<PAGE> 1
Exhibit (a)
THE QUAKER OATS COMPANY
THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES
FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND 1999
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
<PAGE> 2
THE QUAKER OATS COMPANY
THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES
AS OF JUNE 30, 2000 AND 1999
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 3
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS 4
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS 5
NOTES TO FINANCIAL STATEMENTS 6 - 21
Note: Supplemental schedules are either inapplicable for the twelve months ended
June 30, 2000, or are not required because they are filed as part of The Quaker
Oats Company 401(k) Plans Master Trust (Quaker Master Trust), in which this Plan
participates.
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
To the Plan Administrative Committee of
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
of The Quaker Oats Company
We have audited the accompanying Statements of Net Assets Available for Benefits
of The Quaker 401(k) Plan for Salaried Employees (Plan), as of June 30, 2000 and
1999, and the related Statement of Changes in Net Assets Available for Benefits
for the year ended June 30, 2000. These financial statements are the
responsibility of the Plan'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 net assets available for benefits of the Plan as of
June 30, 2000 and 1999, and the changes in net assets available for benefits for
the year ended June 30, 2000 in conformity with generally accepted accounting
principles.
/s/ WASHINGTON, PITTMAN & MCKEEVER, LLC
WASHINGTON, PITTMAN & MCKEEVER, LLC
CHICAGO, ILLINOIS
DECEMBER 19, 2000
<PAGE> 4
THE QUAKER OATS COMPANY
THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
AS OF JUNE 30, 2000 AND 1999
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Plan interest in Quaker Master Trust, at fair value:
Participant-directed investments $385,929 $398,884
Nonparticipant-directed investments 512,672 458,894
--------------- ---------------
Total Plan interest in Quaker Master Trust 898,601 857,778
--------------- ---------------
NET ASSETS AVAILABLE FOR BENEFITS $898,601 $857,778
=============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
THE QUAKER OATS COMPANY
THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED JUNE 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
NONPARTICIPANT-DIRECTED INVESTMENTS
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Quaker LESOP Common Stock Fund Quaker LESOP Preferred Stock Fund
-------------------------------------- -------------------------------------
Allocated Unallocated Total Allocated Unallocated Total TOTAL
------------ ----------- ---------- ------------ ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ADDITIONS
Investment income:
Dividends $ 5,270 $ 1,132 $ 6,402 $ 3,139 $ 1,903 $ 5,042 $ 11,444
Interest 90 91 181 27 36 63 244
Interest on participant loans -- -- -- -- -- -- --
Net appreciation in the fair value
of assets 38,658 8,272 46,930 9,455 4,971 14,426 61,356
--------- --------- --------- --------- --------- --------- ---------
Total investment income 44,018 9,495 53,513 12,621 6,910 19,531 73,044
Contributions:
Employee contributions -- -- -- -- -- -- --
Employer contributions -- 22,890 22,890 -- 9,088 9,088 31,978
Rollovers -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total contributions -- 22,890 22,890 -- 9,088 9,088 31,978
Allocation of Company stock, at market 39,260 -- 39,260 12,608 -- 12,608 51,868
Total additions 83,278 32,385 115,663 25,229 15,998 41,227 156,890
DEDUCTIONS
Allocation of Company stock, at market -- 39,260 39,260 -- 12,608 12,608 51,868
Distributions to participants 33,662 -- 33,662 9,622 -- 9,622 43,284
Dividends to participants -- -- -- -- -- -- --
Interest expense on notes payable -- 3,195 3,195 -- 2,805 2,805 6,000
Administrative expenses -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total deductions 33,662 42,455 76,117 9,622 15,413 25,035 101,152
INTERFUND TRANSFERS (1,621) -- (1,621) (339) -- (339) (1,960)
--------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets 47,995 (10,070) 37,925 15,268 585 15,853 53,778
Net assets available for benefits,
beginning of period 286,880 68,273 355,153 80,139 23,602 103,741 458,894
NET ASSETS AVAILABLE FOR
--------- --------- --------- --------- --------- --------- ---------
BENEFITS, END OF PERIOD $ 334,875 $ 58,203 $ 393,078 $ 95,407 $ 24,187 $ 119,594 $ 512,672
========= ========= ========= ========= ========= ========= =========
PARTICIPANT
DIRECTED GRAND
INVESTMENTS TOTAL
----------- -----
ADDITIONS
Investment income:
Dividends $ 9,657 $ 21,101
Interest 772 1,016
Interest on participant loans 742 742
Net appreciation in the fair value
of assets 4,156 65,512
-------- ---------
Total investment income 15,327 88,371
Contributions:
Employee contributions 13,119 13,119
Employer contributions -- 31,978
Rollovers 1,996 1,996
-------- ---------
Total contributions 15,115 47,093
Allocation of Company stock, at market -- 51,868
Total additions 30,442 187,332
DEDUCTIONS
Allocation of Company stock, at market -- 51,868
Distributions to participants 43,786 87,070
Dividends to participants 1,560 1,560
Interest expense on notes payable -- 6,000
Administrative expenses 11 11
-------- ---------
Total deductions 45,357 146,509
INTERFUND TRANSFERS 1,960 --
-------- ---------
Increase (decrease) in net assets (12,955) 40,823
Net assets available for benefits,
beginning of period 398,884 857,778
NET ASSETS AVAILABLE FOR
--------- ---------
BENEFITS, END OF PERIOD $ 385,929 $ 898,601
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
The following brief description of The Quaker 401(k) Plan for Salaried Employees
(Plan) provides only general information. The Plan document should be referred
to for the complete Plan provisions.
