.4 million, respectively. Operating
cash flow in 1997 was favorably affected by a $35.0 million non-recurring cash
litigation settlement and improved profitability of ongoing businesses compared
to 1996.
Capital expenditures were $204.7 million, $215.7 million and $242.7 million for
1998, 1997 and 1996, respectively. Capital expenditures are expected to
continue in the low $200 million range in 1999, as the Company plans to
continue to invest in cost-reduction projects and expand its production
capacity in the United States and Canada. The Company expects capital
expenditures and cash dividends to be financed through cash flow from operating
activities.
Cash proceeds from business divestitures in 1998, 1997 and 1996 were $265.9
million, $300.0 million and $174.4 million, respectively. Over the last three
years, cash proceeds from business divestitures were primarily used to reduce
short-term debt and repurchase shares of the Company's outstanding common
stock. Cash proceeds of $73.2 million from the 1997 sale of certain food
service businesses and $240.0 million from the recovery of Federal income taxes
paid on previous capital gains related to the 1997 divestiture of the Snapple
beverages business were received in 1998.
Financing activities used cash of $556.6 million, $593.4 million and $331.3
million in 1998, 1997 and 1996, respectively, primarily reflecting the use of
business divestiture proceeds to reduce short-term debt in all three years and
to repurchase shares in 1997 and 1998. Short-term and long-term debt (total
debt) as of December 31, 1998, was $931.6 million, a decrease of $125.4 million
from December 31, 1997. Total debt at December 31, 1996, was $1.56 billion.
The total debt-to-total-capitalization ratio was 84.4 percent, 81.0 percent and
55.6 percent as of December 31, 1998, 1997 and 1996, respectively. The loss on
the Snapple beverages divestiture and share repurchase activity in 1998 and
1997 were the main reasons for the ratio changes.
In 1998, the Company reduced the level of its revolving credit facilities by a
total of $175.0 million. The Company now has a $335.0 million annually
extendible five-year revolving credit facility and a $165.0 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.
Amounts available under credit facilities obtained by the Company have
decreased significantly over the last three years as commercial paper
borrowings supported by the revolving credit facilities were reduced. Credit
facilities are also available for direct borrowings. The Company's levels of
revolving credit facilities at December 31, 1997 and 1996, were $675.0 million
and $900.0 million, respectively.
In April 1998, the Fitch Rating Agency upgraded the Company's long-term debt
rating from BBB to BBB+. The improved debt rating reflects the significant
reduction in debt levels compared to the prior year. Other debt and commercial
paper ratings were unchanged. 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 (Baal and P2).
During 1998, the Company repurchased 6.9 million shares of its outstanding
common stock for $386.7 million, completing its 10 million share repurchase
program announced in August 1993 and initiating the $1 billion repurchase
program announced in March 1998. As of December 31, 1998, the Company
repurchased approximately $265 million under the $1 billion share repurchase
program.
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
are summarized on page 30. Actual changes in market prices or rates may differ
from hypothetical changes.
<29>
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 and wheat. The commodity instruments sensitivity analysis excludes
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 on
an average, high and low basis was $4.0 million, $6.7 million and $1.2 million
during 1998 and $2.9 million, $4.2 million and $1.4 million during 1997,
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 market risk exposure to
foreign currency exchange rates exists primarily with the following currencies
versus the U.S. dollar: Italian lira, Brazilian real, Chinese renmimbi and
Canadian dollar. 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 on an
average, high and low basis was $2.1 million, $2.9 million and $0.9 million
during 1998 and $5.9 million, $8.9 million and $2.5 million during 1997,
respectively.
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, 1998. Based on the results of the sensitivity analysis, the
estimated market risk exposure for interest rate-related financial instruments
was approximately $42 million and $44 million as of December 31, 1998 and 1997,
respectively.
Current and Pending Accounting Changes and Other Matters
In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This Statement established standards
for reporting comprehensive income in the financial statements. The Company
adopted this standard in January 1998 and has elected to disclose comprehensive
income, which for the Company includes net income, foreign currency translation
adjustments and unrealized gains on investments, in the consolidated statements
of common shareholders' equity. As previously discussed, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," in December 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement revises employers'
disclosures about pensions and other postretirement benefit plans. It does not
change the measurement or recognition of those plans in the financial
statements. The Company's adoption of this new standard in December 1998 did
not result in material changes to previously reported amounts.
In January 1998, Statement of Position (SOP) No. 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 No. 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 these standards are not expected to materially affect the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including
certain derivative instruments imbedded in other contracts) be recorded in the
balance sheet as either an asset or a liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The accounting provisions for qualifying hedges allow a derivative's
gains and losses to offset related results of the hedged item in the income
statement, and require that the Company must formally document, designate and
assess the effectiveness of transactions that qualify for hedge accounting.
The Company has not determined its method or timing of adopting this Statement,
but will be required to adopt it by January 2000. When adopted, this Statement
could increase volatility in reported earnings and other comprehensive income
of the Company.
<30>
The Company's Mexican operations were treated as a highly inflationary economy
through December 31, 1998. Thereafter, the Company will treat Mexico as non-
highly inflationary and accordingly, change the functional currency from the
U.S. dollar to the Mexican peso. The impact of this change is not expected to
have a material effect on the Company's financial statements.
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. The three
areas where year 2000 issues may affect the Company include: (1) the computer
systems, both hardware and software; (2) imbedded systems, such as computer
chips in machinery and process controls; and (3) third parties with material
relationships with the Company, such as vendors, customers and suppliers.
To address the year 2000 issue, the Company has developed and is executing a
detailed comprehensive readiness plan. The first phase of the readiness plan,
the assessment of the Company's internal systems, has been completed. The
second phase involves the remediation, replacement and testing of computer
systems (90 percent complete) and imbedded systems (85 percent complete) and is
scheduled for completion by mid-l999. The third phase will continue through
mid-l999 and includes the Company taking steps to assess the year 2000 plans of
its material third parties. These steps include contacting the Company's major
service providers, vendors, suppliers and customers who are believed to be
critical to the business operations after January 1, 2000, to determine their
stage of year 2000 compliance through questionnaires, interviews, on-site
visits, testing and other available means. The fourth phase involves the
development of contingency plans in the event of year 2000 non-compliance and
is also expected to be completed by mid-1999.
While the Company's year 2000 readiness plans are under way, the consequences
of non-compliance by the Company, its major service providers, vendors,
suppliers or customers, could have a material adverse effect on the Company's
operations. Although the Company does not anticipate any major non-compliance
issues, it currently believes that the greatest risk of disruption in its
business exists in the event of non-compliance by its material third parties.
Some of the possible consequences of non-compliance by the Company or its
material third parties include, among other things: temporary plant closings;
delays in the delivery and receipt of products and supplies; invoice and
collection errors; and inventory obsolescence. Given these risks, the Company
is developing contingency plans intended to mitigate the possible disruption in
business operations that may result from year 2000 non-compliance. Contingency
plans may include stockpiling raw and packaging materials, increasing finished
goods inventory levels, securing alternate suppliers or other appropriate
measures. It is currently estimated that the aggregate cost of the Company's
year 2000 efforts will be approximately $ 12 million to $15 million, of which
approximately $9 million has been incurred to date. All of these costs are
being funded through operating cash flow. These amounts do not include any
costs associated with the implementation of contingency plans, which are in the
process of being developed.
The Company's year 2000 readiness plan is an ongoing process and the estimates
of costs and completion dates for various components of the program as
described above are subject to change.
Subsequent Event
In February 1999, the Company announced it had reached a definitive agreement
to sell its Brazilian pasta business. 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
Exchange Act of 1934, are made throughout this Management's Discussion and
Analysis. Statements that are not historical facts, including statements about
expectations or projected results, are forward-looking statements. The
Company's results may differ materially from those in the forward-looking
statements. Forward-looking statements are based on management's current views
and assumptions, and involve risks and uncertainties that could significantly
affect expected results. For example, operating results may be affected by
factors such as: actions of competitors; changes in laws and regulations,
including changes in governmental interpretations of regulations and changes in
accounting standards; customer demand; effectiveness of spending or programs;
fluctuations in the cost and availability of supply chain resources; foreign
economic conditions, including currency rate fluctuations; weather; and the
ability of the Company, its major service providers, vendors, suppliers and
customers, to adequately address the year 2000 issue. Forward-looking
statements speak only as of the date they were made, and the Company undertakes
no obligation to publicly update them.
<31>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Consolidated Year Ended December 31 1998 1997 1996
Statements of Income
<S> <C> <C> <C>
Net Sales $ 4,842.5 $ 5,015.7 $ 5,199.0
Cost of goods sold 2,374.4 2,564.9 2,807.5
Gross profit 2,468.1 2,450.8 2,391.5
Selling, general and administrative expenses 1,872.5 1,938.9 1,981.0
Restructuring charges, asset impairments and
losses (gains) on divestitures - net 128.5 1,486.3 (113.4)
Interest expense 69.6 85.8 106.8
Interest income (10.7) (6.7) (7.4)
Foreign exchange loss - net 11.6 10.8 8.9
Income (Loss) Before Income Taxes 396.6 (1,064.3) 415.6
Provision (benefit) for income taxes 112.1 (133.4) 167.7
Net Income (Loss) 284.5 (930.9) 247.9
Preferred dividends - net of tax 4.5 3.5 3.7
Net Income (Loss) Available for Common $ 280.0 $ (934.4) $ 244.2
Per Common Share:
Net income (loss) $ 2.04 $ (6.80) $ 1.80
Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78
Dividends declared $ 1.14 $ 1.14 $ 1.14
Average Number of Common Shares Outstanding (in thousands) 137,185 137,460 135,466
See accompanying notes to the consolidated financial statements.
<32>
<CAPTION>
Dollars in Millions
Consolidated Year Ended December 31 1998 1997 1996
Statements of Cash Flows
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 284.5 $ (930.9) $ 247.9
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 132.5 161.4 200.6
Deferred income taxes (31.1) (12.0) 14.3
(Gains) losses on divestitures - net of tax of $(27.4), $(269.0) and
$54.6 in 1998,1997 and 1996, respectively (26.7) 1,151.4 (81.8)
Restructuring charges 89.7 65.9 23.0
Asset impairment losses 38.1 39.8 --
Loss on disposition of property and equipment 11.9 41.6 29.0
Decrease (increase) in trade accounts receivable 5.6 (61.0) 62.6
(Increase) decrease in inventories (32.8) (24.5) 19.6
(Increase) decrease in other current assets (15.1) (11.6) 65.1
Decrease in trade accounts payable (20.0) (3.2) (53.7)
Increase (decrease) in other current liabilities 21.3 9.8 (164.2)
Change in deferred compensation 32.2 20.1 21.5
Other items 23.4 43.2 26.5
Net Cash Provided by Operating Activities 513.5 490.0 410.4
Cash Flows from Investing Activities:
Capital gains tax recovery 240.0 -- --
Additions to property, plant and equipment (204.7) (215.7) (242.7)
Business divestitures - net of tax of $54.6 in 1996 265.9 300.0 174.4
Purchase of marketable securities (165.5) -- --
Proceeds from sale of marketable securities 143.1 -- --
Proceeds from sale of property, plant and equipment 7.7 -- --
Change in other assets -- -- 0.2
Net Cash Provided by (Used in) Investing Activities 286.5 84.3 (68.1)
Cash Flows from Financing Activities:
Cash dividends (159.7) (159.4) (157.0)
Change in short-term debt (17.2) (452.9) (124.5)
Proceeds from long-term debt 1.9 8.3 2.4
Reduction of long-term debt (108.7) (54.4) (77.7)
Issuance of common treasury stock 112.0 121.2 31.0
Repurchases of common stock (377.3) (50.0) --
Repurchases of preferred stock (7.6) (6.2) (5.5)
Net Cash Used in Financing Activities (556.6) (593.4) (331.3)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.0) (7.2) 6.3
Net Increase (Decrease) in Cash and Cash Equivalents 242.4 (26.3) 17.3
Cash and Cash Equivalents - Beginning of Period 84.2 110.5 93.2
Cash and Cash Equivalents - End of Period $ 326.6 $ 84.2 $ 110.5
See accompanying notes to the consolidated financial statements.
