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, 1999
[ ]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:
Name of each exchange
Title of each class 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 29, 2000, was $7,049,653,148.
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 29, 2000, totaled $111,886,015, plus related dividends. The
number of shares of Common Stock, $5.00 par value, outstanding as of the close
of business on February 29, 2000, was 130,700,406.
<Page 1>
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of The Quaker Oats Company Annual Report to Shareholders for the
fiscal year ended December 31, 1999 (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 10, 2000
(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,"
"Divestitures and Asset Impairments" and "Subsequent Events," found on pages
52-53, 54 and 65, 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 40-43 of the Company's Annual Report, is
incorporated herein by reference.
(c) Description of Business
U.S. and Canadian Foods Description
The Quaker Oats Company (Quaker or the Company) is a major participant in
the competitive packaged food industry in the United States and Canada and
is a leading manufacturer of hot cereals, pancake syrups, grain-based snacks,
cornmeal, hominy grits and value-added rice products. In addition, in the
United States, 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. 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 distributors. The Company utilizes both
its own and broker sales forces and has multiple distribution centers
throughout the United States, 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 oat-based
cereal producer in many European 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 in the
United States and Canada. More than 65 percent of Gatorade sales occur in the
second and third quarters during the spring and summer beverage season.
<Page 2>
Latin American and Other Beverages Description
The Company also manufactures and markets Gatorade thirst quencher in Latin
America, Europe and Asia. Gatorade is sold in more than 55 countries outside
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, Life, Quaker Toasted Oatmeal, Quaker 100%
Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade, Gatorade
Frost and Gatorade Fierce 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, Quaker Oatso Simple,
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 25-33, 44-45,
46-49, 62, 62 and 65, 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 40-43 of the Company's Annual Report, is incorporated herein by
reference.
ITEM 2. PROPERTIES.
As of December 31, 1999, the Company operated 39 manufacturing plants in 11
states and 13 foreign countries and owned or leased distribution centers and
sales offices in 16 states and 16 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 10 8 6 1 3 2 7 2 4
Beverages 8 3 3 -- 1 3 4 -- 5
Shared -- 1 -- 8 16 -- 7 14 --
Total 18 12 9 9 20 5 18 16 9
</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.
<Page 3>
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 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. On September 29, 1999, a class consisting
of all individuals who purchased Quaker common stock during the period between
August 4, 1994 and November 1, 1994 was certified. Factual discovery in the
case has been completed. On February 4, 2000, Quaker filed a motion for summary
judgment, which is now pending. No trial date has been set.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT.
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 8, 2000, and is incorporated herein by reference.
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 45, 48-49, 65 and 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 44-45 and 46-49,
respectively, of the Company's Annual Report, is incorporated herein by
reference.
<Page 4>
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 25-33 of the Company's Annual Report, is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information set forth under the caption "Derivative Financial and Commodity
Instruments," found on page 32 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, 1999,
1998 and 1997 (page 34).
2.) Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 (page 35).
3.) Consolidated Balance Sheets as of December 31, 1999 and 1998
(pages 36-37).
4.) Consolidated Statements of Common Shareholders' Equity as of December 31,
1999, 1998 and 1997 (pages 38-39).
5.) Notes to the Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997 (pages 50-65).
6.) Report of Independent Public Accountants (page 72).
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
Information regarding the Company's executive officers is incorporated by
reference under the caption "Executive Officers of the Registrant" in Part I of
this Form 10-K.
The information set forth under the caption "Compliance with Section 16(a),"
found on page 12 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 9-10, 13-18, 19-21 and 21,
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 11-12 of the Company's Proxy Statement, is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
<Page 5>
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
incorporated by reference under Item 8 of this Form 10-K.
(a)(2) Financial Statement Schedules.
&(d)
All required financial statement schedules are included in the audited
consolidated financial statements or notes thereto as incorporated by reference
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.
<Page 6>
<TABLE>
<CAPTION>
EXHIBIT INDEX
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE (IBRF)
<S> <C> <C>
3(a) Restated Certificate of Incorporation (incorporated
by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, file number 1-12) IBRF
3(b) Bylaws of The Quaker Oats Company, as amended effective
September 9, 1998 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
1998, file number 1-12) IBRF
4(a) Shareholder Rights Plan effective May 8, 1996 (incorporated
by reference to the Company's Form 8-K filed on May 20, 1996,
file number 1-12) IBRF
4(b) Registrant undertakes to furnish to the Commission, upon
request, a copy of any instrument defining the rights of
holders of long-term debt of the registrant and all of its
subsidiaries for which consolidated or unconsolidated
financial statements are required to be filed. IBRF
10(a)(1)* The Quaker Long Term Incentive Plan of 1990 (incorporated
by reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1996, file number 1-12) IBRF
10(a)(2)* First Amendment to The Quaker Long Term Incentive Plan of
1990, as amended and restated effective as of September 1,
1996 (incorporated by reference to the Company's Form 10-Q
for the fiscal quarter ended September 30, 1999, 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 amended and restated effective as of December 1, 1999 E
10(c)* Management Incentive Bonus Plan of The Quaker Oats Company, as
amended and restated effective as of May 13, 1998 (incorporated
by reference to the Company's Form 10-Q for the fiscal quarter
ended September 30, 1999, file number 1-12) IBRF
10(d)* Executive Incentive Bonus Plan of The Quaker Oats Company
(incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1998, file number 1-12) IBRF
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 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 1998, file number 1-12) IBRF
10(e)(3)* Second Amendment to the Deferred Compensation Plan for Directors of
The Quaker Oats Company effective January 1, 1999 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 1998, file number 1-12) IBRF
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 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1998, file number
1-12) IBRF
10(f)(3)* Second Amendment to the Directors' Stock Compensation Plan effective
January 1, 1999 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1998, file
number 1-12) IBRF
<Page 7>
EXHIBIT INDEX CONTINUED
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE (IBRF)
10(g)* The Quaker Oats Stock Option Plan for Outside Directors effective
January 1, 1999 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1998, file number
1-12) IBRF
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 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended
December 31, 1998, file number 1-12) 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 (incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 31, 1998,
file number 1-12) IBRF
10(i)(1)* 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(i)(2)* First Amendment to The Quaker Supplemental Executive Retirement
Program, as amended and restated effective as of November 1, 1996
(incorporated by reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1999, 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)(1)* 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(k)(2)* First Amendment to the Quaker Salaried Employees Compensation and
Benefits Protection Plan, as amended and restated effective as of
November 1, 1996 (incorporated by reference to the Company's Form
10-Q for the fiscal quarter ended September 30, 1999, file
number 1-12) IBRF
10(l)(1)* 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(l)(2)* First Amendment to the Quaker Eligible Earnings Adjustment Plan, as
amended and restated effective as of November 1, 1996 (incorporated
by reference to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1999, file number 1-12) IBRF
<Page 8>
EXHIBIT INDEX CONTINUED
ELECTRONIC (E)
OR
EXHIBIT INCORPORATED
NO. DESCRIPTION BY REFERENCE (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 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)(3)* Second Amendment to the Quaker Officers Severance Program, as
amended and restated effective as of July 9, 1997 (incorporated
by reference to the Company's Form 10-Q for the fiscal quarter
ended September 30, 1999, file Number 1-12) IBRF
10(n)(1)* The Quaker 415 Excess Benefit Plan, as amended and 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(n)(2)* First Amendment to The Quaker 415 Excess Benefit Plan, as amended
and restated effective as of November 1, 1996 (incorporated by
reference to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1999, file number 1-12) IBRF
12 Statements re: Computation of Ratios E
13 Annual Report to Shareholders of The Quaker Oats Company for the
fiscal year ended December 31, 1999 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.
</TABLE>
<Page 9>
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 Date: March 8, 2000
Robert S. Morrison, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 8th day of March 2000, 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/WILLIAM G. BARKER Vice President and Corporate Controller
William G. Barker
/s/FRANK C. CARLUCCI Director
Frank C. Carlucci
/s/ARMANDO M. CODINA Director
Armando M. Codina
/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
<Page 10>
EXHIBIT 10
DEFERRED COMPENSATION PLAN
FOR EXECUTIVES OF THE QUAKER OATS COMPANY
(As Amended and Restated Effective as of December 1, 1999)
1. PURPOSE
The purpose of this Deferred Compensation Plan (the "Plan") is to offer
certain senior-level employees and expatriates of The Quaker Oats Company
and its subsidiaries (collectively the "Company") the opportunity to defer
receipt of compensation payments until termination of their service with the
Company.
2. DEFINITIONS
a. "Beneficiary" shall mean the entity or person designated from time to time
in writing by a Participant to receive payments under the Plan after the
death of such Participant, or in the absence of an effective designation
or the event that such designated person shall predecease such
Participant, the Participant's estate.
b. "Bonus" shall mean the amount of money which the Executive shall be
awarded periodically under any of the Company's incentive plans.
c. "Compensation" shall mean the Salary, Bonus and Excess ESOP Award payments
which the Executive is eligible to receive from the Company for services.
d. "Deferred Amount" shall mean an amount of Compensation deferred under this
Plan and carried during the deferral period as Deferred Units.
e. "Deferred Unit" shall mean a Deferred Amount and any earnings or losses to
be allocated as set forth in Section 5 during the period of deferral.
f. "ESOP" shall mean the portion of The Quaker 401(k) Plan for Salaried
Employees that constitutes a leveraged employee stock ownership plan.
g. "Excess ESOP Award" shall mean any award authorized by the Company's Board
of Directors, Compensation Committee or Chief Executive Officer and
intended to make the Participant whole for the fact that compensation
taken into account in qualified plans is limited under Internal Revenue
Code Section 401(a)(17).
h. "Executive" shall mean for each twelve month period ending June 30, each
employee of the Company who is expected to be paid by the Company,
Salary and Bonus for such twelve month period in excess of the
compensation limit under Internal Revenue Code Section 401(a)(17).
i. "Participant" shall mean an Executive who has elected to participate in
this Plan.
j. "Salary" shall mean the annual base salary earned from the Company of any
Executive.
k. "Termination of Service" shall mean the termination (by death, retirement
or otherwise) of a Participant's service with the Company as an employee.
3. DEFERRAL OF COMPENSATION
As permitted by the Company, each Executive may elect to defer Compensation
under this Plan. Such election shall specify the percentage (in multiples
of 10%) of the Participant's Salary, Bonus, and/or Excess ESOP Award to be
deferred under the Plan and shall be executed by the Executive on a form
prescribed by the Company as follows: a) for Salary, prior to the beginning
of the month in which such salary is earned; b) for Bonus, prior to the date
established by the Company, which precedes the Bonus payment; and c) for the
Excess ESOP Award, prior to the date established by the Company, which
precedes the Excess ESOP Award payment. An election with respect to Salary
shall continue in effect for future similar payments until changed
prospectively by the Participant. Elections with respect to Bonus and the
Excess ESOP Award shall be made available annually and once made shall be
irrevocable for the Compensation for the year for which it is to be
effective. In no event will a Participant's total deferral election for
each twelve month period ending June 30, reduce the Compensation payable and
taxable to the Participant (not deferred) below the limit referred to in
Code Section 401(a)(17) for the twelve month period ending each June 30,
which may require the Company to return all or a portion of the
Participant's Deferred Amount.
4. TREATMENT OF DEFERRED AMOUNTS
Participants shall be entitled to select where, from among two or more
phantom investment funds (the "Investment Funds") chosen by the Company,
such Deferred Amounts and the earnings thereon shall be invested. The
deferred amount shall not actually be invested in any fund, but a
Participant's account shall be credited with earnings and losses as if it
had been so invested. A Participant's account shall not actually be funded,
but shall only represent an unsecured unfunded promise of the Company to pay
pursuant to the terms of this Plan. The Investment Funds shall include a
Quaker Stock Fund, which shall be carried as common stock units of the
Company. The Company may add or delete an Investment Fund or change the
investment strategy of any Investment Fund at any time without prior notice.
To the extent that the Company must return a Participant's Deferred Amount
to meet the deferral limit described in paragraph 3, no earnings or losses
shall be credited to such returned amount. No Deferred Amounts may be
invested in the Company's Incentive Investment Program or Phantom Incentive
Investment Program with respect to Compensation deferred on or after
December 1, 1999.
The Company shall maintain or cause to be maintained separate subaccounts
for each Participant in each of the Investment Funds to separately reflect
his interests in each such Fund.
At the time that a Participant enrolls in the Plan he may specify the
percentage, in increments of 10% of Deferred Amounts subsequently credited
to the Plan that are to be invested in each of the Investment Funds in
accordance with uniform rules established by the Company. Any such
investment direction shall be deemed to be a continuing direction until
changed. During any period in which no such direction has been given in
accordance with rules established by the Company, contributions credited to
a Participant shall be invested in the Investment Funds as determined by the
Company. A Participant may modify his investment direction prospectively by
submitting his election to do so prior to the effective time of the change
in accordance with uniform rules established by the Company.
Subject to uniform rules established by the Company, each Participant may
elect to transfer prospectively, in increments of 10% the value of his
Deferred Units held in any Investment Fund to any other Investment Fund then
made available to such Participant. Any such election shall be made by
submitting prior to the time it is to be effective in accordance with
uniform rules established by the Company. Rights and interests under this
Plan may not be assigned.
A Participant who has elected to defer Compensation shall have the amount of
such Compensation credited to the Participant's account as of the same date
that it would otherwise be payable to him.
5. PAYMENT OF DEFERRED AMOUNTS
At the time a Participant first elects to defer Compensation under this
Plan, the Participant shall irrevocably specify, on a form prescribed by the
Secretary of the Company, the number of annual installments (not exceeding
15) that the Participant desires to receive payment of the Deferred Amount,
and how soon after Termination of Service the Participant wishes to have
payment begin. A beneficiary shall also be designated on such form and such
Beneficiary may be changed by the Participant at any time prior to the
Participant's death. If no effective election (with respect to the number
of installments and the beginning date of payments) has been made at the
time of Termination of Service, if the Participant has not attained the age
of 55 at the time of Termination of Service, or if the Participant has been
terminated for gross misconduct, payment of the entire Deferred Amount shall
be paid to a Participant (or a Beneficiary, if the Participant shall have
died) no later than six months following the year of Termination of Service.
All payments of Deferred Amounts under this Plan shall be made in cash, or
the Company's common stock if The Participants Deferred Units are carried as
common stock units of the Company, out of the general assets of the Company,
and shall constitute an unfunded and unsecured promise to pay by the
Company. The amount of each annual installment payment to a Participant
shall be determined by dividing the Deferred Units in the Participant's
account by the number of installments remaining to be paid.
6. ACCELERATION OF PAYMENTS
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee" and the "Board") is empowered to accelerate the
payment of Deferred Amounts to a Participant or to all Participants or to a
Beneficiary, whether before or after the Participant's Termination of
Service, for reasons of individual hardship, death, changes in the tax laws
or accounting principles, or other reasons which negate or diminish the
continued value of Deferred Amounts to Participants or to the Company;
provided, however that following a Change in Control, such acceleration may
be carried out for any reason deemed appropriate by the Compensation
Committee.
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 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.
8. WITHHOLDING
The Company may withhold taxes, and any other required amounts, including
the Hospital Insurance portion of the Federal Social Security Act, from the
payment of Deferred Amounts or other amounts paid to the Executive.
