-----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, SjRdWkjRuQd+8dyimpMNQqeoDQPp4J9k22hbqkMEdA8NLRpsC/ehrlAE0/4/EBTC i1ah/Kypo4ENFWhclpRt8Q== 0000081371-98-000019.txt : 19981228 0000081371-98-000019.hdr.sgml : 19981228 ACCESSION NUMBER: 0000081371-98-000019 CONFORMED SUBMISSION TYPE: 11-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981224 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: 11-K SEC ACT: SEC FILE NUMBER: 001-00012 FILM NUMBER: 98775357 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 11-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K [X] Annual Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 [ ] Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 Commission file number 1-12 Full title of the Plan and the address of the Plan, if different from that of the issuer named below: The Quaker 401(k) Plan for Salaried Employees Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office: The Quaker Oats Company P.O. Box 049001 Chicago, Illinois 60604-9001 Item 1. See Item 4. Item 2. See Item 4. Item 3. See Item 4. Item 4. Financial Statements and Exhibits (a) Financial Statements The Quaker 401(k) Plan for Salaried Employees is subject to the Employee Retirement Income Security Act of 1974 (ERISA), and the report of Washington, Pittman & McKeever, LLC, independent public accountants, as prepared in accordance with the financial reporting requirements of ERISA is attached hereto and incorporated into this report. (b) Exhibit Consent of Independent Public Accountants - Washington, Pittman & McKeever, LLC. SIGNATURES The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the administrators of the Plan have duly caused this annual report to be signed on their behalf by the undersigned hereunto duly authorized. The Quaker 401(k) Plan for Salaried Employees (Name of Plan) /s/ PAMELA S. HEWITT (Pamela S. Hewitt) Senior Vice President - Human Resources /s/ DENNIS CORRY (Dennis Corry) Director - Employee Benefits /s/ JAMES BROWN (James Brown) Manager - Benefit Plans Date: December 22, 1998 <2> Exhibit Index Exhibit Paper (P) or Number Description Electronic (E) (a) The Quaker 401(k) Plan E for Salaried Employees Financial Statements as of June 30, 1998 and 1997 (b) Consent of Independent E Public Accountants <3> Exhibit (a) THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 TOGETHER WITH INDEPENDENT AUDITOR'S REPORT <4> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES AS OF JUNE 30, 1998 AND 1997 TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT 6 STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS 7-8 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS 9-10 NOTES TO FINANCIAL STATEMENTS 11-23 SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES 24 SCHEDULE OF REPORTABLE TRANSACTIONS 25 <5> INDEPENDENT AUDITOR'S REPORT To the Plan Committee of THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES of The Quaker Oats Company We have audited the accompanying Statements of Net Assets Available for Benefits of The Quaker 401(k) Plan for Salaried Employees (Plan), formerly The Quaker Employee Stock Ownership Plan (Plan) as of June 30, 1998 and 1997, and the related Statements of Changes in Net Assets Available for Benefits for the year ended June 30, 1998 and 1997. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of June 30, 1998 and 1997, and the changes in net assets available for benefits for the year ended June 30, 1998 and 1997 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental Schedules of Assets Held for Investment Purposes and of Reportable Transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements. These schedules contain supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ WASHINGTON, PITTMAN & McKEEVER, LLC WASHINGTON, PITTMAN & McKEEVER, LLC Chicago, Illinois December 18, 1998 <6> THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF JUNE 30, 1998 (dollars in thousands)
Pimco Retirement Fidelity Fidelity Fidelity Quaker ICAP Total Money Low-Priced Asset Asset Fidelity Stock Diversified Return Market Stock Manager: Manager: Asset ASSETS Total Fund Fund Fund Fund Fund Growth Income Manager Investments, at market $846,829 $90,056 $206,779 $24,765 $40,165 $ 1 $ 1 $ -- $ -- Cash 17,166 1,019 -- -- -- -- -- -- -- Employer contributions receivable 13,680 -- -- -- -- -- -- -- -- Accrued dividends and interest receivable 1,880 4 -- -- -- -- -- -- -- Due from broker for unsetttled trades 105 -- -- -- -- -- -- -- -- Total assets 879,660 91,079 206,779 24,765 40,165 1 1 -- -- LIABILITIES Accrued interest payable 4,961 -- -- -- -- -- -- -- -- Due to broker for unsettled trades 213 -- -- -- -- -- -- -- -- Notes payable 135,300 -- -- -- -- -- -- -- -- Total