GENERAL
The Plan covers salaried domestic employees of The Quaker Oats Company (Company
or Quaker) and certain domestic subsidiaries. The Plan includes The Quaker LESOP
(leveraged employee stock ownership plan) Common Stock Fund and The Quaker LESOP
Preferred Stock Fund (LESOP Funds) and 13 participant-directed investment funds
(non-LESOP Funds). Under the Plan, eligible salaried employees are awarded
annual employer contributions to the LESOP Funds and may contribute to non-LESOP
Funds on a pretax basis for long-term retirement savings.
The Plan is intended to qualify as a cash or deferred arrangement under Section
401(k) of the Internal Revenue Code and is subject to the provisions of the
Employee Retirement Income Security Act of 1974.
Overall responsibility for administering the Plan rests with the Plan's
Administrative Committee which is appointed by the Board of Directors of the
Company. The Plan's trustee is responsible for the management and control of the
Plan's assets and has certain discretionary authority and control over such
assets. The Plan's Administrative Committee appointed Fidelity Management Trust
Company (FMTC) as the trustee and Fidelity Institutional Retirement Services
Company as the record-keeper for the Plan.
PLAN EXPENSES
The Company pays administrative record-keeping expenses as well as expenses for
the operation and management of the LESOP Funds. Participants' account balances
are deducted for investment management fees and other direct expenses of the
non-LESOP Funds in which the participant invests.
ELIGIBILITY
Under the current terms of the Plan, designated salaried employees of the
Company are eligible to participate in the Plan on their first day of service.
VESTING
Participants are immediately vested in both their voluntary contributions and
the Company's allocations as well as the actual earnings thereon.
<PAGE> 7
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES (CONTINUED)
LESOP FUNDS (NONPARTICIPANT-DIRECTED)
FMTC must invest all of the LESOP Funds' assets, including earnings thereon,
primarily in Quaker stock, except as otherwise directed by the Plan's
Administrative Committee. The assets of the LESOP Funds may not be commingled
with the assets of the non-LESOP Funds. Participants over age 55 with ten or
more years of participation in the Plan may elect to diversify their investments
by transferring certain amounts out of the LESOP Funds and into other Plan
investment funds once a year.
NON-LESOP FUNDS (PARTICIPANT-DIRECTED)
As of June 30, 2000 and 1999, participants may invest in one or more of the
following 13 investment funds:
FIDELITY RETIREMENT MONEY MARKET PORTFOLIO
This fund invests in high quality, short-term, U.S. dollar denominated money
market securities of domestic and foreign issuers. The fund seeks to
maintain a stable net asset value of $1 per share and to provide current
income, but there is no guarantee it will do so.
PIMCO TOTAL RETURN FUND - ADMINISTRATIVE CLASS
This fund invests in a variety of bonds, including U.S. government,
corporate, mortgage and foreign. The fund seeks to provide high total return
that exceeds general bond market indices.
FIDELITY'S U.S. EQUITY INDEX COMMINGLED POOL
This fund primarily invests in the common stocks of the 500 companies that
comprise the Standard and Poor's 500 Index (S&P 500). The fund seeks to
approximate the composition and total return of the S&P 500.