9. AMENDMENT OR TERMINATION
The Company reserves the right, at any time or from time to time, by action
of its Board or Executive Committee thereof, to amend or modify, in whole or
in part, or terminate the Plan. No amendment or termination shall adversely
affect any then existing Deferred Amounts or rights under this Plan.
IN WITNESS WHEREOF, this Plan, as stated, is effective as of December, 1999,
and is executed by a duly authorized officer of the Company.
THE QUAKER OATS COMPANY
Dated: January 26, 2000 By: /s/Pamela S. Hewitt
Its Senior Vice President
EXHIBIT 12
STATEMENTS RE COMPUTATION OF RATIOS
THE QUAKER OATS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(Dollars in Millions) Year Ended December 31
1999 1998
<S> <C> <C>
Earnings:
Income Before Income Taxes
and Cumulative Effect of Accounting Changes $ 618.3 $ 396.6
Add Fixed Charges, net of capitalized interest 76.9 82.4
Earnings $ 695.2 $ 479.0
Fixed Charges:
Interest on Indebtedness $ 65.1 $ 72.0
Portion of rents representative of the interest factor 15.0 12.8
Fixed Charges $ 80.1 $ 84.8
Ratio of Earnings to Fixed Charges (a) 8.68 5.65
(a) For purposes of computing the ratio of earnings to fixed charges, earnings
represent pretax income from continuing operations plus fixed charges
(net of capitalized interest). Fixed charges represent interest (whether
expensed or capitalized) and one-third (the portion deemed representative of
the interest factor) of rents.
</TABLE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
THE QUAKER OATS COMPANY
FOR THE YEAR ENDED DECEMBER 31, 1999
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, 1999 (current year) and 1998
(prior year). The Company divested a number of businesses in 1999, 1998 and
1997, including a Brazilian pasta business, a soup-cup business, five food
service businesses and Snapple beverages. As a result of these divestitures,
year-to-year financial comparisons do not easily provide an understanding of the
operating results of ongoing businesses. To assist in the understanding of
operating results, this discussion will address total consolidated Company
results, 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 is consistent with the
way the Company's management assesses performance. The Company reports results
by Foods, Beverages and Divested operating segments. U.S. and Canadian Foods
includes hot and ready-to-eat cereals, snacks, flavored rice and pasta, mixes,
syrups and corn products. Latin American Foods includes Quaker brand cereals and
snacks, Coqueiro brand canned fish and Toddy, ToddYnho and FrescaAvena brand
beverages and beverage powders. Other Foods includes the combined results of the
European and Asia/Pacific foods businesses. U.S. and Canadian Beverages, Latin
American Beverages and Other Beverages, the combined European and Asia/Pacific
businesses, all include results from Gatorade thirst quencher products. The
Divested Businesses segment includes historical results for businesses that have
been sold by the Company.
<Graph>
[CAPTION]
1999 Net Sales (Ongoing Businesses)
Dollars in Millions
[S]
U.S. and Canadian Foods [C]
Hot Cereals $ 485.5
Ready-to-Eat Cereals $ 724.5
Flavored Rice and Pasta $ 344.3
Grain-based Snacks $ 304.6
Other (syrup, mixes, corn
products, Canada and other) $ 500.6
Latin American Foods $ 308.4
European and Asia/Pacific Foods $ 215.4
U.S. and Canadian Beverages $ 1,502.3
Latin American Beverages $ 229.1
European and Asia/Pacific Beverages $ 103.8
</Graph>
In determining the operating income or loss of each segment, restructuring
charges, asset impairment losses, divestiture gains and losses and certain
other expenses, such as income taxes, general corporate expenses and financing
costs, are not allocated to operating segments.
1999 Compared with 1998
Consolidated volume was even with the prior year and net sales decreased 2
percent, due to business divestitures and weaker exchange rates, particularly in
Brazil. For ongoing businesses, volume and net sales increased 7 percent and 4
percent, respectively, primarily driven by double-digit growth in the U.S. and
Canadian Gatorade business. Excluding the impact of foreign currency exchange
rate changes, net sales from ongoing businesses increased approximately 6
percent. Price changes did not significantly affect the comparison of 1999 and
1998 net sales.
<TABLE>
<CAPTION>
Ongoing Businesses
Sales Growth by Operating Segment
1999
<S> <C>
U.S. and Canadian Foods 4%
Latin American Foods -17%
Other Foods 6%
Total Foods 1%
U.S. and Canadian Beverages 12%
Latin American Beverages -14%
Other Beverages 1%
Total Beverages 7%
Total 4%
</TABLE>
The consolidated gross profit margin expanded to 54.8 percent in 1999 compared
to 51.0 percent in 1998. More than one-half of the gross margin improvement was
driven by ongoing businesses, primarily due to lower raw material costs and
supply chain cost-reduction efforts. The remaining margin improvement reflects
the divestiture of low-margin businesses.
Selling, general and administrative (SG&A) expenses increased $31.6 million to
$1.90 billion. The largest component of SG&A expense is advertising and
merchandising (A&M), which totaled $1.32 billion in 1999. Increased investment
in brand-building activities, such as media and new product marketing support,
<Page 25>
led to an $81.9 million increase in A&M spending over the prior year. Total
Company A&M expenses as a percent of sales increased to 28.0 percent in 1999
compared to 25.6 percent in 1998. The increase in A&M expenses was largely
offset by: lower overheads due to business divestitures; savings from prior-
year restructuring actions; and other cost-reduction efforts.
Consolidated operating results also included a combined pretax gain of $2.3
million in 1999 and a combined pretax loss of $128.5 million in 1998 for gains
and losses on divestitures and restructuring and asset impairment charges. The
$2.3 million gain in 1999 was the sum of a divestiture gain, reserve adjustments
and current-year restructuring actions.
A $5.1 million pretax divestiture gain was recognized when the Company sold its
Brazilian pasta business on March 1, 1999. Pretax adjustments were recorded in
1999 to reduce prior restructuring and divestiture reserves by $8.8 million and
$1.1 million, respectively. These adjustments were primarily due to higher than
anticipated proceeds on the sale of closed facilities and certain other changes
from estimates. Current-year pretax restructuring charges totaled $12.7 million.
Two sales offices were closed, and approximately 45 positions were eliminated,
resulting in restructuring charges of $4.7 million for severance and termination
benefits, asset write-offs and losses on leases. Annual savings resulting from
this action are expected to be about $4 million to $5 million and will be
reflected in the U.S. and Canadian Foods and Beverages businesses beginning in
2000. The Company also recorded $8.0 million of pretax restructuring charges
related to a three-year project that began in 1999. Several cereal
manufacturing lines were consolidated and early retirement was offered to
certain employees to eliminate approximately 68 positions.
In September 1999, the Company began a three-year project to upgrade and
optimize its manufacturing and distribution capabilities in its U.S. and
Canadian businesses (Supply Chain Reconfiguration project). The project
involves the rationalization of U.S. and Canadian Foods operations, an expansion
of U.S. beverage manufacturing and a reconfiguration of the Company's food and
beverage logistics network. This project is expected to significantly lower
operating costs by removing inefficient assets, building operating scale in key
product lines, and integrating foods and beverages warehousing. Actions will
include plant closures, line consolidations and selective outsourcing of product
manufacturing and logistics. The Company expects the project to result in a
series of pretax restructuring and impairment charges, totaling in the range of
$225 million to $250 million, $8.0 million of which was recognized in 1999.
Targeted savings for the project are in the range of $40 million to $50
million in 2001, rising to $60 million to $70 million beginning in 2002 and
going forward. In 2000, the Company announced further developments related
to the Supply Chain Reconfiguration project and other restructuring actions. See
"Subsequent Events" on page 33 for additional information. The Company will
continue to review its strategies and to implement specific plans, which will
result in future charges.
Net financing costs (net interest expense and foreign exchange losses) decreased
$2.2 million in 1999. Lower interest expense, which resulted from lower debt
levels, was partly offset by higher net foreign exchange losses. In Brazil,
losses increased $6.9 million due to the 1999 currency devaluation.
In 1999, the Company adjusted its tax accruals and tax assets to reflect
developments and information received during the current year. The net effect
of these adjustments was to reduce the current year tax provision by $59.3
million. Excluding these tax adjustments and the tax impact of gains and losses
on divestitures, restructuring charges and asset impairments, the effective tax
rate was 36.1 percent in 1999 versus 36.3 percent in 1998.
Operating Segment Results
Total segment operating income increased 13 percent, or $82.7 million, to $710.2
million in 1999. Business segment operating margin expanded to 15 percent of
sales from 13 percent of sales in the prior year.
<TABLE>
<CAPTION>
Segment Operating Income (Loss)
Dollars in Millions 1999 1998
<S> <C> <C>
U.S. and Canadian Foods $ 399.8 $ 369.8
Latin American Foods 26.2 28.2
Other Foods 21.1 (1.2)
Total Foods 447.1 396.8
U.S. and Canadian Beverages 253.9 214.9
Latin American Beverages 16.5 25.6
Other Beverages (7.3) (7.4)
Total Beverages 263.1 233.1
Divested Businesses -- (2.4)
Total $ 710.2 $ 627.5
</TABLE>
<Page 26>
Foods
<Graph>
U.S. and Canadian Foods
50% of Total Sales
</Graph>
U.S. and Canadian Foods - The Company's largest business segment reported 1999
operating income of $399.8 million, an increase of $30.0 million compared to
1998. Volume and sales increased 1 percent and 4 percent, respectively. Sales
increased in virtually all major food product lines, led by 13 percent sales
growth in Quaker oatmeal, driven by new product introductions and effective
advertising. Ready-to-eat cereal sales increased 2 percent, and profitability
improved. Total U.S. flavored rice and pasta sales grew 1 percent, despite
increased competition in the category. U.S. snacks sales grew on the strength
of Quaker Chewy granola bars and Quaker Fruit & Oatmeal cereal bars, while
rice cakes sales declined 11 percent. Gross margins improved across all
product lines due to lower raw material costs and supply chain cost-savings
initiatives. Increased sales and expanded gross margins enabled the business to
invest in new products and increased advertising, while delivering operating
income growth of 8 percent. A&M increases were focused on investments for hot
cereals,snacks and flavored rice and pasta.
<Graph>
U.S. and Canadian Foods-1999 Net Sales
Dollars in Millions
[S] [C] [C]
Hot Cereals $485.5 13% growth
Ready-to-Eat Cereals $724.5 2% growth
Flavored Rice and Pasta $344.3 1% growth
Grain-based Snacks $304.6 5% growth
Other $500.6 <1% growth
</Graph>
<Graph>
Latin American Foods
6% of Total Sales
</Graph>
Latin American Foods - Financial results were negatively affected by a severe
currency devaluation and recession in Brazil, lowering 1999 sales substantially
and impacting operating income to a lesser extent. Although 1999 volume was
even with the prior year, sales declined $64.5 million, or 17 percent.
Operating income of $26.2 million decreased $2.0 million from the prior year,
or 7 percent. Declines in Brazil, Latin American Foods' largest business,
were partly offset by double-digit sales and operating income growth in the
smaller Mexican and Caribbean businesses, and by savings from prior-year
restructuring actions. The recession in Brazil continues to affect the current
outlook for this business.
<Graph>
Other Foods
5% of Total Sales
</Graph>
Other Foods - The combined European and Asia/Pacific Foods businesses reported
operating income of $21.1 million, a $22.3 million improvement, primarily due to
savings from the 1998 restructuring of the Asia business. Volume and sales
increased 5 percent and 6 percent, respectively, reflecting growth in both
businesses. In Europe, sales and profit increased, driven by new cereals
products. In Asia, extensive restructuring and increased sales of hot cereals
allowed this business to operate at a modest profit, following several years of
operating losses.
Beverages
<Graph>
U.S. and Canadian Beverages
32% of Total Sales
</Graph>
U.S. and Canadian Beverages - Volume, sales and operating income all grew at
double-digit rates for the second consecutive year, reflecting the strength of
the Gatorade brand. In 1999, Gatorade volume and sales increased 16 percent and
12 percent, respectively, driven by new flavors, such as Gatorade Fierce, and
new packaging, such as a redesigned sports bottle and a 20-ounce wide-mouth
bottle. Gatorade continued to grow through expanded distribution and
availability outside traditional retail channels. Operating income grew 18
percent to $253.9 million, an increase of $39.0 million from the prior year,
reflecting strong sales growth and SG&A overhead efficiencies, partly offset by
increased A&M spending.
<Graph>
Latin American Beverages
5% of Total Sales
</Graph>
Latin American Beverages - Financial results were negatively affected by
currency devaluations and recessions in Brazil and Colombia, resulting in
volume, sales and operating income declines. Volume and sales decreased 10
percent and 14 percent, respectively. Depressed sales and demand due to the
recessions in Brazil and Colombia more than offset double-digit growth in
Mexico. As a result, 1999 operating income declined $9.1 million to $16.5
million. The recession in Brazil and Colombia continue to affect the current
outlook for this business.
<Page 27>
<Graph>
Other Beverages
2% of Total Sales
</Graph>
Other Beverages - The combined European and Asia/Pacific Gatorade businesses
reported volume and sales growth of 3 percent and 1 percent, respectively. The
Company significantly restructured its Asia Gatorade business in 1998 to focus
on building the brand in China. In China, volume and sales increased due to new
flavors and packaging, which were supported by increased media spending. In
Europe, Gatorade sales declined modestly compared to the prior year. Operating
losses in the Asia/Pacific business more than offset profits from the European
business, totaling to a loss of $7.3 million in 1999 compared to $7.4 million
in 1998.
Divested
Operating results from divested businesses reflect the Brazilian pasta business
through its March 1, 1999, divestiture date. 1998 includes operating results of
the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri businesses
through their divestiture dates, and a full year of operating results of the
Brazilian pasta business.
1998 Compared with 1997
Consolidated net sales decreased 3 percent in 1998 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 1998 and 1997 net sales.
<TABLE>
<CAPTION>
Ongoing Businesses
Sales Growth by Operating Segment
1998
<S> <C>
U.S. and Canadian Foods -1%
Latin American Foods 0%
Other Foods -1%
Total Foods -1%
U.S. and Canadian Beverages 13%
Latin American Beverages 15%
Other Beverages 0%
Total Beverages 13%
Total 4%
</TABLE>
The consolidated gross profit margin was 51.0 percent in 1998, compared to 48.9
percent in 1997, reflecting improvements across all ongoing business segments
and the divestiture of low-margin businesses in 1998.
SG&A expenses decreased $66.4 million due to the absence of divested businesses.
For ongoing businesses, SG&A increased $66.7 million, or 4 percent, driven by a
6 percent increase in A&M expenses, which was partly offset by lower general
corporate expenses. Total Company A&M expenses were 25.6 percent of sales, up
from 24.5 percent in 1997, 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 were divided into three categories: organization alignment, plant
consolidations and Asia 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 charges of $18.3 million and $0.9 million, respectively, and the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its operational
strategy for Asia. The going-forward focus was shifted toward building the
Gatorade business in China. Asia reorganization 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 were composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs. Savings
from these actions primarily began in 1999 and were estimated to be $65 million
annually, with approximately 90 percent of the savings in cash.