liabilities 140,474 -- -- -- -- -- -- -- -- NET ASSETS AVAILABLE FOR BENEFITS $739,186 $91,079 $206,779 $24,765 $40,165 $ 1 $ 1 $ -- $ -- Fidelity Fidelity's Morgan Neuberger Quaker Quaker Diversified U.S. Equity Stanley & Berman Fidelity LESOP LESOP International Index Institutional Partners Brokerage Common Preferred Loan ASSETS Fund Pool Fund Trust Link Fund Fund Fund Investments, at market $ -- $ 4 $ 1 $ 2 $ -- $349,121 $129,704 $6,230 Cash -- -- -- -- -- 12,685 3,462 -- Employer contributions receivable -- -- -- -- -- 10,042 3,638 -- Accrued dividends and interest receivable -- -- -- -- -- 1,862 14 -- Due from broker for unsetttled trades -- -- -- -- -- 105 -- -- Total assets -- 4 1 2 -- 373,815 136,818 6,230 LIABILITIES Accrued interest payable -- -- -- -- -- 3,061 1,900 -- Due to broker for unsettled trades -- -- -- -- -- -- 213 -- Notes payable -- -- -- -- -- 82,500 52,800 -- Total liabilities -- -- -- -- -- 85,561 54,913 -- NET ASSETS AVAILABLE FOR BENEFITS $ -- $ 4 $ 1 $ 2 $ -- $288,254 $ 81,905 $6,230 See accompanying notes to financial statements.
<7> THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (FORMERLY THE QUAKER EMPLOYEE STOCK OWNERSHIP PLAN) STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF JUNE 30, 1997 (dollars in thousands) 1988 1989 Quaker ESOP Quaker ESOP Total Trust Trust ASSETS Investments, at market $426,859 $302,950 $123,909 Cash 5,822 2,956 2,866 Employer contributions receivable 21,954 18,692 3,262 Accrued dividends and interest receivable 2,002 1,942 60 Total assets 456,637 326,540 130,097 LIABILITIES Accrued interest payable 5,884 3,699 2,185 Notes payable 161,350 100,300 61,050 Total liabilities 167,234 103,999 63,235 NET ASSETS AVAILABLE FOR BENEFITS $289,403 $222,541 $ 66,862 See accompanying notes to financial statements. <8> THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED JUNE 30, 1998 (dollars in thousands)
Pimco Retirement Fidelity Fidelity Fidelity Quaker ICAP Total Money Low-Priced Asset Asset Fidelity Stock Diversified Return Market Stock Manager: Manager: Asset ADDITIONS Total Fund Fund Fund Fund Fund Growth Income Manager Investment income: Dividends $ 13,832 $ -- $ 344 $ 115 $ 166 $ -- $ -- $ -- $ -- Interest 598 4 135 -- 3 -- -- -- -- Total investment income 14,430 4 479 115 169 -- -- -- -- Realized gain on investments 5,635 (21) 452 -- -- -- -- -- -- Unrealized gain/(loss) on investments 78,898 (4,463) 540 92 -- -- -- -- -- Employee contributions 950 241 545 102 53 1 1 -- -- Employer contributions 27,275 -- -- -- -- -- -- -- -- Net transfers to the Plan - (Note 2) 374,739 96,286 206,206 25,009 40,737 -- -- -- -- Total additions 501,927 92,047 208,222 25,318 40,959 1 1 -- -- DEDUCTIONS Distributions to participants 41,168 968 1,443 553 1,065 -- -- -- -- Interest expense on note payable 10,976 -- -- -- -- -- -- -- -- Total deductions 52,144 968 1,443 553 1,065 -- -- -- -- INTERFUND TRANSFERS -- -- -- -- 271 -- -- -- -- Increase in net assets 449,783 91,079 206,779 24,765 40,165 1 1 -- -- Net assets available for benefits, beginning of period 289,403 -- -- -- -- -- -- -- -- NET ASSETS AVAILABLE FOR BENEFITS, END OF PERIOD $739,186 $91,079 $206,779 $24,765 $40,165 $ 1 $ 1 $ -- $ -- Fidelity Fidelity's Morgan Neuberger Quaker Quaker Diversified U.S. Equity Stanley & Berman Fidelity LESOP LESOP International Index Institutional Partners Brokerage Common Preferred Loan ADDITIONS Fund Pool Fund Trust Link Fund Fund Fund Investment income: Dividends $ -- $ -- $ -- $ -- $ -- $ 7,313 $ 5,894 $ -- Interest -- -- -- -- -- 325 131 -- Total investment income -- -- -- -- -- 7,638 6,025 -- Realized gain on investments -- -- -- -- -- 4,075 1,129 -- Unrealized gain/(loss) on investments -- -- -- -- -- 65,016 17,713 -- Employee contributions -- 4 1 2 -- -- -- -- Employer contributions -- -- -- -- -- 19,891 7,384 -- Net transfers to the Plan - (Note 2) -- -- -- -- -- -- -- 6,501 Total additions -- 4 1 2 -- 96,620 32,251 6,501 DEDUCTIONS Distributions to participants -- -- -- -- -- 29,837 7,302 -- Interest expense on note payable -- -- -- -- -- 6,672 4,304 -- Total deductions -- -- -- -- -- 36,509 11,606 -- INTERFUND TRANSFERS -- -- -- -- -- 5,602 (5,602) (271) Increase in net assets -- 4 1 2 -- 65,713 15,403 6,230 Net assets available for benefits, beginning of period -- -- -- -- -- 222,541 66,862 -- NET ASSETS AVAILABLE FOR BENEFITS, END OF PERIOD $ -- $ 4 $ 1 $ 2 $ -- $288,254 $81,905 $6,230 See accompanying notes to financial statements.