<33>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<CAPTION>
Consolidated December 31 1998 1997
Balance Sheets
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 326.6 $ 84.2
Marketable securities 27.5 --
Trade accounts receivable - net of allowances 283.4 305.7
Inventories
Finished goods 189.1 172.6
Grains and raw materials 48.4 59.0
Packaging materials and supplies 23.9 24.5
Total inventories 261.4 256.1
Other current assets 216.1 487.0
Total Current Assets 1,115.0 1,133.0
Property, Plant and Equipment
Land 24.1 29.1
Buildings and improvements 390.2 417.2
Machinery and equipment 1,404.5 1,466.8
Property, plant and equipment 1,818.8 1,913.1
Less: accumulated depreciation 748.6 748.4
Property - Net 1,070.2 1,164.7
Intangible Assets - Net of Amortization 245.7 350.5
Other Assets 79.4 48.8
Total Assets $ 2,510.3 $ 2,697.0
See accompanying notes to the consolidated financial statements.
<34>
<CAPTION>
Dollars in Millions (Except Per Share Data)
December 31 1998 1997
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt $ 41.3 $ 61.0
Current portion of long-term debt 95.2 108.4
Trade accounts payable 168.4 191.3
Accrued payroll, benefits and bonus 131.4 132.3
Accrued advertising and merchandising 125.6 123.0
Income taxes payable 63.7 73.8
Other accrued liabilities 383.5 255.9
Total Current Liabilities 1,009.1 945.7
Long-term Debt 795.1 887.6
Other Liabilities 533.4 578.9
Deferred Income Taxes -- 36.3
Preferred Stock, Series B, no par value, authorized 1,750,000 shares;
issued 1,282,051 of $5.46 cumulative convertible shares (liquidating
preference of $78 per share) 100.0 100.0
Deferred Compensation (48.4) (57.2)
Treasury Preferred Stock, at cost, 302,969 and 245,147 shares, respectively (29.9) (22.3)
Common Shareholders' Equity
Common stock, $5 par value, authorized 400 million shares 840.0 840.0
Additional paid-in capital 78.9 29.0
Reinvested earnings 555.8 431.0
Accumulated other comprehensive income (80.1) (82.4)
Deferred compensation (67.6) (91.0)
Treasury common stock, at cost (1,176.0) (898.6)
Total Common Shareholders' Equity 151.0 228.0
Total Liabilities and Shareholders' Equity $ 2,510.3 $ 2,697.0
</TABLE>
<35>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated
Statements of Common
Shareholders'Equity
Common Stock Issued Common Shares
Shares Amount Outstanding
<S> <C> <C> <C>
Balance as of December 31, 1995 167,978,792 $ 840.0 134,806,055
Net income
Other comprehensive income:
Foreign currency translation adjustments -
net of allocated income tax benefits of $1.1
Total comprehensive 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
Deferred compensation
Other
Balance as of December 31, 1996 167,978,792 840.0 136,093,065
Net loss
Other comprehensive income:
Foreign currency translation adjustments -
net of allocated income tax provision of $0.4
Total comprehensive income
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)
Deferred compensation
Other
Balance as of December 31, 1997 167,978,792 840.0 138,813,100
Net income
Other comprehensive income:
Foreign currency translation adjustments -
net of allocated income tax benefits of $0.3
Unrealized gain on investments (b)
Total comprehensive income
Cash dividends declared on common stock
Cash dividends declared on preferred stock
Common stock issued for stock purchase and
incentive plans 3,375,088
Repurchases of common stock (6,865,680)
Deferred compensation
Other
Balance as of December 31, 1998 167,978,792 $ 840.0 135,322,508
</TABLE>
(a) Cumulative translation adjustment as of December 31, 1995,
1996, 1997 and 1998 were $(77.8) million, $(68.2) million,
$(82.4) million and $(80.5) million, respectively.
(b) Reflects the Company's investment in preferred stock that
is classified as marketable securities in the balance sheet.
Estimated income taxes were not material.
See accompanying notes to the consolidated financial statements.
<36>
<TABLE>
<CAPTION>
Dollars in Millions
Additional Accumulated Other
Paid-In Reinvested Deferred Treasury Common Stock Comprehensive
Capital Earnings Compensation Shares Amount Income (a) Total
<C> <C> <C> <C> <C> <C> <C>
$ -- $ 1,433.6 $ (118.1) 33,172,737 $ (998.4) $ (77.8) $ 1,079.3
247.9 247.9
9.6 9.6
257.5
(153.3) (153.3)
(3.7) (3.7)
(3.0) (3.2) (1,287,010) 38.6 32.4
14.7 14.7
3.0 3.0
-- 1,521.3 (103.4) 31,885,727 (959.8) (68.2) 1,229.9
(930.9) (930.9)
(14.2) (14.2)
(945.1)
(155.9) (155.9)
(3.5) (3.5)
11.2 (3,707,667) 111.2 122.4
987,632 (50.0) (50.0)
12.4 12.4
17.8 17.8
29.0 431.0 (91.0) 29,165,692 (898.6) (82.4) 228.0
284.5 284.5
1.9 1.9
0.4 0.4
286.8
(155.2) (155.2)
(4.5) (4.5)
15.7 (3,375,088) 109.3 125.0
6,865,680 (386.7) (386.7)
23.4 23.4
34.2 34.2
$ 78.9 $ 555.8 $ (67.6) 32,656,284 $(1,176.0) $ (80.1) $ 151.0
</TABLE>
<37>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Operating Segment Net Sales (a) Operating Income (Loss) (b)
Information Year Ended December 31 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Foods
U.S. and Canadian $ 2,274.1 $ 2,287.8 $ 2,184.5 $ 369.8 $ 390.3 $ 375.3
Latin American 449.8 451.4 418.3 25.4 21.4 14.1
Other (c) 202.9 205.7 207.2 (1.2) (9.9) (7.5)
Total Foods 2,926.8 2,944.9 2,810.0 394.0 401.8 381.9
Beverages
U.S. and Canadian 1,338.2 1,183.3 1,095.4 214.9 182.7 176.3
Latin American 267.7 232.2 187.4 25.6 19.3 5.9
Other (c) 103.1 103.0 95.1 (7.4) (15.0) (26.5)
Total Beverages 1,709.0 1,518.5 1,377.9 233.1 187.0 155.7
Total Ongoing Businesses 4,635.8 4,463.4 4,187.9 627.1 588.8 537.6
Total Divested Businesses(d) 206.7 552.3 1,011.1 0.4 (22.0) (85.1)
Total Sales/Operating Income $ 4,842.5 $ 5,015.7 $ 5,199.0 $ 627.5 $ 566.8 $ 452.5
Less: Restructuring charges, asset impairments,
losses (gains) on divestitures and other -
net (e)(f)(g)(h) 128.5 1,491.1 (113.4)
General corporate expenses 31.9 50.1 42.0
Interest expense - net 58.9 79.1 99.4
Foreign exchange loss - net 11.6 10.8 8.9
Income (Loss) before income taxes 396.6 (1,064.3) 415.6
Provision (benefit) for income taxes 112.1 (133.4) 167.7
Net Income (Loss) $ 284.5 $ (930.9) $ 247.9
Per Common Share:
Net income (loss) $ 2.04 $ (6.80) $ 1.80
Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78
</TABLE>
(a) Intersegment revenue is not material.
(b) Operating results exclude restructuring and impairment
charges, losses and gains on divestitures and certain other
expenses not allocated to operating segments such as income
taxes, general corporate expenses and financing costs.
(c) Other includes European and Asia/Pacific businesses.
(d) 1998 includes net sales and operating results (through the
divestiture date) for the Ardmore Farms, Continental Coffee, Nile
Spice and Liqui-Dri businesses. 1997 includes net sales and
operating results (through the divestiture date) for the Snapple
beverages and certain food service businesses and the businesses
divested in 1998. 1996 includes net sales and operating results
(through the divestiture date) for the U.S. and Canadian frozen
foods and Italian products businesses and the businesses
divested in 1998 and 1997.
(e) 1998 includes pretax restructuring charges of $89.7 million,
or $0.38 per share, pretax asset impairment losses of $38.1
million, or $0.18 per share, and a combined pretax divestiture
loss of $0.7 million, or a gain of $0.20 per share due to certain
tax benefits.
(f) 1997 includes pretax restructuring charges of $65.9 million,
or $0.27 per share, a pretax net charge of $4.8 million, or $0.02
per share, for an asset impairment loss partly offset by a cash
litigation settlement, and a combined pretax loss of $1.42
billion, or $8.41 per share, for business divestitures.
(g) 1996 includes pretax restructuring charges of $23.0 million,
or $0.14 per share, and pretax gains of $136.4 million, or $0.60
per share, for business divestitures.
(h) See Notes 2 and 3 to the consolidated financial statements
for further discussion of 1996 through 1998 restructuring and
impairment charges and losses and gains on divestitures.
<38>
<TABLE>
<CAPTION>
Dollars in Millions
Operating Segment Data
Identifiable Capital Depreciation and
Assets Expenditures Amortization
Year Ended December 31 1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foods
U.S. and Canadian $ 1,187.0 $ 1,056.9 $ 1,089.1 $ 102.7 $ 76.6 $ 90.4 $ 65.2 $ 69.4 $ 66.6
Latin American 205.2 207.4 255.9 13.4 15.7 14.8 9.5 13.4 14.1
Other (a) 92.1 121.5 128.5 5.7 18.0 17.3 6.3 5.7 6.7
Total Foods 1,484.3 1,385.8 1,473.5 121.8 110.3 122.5 81.0 88.5 87.4
Beverages
U.S. and Canadian 464.2 364.5 368.2 57.6 55.1 81.3 31.5 28.7 23.8
Latin American 94.6 81.9 83.7 12.1 5.6 5.4 5.8 6.5 4.7
Other (a) 109.5 98.2 85.9 5.5 24.2 10.6 4.7 4.2 3.7
Total Beverages 668.3 544.6 537.8 75.2 84.9 97.3 42.0 39.4 32.2
Total Ongoing Businesses 2,152.6 1,930.4 2,011.3 197.0 195.2 219.8 123.0 127.9 119.6
Total Divested Businesses (b) -- 250.9 2,162.3 7.7 20.5 22.9 8.6 31.8 79.5
Total Operating Segments 2,152.6 2,181.3 4,173.6 204.7 215.7 242.7 131.6 159.7 199.1
Corporate (c) 357.7 515.7 220.8 -- -- -- 0.9 1.7 1.5
Total Consolidated $ 2,510.3 $ 2,697.0 $ 4,394.4 $ 204.7 $ 215.7 $ 242.7 $ 132.5 $ 161.4 $ 200.6
</TABLE>
(a) Other includes European and Asia/Pacific businesses.