ICAP DIVERSIFIED FUND
This fund primarily invests in large-capitalization stocks. The fund seeks
to achieve a total return greater than the S&P 500 with an equal or lesser
degree of risk than the S&P 500.
NEUBERGER & BERMAN PARTNERS TRUST
This fund invests in common stocks of established medium- to
large-capitalization companies, using a value-oriented investment approach.
The fund seeks to provide capital growth.
<PAGE> 8
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES (CONTINUED)
FIDELITY LOW-PRICED STOCK FUND
This fund primarily invests in stocks of companies that the fund manager
considers undervalued or out of favor with other investors and that could
offer the possibility for significant growth. This fund seeks long-term
capital appreciation.
FIDELITY DIVERSIFIED INTERNATIONAL FUND
This fund primarily invests in stocks of larger companies located outside
the United States. The fund manager seeks stocks that are undervalued
compared to industry norms in their countries. This fund seeks long-term
capital growth.
MORGAN STANLEY INSTITUTIONAL FUND, INC. - GLOBAL EQUITY PORTFOLIO CLASS B
This fund invests in a diversified mix of stocks throughout the world,
selected after detailed analysis by local country investment experts. The
fund's portfolio may have some exposure to emerging markets, which pose
greater risks due to less developed political and economic situations and
less liquid markets. This fund seeks long-term capital growth.
QUAKER STOCK FUND
This fund pools a participant's money with that of other participants to buy
shares of Quaker common stock. The fund also holds an amount of short-term
investments to allow participants to buy or sell every business day without
the usual trade settlement period for individual stock transactions.
Ownership is measured in units of the fund instead of shares of stock. The
fund seeks to increase the investment value over the long term by investing
in the common stock of the Company.
The Quaker Stock Fund is an employee stock ownership plan and, as such,
participants may be paid quarterly cash dividends from the Quaker Stock Fund
and, when paid, the Company is eligible for a corresponding tax deduction.
FIDELITY ASSET MANAGER: INCOME
This fund invests in all basic types of U.S. and foreign investments:
stocks, bonds, and short-term and money market instruments. The benchmark
allocation for this fund is 20% in stocks, 50% in bonds and 30% in the
short-term/money market class. The fund seeks to provide high current
income, with some potential for capital appreciation.
<PAGE> 9
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES (CONTINUED)
FIDELITY ASSET MANAGER
This fund invests in all basic types of U.S. and foreign investments:
stocks, bonds, and short-term and money market instruments. The benchmark
allocation for this fund is 50% in stocks, 40% in bonds and 10% in the
short-term/money market class. This fund seeks to provide high total return
with reduced risk over the long term.
FIDELITY ASSET MANAGER: GROWTH
This fund invests in all basic types of U.S. and foreign investments:
stocks, bonds, and short-term and money market instruments. The benchmark
allocation for this fund is 70% in stocks, 25% in bonds and 5% in the
short-term/money market class. This fund seeks to provide maximum total
return over the long term.
FIDELITY BROKERAGELINK
BrokerageLink is a service that allows the participant to open a Fidelity
brokerage account with the assets in the participant's Plan account. Through
this account, participants have access to a wide range of additional
investments.
EMPLOYER CONTRIBUTIONS
The Company has made cash contributions to the LESOP Funds to make payments of
principal and/or interest on the notes payable. Most cash dividends received and
interest income of the LESOP Funds are available to make payments on maturing
obligations on the LESOP loans. Refer to Notes 7 and 8 for further discussion of
the notes payable issued by the LESOP Funds.
EMPLOYEE CONTRIBUTIONS
All participants in the Plan are allowed to defer receipt of, and have placed in
the non-LESOP Funds, up to ten percent of their base salary, subject to the
Internal Revenue Service (IRS) dollar amounts allowed.
Contributions are not subject to federal income tax until distributed to the
participants or their beneficiaries. The Plan allows participants to transfer
their accounts daily among non-LESOP Funds in increments of one percent or in
specific dollar amounts. Participants may also make daily changes to the
percentage of their future earnings contributed to the Plan. The Plan also
allows a participant to contribute to the Plan a lump-sum distribution received
from other qualified plans when the contribution qualifies as a tax-free
rollover.
<PAGE> 10
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES (CONTINUED)
PARTICIPANT ACCOUNTS
Each participant account is credited with the participant's contribution and an
allocation of the Plan earnings. Each participant account is also charged with
an allocation of investment management fees and other direct expenses.