<9> THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (FORMERLY THE QUAKER EMPLOYEE STOCK OWNERSHIP PLAN) STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED JUNE 30, 1997 (dollars in thousands) 1988 1989 Quaker ESOP Quaker ESOP ADDITIONS Total Trust Trust Investment income: Dividends $ 14,117 $ 7,895 $ 6,222 Interest 254 138 116 Total investment income 14,371 8,033 6,338 Realized gain on investments 1,594 1,144 450 Unrealized gain/(loss) on investments 100,236 73,775 26,461 Employer contributions 25,829 19,235 6,594 Total additions 142,030 102,187 39,843 DEDUCTIONS Distributions to participants 27,886 22,377 5,509 Interest expense on note payable 12,937 8,043 4,894 Total deductions 40,823 30,420 10,403 INTERFUND TRANSFERS -- 783 (783) Increase in net assets 101,207 72,550 28,657 Net assets available for benefits, beginning of period 188,196 149,991 38,205 NET ASSETS AVAILABLE FOR BENEFITS, END OF PERIOD $289,403 $222,541 $66,862 See accompanying notes to financial statements. <10> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES The Quaker Employee Stock Ownership Plan (ESOP) was renamed The Quaker 401(k) Plan for Salaried Employees (Plan). Effective May 31, 1998, at the close of business, The Quaker Investment Plan (QIP) merged into the Plan. The following brief description of the Plan provides only general information. The Plan document should be referred to for the complete Plan provisions. General The Plan covers salaried domestic employees of The Quaker Oats Company (Company or Quaker) and certain domestic subsidiaries. The Plan includes The Quaker LESOP Common Stock Fund and The Quaker LESOP Preferred Stock Fund (LESOP Funds) and 13 investment funds (non-LESOP Funds). Under the Plan, eligible salaried employees are awarded annual employer contributions to the LESOP funds and may contribute to non-LESOP Funds on a pretax basis for long-term retirement savings. The Plan is intended to qualify as a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code (Code) and is subject to the provisions of the Employee Retirement Income Security Act of 1974. Overall responsibility for administering the Plan rests with the Plan's administrative committee which is appointed by the Board of Directors of the Company. The Plan's trustee is responsible for the management and control of the Plan's assets and has certain discretionary authority and control over such assets. The Plan's administrative committee appointed The Fidelity Management Trust Company (FMTC) as the trustee and The Fidelity Institutional Retirement Services Company as the record keeper for the Plan, effective June 1, 1998. Prior to June 1, 1998, The Northern Trust Company (Northern Trust) was the trustee and Hewitt Associates was the record keeper for the Plan. The Company currently pays all record keeping expenses as well as expenses for operation and management of LESOP Funds. Participants pay operating and management expenses which are deducted from non-LESOP Funds. Eligibility Under the current terms of the Plan, salaried employees of the Company are eligible to participate in the Plan on the date of employment. LESOP Funds FMTC must invest all LESOP Funds assets, including earnings thereon, primarily in Quaker stock, except as otherwise directed by the Plan committee. The assets of the LESOP Funds may not be commingled with the assets of the non-LESOP Funds. <11> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Non-LESOP Funds Effective June 1, 1998, participants could invest in one or more of the following 13 investment funds: Fidelity Retirement Money Market Portfolio This fund invests in high quality, short-term, U.S. dollar denominated money market securities of domestic and foreign issuers. The fund seeks to maintain a stable net asset value of $1 per share, but there is no guarantee it will do so. PIMCO Total Return Fund - Administrative Class This fund invests in a variety of bonds, including U.S. government, corporate, mortgage and foreign. The fund seeks to provide high total return that exceeds general bond market indices. Fidelity's U.S. Equity Index Commingled Pool This fund primarily invests in the common stocks of the 500 companies that comprise the Standard and Poor's 500 Index (S&P 500). The fund seeks to approximate the composition and total return of the S&P 500. ICAP Diversified Fund This fund primarily invests in large capitalization stocks. The fund seeks to achieve a total return greater than the S&P 500 with an equal or lesser degree of risk than the S&P 500. Neuberger & Berman Partners Trust This fund invests in common stocks of established medium- to large-capitalization companies, using a value-oriented investment approach. The fund seeks to provide capital growth. <12> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Fidelity Low-Priced Stock Fund This fund primarily invests in stocks of companies that the fund manager considers undervalued or out of favor with other investors and