-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HI2JaUjp4Ezra8mtr9V2ht6FPq2TBc9IaCjGVKExfpkCnIwYdu3J1DonKCc4+1g5 SrzzZpNGehRO/LGwVTNMkw== 0000081371-98-000014.txt : 19981110 0000081371-98-000014.hdr.sgml : 19981110 ACCESSION NUMBER: 0000081371-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER OATS CO CENTRAL INDEX KEY: 0000081371 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 361655315 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00012 FILM NUMBER: 98741027 BUSINESS ADDRESS: STREET 1: QUAKER TOWER STREET 2: PO BOX 049001 CITY: CHICAGO STATE: IL ZIP: 60604-9001 BUSINESS PHONE: 3122228503 MAIL ADDRESS: STREET 1: P.O. BOX 049001-STE 26-5 CITY: CHICAGO STATE: IL ZIP: 60604-9001 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from ____ to ____ Commission file number 1-12 THE QUAKER OATS COMPANY (Exact name of registrant as specified in its charter) New Jersey 36-1655315 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Quaker Tower P.O. Box 049001 Chicago, Illinois 60604-9001 (Address of principal executive office) (Zip Code) (312) 222-7111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file for such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO The number of shares of Common Stock, $5.00 par value, outstanding as of the close of business on September 30, 1998 was 136,254,958 THE QUAKER OATS COMPANY AND SUBSIDIARIES INDEX TO FORM 10-Q Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Statements of Income and Reinvested Earnings for the Nine and Three Months Ended September 30, 1998 and 1997 3-4 Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 6 Net Sales and Operating Income by Segment for the Nine and Three Months Ended September 30, 1998 and 1997 7-8 Notes to the Condensed Consolidated Financial Statements 9-14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-24 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 25 Item 6 - Exhibits and Reports on Form 8-K 25 SIGNATURES 26 EXHIBIT INDEX 27 <2> THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Nine Months Ended Dollars in Millions (Except Per Share Data) September 30, 1998 1997 Net sales $ 3,879.2 $ 3,967.9 Cost of goods sold 1,892.1 2,005.9 Gross profit 1,987.1 1,962.0 Selling, general and administrative expenses 1,473.2 1,518.9 Restructuring charges, asset impairments and (gains) losses on divestitures 129.6 1,473.3 Interest expense 52.7 67.5 Interest income (6.5) (4.7) Foreign exchange loss - net 11.2 8.1 Income (loss) before income taxes 326.9 (1,101.1) Provision (benefit) for income taxes 115.6 (144.6) Net Income (Loss) 211.3 (956.5) Preferred dividends - net of tax 2.5 2.7 Net Income (Loss) Available for Common $ 208.8 $ (959.2) Per Common Share: Net income (loss) $ 1.52 $ (7.00) Net income (loss) - assuming dilution $ 1.47 $ (7.00) Dividends declared $ .855 $ .855 Average Number of Common Shares Outstanding (in thousands) 137,552 137,089 Reinvested Earnings: Balance beginning of period $ 431.0 $ 1,521.3 Net income (loss) 211.3 (956.5) Dividends (119.2) (119.3) Balance end of period $ 523.1 $ 445.5 See accompanying notes to the condensed consolidated financial statements. <3> THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND REINVESTED EARNINGS (UNAUDITED) Three Months Ended Dollars in Millions (Except Per Share Data) September 30, 1998 1997 Net sales $ 1,405.2 $ 1,370.7 Cost of goods sold 663.4 674.1 Gross profit 741.8 696.6 Selling, general and administrative expenses 521.8 506.9 Restructuring charges, asset impairments and (gains) on divestitures 41.9 46.9 Interest expense 16.9 18.0 Interest income (2.5) (1.4) Foreign exchange loss - net 2.3 3.1 Income before income taxes 161.4 123.1 Provision for income taxes 53.6 45.6 Net Income 107.8 77.5 Preferred dividends - net of tax 0.8 1.0 Net Income Available for Common $ 107.0 $ 76.5 Per Common Share: Net income $ 0.78 $ 0.58 Net income - assuming dilution $ 0.75 $ 0.58 Dividends declared $ 0.285 $ 0.285 Average Number of Common Shares Outstanding (in thousands) 136,394 138,064 Reinvested Earnings: Balance beginning of period $ 454.2 $ 408.3 Net income 107.8 77.5 Dividends (38.9) (40.3) Balance end of period $ 523.1 $ 445.5 See accompanying notes to the condensed consolidated financial statements. <4> THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, Dollars in Millions 1998 1997 Assets Current Assets: Cash and cash equivalents $ 266.4 $ 84.2 Marketable securities 148.6 -- Trade accounts receivable - net of allowances 355.9 305.7 Inventories: Finished goods 179.0 172.6 Grains and raw materials 50.3 59.0 Packaging materials and supplies 23.4 24.5 Total inventories 252.7 256.1 Other current assets 181.9 487.0 Total Current Assets 1,205.5 1,133.0 Property, plant and equipment 1,872.2 1,913.1 Less: accumulated depreciation 786.1 748.4 Property - net 1,086.1 1,164.7 Intangible assets - net of amortization 249.2 350.5 Other assets 70.4 48.8 Total Assets $ 2,611.2 $ 2,697.0 Liabilities and Shareholders' Equity Current Liabilities: Short-term debt $ 45.7 $ 61.0 Current portion of long-term debt 79.8 108.4 Trade accounts payable 212.9 191.3 Other current liabilities 695.5 585.0 Total Current Liabilities 1,033.9 945.7 Long-term debt 814.5 887.6 Other liabilities 551.6 578.9 Deferred income taxes -- 36.3 Preferred Stock, Series B, no par value, authorized 1,750,000 shares; issued 1,282,051 of $5.46 cumulative convertible shares (liquidating preference of $78 per share) 100.0 100.0 Deferred compensation (48.4) (57.2) Treasury Preferred Stock, at cost, 289,829 shares and 245,147 shares, respectively (28.0) (22.3) Common Shareholders' Equity: Common stock, $5 par value, authorized 400 million shares; issued 167,978,792 shares 840.0 840.0 Additional paid-in capital 73.9 29.0 Reinvested earnings 523.1 431.0 Cumulative translation adjustment (79.7) (82.4) Unrealized gain on marketable securities 3.9 -- Deferred compensation (68.1) (91.0) Treasury common stock, at cost, 31,723,834 shares and 29,165,692 shares, respectively (1,105.5) (898.6) Total Common Shareholders' Equity 187.6 228.0 Total Liabilities and Shareholders' Equity $ 2,611.2 $ 2,697.0 See accompanying notes to the condensed consolidated financial statements. <5> THE QUAKER OATS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended Dollars in Millions September 30, 1998 1997 Cash Flows from Operating Activities: Net income (loss) $ 211.3 $ (956.5) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 100.6 125.2 Deferred income taxes (38.8) 0.8 Loss on divestitures - net of tax benefit of $265.1 in 1997 32.4 1,149.5 Restructuring charges 33.7 58.7 Asset impairment losses 63.5 39.8 Loss on disposition of property, plant and equipment 8.0 30.9 Increase in trade accounts receivable (65.0) (101.0) Increase in inventories (19.8) (26.8) Decrease (increase) in other current assets 19.4 (8.0) Increase in trade accounts payable 25.7 12.6 Increase in other current liabilities 93.0 77.5 Change in deferred compensation 31.7 24.7 Other items 17.5 16.0 Net Cash Provided by Operating Activities 513.2 443.4 Cash Flows from Investing Activities: Capital gains tax recovery 240.0 -- Business divestitures 160.9 300.0 Purchase of marketable securities (159.1) -- Additions to property, plant and equipment (135.9) (144.1) Proceeds on sale of property, plant and equipment 4.2 -- Net Cash Provided by Investing Activities 110.1 155.9 Cash Flows from Financing Activities: Cash dividends (119.2) (119.3) Change in short-term debt (12.3) (457.4) Proceeds from long-term debt 0.7 6.7 Reduction of long-term debt (103.0) (53.4) Issuance of common treasury stock 96.9 91.7 Repurchases of common stock (300.2) (21.7) Repurchases of preferred stock (5.7) (4.3) Net Cash Used in Financing Activities (442.8) (557.7) Effect of Exchange Rate Changes on Cash and Cash Equivalents 1.7 (4.1) Net Increase in Cash and Cash Equivalents 182.2 37.5 Cash and Cash Equivalents - Beginning of Period 84.2 110.5 Cash and Cash Equivalents - End of Period $ 266.4 $ 148.0 See accompanying notes to the condensed consolidated financial statements. <6> THE QUAKER OATS COMPANY AND SUBSIDIARIES NET SALES AND OPERATING INCOME BY SEGMENT (UNAUDITED)
Net Sales Operating Income (Loss) (a) Nine Months Nine Months Dollars in Millions Ended September 30, Ended September 30, 1998 1997 1998 1997 Foods U.S. and Canadian (b) $ 1,795.2 $ 1,793.1 $ 218.9 $ 227.9 International (c) 483.1 477.6 (26.4) (7.7) Total Foods 2,278.3 2,270.7 192.5 220.2 Beverages U.S. and Canadian (d) 1,186.3 1,050.5 237.8 208.9 International (e) 303.4 267.5 17.2 7.3 Total Beverages 1,489.7 1,318.0 255.0 216.2 Divested Businesses (f) 111.2 379.2 (39.1) (1,438.3) Total Sales/Operating Income (Loss) $ 3,879.2 $ 3,967.9 408.4 (1,001.9) Less: General corporate expenses 24.1 28.3 Interest expense - net 46.2 62.8 Foreign exchange loss - net 11.2 8.1 Income (loss) before income taxes $ 326.9 $(1,101.1)