Allocations are performed daily and are based on participant earnings or account
balances in each fund.
DISTRIBUTIONS
Participants may elect in writing to receive all or a portion of their non-LESOP
accounts if they are at least age 59-1/2 years or if they are totally and
permanently disabled, as determined by the Company with the advice of a medical
doctor. The participant's account will then be valued as of the latest available
valuation date before distribution. If only a portion of the account is
distributed, the remaining balance will continue to be adjusted for
contributions, net earnings, gains and losses as of each valuation date.
Participants may receive a distribution of a portion of their non-LESOP accounts
in the event of a hardship. Hardship withdrawals occur when funds are required
for purchasing or making capital expenditures for a primary residence, financing
the higher education of the participant or the participant's family or
alleviating existing financial hardship.
If a participant's employment with the Company is terminated, the Plan may
distribute the participant's account balance to the participant or the
participant's beneficiary. A participant may elect to defer the lump-sum
distribution or the start of installment payments until age 70-1/2. A
participant may elect in writing to receive the distribution in one of the
following ways: (a) in a lump sum; (b) in a partial distribution, with the
balance in installments; or (c) in approximately equal annual installments over
a chosen period. The period chosen, however, must be no longer than the
participant's life expectancy when distributions begin, as determined by the IRS
regulations.
If the distribution is made through installment payments, the participant's
remaining account balance will continue to be adjusted for net earnings and
gains and losses as of each valuation date. If a participant's account value is
$5,000 or less, an automatic lump-sum distribution may be made as soon as
practicable after the end of the Plan year in which termination occurs.
<PAGE> 11
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES (CONTINUED)
PARTICIPANT LOANS
Participants may borrow from their fund accounts a minimum of $1,000 up to a
maximum equal to 50 percent of their account balance or $50,000. Loan
transactions are treated as a transfer to (from) the investment from (to) the
Participant Loan Fund. Loan terms range from one year to five years or from six
to 15 years for the purchase of a primary residence. Loan amounts may not be
deducted from the LESOP Funds; as such, in no event can a participant borrow
more than their combined balance in all of the non-LESOP Funds. The loans are
secured by the balance in the participant's account and bear a fixed rate of
interest at the prime lending rate plus one percent, as determined by the Plan's
administrator. Interest rates during the year ended June 30, 2000 (Fiscal 2000),
ranged from 9.00 percent to 10.50 percent. Principal and interest are paid
ratably according to a regular payment schedule, directly through payroll
deductions for active employees.
PLAN TERMINATION
While the Company has not expressed intent to terminate the Plan, the Plan may
be terminated at any time by action of the Company's Board of Directors. In the
event of the Plan's termination, the value of the accounts determined as of the
effective date of such termination shall be held for the benefit of
participants, former participants or their beneficiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis of
accounting.
BENEFIT OBLIGATIONS
In accordance with guidance issued by the American Institute of Certified Public
Accountants, the Plan accounts for participant distributions when paid. For
purposes of reporting on Form 5500, distributions are recorded in the period
such amounts are authorized to be paid to participants.
Such treatment may result in a difference between the Plan's Form 5500 and the
accompanying financial statements. For the years ended June 30, 2000 and 1999,
there were no such differences.
<PAGE> 12
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT VALUATION AND INCOME RECOGNITION
Investments are included in the accompanying Statements of Net Assets Available
for Benefits at fair market value. Fair market value is based on published
market prices.
The purchase and sale of investments, including related gains and losses, are
recognized on the transaction trade date. Brokerage commissions and investment
management fees increase the cost or decrease the sale proceeds on the
transactions. Interest income is recorded as earned and dividend income is
recorded as of the record date.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Plan's management to use estimates
and assumptions that affect the accompanying financial statements and
disclosures. Actual results could differ from those estimates and assumptions.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to the
current presentation.
CHANGE IN REPORTING OF INVESTMENTS
The Plan has adopted Statement of Position 99-3, "Accounting for and Reporting
of Certain Defined Contribution Plan Investments and Other Disclosure Matters,"
which was issued in September 1999. This statement simplifies disclosure
requirements, eliminating previously required disclosures for
participant-directed investment programs. As a result, the Plan has eliminated
"by-fund" disclosures in the accompanying financial statements.