that could offer the possibility for significant growth. This fund seeks long-term capital appreciation. Fidelity Diversified International Fund This fund primarily invests in stocks of larger companies located outside the United States. The fund manager seeks stocks that are undervalued compared to industry norms for their countries. This fund seeks long-term capital growth. Morgan Stanley Institutional Fund, Inc. - Global Equity Portfolio Class B This fund invests in a diversified mix of stocks throughout the world, selected after detailed analysis by local country investment experts. The portfolio may have some exposure to emerging markets, which pose greater risks due to less developed political and economic situations and less liquid markets. The fund seeks long-term capital growth. Quaker Stock Fund This fund pools a participant's money with that of other participants to buy shares of Quaker common stock. The fund also holds an amount of short-term investments to allow participants to buy or sell every business day without the usual trade settlement period for individual stock transactions. Ownership is measured in units of the fund instead of shares of stock. The fund seeks to increase the investment value over the long term by investing in the common stock of the Company. The Quaker Stock Fund is an employee stock ownership plan and, as such, participants may be paid quarterly cash dividends from the Quaker Stock Fund and, when paid, the Company is eligible for a corresponding tax deduction. Fidelity Asset Manager: Income This fund invests in a variety of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 20% in stocks, 50% in bonds and 30% in the short-term/money market class. The fund seeks to provide high current income, with some potential for capital appreciation. <13> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Fidelity Asset Manager This fund invests in a variety of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 50% in stocks, 40% in bonds and 10% in the short-term/money market class. This fund seeks to provide high total return with reduced risk over the long term. Fidelity Asset Manager: Growth This fund invests in a variety of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 70% in stocks, 25% in bonds and 5% in the short-term/money market class. This fund seeks to provide maximum total return over the long term. Fidelity BrokerageLink BrokerageLink is a service that allows the participant to open a Fidelity brokerage account with the assets in the participants Plan account. Through this account, participants have access to thousands of investments, including: over 2,000 Fidelity and non-Fidelity mutual funds, individual stocks on all major exchanges, government and corporate bonds, treasuries and other government securities, certificates of deposits, unit investment trusts, and foreign securities. Employer Contributions The Company has made cash contributions to the LESOP Funds to make payments of principal and/or interest on the notes payable. All cash dividends received with respect to unallocated shares of Quaker stock in the LESOP Funds and interest income of the LESOP Funds are available to make payments on maturing obligations on the LESOP loans. Refer to Notes 6 and 7 for further discussion of the notes payable issued by the LESOP Funds. <14> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Employee contributions Participants in the Plan are allowed to defer receipt of, and have placed in the non-LESOP Funds, up to 15 percent of their base salary, subject to the Internal Revenue Service (IRS) dollar amounts allowed. Participants with a base salary of less than $70,000 are able to contribute up to 15 percent. Those participants with a base salary of $70,000 or more are limited to 7 percent. Contributions are not subject to federal income tax until distributed to the participants or their beneficiaries. The Plan allows participants to transfer their accounts among non-LESOP Funds in increments of one percent or in specific dollar amounts. Participants may also change the percentage of their future earnings contributed to the Plan. The Plan allows employees the option to deposit excess funds from The Quaker Flex Plan to the Plan. The Plan also allows a participant to contribute to the Plan a lump-sum distribution received from other qualified plans when the contribution qualifies as a tax-free rollover. Distributions Participants may elect in writing to receive all or a portion of their accounts if they are at least age 59 1/2 years or if they are totally and permanently disabled as determined by the Company with the advice of a medical doctor. The participant's account will then be valued as of