(a) Operating income (loss) includes certain allocations of overhead expenses. (b) 1998 operating income includes pretax restructuring charges of $15.6 million for organization alignment and non-cash, pretax charges of $25.4 million for asset impairment losses. 1997 operating income includes pretax restructuring charges of $40.2 million for plant consolidations and $4.9 million related to a staff restructuring. (c) 1998 operating results include pretax restructuring charges of $7.8 million for organization alignment and non-cash, pretax charges of $38.1 million for asset impairment losses. 1997 operating results include pretax restructuring charges of $10.7 million for plant consolidations in the Brazilian pasta business and a pretax net charge of $4.8 million for an asset impairment loss partly offset by a cash litigation settlement. (d) 1998 operating income includes pretax restructuring charges of $7.0 million for organization alignment. 1997 operating income includes a pretax restructuring charge of $1.8 million related to a staff restructuring. (e) 1998 operating income includes pretax restructuring charges of $3.3 million for organization alignment. 1997 operating income includes pretax restructuring charges of $1.1 million for the closing of an office in Singapore. (f) 1998 includes the sales and operating results of the Ardmore Farms and Continental Coffee food service businesses that were divested in 1998. Operating results for the nine months ended September 30, 1998, includes a combined asset impairment and divestiture loss for the Continental Coffee business net of a pretax gain for the sale of the Ardmore Farms business. See Note 4 for further discussion. 1997 includes the sales and operating results of the Snapple beverages business and the food service businesses that were divested in 1997 and 1998. Operating results for the nine months ended September 30, 1997, includes a pretax loss of $1.41 billion on the sale of the Snapple beverages business. <7> THE QUAKER OATS COMPANY AND SUBSIDIARIES NET SALES AND OPERATING INCOME BY SEGMENT (UNAUDITED)
Net Sales Operating Income (Loss) (a) Three Months Three Months Dollars in Millions Ended September 30, Ended September 30, 1998 1997 1998 1997 Foods U.S. and Canadian (b) $ 644.4 $ 642.3 $ 72.2 $ 68.4 International (c) 163.7 163.2 (3.6) (0.5) Total Foods 808.1 805.5 68.6 67.9 Beverages U.S. and Canadian (d) 471.2 401.3 104.8 83.6 International 101.2 93.2 6.2 4.5 Total Beverages 572.4 494.5 111.0 88.1 Divested Businesses (e) 24.7 70.7 4.7 (3.1) Total Sales/Operating Income $ 1,405.2 $ 1,370.7 184.3 152.9 Less: General corporate expenses 6.2 10.1 Interest expense - net 14.4 16.6 Foreign exchange loss - net 2.3 3.1 Income before income taxes $ 161.4 $ 123.1
(a) Operating income (loss) includes certain allocations of overhead expenses. (b) 1998 operating income includes pretax restructuring charges of $6.3 million for organization alignment and non-cash, pretax charges of $25.4 million for asset impairment losses. 1997 operating income includes pretax restructuring charges of $40.2 million for plant consolidations and $4.9 million related to a staff restructuring. (c) 1998 operating results include a non-cash, pretax charge of $15.1 million for asset impairment losses. 1997 operating results include a pretax charge of $4.8 million for an asset impairment loss partly offset by a cash litigation settlement. (d) 1998 operating income includes pretax restructuring charges of $2.7 million for organization alignment. 1997 operating income includes pretax restructuring charges of $1.8 million related to a staff restructuring. (e) 1998 includes the sales and operating results of the Ardmore Farms and Continental Coffee food service businesses that were divested in 1998. See Note 4 for further discussion. 1997 includes the sales and operating results of the Snapple beverages business and the food service businesses that were divested in 1997 and 1998. <8> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Note 1 - Basis of Presentation The condensed consolidated financial statements include The Quaker Oats Company and its subsidiaries (the Company). The condensed consolidated statements of income and reinvested earnings for the nine and three months ended September 30, 1998 and 1997, the condensed consolidated balance sheet as of September 30, 1998, and the condensed consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997, have been prepared by the Company without audit. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of September 30, 1998, and for all periods presented. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's report to shareholders for the year ended December 31, 1997. Certain previously reported amounts have been reclassified to conform to the current presentation. Note 2 - Litigation The Company is a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to the Company's past acquisition activity and other issues. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change. Note 3 - Restructuring and Other Unusual Charges The Company recorded pretax restructuring charges of $9.0 million during the three months ended September 30, 1998 (current quarter). In the U.S. and Canadian businesses, the Company announced plans to combine its foods and beverages sales organizations in order to realize synergies and leverage scale. This plan includes the elimination of positions and the consolidation of sales offices. In addition, the U.S. Foods marketing organization was realigned. Combined, these actions are expected to result in the elimination of about 90 positions. The charges are comprised of $5.8 million in severance and related benefits, $1.0 million in loss on leases and $2.2 million in asset write-offs. The charges are reflected in the operating results of the business segments as follows: U.S. and Canadian Foods, $6.3 million, and U.S. and Canadian Beverages, $2.7 million. Savings from these actions are estimated to be $7 million annually, primarily beginning in 1999, with approximately 90 percent of such savings in cash. The Company's organization alignment activities are expected to continue during the remainder of the year. <9> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 During the current quarter, the Company continued to review its strategies related to underperforming businesses in its portfolio. The Company evaluates the recoverability of certain long-lived assets pursuant to the provisions of Financial Accounting Standards Board (FASB) Statement #121 for impaired assets held for use. In the U.S. and Canadian Foods business, a non-cash, pretax charge of $25.4 million was recognized for an impaired business. The Company's foods business in China was also included in this review. As a result of this review, the Company concluded that this business was impaired and recorded a non-cash, pretax charge of $15.1 million to adjust the carrying amount of the long-lived assets to fair value. The estimated fair market value of these businesses was based on various methodologies, including a discounted value of the estimated future cash flows of the businesses. In light of the recent downturn in the economic environment in the Asia/Pacific region, the Company will continue to evaluate its strategies related to its businesses in this region. Currently, the Company has decided to focus on building its beverages business in China and is working on a plan to restructure its other operations in the Asia/Pacific region for improved profitability. As the Company determines the course of action related to its Asia/Pacific businesses, it is also scrutinizing its domestic assets. The continuation of the worldwide organization alignment, manufacturing consolidations and other cost-reduction actions could result in additional charges of up to $50 million in the fourth quarter of 1998. Year-to-date restructuring charges total $33.7 million, including $9.0 million of current quarter charges. Note 4 - Divestitures During the current quarter, the Company completed the sale of its Ardmore Farms juice and Continental Coffee food service businesses. These transactions resulted in a combined pretax gain of $7.6 million in the current quarter. The current quarter $7.6 million pretax gain reflects the sale of the Ardmore Farms business and an adjustment upon sale of the Continental Coffee business. The year-to-date combined impact of these transactions is a pretax loss of $32.4 million. During the first quarter of 1998, the Company received cash proceeds of $73.2 million from the December 1997 sale of certain food service businesses and the Company received $240.0 million from the recovery of income taxes paid on previous capital gains related to divestitures. Cash provided by investing activities for the nine months ended September 30, 1998 (current year) includes these amounts. On May 22, 1997, the Company completed the sale of 100 percent of its shares of its wholly-owned subsidiary, Snapple Beverage Corp. (Snapple), to Triarc Companies, Inc. (Triarc) for $300 million in cash. The disposition was made pursuant to the Stock Purchase Agreement dated March 27, 1997, between the Company and Triarc. The Company realized a pretax loss on the sale of $10.6 million in the second quarter of 1997, which, combined with the previously recorded impairment loss in the first quarter of 1997, resulted in a total pretax loss on the sale of $1.41 billion. <10> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Note 5 - Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 6 - Marketable Securities During the current year, the Company made investments in marketable securities. These marketable securities are available for sale and consist of investments in