(b) Includes the following Divested Businesses: 1998 (Ardmore Farms,
Continental Coffee, Nile Spice and Liqui-Dri); 1997 (Snapple, certain
food service businesses and the businesses divested in 1998); 1996
(U.S. and Canadian frozen foods and Italian products businesses, and
the businesses divested in 1998 and 1997).
(c) Includes corporate cash and cash equivalents, short-term
investments and miscellaneous receivables and investments.
<39>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Dollars in Millions
Enterprise Information Year Ended December 31 1998 1997 1996
<S> <C> <C> <C>
Net Sales (a)
U.S. Hot Cereals $ 430.8 $ 462.0 $ 439.9
U.S. Ready-to-Eat Cereals 711.9 692.9 626.3
U.S. Grain-based Snacks 290.8 268.5 284.6
U.S. Flavored Rice and Pasta 340.5 343.1 315.5
U.S. Other Foods 318.3 327.6 325.4
Total U.S. Foods 2,092.3 2,094.1 1,991.7
Canadian Foods 181.8 193.7 192.8
Latin American Foods 449.8 451.4 418.3
European and Asia/Pacific Foods 202.9 205.7 207.2
Total Foods 2,926.8 2,944.9 2,810.0
U.S. Beverages 1,306.8 1,153.2 1,066.0
Canadian Beverages 31.4 30.1 29.4
Latin American Beverages 267.7 232.2 187.4
European and Asia/Pacific Beverages 103.1 103.0 95.1
Total Beverages 1,709.0 1,518.5 1,377.9
Total Ongoing Businesses 4,635.8 4,463.4 4,187.9
U.S. Divested 206.7 545.5 975.6
Foreign Divested -- 6.8 35.5
Total Divested Businesses 206.7 552.3 1,011.1
Total Consolidated $ 4,842.5 $ 5,015.7 $ 5,199.0
(a) Represents net sales to unaffiliated customers.
</TABLE>
<40>
<TABLE>
<CAPTION>
Dollars in Millions
Geographic Information Year Ended December 31 1998 1997 1996
<S> <C> <C> <C>
Net Sales (a)
Total U.S. $ 3,605.8 $ 3,792.8 $ 4,033.3
Total Foreign 1,236.7 1,222.9 1,165.7
Total Consolidated $ 4,842.5 $ 5,015.7 $ 5,199.0
<CAPTION>
Year Ended December 31 1998 1997 1996
<S> <C> <C> <C>
Long-lived Assets (b)
Total U.S. $ 1,078.1 $ 1,227.2 $ 3,110.8
Total Foreign 237.8 288.0 327.1
Total Consolidated $ 1,315.9 $ 1,515.2 $ 3,437.9
(a) Represents net sales to unaffiliated customers.
(b) Long-lived assets include net intangible assets and
net property, plant and equipment. 1997 assets include
assets related to businesses divested in 1998; 1996 assets
include assets related to businesses divested in 1997 and
1998.
</TABLE>
<41>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six-Year Year Ended December 31 1998 1997 1996 1995 1994 1993
Selected Operating Results (a)(b)(c)(d)(e)(f)(g)(h)
Financial
Data <S> <C> <C> <C> <C> <C> <C>
Net sales $ 4,842.5 $ 5,015.7 $ 5,199.0 $ 5,954.0 $ 6,211.1 $ 5,791.9
Gross profit 2,468.1 2,450.8 2,391.5 2,659.6 3,088.4 2,920.0
Income (loss) before income taxes and
cumulative effect of accounting changes 396.6 (1,064.3) 415.6 1,220.5 320.4 495.0
Provision (benefit) for income taxes 112.1 (133.4) 167.7 496.5 127.3 190.4
Income (loss) before cumulative effect of
accounting changes 284.5 (930.9) 247.9 724.0 193.1 304.6
Cumulative effect of accounting
changes - net of tax -- -- -- -- (4.1) --
Net income (loss) $ 284.5 $ (930.9) $ 247.9 $ 724.0 $ 189.0 $ 304.6
Per common share:
Income (loss) before cumulative effect of
accounting changes $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.41 $ 2.14
Cumulative effect of accounting changes -- -- -- -- (0.03) --
Net income (loss) $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.38 $ 2.14
Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78 $ 5.23 $ 1.36 $ 2.09
Dividends declared:
Common stock $ 155.2 $ 155.9 $ 153.3 $ 150.8 $ 145.8 $ 138.2
Per common share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.10 $ 1.01
Convertible preferred and redeemable
preference stock $ 4.5 $ 3.5 $ 3.7 $ 4.0 $ 4.0 $ 4.1
Average number of common shares
outstanding (in thousands) 137,185 137,460 135,466 134,149 133,709 139,833
</TABLE>
(a) 1998 operating results include pretax restructuring
charges of $89.7 million, or $0.38 per share, pretax asset
impairment losses of $38.1 million, or $0.18 per share, and a
combined pretax divestiture loss of $0.7 million, or a gain of
$0.20 per share due to certain tax benefits.
(b) 1997 operating results include pretax restructuring
charges of $65.9 million, or $0.27 per share, and a combined
pretax loss of $1.42 billion, or $8.41 per share, for business
divestitures.
(c) 1996 operating results include pretax restructuring
charges of $23.0 million, or $0.14 per share, and pretax gains
of $136.4 million, or $0.60 per share, for business
divestitures.
(d) 1995 operating results include pretax restructuring
charges of $117.3 million, or $0.53 per share, and pretax
gains of $1.17 billion, or $5.20 per share, for business
divestitures.
(e) 1994 operating results include pretax restructuring
charges of $118.4 million, or $0.55 per share, and a pretax
gain of $9.8 million, or $0.07 per share, for a business
divestiture.
(f) See Notes 2 and 3 to the consolidated financial statements
for further discussion of 1996 through 1998 restructuring and
impairment charges and losses and gains on divestitures.
(g) 1994 cumulative effect of accounting changes includes an
after-tax charge of $4.1 million for the adoption of SFAS
No. 112.
(h) Per share data and average number of common shares
outstanding reflect the 1994 two-for-one stock split-up.
<42>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Year Ended December 31 1998 1997 1996 1995 1994 1993
Financial Statistics
<S> <C> <C> <C> <C> <C> <C>
Current ratio 1.1 1.2 0.7 0.6 0.5 0.9
Working capital $ 105.9 $ 187.3 $ (465.0) $ (621.6) $(1,616.9) $ (89.4)
Property, plant and equipment - net $ 1,070.2 $ 1,164.7 $ 1,200.7 $ 1,167.8 $ 1,333.1 $ 1,222.0
Depreciation expense $ 116.3 $ 122.0 $ 119.1 $ 115.3 $ 133.1 $ 132.3
Total assets $ 2,510.3 $ 2,697.0 $ 4,394.4 $ 4,620.4 $ 5,061.1 $ 2,805.2
Long-term debt $ 795.1 $ 887.6 $ 993.5 $ 1,051.8 $ 1,025.9 $ 708.4
Convertible preferred stock (net of
deferred compensation) and redeemable
preference stock $ 21.7 $ 20.5 $ 19.0 $ 17.7 $ 17.0 $ 13.1
Common shareholders' equity $ 151.0 $ 228.0 $ 1,229.9 $ 1,079.3 $ 452.7 $ 437.4
Net cash provided by operating activities $ 513.5 $ 490.0 $ 410.4 $ 407.1 $ 415.8 $ 506.6
Operating return on assets (a) 29.0% 17.8% 10.6% 7.9% 16.0% 23.6%
Gross profit as a percentage of sales 51.0% 48.9% 46.0% 44.7% 49.7% 50.4%
Advertising and merchandising as a
percentage of sales 25.6% 24.5% 23.1% 24.6% 27.2% 25.9%
Income (loss) before cumulative effect of
accounting changes as a percentage of sales 5.9% (18.6%) 4.8% 12.2% 3.1% 5.3%
Total debt-to-total-capitalization ratio (b) 84.4% 81.0% 55.6% 61.7% 86.3% 69.9%
Common dividends per share as a percentage
of income (loss) available for common
shares (excluding cumulative effect of
accounting changes) 55.9% (16.8%) 63.3% 21.2% 78.0% 47.2%
Number of common shareholders 26,352 27,838 29,690 30,353 28,142 28,237
Number of employees worldwide 11,860 14,123 14,800 16,100 20,753 20,207
Market price range of common stock:
High (c) $ 65 9/16 $ 55 1/8 $ 39 1/2 $ 37 1/2 $ 42 1/2 $ 38 1/2
Low (c) $ 48 1/2 $ 34 3/8 $ 30 3/8 $ 30 1/4 $ 29 3/4 $ 30 3/16
</TABLE>
(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.
<43>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Eleven-Year
Selected Financial Data
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)(j)(k)(l)
Net sales $ 4,842.5 $ 5,015.7 $ 5,199.0
Gross profit 2,468.1 2,450.8 2,391.5
Income (loss) from continuing operations before income taxes
and cumulative effect of accounting changes 396.6 (1,064.3) 415.6
Provision (benefit) for income taxes 112.1 (133.4) 167.7
Income (loss) from continuing operations before cumulative
effect of accounting changes 284.5 (930.9) 247.9
(Loss) income from discontinued operations - net of tax -- -- --
Cumulative effect of accounting changes - net of tax -- -- --
Net income (loss) $ 284.5 $ (930.9) $ 247.9
Per common share:
Income (loss) from continuing operations before cumulative
effect of accounting changes $ 2.04 $ (6.80) $ 1.80
(Loss) income from discontinued operations -- -- --
Cumulative effect of accounting changes -- -- --
Net income (loss) $ 2.04 $ (6.80) $ 1.80
Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78
Dividends declared:
Common stock $ 155.2 $ 155.9 $ 153.3
Per common share $ 1.14 $ 1.14 $ 1.14
Convertible preferred and redeemable preference stock $ 4.5 $ 3.5 $ 3.7
Average number of common shares outstanding (in thousands) 137,185 137,460 135,466
</TABLE>
(a) 1998 operating results include pretax restructuring charges
of $89.7 million, or $0.38 per share, pretax asset impairment
losses of $38.1 million, or $0.18 per share, and a combined
pretax divestiture loss of $0.7 million, or a gain of $0.20 per
share due to certain tax benefits.
(b) 1997 operating results include pretax restructuring charges
of $65.9 million, or $0.27 per share, and a combined pretax loss
of $1.42 billion, or $8.41 per share, for business divestitures.
(c) 1996 operating results include pretax restructuring charges
of $23.0 million, or $0.14 per share, and pretax gains of $136.4
million, or $0.60 per share, for business divestitures.
(d) See Notes 2 and 3 to the consolidated financial statements
for further discussion of 1996 through 1998 restructuring and
impairment charges and losses and gains on divestitures.
(e) 1995 transition period reflects only six months of operating
results.
(f) 1995 transition period operating results include pretax
restructuring charges of $40.8 million, or $0.18 per share.