the latest available valuation date before distribution. If only a portion of the account is distributed, the remaining balance will continue to be adjusted for contributions, net earnings, gains and losses as of each valuation date. Participants may receive a distribution of a portion of their non-LESOP accounts in the event of a hardship. Hardship withdrawals occur when funds are required for purchasing or making capital expenditures for a primary residence, financing the post-secondary education of the participant or the participant's family or alleviating existing financial hardship. If a participant's employment with the Company is terminated, the Plan may distribute the participant's account balance to the participant or the participant's beneficiary. A participant may elect to defer the lump-sum distribution or the start of installment payments until age 70 1/2. A participant may elect in writing to receive the distribution in one of the following ways: (a) in a lump sum; (b) in a partial distribution; or (c) in approximately equal annual installments over a chosen period. The period chosen, however, must be no longer than the participant's life expectancy when distributions begin as determined by the IRS regulations. If the distribution is made through installment payments, the participant's remaining account balance will continue to be adjusted for net earnings and gains and losses as of each valuation date. If a participant's account value is $5,000 or less, an automatic lump-sum distribution may be made as soon as practicable after the end of the Plan year in which termination occurs. <15> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Loans Plan participants may borrow up to 50 percent of their account balances. The minimum loan amount is $1,000 and the maximum is $50,000. The term of a loan may be a minimum of one year and a maximum of 15 years. Loan amounts may not be deducted from the LESOP Funds; as such, in no event can a participant borrow more than their combined balance in all of the non-LESOP Funds. Participants may have up to three loans outstanding at any time and each loan will have a separate payment schedule. Repayments on the loan are to be made directly through payroll deductions for active employees. Loans made to a participant shall be secured by the participant's non-forfeitable interest from one or more of the funds in which a participant's account is invested prior to the making of such loans. Plan Termination The Plan may be terminated at any time by the action of the Board of Directors or the Executive Committee of the Board. In the event of termination of the Plan, the accounts shall be held for the benefit of the participants, former participants or their beneficiaries. Income Tax Status The QIP obtained its latest determination letter on October 9, 1997, in which the IRS stated that the QIP, as then designed, was in compliance with the applicable requirements of the Code. The ESOP obtained its latest determination letter on May 22, 1996. Effective May 31, 1998, at the close of business, the QIP merged into the Plan. The Plan has not since received a determination letter from the IRS; however, the Plan administrator believes that the merged plan is currently designed and being operated in compliance with the applicable requirements of the Code, and therefore, qualifies as tax exempt as of June 30, 1998. <16> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 2 - PLAN CHANGES Plan Merger Effective May 31, 1998, at the close of business, the QIP merged into the Plan. As a result of this merger, the assets of the QIP were transferred to the Plan. For additional information regarding the transferred assets refer to Form 11-K of the QIP for the transition period from January 1, 1998 to May 31, 1998. Management Change The Plan's administrative committee appointed FMTC as the trustee and The Fidelity Institutional Retirement Services Company as the record keeper for the Plan, effective June 1, 1998. Participant accounts transferred from the QIP were invested in similar non-LESOP Funds. The Bond Fund, previously managed by Barclays Global Investors, is managed by The Pacific Investment Management Company. The Money Market Fund and the Quaker Stock Fund, previously managed by Northern Trust, are managed by FMTC. Management of the Diversified Fund remains the same. The Quaker LESOP Common Stock Fund and The Quaker LESOP Preferred Stock Fund previously managed by Northern Trust, are managed by FMTC. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying financial statements are prepared on the accrual basis of accounting. Interest income is recorded as earned and dividend income is recorded as of the record date. The preparation of the financial statements in conformity with generally accepted accounting principles (GAAP) requires the Plan's management to use estimates and assumptions that affect the accompanying financial statements and disclosures. Actual results could differ from these estimates and assumptions. Certain previously reported amounts have been reclassified to conform to the current presentation. <17> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment Valuation Investments are included in the accompanying Statements of Net Assets Available for Benefits at fair market value. Fair market value is based on published market prices. Net realized and unrealized gains and losses for the period are reflected in the accompanying Statement of Changes in Net Assets Available for Benefits based on revalued cost. The net realized gain or loss on the investments sold is calculated as the difference between the proceeds received and the fair market value of investments on the first day of the Plan year or the average cost of investments if purchased during the Plan year. The net realized gain or loss on the distribution of Quaker common stock shares is calculated as the difference between the fair market value on the date of distribution and fair market value on the first day of the Plan year. The net unrealized gain is calculated as the difference between the fair market value of investments at the end of the Plan year and the fair market value at the beginning of the Plan year or the average cost of investments if purchased during the Plan year. Purchases and sales of securities, including related gains and losses, are recognized on the transaction trade date. Brokerage commissions increase the cost or decrease the sale proceeds on the security transactions. NOTE 4 - INVESTMENTS The fair value of the Plan's investments at June 30, 1998, which represent 5% or more of the Plan's net assets are summarized as follows: Fair Value (in thousands) Quaker LESOP Common Fund $ 288,254 ICAP Diversified Fund $ 206,779 Quaker Stock Fund $ 91,079 Quaker LESOP Preferred Fund $ 81,905 Retirement Money Market Fund $ 40,165 The net realized gain and net unrealized gain were as follows: Year Ended Year Ended June 30, 1998 June 30, 1997 Net realized gain on investments $ 5,635 $ 1,594 Net unrealized gain on fair value of investments 78,898 100,236 NET GAIN ON FAIR VALUE OF INVESTMENTS $ 84,533 $101,830 18 THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 5 - PARTICIPATION IN A MASTER TRUST Effective June 1, 1998, the investments of the Plan and the investments of The Quaker 401(k) Plan for Hourly Employees were combined in The Quaker Oats Company 401(k) Plans Master Trust in order to realize certain administrative efficiencies. A separate account is maintained reflecting the equitable share of each plan's participation in each investment fund. At June 30, 1998, the Plan's undivided interest in The Quaker Oats Company 401(k) Plans Master Trust was 87%. NOTE 6 - THE QUAKER LESOP COMMON STOCK FUND Effective June 1, 1998, the common shares within The 1988 Quaker Employee Stock Ownership Trust and the common shares within The 1989 Quaker Employee Stock Ownership Trust were combined to form The Quaker LESOP Common Stock Fund. The Quaker LESOP Common Stock Fund, or its predecessors, was established to issue certain notes pursuant to one or more loan agreements, and to use the proceeds of such notes to acquire, for the future allocation to Plan participants, shares of common stock of the Company. Note Payable In January 1989, The Quaker LESOP Common Stock Fund (then known as The 1988 Quaker Employee Stock Ownership Trust) issued $150,000,000 Senior ESOP Notes at an interest rate of 8.07% with principal due in annual installments through July 15, 2001. Under the terms of the note agreement of The Quaker LESOP Common Stock Fund, if there is a change in the federal tax rate or the inclusion rate (the percentage of income received by the lenders that is not excludable from gross income pursuant to Section 133 of the Code), the interest rate of the loan will be adjusted effective on the date the change in rates occurs. The new interest rate will be determined by multiplying the old interest rate by an adjustment fraction. Effective January 1, 1993, under the new tax bill, the federal tax rate increased. Thus, the interest rate paid on The Quaker LESOP Common Stock Fund declined from 8.07% to 8.00%. Interest is payable semiannually on January 15th and July 15th. Payment of the notes and interest is unconditionally guaranteed by Quaker. Northern Trust purchased 5,626,304 shares of Quaker common stock with the proceeds of the note at a cost of $149,624,972. These