mutual funds and preferred stock. The investments in mutual funds are expected to be held less than twelve months and are classified as marketable securities on the balance sheet, while the investments in preferred stock are expected to be held to maturity, which is greater than twelve months, and are classified as a component of other long-term assets on the balance sheet. During the current quarter, the Company recorded a net unrealized gain of $3.9 million on its investment in mutual funds to adjust the carrying value of this investment to fair value, in accordance with the provisions of FASB Statement #115. This gain is classified as a separate component of shareholders' equity and is included in comprehensive income. Note 7 - Current and Pending Accounting Changes In July 1997, the FASB issued Statement #131, "Disclosures about Segments of an Enterprise and Related Information." This Statement expands certain reporting and disclosure requirements for segments from current standards. In February 1998, the FASB issued Statement #132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company is not required to adopt these Statements until December 1998 and does not expect the adoption of these standards to result in material changes to previously reported amounts. In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. This SOP provides guidance on the accounting for computer software costs. In April 1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on accounting for the cost of start-up activities. The Company is not required to adopt these Statements until January 1999 and does not expect the adoption of these standards to result in material changes to previously reported amounts or disclosures. In June 1998, the FASB issued Statement #133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The accounting provisions for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that the Company must formally document, designate, and assess the effectiveness of transactions that qualify for hedge accounting. The Company is not required to adopt this Statement until January 2000. The Company has not determined its method or timing of adopting this Statement or the impact on its financial statements. However, when adopted, this Statement could increase volatility in reported earnings and other comprehensive income of the Company. <11> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Note 8 - Comprehensive Income (Loss) Total comprehensive income for the three months ended September 30, 1998 and 1997, was $109.5 million and $72.9 million, respectively. For the nine months ended September 30, 1998 and 1997, total comprehensive income (loss) was $217.9 million and $(964.5) million, respectively. Total comprehensive income (loss) for the Company includes net income (loss), foreign currency translation adjustments and unrealized gains on securities. Note 9 - Derivative Financial and Commodity Instruments The Company actively monitors its exposure to commodity price, foreign currency exchange rate and interest rate risks and uses derivative financial and commodity instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the commodity price, exchange rate or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. Complex instruments involving leverage or multipliers are not used. Management believes that its use of these instruments to manage risk is in the Company's best interest. Instruments used as hedges must be effective at reducing the risks associated with the underlying exposure and must be designated as a hedge at the inception of the contract. Accordingly, changes in the market value of the instruments must have a high degree of inverse correlation with changes in market values or cash flows of the underlying hedged item. Summarized below are the specific accounting policies by market risk category. Commodity Price Risk The Company uses commodity futures and options to manage price exposures on commodity inventories or anticipated purchases of commodities. The deferral method is used to account for those instruments which effectively hedge the Company's price exposures. For hedges of anticipated transactions, the significant characteristics and terms of the anticipated transaction must be identified, and the transaction must be probable of occurring to qualify for deferral method accounting. Under the deferral method, gains and losses on derivative instruments are deferred in the condensed consolidated balance sheets as a component of other current assets (if a loss) or other current liabilities (if a gain) until the underlying inventory being hedged is sold. As the hedged inventory is sold, the deferred gains and losses are recognized in the condensed consolidated statements of income as a component of cost of goods sold. Derivative instruments that do not meet the above criteria required for deferral treatment are accounted for under the fair value method with gains and losses recognized currently in the condensed consolidated statements of income as a component of cost of goods sold. <12> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 Foreign Currency Exchange Rate Risk The Company uses forward contracts, purchased options, and currency swap agreements to manage foreign currency exchange rate risk related to projected operating income from foreign operations and net investments in foreign subsidiaries. The fair value method is used to account for these instruments. Under the fair value method, the instruments are carried at fair value on the condensed consolidated balance sheets as a component of other current assets (deferred expense) or other current liabilities (deferred income). Changes in the fair value of derivative instruments which are used to manage exchange rate risk in foreign-currency denominated operating income and net investments in highly inflationary economies are recognized in the condensed consolidated statements of income as foreign exchange loss or gain. Changes in the fair value of such instruments used to manage exchange rate risk on net investments in economies that are not highly inflationary are recognized in the condensed consolidated balance sheets as a component of the cumulative translation adjustment in common shareholders' equity and are included in comprehensive income. To the extent an instrument is no longer effective as a hedge of a net investment due to a change in the underlying exposure, gains and losses are recognized currently in the condensed consolidated statements of income as foreign exchange loss or gain. Interest Rate Risk The Company has used interest rate swap agreements to reduce its exposure to changes in interest rates and to balance the mix of its fixed and floating rate debt. Currently, there are no interest swap agreements outstanding. The settlement costs of terminated swap agreements are reported in the condensed consolidated balance sheets as a component of other assets and are being amortized over the life of the original swap agreements. The amortization of the settlement amounts is reported in the condensed consolidated statements of income as a component of interest expense. Note 10 - Share Repurchases During the current year, the Company repurchased 5.5 million shares of its outstanding common stock for $300.2 million, completing its 10 million share repurchase program announced in August 1993 and initiating the March 1998 $1 billion repurchase program. Of the total shares repurchased, approximately 912,000 shares were repurchased during the current quarter for $50.0 million. <13> THE QUAKER OATS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998
Note 11 - Earnings Per Share Reconciliations of basic earnings per share (EPS) to diluted EPS were as follows: Dollars in Millions (Except Per Share Data) Nine Months Ended September 30, 1998 1997 Income Shares Income Shares Net income (loss) $ 211.3 $ (956.5) Less: Preferred dividends - net of tax 2.5 2.7 Net income (loss) available for common $ 208.8 137,552 $ (959.2) 137,089 Net income (loss) per common share $ 1.52 $ (7.00) Net income (loss) available for common $ 208.8 137,552 $ (959.2) 137,089 Effect of dilutive securities: Stock options -- 3,551 -- -- Non-vested awards -- 218 -- -- ESOP Convertible Preferred Stock 2.3 2,198 -- -- $ 211.1 143,519 $ (959.2) 137,089 Net income (loss) per common share - assuming dilution $ 1.47 $ (7.00)
The increase in average common shares outstanding at September 30, 1998, compared to September 30, 1997, reflects the exercise of a significant number of employee stock options, partly offset by share repurchases. As of September 30, 1998, certain stock options were excluded from the computation of diluted EPS because the exercise prices were higher than the average market price. As the Company incurred a net loss for the nine months ended September 30, 1997, there were no adjustments for potentially dilutive securities as the adjustments would have been antidilutive. Adjustments to income and shares for such potentially dilutive securities in the nine months ended September 30, 1997, had the Company earned net income, would have resulted in a $2.1 million increase to net income available for common and an increase of 5.4 million shares. Historical adjustments for potentially dilutive securities are not necessarily indicative of future trends. <14> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 1998 Compared with Nine Months Ended September 30, 1997 Consolidated Operating Results The following tables summarize the net sales and operating results of the Company for the nine months ended September 30, 1998 (current year) and September 30, 1997 (prior year):