NOTE 3 - RISKS AND UNCERTAINTIES
The Plan provides for various investment options in funds which invest in any
combination of stocks, bonds, fixed income securities, mutual funds, and other
investment securities. Investment securities are exposed to various risks, such
as interest rate, market, and credit. Due to the level of risk associated with
certain investment securities and the level of uncertainty related to changes in
the value of investment securities, it is at least reasonably possible that
changes in risks in the near term would materially affect participants' account
balances and the amounts reported in the statements of net assets available for
benefits and the statement of changes in net assets available for benefits.
<PAGE> 13
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 4 - FEDERAL INCOME TAXES
The Quaker Investment Plan (QIP) merged into The Quaker Employee Stock Ownership
Plan (ESOP) which was renamed The Quaker 401(k) Plan for Salaried Employees at
the close of business May 31, 1998. The QIP obtained its latest determination
letter on October 9, 1997, in which the IRS stated that the QIP, as then
designed, was in compliance with the applicable requirements of the Code. The
ESOP obtained its latest determination letter on May 22, 1996, in which the IRS
stated that the ESOP, as then designed, was in compliance with the applicable
requirements of the Code.
The Plan has not received a determination letter from the IRS since those
referred to in the preceding paragraph; however, the Plan administrator believes
that the merged plan is currently designed and being operated in compliance with
the applicable requirements of the Code and, therefore, qualifies as tax-exempt
as of June 30, 2000.
NOTE 5 - RELATED PARTY TRANSACTIONS
Certain Plan investments available in the Master Trust are shares of mutual
funds managed by Fidelity Management Trust Company, the trustee as defined by
the Plan. Also, the Master Trust holds investment in shares of the Company's
stock in the Quaker Stock Fund and the LESOP Funds. These transactions qualify
as exempt party-in-interest transactions. There have been no known prohibited
transactions with a party-in-interest.
NOTE 6 - PARTICIPATION IN A MASTER TRUST
Effective June 1, 1998, the investments of the Plan and the investments of The
Quaker 401(k) Plan for Hourly Employees were combined in the Quaker Master Trust
in order to realize certain administrative efficiencies. Investment income,
investment management fees and other direct expenses relating to the Quaker
Master Trust are allocated to the individual plans based on the average daily
balances of each plan. A separate account is maintained reflecting the equitable
share of each plan's participation in each investment fund. As of June 30, 2000
and 1999, the Plan's interest in the Quaker Master Trust was approximately 85
percent and 86 percent, respectively. As of December 31, 1999, the fiscal year
end of the Quaker Master Trust, the Plan's interest was approximately 85 percent
of the total $970,624,000.
<PAGE> 14
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
NOTE 6 - PARTICIPATION IN A MASTER TRUST (CONTINUED)
A summary of the assets and liabilities of the Quaker Master Trust as of June
30, 2000 and 1999 was as follows:
2000 1999
----------- -----------
Assets:
Investments, at fair value:
Quaker common stock $ 588,615 $ 591,206
Other common stock investments 162,604 186,272
Quaker preferred stock 147,447 142,832
Other preferred stock investments 42 --
Government obligations 1,660 --
Short-term investments 186,527 144,013
----------- -----------
Total investments 1,086,895 1,064,323
Receivables:
Participant loans receivable 15,872 14,568
Accrued income 2,464 2,966
Employer contributions receivable 27,365 25,500
Miscellaneous receivables 2,589 3,543
----------- -----------
Total receivables 48,290 46,577
Assets held in the Quaker Master Trust $ 1,135,185 $ 1,110,900
Liabilities:
Leveraged ESOP notes payable $ (71,850) $ (105,550)
Leveraged ESOP interest payable (2,646) (3,868)
Miscellaneous payables and accrued expenses (5,372) (6,756)
----------- -----------
Liabilities in the Quaker Master Trust $ (79,868) $ (116,174)
----------- -----------
Net assets held in the Quaker Master Trust $ 1,055,317 $ 994,726
=========== ===========
A summary of the Quaker Master Trust income for the period from July 1, 1999
through June 30, 2000 was as follows:
Interest $ 1,098
Interest - participant loans 1,294
Dividends 23,929
Net realized and unrealized gain (loss) on investments:
Quaker common stock 73,307
Other common stock investments (10,632)
Quaker preferred stock 14,425
Short-term investments 2,367
-----------
Quaker Master Trust net investment income $ 105,788
===========
<PAGE> 15
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - THE QUAKER LESOP COMMON STOCK FUND
Effective June 1, 1998, the common shares held within The 1988 Quaker Employee
Stock Ownership Trust and The 1989 Quaker Employee Stock Ownership Trust were
combined to form The Quaker LESOP Common Stock Fund. The 1988 and 1989 Trusts
issued certain notes pursuant to one or more loan agreements and used the
proceeds of such notes to acquire, for the future allocation to Plan
participants, shares of common stock of the Company.