<Page 28>
In 1997, the Company initiated several restructuring actions resulting in
charges of $65.9 million. Manufacturing consolidation activities in the U.S.
and Canadian businesses resulted in two foods plant closures and charges of
$47.4 million. A Latin American Foods' pasta plant was closed, which resulted
in charges of $10.7 million. Other actions included an office closure in the
Asia/Pacific business and staff reductions in the U.S. and Canadian businesses,
and resulted in charges of $1.1 million and $6.7 million, respectively.
In 1998, the Company recorded $38.1 million of pretax asset impairment losses
related to ongoing businesses. In conjunction with the Company's ongoing review
of underperforming businesses, certain assets were 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.
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 recognized 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>
In 1997, the Company recorded a pretax asset impairment loss of $39.8 million to
reduce the carrying value of the long-lived assets of the Brazilian pasta
business to fair 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 operating segment results.
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 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 value.
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. The changes were primarily due 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 tax impact of restructuring charges, asset impairments, 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.
<Page 29>
Operating Segment Results
Total segment operating income increased 11 percent, or $60.7 million, to $627.5
million in 1998. Business segment operating margin expanded to 13 percent of
sales in 1998 from 11 percent of sales in 1997.
<TABLE>
<CAPTION>
Segment Operating Income (Loss)
Dollars in Millions 1998 1997
<S> <C> <C>
U.S. and Canadian Foods $ 369.8 $ 390.3
Latin American Foods 28.2 34.0
Other Foods (1.2) (9.9)
Total Foods 396.8 414.4
U.S. and Canadian Beverages 214.9 182.7
Latin American Beverages 25.6 19.3
Other Beverages (7.4) (15.0)
Total Beverages 233.1 187.0
Divested Businesses (2.4) (34.6)
Total $ 627.5 $ 566.8
</TABLE>
Foods
U.S. and Canadian Foods - Volume and 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 reflected the
introduction of a new snacks product, Quaker Fruit & Oatmeal bars. Operating
income decreased 5 percent from 1997 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 sales were up slightly,
reflecting sales increases in Brazilian canned fish and ready-to-drink
beverages, partly offset by a weaker exchange rate. Operating income decreased
17 percent, or $5.8 million, primarily reflecting increased A&M spending.
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. Restructuring actions were taken to improve future
profitability.
Beverages
U.S. and Canadian Beverages - Volume and sales increased 17 percent and 13
percent, respectively. New packaging and flavors, strong growth outside the
traditional retail market and more favorable weather versus 1997 contributed to
the volume and sales increase, which resulted in market share gains. Strong
sales growth and supply chain efficiencies drove an 18 percent increase in
operating income.
Latin American Beverages - Volume and 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.
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 European beverages was more than offset by
continued losses in Asia/Pacific beverages.
Divested
1998 and 1997 operating results from divested businesses were restated to
include a full year of operating results of the Brazilian pasta business
divested in 1999. 1998 also includes the Ardmore Farms, Continental Coffee, Nile
Spice and Liqui-Dri businesses through their 1998 divestiture dates. 1997
includes operating results from Snapple beverages through its May 1997
divestiture date and a full year of results from certain food service businesses
and the businesses divested in 1998 and 1999.
<Page 30>
Liquidity and Capital Resources
Net cash provided by operating activities was $631.1 million in 1999, an
increase of $117.6 million compared to 1998, primarily due to improved
operating profitability. Net cash provided by operating activities in 1998 and
1997 was $513.5 million and $490.0 million, respectively.
Capital expenditures were $222.4 million, $204.7 million and $215.7 million for
1999, 1998 and 1997, respectively. Capital expenditures are expected to
increase by about $50 million to $100 million in 2000, as the Company plans to
expand Gatorade production capacity and increase investment in cost-reduction
projects 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 1999, 1998 and 1997 were $14.3
million, $265.9 million and $300.0 million, respectively. Over the last three
years, cash proceeds from business divestitures were primarily used to reduce
total 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 $516.3 million, $556.6 million and $593.4
million in 1999, 1998 and 1997, respectively, primarily reflecting the
Company's stock repurchase programs and the reduction of total debt in all three
years. The Company's activity in share repurchase programs used cash of $373.2
million, $377.3 million and $50.0 million in 1999, 1998 and 1997, respectively.
During 1999, the Company repurchased 5.8 million shares of its outstanding
common stock for $369.9 million under the $1 billion repurchase program
announced in March 1998. As of December 31, 1999, the Company had repurchased
$634.9 million under the $1 billion share repurchase program.
As of December 31, 1999, total debt was $869.5 million, a decrease of $62.1
million from $931.6 million as of December 31, 1998. Total debt at December 31,
1997, was $1.06 billion. The total debt-to-total-capitalization ratio was 79.8
percent, 84.4 percent and 81.0 percent as of December 31, 1999, 1998 and 1997,
respectively.
The Company's current debt and commercial paper ratings remained unchanged from
the prior year, and are as follows: Standard & Poor's (BBB+ and A2); Moody's
(Baa1 and P2); and Fitch (BBB+ and F2).
The Company currently 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 1999 or in 1998. The Company's
levels of revolving credit facilities at December 31, 1998 and 1997, were $500.0
million and $675.0 million, respectively.
<Graph>
Total Debt
Dollars in Millions
Long-term debt Short-term debt
1999 $715.0 $154.5
1998 $795.1 $136.5
1997 $887.6 $169.4
</Graph>
<Page 31>
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 derivative 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. Actual changes in market prices or rates
may differ from hypothetical changes presented in sensitivity analyses.
Foreign Exchange - The Company uses foreign currency forward and option
contracts and currency swap agreements to manage foreign currency exchange rate
risk related to certain cash flows 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: Brazilian real, Canadian dollar, Chinese renmimbi, Euro and Mexican
peso. 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 cash flows and net investment
exposures, which have a high degree of inverse correlation with the financial
instruments 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, $7.6 million and zero during 1999 and $2.1 million,
$2.9 million and $0.9 million during 1998, respectively.
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 $2.4 million, $3.7 million and $0.7 million
during 1999 and $4.0 million, $6.7 million and $1.2 million during 1998,
respectively.
Interest Rates - The Company uses interest rate swap agreements to manage its
exposure to fluctuations in interest rates. In 1999, the Company entered into
fixed-to-floating interest rate swap agreements to increase floating rate
exposure. The Company's interest rate related financial instruments consist
primarily of debt. Based on the results of the sensitivity analysis, the
estimated market risk exposure for interest rate related financial instruments
was approximately $40 million and $42 million as of December 31, 1999 and 1998,
respectively. Derivative financial instruments related to interest rate risk
outstanding as of December 31, 1999 were not material to the results of this
sensitivity analysis.
Current and Pending Accounting Changes
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This 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. This
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 2001. When adopted, this statement could
increase volatility in reported earnings and other comprehensive income.
<Page 32>
Year 2000
The Company spent approximately $12 million to address issues with the year 2000
date change. The Company has not experienced business disruption or incurred
significant expenses in 2000 related to the date change.
Subsequent Events
In January and February of 2000, the Company announced its plans to close two
cereals manufacturing facilities and two distribution centers in the United
States, a further development of the Supply Chain Reconfiguration project. The
Company also announced a restructuring of its human resources organization,
plans to close an administrative office in California and the decentralization
of certain customer service functions to the sales offices. As a result of these
actions, the Company expects to recognize restructuring and asset impairment
charges in the range of $175 million to $225 million during the first quarter of
2000.
In February of 2000, the Company announced that it entered into a joint venture
agreement with Novartis Consumer Health, Inc. to form Altus Food Company, LLC,
which plans to develop and market functional food brands in North America. The
Company will hold a 50 percent interest in this new company.
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 suggested by 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 and consumer demand (including
customer and consumer responses to marketing); effectiveness of spending,
investments or programs (including cost-reduction projects); changes in market
prices or rates; fluctuations in the cost and availability of supply chain
resources; foreign economic conditions (including currency rate fluctuations);
weather; the ability of the Company to effectuate manufacturing, distribution
and outsourcing initiatives and plant consolidations; and costs related to the
year 2000 issue, which may arise during the remainder of 2000. In addition,
capital expenditures and cash dividends may be affected by the amount of cash
flow from operating activities; and the Company's market risk exposures may be
affected by actual changes in market prices of derivative financial and
commodity instruments if actual changes differ from the hypothetical changes
used in sensitivity analyses. Forward-looking statements speak only as of the
date they were made, and the Company undertakes no obligation to update them.
<Page 33>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
<S> Dollars in Millions (Except Per Share Data)
Consolidated Year Ended December 31 1999 1998 1997
Statements of <C> <C> <C>
Income <S>
Net Sales $4,725.2 $4,842.5 $5,015.7
Cost of goods sold 2,136.8 2,374.4 2,564.9
Gross profit 2,588.4 2,468.1 2,450.8
Selling, general and administrative expenses 1,904.1 1,872.5 1,938.9
(Gains) losses on divestitures, restructuring charges
and asset impairments - net (2.3) 128.5 1,486.3
Interest expense 61.9 69.6 85.8
Interest income (11.7) (10.7) (6.7)
Foreign exchange loss - net 18.1 11.6 10.8
Income (Loss) Before Income Taxes 618.3 396.6 (1,064.3)
Provision (Benefit) for income taxes 163.3 112.1 (133.4)
Net Income (Loss) 455.0 284.5 (930.9)
Preferred dividends - net of tax 4.4 4.5 3.5
Net Income (Loss) Available for Common $ 450.6 $ 280.0 $ (934.4)
Per Common Share:
Net income (loss) $ 3.36 $ 2.04 $ (6.80)
Net income (loss) - diluted $ 3.23 $ 1.97 $ (6.80)
Dividends declared $ 1.14 $ 1.14 $ 1.14
Average Number of Common Shares Outstanding (in thousands) 134,027 137,185 137,460
See accompanying notes to the consolidated financial statements.
</TABLE>
<Page 34>
<TABLE>
<CAPTION>
Dollars in Millions
Consolidated Year Ended December 31 1999 1998 1997
Statements of
Cash Flows <S>
Cash Flows from Operating Activities: <C> <C> <C>
Net income (loss) $ 455.0 $ 284.5 $ (930.9)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 123.8 132.5 161.4
Deferred income taxes 14.2 (31.1) (12.0)
(Gains) losses on divestitures - net of tax
of $1.7, $(27.4) and $(269.0) in 1999,
1998 and 1997, respectively (4.5) (26.7) 1,151.4
Restructuring charges 3.9 89.7 65.9
Asset impairment losses -- 38.1 39.8
Loss on disposition of property and equipment 12.9 11.9 41.6
Decrease (increase) in trade accounts receivable 14.8 5.6 (61.0)
Increase in inventories (15.3) (32.8) (24.5)
Decrease (increase) in other current assets 20.3 (15.1) (11.6)
Increase (decrease) in trade accounts payable 49.7 (20.0) (3.2)
(Decrease) increase in other current liabilities (107.1) 21.3 9.8
Change in deferred compensation 32.0 32.2 20.1
Other items 31.4 23.4 43.2
Net Cash Provided by Operating Activities 631.1 513.5 490.0
Cash Flows from Investing Activities:
Additions to property, plant and equipment (222.4) (204.7) (215.7)
Business divestitures 14.3 265.9 300.0
Purchase of marketable securities (185.1) (165.5) --
Proceeds from sale of marketable securities 219.0 143.1 --
Proceeds from sale of property, plant
and equipment 13.8 7.7 --
Capital gains tax recovery -- 240.0 --
Net Cash (Used in) Provided by
Investing Activities (160.4) 286.5 84.3
Cash Flows from Financing Activities:
Cash dividends (156.2) (159.7) (159.4)
Change in short-term debt 34.2 (17.2) (452.9)
Proceeds from long-term debt 1.2 1.9 8.3
Reduction of long-term debt (95.8) (108.7) (54.4)
Issuance of common treasury stock 82.6 112.0 121.2
Repurchases of common stock (373.2) (377.3) (50.0)
Repurchases of preferred stock (9.1) (7.6) (6.2)
Net Cash Used in Financing Activities (516.3) (556.6) (593.4)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 1.9 (1.0) (7.2)
Net (Decrease) Increase in Cash and
Cash Equivalents (43.7) 242.4 (26.3)
Cash and Cash Equivalents - Beginning of Period 326.6 84.2 110.5
Cash and Cash Equivalents - End of Period $ 282.9 $ 326.6 $ 84.2
See accompanying notes to the consolidated financial statements.
</TABLE>
<Page 35>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Dollars in Millions
Consolidated December 31 1999 1998
Balance Sheets <S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 282.9 $ 326.6
Marketable securities 0.3 27.5
Trade accounts receivable -
net of allowances 254.3 283.4
Inventories
Finished goods 186.6 189.1
Grains and raw materials 50.0 48.4
Packaging materials and supplies 29.6 23.9
Total inventories 266.2 261.4
Other current assets 193.0 216.1
Total Current Assets 996.7 1,115.0
Property, Plant and Equipment
Land 28.2 24.1
Buildings and improvements 407.6 390.2
Machinery and equipment 1,416.1 1,404.5
Property, plant and equipment 1,851.9 1,818.8
Less: Accumulated depreciation 745.2 748.6
Property - Net 1,106.7 1,070.2
Intangible Assets -
Net of Amortization 236.9 245.7
Other Assets 55.9 79.4
Total Assets $ 2,396.2 $ 2,510.3
See accompanying notes to the consolidated financial statements.
</TABLE>
<Page 36>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
December 31 1999 1998
<S>
Liabilities and Shareholders' Equity
Current Liabilities <C> <C>
Short-term debt $ 73.3 $ 41.3
Current portion of long-term debt 81.2 95.2
Trade accounts payable 213.6 168.4
Accrued payroll, benefits and bonus 139.1 131.4
Accrued advertising and merchandising 138.7 125.6
Income taxes payable 40.1 63.7
Other accrued liabilities 252.3 383.5
Total Current Liabilities 938.3 1,009.1
Long-term Debt 715.0 795.1
Other Liabilities 523.1 533.4
Preferred Stock, Series B, no par value,
authorized 1,750,000 shares; issued
1,282,051 of $5.46 cumulative convertible
shares (liquidating preference of $78
per share) 100.0 100.0
Deferred Compensation (38.5) (48.4)
Treasury Preferred Stock, at cost, 366,069 and
302,969 shares, respectively (39.0) (29.9)
Common Shareholders' Equity
Common stock, $5 par value, authorized
400 million shares 840.0 840.0
Additional paid-in capital 100.7 78.9
Reinvested earnings 854.6 555.8
Accumulated other comprehensive income (95.1) (80.1)
Deferred compensation (45.5) (67.6)
Treasury common stock, at cost (1,457.4) (1,176.0)
Total Common Shareholders' Equity 197.3 151.0
Total Liabilities and Shareholders' Equity $ 2,396.2 $ 2,510.3
</TABLE>
<Page 37>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Consolidated
Statements of Common Common Stock Issued Common Shares
Shareholders' Equity Shares Amount Outstanding
<S> <C> <C> <C>
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
Net income
Other comprehensive income:
Foreign currency translation adjustments -
net of allocated income tax provision of $2.4
Reclassification of unrealized gain (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 2,392,609
Repurchases of common stock (5,779,663)
Deferred compensation
Other
Balance as of December 31, 1999 167,978,792 $ 840.0 131,935,454
<FN>
(a) Cumulative translation adjustments as of December 31,
1996, 1997, 1998 and 1999, were $(68.2) million, $(82.4)
million, $(80.5) million and $(95.1) million, respectively.