NET SALES for the Nine Months Ended September 30, Dollars in Millions 1998 1997 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 1,795.2 $ 483.1 $ 2,278.3 $ 1,793.1 $ 477.6 $ 2,270.7 Beverages 1,186.3 303.4 1,489.7 1,050.5 267.5 1,318.0 Ongoing Businesses 2,981.5 786.5 3,768.0 2,843.6 745.1 3,588.7 Divested Businesses 111.2 -- 111.2 372.4 6.8 379.2 Total Company $ 3,092.7 $ 786.5 $ 3,879.2 $ 3,216.0 $ 751.9 $ 3,967.9 OPERATING INCOME (LOSS) for the Nine Months Ended September 30, Dollars in Millions 1998 1997 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 218.9 $ (26.4) $ 192.5 $ 227.9 $ (7.7) $ 220.2 Beverages 237.8 17.2 255.0 208.9 7.3 216.2 Ongoing Businesses 456.7 (9.2) 447.5 436.8 (0.4) 436.4 Losses on divestitures (32.4) -- (32.4) (1,414.6) -- (1,414.6) Divested Businesses (6.7) -- (6.7) (22.0) (1.7) (23.7) Total Divested (39.1) -- (39.1) (1,436.6) (1.7) (1,438.3) Total Company $ 417.6 $ (9.2) $ 408.4 $ (999.8) $ (2.1) $(1,001.9) Note: Operating results include certain allocations of overhead expenses. "Foods": includes all food lines as well as the food service business. "Beverages": includes Gatorade thirst quencher. "Ongoing Businesses": includes the net sales and operating results of all company businesses not reported as Divested Businesses (see below). "Losses on divestitures": 1998 includes a combined asset impairment and divestiture loss for the Continental Coffee business net of a pretax gain for the sale of the Ardmore Farms business. 1997 includes the loss on divestiture for the Snapple beverages business. "Divested Businesses": 1998 includes the net sales and operating results (through the divestiture date) for the Ardmore Farms (August 1998) and Continental Coffee (September 1998) food service businesses. 1997 includes net sales and operating results (through the divestiture date) for the Snapple beverages business (May 1997), certain food service businesses (December 1997) and the businesses divested in 1998.
<15> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated net sales decreased 2 percent from the prior year, primarily due to the absence of divested businesses. Excluding divested businesses, sales increased 5 percent from the prior year led by 13 percent growth in the U.S. and Canadian Gatorade business. Price changes did not significantly affect the comparison of current and prior-year net sales. Weaker exchange rates impacted sales, particularly in the Canadian and Asia/Pacific businesses. Consolidated gross profit margin was 51.2 percent in the current year compared to 49.4 percent in the prior year. The gross profit margin improvement reflects the divestiture of the lower-margin Snapple beverages business in May 1997 and improved margins across all ongoing business segments. Selling, general and administrative (SG&A) expenses decreased $45.7 million, or 3 percent, due to the absence of divested businesses. For ongoing businesses, SG&A expenses increased $65.0 million, or 5 percent, primarily due to higher advertising and merchandising expenses (A&M). Consolidated operating income was $408.4 million in the current year compared to a loss of $1.0 billion in the prior year. The current-year operating results include $33.7 million of restructuring charges, $63.5 million of non- cash asset impairment losses for ongoing businesses and a combined pretax charge of $32.4 million related to divested businesses for asset impairments and losses on divestitures (see Restructuring and Other Unusual Charges and Divestitures for further discussion). The prior-year operating results include a $1.41 billion loss on the sale of the Snapple beverages business, restructuring charges of $58.7 million and net charge of $4.8 million for a non-cash asset impairment loss partly offset by a separate cash litigation settlement. Excluding the restructuring charges, asset impairment losses and operating results from divested businesses, operating income of $544.7 million increased 9 percent, primarily driven by growth in U.S. Gatorade and Foods and Gatorade in Latin America and Europe. Net financing costs (net interest expense and foreign exchange loss) decreased $13.5 million in the current year, due to lower interest expense as a result of lower debt levels, partly offset by higher foreign exchange costs. Excluding the impact of restructuring charges, loss on divestitures and asset impairment losses, the effective tax rate in the current year was 36.6 percent versus 38.4 percent in the prior year. The decrease was primarily due to the absence of non-deductible amortization expense related to Snapple intangibles. Industry Segment Operating Results Foods - U.S. and Canadian volume increased 1 percent on nearly flat sales. Sales increased for ready-to-eat cereals and snacks, reflecting volume growth in boxed and bagged cereals, granola bars and a new product, Quaker Fruit & Oatmeal bars. This increase was partially offset by sales declines in hot cereals and Canadian Foods. The sales decline in hot cereals was driven, in part, by unusually mild winter weather, while the sales decline in Canadian Foods was primarily due to a weaker exchange rate. Excluding current and prior-year restructuring charges of $15.6 million and $45.1 million, respectively, and current-year asset impairment losses of $25.4 million, U.S. and Canadian operating income decreased 5 percent from the prior year as the favorable impact of lower supply chain costs was offset by increased A&M spending, primarily on ready-to-eat cereals and new snacks. <16> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International volume and sales increased 4 percent and 1 percent, respectively. Sales gains in Latin America and Europe were partly offset by a sales decline in Asia/Pacific Foods. Increases in the canned fish and chocolate beverages businesses, partly offset by a weaker exchange rate, drove 2 percent sales growth in Latin America, while the European cereals business grew 1 percent. Excluding restructuring charges of $7.8 million and $10.7 million and asset impairment losses of $38.1 million and $4.8 million, in the current and prior year, respectively, International Foods operating income increased $11.7 million, primarily due to improved profitability in the European business. Results in the Asia/Pacific business were disappointing and underwriting continued. Beverages - U.S. and Canadian Gatorade volume and sales grew 17 percent and 13 percent, respectively. New packaging and flavors and strong growth outside of the traditional retail market, along with more favorable weather versus the prior year contributed to the volume and sales increase. Excluding current and prior-year restructuring charges of $7.0 million and $1.8 million, respectively, operating income of $244.8 million, increased 16 percent from the prior year. The increase in operating income was driven by strong sales growth and efficiencies within manufacturing and A&M expenditures. International Gatorade volume and sales increased 22 percent and 13 percent, respectively, driven by double-digit sales gains in Latin America and Europe. The Latin American sales increase reflects the successful new product launch of Gatorade Xplosive and improved cold-channel distribution. Warmer weather contributed to Europe's volume gain, while a sales decline in the Asia/Pacific region reflected lower volumes and a weaker exchange rate. Excluding current and prior-year restructuring charges of $3.3 million and $1.1 million, respectively, operating income of $20.5 million increased $12.1 million from the prior year. Operating income improved in the Latin American and European businesses, while results in the Asia/Pacific business were disappointing. <17> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended September 30, 1998 Compared with Three Months Ended September 30, 1997 Consolidated Operating Results The following tables summarize the net sales and operating results of the Company for the three months ended September 30, 1998 (current year) and September 30, 1997 (prior year):
NET SALES for the Three Months Ended September 30, Dollars in Millions 1998 1997 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 644.4 $ 163.7 $ 808.1 $ 642.3 $ 163.2 $ 805.5 Beverages 471.2 101.2 572.4 401.3 93.2 494.5 Ongoing Businesses 1,115.6 264.9 1,380.5 1,043.6 256.4 1,300.0 Divested Businesses 24.7 -- 24.7 70.7 -- 70.7 Total Company $ 1,140.3 $ 264.9 $ 1,405.2 $ 1,114.3 $ 256.4 $ 1,370.7 OPERATING INCOME (LOSS) for the Three Months Ended September 30, Dollars in Millions 1998 1997 U.S. and U.S. and Canadian International Total Canadian International Total Foods $ 72.2 $ (3.6) $ 68.6 $ 68.4 $ (0.5) $ 67.9 Beverages 104.8 6.2 111.0 83.6 4.5 88.1 Ongoing Businesses 177.0 2.6 179.6 152.0 4.0 156.0 Gain on divestitures 7.6 -- 7.6 -- -- -- Divested Businesses (2.9) -- (2.9) (3.1) -- (3.1) Total Divested 4.7 -- 4.7 (3.1) -- (3.1) Total Company $ 181.7 $ 2.6 $ 184.3 $ 148.9 $ 4.0 $ 152.9 Note: Operating results include certain allocations of overhead expenses. "Foods": includes all food lines as well as the food service business. "Beverages": includes Gatorade thirst quencher. "Ongoing Businesses": includes the net sales and operating results of all company businesses not reported as Divested Businesses (see below). "Gain on divestitures": represents combined pretax gain for the sale of the Ardmore Farms and Continental Coffee businesses. "Divested Businesses": 1998 includes the net sales and operating results (through the divestiture date) for the Ardmore Farms (August 1998) and Continental Coffee (September 1998) food service businesses. 1997 includes net sales and operating results (through the divestiture date) for the Snapple beverages business (May 1997), certain food service businesses (December 1997) and the businesses divested in 1998.