<44>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Transition Fiscal Year
Period Ended Ended
December 31 June 30
1995 1995 1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 2,733.1 $ 6,365.2 $ 5,955.0 $ 5,730.6 $ 5,576.4 $ 5,491.2 $ 5,030.6 $ 4,879.4 $ 4,508.0
1,203.8 2,983.7 3,028.8 2,860.6 2,745.3 2,652.7 2,350.3 2,229.0 2,114.6
25.6 1,359.9 378.7 467.6 421.5 411.5 382.4 239.1 314.6
11.9 553.8 147.2 180.8 173.9 175.7 153.5 90.2 118.1
13.7 806.1 231.5 286.8 247.6 235.8 228.9 148.9 196.5
-- -- -- -- -- (30.0) (59.9) 54.1 59.2
-- (4.1) -- (115.5) -- -- -- -- --
$ 13.7 $ 802.0 $ 231.5 $ 171.3 $ 247.6 $ 205.8 $ 169.0 $ 203.0 $ 255.7
$ 0.09 $ 6.00 $ 1.68 $ 1.96 $ 1.63 $ 1.53 $ 1.47 $ 0.94 $ 1.23
-- -- -- -- -- (0.20) (0.40) 0.34 0.37
-- (0.03) -- (0.79) -- -- -- -- --
$ 0.09 $ 5.97 $ 1.68 $ 1.17 $ 1.63 $ 1.33 $ 1.07 $ 1.28 $ 1.60
$ 0.09 $ 5.80 $ 1.65 $ 1.14 $ 1.59 $ 1.30 $ 1.05 $ 1.25 $ 1.57
$ 75.7 $ 150.8 $ 140.6 $ 136.1 $ 128.6 $ 118.7 $ 106.9 $ 95.2 $ 79.9
$ 0.57 $ 1.14 $ 1.06 $ 0.96 $ 0.86 $ 0.78 $ 0.70 $ 0.60 $ 0.50
$ 2.0 $ 4.0 $ 4.0 $ 4.2 $ 4.2 $ 4.3 $ 3.6 -- --
134,355 133,763 135,236 143,948 149,762 151,808 153,074 158,614 159,670
</TABLE>
(g) Fiscal 1995 operating results include pretax restructuring charges of $76.5
million, or $0.35 per share, and pretax gains of $1.17 billion, or $5.20 per
share, for business divestitures.
(h) Fiscal 1994 operating results include pretax restructuring charges of
$118.4 million, or $0.55 per share, and a pretax gain of $9.8 million, or $0.07
per share, for a business divestiture.
(i) Fiscal 1995 cumulative effect of accounting changes includes an after-tax
charge of $4.1 million for the adoption of SFAS No. 112.
(j) Fiscal 1993 cumulative effect of accounting changes includes an after-tax
charge of $125.4 million for the adoption of SFAS No. 106 and a $9.9 million tax
benefit for the adoption of SFAS No. 109.
(k) Fiscal 1989 operating results include pretax restructuring charges of
$124.3 million, or $0.50 per share, for plant consolidations and overhead
reductions, and a pretax charge of $25.6 million, or $0.10 per share, for a
change to the LIFO method of accounting for the majority of U.S. Foods and
Beverages inventories.
(l) Per share data and average number of common shares outstanding reflect the
fiscal 1995 two-for-one stock split-up.
<45>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Eleven-Year
Selected Financial Data
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Financial Statistics (a)(b)(c)
Current ratio 1.1 1.2 0.7
Working capital $ 105.9 $ 187.3 $ (465.0)
Property, plant and equipment - net $ 1,070.2 $ 1,164.7 $ 1,200.7
Depreciation expense $ 116.3 $ 122.0 $ 119.1
Total assets $ 2,510.3 $ 2,697.0 $ 4,394.4
Long-term debt $ 795.1 $ 887.6 $ 993.5
Convertible preferred stock (net of deferred compensation) and
redeemable preference stock $ 21.7 $ 20.5 $ 19.0
Common shareholders' equity $ 151.0 $ 228.0 $ 1,229.9
Net cash provided by operating activities $ 513.5 $ 490.0 $ 410.4
Operating return on assets (d) 29.0% 17.8% 10.6%
Gross profit as a percentage of sales 51.0% 48.9% 46.0%
Advertising and merchandising as a percentage of sales 25.6% 24.5% 23.1%
Income (loss) from continuing operations before cumulative effect of
accounting changes as a percentage of sales 5.9% (18.6%) 4.8%
Total debt-to-total-capitalization ratio (e) 84.4% 81.0% 55.6%
Common dividends per share as a percentage of income (loss)
available for common shares (excluding cumulative effect of
accounting changes) 55.9% (16.8%) 63.3%
Number of common shareholders 26,352 27,838 29,690
Number of employees worldwide 11,860 14,123 14,800
Market price range of common stock:
High (f) $ 65 9/16 $ 55 1/8 $ 39 1/2
Low (f) $ 48 1/2 $ 34 3/8 $ 30 3/8
</TABLE>
(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
the number of employees worldwide were reduced as a result
of the Fisher-Price spin-off.
<46>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Transition Fiscal
Period Ended Year Ended
December 31 June 30
1995 1995 1994 1993 1992 1991 1990 1989 1988
<C> <C> <C> <C> <C> <C> <C> <C> <C>
0.6 0.7 1.0 1.0 1.2 1.3 1.3 1.8 1.4
$ (621.6) $ (496.3) $ (5.5) $ (37.5) $ 168.7 $ 317.8 $ 342.8 $ 695.8 $ 417.5
$ 1,167.8 $ 1,113.4 $ 1,214.2 $ 1,228.2 $ 1,273.3 $ 1,232.7 $ 1,154.1 $ 959.6 $ 922.5
$ 59.2 $ 125.4 $ 133.3 $ 129.9 $ 129.7 $ 125.2 $ 103.5 $ 94.2 $ 88.3
$ 4,620.4 $ 4,826.9 $ 3,043.3 $ 2,815.9 $ 3,039.9 $ 3,060.5 $ 3,377.4 $ 3,125.9 $ 2,886.1
$ 1,051.8 $ 1,103.1 $ 759.5 $ 632.6 $ 688.7 $ 701.2 $ 740.3 $ 766.8 $ 299.1
$ 17.7 $ 18.8 $ 15.3 $ 11.4 $ 7.9 $ 4.8 $ 1.8 -- --
$ 1,079.3 $ 1,128.8 $ 445.8 $ 551.1 $ 842.1 $ 901.0 $ 1,017.5 $ 1,137.1 $ 1,251.1
$ 84.3 $ 475.5 $ 450.8 $ 558.2 $ 581.3 $ 543.2 $ 460.0 $ 408.3 $ 320.8
3.3% 12.4% 23.9% 21.8% 18.8% 19.1% 19.8% 19.5% 19.6%
44.0% 46.9% 50.9% 49.9% 49.2% 48.3% 46.7% 45.7% 46.9%
24.1% 26.3% 26.6% 25.7% 26.0% 25.6% 23.8% 23.4% 24.9%
0.5% 12.7% 3.9% 5.0% 4.4% 4.3% 4.6% 3.1% 4.4%
61.7% 59.0% 68.8% 59.0% 48.7% 47.4% 52.3% 44.2% 33.8%
633.3% 19.0% 63.1% 48.9% 52.9% 58.9% 65.1% 46.9% 31.3%
30,353 29,148 28,197 33,154 33,580 33,603 33,859 34,347 34,231
16,100 17,300 20,000 20,200 21,100 20,900 28,200 31,700 31,300
$ 37 3/8 $ 42 1/2 $ 41 $ 38 1/2 $ 37 7/8 $ 32 7/16 $ 34 7/16 $ 33 1/8 $ 28 11/16
$ 30 3/4 $ 29 3/4 $ 30 15/16 $ 28 1/16 $ 25 1/8 $ 20 7/8 $ 22 9/16 $ 21 5/16 $ 15 1/2
</TABLE>
(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.
<47>
THE QUAKER OATS COMPANY AND SUBSIDIARIES
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. 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 totaled $40.8 million and
$45.1 million as of December 31, 1998 and 1997, 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 1998 1997
Last-in, first-out (LIFO) 52% 65%
Average quarterly cost 46% 30%
First-in, first-out (FIFO) 2% 5%
If the LIFO method of valuing these inventories was not used, total inventories
would have been $5.9 million and $8.6 million higher than reported as of
December 31, 1998 and 1997, 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, pursuant to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." 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.
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.
Intangible assets, net of amortization and their estimated useful lives consist
of the following at December 31, 1998 and 1997:
Estimated Useful
Dollars in Millions Lives (In Years) 1998 1997
Goodwill 10 to 40 $385.3 $500.6
Trademarks and other 2 to 40 25.4 20.4
Intangible assets 410.7 521.0
Less: accumulated amortization 165.0 170.5
Intangible assets - net of amortization $245.7 $350.5
Property and Depreciation - Property, plant and equipment are carried at cost
and depreciated primarily 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 1998 or 1997. Amounts deferred
are amortized over a three-year period beginning with a project's completion.
Net deferred software costs as of December 31, 1997, were $0.1 million. As of
December 31, 1998, all deferred software costs were fully amortized.
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.
<48>
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 in 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 that 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 accumulated other comprehensive
income 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 that
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 SOP No. 93-7, "Reporting on Advertising
Costs," the Company expenses all advertising expenditures as incurred except for
production costs which are deferred and expensed when advertisements run for the
first time. The amount of production costs deferred and included in the
consolidated balance sheets as of December 31, 1998 and 1997, was $5.6 million
and $5.4 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. Current
deferred tax assets and liabilities are netted in the consolidated balance
sheets as are long-term deferred tax assets and liabilities. Income taxes have
been provided on $207.8 million of the $219.6 million of unremitted earnings
from foreign subsidiaries. Taxes are not provided on earnings expected to be
indefinitely reinvested. Income taxes have also been provided for potential tax
assessments and the related tax accruals are in the consolidated balance sheets.
To the extent tax accruals differ from actual payments or assessments, the
accruals will be adjusted through the provision for income taxes.
<49>
Segment Reporting - In December 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of this standard requires that reportable segments are reported
consistent with how management assesses segment performance. As a result, the
Company will separately report information on the following seven operating
segments: U.S. and Canadian Foods; Latin American Foods; Other Foods; U.S. and
Canadian Beverages; Latin American Beverages; Other Beverages; and Total
Divested Businesses. U.S. and Canadian Foods includes hot and ready-to-eat
cereals, mixes, syrups, snacks and flavored rice and pasta. Other Foods and
Beverages include businesses in the European and Asia/Pacific regions. In
determining the operating income or loss of each segment, restructuring charges,
asset impairment losses and certain other expenses,such as income taxes, general
corporate expenses and financing costs, are not allocated to operating segments.
Comparative segment data is presented in tabular form on page 38.
Other Current and Pending Accounting Changes - In July 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income." This Statement established
standards for reporting comprehensive income in the financial statements. The
Company adopted this standard in January 1998, and has elected to disclose
comprehensive income, which for the Company includes net income, foreign
currency translation adjustments and unrealized gains on investments, in the
consolidated statement of common shareholders' equity.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement revises employers'
disclosures about pensions and other postretirement benefit plans. It does not
change the measurement or recognition of those plans in the financial
statements. The Company's adoption of this new standard in December 1998 did
not result in material changes to previously reported amounts. See Note 10 for
further discussion.