(b) Reflects the Company's investment in preferred stock
that was classified as marketable securities in the balance
sheet as of December 31, 1998, and was reclassified to a
realized gain during the twelve months ended December 31,
1999. Estimated income taxes were not material.
See accompanying notes to the consolidated financial
statements.
</FN>
</TABLE>
<Page 38>
<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>
$ -- $ 1,521.3 $ (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
455.0 $ 455.0
(14.6) (14.6)
(0.4) (0.4)
$ 440.0
(151.8) (151.8)
(4.4) (4.4)
(1.0) (2,392,609) 88.5 87.5
5,779,663 (369.9) (369.9)
22.1 22.1
22.8 22.8
$ 100.7 $ 854.6 $ (45.5) 36,043,338 $(1,457.4) $ (95.1) $ 197.3
</TABLE>
<Page 39>
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 1999 1998 1997 1999 1998 1997
<S>
Foods: <C> <C> <C> <C> <C> <C>
U.S. and Canadian $ 2,359.5 $ 2,274.1 $ 2,287.8 $ 399.8 $ 369.8 $ 390.3
Latin American 308.4 372.9 371.4 26.2 28.2 34.0
Other (c) 215.4 202.9 205.7 21.1 (1.2) (9.9)
Total Foods 2,883.3 2,849.9 2,864.9 447.1 396.8 414.4
Beverages:
U.S. and Canadian 1,502.3 1,338.2 1,183.3 253.9 214.9 182.7
Latin American 229.1 267.7 232.2 16.5 25.6 19.3
Other (c) 103.8 103.1 103.0 (7.3) (7.4) (15.0)
Total Beverages 1,835.2 1,709.0 1,518.5 263.1 233.1 187.0
Total Ongoing Businesses 4,718.5 4,558.9 4,383.4 710.2 629.9 601.4
Total Divested Businesses (d) 6.7 283.6 632.3 -- (2.4) (34.6)
Total Sales/Operating Income $ 4,725.2 $ 4,842.5 $ 5,015.7 $ 710.2 $ 627.5 $ 566.8
Less: (Gains) losses on divestitures,
restructuring charges,
asset impairments
and other - net (e)(f)(g)(h) (2.3) 128.5 1,491.1
General corporate expenses 25.9 31.9 50.1
Interest expense - net 50.2 58.9 79.1
Foreign exchange loss - net 18.1 11.6 10.8
Income (Loss) before income taxes 618.3 396.6 (1,064.3)
Provision (Benefit) for income taxes (i) 163.3 112.1 (133.4)
Net Income (Loss) $ 455.0 $ 284.5 $ (930.9)
Per Common Share:
Net income (loss)(e)(f)(g)(h)(i) $ 3.36 $ 2.04 $ (6.80)
Net income (loss) - diluted $ 3.23 $ 1.97 $ (6.80)
<FN>
(a) Intersegment revenue is not material.
(b) Operating results exclude restructuring and asset impairment charges, gains and losses 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) 1999 includes net sales and operating results (through the divestiture date) for the Brazilian pasta
business. 1998 includes net sales and operating results (through the divestiture date) for the Ardmore Farms,
Continental Coffee, Nile Spice and Liqui-Dri businesses and the business divested in 1999. 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 1999 and 1998.
(e) 1999 includes pretax restructuring charges of $12.7 million, or $0.06 per share, a pretax divestiture gain
of $5.1 million, or $0.03 per share, and pretax adjustments of $9.9 million, or $0.04 per share, to reduce prior
restructuring and divestiture reserves.
(f) 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.
(g) 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.
(h) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1997 through 1999
restructuring and impairment charges and gains and losses on divestitures.
(i) 1999 includes reductions in the provision for income taxes of $59.3 million, or $0.44 per share, related to
previously recorded tax accruals and tax assets.
</FN>
</TABLE>
<Page 40>
<TABLE>
<CAPTION>
Dollars in Millions
Operating
Segment Identifiable Capital Depreciation
Data Assets Expenditures and Amortization
Year Ended December 31 1999 1998 1997 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foods:
U.S.and Canadian $ 1,124.6 $ 1,187.0 $ 1,056.9 $ 70.6 $ 102.7 $ 76.6 $ 66.9 $ 65.2 $ 69.4
Latin American 174.0 167.7 122.4 9.6 13.2 15.6 5.9 6.7 5.9
Other (a) 110.1 92.1 121.5 3.7 5.7 18.0 3.5 6.3 5.7
Total Foods 1,408.7 1,446.8 1,300.8 83.9 121.6 110.2 76.3 78.2 81.0
Beverages:
U.S.and Canadian 522.7 464.2 364.5 106.0 57.6 55.1 36.2 31.5 28.7
Latin American 105.4 94.6 81.9 25.4 12.1 5.6 5.0 5.8 6.5
Other (a) 79.6 109.5 98.2 7.1 5.5 24.2 5.4 4.7 4.2
Total Beverages 707.7 668.3 544.6 138.5 75.2 84.9 46.6 42.0 39.4
Total Ongoing Businesses 2,116.4 2,115.1 1,845.4 222.4 196.8 195.1 122.9 120.2 120.4
Total Divested Businesses (b) -- 37.5 335.9 -- 7.9 20.6 -- 11.4 39.3
Total Operating Segments 2,116.4 2,152.6 2,181.3 222.4 204.7 215.7 122.9 131.6 159.7
Corporate (c) 279.8 357.7 515.7 -- -- -- 0.9 0.9 1.7
Total Consolidated $ 2,396.2 $ 2,510.3 $ 2,697.0 $ 222.4 $ 204.7 $ 215.7 $ 123.8 $ 132.5 $ 161.4
<FN>
(a) Other includes European and Asia/Pacific businesses.
(b) Includes the following Divested Businesses: in 1999, the Brazilian
pasta business; in 1998, Ardmore Farms, Continental Coffee, Nile
Spice, Liqui-Dri and the business divested in 1999; in 1997, Snapple,
certain food service businesses and the businesses divested in 1999
and 1998.
(c) Includes corporate cash and cash equivalents, short-term
investments and miscellaneous receivables and investments.
<FN>
</TABLE>
<Page 41>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Dollars in Millions
Enterprise Information Year Ended December 31 1999 1998 1997
<S> <C> <C> <C>
Net Sales (a)
U.S. Hot Cereals $ 485.5 $ 430.8 $ 462.0
U.S. Ready-to-Eat Cereals 724.5 711.9 692.9
U.S. Grain-based Snacks 304.6 290.8 268.5
U.S. Flavored Rice and Pasta 344.3 340.5 343.1
U.S. Other Foods 306.0 318.3 327.6
Total U.S. Foods 2,164.9 2,092.3 2,094.1
Canadian Foods 194.6 181.8 193.7
Latin American Foods 308.4 372.9 371.4
European and Asia/Pacific Foods 215.4 202.9 205.7
Total Foods 2,883.3 2,849.9 2,864.9
U.S. Beverages 1,469.0 1,306.8 1,153.2
Canadian Beverages 33.3 31.4 30.1
Latin American Beverages 229.1 267.7 232.2
European and Asia/Pacific Beverages 103.8 103.1 103.0
Total Beverages 1,835.2 1,709.0 1,518.5
Total Ongoing Businesses 4,718.5 4,558.9 4,383.4
U.S. Divested -- 206.7 545.5
Foreign Divested 6.7 76.9 86.8
Total Divested Businesses 6.7 283.6 632.3
Total Consolidated $ 4,725.2 $ 4,842.5 $ 5,015.7
</TABLE>
[FN]
(a) Represents net sales to unaffiliated customers.
</FN>
<Page 42>
<TABLE>
<CAPTION>
Dollars in Millions
Geographic Information Year Ended December 31 1999 1998 1997
<S> <C> <C> <C>
Net Sales (a)
Total U.S. $ 3,633.9 $ 3,605.8 $ 3,792.8
Total Foreign 1,091.3 1,236.7 1,222.9
Total Consolidated $ 4,725.2 $ 4,842.5 $ 5,015.7
Year Ended December 31 1999 1998 1997
Long-lived Assets (b)
Total U.S. $ 1,111.5 $ 1,078.1 $ 1,227.2
Total Foreign 232.1 237.8 288.0
Total Consolidated $ 1,343.6 $ 1,315.9 $ 1,515.2
<FN>
(a) Represents net sales to unaffiliated customers.
(b) Long-lived assets include net intangible assets and
net property, plant and equipment. 1998 assets include
assets related to the business divested in 1999; 1997
assets include assets related to businesses divested in
1999 and 1998.
</FN>
</TABLE>
<Page 43>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Six-Year Year Ended December 31 1999 1998 1997 1996 1995 1994
Selected Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)
Financial Data <S> <C> <C> <C> <C> <C> <C>
Net sales $4,725.2 $4,842.5 $5,015.7 $5,199.0 $5,954.0 $6,211.1
Gross profit 2,588.4 2,468.1 2,450.8 2,391.5 2,659.6 3,088.4
Income (loss) before income taxes and
cumulative effect of accounting changes 618.3 396.6 (1,064.3) 415.6 1,220.5 320.4
Provision (benefit) for income taxes 163.3 112.1 (133.4) 167.7 496.5 127.3
Income (loss) before cumulative effect of
accounting changes 455.0 284.5 (930.9) 247.9 724.0 193.1
Cumulative effect of accounting
changes - net of tax -- -- -- -- -- (4.1)
Net income (loss) $ 455.0 $ 284.5 $ (930.9) $ 247.9 $ 724.0 $ 189.0
Per common share:
Income (loss) before cumulative effect of
accounting changes $ 3.36 $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.41
Cumulative effect of accounting changes -- -- -- -- -- (0.03)
Net income (loss) $ 3.36 $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.38
Net income (loss) - diluted $ 3.23 $ 1.97 $ (6.80) $ 1.78 $ 5.23 $ 1.36
Dividends declared:
Common stock $ 151.8 $ 155.2 $ 155.9 $ 153.3 $ 150.8 $ 145.8
Per common share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.10
Convertible preferred and redeemable
preference stock $ 4.4 $ 4.5 $ 3.5 $ 3.7 $ 4.0 $ 4.0
Average number of common shares
outstanding (in thousands) 134,027 137,185 137,460 135,466 134,149 133,709
<FN>
(a) 1999 operating results include pretax restructuring charges of $12.7 million, or $0.06 per share,
a pretax gain of $5.1 million, or $0.03 per share, for a business divestiture, pretax
adjustments of $9.9 million, or $0.04 per share, to reduce prior restructuring and divestiture reserves,
and reductions in the provision for income taxes of $59.3 million, or $0.44 per share, related to
previously recorded tax accruals and tax assets.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1997 through
1999 restructuring and asset impairment charges and losses and gains on divestitures.
(h) 1994 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for the
adoption of SFAS No.112.
(i) Per share data and average number of common shares outstanding reflect the 1994 two-for-one stock
split-up.
</FN>
</TABLE>
<Page 44>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Year Ended December 31 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Financial Statistics
Current ratio 1.1 1.1 1.2 0.7 0.6 0.5
Working capital $ 58.4 $ 105.9 $ 187.3 $ (465.0) $ (621.6) $(1,616.9)
Property, plant and equipment - net $1,106.7 $1,070.2 $1,164.7 $1,200.7 $1,167.8 $ 1,333.1
Depreciation expense $ 114.0 $ 116.3 $ 122.0 $ 119.1 $ 115.3 $ 133.1
Total assets $2,396.2 $2,510.3 $2,697.0 $4,394.4 $4,620.4 $ 5,061.1
Long-term debt $ 715.0 $ 795.1 $ 887.6 $ 993.5 $1,051.8 $ 1,025.9
Convertible preferred stock (net of
deferred compensation) and redeemable
preference stock $ 22.5 $ 21.7 $ 20.5 $ 19.0 $ 17.7 $ 17.0
Common shareholders' equity $ 197.3 $ 151.0 $ 228.0 $1,229.9 $1,079.3 $ 452.7
Net cash provided by operating activities $ 631.1 $ 513.5 $ 490.0 $ 410.4 $ 407.1 $ 415.8
Operating return on assets (a) 33.3% 29.0% 17.8% 10.6% 7.9% 16.0%
Gross profit as a percentage of sales 54.8% 51.0% 48.9% 46.0% 44.7% 49.7%
Advertising and merchandising as a
percentage of sales 28.0% 25.6% 24.5% 23.1% 24.6% 27.2%
Income (loss) before cumulative effect
of accounting changes as a percentage
of sales 9.6% 5.9% (18.6%) 4.8% 12.2% 3.1%
Total debt-to-total-capitalization ratio (b) 79.8% 84.4% 81.0% 55.6% 61.7% 86.3%
Common dividends per share as a percentage of
income (loss) available for common shares
(excluding cumulative effect of
accounting changes) 33.9% 55.9% (16.8%) 63.3% 21.2% 78.0%
Number of common shareholders 24,727 26,352 27,838 29,690 30,353 28,142
Number of employees worldwide 11,666 11,860 14,123 14,800 16,100 20,753
Market price range of common stock:
High (c) $ 71 $ 65 9/16 $ 55 1/8 $ 39 1/2 $ 37 1/2 $ 42 1/2
Low (c) $ 50 7/8 $ 48 1/2 $ 34 3/8 $ 30 3/8 $ 30 1/4 $ 29 3/4
<FN>
(a) Operating income divided by average identifiable assets of the consolidated total (excluding corporate).
(b) Total debt divided by total debt plus total shareholders' equity including convertible preferred
stock (net of deferred compensation) and redeemable preference stock.
(c) Per share data reflect the 1994 two-for-one stock split-up.
</FN>
</TABLE>
<Page 45>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Eleven-Year
Selected Financial Data
Year Ended December 31
1999 1998 1997
Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)(j)(k)(l)(m)
<S> <C> <C> <C>
Net sales $ 4,725.2 $ 4,842.5 $ 5,015.7
Gross profit 2,588.4 2,468.1 2,450.8
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting changes 618.3 396.6 (1,064.3)
Provision (benefit) for income taxes 163.3 112.1 (133.4)
Income (loss) from continuing operations before cumulative
effect of accounting changes 455.0 284.5 (930.9)
(Loss) income from discontinued operations - net of tax -- -- --
Cumulative effect of accounting changes - net of tax -- -- --
Net income (loss) $ 455.0 $ 284.5 $ (930.9)
Per common share:
Income (loss) from continuing operations before cumulative
effect of accounting changes $ 3.36 $ 2.04 $ (6.80)
(Loss) income from discontinued operations -- -- --
Cumulative effect of accounting changes -- -- --
Net income (loss) $ 3.36 $ 2.04 $ (6.80)
Net income (loss) - diluted $ 3.23 $ 1.97 $ (6.80)
Dividends declared:
Common stock $ 151.8 $ 155.2 $ 155.9
Per common share $ 1.14 $ 1.14 $ 1.14
Convertible preferred and redeemable preference stock $ 4.4 $ 4.5 $ 3.5
Average number of common shares outstanding (in thousands) 134,027 137,185 137,460
<FN>
(a) 1999 operating results include pretax restructuring charges of $12.7 million, or $0.06 per share,
a pretax gain of $5.1 million, or $0.03 per share, for a business divestiture, pretax adjustments of
$9.9 million, or $0.04 per share, to reduce prior restructuring and divestiture reserves, and reductions
in the provision for income taxes of $59.3 million, or $0.44 per share, related to previously recorded
tax accruals and tax assets.