shares were placed in the fund's unallocated account pending future allocation to Plan participants. The Quaker LESOP Common Stock Fund includes 1,861,286 shares of Quaker common stock that were transferred from the 1985 Trust into The 1988 Quaker Employee Stock Ownership Trust in July of 1995. <19> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 6 - THE QUAKER LESOP COMMON STOCK FUND (CONTINUED) The Quaker LESOP Common Stock Fund investments at June 30, 1998, and The 1998 Quaker Employee Stock Ownership Trust investments at June 30, 1997, were as follows: 1998 1997 Allocated Unallocated Allocated Unallocated Quaker Common Shares: Number of Shares 4,145,094 2,209,790 3,813,305 2,937,670 Cost $ 96,061,552 $ 55,262,449 $ 83,783,757 $ 73,465,279 Market $227,721,102 $121,400,338 $171,122,062 $131,827,941 The outstanding balance of the note payable at June 30, 1998, was $82,500,000 with maturing principal balances as follows: Fiscal 1999 $20,400,000 Fiscal 2000 23,100,000 Fiscal 2001 25,800,000 Fiscal 2002 13,200,000 $82,500,000 Contributions The Company's regular contributions, plus cash received from dividends and interest, were used to make a regularly scheduled payment on January 15, 1998 of $3,298,915 (interest only) on the note payable. On May 27, 1998, 116,446 shares of the Company's common stock were pre-released from the unallocated account to replace dividends from the allocated accounts that were used to repay the LESOP Funds notes payable. The Company's regular contributions, plus cash received from dividends and interest, were used to make a regularly scheduled payment on July 15, 1998 of $23,698,915 (principal and interest in the amount of $20,400,000 and $3,298,915, respectively), on the note payable. In association with this payment, 522,846 shares of the Company's common stock were released from the trust's unallocated account, and 503,173 shares were allocated to participants' accounts based on participants' compensation pursuant to the terms of the Plan. The remaining 19,133 shares were allocated by the Company to replace dividends from the allocated accounts that were used to repay the LESOP Funds notes payable. <20> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 7 - THE QUAKER LESOP PREFERRED STOCK FUND Effective June 1, 1998, the common shares within The 1989 Quaker Employee Stock Ownership Trust were transferred to The Quaker LESOP Common Stock Fund. The remaining preferred shares formed The Quaker LESOP Preferred Stock Fund. The Quaker LESOP Preferred Stock Fund, or its predecessor, was established to issue certain notes pursuant to one or more loan agreements, and to use the proceeds of such notes to acquire, for the future allocation to Plan participants, shares of stock of the Company. Note Payable In June 1989, The Quaker LESOP Preferred Stock Fund (then known as The 1989 Quaker Employee Stock Ownership Trust) issued $100,000,000 Senior ESOP Notes at an interest rate of 7.83% due July 15, 2001. Under the terms of the note agreement of The Quaker LESOP Preferred Stock Fund, if there is a change in the federal tax rate or the inclusion rate (the percentage of income received by the lenders that is not excludable from gross income pursuant to Section 133 of the Code), the interest rate of the loan will be adjusted effective on the date the change in rates occurs. The new interest rate will be determined by multiplying the old interest rate by an adjustment fraction. Effective January 1, 1993, under the new tax bill, the federal tax rate increased. Thus, the interest rate paid on The Quaker LESOP Preferred Stock Fund declined from 7.83% to 7.76%. Interest and principal is payable semiannually on January 15th and July 15th. Payment of the notes and interest is unconditionally guaranteed by Quaker. Northern Trust purchased 1,282,051 shares of the Company's Series B ESOP Convertible Preferred Stock with the proceeds of the note at a cost of $99,999,978. These shares were placed in the fund's unallocated account pending future allocation to Plan participants. The conversion rate of convertible preferred stock to common stock is 1:2.1576. <21> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 7 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED) The Quaker LESOP Preferred Stock Fund investments at June 30, 1998, and The 1989 Quaker Employee Stock Ownership Trust at June 30, 1997, were as follows: 1998 1997 Allocated Unallocated Allocated Unallocated Quaker Common Shares: Number of Shares 5,396 -- 163,905 -- Cost $300,841 -- $5,042,092 -- Market $296,443 -- $7,355,237 -- Quaker Series B ESOP Convertible Preferred Shares: Number of Shares 468,705 542,687 429,387 641,136 Cost $33,241,250 $47,872,975 $28,720,091 $56,557,624 Market $59,970,805 $69,436,801 $46,749,510 $69,803,682 The outstanding balance of the note payable at June 30, 1998, was $52,800,000 with maturing principal balances as follows: Fiscal 1999 $ 9,350,000 Fiscal 2000 10,600,000 Fiscal 2001 19,250,000 Fiscal 2002 13,600,000 $ 52,800,000 Contributions The Company's regular contributions, plus cash received from dividends and interest, were used to make a regularly scheduled payment on January 15, 1998 of $6,619,360 (principal and interest in the amount of $4,400,000 and $2,219,360, respectively), on the note payable. In association with this payment, 51,774 shares of the Company's preferred stock were released from the unallocated account. <22> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 NOTE 7 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED) The Company's regular contributions, plus cash received from dividends and interest, were used to make a regularly scheduled payment on July 15, 1998 of $6,448,640 (principal and interest in the amount of $4,400,000 and $2,048,640, respectively), on the note payable. In association with this payment, 50,439 shares of the Company's preferred stock were released from the unallocated account. All of the shares released from the unallocated account, after the note payments, were allocated to participants' accounts based on participants' compensation pursuant to the Plan. NOTE 8 - RECONCILIATION OF THE FORM 5500 TO THE FINANCIAL STATEMENTS The following is a reconciliation of net assets available for benefits per the Form 5500 to the financial statements: As of As of June 30, 1998 June 30, 1997 Net assets available for benefits per the Form 5500 $ 739,186 $ 285,761 Add: Distributions payable to participants -- 3,642 NET ASSETS AVAILABLE FOR BENEFITS PER THE FINANCIAL STATEMENTS $ 739,186 $ 289,403 The following is a reconciliation of benefits paid to participants per the Form 5500 to the financial statements: Year Ended Year Ended June 30, 1998 June 30, 1997 Distributions to participants per $ 37,139 $ 27,208 the Form 5500 Add: Distributions payable, beginning of year -- 4,320 Add: Distributions payable, transferred to the Plan on May 31, 1998 4,029 -- Less: Distributions payable, end of year -- 3,642 DISTRIBUTIONS TO PARTICIPANTS PER THE FINANCIAL STATEMENTS $ 41,168 $ 27,886 <23> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES FORM 5500 ITEM 27A - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AS OF JUNE 30, 1998
Number of Market Description Shares Cost Value The Quaker Oats Company Series B ESOP Convertible Preferred Stock* 1,011,392 $ 81,114,225 $129,407,606 The Quaker Oats Company Common Stock* 7,999,576 194,880,654 439,474,272 Collective Funds Fidelity Retirement Money Market Portfolio* 40,165,303 40,165,303 40,165,303 ICAP Diversified Fund 20,534,184 180,106,031 206,779,241 Total Collective Funds 220,271,334 246,944,544 Registered Investment Companies Fidelity Asset Manager* -- -- -- Fidelity Asset Manager: Growth* 27 544 548 Fidelity Asset Manager: Income* -- -- -- Fidelity Diversified International Fund* 7 128 128 Fidelity Low-Priced Stock Fund* 46 1,242 1,252 Fidelity's U.S. Equity Index Commingled Pool* 109 3,429 3,461 Morgan Stanley Global Equity B 62 1,306 1,310 Neuberger & Berman Partners Trust 94 1,774 1,756 PIMCO Total Return Fund - Administrative Class 2,310,154 24,672,930 24,764,849 Total Registered Investment Companies 24,681,323 24,773,304 Cash 17,166,750 17,166,750 Participant Loans (9.25%) 6,230,044 6,230,044 TOTAL INVESTMENTS $544,342,330 $863,995,520 * Represents party-in-interest to the Plan. <24>
THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES FORM 5500 ITEM 27D - SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED JUNE 30, 1998
Purchase Selling Expense Cost of Current Value on Net Description Price # of Trades Price # of Trades Incurred Asset Transaction Date Gain Northern Trust Money Market Fund $ -- -- $39,686,995 1 $ -- $39,686,995 $39,686,995 $ -- Fidelity Retirement Money Market Fund $40,165,303 6 -- -- $ -- $40,165,303 $40,165,303 $ -- PIMCO Total Return - Administrative Class $24,672,930 5 -- -- $ -- $24,672,930 $24,672,930 $ -- <25> Exhibit (b) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated December 18, 1998 (and references to our Firm) included in or made a part of this Form 11-K. It should be noted that we have not audited any financial statements of The Quaker 401(k) Plan for Salaried Employees subsequent to June 30, 1998 or performed any audit procedures subsequent to the date of our report. /s/ WASHINGTON, PITTMAN & McKEEVER, LLC WASHINGTON, PITTMAN & McKEEVER, LLC Chicago, Illinois December 21, 1998 <26>
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