<18> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated net sales increased 3 percent from the prior year. Excluding divested businesses, sales increased 6 percent from the prior year primarily driven by U.S. and Canadian Gatorade growth. Price changes did not significantly affect the comparison of current and prior-year net sales. Weaker exchange rates impacted sales, particularly in the Canadian and Asia/Pacific business. Consolidated gross profit margin was 52.8 percent in the current year compared to 50.8 percent in the prior year. The gross profit margin improved across all ongoing business segments primarily due to supply chain efficiencies. SG&A expenses increased $14.9 million, or 3 percent, primarily due to higher A&M expenses, which were partly offset by lower overhead costs. Total Company A&M expenses were 25.7 percent of sales in the current year, up from 24.3 percent in the prior year, reflecting increased spending in the U.S. and Canadian Foods business. Consolidated operating income was $184.3 million in the current year, an increase of 21 percent from the prior year. The current-year operating results include $9.0 million of restructuring charges, $40.5 million of non-cash asset impairment losses and a combined gain of $7.6 million on divested businesses (see Restructuring and Other Unusual Charges and Divestitures for further discussion). Prior-year operating results include restructuring charges of $46.9 million and a net charge of $4.8 million for a non-cash asset impairment loss partly offset by a separate cash litigation settlement. Excluding the restructuring charges, asset impairment losses, gains on divestitures and operating results from divested businesses, operating income of $229.1 million increased 10 percent compared to the prior year, primarily due to growth in the U.S. and Canadian Gatorade business. Net financing costs (net interest expense and foreign exchange loss) decreased $3.0 million in the current year, primarily due to lower interest expense as a result of reduced debt levels. Excluding the impact of restructuring charges, asset impairment losses and gains on divestitures in the current year, the effective tax rate in the current quarter was 36.1 percent versus 37.7 percent in the same quarter last year. Industry Segment Operating Results Foods - U.S. and Canadian volume increased 1 percent on nearly flat sales. Sales increased in ready-to-eat cereals, driven by 1 percent volume growth in boxed cereals and 10 percent growth in bagged cereals. In addition, continued expansion of Quaker Fruit & Oatmeal Bars drove an increase in snacks sales. These sales increases were partly offset by declines in the Canadian Foods, rice cakes and the flavored rice and pasta businesses. The decline in Canadian foods sales was primarily driven by a weaker exchange rate. Excluding current and prior-year restructuring charges of $6.3 million and $45.1 million, respectively, and current-year asset impairment losses of $25.4 million, U.S. and Canadian operating income decreased 9 percent from the prior year. The decline in operating income was primarily driven by increased A&M expenses, partly offset by improved gross margins. Higher A&M expenses reflect increased spending for cereals to support the beginning of the hot cereal season and the continued growth of boxed cereals. <19> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International volume increased 6 percent on flat sales reflecting weaker exchange rates. Volume growth of 8 percent and 9 percent in Latin America and Europe, respectively, was partly offset by a decrease in Asia/Pacific Foods. Excluding current and prior-year asset impairment losses of $15.1 million and $4.8 million, respectively, International Foods operating income increased $7.2 million reflecting significant profitability improvement in Europe and modest improvement in Latin America and Asia/Pacific. Beverages - U.S. and Canadian Gatorade volume and sales increased 22 percent and 17 percent, respectively, driven by new packaging and flavors, strong growth outside of the traditional retail market and favorable weather versus last year. Excluding current and prior-year restructuring charges of $2.7 million and $1.8 million, respectively, operating income was $107.5 million, up 26 percent from the prior year. The increase in operating income was due to strong sales growth and manufacturing and A&M efficiencies. International Gatorade volume and sales increased 16 percent and 9 percent, respectively, primarily due to 31 percent sales growth in Europe. Volume growth in Europe was partly driven by warmer weather compared to the prior year. Volume increased 12 percent in Latin America due to improved cold- channel distribution. Sales declined in the Asia/Pacific region, reflecting lower volumes and a weaker exchange rate. Operating income was $6.2 million, compared to $4.5 million in the prior year. Operating income increased in Latin America and Europe, while underwriting continued in the Asia/Pacific business. Restructuring and Other Unusual Charges The Company recorded pretax restructuring charges of $9.0 million during the three months ended September 30, 1998 (current quarter). In the U.S. and Canadian businesses, the Company announced plans to combine its foods and beverages sales organizations in order to realize synergies and leverage scale. This plan includes the elimination of positions and the consolidation of sales offices. In addition, the U.S. Foods marketing organization was realigned. Combined, these actions are expected to result in the elimination of about 90 positions. The charges are comprised of $5.8 million in severance and related benefits, $1.0 million in loss on leases and $2.2 million in asset write-offs. The charges are reflected in the operating results of the business segments as follows: U.S. and Canadian Foods, $6.3 million, and U.S. and Canadian Beverages, $2.7 million. Savings from these actions are estimated to be $7 million annually, primarily beginning in 1999, with approximately 90 percent of such savings in cash. The Company's organization alignment activities are expected to continue during the remainder of the year. During the current quarter, the Company continued to review its strategies related to underperforming businesses in its portfolio. The Company evaluates the recoverability of certain long-lived assets pursuant to the provisions of Financial Accounting Standards Board (FASB) Statement #121 for impaired assets held for use. In the U.S. and Canadian Foods business, a non-cash, pretax charge of $25.4 million was recognized for an impaired business. The Company's foods business in China was also included in this review. As a result of this review, the Company concluded that this business was impaired and recorded a non-cash, pretax charge of $15.1 million to adjust the carrying amount of the long-lived assets to fair value. The estimated fair market values of these businesses were based on various methodologies, including a discounted value of the estimated future cash flows of the businesses. <20> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In light of the recent downturn in the economic environment in the Asia/Pacific region, the Company will continue to evaluate its strategies related to its businesses in this region. Currently, the Company has decided to focus on building its beverages business in China and is working on a plan to restructure its other operations in the Asia/Pacific region for improved profitability. As the Company determines the course of action related to its Asia/Pacific businesses, it is also scrutinizing its domestic assets. The continuation of the worldwide organization alignment, manufacturing consolidations and other cost-reduction actions could result in additional charges of up to $50 million in the fourth quarter of 1998. Year-to-date restructuring charges total $33.7 million, including $9.0 million of current quarter charges. Divestitures During the current quarter, the Company completed the sale of its Ardmore Farms juice and Continental Coffee food service businesses. These transactions resulted in a combined pretax gain of $7.6 million in the current quarter. The current-quarter $7.6 million pretax gain reflects the sale of the Ardmore Farms business and an adjustment upon sale of the Continental Coffee business. The year-to-date combined impact