(b) 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.
(c) 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.
(d) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1997 through
1999 restructuring and impairment charges and gains and losses on divestitures.
(e) 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.
(f) 1995 transition period reflects only six months of operating results.
(g) 1995 transition period operating results include pretax restructuring charges of $40.8 million, or
$0.18 per share.
</FN>
</TABLE>
<Page 46>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Year Transition Fiscal
Ended Period Ended Year Ended
December 31 December 31 June 30
1996 1995 1995 1994 1993 1992 1991 1990 1989
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 5,199.0 $ 2,733.1 $ 6,365.2 $ 5,955.0 $ 5,730.6 $ 5,576.4 $ 5,491.2 $ 5,030.6 $ 4,879.4
2,391.5 1,203.8 2,983.7 3,028.8 2,860.6 2,745.3 2,652.7 2,350.3 2,229.0
415.6 25.6 1,359.9 378.7 467.6 421.5 411.5 382.4 239.1
167.7 11.9 553.8 147.2 180.8 173.9 175.7 153.5 90.2
247.9 13.7 806.1 231.5 286.8 247.6 235.8 228.9 148.9
-- -- -- -- -- -- (30.0) (59.9) 54.1
-- -- (4.1) -- (115.5) -- -- -- --
$ 247.9 $ 13.7 $ 802.0 $ 231.5 $ 171.3 $ 247.6 $ 205.8 $ 169.0 $ 203.0
$ 1.80 $ 0.09 $ 6.00 $ 1.68 $ 1.96 $ 1.63 $ 1.53 $ 1.47 $ 0.94
-- -- -- -- -- -- (0.20) (0.40) 0.34
-- -- (0.03) -- (0.79) -- -- -- --
$ 1.80 $ 0.09 $ 5.97 $ 1.68 $ 1.17 $ 1.63 $ 1.33 $ 1.07 $ 1.28
$ 1.78 $ 0.09 $ 5.80 $ 1.65 $ 1.14 $ 1.59 $ 1.30 $ 1.05 $ 1.25
$ 153.3 $ 75.7 $ 150.8 $ 140.6 $ 136.1 $ 128.6 $ 118.7 $ 106.9 $ 95.2
$ 1.14 $ 0.57 $ 1.14 $ 1.06 $ 0.96 $ 0.86 $ 0.78 $ 0.70 $ 0.60
$ 3.7 $ 2.0 $ 4.0 $ 4.0 $ 4.2 $ 4.2 $ 4.3 $ 3.6 --
135,466 134,355 133,763 135,236 143,948 149,762 151,808 153,074 158,614
<FN>
(h) 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.
(i) 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.
(j) Fiscal 1995 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for the
adoption of SFAS No. 112.
(k) 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.
(l) 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.
(m) Per share data and average number of common shares outstanding reflect the fiscal 1995 two-for-one stock
split-up.
</FN>
</TABLE>
<Page 47>
The Quaker Oats Company and Subsidiaries
<TABLE>
<CAPTION>
Eleven-Year
Selected Financial Data
Year Ended December 31
1999 1998 1997
<S> <C> <C> <C>
Financial Statistics (a)(b)(c)
Current ratio 1.1 1.1 1.2
Working capital $ 58.4 $ 105.9 $ 187.3
Property, plant and equipment - net $ 1,106.7 $ 1,070.2 $ 1,164.7
Depreciation expense $ 114.0 $ 116.3 $ 122.0
Total assets $ 2,396.2 $ 2,510.3 $ 2,697.0
Long-term debt $ 715.0 $ 795.1 $ 887.6
Convertible preferred stock (net of deferred compensation)
and redeemable preference stock $ 22.5 $ 21.7 $ 20.5
Common shareholders' equity $ 197.3 $ 151.0 $ 228.0
Net cash provided by operating activities $ 631.1 $ 513.5 $ 490.0
Operating return on assets (d) 33.3% 29.0% 17.8%
Gross profit as a percentage of sales 54.8% 51.0% 48.9%
Advertising and merchandising as a percentage of sales 28.0% 25.6% 24.5%
Income (loss) from continuing operations before cumulative
effect of accounting changes as a percentage of sales 9.6% 5.9% (18.6%)
Total debt-to-total-capitalization ratio (e) 79.8% 84.4% 81.0%
Common dividends per share as a percentage of income (loss)
available for common shares (excluding cumulative effect of
accounting changes) 33.9% 55.9% (16.8%)
Number of common shareholders 24,727 26,352 27,838
Number of employees worldwide 11,666 11,860 14,123
Market price range of common stock:
High (f) $ 71 $ 65 9/16 $ 55 1/8
Low (f) $ 50 7/8 $ 48 1/2 $ 34 3/8
<FN>
(a) Income-related statistics exclude the results of businesses reported as discontinued operations.
Balance sheet amounts and related statistics have not been restated
for discontinued operations, other than Fisher-Price, due to materiality.
(b) 1995 transition period reflects only six months of results.
(c) Effective fiscal 1991, common shareholders' equity and the number of employees worldwide were
reduced as a result of the Fisher-Price spin-off.
</FN>
</TABLE>
<Page 48>
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
Year Transition Fiscal
Ended Period Ended Year Ended
December 31 December 31 June 30
1996 1995 1995 1994 1993 1992 1991 1990 1989
<C> <C> <C> <C> <C> <C> <C> <C> <C>
0.7 0.6 0.7 1.0 1.0 1.2 1.3 1.3 1.8
$ (465.0) $ (621.6) $ (496.3) $ (5.5) $ (37.5) $ 168.7 $ 317.8 $ 342.8 $ 695.8
$ 1,200.7 $ 1,167.8 $ 1,113.4 $ 1,214.2 $ 1,228.2 $ 1,273.3 $ 1,232.7 $ 1,154.1 $ 959.6
$ 119.1 $ 59.2 $ 125.4 $ 133.3 $ 129.9 $ 129.7 $ 125.2 $ 103.5 $ 94.2
$ 4,394.4 $ 4,620.4 $ 4,826.9 $ 3,043.3 $ 2,815.9 $ 3,039.9 $ 3,060.5 $ 3,377.4 $ 3,125.9
$ 993.5 $ 1,051.8 $ 1,103.1 $ 759.5 $ 632.6 $ 688.7 $ 701.2 $ 740.3 $ 766.8
$ 19.0 $ 17.7 $ 18.8 $ 15.3 $ 11.4 $ 7.9 $ 4.8 $ 1.8 --
$ 1,229.9 $ 1,079.3 $ 1,128.8 $ 445.8 $ 551.1 $ 842.1 $ 901.0 $ 1,017.5 $ 1,137.1
$ 410.4 $ 84.3 $ 475.5 $ 450.8 $ 558.2 $ 581.3 $ 543.2 $ 460.0 $ 408.3
10.6% 3.3% 12.4% 23.9% 21.8% 18.8% 19.1% 19.8% 19.5%
46.0% 44.0% 46.9% 50.9% 49.9% 49.2% 48.3% 46.7% 45.7%
23.1% 24.1% 26.3% 26.6% 25.7% 26.0% 25.6% 23.8% 23.4%
4.8% 0.5% 12.7% 3.9% 5.0% 4.4% 4.3% 4.6% 3.1%
55.6% 61.7% 59.0% 68.8% 59.0% 48.7% 47.4% 52.3% 44.2%
63.3% 633.3% 19.0% 63.1% 48.9% 52.9% 58.9% 65.1% 46.9%
29,690 30,353 29,148 28,197 33,154 33,580 33,603 33,859 34,347
14,800 16,100 17,300 20,000 20,200 21,100 20,900 28,200 31,700
$ 39 1/2 $ 37 3/8 $ 42 1/2 $ 41 $ 38 1/2 $ 37 7/8 $ 32 7/16 $ 34 7/16 $ 33 1/8
$ 30 3/8 $ 30 3/4 $ 29 3/4 $ 30 15/16 $ 28 1/16 $ 25 1/8 $ 20 7/8 $ 22 9/16 $ 21 5/16
<FN>
(d) Operating income divided by average identifiable assets of the consolidated total (excluding corporate).
(e) Total debt divided by total debt plus total shareholders' equity including
convertible preferred stock (net of deferred compensation) and redeemable
preference stock.
(f) Per share data reflect the fiscal 1995 two-for-one stock split-up.
</FN>
</TABLE>
<Page 49>
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 $55.0 million and
$40.8 million as of December 31, 1999 and 1998, 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:
<TABLE>
<CAPTION>
December 31 1999 1998
<S> <C> <C>
Last-in, first-out (LIFO) 54% 52%
Average quarterly cost 44% 46%
First-in, first-out (FIFO) 2% 2%
</TABLE>
If the LIFO method of valuing these inventories was not used, total inventories
would have been $1.8 million lower and $5.9 million higher than reported as of
December 31, 1999 and 1998, 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 primarily
ranging from two to 40 years.
Intangible assets, net of amortization, and their estimated useful lives
consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Estimated Useful
Dollars in Millions Lives (In Years) 1999 1998
<S> <C> <C> <C>
Goodwill 10 to 40 $ 370.3 $ 385.3
Trademarks and other 2 to 40 19.5 25.4
Intangible assets 389.8 410.7
Less: Accumulated amortization 152.9 165.0
Intangible assets - net of amortization $ 236.9 $ 245.7
</TABLE>
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 and amortizes them over a three-year period beginning with the project's
completion. As of December 31, 1999 and 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.
<Page 50>
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 certain projected cash flows 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 cash flows 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 uses interest rate swap agreements to manage
its exposure to changes in interest rates and to balance the mix of its fixed
and floating rate debt. The settlement costs of terminated swap agreements are
reported in the consolidated balance sheets as a component of other assets and
are 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 countries designated as highly
inflationary, 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
accumulated other comprehensive income in common shareholders' equity, except
for those associated with countries designated as highly inflationary, 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, 1999 and 1998, was $7.7 million
and $5.6 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 $147.6 million of the $148.7 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.
<Page 51>
Segment Reporting - The Company reports segments consistent with the way
management assesses segment performance. The Company reports results by Foods,
Beverages and Divested operating segments. U.S. and Canadian Foods includes hot
and ready-to-eat cereals, snacks, flavored rice and pasta, mixes, syrups and
corn products. Latin American Foods includes Quaker brand cereals and snacks,
Coqueiro brand canned fish and Toddy, ToddYnho and FrescaAvena brand beverages
and beverage powders. Other Foods includes the combined results of the
European and Asia/Pacific foods businesses. U.S. and Canadian Beverages, Latin
American Beverages and Other Beverages, the combined European and Asia/Pacific
businesses, all include results from Gatorade thirst quencher products. The
Divested Businesses segment includes historical results for businesses that have
been sold by the Company. In determining the operating income or loss of each
segment, restructuring charges, asset impairment losses, divestiture gains and
losses and certain other expenses, such as income taxes, general corporate
expenses and financing costs, are not allocated to operating segments.
Current and Pending Accounting Changes - 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's adoption of these Statements
in January 1999 did not materially affect the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This 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. This
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 2001. When adopted, this statement could
increase volatility in reported earnings and other comprehensive income.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Note 2
Restructuring Charges
In 1999, the Company recorded $12.7 million of pretax restructuring charges.
Two sales offices were closed, and approximately 45 positions were eliminated,
resulting in restructuring charges of $4.7 million for severance and termination
benefits, asset write-offs and losses on leases. Annual savings resulting from
this action are expected to be about $4 million to $5 million and will be
reflected in the U.S. and Canadian Foods and Beverages businesses beginning in
2000. The Company also recorded $8.0 million of pretax restructuring charges
related to a three-year project that began in 1999. Several cereal
manufacturing lines were consolidated and early retirement was offered to
certain employees to eliminate approximately 68 positions.
In September 1999, the Company began a three-year project to upgrade and
optimize its manufacturing and distribution capabilities in its U.S. and
Canadian businesses (Supply Chain Reconfiguration project). The project
involves the rationalization of U.S. and Canadian Foods operations, an expansion
of U.S. beverage manufacturing and a reconfiguration of the Company's food and
beverage logistics network. This project is expected to significantly lower
operating costs by removing inefficient assets, building operating scale in key
product lines, and integrating foods and beverages warehousing. Actions will
include plant closures, line consolidations and selective outsourcing of product
manufacturing and logistics. The Company expects the project to result in a
series of pretax restructuring and impairment charges, totaling in the range of
$225 million to $250 million, $8.0 million of which was recognized in 1999.
Targeted savings for the project are in the range of $40 million to $50 million
in 2001, rising to $60 million to $70 million beginning in 2002 and going
forward.
<Page 52>
In 2000, the Company announced further developments related to the Supply Chain
Reconfiguration project and other restructuring actions. See Note 18 for
additional information. The Company will continue to review its strategies and
to implement specific plans, which will result in future charges.
During 1998, the Company initiated numerous actions to improve future
profitability. These actions resulted in $89.7 million in restructuring charges
and were divided into three categories: organization alignment, plant
consolidations and Asia 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 charges of $18.3 million and $0.9 million, respectively, and the
elimination of approximately 300 positions. In light of disappointing
performance and a weak economic environment, the Company revised its operational
strategy for Asia. The going-forward focus was shifted towards building the
Gatorade business in China. This Asia reorganization 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 were composed of severance and other termination
benefits, asset write-offs, losses on leases and other shut-down costs. Savings
from these actions primarily began in 1999, and were estimated to be $65 million
annually, with approximately 90 percent of the savings in cash.
In 1997, the Company initiated several restructuring actions resulting in
charges of $65.9 million. Manufacturing consolidation activities in the U.S.
and Canadian businesses resulted in two foods plant closures and charges of
$47.4 million. A Latin American Foods' pasta plant was closed, which resulted
in charges of $10.7 million. Other actions included an office closure in the
Asia/Pacific business and staff reductions in the U.S. and Canadian businesses,
and resulted in charges of $1.1 million and $6.7 million, respectively.
Savings realized from the 1998 and 1997 restructuring actions have been in line
with expectations. However, there are no recurring savings to be realized from
restructuring activities related to the divested Brazilian pasta business.
Restructuring provisions were determined based on estimates prepared at the time
the restructuring actions were approved by management and the Board of
Directors. In 1999, the Company recorded pretax adjustments to reduce prior
restructuring reserves by $8.8 million. These adjustments were primarily due to
higher than anticipated proceeds on the sales of closed facilities and certain
other changes from estimates. The remaining 1999, 1998 and 1997 restructuring
reserve balances are considered adequate to cover committed restructuring
actions.
The restructuring reserves and utilization to date were as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
Amounts Charged Amounts Amounts Remaining
Dollars in Millions Cash Non-Cash Total Utilized Adjusted Reserve
1999
<S> <C> <C> <C> <C> <C> <C>
Severance and termination benefits $ 2.1 $ -- $ 2.1 $ -- $ -- $ 2.1
Asset write-offs -- 5.6 5.6 (2.8) -- 2.8
Loss on leases and other 2.8 2.2 5.0 (2.5) -- 2.5
Subtotal 4.9 7.8 12.7 (5.3) -- 7.4
1998
Severance and termination benefits 41.3 -- 41.3 (36.2) (0.2) 4.9
Asset write-offs -- 29.6 29.6 (22.7) (3.2) 3.7
Loss on leases and other 17.8 1.0 18.8 (3.7) (0.1) 15.0
Subtotal 59.1 30.6 89.7 (62.6) (3.5) 23.6
1997
Severance and termination benefits 12.6 -- 12.6 (10.0) (2.4) 0.2
Asset write-offs -- 49.1 49.1 (46.2) (2.9) --
Loss on leases and other 4.2 -- 4.2 (2.8) -- 1.4
Subtotal 16.8 49.1 65.9 (59.0) (5.3) 1.6
Total $ 80.8 $ 87.5 $ 168.3 $ (126.9) $ (8.8) $ 32.6
</TABLE>
<Page 53>
Note 3
Divestitures and Asset Impairments
In 1999, the Company divested its Brazilian pasta business for $14.3 million and
recognized a pretax divestiture gain of $5.1 million. The Company recorded $1.1
million in pretax adjustments to reduce prior divestiture reserves to reflect
changes from estimates.