In January 1998, SOP No. 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 No. 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 these standards are
not expected to materially affect the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that all derivative instruments (including certain
derivative instruments imbedded in other contracts) be recorded in the balance
sheet as either an asset or a liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
accounting provisions for qualifying hedges allow a derivative's gains and
losses to offset related results on the hedged item in the income statement and
require that the Company must formally document, designate and assess the
effectiveness of transactions that qualify for hedge accounting. The Company
has not determined its method or timing of adopting this Statement, but will be
required to adopt it by January 2000. When adopted, this Statement could
increase volatility in reported earnings and other comprehensive income of the
Company.
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.
<50>
Note 2
Restructuring Charges
During 1998, the Company initiated numerous actions to improve future
profitability. These actions resulted in $89.7 million in restructuring charges
and are divided into three categories: organization alignment, plant
consolidations and Asian reorganization. Charges for organization alignment
activities totaled $41.5 million. The Company aligned its foods and beverages
businesses, combining sales, supply chain and certain administrative functions
to realize synergies and maximize scale. These actions resulted in the
elimination of approximately 550 positions worldwide, as a layer of executive
management was removed and sales and administrative offices and functions were
consolidated. Plant consolidations in the United States and Latin America
resulted in $19.2 million in charges. These actions will result in the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its operational
strategy for the Asia/Pacific region. The focus going forward is on building
the Gatorade business in China. This Asia/Pacific restructuring resulted in
$29.0 million in charges for plant and sales and administrative office closures,
restructuring of certain joint ventures and the elimination of approximately 450
positions.
The 1998 restructuring charges are composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs. Savings
from these actions are estimated to be $65 million annually, primarily beginning
in 1999, with approximately 90 percent of the savings in cash.
In 1997, the Company initiated several restructuring actions resulting in
charges of $65.9 million. Three foods plants were closed, two in the United
States and one in Latin America. Combined with other manufacturing
consolidation activities in the U.S. and Canadian businesses, restructuring
charges for these actions totaled $58.1 million. Other actions taken included
an office closure in the Asia/Pacific region and staff reductions in the U.S.
and Canadian businesses, resulting in charges of $1.1 million and $6.7 million,
respectively.
In 1996, the Company recorded restructuring charges of $23.0 million including
$16.6 million related to the divested Snapple beverages business and $6.4
million for plant consolidations in the U.S. and Canadian Foods business.
Savings realized from the 1997 and 1996 restructuring actions have been in line
with expectations. However, there are no recurring savings to be realized from
restructuring activities related to the divested Snapple beverages business.
1998, 1997 and 1996 restructuring charges by operating segment were as follows:
Dollars in Millions 1998 1997 1996
U.S. and Canadian Foods $ 38.4 $ 49.2 $ 6.4
Latin American Foods 9.3 10.7 --
Other Foods 17.8 -- --
U.S. and Canadian Beverages 8.9 4.9 --
Latin American Beverages 2.8 -- --
Other Beverages 12.5 1.1 --
Divested Businesses -- -- 16.6
Total Charges $ 89.7 $ 65.9 $ 23.0
Restructuring provisions were determined based on estimates prepared at the time
the restructuring actions were approved by management and the Board of
Directors. The 1998 and 1997 restructuring reserve balances are considered
adequate to cover committed restructuring actions.
<51>
The restructuring charges and utilization to date were as follows:
<TABLE>
<CAPTION>
As of December 31, 1998
Amounts Charged Amounts Remaining
Dollars in Millions Cash Non-Cash Total Utilized Reserve
<S> <C> <C> <C> <C> <C>
1998
Severance and termination benefits $ 41.3 $ -- $ 41.3 $ 12.6 $ 28.7
Asset write-offs -- 29.6 29.6 1.7 27.9
Loss on leases and other 17.8 1.0 18.8 -- 18.8
Subtotal 59.1 30.6 89.7 14.3 75.4
1997
Severance and termination benefits 12.6 -- 12.6 8.8 3.8
Asset write-offs -- 49.1 49.1 44.4 4.7
Loss on leases and other 4.2 -- 4.2 2.3 1.9
Subtotal 16.8 49.1 65.9 55.5 10.4
1996
Severance and termination benefits 1.4 -- 1.4 1.4 --
Asset write-offs -- 18.9 18.9 18.9 --
Loss on leases and other 2.6 0.1 2.7 2.7 --
Subtotal 4.0 19.0 23.0 23.0 --
Total $ 79.9 $ 98.7 $ 178.6 $ 92.8 $ 85.8
</TABLE>
Note 3
Asset Impairments and Divestitures
In 1998, the Company recorded $38.1 million of asset impairment losses related
to ongoing businesses. In conjunction with the Company's ongoing review of
underperforming businesses, certain assets are reviewed for impairment, pursuant
to the provisions of SFAS No. 121. During 1998, the China foods and Brazilian
pasta businesses were determined to be impaired. Accordingly, pretax losses of
$15.1 million and $23.0 million on these impaired Chinese and Brazilian
businesses, respectively, were recorded in order to adjust the carrying value of
the long-lived assets of these businesses to fair value. The estimated fair
value of these assets was based on various methodologies, including a discounted
value of estimated future cash flows and liquidation analyses. The Company
continues to review its business strategies and pursue other cost-reduction
activities, some of which could result in future charges.
The Company took numerous actions in 1997 relative to its Brazilian pasta
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 review, the Company evaluated
the recoverability of the long-lived assets of this business pursuant to SFAS
No. 121 and recorded a non-cash charge of $39.8 million to reduce the carrying
value of the net assets of the 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. Separately, the Company received a $35.0
million cash litigation settlement related to this business. The combined
charge of $4.8 million was not included in the operating segment results of
Latin American Foods.
Charges for asset impairment losses related to divested businesses were also
recorded in 1998. The Company divested the following U.S. food businesses in
1998 for a total of $192.7 million and realized a combined pretax loss of $0.7
million, including related impairment losses:
<TABLE>
<CAPTION>
Divestiture Impairment (Gains) Losses Total
Dollars in Millions Date Losses on Sale (Gains) Losses
<S> <C> <C> <C> <C>
Ardmore Farms juice August 1998 $ -- $ (2.5) $ (2.5)
Continental Coffee September 1998 40.0 (5.1) 34.9
Nile Spice soup cup December 1998 25.4 3.1 28.5
Liqui-Dri biscuit December 1998 -- (60.2) (60.2)
Total Losses (Gains) $ 65.4 $(64.7) $ 0.7
</TABLE>
<52>
During 1997, the Company divested the Snapple beverages, Richardson toppings and
condiments and food service bagel businesses for a total of $373.2 million and
realized a combined pretax loss of $1.42 billion.
Divestiture Impairment Losses Total
Dollars in Millions Date Losses on Sale Losses
Snapple beverages May 1997 $ 1,404.0 $ 10.6 $ 1,414.6
Richardson/Bagels December 1997 -- 5.8 5.8
Total Losses $ 1,404.0 $ 16.4 $ 1,420.4
In 1996, the Company completed the sale of its frozen foods business for $185.8
million and realized a gain of $133.6 million. The Company also sold its
Italian products business in 1996 and recorded a pretax gain of $2.8 million.
For operating results from divested businesses, see page 38.
Note 4
Trade Accounts Receivable Allowances
Dollars in Millions 1998 1997
Balance at beginning of year $ 22.3 $ 29.3
Provision for doubtful accounts 4.0 4.2
Provision for discounts and allowances 30.0 25.0
Write-offs of doubtful accounts - net of recoveries (3.6) (5.5)
Discounts and allowances taken (31.0) (26.5)
Effect of divestitures (0.3) (3.8)
Effect of exchange rate changes and other (0.2) (0.4)
Balance at end of year $ 21.2 $ 22.3
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.
Marketable Securities -
During 1998, the Company made investments in marketable securities. These
marketable securities are available for sale and consisted of investments in
mutual funds and preferred stock. As of December 31, 1998, only investments in
preferred stock were outstanding. These investments are expected to be held
less than 12 months and are classified as marketable securities in the
consolidated balance sheet. In 1998, the Company recorded a net unrealized gain
of $0.4 million on its investments in preferred stock to adjust the carrying
value of this investment to fair value. This gain is classified as a component
of shareholders' equity and is included in comprehensive income. The Company's
investments in mutual funds were sold during the fourth quarter of 1998,
resulting in a realized gain of $4.7 million included in selling, general and
administrative expenses.
Debt Instruments -
Revolving Credit Facilities and Short-term Debt - In 1998, the Company reduced
the level of its revolving credit facilities by a total of $175.0 million. The
Company now has a $335.0 million annually extendible five-year revolving credit
facility and a $165.0 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. Amounts available under credit facilities
obtained by the Company have decreased significantly over the last three years
as commercial paper borrowings supported by the revolving credit facilities were
reduced. Credit facilities are also available for direct borrowings. There
were no direct borrowings in 1998 or in 1997. The revolving credit facilities
require the Company and certain domestic subsidiaries to maintain certain
financial ratios.
<53>
Short-term debt consists primarily of notes payable to banks in foreign
countries and commercial paper borrowings in the United States. Notes payable
to banks were $41.3 million and $56.0 million as of December 31, 1998 and 1997,
respectively. Commercial paper borrowings outstanding as of December 31, 1997
were $5.0 million. 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, 1998 and
1997, were 9.6 percent and 7.2 percent, respectively. This increase in rates
was due primarily to an increase in international borrowing rates. 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, 1998 and 1997, is summarized below.
Dollars in Millions 1998 1997
7.76% Senior ESOP notes due through 2001 $ 48.4 $ 57.2
8.0% Senior ESOP notes due through 2001 62.1 82.5
7.75%-7.9% Series A medium-term notes due through 2000 25.5 41.5
8.63%-9.34% Series B medium-term notes due through 2019 166.4 178.7
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 350.0 400.0
11.7% Chinese renmimbi notes due 2001 4.8 4.8
5.7%-6.63% Industrial Revenue Bonds due through 2009, tax-exempt 19.4 19.4
Non-interest bearing installment note due 2014 7.9 7.0
Other 5.8 4.9
Subtotal 890.3 996.0
Less: current portion of long-term debt 95.2 108.4
Long-term debt $ 795.1 $ 887.6
The fair value of long-term debt, including current maturities, was $1.01
billion and $1.06 billion as of December 31, 1998 and 1997, 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.
The non-interest bearing installment note for $55.5 million had an unamortized
discount of $47.6 million and $48.5 million as of December 31, 1998 and 1997,
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 1999 2000 2001 2002 2003
Required payments $95.2 $82.1 $53.3 $46.7 $28.1
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 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 these instruments with the objective of earning financial
gains on the exchange rate, commodity price 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.
During 1998, the Company executed certain hedging instruments to manage exposure
to Canadian, European and Brazilian currency movements. 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.
<54>
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,
1998, were as follows:
Dollars in Millions Net Investment Net Hedge Net Exposure
Currency:
Brazilian real $ 26.9 $ 3.0 $ 23.9
British pounds $ 26.0 $ 5.0 $ 21.0
Dutch guilders $ 16.5 $ 12.4 $ 4.1
German marks $ 19.9 $ 13.9 $ 6.0
Italian lira $ 31.1 $ 4.1 $ 27.0
The Company actively monitors its net exposures and adjusts the hedge amounts as
appropriate. The net hedges above are stated on an after-tax basis. The net
exposures are subject to gain or loss if foreign currency exchange rates
fluctuate.