of these transactions is a pretax loss of $32.4 million. Liquidity and Capital Resources Net cash provided by operating activities was $513.2 million, an increase of $69.8 million from the prior year, primarily reflecting improved operating profitability. Capital expenditures for the current and prior year were $135.9 million and $144.1 million, respectively. The rate of capital expenditures is expected to increase during the remainder of the current year as the Company continues its expansion of production capacity for U.S. and International Beverages and for certain Foods businesses in the United States. The Company expects that capital expenditures and cash dividends for the remainder of the year will be financed through cash flow from operating activities and proceeds from investing activities. Cash provided by investing activities includes a $240.0 million tax recovery and divestiture proceeds of $160.9 million. These cash flows were partly offset by the Company's purchase of marketable securities of $159.1 million during the current year. Cash provided by investing activities in the prior year includes the proceeds from the Snapple divestiture. <21> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financing activities used cash of $442.8 million in the current year primarily to pay down debt and to repurchase shares. During the current year, the Company repurchased 5.5 million shares of its outstanding common stock for $300.2 million, completing its 10 million share repurchase program announced in August 1993, and initiating the $1 billion share repurchase program announced in March 1998. During the current year, approximately 2.9 million employee stock options were exercised which provided cash of $97.5 million. Short-term and long-term debt (total debt) as of September 30, 1998 was $940.0 million, a decrease of $117.0 million from December 31, 1997. Derivative Financial and Commodity Instruments The Company actively monitors its exposure to commodity price, foreign currency exchange rate and interest rate risks and uses derivative financial and commodity instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the commodity price, exchange rate or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. Complex instruments involving leverage or multipliers are not used. Management believes that its use of these instruments to manage risk is in the Company's best interest. The Company has estimated its market risk exposures using sensitivity analyses. Market risk exposure has been defined as the change in fair value of a derivative commodity or financial instrument assuming a hypothetical 10 percent adverse change in market prices or rates. Fair value was determined using quoted market prices, if available. The results of the sensitivity analyses as of September 30, 1998 did not differ materially from the amounts reported as of December 31, 1997. Actual changes in market prices or rates may differ from hypothetical changes. Current and Pending Accounting Changes In July 1997, the FASB issued Statement #131, "Disclosures about Segments of an Enterprise and Related Information." This Statement expands certain reporting and disclosure requirements for segments from current standards. In February 1998, the FASB issued Statement #132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company is not required to adopt these Statements until December 1998 and does not expect the adoption of these standards to result in material changes to previously reported consolidated amounts. In January 1998, Statement of Position (SOP) #98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. This SOP provides guidance on the accounting for computer software costs. In April 1998, SOP #98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on accounting for the cost of start-up activities. The Company is not required to adopt these Statements until January 1999 and does not expect the adoption of these standards to result in material changes to previously reported amounts or disclosures. <22> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In June 1998, the FASB issued Statement #133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The accounting provisions for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that the Company must formally document, designate, and assess the effectiveness of transactions that qualify for hedge accounting. The Company is not required to adopt this Statement until January 2000. The Company has not determined its method or timing of adopting this Statement or the impact on its financial statements. However, when adopted this Statement could increase volatility in reported earnings and other comprehensive income of the Company. Year 2000 The Company uses software and other related technologies throughout its business that will be affected by the date change in year 2000. The three areas where year 2000 issues may affect the Company, include (1) the computer systems, both hardware and software, (2) imbedded systems, as in computer chips in machinery and process controls, and (3) third parties with material relationships with the Company, such as vendors, customers and suppliers. To address the year 2000 issue, the Company has developed and is executing a detailed comprehensive readiness plan. The first phase of the readiness plan, the assessment of the Company's internal systems, has been completed. The second phase involves the remediation, replacement and testing of computer systems and imbedded systems and is scheduled for completion by mid-1999. The third phase will continue through mid-1999 and includes the Company taking steps to assess the year 2000 plans of its material third parties. These steps include contacting the Company's major service providers, vendors, suppliers, and customers that are believed to be critical to the business operations after January 1, 2000, to determine their stage of year 2000 compliance through questionnaires, interviews, on-site visits, testing and other available means. The fourth phase involves the development of contingency plans in the event of year 2000 non-compliance and is also expected to be completed by mid-1999. While the Company's year 2000 readiness plans are underway, the consequences of non-compliance by the Company, its major service providers, vendors, suppliers or customers, could have a material adverse impact on the Company's operations. Although the Company does not anticipate any major non-compliance issues, it currently believes that the greatest risk of disruption in its business exists in the event of non-compliance by its material third parties. Some of the possible consequences of non-compliance by the Company or its material third parties include, among other things, temporary plant closings, delays in the delivery and receipt of products and supplies, invoice and collection errors, and inventory obsolescence. Given this risk, the Company is <23> THE QUAKER OATS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS developing contingency plans intended to mitigate the possible disruption in business operations that may result from non-year 2000 compliance. Contingency plans may include stockpiling raw and packaging materials, increasing finished goods inventory levels, securing alternate suppliers, or other appropriate measures. It is currently estimated that the aggregate cost of the Company's year 2000 efforts will be approximately $12 million to $15 million, of which approximately $4 million has been incurred to date. All of these costs are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed. The Company's year 2000 readiness plan is an ongoing process and the estimates of costs and completion dates for various components of the program as described above are subject to change. 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. The Company's results may differ materially from those in the forward-looking statements. Forward-looking statements are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. For example, operating results may be affected by factors such as: actions of competitors; changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards; customer demand; effectiveness of spending or programs; fluctuations in the cost and availability of supply chain resources; and foreign economic conditions, including currency rate fluctuations; weather; and the ability of the Company, and its major service providers, vendors, suppliers and customers, to adequately address the year 2000 issue. <24> PART II - OTHER INFORMATION Item 1 Legal Proceedings Note 2 in Part I is incorporated by reference herein. Item 6 Exhibits and Reports on Form 8-K Item 6(a) See Exhibit Index. All other items in Part II are either inapplicable to the Company during the quarter ended September 30, 1998, the answer is negative or a response has been previously reported and an additional report of the information need not be made, pursuant to the instructions to Part II. <25> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Quaker Oats Company (Registrant) Date: November 9, 1998 /s/ Robert S. Thomason Robert S. Thomason Senior Vice President - Finance and Chief Financial Officer Date: November 9, 1998 /s/ Richard M. Gunst Richard M. Gunst Vice President and Corporate Controller <26> EXHIBIT INDEX Exhibit Paper (P) or Number Description Electronic (E) 10(e) Termination Benefits Agreement with certain Executive Officers, first effective for the quarter ended ended September 30, 1998 E 27 Financial Data Schedule E <27> EX-27 2