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 took numerous actions in 1997 relative to its Brazilian pasta
business, which was divested in 1999. 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 pretax loss of $39.8
million to reduce the carrying value of the long-lived assets of the Brazilian
pasta business to fair value. The estimated fair 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 operating segment results.
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 asset impairment losses:
<TABLE>
<CAPTION>
(Gains) Total
Divestiture Impairment Losses (Gains)
Dollars in Millions Date Losses on Sale 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>
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.
<TABLE>
<CAPTION>
Divestiture Impairment Losses Total
Dollars in Millions Date Losses on Sale Losses
<S> <C> <C> <C> <C>
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
</TABLE>
Note 4
Trade Accounts Receivable Allowances
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998
<S> <C> <C>
Balance at beginning of year $ 21.2 $ 22.3
Provision for doubtful accounts 6.0 4.0
Provision for discounts and allowances 41.8 30.0
Write-offs of doubtful accounts - net of recoveries (2.5) (3.6)
Discounts and allowances taken (40.6) (31.0)
Effect of divestitures 0.1 (0.3)
Effect of exchange rate changes and other (1.5) (0.2)
Balance at end of year $ 24.5 $ 21.2
</TABLE>
<Page 54>
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 risks. 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 1999 and 1998, the Company made investments in marketable securities.
These marketable securities were available for sale and primarily consisted of
investments in mutual funds and preferred stock. These investments were held
less than 12 months and classified as marketable securities in the consolidated
balance sheets. Realized gains on the sales of marketable securities of $7.1
million and $4.7 million in 1999 and 1998, respectively, were included in
selling, general and administrative expenses. The Company's investment in
preferred stock, outstanding as of December 31, 1998, matured in 1999.
Accordingly, the unrealized gain of $0.4 million included in accumulated other
comprehensive income as of December 31, 1998, was reclassified during 1999.
As of December 31, 1999, the Company's investments in marketable securities
totaled $0.3 million and approximated fair value.
Debt Instruments
Revolving Credit Facilities and Short-term Debt - The Company currently 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 1999 or in 1998. The revolving credit facilities require the
Company and certain domestic subsidiaries to maintain certain financial ratios.
Short-term debt consists of notes payable to banks in foreign countries, which
totaled $73.3 million and $41.3 million as of December 31, 1999 and 1998,
respectively. The carrying value of short-term debt approximates fair value due
to the short-term maturity of the instruments. Weighted average interest rates
on all short-term debt outstanding as of December 31, 1999 and 1998, were 6.7
percent and 9.6 percent, respectively. This decrease in rates primarily was due
to a change in the mix of countries with outstanding debt. Nominal interest
rates in countries designated as highly inflationary 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, 1999 and 1998, is summarized below:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998
<S> <C> <C>
7.76% Senior ESOP notes due through 2001 $ 38.5 $ 48.4
8.00% Senior ESOP notes due through 2001 39.0 62.1
7.80% - 7.90% Series A medium-term notes due through 2000 10.0 25.5
8.63% - 9.34% Series B medium-term notes due through 2019 121.2 166.4
6.50% - 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 350.0 350.0
11.70% Chinese renmimbi notes due 2001 4.8 4.8
5.70%-6.63% Industrial Revenue Bonds due through 2009, tax-exempt 19.4 19.4
Non-interest bearing installment note due 2014 9.0 7.9
Other 4.3 5.8
Subtotal 796.2 890.3
Less: Current portion of long-term debt 81.2 95.2
Long-term debt $ 715.0 $ 795.1
</TABLE>
The fair value of long-term debt, including current maturities, was $785.6
million and $1.01 billion as of December 31, 1999 and 1998, respectively. Fair
value 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 due 2014, with a face value of $55.5
million, had an unamortized discount of $46.5 million and $47.6 million as of
December 31, 1999 and 1998, respectively, based on an imputed interest rate of
13 percent.
<Page 55>
Total required payments for long-term debt maturing over the next five years are
as follows:
<TABLE>
<CAPTION>
Dollars in Millions 2000 2001 2002 2003 2004
<S> <C> <C> <C> <C> <C>
Required payments $81.2 $54.5 $46.9 $27.8 $47.3
</TABLE>
Derivative Instruments
The primary derivative instruments used by the Company are foreign exchange
forward contracts, purchased foreign currency options, interest rate swap
agreements 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's policy is to use
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 derivative instruments to
manage risk is in the Company's best interest.
During 1999, the Company executed certain hedging instruments to manage exposure
to Canadian, European, Brazilian and Mexican 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.
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,
1999, were as follows:
<TABLE>
<CAPTION>
Dollars in Millions Net Investment Net Hedge Net Exposure
<S>
Currency: <C> <C> <C>
Dutch guilders $ 15.1 $ 9.1 $ 6.0
German marks $ 18.3 $ 11.9 $ 6.4
</TABLE>
The Company actively monitors its net exposures and adjusts the hedge amounts as
appropriate. The net hedges 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,
which matured in 1999, to sell various European currencies and Brazilian real
for $18.9 million to hedge its net investments. Unrealized gains as of December
31, 1998, were $0.2 million. The carrying value of these contracts approximated
fair value, except for the Brazilian real contracts, which had a fair value of
$0.8 million less than the book value at December 31, 1998. The Company had no
outstanding balance sheet forward contract hedges as of December 31, 1999.
Income Statement Hedges
Foreign Currency Hedges - The Company uses foreign currency options and forward
contracts to manage the impact of foreign currency fluctuations recognized in
the Company's operating results. Included in the consolidated statements of
income were losses (gains) from foreign currency hedge instruments of $1.0
million, $(0.8) million and $2.5 million in 1999, 1998 and 1997, respectively.
As of December 31, 1999, the Company had $50.8 million in forward contracts
outstanding to manage exposure to foreign currency movements. These contracts
mature in 2000.
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 $2.14 billion in cost of goods sold,
approximately $120 million to $150 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, 1999 and 1998,
approximately 55 percent and 28 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, 1999 and
1998, were $0.9 million and $0.2 million, respectively. Realized losses (gains)
charged to cost of goods sold in 1999, 1998 and 1997 were $2.5 million, $13.5
million and $(6.6) million, respectively.
<Page 56>
The fair values of these commodity instruments as of December 31, 1999 and 1998,
based on quotes from brokers, were net losses of $1.0 million and $2.2 million,
respectively.
Interest Rate Hedges - The Company actively monitors its interest rate exposure.
In 1999, the Company entered into cancelable interest rate swap agreements with
a notional value of $80.0 million, to exchange fixed for floating-rate debt.
The Company uses swap agreements to manage its exposure to fluctuations in
interest rates. The counterparties have options to cancel these agreements that
expire in November and December 2000; otherwise, they will mature in 2003 and
2005 for $20.0 million and $60.0 million, respectively. Interest differentials
to be received or paid on the swaps are recognized in the consolidated
statements of income as a reduction or increase in interest expense,
respectively.
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,
1999 and 1998, were $4.5 million and $5.7 million, respectively, of prepaid
interest expense as settlement of the 1995 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. Amounts included in interest expense related to the
interest rate swap agreements were $1.2 million, $1.4 million and $1.8 million
in 1999, 1998 and 1997, respectively.
Note 6
Capital Stock
During 1999, the Company repurchased 5.8 million shares of its outstanding
common stock for $369.9 million under its $1 billion repurchase program
announced in March 1998. As of December 31, 1999, the Company repurchased
$634.9 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, 1999, 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, 1999.
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 $84.0 million as of December 31, 1999, 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:
<TABLE>
<CAPTION>
Dollars in Millions
1999 1998
<S> <C> <C>
Principal payments $ 33.0 $ 29.2
Interest payments 8.5 10.9
Total ESOP payments $ 41.5 $ 40.1
</TABLE>
As of December 31, 1999, 4,692,095 shares of common stock and 591,262 shares of
preferred stock were held in the accounts of ESOP participants.
<Page 57>
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, 1999,
625 persons held such options.
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
this 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:
<TABLE>
<CAPTION>
Dollars in Millions (Except per Share Data) 1999 1998 1997
<S>
Net income (loss): <C> <C> <C>
As reported $ 455.0 $ 284.5 $ (930.9)
Pro forma $ 439.0 $ 272.5 $ (940.7)
Net income (loss) per share:
As reported $ 3.36 $ 2.04 $ (6.80)
Pro forma $ 3.24 $ 1.95 $ (6.87)
Net income (loss) per share - diluted:
As reported $ 3.23 $ 1.97 $ (6.80)
Pro forma $ 3.12 $ 1.89 $ (6.87)
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield 1.7% - 2.1% 1.9% - 2.0% 2.4% - 3.1%
Expected volatility 26.2% - 30.3% 18.6% - 20.8% 16.3% - 22.5%
Risk-free interest rates 5.0% - 6.0% 4.7% - 5.7% 5.9% - 6.7%
Expected lives 3 to 9 years 3 to 8 years 3 to 8 years
</TABLE>
A summary of the status of the Company's option activity is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S>
Outstanding at <C> <C> <C> <C> <C> <C>
beginning of year 11,608,894 $40.88 13,017,621 $36.25 14,264,030 $34.42
Granted 2,041,050 $53.49 2,399,000 $57.16 3,205,250 $40.61
Exercised 2,261,364 $34.87 3,326,292 $33.88 3,661,269 $33.00
Forfeited 397,921 $48.14 481,435 $45.13 790,390 $36.05
Outstanding at end of year 10,990,659 $44.20 11,608,894 $40.88 13,017,621 $36.25
Exercisable at end of year 6,861,634 $39.22 7,842,314 $36.44 9,403,675 $35.70
Weighted-average fair
value of options
granted during the year $15.42 $13.84 $ 9.03
</TABLE>
The following summarizes information about stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$22.79 - $35.35 2,995,863 4.44 Years $33.17 2,995,863 $33.17
$37.25 - $48.03 4,068,897 5.80 Years $41.57 3,271,516 $41.53
$53.34 - $67.84 3,925,899 8.75 Years $55.35 594,255 $57.07
$22.79 - $67.84 10,990,659 6.48 Years $44.20 6,861,634 $39.22
</TABLE>
<Page 58>
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 1999, 1998 and 1997 were 87,046, 55,981 and
178,475, respectively. Restrictions on these awards lapse after a period of
time designated by the Compensation Committee of the Board of Directors.
Note 9
Shareholder Rights Plan
The Company's Shareholder Rights Plan is designed to deter coercive or unfair
takeover tactics and to prevent a person or group from gaining control of the
Company without offering a fair price to all shareholders. Under the terms of
the 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.
Total Company Benefit Costs - The components of net periodic benefit costs for
the plans were as follows:
<TABLE>
<CAPTION>
Pension Benefits
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Components of net periodic benefit costs:
Service cost $ 34.2 $ 33.7 $ 28.9
Interest cost 80.1 76.3 74.5
Expected return on plan assets (112.8) (102.5) (86.3)
Amortization of prior service cost 3.2 4.2 4.2
Amortization of transitional asset (0.9) (0.9) (10.7)
Recognized net actuarial gain (0.2) (0.8) (0.1)
Multi-employer plans 0.4 0.3 0.5
Termination benefits/curtailment losses 2.2 1.1 --
Net periodic benefit costs $ 6.2 $ 11.4 $ 11.0
</TABLE>
<TABLE>
<CAPTION>
Postretirement Benefits
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Components of net periodic benefit costs:
Service cost $ 7.1 $ 7.2 $ 6.3
Interest cost 19.2 19.5 18.6
Amortization of prior service cost 0.5 0.6 0.5
Recognized net actuarial gain (0.1) (0.1) (0.1)
Gain from curtailment (0.1) (0.1) --
Net periodic benefit costs $ 26.6 $ 27.1 $ 25.3
</TABLE>
<Page 59>
The Company incurred $3.6 million, $5.3 million and $5.5 million in costs in
1999, 1998 and 1997, respectively, for defined contribution benefit plans.
These costs are not included in the net periodic benefit costs summarized on
page 59.
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 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 1,049.8 $ 993.0 $ 292.5 $ 271.3
Service cost 27.0 25.6 6.8 6.8
Interest cost 70.3 65.8 18.6 18.9
Benefits paid (49.5) (48.6) (17.3) (15.0)
Actuarial (gain) loss (142.8) 14.0 (38.5) 9.2
Plan participant contributions -- -- 1.2 1.3
Plan amendments 10.6 -- -- --
Benefit obligation at end of year $ 965.4 $ 1,049.8 $ 263.3 $ 292.5
Change in plan assets:
Fair value of plan assets
at beginning of year $ 1,141.4 $ 1,075.1 $ -- $ --
Actual return on assets 173.9 109.9 -- --
Company contributions 3.6 5.0 16.1 13.7
Benefits paid (49.5) (48.6) (17.3) (15.0)
Plan participant contributions -- -- 1.2 1.3
Fair value of plan assets at end of year $ 1,269.4 $ 1,141.4 $ -- $ --
Fair value of plan assets greater (less)
than benefit obligation $ 304.0 $ 91.6 $ (263.3) $ (292.5)
Unrecognized net actuarial (gain)loss (415.5) (199.7) (33.7) 4.9
Unrecognized prior service cost 22.0 14.3 3.4 3.8
Unrecognized net liability at transition 0.5 0.6 -- --
Net amounts recognized $ (89.0) $ (93.2) $ (293.6) $ (283.8)
Net amounts recognized consist of:
Accrued benefit liability $ (89.0) $ (93.2) $ (293.6) $ (283.8)
Net amounts recognized $ (89.0) $ (93.2) $ (293.6) $ (283.8)
</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 $60.5 million, $43.4 million and zero,
respectively, as of December 31, 1999, and $95.2 million, $82.1 million and
$31.4 million, respectively, as of December 31, 1998.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
Weighted average assumptions as of December 31 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Discount rate 8.00% 6.75% 8.00% 6.75%
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 6.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 4.5 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, 1999, would have been $4.1 million
higher, and the accumulated postretirement benefit obligation as of December 31,
1999, would have been $35.0 million higher. If the health care trend rate was
decreased one percentage point, postretirement benefit costs for the year ended
December 31, 1999, would have been $3.3 million lower, and the accumulated
postretirement benefit obligation as of December 31, 1999, would have been $29.1
million lower.