As of December 31, 1998, the Company had net foreign exchange forward contracts
to sell various European currencies and Brazilian real for $18.9 million to
hedge its net investments. These contracts will mature in 1999. As of December
31, 1997, the Company had such contracts to sell various European and Canadian
currencies for $14.4 million, which matured in 1998. Unrealized (gains) losses
as of December 31, 1998 and 1997, were $(0.2) million and $0.1 million,
respectively. The carrying value of these contracts approximated fair value,
except for the Brazilian real contracts, which have a fair value of $0.8 million
less than the book value at December 31, 1998.
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.
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 (gains) losses from foreign currency hedge instruments of $(0.8)
million, $2.5 million and $1.0 million in 1998, 1997 and 1996, respectively.
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 and wheat. Of the $2.37 billion in cost of goods sold,
approximately $140 million to $190 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, 1998 and 1997,
approximately 28 percent and 36 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, 1998 and
1997, were $0.2 million and $0.1 million, respectively. Realized losses (gains)
charged to cost of goods sold in 1998, 1997 and 1996 were $13.5 million, $(6.6)
million and $(5.1) million, respectively. The fair values of these commodity
instruments as of December 31, 1998 and 1997, based on quotes from brokers, were
net losses of $2.2 million and $0.8 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,
1998 and 1997, were $5.7 million and $7.1 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 $1.4 million, $1.8
million and $1.9 million related to the interest rate swap agreements in 1998,
1997 and 1996, respectively.
<55>
Note 6
Capital Stock
During 1998, the Company repurchased 6.9 million shares of its outstanding
common stock for $386.7 million completing its 10 million share repurchase
program announced in August 1993 and initiating the $1 billion repurchase
program announced in March 1998. As of December 31, 1998, the Company
repurchased approximately $265 million under the $1 billion share repurchase
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. Four million
shares of Series C Junior Participating Preferred Stock have been reserved for
issuance in connection with the 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, 1998, 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, 1998.
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 in the
Company's consolidated balance sheets. See Note 5 for further discussion of
ESOP notes.
Deferred compensation of $116.0 million as of December 31, 1998, 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 1998 1997
Principal payments $ 29.2 $ 25.5
Interest payments 10.9 12.9
Total ESOP payments $ 40.1 $ 38.4
As of December 31, 1998, 4,528,701 shares of common stock and 538,608 shares of
preferred stock were held in the accounts of ESOP participants.
Note 8
Employee Stock Option and Award Plans
In May 1998, the Company's shareholders adopted The Quaker Long Term Incentive
Plan of 1999 (Plan) to replace The Quaker Long Term Incentive Plan of 1990. 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. Approximately 12 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, 1998,
669 persons held such options.
<56>
The Company has elected to disclose the pro forma effects of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
the Statement, the Company will continue to apply APB Opinion No. 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 SFAS No. 123,
the Company's net income (loss) and net income (loss) per share would have been
the pro forma amounts indicated below:
Dollars in Millions 1998 1997 1996
Net income (loss):
As reported $284.5 $(930.9) $247.9
Pro forma $272.5 $(940.7) $242.0
Net income (loss) per share:
As reported $ 2.04 $ (6.80) $ 1.80
Pro forma $ 1.95 $ (6.87) $ 1.76
Net income (loss) per share - assuming dilution:
As reported $ 1.97 $ (6.80) $ 1.78
Pro forma $ 1.89 $ (6.87) $ 1.74
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:
1998 1997 1996
Dividend yield 1.9% - 2.0% 2.4% - 3.1% 3.3 % - 3.4 %
Expected volatility 18.6% - 20.8% 16.3% - 22.5% 14.4 % - 20.1 %
Risk-free interest rates 4.7% - 5.7% 5.9% - 6.7% 5.7 % - 6.8 %
Expected lives 3 to 8 years 3 to 8 years 2 to 8 years
A summary of the status of the Company's option activity is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
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 13,017,621 $36.25 14,264,030 $34.42 16,724,814 $33.99
Granted 2,399,000 $57.16 3,205,250 $40.61 152,150 $33.93
Exercised 3,326,292 $33.88 3,661,269 $33.00 1,260,977 $24.66
Forfeited 481,435 $45.13 790,390 $36.05 1,351,957 $38.14
Outstanding at end of year 11,608,894 $40.88 13,017,621 $36.25 14,264,030 $34.42
Exercisable at end of year 7,842,314 $36.44 9,403,675 $35.70 10,947,837 $34.33
Weighted-average fair
value of options granted
during the year $13.84 $ 9.03 $ 5.97
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
<C> <C> <C> <C> <C> <C>
$22.79-$34.53 4,096,066 5.19 Years $32.23 4,084,544 $32.23
$35.35-$40.35 3,830,858 6.15 Years $38.49 2,713,800 $39.00
$44.18-$60.41 3,681,970 8.33 Years $52.99 1,043,970 $46.25
$22.79-$60.41 11,608,894 6.50 Years $40.88 7,842,314 $36.44
</TABLE>
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 1998, 1997 and 1996 were 55,981, 178,475 and
55,600, respectively. Restrictions on these awards lapse after a period of time
designated by the Compensation Committee of the Board of Directors.
<57>
Note 9
Shareholder Rights Plan
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
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
percent 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 and Postretirement Plans
The Company has various pension plans covering substantially all U.S. employees
and certain foreign employees. Plan benefits (Pension 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 Company also 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
(Postretirement Benefits) for retired employees who meet certain service-related
eligibility requirements. The Company funds only the plans' annual cash
requirements.
The following discussion has been modified and expanded to reflect the Company's
adoption of SFAS No. 132, "Employers' Disclosures about Pensions and
Postretirement Benefits." This Statement revises employers' disclosures about
pensions and other postretirement benefit plans. It allows for combined
disclosures for those benefits and requires more detailed information about the
changes in employers' obligations and funded assets than was previously
reported. It does not change the measurement or recognition of those benefits
in the financial statements. The Company's adoption of this new standard in
December 1998 did not result in material changes to previously reported amounts.
Total Company Benefit Costs - The components of net periodic benefit costs for
the plans were as follows:
Pension Benefits
Dollars in Millions 1998 1997 1996
Components of net periodic benefit costs:
Service cost $ 33.7 $ 28.9 $ 31.4
Interest cost 76.3 74.5 69.5
Expected return on plan assets (102.5) (86.3) (72.3)
Amortization of prior service cost 4.2 4.2 4.0
Amortization of transitional asset (0.9) (10.7) (12.6)
Recognized net actuarial gain (0.8) (0.1) (0.1)
Multi-employer plans 0.3 0.5 0.5
Loss from curtailment 1.1 -- --
Net periodic benefit costs $ 11.4 $ 11.0 $ 20.4
Postretirement Benefits
Dollars in Millions 1998 1997 1996
Components of net periodic benefit costs:
Service cost $ 7.2 $ 6.3 $ 6.7
Interest cost 19.5 18.6 17.3
Amortization of prior service cost 0.6 0.5 0.5
Recognized net actuarial gain (0.1) (0.1) (0.1)
Gain from curtailment (0.1) -- --
Net periodic benefit costs $ 27.1 $ 25.3 $ 24.4
<58>
The decline in the Company's pension expense from 1996 to 1997 was primarily due
to an increase in the rate of return on the plans' net assets and a reduction in
the number of active employees. The Company incurred $5.3 million, $5.5 million
and $4.5 million in costs in 1998, 1997 and 1996, respectively, for defined
contribution benefit plans. These costs are not included in the net periodic
benefit costs summarized on page 58.
Domestic Obligations and Funded Status - The changes in the benefit obligations
and the reconciliations of the funded status of the Company's domestic plans to
the statement of financial position were as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
Dollars in Millions 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 993.0 $ 869.6 $ 271.3 $ 238.5
Service cost 25.6 22.6 6.8 6.0
Interest cost 65.8 64.2 18.9 17.9
Benefits paid (48.6) (43.7) (15.0) (14.8)
Actuarial loss 14.0 80.3 9.2 22.5
Plan participant contributions -- -- 1.3 1.2
Benefit obligation at end of year $ 1,049.8 $ 993.0 $ 292.5 $ 271.3
Change in plan assets:
Fair value of plan assets
at beginning of year $ 1,075.1 $ 907.3 $ -- $ --
Actual return on assets 109.9 209.5 -- --
Company contributions 5.0 2.0 13.7 13.6
Benefits paid (48.6) (43.7) (15.0) (14.8)
Plan participant contributions -- -- 1.3 1.2
Fair value of plan assets at end of year $ 1,141.4 $ 1,075.1 $ -- $ --
Fair value of plan assets greater (less)
than benefit obligation $ 91.6 $ 82.1 $ (292.5) $ (271.3)
Unrecognized net actuarial (gain) loss (199.7) (195.6) 4.9 (4.4)
Unrecognized prior service cost 14.3 18.2 3.8 4.3
Unrecognized net liability at transition 0.6 0.8 -- --
Net amounts recognized $ (93.2) $ (94.5) $ (283.8) $ (271.4)
Net amounts recognized consist of:
Accrued benefit liability $ (93.2) $ (94.5) $ (283.8) $ (271.4)
Net amounts recognized $ (93.2) $ (94.5) $ (283.8) $ (271.4)
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $95.2 million, $82.1 million and $31.4
million, respectively, as of December 31, 1998, and $87.1 million, $76.8 million
and $29.7 million, respectively, as of December 31, 1997.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
Weighted average assumptions as of December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected long-term rate of return on plan assets 9.75% 9.75% N/A N/A
Rate of future compensation increases 4.50% 4.50% N/A N/A
N/A: Not applicable
</TABLE>
For measurement purposes, a 7.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 4.0 percent for 2005 and remain at that level
beyond.
If the health care trend rate was increased one percentage point, postretirement
benefit costs for the year ended December 31, 1998, would have been $4.1 million
higher, and the accumulated postretirement benefit obligation as of December 31,
1998, would have been $42.1 million higher. If the health care trend rate was
decreased one percentage point, postretirement benefit costs for the year ended
December 31, 1998, would have been $3.3 million lower, and the accumulated
postretirement benefit obligation as of December 31, 1998, would have been $34.6
million lower.