STATEMENTS OF NET ASSETS
The Quaker LESOP Common Stock Fund's statements of net assets as of June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
2000 1999
------------------------------- ------------------------------
Allocated Unallocated Total Allocated Unallocated Total
--------- ----------- ----- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investment in Quaker
common stock, at market $333,575 $ 72,452 $406,027 $285,534 $108,190 $393,724
Cash and cash equivalents 1,391 3,026 4,417 799 2,532 3,331
Employer contributions receivable -- 22,890 22,890 -- 21,480 21,480
Dividends and interest receivable 1,278 291 1,569 1,236 475 1,711
Miscellaneous receivables -- -- -- 699 -- 699
-------- -------- -------- -------- -------- --------
Total assets 336,244 98,659 434,903 288,268 132,677 420,945
Liabilities:
Accrued interest payable -- 1,456 1,456 -- 2,304 2,304
Notes payable -- 39,000 39,000 -- 62,100 62,100
Miscellaneous payables 1,369 -- 1,369 1,388 -- 1,388
-------- -------- -------- -------- -------- --------
Total liabilities 1,369 40,456 41,825 1,388 64,404 65,792
-------- -------- -------- -------- -------- --------
Net assets available for benefits $334,875 $ 58,203 $393,078 $286,880 $ 68,273 $355,153
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 16
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - THE QUAKER LESOP COMMON STOCK FUND (CONTINUED)
INVESTMENTS IN COMPANY STOCK
The Quaker LESOP Common Stock Fund's investment in Company stock as of June 30,
2000 and 1999 was as follows:
2000 1999
------------------------------ ------------------------------
Allocated Unallocated Allocated Unallocated
-------------- -------------- -------------- --------------
Quaker Common
Shares:
Number of
Shares 4,440,261 964,418 4,301,823 1,629,977
Cost $106,229,419 $ 24,118,175 $101,029,872 $ 40,761,727
Market $333,574,608 $ 72,451,902 $285,533,502 $108,189,723
During Fiscal 2000, 665,559 shares of the Company's common stock were allocated.
591,493 shares were allocated to participants' accounts based on participants'
compensation pursuant to the terms of the Plan. The remaining 74,066 shares were
allocated to participants' accounts to replace dividend earnings on allocated
shares.
NOTES PAYABLE
In January 1989, The Quaker LESOP Common Stock Fund (then known as The Quaker
Employee Stock Ownership Trust) issued $150,000,000 Senior ESOP Notes at an
interest rate of 8.07% with principal due in annual installments through July
15, 2001. Under the terms of the note agreement of The Quaker LESOP Common Stock
Fund, if there is a change in the federal tax rate or the inclusion rate (the
percentage of income received by the lenders that is not excludable from gross
income pursuant to Section 133 of the Code), the interest rate of the loan will
be adjusted effective on the date the change in rates occurs. The new interest
rate is determined by multiplying the old interest rate by an adjustment
fraction. Effective January 1, 1993, under the new tax bill, the federal tax
rate increased. Thus, the interest rate paid by The Quaker LESOP Common Stock
Fund declined from 8.07% to 8.00%. Interest is payable semiannually on January
15th and July 15th. Payment of the notes payable and interest is unconditionally
guaranteed by Quaker. Northern Trust purchased 5,626,304 shares of Quaker common
stock with the proceeds of the notes at a cost of $149,624,972. These shares
were placed in the fund's unallocated account pending future allocation to Plan
participants.
In July of 1995, 1,861,286 shares of Quaker common stock were transferred from a
1985 trust into The 1988 Quaker Employee Stock Ownership Trust.
<PAGE> 17
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 7 - THE QUAKER LESOP COMMON STOCK FUND (CONTINUED)
The Company's cash contributions, plus cash received from dividends and
interest, were used to make regularly scheduled note payments on July 15, 1999
of $25,583,183 (principal and interest in the amount of $23,100,000 and
$2,483,183, respectively), and January 15, 2000 of $1,559,487 (interest only).