<Page 60>
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 1999 1998 1999 1998
<S>
Change in benefit obligations: <C> <C> <C> <C>
Benefit obligation at beginning of year $ 169.0 $ 139.6 $ 10.1 $ 9.4
Service cost 7.2 8.1 0.3 0.4
Interest cost 9.8 10.5 0.6 0.6
Benefits paid (10.8) (10.9) (0.2) (0.2)
Actuarial (gain)loss (1.9) 23.2 (2.9) 0.1
Plan participant contributions 0.6 0.6 -- --
Plan amendments 1.5 -- -- 0.6
Foreign currency exchange rate change (4.3) (2.9) 0.5 (0.7)
Plan curtailments -- 0.8 -- (0.1)
Benefit obligation at end of year $ 171.1 $ 169.0 $ 8.4 $ 10.1
Change in plan assets:
Fair value of plan assets at beginning of year $ 158.3 $ 144.1 $ -- $ --
Actual return on assets 15.8 20.3 -- --
Company contributions 7.4 7.4 0.2 0.2
Benefits paid (10.8) (10.9) (0.2) (0.2)
Plan participant contributions 0.5 0.5 -- --
Foreign currency exchange rate changes (2.5) (3.1) -- --
Fair value of plan assets at end of year $ 168.7 $ 158.3 $ -- $ --
Fair value of plan assets less than
benefit obligation $ (2.4) $ (10.7) $ (8.4) $ (10.1)
Unrecognized net actuarial (gain) loss (3.0) 5.8 (4.2) (1.3)
Unrecognized prior service cost 4.8 3.4 0.8 0.9
Unrecognized net asset at transition (4.0) (4.9) -- --
Net amounts recognized $ (4.6) $ (6.4) $ (11.8) $ (10.5)
Net amounts recognized consist of:
Accrued benefit liability $ (13.0) $ (13.9) $ (11.8) $ (10.5)
Prepaid benefit costs 8.4 7.5 -- --
Net amounts recognized $ (4.6) $ (6.4) $ (11.8) $ (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 $6.5 million, $5.9 million and zero,
respectively, as of December 31, 1999, and $28.5 million, $27.9 million and
$19.0 million, respectively, as of December 31, 1998.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
<S> <C> <C> <C> <C>
Weighted average assumptions as of December 31 1999 1998 1999 1998
Discount rate 6.00% 5.50% 7.50% 6.25%
Expected long-term rate of return on plan assets 6.70% 7.60% N/A N/A
Rate of future compensation increases 3.90% 4.00% 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 2000. The rate was
assumed to decrease gradually to 5.0 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, 1999, would have been $0.2 million
higher, and the accumulated postretirement benefit obligation as of December 31,
1999, would have been $1.6 million higher. If the health care trend rate was
decreased one percentage point, postretirement benefit costs for the year ended
December 31, 1999, would have been $0.2 million lower, and the accumulated
postretirement benefit obligation as of December 31, 1999, would have been $1.3
million lower.
<Page 61>
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
$45.0 million, $38.5 million and $38.0 million for the years ended December 31,
1999, 1998 and 1997, 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, 1999.
<TABLE>
<CAPTION>
Dollars in Millions 2000 2001 2002 2003 2004 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Total payments $23.8 $22.5 $17.6 $14.0 $13.7 $31.5 $123.1
</TABLE>
The Company enters into executory contracts to obtain inventory and promote
various products. As of December 31, 1999, future commitments under these
contracts were $862.1 million.
Note 12
Supplementary Income Statement Information
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Advertising, media and production $ 345.9 $ 281.9 $ 292.7
Merchandising 977.8 959.9 933.7
Total advertising and merchandising $ 1,323.7 $ 1,241.8 $ 1,226.4
Depreciation expense $ 114.0 $ 116.3 $ 122.0
Amortization of intangibles $ 9.8 $ 12.8 $ 35.6
Research and development $ 28.8 $ 31.0 $ 34.9
</TABLE>
Note 13
Interest Expense
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Interest expense $ 65.1 $ 72.0 $ 89.8
Interest expense capitalized (3.2) (2.4) (4.0)
Subtotal 61.9 69.6 85.8
Interest income (11.7) (10.7) (6.7)
Interest expense - net $ 50.2 $ 58.9 $ 79.1
</TABLE>
Interest paid in the years ended December 31, 1999, 1998 and 1997, was
$62.8 million, $68.8 million, and $83.2 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:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Currently payable (receivable):
Federal $ 88.1 $ 147.4 $ (140.1)
Foreign 15.6 21.2 21.9
State 16.0 27.0 4.2
Total currently payable (receivable) 119.7 195.6 (114.0)
Deferred - net:
Federal 40.7 (62.7) (3.0)
Foreign (4.7) (12.6) (13.6)
State 7.6 (8.2) (2.8)
Total deferred - net 43.6 (83.5) (19.4)
Income tax provision (benefit) $ 163.3 $ 112.1 $ (133.4)
</TABLE>
<Page 62>
In 1998, as a result of the loss on the 1997 divestiture of the Snapple
business, the Company recovered $240.0 million in Federal taxes paid on previous
capital gains from business divestitures.
Income taxes paid (refunded) during 1999, 1998 and 1997 were $159.2 million,
$(110.4) million and $92.9 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 provision (benefit) were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Accelerated tax depreciation $ 13.0 $ (10.9) $ 12.8
Postretirement benefits (4.3) (3.9) (8.4)
Accrued expenses including
restructuring charges 16.7 (34.6) --
Loss carryforwards, net of valuation allowances 2.9 4.4 (4.6)
Foreign gain deferral (1.8) (3.7) (4.3)
Asset impairment losses (0.6) (39.8) (1.6)
Other 17.7 5.0 (13.3)
Provision (benefit) for deferred income taxes $ 43.6 $ (83.5) $ (19.4)
</TABLE>
Total income tax provisions (benefits) were allocated as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
Continuing operations $ 163.3 $ 112.1 $ (133.4)
Items charged directly to common
shareholders' equity $ (30.7) $ (43.8) $ (21.0)
</TABLE>
The sources of pretax income (loss) were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C>
U.S. sources $ 579.2 $ 435.3 $ (1,087.7)
Foreign sources 39.1 (38.7) 23.4
Income (loss) before income taxes $ 618.3 $ 396.6 $ (1,064.3)
</TABLE>
Reconciliations of the statutory Federal income tax rates to the effective
income tax rates were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Loss
Tax provision (benefit) based
on the Federal statutory rate $ 216.4 35.0% $ 138.8 35.0% $ (372.5) 35.0%
State and local income tax
provision (benefit) - net of
Federal income taxes 19.7 3.2 9.2 2.3 (7.1) 0.7
Repatriation of foreign earnings (6.6) (1.1) (2.9) (0.7) 1.9 (0.2)
Foreign tax rate differential 4.9 0.8 3.5 0.9 0.1 --
Capital loss valuation allowance (2.4) (0.4) (25.4) (6.4) 253.1 (23.8)
Miscellaneous items (68.7) (11.1) (11.1) (2.8) (8.9) 0.8
Income tax provision (benefit) $ 163.3 26.4% $ 112.1 28.3% $ (133.4) 12.5%
</TABLE>
In 1999, the Company adjusted its tax accruals and tax assets to reflect
developments and information received during the year. The net effect of these
adjustments, which are included above in miscellaneous items, was to reduce the
1999 income tax provision by $59.3 million.
Deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1999 1998
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Depreciation and amortization $ 38.6 $ 211.5 $ 37.4 $ 183.2
Postretirement benefits 122.8 -- 118.4 --
Other benefit plans 60.0 5.8 62.8 5.8
Accrued expenses including
restructuring charges 86.4 14.5 122.5 9.7
Loss carryforwards 301.7 -- 316.7 --
Other 11.0 4.8 12.0 9.0
Subtotal 620.5 236.6 669.8 207.7
Valuation allowance (296.3) -- (314.0) --
Total $ 324.2 $ 236.6 $ 355.8 $ 207.7
</TABLE>
<Page 63>
Included in other current assets were deferred tax assets of $73.8 million and
$116.6 million as of December 31, 1999 and 1998, respectively. Included in
other assets were deferred tax assets of $13.8 million and $31.5 million as of
December 31, 1999 and 1998, respectively.
As of December 31, 1999 and 1998, the Company had approximately $710 million and
$760 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 the Company's 1997 loss on divestiture of the Snapple
beverages business. Therefore, the majority of those capital loss carryforwards
expire in 2002. During 1999, the amount of available capital loss carryforwards
decreased as a result of prior 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, 1999, the Company had $68.6 million of operating and capital
loss carryforwards available to reduce future taxable income of certain
international subsidiaries. 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) and Shares in Thousands
Year ended December 31 1999 1998 1997
Income Shares Income Shares Income Shares
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 455.0 $ 284.5 $ (930.9)
Less: Preferred dividends 4.4 4.5 3.5
Net income (loss) available
for common $ 450.6 134,027 $ 280.0 137,185 $ (934.4) 137,460
Net income (loss) per
common share $ 3.36 $ 2.04 $ (6.80)
Net income (loss) available
for common $ 450.6 134,027 $ 280.0 137,185 $ (934.4) 137,460
Effect of dilutive securities:
Stock options -- 3,625 -- 3,613 -- --
ESOP Convertible
Preferred Stock 2.0 2,042 2.0 2,180 -- --
Non-vested awards -- 226 -- 219 -- --
$ 452.6 139,920 $ 282.0 143,197 $ (934.4) 137,460
Net income (loss) per
common share - diluted $ 3.23 $ 1.97 $ (6.80)
</TABLE>
As of December 31, 1999 and 1998, 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.
<Page 64>
Note 17
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Dollars in Millions (Except Per Share Data)
First Second Third Fourth
1999 Quarter(a) Quarter(b) Quarter(c) Quarter(d)
<S> <C> <C> <C> <C>
Net sales $ 1,074.6 $ 1,317.5 $ 1,384.0 $ 949.1
Cost of goods sold 488.3 594.1 600.9 453.5
Gross profit $ 586.3 $ 723.4 $ 783.1 $ 495.6
Net income $ 86.7 $ 172.0 $ 137.3 $ 59.0
Per common share:
Net income $ 0.63 $ 1.27 $ 1.02 $ 0.44
Net income - diluted $ 0.61 $ 1.22 $ 0.98 $ 0.42
Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285
Market price range:
High $ 63 3/8 $ 70 3/4 $ 71 $ 71
Low $ 50 7/8 $ 59 1/2 $ 60 1/2 $ 59 5/16
<FN>
(a) Includes a pretax divestiture gain of $5.1 million ($3.4 million after-tax
or $0.03 per share) on the divestiture of the Brazilian pasta business, pretax
adjustments of $3.3 million ($2.0 million after-tax or $0.01 per share) to
reduce prior restructuring and divestiture reserves, and reductions in the
provision for income taxes of $8.4 million ($0.06 per share) related to
previously recorded tax accruals and tax assets.
(b) Includes reductions in the provision for income taxes of $37.7 million
($0.28 per share) related to previously recorded tax accruals.
(c) Includes pretax restructuring charges of $6.7 million ($4.0 million after-
tax or $0.03 per share) for the Supply Chain Reconfiguration project and pretax
adjustments of $0.1 million ($0.2 million after-tax and not material per share)
to reduce prior divestiture reserves.
(d) Includes pretax restructuring charges of $6.0 million ($3.6 million after-
tax or $0.03 per share) for the Supply Chain Reconfiguration project and
customer organization alignment, pretax adjustments of $6.5 million ($3.9
million after-tax or $0.03 per share) to reduce prior restructuring reserves,
and reductions in the provision for income taxes of $13.2 million ($0.10 per
share) related to previously recorded tax accruals.
</FN>
</TABLE>
[S]
Dollars in Millions (Except Per Share Data)
<TABLE>
<CAPTION>
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 - diluted $ 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
<FN>
(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.
</FN>
</TABLE>
Note 18
Subsequent Events
In January and February of 2000, the Company announced its plans to close two
cereals manufacturing facilities and two distribution centers in the United
States, a further development of the Supply Chain Reconfiguration project. The
Company also announced a restructuring of its human resources organization,
plans to close an administrative office in California and the decentralization
of certain customer service functions to the sales offices. As a result of
these actions, the Company expects to recognize restructuring and asset
impairment charges in the range of $175 million to $225 million during the first
quarter of 2000.
In February of 2000, the Company announced that it entered into a joint venture
agreement with Novartis Consumer Health, Inc. to form Altus Food Company, LLC,
which plans to develop and market functional food brands in North America. The
Company will hold a 50 percent interest in this new company.
<Page 65>
Additional 10-K Information
Description of Property
As of December 31, 1999, the Company operated 39 manufacturing plants in 11
states and 13 foreign countries and owned or leased distribution centers and
sales offices in 16 states and 16 foreign countries.
<TABLE>
<CAPTION>
Foods Beverages Shared Total
Owned and Leased Manufacturing Locations:
<S> <C> <C> <C> <C>
U.S. and Canadian 10 8 -- 18
Latin American 8 3 1 12
Other 6 3 -- 9
Owned and Leased Distribution Centers:
U.S. and Canadian 1 -- 8 9
Latin American 3 1 16 20
Other 2 3 -- 5
Owned and Leased Sales Offices:
U.S. and Canadian 7 4 7 18
Latin American 2 -- 14 16
Other 4 5 -- 9
</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.
Trademarks
The Company and its subsidiaries (the Company) 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, Life, Quaker Toasted
Oatmeal, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast cereals;
Gatorade, Gatorade Frost and Gatorade Fierce 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,
Quaker Oatso Simple, 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 Canada and is a leading manufacturer of hot cereals,
pancake syrups, grain-based snacks, cornmeal, hominy grits and value-added rice
products. In addition, in the United States, 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. 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 distributors. The
Company utilizes both its own and broker sales forces and has multiple
distribution centers throughout the United States, each of which carries an
inventory of most of the Company's food products.
<Page 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 oat-based
cereal producer in many European 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 in the
United State and Canada. More than 65 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 thirst quencher in Latin
America, Europe and Asia. Gatorade is sold in more than 55 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.
<Page 67>
Corporate Social Responsibility
Social Responsibility
Quaker is committed to supporting the communities in which we manufacture and
market products. Through The Quaker Oats Foundation, corporate community
relations and volunteer programs, the Company supports groups and activities
that strengthen the community, develop a diverse work force and supplier base,
and build positive relationships with community groups and neighbors. The
primary areas for support in 1999 were nutrition education, hunger relief and
minority education.
In 1999, The Quaker Oats Company and The Quaker Oats Foundation contributed
approximately $3.0 million in cash grants and $17.8 million in food product
donations to support our communities.
Quaker was recognized as one of America's 50 top profit-sharers (as measured by
charitable giving as a percent of pre-tax income) in Worth magazine's
December/January 2000 issue, which profiled America's most generous companies.
The magazine surveyed 500 of America's largest corporations in a joint project
with the Council on Economic Priorities (CEP), a public service organization
dedicated to analyzing the social and environmental records of corporations.
CEP publishes its findings annually in the book "Shopping for a Better World,"
a consumer guide to socially responsible shopping.
The Quaker Oats Foundation - In 1999, the Foundation made contributions
totaling more than $1.9 million. Direct grants were made to 59 organizations,
totaling $896,500. Ninety percent of those dollars benefited communities where
Quaker has a facility. Examples of the Foundation's grants during the year
include support to: the National Hispanic Scholarship Fund, the NAACP, the
NAACP ACT-SO scholarship awards program, City of Chicago Gospel Festival, the
American Indian College Fund, the Chinese American Service League, the Greater
Chicago Food Depository, Junior Achievement, the Chicago Public Schools'
Partners Program, and CARE.