<59>
Foreign Obligations and Funded Status - The changes in the benefit obligations
and the reconciliations of the funded status of the Company's foreign plans to
the statement of financial position were as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
Dollars in Millions 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 139.6 $ 138.4 $ 9.4 $ 10.6
Service cost 8.1 6.3 0.4 0.3
Interest cost 10.5 10.3 0.6 0.7
Benefits paid (10.9) (13.5) (0.2) (0.2)
Actuarial loss (gain) 23.2 3.5 0.1 (1.6)
Plan participant contributions 0.6 0.6 -- --
Plan amendments -- 1.7 0.6 --
Foreign currency exchange rate change (2.9) (7.7) (0.7) (0.4)
Plan curtailments 0.8 -- (0.1) --
Benefit obligation at end of year $ 169.0 $ 139.6 $ 10.1 $ 9.4
Change in plan assets:
Fair value of plan assets at beginning of year $ 144.1 $ 139.1 $ -- $ --
Actual return on assets 20.3 14.7 -- --
Company contributions 7.4 9.5 0.2 0.2
Benefits paid (10.9) (13.5) (0.2) (0.2)
Plan participant contributions 0.5 0.5 -- --
Foreign currency exchange rate changes (3.1) (6.2) -- --
Fair value of plan assets at end of year $ 158.3 $ 144.1 $ -- $ --
Fair value of plan assets (less) greater
thanbenefit obligation $ (10.7) $ 4.4 $ (10.1) $ (9.4)
Unrecognized net actuarial loss (gain) 5.8 (6.3) (1.3) (1.5)
Unrecognized prior service cost 3.4 4.1 0.9 0.4
Unrecognized net asset at transition (4.9) (6.2) -- --
Net amounts recognized $ (6.4) $ (4.0) $ (10.5) $ (10.5)
Net amounts recognized consist of:
Accrued benefit liability $ (13.9) $ (10.9) $ (10.5) $ (10.5)
Prepaid benefit costs 7.5 6.9 -- --
Net amounts recognized $ (6.4) $ (4.0) $ (10.5) $ (10.5)
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the defined benefit pension plans with accumulated benefit
obligations in excess of plan assets were $28.5 million, $27.9 million and $19.0
million, respectively, as of December 31, 1998, and $7.8 million, $7.1 million
and $0.2 million, respectively, as of December 31, 1997.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
Weighted average assumptions as of December 31 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Discount rate 5.50% 7.50% 6.25% 7.00%
Expected long-term rate of return on plan assets 7.60% 8.00% N/A N/A
Rate of future compensation increases 4.00% 6.00% N/A N/A
N/A: Not applicable
</TABLE>
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 4.5 percent for 2002 and remain at that level
beyond.
If the health care trend rate was increased one percentage point, postretirement
benefit costs for the year ended December 31, 1998, would have been $0.3 million
higher, and the accumulated postretirement benefit obligation as of December 31,
1998, would have been $1.7 million higher. If the health care trend rate was
decreased one percentage point, postretirement benefit costs for the year ended
December 31, 1998, would have been $0.3 million lower, and the accumulated
postretirement benefit obligation as of December 31, 1998, would have been $1.7
million lower.
<60>
Note 11
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
$38.5 million, $38.0 million and $36.4 million for the years ended December 31,
1998, 1997 and 1996, 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, 1998.
Dollars in Millions 1999 2000 2001 2002 2003 Thereafter Total
Total payments $25.1 $23.5 $22.3 $17.1 $13.5 $30.4 $131.9
The Company enters into executory contracts to obtain inventory and promote
various products. As of December 31, 1998, future commitments under these
contracts were $348.5 million.
Note 12
Supplementary Income Statement Information
Dollars in Millions 1998 1997 1996
Advertising, media and production $ 281.9 $ 292.7 $ 289.8
Merchandising 959.9 933.7 913.5
Total advertising and merchandising $ 1,241.8 $ 1,226.4 $ 1,203.3
Depreciation expense $ 116.3 $ 122.0 $ 119.1
Amortization of intangibles $ 12.8 $ 35.6 $ 78.5
Research and development $ 31.0 $ 34.9 $ 33.0
Note 13
Interest Expense
Dollars in Millions 1998 1997 1996
Interest expense $ 72.0 $ 89.8 $ 113.0
Interest expense capitalized (2.4) (4.0) (6.2)
Subtotal 69.6 85.8 106.8
Interest income (10.7) (6.7) (7.4)
Interest expense - net $ 58.9 $ 79.1 $ 99.4
Interest paid in the years ended December 31, 1998, 1997 and 1996, was $68.8
million, $83.2 million and $109.0 million, respectively.
Note 14
Income Taxes
The Company uses an asset and liability approach to financial accounting and
reporting for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Income tax provisions (benefits) were as follows:
Dollars in Millions 1998 1997 1996
Currently payable (receivable):
Federal $ 147.4 $ (140.1) $ 99.4
Foreign 21.2 21.9 10.2
State 27.0 4.2 26.6
Total currently payable (receivable) 195.6 (114.0) 136.2
Deferred - net:
Federal (62.7) (3.0) 15.9
Foreign (12.6) (13.6) 10.4
State (8.2) (2.8) 5.2
Total deferred - net (83.5) (19.4) 31.5
Income tax provision (benefit) $ 112.1 $ (133.4) $ 167.7
As a result of the loss on the divestiture of Snapple in 1997, the Company
recovered $240.0 million in Federal taxes paid on previous capital gains from
business divestitures and expects to recover an additional $10.0 million in
state taxes. Included in other current assets as a tax receivable related to
these recoveries is $10.0 million and $250.0 million as of December 31, 1998 and
1997, respectively.
<61>
Income taxes (refunded) paid during 1998, 1997 and 1996 were $(110.4) million,
$92.9 million and $161.1 million, respectively. The net amount refunded in 1998
includes the $240.0 million recovery of Federal taxes paid on previous capital
gains.
The components of the deferred income tax (benefit) provision were as follows:
Dollars in Millions 1998 1997 1996
Accelerated tax depreciation $ (10.9) $ 12.8 $ 3.7
Postretirement benefits (3.9) (8.4)* 0.6
Accrued expenses including
restructuring charges (34.6) -- 40.6
Loss carryforwards, net of valuation allowances 4.4 (4.6) (7.1)
Foreign gain deferral (3.7) (4.3) 9.8
Impairment losses (39.8) (1.6)* --
Other 5.0 (13.3)* (16.1)
(Benefit) provision for deferred income taxes $ (83.5) $ (19.4) $ 31.5
* Restated to conform to current presentation.
Total income tax provisions (benefits) were allocated as follows:
Dollars in Millions 1998 1997 1996
Continuing operations $ 112.1 $ (133.4) $ 167.7
Items charged directly to
common shareholders' equity $ (43.8) $ (21.0) $ (8.4)
The sources of pretax income (loss) were as follows:
Dollars in Millions 1998 1997 1996
U.S. sources $ 435.3 $(1,087.7) $ 362.8
Foreign sources (38.7) 23.4 52.8
Income (loss) before income taxes $ 396.6 $(1,064.3) $ 415.6
Reconciliations of the statutory Federal income tax rates to the effective
income tax rates were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1998 1997 1996
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Loss Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) based
on the Federal statutory rate $ 138.8 35.0% $ (372.5) 35.0% $ 145.5 35.0%
State and local income tax
Provision (benefit) - net of
Federal income taxes 9.2 2.3 (7.1) 0.7 20.7 5.0
Repatriation of foreign earnings (2.9) (0.7) 1.9 (0.2) (11.3) (2.7)
Foreign tax rate differential 3.5 0.9 0.1 -- 2.1 0.5
Capital loss valuation allowance (25.4) (6.4) 253.1 (23.8) -- --
Miscellaneous items (11.1) (2.8) (8.9) 0.8 10.7 2.6
Income tax provision (benefit) $ 112.1 28.3% $ (133.4) 12.5% $ 167.7 40.4%
Deferred tax assets and deferred tax liabilities were as follows:
<CAPTION>
Dollars in Millions 1998 1997
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Depreciation and amortization $ 37.4 $ 183.2 $ 20.3 $ 218.9
Postretirement benefits 118.4 -- 114.5* --
Other benefit plans 62.8 5.8 65.5* 5.7*
Accrued expenses including
restructuring charges 122.5 9.7 92.5 11.5
Loss carryforwards 316.7 -- 328.5 --
Other 12.0 9.0 4.1 15.9
Subtotal 669.8 207.7 625.4 252.0
Valuation allowance (314.0) -- (319.2) --
Total $ 355.8 $ 207.7 $ 306.2 $ 252.0
*Restated to conform to current presentation.
</TABLE>
Included in other current assets were deferred tax assets of $116.6 million and
$90.5 million as of December 31, 1998 and 1997, respectively. Included in other
assets were deferred tax assets of $31.5 million as of December 31, 1998.
<62>
As of December 31, 1998 and 1997, the Company had approximately $760 million and
$790 million, respectively, of capital loss carryforwards available to reduce
future capital gains in the United States. The capital loss carryforwards are
primarily the result of Quaker's 1997 loss on divestiture of Snapple.
Therefore, the majority of those capital loss carryforwards expire in 2002.
During 1998, the amount of available capital loss carryforwards decreased as a
result of business divestitures. A valuation allowance has been provided for
the full value of the deferred tax assets related to these carryforwards.
As of December 31, 1998, the Company had $41.2 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 50 percent of the deferred tax assets related to the
loss carryforwards.
Note 15
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 16
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, 1998 1997 1996
Income Shares Income Shares Income Shares
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 284.5 $ (930.9) $ 247.9
Less: Preferred dividends 4.5 3.5 3.7
Net income (loss) available
for common $ 280.0 137,185 $ (934.4) 137,460 $ 244.2 135,466
Net income (loss) per
common share $ 2.04 $ (6.80) $ 1.80
Net income (loss) available for common
for common $ 280.0 137,185 $ (934.4) 137,460 $ 244.2 135,466
Effect of dilutive securities:
Stock options -- 3,613 -- -- -- 1,000
ESOP Convertible
Preferred Stock 2.0 2,180 -- -- 2.9 2,441
Non-vested awards -- 219 -- -- -- 83
$ 282.0 143,197 $ (934.4) 137,460 $ 247.1 138,990
Net income (loss) per
common share - assuming
dilution $ 1.97 $ (6.80) $ 1.78
</TABLE>
As of December 31, 1998 and 1996, 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.
As the Company incurred a net loss for the year ended December 31, 1997, there
was no adjustment for potentially dilutive securities as the adjustment 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.
<63>
Note 17
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
First Second Third Fourth
1998 Quarter (a) Quarter (b) Quarter (c) Quarter (d)
<S> <C> <C> <C> <C>
Net sales $ 1,092.3 $ 1,381.7 $ 1,405.2 $ 963.3
Cost of goods sold 552.2 676.5 663.4 482.3
Gross profit $ 540.1 $ 705.2 $ 741.8 $ 481.0
Net income $ 47.0 $ 56.5 $ 107.8 $ 73.2
Per common share:
Net income $ 0.33 $ 0.41 $ 0.78 $ 0.52
Net income - assuming
dilution $ 0.32 $ 0.40 $ 0.75 $ 0.50
Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285
Market price range:
High $ 60 3/8 $ 58 7/16 $ 63 $ 65 9/16
Low $ 48 1/2 $ 50 5/8 $ 51 3/4 $ 55 1/8
</TABLE>
(a) Includes pretax restructuring charges of $9.1 million ($5.5 million after-
tax or $0.04 per share) for organization alignment.
(b) Includes pretax impairment losses of $63.0 million ($39.4 million after-tax
or $0.28 per share) related to the Continental Coffee and Brazilian pasta
businesses, and pretax restructuring charges of $15.6 million ($11.1 million
after-tax or $0.08 per share) for organization alignment.
(c) Includes pretax impairment losses of $40.5 million ($24.3 million after-tax
or $0.18 per share) related to the Nile Spice and China Foods businesses, a
combined pretax gain of $7.6 million ($7.6 million after-tax or $0.05 per share)
for the sale of the Ardmore Farms and Continental Coffee businesses and pretax
restructuring charges of $9.0 million ($5.4 million after-tax or $0.04 per
share) for organization alignment.