5 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 266 149 388 32 253 1206 1872 786 2611 1034 814 0 100 840 (729) 2611 3879 3879 1892 1892 0 3 53 327 116 211 0 0 0 211 1.52 1.47
EX-10 3 Exhibit 10(e) EXECUTIVE SEPARATION AGREEMENT THIS AGREEMENT is made between The Quaker Oats Company, a New Jersey corporation (the "Company"), and Penelope C. Cate (the "Executive"), dated this 23rd day of August, 1998. WITNESSETH THAT: WHEREAS, the Company wishes to attract and retain well- qualified executive personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Operation of Agreement. The "effective date of this Agreement" shall be the date on which the Executive declares it effective, by notice to the Company in writing, but only if a change in control of the Company (as defined in Section 2) has occurred on or before the date of the notice. 2. Change in Control. A "change in control of the Company" shall be deemed to have occurred if: a. any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 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 Company's Board of Directors (the "Board"), and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2) or d. of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; c. the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs d. (1) or d. (2) of this Section; or d. the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph d., "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2), d. (1) or d. (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the effective date of this Agreement and ending on the earlier to occur of the third anniversary of such effective date or the 65th birthday of the Executive (the "employment period"), to exercise such authorities and powers, and perform such duties and functions, as are commensurate with the authorities and powers being exercised, and duties and functions being performed, by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at the current location where the Executive was employed immediately prior to the effective date of this Agreement or at such other location within a 30-mile radius of such current location. The Executive shall not be required to accept any other location. The Executive agrees that during the employment period he shall devote his full business time exclusively to his executive duties as described herein and perform such duties faithfully and efficiently. 4. Compensation, Compensation Plans, Benefit Plans, Perquisites. During the employment period and prior to termination (as defined in Section 5) of the Executive, the Executive shall be compensated as follows: a. He shall receive an annual salary which is not less than his annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices. b. He shall be eligible to participate on a reasonable basis in bonus, stock option, restricted stock and other incentive compensation plans, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. c. He shall be eligible to participate on a reasonable basis in tax-qualified employee benefit plans (including but not limited to pension, profit sharing and employee stock ownership plans), and supplemental non-qualified employee benefit plans relating thereto, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. d. He shall be entitled to receive employee welfare benefits (currently elected medical, dental and life insurance benefits) and perquisites which are comparable to those to which he was provided immediately prior to the effective date of this Agreement. 5. Termination. "Termination" shall mean either (a) termination by the Company of the employment of the Executive with the Company for any reason other than death, physical or mental incapacity, or cause (as defined below) or (b) resignation of the Executive upon the occurrence of any of the following events: (1) a significant change in the nature or scope of the Executive's authorities, powers, functions, or duties from those described in Section 3; (2) a reduction in total compensation from that provided in Section 4; (3) the breach by the Company of any other provision of this Agreement; or (4) a reasonable determination by the Executive that, as a result of a change in control of the Company his position is significantly affected so that he is unable to exercise the authorities, powers, functions or duties attached to his position as described in Section 3. "Cause" means gross misconduct or willful and material breach of this Agreement by the Executive. No act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. For purposes of clarification, a mere transfer of the Executive to an entity created in a Company initiated spin- off or reorganization, without a subsequent Termination, shall not be treated as a Termination of the employment of the Executive with the Company for purposes of eligibility under this Agreement. The Company shall cause the newly created entity to provide to the Executive an Executive Separation Agreement substantially similar to this Agreement. 6. Confidentiality. The Executive agrees that during and after the employment period, he will not divulge or appropriate to his own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company or any of its subsidiaries. 7. Severance and Benefit Payments. a. In the event of termination of the Executive during the employment period, the Company shall pay the Executive a lump-sum severance allowance equal to salary and bonus payments for the following 24 calendar months. The initial salary rate shall not be less than his annual salary immediately prior to termination, or if greater, not less than his annual salary immediately prior to the change in control of the Company; such salary shall be increased every March 1, thereafter, according to the then current Hewitt Associate's projection for movement in executive base salaries. The initial bonus amount shall not be less than the annual equivalent of the incentive bonus calculated under Section 4(a)(1) of the Salaried Employees Compensation and Benefits Protection Plan; such bonus amount shall be increased every January 1, thereafter, according to the then current Hewitt Associates' projection for movement in executive total cash compensation. The lump-sum severance allowance shall not be adjusted on a present value basis. b. In the event of termination of the Executive during the employment period, the Company shall also pay the Executive a lump-sum benefit payment in an amount equivalent to (1) the benefits he would have accrued or been allocated under any tax-qualified employee benefit plan (including but not limited to pension, profit sharing and employee stock ownership plans) and any non- qualified supplemental benefit plan relating thereto, maintained by the Company as if he had remained in the employ of the Company for 24 calendar months after his termination, which benefits will be paid in addition to the benefits provided under such plans and (2) employee welfare benefits (currently elected coverage under the medical, dental and life insurance programs) to which he would have been entitled under all such employee benefit plans, programs or arrangements maintained by the Company as if he had remained in the employ of the company for 24 calendar months after his termination. Such a benefit payment shall be adjusted to include expected increases to the Executive's salary, bonus and other compensation as specified in paragraph a. of this Section having an effect on such benefits for such period. The lump-sum benefit payment shall not be adjusted on a present value basis (except for benefits accrued in a defined benefit pension plan). c. The amount of the severance allowance and benefit payment described in this Section shall be determined and such payment shall be made as soon as it is reasonably practicable. d. The severance allowance and benefit payment to be provided pursuant to this Section 7 shall be in addition to, and shall not be reduced by, any other amounts or benefits provided by separate agreement with the Executive, or plan or arrangement of the Company or its subsidiaries, unless specifically stipulated in an agreement which constitutes an amendment to this Agreement as provided in Section 14. 