The Foundation contributed about $82,000 in scholarships for children of Quaker
employees through the National Merit Scholarship Program. It also provided
substantial support to local United Way campaigns. In 1999, the Foundation's
contributions to 18 United Way campaigns throughout the country totaled nearly
$380,000. Combined with Quaker employee contributions of nearly $946,000,
employees and the Foundation contributed more than $1.3 million to United Way
in 1999.
In addition to direct grants, The Quaker Oats Foundation encourages and enhances
the philanthropic activity of our employees through a Matching Gifts Program. In
1999, 970 not-for-profit organizations received more than $560,000 in matching
gifts through Quaker's Foundation and more than $544,000 from Quaker employees,
for a total of $1.1 million.
Community Relations and Volunteer Programs - Around the block and around the
country, Quaker supports communities where it does business. Support ranges
from financial contributions and product donations to volunteer efforts by
Quaker employees. In 1999, Quaker provided nearly $950,000 in company support to
various not-for-profit organizations throughout the country. Examples include:
the League of United Latin American Citizens, the United Negro College Fund,
Chicago Urban League, Cabrini-Green Tutoring Program, Chicago Cares Volunteer
Program, Chicago Foundation for Women, YMCA, Spanish Coalition for Jobs,
Metropolitan Family Services, Boys and Girls Clubs, and the National Council of
LaRaza.
Quaker has a long history of encouraging and supporting employee volunteer
programs, both at our corporate headquarters and at local facilities throughout
the United States. Employee volunteer efforts are wide-ranging, including
tutoring and school mentoring programs and a variety of walks and runs for
causes such as the March of Dimes' WalkAmerica, the Greater Chicago Food
Depository's Walk for Hunger and various marathons that support research
efforts on behalf of AIDS, cancer, diabetes and heart disease. In addition,
many Quaker employees work at food banks, solicit donors for blood and bone-
marrow drives, work with Boy and Girl Scouts, staff shelters and food pantries,
and provide food, clothing and toys to various not-for-profit organizations.
Corporate Social Responsibility
The Quaker Oats Foundation publishes an annual report and the Company also
makes available several reports detailing its community outreach efforts.
To receive copies, please contact:
The Quaker Oats Company
Public Affairs-Suite 27-3
P.O. Box 049001
Chicago, Illinois 60604-9001
or call (312) 222-7377.
<Page 68>
Diversity Management: Vision and Initiatives
We believe every competitive advantage begins with people. People are
different. Differences create opportunity. That's diversity, and that's Quaker.
We are committed to developing a culture at Quaker that maximizes the strengths
of our employees to accelerate profitable growth. We are committed to providing
equal opportunity and advancement for all qualified employees. We strive to
provide a workplace that fosters productivity and inspires each employee to
realize his or her fullest potential. By accomplishing this, we believe Quaker
builds a competitive advantage in the marketplace.
Diversity Management - The Quaker Oats Company recognizes that recruiting,
retaining and advancing a diverse group of talented people is strongly linked
to business performance. Given our domestic and global marketplaces, shifting
populations, workplace demographic trends and the rapidly changing nature of
our customer and consumer base, a diversity management strategy is important to
maintaining a competitive advantage in the marketplace. Core initiatives
include: focused college and professional recruiting, mentoring programs and
skill-based diversity training.
Quaker's diversity management initiatives also include innovative and nationally
recognized family and work-life programs, designed to promote increased
productivity by helping employees balance their work and home lives.
Among these are QuakerFlex (a flexible benefits program capable of being
tailored to the employee's needs) and a variety of flexible work schedules in a
number of Company locations. Other programs provide guidance and information on
child education, child care, elder care, adoption and other topics.
An important element of Quaker's overall diversity management strategy is the
continued development of partnerships with qualified and qualifiable small
business suppliers, including those owned and operated by diverse constituents.
Equal Employment Opportunity and Affirmative Action - Quaker is an equal
opportunity and affirmative action employer, committed to the employment and
advancement of qualified employees without regard to race, color, religion,
gender, national origin, age, veteran status, physical or mental disabilities,
sexual orientation, marital status or other non job-related characteristics. As
a Federal government contractor, the Company has an affirmative action plan at
each of our facilities for women, minorities, persons with disabilities and
Vietnam-era veterans.
Health, Safety and Environmental Programs
Quaker is committed to conducting our business responsibly and in a manner
designed to protect employees, consumers, public health and the environment.
Ensuring that we meet these commitments is the responsibility of every Quaker
employee.
Safety and Health - Quaker's goal is to continue to minimize risks associated
with work-related injuries and illnesses through a systematic process of
identifying, evaluating and controlling on-site risks, employee training and
awareness programs, as well as internal assessments. As a result, we continue
to make ongoing improvements in the effectiveness of our safety and health risk
management efforts.
Health Promotion - Our widely acclaimed LiveWell-BeWell program encourages
employees to live healthy lifestyles and offers U.S. employees many ways to
identify and manage their health risks. If Quaker employees in the United
States pledge to exercise at least three times a week and are non-smokers, they
are rewarded with financial incentives tied to Company benefits. Results from
Quaker's programs show a reduction in overall employee health risks, which is
reflected in substantially lower lifestyle-related health care claims for
Quaker employees compared to industry norms. The majority of employee health
risks (related to smoking, exercise, eating habits, etc.) have been reduced
significantly over time.
In 1999, Quaker received the Gold Well Work Place Award from the National
Wellness Councils of America for documented excellence in health promotion. The
awards are given every three years for outstanding achievement in creating work
environments that allow employees to lead a healthy lifestyle. This is the
third gold award Quaker has received since 1992, making the Company the first
triple award or "three-peat" winner in Illinois and the second triple award
winner in the United States.
Environment - Quaker is committed to practicing responsible environmental
stewardship through regulatory compliance and environmental sustainability
efforts.
Given the nature of our manufacturing processes and products, Quaker is focused
on three major areas with regard to environmental sustainability: energy, water
and solid waste. In these areas, Quaker continues to refine our long-term
strategic approach to effectively conserving energy, reducing water usage and
wastewater generation, and minimizing the amount of waste generated by our
operations and packaging. Quaker is also committed to ongoing re-evaluation and
continuous improvement in our approach to environmental matters.
<Page 69>
Members of the
Board of Directors
Frank C. Carlucci 1*,3,4
Age 69
Chairman
The Carlyle Group
(Banking)
Washington, D.C.
Armando M. Codina 1,5
Age 53
Chairman and
Chief Executive Officer
Codina Group Inc.
(Real Estate Development)
Coral Gables, Florida
W. James Farrell 1,3,4
Age 57
Chairman and
Chief Executive Officer
Illinois Tool Works Inc.
(Component Manufacturer)
Glenview, Illinois
Judy C. Lewent 1,3,5
Age 51
Senior Vice President and
Chief Financial Officer
Merck & Co., Inc.
(Pharmaceuticals)
Whitehouse Station,
New Jersey
J. Michael Losh 1,2,5
Age 53
Executive Vice President
and Chief Financial Officer
General Motors Corporation
(Automotive Manufacturing)
Detroit, Michigan
Vernon R. Loucks, Jr. 2,3*,5
Age 65
Chairman
InLight, Inc.
(Medical Care Services)
Deerfield, Illinois
Robert S. Morrison 2,4
Age 57
Chairman, President and
Chief Executive Officer
Walter J. Salmon 2*,5
Age 69
Stanley Roth, Sr.
Professor of Retailing,
Emeritus
Harvard Business School
Boston, Massachusetts
William L. Weiss 2,3,4,5*
Age 70
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
Operating Committee
Robert S. Morrison+
Age 57
Chairman, President
and Chief Executive Officer
Joined Quaker in
October 1997.
Elected to present
office in October 1997.
Cassian K.S. Cheung+
Age 44
Vice President and President
Quaker Asia
Joined Quaker in 1994.
Elected to present
office in March 1998.
Harry M. Dent+
Age 42
Vice President and President
Ready-To-Eat Cereals
Joined Quaker in 1983.
Elected to present
office in March 1998.
Margaret M. Eichman+
Age 41
Vice President
Investor Relations
and Corporate Affairs
Joined Quaker in 1980.
Elected to present
office in July 1997.
Pamela S. Hewitt+
Age 47
Senior Vice President
Human Resources
Joined Quaker in 1992.
Elected to present
office in May 1998.
John G. Jartz+
Age 46
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 45
Vice President and President
Hot Breakfast
Joined Quaker in 1979.
Elected to present
office in March 1998.
Charles I. Maniscalco+
Age 46
Vice President and President
Convenience Foods
Joined Quaker in 1980.
Elected to present
office in January 2000.
<Page 70>
Terence D. Martin+
Age 56
Senior Vice President and
Chief Financial Officer
Joined Quaker in 1998.
Elected to present
office in November 1998.
Terrence B. Mohr+
Age 56
Senior Vice President
Customer Organization
Joined Quaker in 1987.
Elected to present
office in March 1998.
David L. Morton
Age 55
President and
Chief Executive Officer
The Quaker Oats Company
of Canada, Ltd.
Joined Quaker in 1973.
George Sewell
Age 53
President
Cereals, Europe
Joined Quaker in 1972.
Mark A. Shapiro+
Age 44
Senior Vice President
Corporate Strategy
and Development
Joined Quaker in 1983.
Elected to present
office in January 2000.
Susan D. Wellington+
Age 41
Vice President and President
U.S. Beverages
Joined Quaker in 1981.
Elected to present
office in March 1998.
Bernardo Wolfson+
Age 46
Vice President and President
Quaker Latin America
Joined Quaker in 1983.
Elected to present
office in March 1998.
Russell A. Young+
Age 51
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
William G. Barker+
Age 41
Vice President and
Corporate Controller
Joined Quaker in 1996.
Elected to present
office in January 2000.
Penelope C. Cate
Vice President
Public Affairs
Thomas L. Gettings+
Age 43
Vice President
Treasurer and Tax
Joined Quaker in 1987.
Elected to present
office in May 1998.
Richard M. Gunst+
Age 43
Vice President
Planning, Analysis
and Controls
Joined Quaker in 1992.
Elected to present
office in January 2000.
Douglas A. James
Assistant Treasurer
James E. LeGere
Vice President
Information Services
Kenneth W. Murray
Vice President
Audit Services and
Chief Ethics Officer
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. North America of
Philip Morris Companies, Inc. [1994-
1997] and President of General Foods
U.S.A. of Philip Morris Companies, Inc.
[1991-1994], 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], and William G. Barker who
joined the Company in January 1996,
and was formerly the Assistant
Treasurer, International for Fruit of the
Loom, Inc. [1994-1995]), have been
employed by The Quaker Oats
Company in an executive capacity for
five years or more.
<Page 71>
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, 1999 and
1998, and the related consolidated statements of income, common shareholders'
equity and cash flows for the years ended December 31, 1999, 1998 and 1997.
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 audit 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, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 27, 2000
(except with respect to the matters discussed in
Note 18, as to which the date is February 15, 2000.)
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.
<Page 72>
Corporate Headquarters
Mailing Address:
The Quaker Oats Company
P.O. Box 049001
Chicago, Illinois 60604-9001
Street Address:
Quaker Tower
321 North Clark Steet
Chicago, Illinois 60610-4714
(312) 222-7111
Internet Web Site Address
www.quakeroats.com
Consumer Affairs
Inquires regarding our products
should be addressed to:
Consumer Affairs
The Quaker Oats Company
P.O. Box 049003
Chicago, Illinois 60604-9003
or call 1-800-494-7843
Media Relations
Copies of press releases are available at
PR Newswire's Company News On-Call
fax service, 1-800-758-5804, extension
103689 or at www.quakeroats.com
News media-related inquires
should be addressed to:
Corporate Communications - Suite 27-6
or call (312) 222-7399
Shareholder Services
Harris Trust and Savings Bank acts
as transfer agent and registrar for the
Company stock and maintains all primary
shareholder records. Shareholders may
obtain information relating to their share
positions, dividends, stock transfer
requirements, lost certificates and
other related matters by telephoning
the Shareholder Hotline toll-free at
1-800-344-1198.
For General Correspondence
Harris Trust and Savings Bank
Shareholder Services
P.O. Box A3504
Chicago, Illinois 60690-3504
For Securities Transfer
Harris Trust and Savings Bank
Stock Transfer
P.O. Box 3480
Chicago, Illinois 60690-3480
Harris Trust and Saving Bank
Internet Web Site Address
www.harrisbank.com
Harris DOCS (Direct Ownership of
Corporate Shares) Program
This program is a means for dividend
reinvestment and stock purchases.
Your initial investment may be made
through this program. Additional
shares may then be purchased
through the reinvestment of dividends,
automatic checking/savings account
debits (EFT), and/or optional cash
investments. A brochure describing
the program and an enrollment form
are available by calling 1-800-524-8580.
Current shareholders should call
Harris Bank directly at 1-800-344-1198.
Harris DOCS
The Quaker Oats Company
Administrator
P.O. Box A3309
Chicago, Illinois 60690-3309
1-800-344-1198
Investor Relations
Security analysts, investment
professionals and shareholders should
direct their business-related inquires to:
Investor Relations - Suite 27-7
or call (312) 222-7818
Annual Meeting
Shareholders are cordially invited to
attend the Annual Meeting, which will be
held at the Civic Opera House, 20 North
Wacker Drive, in Chicago, Illinois,
May 10, 2000, at 9:30 a.m. (CDT).
Dividends
Cash dividends on Quaker common
stock have been paid for 94 consecutive
years. Dividends are generally declared
on a quarterly basis, with holders as of
the record date being entitled to receive
the cash dividend on the payable date.
Shares Listed
New York Stock Exchange
Chicago Stock Exchange
Ticker Symbol: OAT
The Quarter Oats Company was
incorporated in 1901 under
the laws of the State of New Jersey.
<Page 73>
EXHIBIT 21
State of Subsidiary
Incorporation
THE QUAKER OATS COMPANY
ACTIVE DOMESTIC SUBSIDIARIES AS OF DECEMBER 31, 1999
SUBSIDIARY STATE OF INCORPORATION
The Gatorade Company Delaware
Gatorade Puerto Rico Company Delaware
Golden Grain Company California
Grocery International Holdings, Inc. Delaware
Quaker Oats Asia, Inc. Delaware
Quaker Oats Europe, Inc. Illinois
Quaker Oats Holdings, Inc. Delaware
Quaker Sales & Distribution, 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
SVC Manufacturing, Inc. Delaware
ACTIVE FOREIGN SUBSIDIARIES AS OF DECEMBER 31, 1999
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
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
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%
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K for the year ended
December 31, 1999 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, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 283
<SECURITIES> 0
<RECEIVABLES> 279
<ALLOWANCES> 25
<INVENTORY> 266
<CURRENT-ASSETS> 997
<PP&E> 1,852
<DEPRECIATION> 745
<TOTAL-ASSETS> 2,396
<CURRENT-LIABILITIES> 938
<BONDS> 715
0
100
<COMMON> 840
<OTHER-SE> (720)
<TOTAL-LIABILITY-AND-EQUITY> 2,396
<SALES> 4,725
<TOTAL-REVENUES> 4,725
<CGS> 2,137
<TOTAL-COSTS> 2,137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 618
<INCOME-TAX> 163
<INCOME-CONTINUING> 455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 455
<EPS-BASIC> 3.36
<EPS-DILUTED> 3.23
</TABLE>