(d) Includes pretax restructuring charges of $56.0 million ($30.1 million after-
tax or $0.22 per share) for organization alignment, plant consolidations and
Asian reorganization, a pretax loss of $3.1 million ($1.9 million after-tax or
$0.01 per share) for the sale of the Nile Spice business and a pretax gain of
$60.2 million ($60.2 million after-tax or $0.44 per share) for the sale of the
Liqui-Dri business.
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
First Second Third Fourth
1997 Quarter (a) Quarter (b) Quarter (c) Quarter (d)
<S> <C> <C> <C> <C>
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
</TABLE>
(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 $0.02 per
share) for the sale of the Snapple beverages business and pretax restructuring
charges of $11.8 million ($7.9 million after-tax or $0.06 per share) for plant
consolidations in the Latin American Foods business and the closing of a
Singapore beverages office.
(c) Includes a $4.8 million pretax net charge ($3.4 million after-tax or $0.02
per share) for an impairment loss partly offset by a litigation settlement in
the Latin American Foods business and pretax restructuring charges of $46.9
million ($28.2 million after-tax or $0.19 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 million after-tax or
$0.02 per share) for manufacturing reconfigurations in the U.S. and Canadian
Foods and Beverages businesses.
Note 18
Subsequent Event
In February 1999, the Company announced it had reached a definitive agreement to
sell its Brazilian pasta business. The sale of this business is not expected to
have a material impact on the Company's operating results.
<64>
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, 1998 and
1997, and the related consolidated statements of income, common shareholders'
equity and cash flows for the years ended December 31, 1998, 1997 and 1996.
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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 2, 1999
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.
<65>
ADDITIONAL 10-K INFORMATION
Description of Property
As of December 31, 1998, the Company operated 46 manufacturing plants in 13
states and 14 foreign countries and owned or leased distribution centers and
sales offices in 22 states and 20 foreign countries.
<TABLE>
<CAPTION>
Foods Beverages Shared Total
<S> <C> <C> <C> <C>
Owned and Leased Manufacturing Locations:
U.S. and Canadian 13 8 -- 21
Latin American 12 3 1 16
Other 5 4 -- 9
Owned and Leased Distribution Centers:
U.S. and Canadian 1 -- 8 9
Latin American 2 1 16 19
Other -- 2 -- 2
Owned and Leased Sales Offices:
U.S. and Canadian 11 13 6 30
Latin American 4 3 13 20
Other 6 7 -- 13
</TABLE>
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. Production capacity is appropriately
utilized. The Company is in the process of terminating certain sales office
leases in light of its recent restructuring actions.
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 and Gatorade
Frost 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; Golden Grain and Mission for pasta; and Quaker and
Aunt Jemima for mixes, syrups and corn goods. 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; and Gatorade for thirst-quenching beverages.
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 syrups,
grain-based snacks, cornmeal, hominy grits and value-added rice products. In
addition, the Company is the second-largest manufacturer of pancake mixes and
value-added pasta products and is among the four largest manufacturers of ready-
to-eat cereals and five largest manufacturers of branded 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.
<66>
Latin American Foods Description
The Company manufactures and markets its products in many countries throughout
Latin America and is broadly diversified by product line. It is the leading
brand-name hot cereals producer in many countries and has other leading category
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.
Other Foods Description
The Company is broadly diversified, both geographically and by product line, in
the packaged food industry. The Company manufactures and markets its products
in many countries throughout Europe and Asia. It is the leading brand-name
cereals producer in many European countries and has other leading category
positions for products in a number of countries.
U.S. and Canadian Beverages Description
The Company is the leading manufacturer and distributor of sports beverages in
the United States and Canada and accounts for more than 80 percent of sales in
the sports drink category. The Company uses both its own and broker sales
forces to sell Gatorade thirst quencher and has distribution centers around the
country. Over 60 percent of Gatorade sales occur in the second and third
quarters during the spring and summer beverage season.
Latin American and Other Beverages Description
The Company also manufactures and markets Gatorade in Latin America, Europe and
Asia. Gatorade is sold in more than 45 countries outside of North America and
is the leading sports drink distributor in Mexico, Argentina, Brazil, Venezuela,
Colombia, the Philippine Islands and Italy. Gatorade is also one of the leading
sports drink brands in Korea and Australia, where it is sold through license
arrangements.
Raw Materials
Raw materials used in manufacturing include oats, wheat, corn, rice, sweeteners,
almonds, fruit, cocoa, vegetable oil 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.
<67>
DIRECTORS
Members of the
Board of Directors
Frank C. Carlucci 1*,4,5
Chairman
The Carlyle Group
(Banking)
Washington, D.C.
Kenneth I. Chenault 1,3
President and
Chief Operating Officer
American Express Company
(Financial and Travel Services)
New York, New York
John H. Costello 1,2,4
President
Republic Industries, Inc.
(Automotive Retailing and Rental)
Fort Lauderdale, Florida
W. James Farrell 1,3,4
Chairman and
Chief Executive Officer
Illinois Tool Works, Inc.
(Component Manufacturer)
Glenview, Illinois
Judy C. Lewent 1,3,5
Senior Vice President and
Chief Financial Officer
Merck & Co., Inc.
(Pharmaceuticals)
Whitehouse Station,
New Jersey
J. Michael Losh 1,2,5
Executive Vice President and
Chief Financial Officer
General Motors Corporation
(Automotive Manufacturing)
Detroit, Michigan
Vernon R. Loucks, Jr. 2,3*,5
Chairman
Baxter International Inc.
(Medical Care Products)
Deerfield, Illinois
Robert S. Morrison 2,4
Chairman, President and
Chief Executive Officer
Walter J. Salmon 2*,5
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 Board Affairs
(Robert S. Morrison
Ex Officio Member)
3 Compensation
4 Executive
5 Finance
* Denotes Committee Chairman
OFFICERS
Operating Committee
Robert S. Morrison+
Age 56
Chairman, President and
Chief Executive Officer
Joined Quaker in October 1997.
Elected to present office
in October 1997.
Cassian K.S. Cheung+
Age 43
Vice President and President
Quaker Asia
Joined Quaker in 1994.
Elected to present office
in March 1998.
Harry M. Dent+
Age 41
Vice President and President
Ready-to-Eat Cereals
Joined Quaker in 1983.
Elected to present office
in March 1998.
Margaret M. Eichman+
Age 40
Vice President
Investor Relations and
Corporate Affairs
Joined Quaker in 1980.
Elected to present office
in July 1997.
Pamela S. Hewitt+
Age 46
Senior Vice President
Human Resources
Joined Quaker in 1992.
Elected to present office
in May 1998.
John G. Jartz+
Age 45
Senior Vice President
General Counsel, Business
Development and
Corporate Secretary
Joined Quaker in 1980.
Elected to present office
in July 1997.
Polly B. Kawalek+
Age 44
Vice President and President
Hot Breakfast
Joined Quaker in 1979.
Elected to present office
in March 1998.
<70>
Charles I. Maniscalco+
Age 45
Vice President and President
Snacks
Joined Quaker in 1980.
Elected to present office
in March 1998.
Terence D. Martin+
Age 55
Senior Vice President and
Chief Financial Officer
Joined Quaker in 1998.
Elected to present office
in November 1998.
Terrence B. Mohr+
Age 55
Senior Vice President
Customer Organization
Joined Quaker in 1987.
Elected to present office
in March 1998.
David L. Morton
Age 54
President and
Chief Executive Officer
The Quaker Oats Company
Of Canada, Ltd.
George F. Sewell
Age 52
President
Cereals, Europe
Mark A. Shapiro+
Age 43
Vice President and President
Golden Grain Company
The Quaker Oats Company
of Canada, Ltd.
Joined Quaker in 1983.
Elected to present office
in March 1998.
Susan D. Wellington+
Age 40
Vice President and President
U.S. Beverages
Joined Quaker in 1981.
Elected to present office
in March 1998.
Bernardo Wolfson+
Age 45
Vice President and President
Quaker Latin America
Joined Quaker in 1983.
Elected to present office
in March 1998.
Russell A. Young+
Age 50
Senior Vice President
Supply Chain
Joined Quaker in 1971.
Elected to present office
in March 1998.
Corporate Staff
Officers
Michael D. Annes
Vice President
Business Development
and Counsel Law
Penelope C. Cate
Vice President
Public Affairs
Thomas L. Gettings+
Age 42
Vice President
Treasurer and Tax
Joined Quaker in 1987.
Elected to present office
in May 1998.
Richard M. Gunst+
Age 42
Vice President and
Corporate Controller
Joined Quaker in 1992.
Elected to present office
in May 1998.
Douglas A. James
Assistant Treasurer
James E. LeGere
Vice President
Information Systems
I. Charles Mathews
Vice President
Organization Effectiveness
Kenneth W. Murray
Vice President
Audit Services and
Chief Ethics Officer
Edward H. Stassen
Vice President
Planning, Analysis and
Controls
Michael T. Welch
Vice President
Legal Services
+ 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. of Philip Morris
Companies, Inc. [1994-1997] and
President of General Foods U.S.A. of
Philip Morris Companies, Inc. [1991-
1994], and Terence D. Martin, who
joined the Company in November
1998, and was formerly the Executive
Vice President and Chief Financial
Officer of General Signal Corporation
[1995-1998] and Chief Financial
Officer of American Cyanamid
Company [1991-1995]) have been
employed by The Quaker Oats
Company in an executive capacity for
five years or more.
<71>
CORPORATE AND SHAREHOLDER INFORMATION
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 (800) 494-7843
Media Relations
Copies of press releases are available
at no charge through PR Newswire's
Company News On-Call fax service,
(800) 758-5804, extension 103689
News media-related inquiries
should be addressed to:
Corporate Communications
Suite 27-6
or call (312) 222-7399
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
Shareholder Services
Harris Trust and Savings Bank acts as
transfer agent and registrar for Quaker
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 (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 (800) 524-8580. Current
shareholders should call Harris Bank
directly at (800) 344-1198.
Harris DOCS
The Quaker Oats Company
Administrator
P.O. Box A33090
Chicago, Illinois 60690-3309
(800) 344-1198
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 the Form
10-K cover page, exhibit list
and conformed signature page.
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, at 9:30 a.m. (CDT),
on May 12, 1999.
Dividends
Cash dividends on Quaker common
stock have been paid for 93
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.
<72>
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 Web Site Address
www.quakeroats.com
Shares Listed
New York Stock Exchange
Chicago Stock Exchange
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 12/31/98
SUBSIDIARY STATE OF INCORPORATION
The Gatorade Company Delaware
Gatorade Puerto Rico Company Delaware
Golden Grain Company California
Grocery International Holdings, Inc. Delaware
QO Coffee Holdings Inc. Delaware
Quaker Oats Asia, Inc. Delaware
Quaker Oats Europe, Inc. Illinois
Quaker Oats Holdings, Inc. Delaware
Quaker Oats Music, Inc. Delaware
Quaker Oats Philippines, Inc. Delaware
Quaker South Africa, Inc. Delaware
Quaker Spain, Inc. Delaware
Stokely-Van Camp, Inc. Indiana
SVC Equipment Company Delaware
SVC Latin America, Inc. Delaware
SVC Latin America, LLC Delaware
ACTIVE FOREIGN SUBSIDIARIES AS OF 12/31/98
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
Fester Industria Alimenticia 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 Co. The Quaker Oats Company 80%
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 2, 1999,
included in this Form 10-K for the year ended December 31, 1998
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 17, 1999
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