8. Make-Whole Payments. If any amount payable to the Executive by the Company or any subsidiary or affiliate thereof, whether under this Agreement or otherwise (a "Payment"), is subject to any tax under section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code"), or any similar federal or state law (an "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Make Whole-Amount")which is equal to (I) the amount of the Excise Tax, plus (II) the aggregate amount of any interest, penalties, fines or additions to any tax which are imposed in connection with the imposition of such Excise Tax, plus (III) all income, excise and other applicable taxes imposed on the Executive under the laws of any Federal, state, or local government or taxing authority by reason of the payments required under clause (I) and clause (II) and this clause (III). a. For purposes of determining the Make-Whole Amount, the Executive shall be deemed to be taxed at the highest marginal rate under all applicable local, state, federal and foreign income tax laws for the year in which the Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the Payment with respect to which such Excise Tax relates. b. All calculations under this Section 8 shall be made initially by the Company and the Company shall provide prompt written notice thereof to the Executive to timely file all applicable tax returns. Upon request of the Executive, the Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to independently make the calculations described in subparagraph a. above and the Company shall reimburse the Executive for reasonable fees and expenses incurred for any such verification. c. If the Executive gives written notice to the Company of any objection to the results of the Company's calculations within 60 days of the Executive's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of the Company ("Tax Counsel"). The Company shall pay all fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, the Company shall pay the Executive the Make-Whole Amount as determined by it in good faith. The Company shall pay the Executive any additional amount determined by Tax Counsel to be due under this Section 8 (together with interest thereon at a rate equal to 120% of the Federal short-term rate determined under section 1274(d) of the Code) promptly after such determination. d. The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Executive owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determine by Tax Counsel. e. If a Tax Authority makes a claim against the Executive which, if successful, would require the Company to make a payment under this Section 8, the Executive agrees to contest the claim on request of the Company subject to the following conditions: (1) The Executive shall notify the Company of any such claim within 10 days of becoming aware thereof. In the event that the Company desires the claim to be contested, it shall promptly (but in no event more than 30 days after the notice from the Executive or such shorter time as the Tax Authority may specify for responding to such claim) request the Executive to contest the claim. The Executive shall not make any payment of any tax which is the subject of the claim before the Executive has given the notice or during the 30-day period thereafter unless the Executive receives written instructions from the Company to make such payment together with an advance of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax, in which case the Executive will act promptly in accordance with such instructions. (2) If the Company so requests, the Executive will contest the claim by either paying the tax claimed and suing for a refund in the appropriate court or contesting the claim in the United States Tax Court or other appropriate court, as directed by the Company; provided, however, that any request by the Company for the Executive to pay the tax shall be accompanied by an advance from the Company to the Executive of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax. If directed by the Company in writing the Executive will take all action necessary to compromise or settle the claim, but in no event will the Executive compromise or settle the claim or cease to contest claim without the written consent of the Company; provided, however, that the Executive may take any such action if the Executive waives in writing his right to a payment under this Section 8 for any amounts payable in connection with such claim. The Executive agrees to cooperate in good faith with the Company in contesting the claim and to comply with any reasonable request from the Company concerning the contest of the claim, including the pursuit of administrative remedies, the appropriate forum for any judicial proceedings, and the legal basis for contesting the claim. Upon request of the Company, the Executive shall take appropriate appeals of any judgment or decision that would require the Company to make a payment under this Section 8. Provided that the Executive is in compliance with the provisions of this section, the Company shall be liable for and indemnify the Executive against any loss in connection with, and all costs and expenses, including attorney's fees, which may be incurred as a result of, contesting the claim, and shall provide the Executive within 30 days after each written request therefor by the Executive cash advances or reimbursement for all such costs and expenses actually incurred or reasonably expected to beincurred by the Executive as a result of contesting the claim. f. Should a Tax Authority finally determine that an additional Excise Tax is owed, then the Company shall pay an additional Make-Up Amount to the Executive in a manner consistent with this Section 8 with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by the Company or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Executive shall repay such excess to the Company, but such repayment shall be reduced by the amount of any taxes paid by the Executive on such excess which are not offset by the tax benefit attributable to the repayment. 9. Mitigation and Set Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of his employment with the Company, or any amounts which might have been earned by the Executive in other employment had he sought such other employment. 10. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, except with respect to Section 8, shall be settled by arbitration in the City of Chicago in accordance with the laws of the State of Illinois by three arbitrators appointed by the parties. If the parties cannot agree on the appointment, one arbitrator shall be appointed by the Company and one by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States Court of Appeals for the Seventh Circuit. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 10. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in connection with enforcement of his rights under this Agreement, Executive shall be entitled to recover from the Company his reasonable attorneys' fees and costs and expenses in connection with enforcement of his rights (including the enforcement of any arbitration award in court). Payment shall be made to the Executive by the Company at the time these attorneys' fees and costs and expenses are incurred by the Executive. If, however, the arbitrators should later determine that under the circumstances the Executive could have had no reasonable expectation of prevailing on the merits at the time he initiated the arbitration based on the information then available to him, he shall repay any such payments to the Company in accordance with the order of the arbitrators. Any award of the arbitrators shall include interest at a rate or rates considered just under the circumstances by the arbitrators. 11. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices. 12. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Nothing in this paragraph shall limit the Executive's rights or powers which his executor or administrator would otherwise have. 13. Governing Law. The Agreement shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not pre-empted by ERISA. 14. Amendment. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 15. Term. Unless the Executive has declared this Agreement effective, pursuant to Section 1 of this Agreement, this Agreement shall terminate prior to a change in control of the Company when the Executive has terminated employment or been placed on inactive service by the Company, or, if later, May 14, 2001. 16. Successors to the Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 17. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. Prior Agreement. Any prior Executive Separation Agreement between the Executive and the Company which has not yet terminated pursuant to its terms, is canceled by mutual consent of the Executive and the Company pursuant to execution of this Agreement, effective as of the day and year first above written. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Assistant Secretary, all as of the day and year first above written. ATTEST: THE QUAKER OATS COMPANY /s/ Gerald A. Cassioppi /s/ Pamela S. Hewitt Assistant Secretary Its Senior Vice President EXECUTIVE /s/ Penelope C. Cate Schedule of Termination Benefit Agreements with Certain Executive Officers The attached Termination Benefit Agreement is identical in all material respects to the executive Termination Benefit Agreements for those executive employees listed below and which have been omitted from this filing: Name Execution Date Harry M. Dent August 28, 1998 Margaret M. Eichman August 18, 1998 Thomas L. Gettings August 23, 1998 Richard M. Gunst August 23, 1998 Pamela S. Hewitt August 23, 1998 John G. Jartz August 19, 1998 Polly B. Kawalek August 21, 1998 James E. LeGere August 23, 1998 Charles I. Maniscalco August 25, 1998 I. Charles Mathews August 18, 1998 Terrence B. Mohr August 23, 1998 Kenneth W. Murray August 23, 1998 Mark A. Shapiro September 8, 1998 Edward H. Stassen August 28, 1998 Robert S. Thomason August 23, 1998 Susan D. Wellington August 23, 1998 Russell A. Young August 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----