The outstanding balance of the notes payable as of June 30, 2000, was
$39,000,000 with maturing principal balances as follows:
Fiscal 2001 $ 25,800,000
Fiscal 2002 13,200,000
------------
$ 39,000,000
============
CONTRIBUTIONS
The Company is obligated to make contributions in cash to the fund which, when
aggregated with the fund's dividends and interest earnings, equal the amount
necessary to enable the Plan to make its regularly scheduled payments of
principal and interest due on its notes payable.
As of June 30, 2000, employer contributions receivable were $22,890,076. The
Company's cash contributions, plus cash received from dividends and interest,
were used to make the regularly scheduled payment on July 15, 2000 of
$27,359,487 (principal and interest in the amount of $25,800,000 and $1,559,487,
respectively) on the notes payable. In association with this payment, 626,852
shares of the Company's common stock were released from the trust's unallocated
account, and 611,470 shares were allocated to participants' accounts based on
participants' compensation pursuant to the terms of the Plan. The remaining
15,382 shares were allocated by the Company to replace dividend earnings on the
allocated shares.
NOTE 8 - THE QUAKER LESOP PREFERRED STOCK FUND
Effective June 1, 1998, the common shares within The 1989 Quaker Employee Stock
Ownership Trust were transferred to The Quaker LESOP Common Stock Fund. The
remaining preferred shares formed The Quaker LESOP Preferred Stock Fund. The
1989 Trust issued certain notes pursuant to one or more loan agreements and used
the proceeds of such notes to acquire, for the future allocation to Plan
participants, shares of common stock of the Company.
<PAGE> 18
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED)
STATEMENTS OF NET ASSETS
The Quaker LESOP Preferred Stock Fund's statements of net assets as of June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
2000 1999
-------------------------------- -------------------------------
Allocated Unallocated Total Allocated Unallocated Total
--------- ----------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investment in Quaker
preferred stock, at market $94,948 $52,499 $147,447 $79,562 $ 63,270 $142,832
Investment in Quaker
common stock, at market 274 -- 274 381 -- 381
Cash and cash equivalents 206 1,246 1,452 235 1,321 1,556
Employer contributions receivable -- 4,475 4,475 -- 4,020 4,020
Dividends and interest receivable 3 7 10 2 5 7
Miscellaneous receivables -- -- -- 6 -- 6
------- ------- -------- ------- -------- --------
Total assets 95,431 58,227 153,658 80,186 68,616 148,802
Liabilities:
Accrued interest payable -- 1,190 1,190 -- 1,564 1,564
Notes payable -- 32,850 32,850 -- 43,450 43,450
Miscellaneous payables 24 -- 24 47 -- 47
------- ------- -------- ------- -------- --------
Total liabilities 24 34,040 34,064 47 45,014 45,061
------- ------- -------- ------- -------- --------
Net assets available for benefits $95,407 $24,187 $119,594 $80,139 $ 23,602 $103,741
======= ======= ======== ======= ======== ========
</TABLE>
<PAGE> 19
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED)
INVESTMENTS IN COMPANY STOCK
The Quaker LESOP Preferred Stock Fund's investment in Company stock at June 30,
2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
----------------------------------- -------------------------------------
Allocated Unallocated Allocated Unallocated
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Quaker Common Shares:
Number of Shares 3,646 -- 5,738 --
Cost $253,565 -- $371,059 --
Market $273,906 -- $380,860 --
Quaker Series B
ESOP Convertible
Preferred Shares:
Number of Shares 566,919 313,463 527,388 419,394
Cost $41,593,259 $27,302,980 $38,196,166 $36,666,528
Market $94,947,594 $52,498,783 $79,561,754 $63,269,779
</TABLE>
During Fiscal 2000, 105,931 of the Company's ESOP preferred stock shares were
allocated to participants. 84,228 shares were allocated to participants'
accounts based on participants' compensation pursuant to the terms of the Plan.
The remaining 21,703 shares were allocated to participants' accounts to replace
dividend earnings on allocated shares. As of June 30, 2000, 34,173 shares were
released but unallocated as a result of the January 15, 2000 principal payment
on the notes payable. (See "Contributions" on page 23.)
NOTES PAYABLE
In June 1989, The Quaker LESOP Preferred Stock Fund (then known as The 1989
Quaker Employee Stock Ownership Trust) issued $100,000,000 Senior ESOP Notes at
an interest rate of 7.83% due July 15, 2001. Under the terms of the note
agreement of The Quaker LESOP Preferred Stock Fund, if there is a change in the
federal tax rate or the inclusion rate (the percentage of income received by the
lenders that is not excludable from gross income pursuant to Section 133 of the
Code), the interest rate of the loan will be adjusted effective on the date the
change in rates occurs. The new interest rate is determined by multiplying the
old interest rate by an adjustment fraction. Effective January 1, 1993, under
the new tax bill, the federal tax rate increased. Thus, the interest rate paid
by The Quaker LESOP Preferred Stock Fund declined from 7.83% to 7.76%. Interest
and principal is payable semiannually on January 15th and July 15th. Payment of
the notes payable and interest is unconditionally guaranteed by Quaker.
<PAGE> 20
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED)
Northern Trust purchased 1,282,051 shares of the Company's Series B ESOP
Convertible Preferred Stock (Quaker preferred stock) with the proceeds of the
note at a cost of $99,999,978. These shares were placed in the fund's
unallocated account pending future allocation to Plan participants. The
conversion rate of convertible preferred stock to common stock is 1:2.1576.
The Company's cash contributions, plus cash received from dividends and
interest, were used to make regularly scheduled note payments on July 15, 1999
of $6,635,860 (principal and interest in the amount of $4,950,000 and
$1,685,860, respectively), and January 15, 2000 of $7,143,800 (principal and
interest in the amount of $5,650,000 and $1,493,800, respectively). The
outstanding balance of the notes payable as of June 30, 2000, was $32,850,000
with maturing principal balances as follows:
Fiscal 2001 $ 19,250,000
Fiscal 2002 13,600,000
------------
$ 32,850,000
============
CONTRIBUTIONS
The Company is obligated to make contributions in cash to the fund which, when
aggregated with the fund's dividends and interest earnings, equal the amount
necessary to enable the Plan to make its regularly scheduled payments of
principal and interest due on its notes payable.
As of June 30, 2000, employer contributions receivable were $4,474,501. The
Company's cash contributions, plus cash received from dividends and interest,
were used to make a regularly scheduled payment on July 15, 2000 of $6,924,580
(principal and interest in the amount of $5,650,000 and $1,274,580,
respectively) on the notes payable. In association with this payment, 54,161
shares of the Company's preferred stock were released from the unallocated
account. These shares combined with 34,173 shares released on January 15, 2000,
(a total of 88,334 shares) were allocated to participants' accounts in July 2000
based on participants' compensation pursuant to the Plan.
<PAGE> 21
THE QUAKER OATS COMPANY
THE QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 9 - SUBSEQUENT EVENT
The Master Trust invests in Company sponsored stock. As of June 30, 2000, the
Plan held 6,288,707 shares (with a market value of $553,748,000) of Company
sponsored stock within its nonparticipant-directed LESOP Funds and held an
interest in the participant-directed Quaker Stock Fund. On December 2, 2000, the
Company, PepsiCo, Inc. (PepsiCo) and BeverageCo, Inc., a direct wholly owned
subsidiary of PepsiCo, entered into a merger agreement (the Merger Agreement).
Pursuant to the Merger Agreement and subject to the terms and conditions set
forth therein, the Company will merge with BeverageCo, Inc. and become a wholly
owned subsidiary of PepsiCo. At the effective time of the merger, Quaker common
shares will be converted to PepsiCo common shares and Quaker preferred shares
will be converted into PepsiCo preferred shares.
Each issued and outstanding share of Quaker common stock will be converted into
the right to receive 2.3 shares of PepsiCo common stock, which ratio will be
adjusted so as to provide a maximum value of $105 of PepsiCo common stock for
each share of Quaker common stock. If the value to the Company's common
shareholders falls below $92 per share of Quaker common stock, there is a
provision for the Company to terminate the Merger Agreement if PepsiCo does not
timely exercise its option to avoid termination by increasing the exchange ratio
to ensure the Company's common shareholders receive a value of $92 per share of
Quaker common stock. Shares of Quaker preferred stock will be exchanged for
shares of PepsiCo preferred stock with the same rights as the Quaker preferred
stock had immediately prior to the merger. The merger is subject to approval by
PepsiCo and Quaker shareholders, certain regulatory approvals and satisfaction
of other closing conditions.
